Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts for Manufacturing Companies

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1 Presentation of David H. Conaway Shumaker, Loop & Kendrick, LLP to Association of Corporate Counsel Charlotte, NC October 24, 2017 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts for Manufacturing Companies 1

2 1. The Risk Trifecta a. Accounts receivable balance at petition date Claim includes unshipped inventory and work-in-progress b. Post-petition sales Impact on sales contracts c. Preference or avoidance liability 2

3 2. Chapter 11 Payment Priority a. Secured claims b. Sections 507/726 priorities Domestic support obligations 503(b) administrative expenses Employee wage claims Employee benefit claims Deposit claims Tax claims General unsecured claims Interests c. Impact of overleverage d. Administrative insolvency 3

4 3. Pre-filing Zone of Insolvency a. News Reports b. Market Reports c. Evaluate A/R balance d. Pending Orders e. Legal Options U.C.C Anticipatory Breach U.C.C Cash Before Delivery Reclamation U.C.C Stoppage of Goods in Transit 4

5 4. First Day Motions Impact on Suppliers a. DIP financing b. Claims procedural motions c. Orders regarding pre-petition P.O. s/post-petition shipment d. Critical vendor motions e. Section 363 sale motion 5

6 4.A. DIP Financing a. Super-priority administrative claim b. Lien on preferences c. Lien on vendor A/Rs impacts setoff remedy d. Budget administrative insolvency 6

7 4.B. Motion to Sell Assets a. First Day Motion b. Free and clear sale; liens attach to proceeds c. Liquidation of lender s collateral d. Purchase price e. Payment of 503(b)(9) claims f. Carve-out for unsecured claims g. Example: Polartec Chapter 11 7

8 5. Supplier Chapter 11 Issues 8

9 5.A. Post-petition Sales to a Debtor-in-Possession a. Post-petition administrative priority Post-petition contract Post-petition shipment b. Pre-petition purchase orders; post-petition shipment c. Debtor must have authority to use cash Cash collateral d. Marathon Petroleum Co. v. Cohen (In re Delco Oil) case: cash before delivery payments post-petition disgorged by creditor 9

10 5.B. Article 2 of the UCC vs. Chapter 11 Doing business on a purchase order/invoice basis Impact of sales or supply agreement Section 365 requirement of performance Applicability of UCC Section and in Chapter 11 Inevitable brinksmanship 10

11 5.C. Executory Contracts Section 365 of the Bankruptcy Code Debtor s right to assume or reject Assumption requires cure Rejection equals breach of contract, deemed a prepetition general unsecured claim Performance obligations pending assumption or rejection Assumption and Assignment 11

12 5.D. Critical Vendor a. Legal basis Section 105 b. Automatic Stay violation Section 362 c. Partial v. full payment d. Waiver of preference claims e. Resumption of Customary Trade Terms f. Recent Example: Toys R Us 12

13 5.E. Section 503(b)(9) Priority Claims Converts pre-petition general unsecured claim to post-petition administrative priority claim Requirements: Goods delivered within 20 days prior to Chapter 11 filing Goods received by the Debtor Procedure Payment of 503(b)(9) claims Impact of Lenders super-priority administrative claims Impact of administrative insolvency 13

14 5.F. Reclamation Claims 2005 change in law Subject to prior perfected inventory liens Residual value? Reclamation demand is cheap and easy 14

15 6. Avoidance Actions Including Preference Claims Preference claims elements To or for the benefit of a creditor On account of antecedent debt Made while debtor insolvent Within 90 days Enabled creditor to receive more than in a liquidation 15

16 defenses Subsequent new value Ordinary course of business Contemporaneous exchange for value Case dynamics Plan of Reorganization Section 363 sale Liquidating Chapter 11 Section 548 Fraudulent Conveyance 16

17 Thank you for your attendance. David H. Conaway 101 S. Tryon Street, Suite 2200 Charlotte, NC Manufacturing Customers Vendors Supply Chain Insolvency Litigation Commercial and Financial Contracts Cross-Border 17

18 DAVID H. CONAWAY BIOGRAPHY David Conaway is a Partner in the Charlotte office of Shumaker, Loop & Kendrick, LLP, an American Lawyer and National Law Journal Top 350 U.S. Law Firm. His focus is representing manufacturing companies regarding a variety of issues involving customers and the supply chain, including commercial and financial contracts, disputes, insolvency; and cross-border transactions, litigation and insolvency. He advises clients and handles matters throughout the U.S. and represents numerous foreign-based clients regarding U.S. issues, and U.S. companies doing business globally. Industry experience includes agrichemicals and seeds, appliances, chemicals, plastics and resins, furniture, paper and packaging, forest products, steel and metals, aluminum and glass containers and packaging, food packaging, textiles, and machinery and equipment. David is the Chair of Shumaker s Bankruptcy, Insolvency and Creditors Rights Practice and of Shumaker s Global and Cross-Border Insolvency Practice; the Co- Chair of Shumaker Manufacturing; and the past Managing Partner of Shumaker s Charlotte office, David Conaway dconaway@slk-law.com Manufacturing Customers Vendors Supply Chain Insolvency Litigation Commercial and Financial Contract Cross-Border

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20 Business Bankruptcy: Executive Summary Business Information for Clients and Friends of Shumaker, Loop & Kendrick, LLP Need to Know Bankruptcy Concepts David H. Conaway, Partner Chair, Shumaker s Bankruptcy, Insolvency and Creditors Rights Group slk-law.com dconaway@slk-law.com The following is an executive summary of the need to know bankruptcy concepts as they impact creditors in business insolvencies. CHAPTER 11 vs. CHAPTER 7 Chapter 11 is technically used for bankruptcy reorganizations, while Chapter 7 applies to liquidations. Chapter 11 and Chapter 7 can apply to either business or individual bankruptcies. Chapter 11 has been increasingly used as a tool to liquidate business assets as a going concern, hence the frequent liquidating 11. By contrast, in a Chapter 7 liquidation, the appointed trustee is not permitted to operate the business, except in rare circumstances. Accordingly, any going concern value can be achieved only through a liquidating Chapter 11. Many lenders, who assert liens on substantially all of a debtor s assets, often prefer a liquidating Chapter 11 because of the Bankruptcy Code s unique provisions allowing debtors to sell assets free and clear of liens (with liens attaching to proceeds), which enable a debtor to deliver clear title to prospective buyers. Many buyers insist that their purchase of assets be conducted through a Section 363 sale in a liquidating Chapter 11. AUTOMATIC STAY To promote the bankruptcy concept of providing breathing room to debtors, the Bankruptcy Code enjoins any action to collect pre-petition debts owed to creditors. This would include commencing or continuing a lawsuit, entering or enforcing a judgment, exercising a right of setoff, terminating contracts or taking any other action to enforce payment. There are limited occasions where the Bankruptcy Code permits a creditor to obtain relief from stay to proceed. Stay violations can result in claim elimination, penalties and sanctions including attorneys fees for the debtor s counsel. FIRST DAY MOTIONS In almost every Chapter 11 proceeding, the debtor will file a number of first day motions which are usually scheduled for hearing a day or two after the bankruptcy filing. Most of the first day motions are procedural and administrative, but there are also substantive motions. Perhaps the most substantive first day motion is the debtor s motion to approve debtor in possession or DIP financing. The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 1

21 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts The Bankruptcy Code provides that pre-petition liens on collateral do not extend to property acquired by the debtor post-petition. In addition, the Bankruptcy Code provides that the debtor may not use as working capital the lender s cash collateral, which is the cash generated by inventory sales and accounts receivable collections, unless the lender consents or the Bankruptcy Court permits the debtor to use cash collateral over the lender s objection. For these reasons, it is common for a debtor and its lender to reach a consensual post- petition financing arrangement, called DIP financing. DOING BUSINESS WITH A CHAPTER 11 DEBTOR Upon the filing of a Chapter 11 by a customer, vendors must determine whether to sell to the debtor postpetition. To avoid the inherent risk of a Chapter 11, vendors often sell on a cash before delivery or CBD basis. To remain competitive, vendors are sometimes compelled to extend credit terms to Chapter 11 customers. In this event, creditors should carefully evaluate the risk of non-payment in Chapter 11. Very often the lender has a superior negotiating position and thus the DIP financing agreement appears one -sided. Bankruptcy Courts almost always approve DIP financing as necessary to allow a debtor to continue operating, although creditor objections can modify or eliminate objectionable provisions of the DIP financing. The Bankruptcy Code treats credit extended to a Chapter 11 debtor in the ordinary course of business as an administrative expense priority claim. As indicated below regarding claim priorities, administrative expense claims enjoy a high priority and are generally paid, absent an administrative insolvency. Clearly there are substantive rights of other creditor s constituents that can be compromised as a result of a DIP financing, and creditors committees often file objections to DIP financing proposals. By contrast, extensions of credit that are not in the ordinary course of business must first be approved by the Bankruptcy Court, or they are not entitled to administrative expense priority treatment. In light of the global credit crisis, lenders willingness and perhaps ability to make DIP loans has been impacted. As an alternative source of cash, debtors unable to obtain DIP financing may seek Bankruptcy Court permission to use the lender s cash collateral over the lender s objections. At one time, critical vendor motions were also included in the first day motions. However, the current trend is for courts to delay consideration of any critical vendor motion until various parties, including the unsecured creditors committee, have been given an opportunity to evaluate the motion. At the time of the Chapter 11 filing, it is common for vendors to have open purchase orders from debtors that arose prior to the Chapter 11 filing, that provide for post-petition shipment by the vendor. In a recent Bankruptcy Court ruling, the Court denied the vendor administrative expense priority status for post-petition shipments on pre-petition purchase orders since the shipment arose from a pre-petition contract. The practical solution to this problem has been for vendors to require the pre-petition purchase orders to be re-issued post-petition. The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 2

22 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts Many debtors, particularly in larger cases, file a first day motion seeking an order from the Bankruptcy Court granting administrative claim priority for postpetition shipments on pre-petition orders, to avoid the re-issuance of purchase orders. In a recent Bankruptcy Court ruling, a vendor sold goods to a Chapter 11 debtor on a cash before delivery basis. The Court later ordered the vendor to disgorge the payments received, since the Debtor did not have authority to use its cash (pledged to a lender) pursuant to a DIP financing or cash collateral order. In the case of a pre-petition supply contract which provides for credit terms, debtors may assert that such contracts impose an obligation on the vendor to extend credit. While Bankruptcy Courts usually compel a vendor who is a party to a supply contract to ship goods, Bankruptcy Courts have rarely forced a vendor to extend credit to a Chapter 11 debtor. The Bankruptcy Code imposes a requirement on every debtor to file detailed Schedules of Assets and Liabilities as well as a Statement of Financial Affairs. The Schedules of Assets and Liabilities list the debtor s assets and values and detail the names of secured and unsecured creditors, the amount of the indebtedness and whether or not the indebtedness is disputed. The Schedules also contain a list of equity holders and contracts to which the debtor is a party. The Statement of Financial Affairs includes the disclosure of the location of books and records, and transfers made to insiders and non-insiders prior to the bankruptcy filing. CLAIM PRIORITIES The Bankruptcy Code sets forth clear priorities of payment or entitlement to payment by types of creditors or claims as follows: Secured creditors, as a result of pre-petition consensual liens on assets and proceeds of assets. Administrative claims, which are the costs associated with the administration of the post-petition bankruptcy estate. These would include purchases of goods and services post-petition as well as professional fees associated with the administration of the bankruptcy estate. Since a Chapter 11 filing effectively relieves the debtor of pre-petition debt, the debtor s post-petition cash flow may actually be healthier than it was pre-petition. However, creditors should independently evaluate the risks of extending credit to a Chapter 11 debtor. A key component of this evaluation should be the debtor s DIP financing and its impact on the debtor s working capital requirements. SCHEDULES OF ASSETS AND LIABILITIES/ STATEMENT OF FINANCIAL AFFAIRS Claims arising during the gap period, which is the time period between the filing of an involuntary petition by three or more creditors and the date on which an order for relief is entered by the Bankruptcy Court. Employee wage claims of not more than $12,475 for Certain employee benefit contribution claims as defined by the Bankruptcy Code. Deposit claims of not more than $2,775 for 2015 for deposits made by individuals for the purchase of goods or services for family or household use. Certain government tax claims as defined by the Bankruptcy Code. Allowed unsecured claims of a Federal Depository Institution regarding capital requirements of an insured The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 3

23 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts depository institution. SECURED CREDITOR ISSUES General unsecured claims. Equity interests. Secured, administrative and priority claims are generally paid in full while unsecured claims are rarely paid in full and in fact rarely receive any material dividend. Equity interests are almost always canceled at no value. There are many exceptions to the general rules. In the case of an administrative insolvency, the value of the debtor s assets are insufficient to pay the lender s claims and also the administrative claims. With increasing frequency, and as a result of very high loan to collateral value ratios, assets are insufficient to pay lenders in full much less claims below the line. Often lenders will find it necessary to pay professional fees associated with negotiating and closing a sale of its collateral in connection with a Bankruptcy Code Section 363 sale. Lenders often resist paying other administrative claims, creating lack of equality in treatment of similarly situated claims. Absent an administrative insolvency, administrative claims are generally paid in full, as the Bankruptcy Code requires that such claims be paid in full as a condition precedent to confirmation of any plan of reorganization. Moreover, while not a specific requirement of the Bankruptcy Code, a debtor is generally obligated to pay as it goes while in Chapter 11, meaning it must be able to pay its ongoing administrative claims in the ordinary course of business. A material build up in unpaid administrative claims indicates a potential inability to obtain plan confirmation, and thus, provides the grounds for a conversion of the Chapter 11 proceeding to a liquidation proceeding under Chapter 7. Banks or other lenders who provide working capital or other loans to customers occasionally face a default under the loan and a subsequent Chapter 11 filing by the customer. Often, the secured lender has a lien on substantially all of the Chapter 11 debtor s assets. At the outset, secured lenders decide whether to support the Chapter 11 debtor for a reorganization, or whether the best course of action is a liquidation of the lender s collateral, often in the form of a Section 363 sale of substantially all of the debtor's assets. Regardless of whether the Chapter 11 case is a reorganization or a liquidating 11, there is usually some form of debtor-in-possession financing provided by the secured lender. Debtor-in-possession financing must be approved by the Bankruptcy Court, after notice of hearing to all creditors. Lenders may elect to not provide debtor-inpossession financing in which case Chapter 11 debtors could seek Bankruptcy Court authorization to use cash collateral, which is the cash generated from the lender s collateral such as accounts receivable. The Bankruptcy Code provides that the debtor may not use cash collateral unless the lender consents, or the Bankruptcy Court so orders. Sometimes secured lenders seek relief from the automatic stay, to allow the lender to pursue state law remedies, primarily Article 9 of the Uniform Commercial Code. Key issues in whether or not the lender is able to obtain relief from stay are the value of equity in the lender s collateral in excess of the debt owed and the debtor s ability to successfully reorganize. In connection with a Section 363 sale of substantially all of the debtor s assets, the Bankruptcy Code allows the The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers 4

24 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts secured lender to credit bid its debt as a potential bidder. Recent court decisions have affirmed a secured lender s ability to credit bid; however, at least one court limited the right to credit bid to the amount paid for the debt, not the face amount of the debt. However, payment on such claims nevertheless exceeds what would be paid absent the 20 day administrative claim. Reclamation. CREDITOR REMEDIES 20 Day Administrative Claim. The 2005 Bankruptcy Code Amendments added Section 503(b)(9) to the Bankruptcy Code which provides that sellers of goods are entitled to an administrative priority claim for the value of goods received by the debtor within 20 days prior to the bankruptcy filing. The case law addressing Section 509(b)(a) provides some predictability on how this remedy will benefit vendors. There are two essential components to the 20 day administrative claim: 1) getting the claim allowed as an administrative claim in the first instance; and 2) getting the claim paid by the bankruptcy estate. Upon a motion by the creditor, most courts have allowed vendors an administrative claim for the value of goods delivered within 20 days prior to the filing. As a result of the general rule that unsecured claims receive little or no distribution and administrative claims are generally paid in full, converting any portion of an unsecured claim to administrative claim is a material achievement. Courts have been less willing to order immediate payment of 20 day administrative claims, instead allowing them to be paid in connection with plan confirmation or in connection with the sale of substantially all of the debtor s assets. As with any other administrative claim, if the Chapter 11 proceeding is administratively solvent, payment of the 20 day administrative claim is probable. In cases where the debtor s Chapter 11 proceeding is insolvent, the likelihood of payment is compromised. Historically, reclamation was a standard vendor remedy. Reclamation is a state law remedy arising from the Uniform Commercial Code s provisions on sales of goods. In particular, most states allow a vendor to reclaim goods delivered to a customer (or stop goods in transit), if the seller learns of the customer s insolvency. Prior to the 2005 Bankruptcy Code Amendments, the Bankruptcy Code recognized the state law remedy of reclamation but also recognized that permitting vendors to reclaim goods would be disruptive to a debtor s attempted reorganization. Accordingly, the Bankruptcy Code allowed a bankruptcy judge to grant a lien or administrative claim to the seller in lieu of the actual return of goods. The 2005 Bankruptcy Code Amendments eliminated the provision allowing a bankruptcy judge to grant a lien or administrative priority in lieu of the actual return of goods. Accordingly, it is unclear what value the current reclamation claim will have. Sellers of goods should nevertheless continue the practice of sending a reclamation demand which must be sent within 20 days after the Chapter 11 filing and can cover invoices for goods delivered within 45 days prior to the bankruptcy filing. Critical Vendor. Critical vendor is a creditor remedy based on a theory that a particular vendor is so essential to a debtor s ability to continue operating that without the uninterrupted flow of the seller s goods, the debtor cannot continue to operate and thus has no realistic chance of The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 5

25 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts a successful reorganization. In these instances, a bankruptcy court has broad authority to order relief that facilitates a successful reorganization. Only a debtor can make the determination that a particular vendor is critical and seek court approval of same. A creditor cannot independently impose its critical vendor status on a debtor. Critical vendor payments were controversial in the Kmart case, and since then courts have more closely scrutinized debtors critical vendor proposals. Some jurisdictions refuse to entertain critical vendor motions. However, Delaware and New York continue to be jurisdictions where critical vendor payments can be approved in appropriate circumstances. Vendors who are truly critical to a debtor-customer should continue to seek critical vendor status as a means of getting paid. In doing so, vendors should be careful to not violate the automatic stay by conditioning future business on payment of pre-petition debt. Moreover, vendors should be aware that getting paid as a critical vendor will likely be conditioned on providing normal lines of credit, pricing and terms, or other customary trade procedures. Setoff and Recoupment. An often overlooked remedy, setoff arises from the settlement of mutual debts or accounts owed between a debtor and a creditor. Simply, if A owes B $100 and B owes A $50, then the debts can be resolved as follows: $100 - $50 = $50, so A pays B $50 and the accounts are settled. The Bankruptcy Code codifies this common law remedy and in fact provides that the creditor has a secured claim to the extent of the value of its setoff claim. The debts owing must be owed to and from precisely the same legal entities and the debts must arise either both pre-petition or both post-petition. The debts do not, however, have to arise out of the same transaction. The Delaware Bankruptcy Court recently ruled that a debtor can set off a prepetition claim against a creditor against that creditor s allowed Section 503(b) (9) administrative priority claim instead of that creditor s general unsecured claim. The exercise of a setoff remedy requires relief from the automatic stay from the Bankruptcy Court. Moreover, there are somewhat complicated rules regarding exercise of setoff during the 90 days prior to the bankruptcy filing, which if not followed, could result in preference exposure. Recoupment is similar to setoff, except that the mutual debts must arise from the same transaction. The distinction can be important in certain situations. A right of recoupment, for example, is not subject to the automatic stay or avoidable as a preference. Rights of setoff and recoupment can be waived. Creditors need to review contracts, chapter 11 plans, DIP financing orders, and 363 sale orders carefully to determine whether they contain any provisions affecting rights of setoff or recoupment. Despite not being subject to the automatic stay, seeking relief from stay may avoid any uncertainty regarding whether the right being exercised is in the nature of setoff or recoupment and the possibility of the debtor later alleging the creditor exercised a right of setoff in violation of the automatic stay. Statutory Liens. Vendors in possession of goods belonging to a debtor may be able to assert a valid possessory lien under state law. The Bankruptcy Code recognizes these liens, and treats the vendor as a secured claimant to the extent of the value of the goods in the vendor s possession. States laws differ on the extent and priority of the lien and whether it covers all amounts owed to the vendor or is limited to amounts directly related to the The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 6

26 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts goods in its possession. Vendors holding such potential possessory liens should not surrender possession to a debtor or trustee absent an adequate protection order, otherwise the vendor risks forfeiting its lien rights. Disclosure. The Bankruptcy Code provides all creditors substantial rights to learn details about the debtor s financial condition, historical transactions and prospects for reorganization. Although creditors have the right to appear at and attend the Section 341 first meeting of creditors, this is rarely productive. Modern practice has been that the Office of the United States Trustee conducts the 341 meeting and covers primarily administrative issues with limited opportunity for creditors to examine the debtor s representatives. Unlike a voluntary petition where an order for relief is entered essentially simultaneously with the filing of the petition, in an involuntary case, upon the filing of the involuntary petition by creditors, a debtor has 30 days to file an answer to the petition. If the debtor contests the bankruptcy, the Bankruptcy Court will schedule and conduct a trial on whether the creditors petition meets the requirements of Section 303 of the Bankruptcy Code. During the gap period (time period between the date of the involuntary petition and the date a Bankruptcy Court enters an order for relief) note the following: 1. the automatic stay is in effect upon the filing of the involuntary petition; Rule 2004 of the Bankruptcy Rules permits creditors broad rights to examine the debtor under oath and penalty of perjury about its financial affairs, historical transactions and prospects for reorganization, and to obtain relevant documents. These tools allow a creditor to obtain details about the debtor s financial condition necessary to evaluate the risk and probability of payment. 2. claims arising during the gap period, including extensions of unsecured credit, are second-tier priority claims, which are subordinate to claims arising after the order for relief is entered; 3. If an order for relief is entered, payments on pre -petition debts made during the gap period can be voided as avoidable post-petition transactions if no value was provided in the gap period. Involuntary Petition. Normally a bankruptcy proceeding is commenced by the filing of a voluntary petition for relief by the debtor. However, Section 303 of the Bankruptcy Code permits three or more creditors to file an involuntary petition against a debtor, in either Chapter 7 or Chapter 11, if certain requirements are met. The requirements are that the aggregate debt owed to the three or more creditors is at least $15,325 for 2015, such debts are not contingent as to liability or subject to a bona fide dispute, and the debtor is not generally paying its debts as they come due. Creditors may seek the immediate appointment of an interim trustee if there is a concern that the debtor may be dissipating assets. Debtors have the absolute right to convert an involuntary Chapter 7 case to a Chapter 11 proceeding or vice versa. A creditor considering an involuntary petition should always analyze payments received in the prior 90 days, as the involuntary filing will establish the 90 day preference period. The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 7

27 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts Motion to Convert to Chapter 7. A party in interest including a creditor or creditors committee may file a motion seeking to convert a Chapter 11 case to a Chapter 7 liquidation case if the creditor can establish cause and that a conversion is in the best interest of creditors. Cause includes: its counsel will incur administrative expenses that will have priority over the Chapter 11 administrative expenses. Moreover, the Bankruptcy Code allows the trustee to be paid a percentage of funds distributed to creditors, which can be as high as 3%. Motion to Appoint a Trustee or Examiner. 1. Substantial losses and no reasonable likelihood of reorganization. 2. Gross mismanagement of the estate. 3. Failure to maintain insurance. 4. Unauthorized use of cash collateral. 5. Failure to pay taxes. 6. Failure to file or confirm a plan of reorganization within the applicable time period. Assuming a creditor has the appropriate grounds for conversion, the creditor should nevertheless consider several issues. A party in interest including a creditor or creditors committee can also file a motion seeking the appointment of a trustee or an examiner. A Chapter 11 trustee would supplant management and take control of the debtor s bankruptcy estate and assets. An examiner does not supplant management or take control of the debtor s estate; rather, an examiner investigates discrete issues, usually relating to questionable transactions, and reports findings to the Court and creditors. A creditor may seek the appointment of a trustee or an examiner for cause including fraud, dishonesty, incompetence or gross mismanagement, if such appointment is in the best interest of creditors or if grounds to convert to Chapter 7 exists. Claims Sale. Since a Chapter 7 trustee cannot operate the business, a conversion will likely result in a closure of the business operation and a quicker liquidation or auction of the assets, or an abandonment of the assets to the secured lender. The Chapter 7 trustee will take control of the debtor and its assets and any creditors committee or individual creditors will have less influence in the bankruptcy process. For example, a Chapter 7 trustee may have more incentive to aggressively pursue avoidance actions such as preferences against creditors. A conversion to Chapter 7 will end Chapter 11 administrative expenses; however, the Chapter 7 trustee and There continues to be a vigorous market for the purchase of bankruptcy debt, particularly in larger bankruptcy cases. The purchasers are usually private equity or hedge funds that are in essence seeking to purchase claims at a discount in hopes that the ultimate dividend, whether in the form of cash payments or stock in the reorganized entity, will provide a return on such investment. Claim purchasers will only purchase claims that are not disputed or contingent as to liability. Claim purchasers will usually agree to buy claims based on the debtor s schedules of assets and liabilities. However, purchasers will not buy claims based on a creditors proof of claim if it is materially greater than the claim listed on the debtor s schedules, at least until the claim The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 8

28 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts is resolved in the claims reconciliation process. creditor from preference liability. Creditors who sell claims should carefully review the claims assignment contract for pitfalls and potential risks. EXECUTORY CONTRACTS Debtors in Chapter 11 must assume an executory contract before or in conjunction with the confirmation of the Chapter 11 Plan. The non-debtor party to the contract can ask the court to set a shorter time if it will be harmed by the delay in the debtor s decision. Executory Contract is the Bankruptcy Code term given to essentially any contract between a debtor and a non -debtor party where both parties owe performance to the other. A promissory note would NOT be an executory contract since the holder of the note has no performance obligation. However, a supply contract or other sales agreement would almost always meet the requirements of an executory contract under the Bankruptcy Code. Real estate or personal property leases are generally treated the same as executory contracts. The Bankruptcy Code Rules for rejecting executory contracts and leases are debtor-friendly which is precisely why retailers who want to close stores often choose Chapter 11 as the vehicle to accomplish such goal. The Bankruptcy Code provides debtors the right to elect to assume or reject executory contracts and unexpired leases. If a debtor rejects an executory contract, the non-debtor party receives a general unsecured claim for damages arising from the debtor s breach of contract. Thus, a debtor escapes the contract with little cost. On the other hand, the debtor also has the right to assume or assign a contract. In this instance, the Bankruptcy Code requires that the debtor cure the contract by paying existing defaults. Presumably, debtors would assume contracts that they deem to be valuable either because they insure an uninterrupted supply of goods or contain favorable pricing or terms. For a creditor who is a party to an executory contract, the assumption of such contract can be an effective vehicle to obtain payment of pre-petition debt. Assumption of an executory contract also insulates the The Bankruptcy Code requires that the non-debtor party to an executory contract must continue to perform its obligations under the contract pending the debtor s decision to assume or reject such contract, and provided that the debtor is in fact performing its obligations of the contract post-petition. A supply agreement impacts a creditor s rights as a critical vendor since the leverage of not shipping is arguably eliminated in the context of an executory contract. Some sales or distribution agreements include patent and/or trademark licenses. The Bankruptcy Code allows licensees of intellectual property to retain their rights for the duration of the license despite the debtor s rejection of the license agreement as long as the licensee continues to pay royalties. Trademarks are not included in the definition of intellectual property but some courts have nevertheless held that rejection of a trademark license does not terminate the licensee s rights. PROOF OF CLAIM A proof of claim is the document by which a creditor registers its claim with the debtor s bankruptcy estate, indicating the type of claim (secured, administrative, priority or unsecured), the amount of the claim and the basis for the claim. Bankruptcy courts almost always set a bar date for filing proofs of claim several months after the bankruptcy petition is filed. To be considered, all claims must be The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 9

29 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts filed within this bar date. If the debtor s Schedules of Assets and Liabilities list a particular creditor s claim correctly, and does not list it as unliquidated, contingent or disputed, and the creditor otherwise agrees with the debtor s Schedules, there is no need for the filing of a proof of claim. In order to assure participation in any distribution to creditors or vote on a Chapter 11 plan, creditors often file a proof of claim, rather than rely on the debtor s Schedules of Assets and Liabilities. The U.S. Supreme Court ruled in 2007 that unsecured creditors can include contingent claims for post-petition attorneys fees based upon a pre-petition contract. A creditor whose claim arises under a prepetition contract that expressly allows for attorneys fees incurred in connection with the debtor s default should include a contingent claim for attorneys fees in its proof of claim particularly in cases where post-petition litigation related to the claim is a possibility. Unsecured creditors are not entitled to post-petition interest on their claims. Creditors who file a proof of claim waive the right to demand a jury trial in, for instance, a preference action. The potential costs and vagaries of a jury trial might provide leverage to a preference defendant. SECTION 363 SALE Section 363 of the Bankruptcy Code allows a debtor to sell substantially all of its assets free and clear of liens with liens attaching to proceeds of sale. This provision allows for the quick and efficient liquidation of a debtor s assets without having to first resolve the extent, validity and priority of liens on assets. This allows assets to be sold relatively quickly and avoids further erosion of value due to operating losses. Buyers of assets often favor acquiring assets in a Section 363 sale (thus requiring a Chapter 11 filing) since sales to good faith purchasers are not subject to later challenge. Generally a Section 363 sale is teed up as an auction with a stalking horse sale as the initial bid. After appropriate advertising and marketing, an auction is conducted where interested buyers are permitted to overbid the stalking horse bid and thus allow the estate to obtain the greatest possible value for its assets. There is usually a required percentage bidding increment and the stalking horse bidder often has bid protection in the form of a break-up fee and expense reimbursement. Secured creditors are generally entitled to credit bid their secured debt, provided the secured claim is not disputed. Although a Section 363 sale can be a valuable tool for maximizing the liquidation value of a debtor s assets, such sales can also create an inherent tension between the secured creditor who asserts liens on the assets being sold and other creditors of the estate. The secured creditor s goal is payment of its secured debt and nothing more, while other creditors seek to achieve a sale in excess of secured debt to generate proceeds for other creditors. The quickest sale does not necessarily produce the best sale, however, prolonged sales processes have the disadvantage of higher administrative costs. With increasing frequency, and due to the recent trend of high loan to value ratios, many Section 363 sales have produced sales proceeds less than the amount owed to secured creditors. These short sales create an administrative insolvency where only secured creditors benefit from the sale. Many courts have required the secured creditor to pay administrative claims associated with the Chapter 11 proceeding to obtain the benefit of the Chapter 11 process and protections. This has been euphemistically referred to as the pay to play rule. In addition, creditors often assert that the The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 10

30 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts Chapter 11 process contemplates a benefit to all creditor classes and thus unsecured creditors should receive a carve-out of the sale proceeds to fund a dividend to unsecured creditors. PLAN OF REORGANIZATION A Plan of Reorganization is essentially the debtor s contract detailing how the debtor will satisfy pre-petition claims. This can be in the form of cash distributions, an allocation of future profits, and/or redistribution of the debtor s equity. mensurate to the value of the reorganized debtor s stock. To be confirmed, a Plan must also be feasible. A key element of feasibility is usually whether or not a debtor has committed exit financing. The credit crisis may undermine the ability of debtors to obtain exit financing, and thus exit Chapter 11. AVOIDANCE ACTIONS Preferences. For a Plan of Reorganization to become effective, it must be confirmed by the Bankruptcy Court. For purposes of Plan confirmation, similarly situated creditors are placed in classes of creditors, usually roughly corresponding to the claim priorities set forth above. If a class of creditors is unimpaired, meaning their claims are satisfied, that class is deemed to have accepted the Plan. For creditor classes that are impaired, the class must either consent to the Plan or be crammed down. For a class to consent to a Plan, of the class members who vote, there must be more than 1/2 in number and 2/3 in dollar amount of creditors accepting the Plan. A debtor can cram down its plan on non-consenting classes if the Plan is fair and equitable, does not discriminate unfairly within classes, and is in the best interests of creditors, primarily that creditors will receive more in the Plan than in a Chapter 7 liquidation. The so called absolute priority rule requires that a junior class of creditors cannot receive value on its claims unless senior classes are paid in full or vote to accept the plan. Thus, unless unsecured creditors are paid in full, equity holders are not permitted to retain their equity interest absent a capital contribution com- Bankruptcy Code Section 547 allows the debtor to recover pre-petition payments to third parties that were made within 90 days prior to filing as to noninsiders and within one (1) year prior to filing with respect to insiders. The requirements to assert a preference are that the payment in question be made within the appropriate time period, made while the debtor is insolvent, the payment was on account of antecedent debt and the payment allowed the creditor to receive more than it would have in a Chapter 7 liquidation. Debtors or trustees pursuing preference claims rarely have difficulty establishing these basic requirements. The statute of limitations on preference actions is the later of 2 years from the petition date or 1 year from the date of appointment of the trustee. Creditors who have received allegedly preferential payments have several defenses, the most common three being that the payment was made in the ordinary course of business, that the creditor provided subsequent new value after the payment at issue, or that the payment constituted a contemporaneous exchange for new value. - The ordinary course of business defense is based on the notion that the payment in question was consistent with the ordinary course of business between the debtor and the particular creditor or The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 11

31 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts consistent with industry standards generally. - Recently, in the C.W. Mining case, the 10 th Circuit Court of Appeals ruled that a first-time transaction can qualify for the ordinary course of business defense. A Delaware Bankruptcy Court has also ruled that a single transaction can qualify for the ordinary course of business defense. The Bankruptcy Court for the SDNY appears to require a baseline of dealings with the debtor, in which case singletransaction creditors must prove the payment was made according to ordinary business terms. The statute of limitations for asserting fraudulent transfer claims under is the later of two (2) years from the petition date or one (1) year after appointment of the trustee. Debtors and trustees in bankruptcy are also entitled to assert claims under state law fraudulent transfer statutes which are similar to the Bankruptcy Code s fraudulent transfer statute but often have a longer statute of limitations, and the reach back period may be longer. - Subsequent new value is simply that creditors provided additional value in the form of goods or services after receipt of the payment that in essence replenished the estate s assets. The defense exists to the extent of such new value. - Contemporaneous exchange for value is where the parties intended the payment to be substantially contemporaneous with the creditor providing new value. The classic example of contemporaneous exchange for value is where a debtor desperate for goods promises to send a check if the creditor will release goods. Documentation of the parties intent of payment in exchange for specific value is critical to this defense. Fraudulent Transfers. Fraudulent transfers is a partial misnomer because actual fraud is not required. Under Section 548 of the Bankruptcy Code, a debtor can recover payments made to non-insiders for transfers occurring within one (1) year prior to bankruptcy and for two (2) years with respect to insiders if the transfers were made in an attempt to defraud creditors or if the transfer was simply for less than reasonably equivalent value, assuming the debtor s insolvency. CROSS-BORDER INSOLVENCY When a multi-national business faces insolvency, assets in more than one country likely require administration and protection. It is sometimes not clear what country s law will apply, and which jurisdiction will control the insolvency process. This can be determinative of outcome since countries laws and approach to business insolvencies can differ materially. Typically, a multi-national business located outside the United States with assets in the United States would seek insolvency protection under the laws of its country, but will also file an ancillary proceeding in the United States. There are many laws, treaties and regulations that address these issues, including: Chapter 15 of the Bankruptcy Code on Ancillary Cases 1. Mostly follows the United Nations Model Law on Cross-Border Insolvency 2. Chapter 15 passed as part of the 2005 Bankruptcy Code Amendments The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 12

32 Business Bankruptcy: Executive Summary Need to Know Bankruptcy Concepts UNCITRAL (United Nations Commission on International Trade Law) Model Law on Cross-Border Insolvency Goal: to modernize and harmonize the rules on international business and to enhance predictability in cross -border commercial transactions. European Union Regulation on Insolvency Proceedings ALI NAFTA Transnational Insolvency Project COMI (or Center of Main Interests) is a key concept in Chapter 15, the UNCITRAL Model Law and the European Union Insolvency Regulation, all of which presume COMI is where an entity has its corporate registration. COMI impacts where the main proceeding should occur, based on where a business has its center of main interests, which is analogous to the principal place of business. Thus, if COMI exists in a foreign country, a U.S. Bankruptcy judge should recognize a foreign insolvency proceeding as the foreign main proceeding and the U.S. Chapter 15 proceeding as an ancillary proceeding. If a debtor does not have COMI in the country where it files its insolvency proceeding, but has an establishment in such county, the U.S. Bankruptcy Court should recognize the foreign proceeding as a foreign non-main proceeding. If the foreign insolvency proceeding is recognized as a foreign main proceeding, the approval of the Chapter 15 proceeding will invoke the automatic stay. If the foreign insolvency proceeding is recognized as a foreign non-main proceeding, the Chapter 15 proceeding will not invoke the automatic stay protections. Preferences in Chapter 15. Chapter 15 provides that Sections 547 (preferences) and 548 (fraudulent conveyances) are not available as remedies to foreign representatives in a Chapter 15 case. However, in 5th Circuit U.S. Court of Appeals case (Condor Insurance Ltd.), the Court ruled a foreign representative could pursue avoidance remedies using the avoidance laws of the foreign jurisdiction. In the Vitro S.A.B. de C.V. proceedings (pending in courts in Mexico and the U.S., including a U.S. Chapter 15 proceeding), U.S. courts refused to enforce Vitro s plan of reorganization approved in Vitro s Mexican insolvency proceeding. See Article: Chapter 15 and Cross-Border Insolvency for in-depth analysis. David Conaway dconaway@slk-law.com Manufacturing Customers Vendors Supply Chain Insolvency Litigation Commercial and Financial Contract Cross-Border The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 13

33 Reducing a Customer s Accounts Receivable in the Zone of Insolvency Business Information for Clients and Friends of Shumaker, Loop & Kendrick, LLP May, 2014 David H. Conaway, Partner Chair, Shumaker s Bankruptcy, Insolvency and Creditors Rights Group slk-law.com dconaway@slk-law.com Reuters, Bloomberg and Debtwire are all reporting negative financial information about your customer: Bond ratings are down-graded, bond prices are falling, a likely restructuring to address the bond debt, bondholders form an ad hoc commi ee to negotiate with the customer, the bondholders retain financial advisors and counsel as does the customer. You know what s coming, a Chapter 11 filing, but the customer will not confirm that. In fact, the customer denies the rumors, fearful of triggering defaults and losing credit terms provided by suppliers. Your accounts receivable balance is $500,000, which will become a pre-petition general unsecured claim in Chapter 11. You know all too well that such claims rarely are paid in a Chapter 11 proceeding, so the $500,000 accounts receivable is looking like a write-off. You re in the twilight zone the zone of insolvency, which often lasts weeks if not months depending on the negotiations among the customer and its lenders and bondholders on DIP financing and on a bond restructuring (often a debt-equity swap). It will likely be a prepackaged or pre-arranged Chapter 11 filing. The good news is you don t have to sit back and watch the painful slide into bankruptcy. You can be proactive and reduce your accounts receivable balance, even absent a material payment default.... you don t have to sit back and watch the painful slide into bankruptcy. Vendors have two powerful tools in Article 2 of the Uniform Commercial Code governing the sale of goods: Section Anticipatory Breach When reasonable grounds for insecurity arise with respect to the performance of either party, the other may in writing demand adequate assurances of due performance and if commercially reasonable, suspend any performance. Section 2-702(1) Cash Before Delivery Upon Buyer s Insolvency Where the seller discovers the buyer to be insolvent, the seller may refuse delivery except for cash. Section and 2-702(1) work well together. The seller s performance obligations, which it may suspend under 2-609, are shipping goods and providing any credit terms agreed on between the parties. If reasonable grounds for insecurity exist, the seller may suspend its obligation to ship or to provide credit terms, or both. Section 2-702(1) likewise allows the seller to sell goods on a cash basis. Frequently Asked Questions 1. What are reasonable grounds for insecurity? Although not defined by Article 2, courts have found that reasonable grounds for insecurity exist when a party fails to make required payments pursuant to a contract, such as when a buyer fails to pay outstanding invoices under a supply contract or when the accumulated debt of a buyer making purchases on credit substantially exceeds the buyer s credit limit.

34 Reducing a Customer s Accounts Receivable in the Zone of Insolvency Additionally, courts have held that a report from an apparently trustworthy source that a party is in financial distress can be enough to give the other party reasonable grounds for insecurity, even if those reports ultimately turn out to be untrue. 2. When does a buyer become insolvent? Insolvency is normally defined on a balance sheet basis: liabilities exceed assets. Also, a company may be insolvent if generally it is unable to pay debts as they come due. In many instances, the customer may be current with respect to its working capital facility, and mostly current on its trade payables. However, if the customer has insufficient resources to pay its bond debt in accordance with its terms, the customer is unable to meet its financial obligations as they come due. Also, the amount of bond debt, working capital and term debt, along with all other debt obligations may cause the customer to be balance sheet insolvent. 3. What if the customer is not in material default? Neither Section nor 2-702(1) hinge on the buyer s default. In fact, Article 2 provides a seller clear remedies when a buyer fails to pay. Section addresses the situation where there is no current default, but the seller can reasonably anticipate a default. Likewise, Section 2-702(1) hinges on the buyer s insolvency, not the buyer s default. Nevertheless, sellers exercising these remedies can anticipate pushback from buyers because they are current. Also, well-wri en terms of sale provide that the failure to pay any invoice when due accelerates payment of all open invoices in which case a non-material breach may trigger a breach of the entire open accounts receivable balance. 4. What if there is a supply contract with the customer? In this context, there is li le difference between doing business on a purchase order and invoice basis and under a supply contract. In both cases, a seller has an obligation to deliver goods and extend terms and the buyer has the obligation to pay for the goods within terms. However, buyers tend to assert that a supply contract heightens the seller s obligation to perform, even regardless of reasonable grounds for insecurity or insolvency. 5. Can the supplier refuse to ship goods altogether? Arguably, yes, but if the seller delivers goods on a cash before delivery basis, the seller fulfills its business mission with no risk of nonpayment. Section allows a seller to suspend all performance if commercially reasonable. Moreover, the Uniform Commercial Code imposes a standard good faith, which weighs in favor of continuing to ship, particularly if the buyer s business operations would be damaged without a consistent flow of goods. 6. How do Sections and 2-702(1) benefit the seller? If the accounts receivable balance is $500,000 and the credit terms are net 30 days, the $500,000 accounts receivable balance should be zero in 30 days, or $250,000 in 2 weeks. Depending on how long the zone of insolvency lasts, the seller will likely reduce, if not eliminate, its accounts receivable balance before the customer files. These are 100% dollars compared to pennies on the dollar if the accounts receivable balance exists at the time of Chapter 11 filing. Given this extreme range of outcomes, sellers should always pursue its remedies under Section and 2-702(1). Buyers often use the threat of future business to avert being put on a cash before delivery basis. Experience suggests that buyers need quality suppliers, and suppliers need quality customers. They will likely do business again despite the pre-chapter 11 rhetoric. Perhaps a supplier increases the price discount a point or two for cash before delivery payments, for good customer relations. 7. What about preference risk? Accelerated pay-downs of accounts receivable balances during the zone of insolvency normally imply an increased preference risk. This is because accelerated pay-downs are not considered in the ordinary course of business. However, if the existing accounts receivable balance is paid in accordance with terms during the zone of insolvency, those payments should be protected by the ordinary course of business defense. Future shipments will be on a cash before delivery basis, so the payments by the customer are not on account of an antecedent (existing) debt since a Given the normal Chapter 11 outcome for unsecured claims, minimizing such claims before filing is highly recommended. debt does not arise until after delivery has occurred. Given the normal Chapter 11 outcome for unsecured claims, minimizing such claims before filing is highly recommended. Stay tuned we will address how to respond when your customer, now in Chapter 11, insists on normalized credit terms because the DIP facility approved by the Court provides adequate cash to pay. We hope you found this useful and informative. Please contact us if you have any questions about this, or any other ma er.

35 Vendor Section 503(b)(9) Administrative Priority Claims: When Goods are Received is Critical Business Information for Clients and Friends of Shumaker, Loop & Kendrick, LLP David Conaway Manufacturing Customers Vendors Supply Chain September, 2017 January 2016 Insolvency Litigation Commercial and Financial Contracts Cross-Border Debtors in Chapter 11 proceedings rarely pay unsecured creditors a meaningful dividend on prepetition accounts receivable balances, much less pay them in full. In an era of aggressive lending to place capital in the market, loan to value ratios are high. When a company experiences financial distress or insolvency, unsecured creditors may be out of the money from the get-go. To improve its outcome, a vendor must pursue available vendor remedies, including critical vendor status, the assumption of a sales contract, reclamation, exercise of setoff, or a priority administrative claim under Section 503(b)(9) of the Bankruptcy Code, known as a 20-day administrative priority. The 20-day administrative priority claim allows a vendor to effectively convert a portion of its prepetition accounts receivable balance to a post-petition administrative priority claim. Since administrative priority claims are normally paid in full (absent administrative insolvency ), this remedy significantly improves the outcome for the vendor. To qualify, the vendor must establish the value of goods it delivered to the debtor that were received by the debtor within 20 days prior to the chapter 11 filing. Debtors (and behind the scenes, their lenders) seek to minimize administrative claims, including 20- day administrative claims. Debtors often challenge the claim by asserting that the goods were not received in the 20-day period. When are goods received? In an F.O.B. seller s plant contract, are goods received when placed with a carrier when risk of loss and possibly title pass to the buyer? Are goods received when the seller delivers goods to the debtor s agent such as a third-party logistics company? When are goods received if the seller drop ships the goods directly to the debtor s customers? In a recent Delaware Chapter 11 case (World Imports Ltd.), a Chinese supplier shipped goods to its U.S. customer F.O.B. point of origin, so risk of loss passed to the U.S. buyer at port in China. The goods were loaded on the ship 38 days prior to the Chapter 11 filing, and arrived at the debtor s warehouse 13 days prior to the filing. The seller argued the goods were received upon physical possession. Of course, the buyer argued that the goods were constructively received when loaded on the ship. The Bankruptcy Court ruled that goods were received when loaded on the ship, and thus not delivered within the required 20 days. Fortunately, the seller persisted and appealed the Bankruptcy Court ruling to the Third Circuit Court of Appeals, which, on July 10, 2017, ruled that receipt does not occur until after the seller s ability to stop delivery ends namely upon the buyer s physical possession.... A victory for vendors! The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 1

36 Vendor Section 503(b)(9) Administrative Priority Claims: When Goods are Received is Critical Subsequently, the Bankruptcy Court in another Delaware Chapter 11 case, SRC Liquidation, LLC, addressed receipt in the context of goods that were drop shipped from the seller directly to the debtor s customers. Jumping on the Third Circuit s physical possession test, the SRC Bankruptcy Court ruled that the debtor never had physical possession, so the goods were never received. The Delaware Bankruptcy Court should have distinguished the F.O.B. shipment case from the drop ship case. Both are used in very different market circumstances and should be treated differently. In a world of Amazon, Google, and Alibaba, sellers of goods do not deliver goods to buyers; rather, sellers deliver goods to the buyer s customers, at the buyer s request. The buyer clearly receives value from the seller, and value should be the fountainhead of the analysis. This is precisely the circumstance where constructive receipt should be applied. The takeaway is that the 20-day administrative priority claim remedy adds significant value for vendors. Anticipate that debtors will challenge such claims, but knowing the rules, and persistence will pay off for vendors. We hope you found this useful and informative. Please contact us if you have any questions about this or any other ma er. David H. Conaway September, 2017 David Conaway dconaway@slk-law.com Manufacturing Customers Vendors Supply Chain Insolvency Litigation Commercial and Financial Contracts Cross-Border The contents of this newsle er are offered as general information only and are not intended for use as legal advice on specific ma ers. 2

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