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Chicago Bankruptcy Attorneys – Creditor Representation

The law firm of Roth Fioretti represents creditors in bankruptcy proceedings.  Our firm’s representation generally involves representing businesses in consulting with troubled customers that may file bankruptcy, and taking offensive measures to protect the business in those circumstances.  Our firm also defends actions for preferential transfers and alleged fraudulent conveyances.

Overview of Chapter 11 Proceeding

Creditor’s rights are primarily at risk when a company files a Chapter 11 bankruptcy.  The debtor in a chapter 11 bankruptcy seeks to implement a plan of reorganization on the debts that exist as of the date of the bankruptcy, while still continuing to operate its business.   Therefore, if a debtor owed money to a creditor as of the date that the debtor filed bankruptcy, then those debts would be subject to the debtor’s plan of reorganization.  The plan of reorganization generally provides that debts that were incurred before the bankruptcy was filed will be paid over a stated period of time.  Those debts may be re-paid at a rate of 100% or even down to 10% of the amount owed.  The debtor pays its past and present debts through continuing to operate its business. The creditor is generally required to file a proof of claim to allow the creditor’s claim to be paid in the bankruptcy proceeding.

A Creditor’s Rights in Bankruptcy Litigation

Continuing to Do Business with a Company That May File Bankruptcy

Companies often sense that certain businesses are failing. Yet the distressed customer still continues to order product to keep its company in operation.

It is important to understand that companies doing business with troubled customers may take certain actions to protect themselves or at least position themselves for successful claims if a customer files bankruptcy.

Proceedings pro Creditor, however, does have remedies under the law that would allow Creditor to either cease shipping products to Debtor or to insure that it is paid by Debtor in the event that Debtor files bankruptcy.

For example, if a company has not shipped product to a troubled company at the time the troubled company files bankruptcy, then the creditor may file a motion in the bankruptcy court requiring the debtor to immediately assume or reject the contract for the sale of the unshipped goods.  If the debtor rejects the contract, then the creditor is not required to sell any further goods to the debtor.  If the debtor assumes the contract and requires that creditor ship the product to debtor, then the Bankruptcy Court would require that debtor pay creditor for that product.

Further, if the creditor has shipped product to debtor when creditor files bankruptcy, but debtor has not yet received that product, then the creditor may exercise its right to what is termed “stoppage in transit.”  Under the law, a seller that discovers that its buyer is insolvent prior to physical delivery to the buyer may issue immediate instructions to the third-party carrier that the seller is exercising its rights under the Uniform Commercial Code to stop delivery in transit.  In that instance, the goods are returned to the seller.  The instructions to the carrier should be issued in writing and sent via email, overnight courier and facsimile to the carrier and to the buyer.  The creditor would then be required to file a motion in the bankruptcy proceeding requiring that the debtor accept or reject the contract. If accepted, the debtor would be required to pay for the product.

Therefore, at any time before the debtor actually receives the product, the creditor has the legal right to require that debtor pay for the product as a condition to receiving the product.

Further, the creditor has two options for goods that creditor has sold to the debtor just prior to any bankruptcy. First, the creditor has a right to reclaim goods that were received by the debtor within 45 days prior to the date of the bankruptcy filing, if the debtor has not paid for those goods as of the bankruptcy.   Any such demand to return the goods to the creditor must be made within 20 days from the date the bankruptcy petition was filed.  That demand must be in writing.

It may be more advantageous, though, to simply insure payment of the goods that debtor has received before the bankruptcy filing, rather than seeking to reclaim the goods.  If the creditor has shipped product to the debtor within 20 days from the date that the debtor filed bankruptcy, then the creditor could file an administrative claim for the amount of the product received by the debtor within the 20 day period before the bankruptcy.

Administrative claims are paid first before other claims are paid to creditors.  Thus, the creditor would most likely be paid in full for the value of the product received by the debtor within 20 days from the date of the bankruptcy filing, if the creditor did not seek to reclaim the goods but rather filed an administrative claim for payment.

A creditor may also desire to continue doing business with the debtor after the debtor files bankruptcy.  In that instance, however, the creditor may negotiate with the debtor or the bankruptcy trustee that any shipments made by the creditor will be paid as an administrative claim and will be paid either contemporaneous with the shipment or within a certain number of days from either the date of the shipment or receipt of the product.

Preference Claims Against A Creditor

When a debtor files bankruptcy the bankruptcy trustee may reach back 90 days before the bankruptcy in order to reclaim payments that the debtor made to creditors within that 90-day period.   The 90-day period before the bankruptcy is called the “preference period,” and payments made by a debtor within that preference period are called “preference payments.”  Those payments are then used by the debtor or trustee in the bankruptcy to satisfy all creditors’ claims.

Defenses to Preference Claims

Ordinary Course of Business Defense

The primary defense to the repayment of alleged preference payments is the “ordinary course of business defense.”  Under that defense, a creditor is not required to repay alleged preference payments if the payments during the preference period were on the same terms and conditions as before the preference period.

The court will look at many factors to determine if payments made during the preference period are on the same terms as those made during the historical period, which is generally two years before the bankruptcy. The court looks at the following factors in determining whether payments are made in the ordinary course of business:

(1) the parties’ prior course of dealings;

(2) the payment amounts;

(3) the timing of payments;

(4) the payment circumstances;

(5) the presence of unusual debt collection practices; and

(6) whether the means of payment had changed.

The most important factor is the timing of the payments.

A court generally looks at the period of payments two years before the bankruptcy and compares those to the payments made during the preference period. The court looks to the number of days between the issuance of the invoice and the payment, the amounts of the payments, etc.

The most important factor is a comparison of the average number of days from invoice to payment during the two years before the bankruptcy, as compared to the payment time during the preference period.  The court may also look to a one or two weeks on either side of the historical straight line average for a range of payment dates. Any payments outside of that period of time during the preference period are considered not made in the ordinary course of business.

Other defenses include the contemporaneous exchange for value and the new value defense.

Contemporaneous Exchange For Value

The most typical example of a contemporaneous exchange is a cash on delivery exchange of money for goods or services. The primary issues which arise under this defense are whether the creditor gave new value and whether the exchange was actually contemporaneous.

New Value Defense

The new value defense provides that a creditor may obtain a set off against any preference payments to the extent it provides value to the debtor after the creditor received a preferential payment.   If a debtor makes a preference payment to the debtor for goods, for example, and then the creditor provides more goods to the creditor after that preference payment, then the amount of the value of those goods sent to the debtor may be deducted from the amount of the preference payment.

Hire a Chicago IL Bankruptcy Lawyer

As the creditor, you must follow the law, but you still have options to recover your losses through litigation. Contact an experienced bankruptcy attorney for help with your case. Roth Fioretti (www.rothfioretti.com) represents creditors in bankruptcy matters and litigation. Let our knowledgeable Chicago business lawyers help you navigate the complexities of bankruptcy court to protect your rights.