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Pre-Petition
Creditor's Rights in a Chapter 11 Bankruptcy
There are
a number of myths and misconceptions about the rights of trade creditors
when their business customers file for Chapter 11 bankruptcy protection.
With the number of Chapter 11 filings on the rise, creditors need to know
their rights in order to protect their employer's interests when customers
file for a reorganization bankruptcy. Creditors can lawfully:
- Be one
of the petitioning creditors that forces an insolvent or illiquid customer
into bankruptcy.
- Place
the account on credit hold once a bankruptcy has been filed.
- Stop all
shipments in transit to the debtor, and demand that common carriers
return such shipments to the seller.
- File a
reclamation claim for any shipments received by the bankrupt debtor
within the time frame specified in the U.S. Bankruptcy Code.
- Refuse
to extend credit to the bankrupt debtor.
- Refuse
to sell on C.O.D. company check terms.
- Demand
immediate payment against a personal guarantee, or an inter-corporate
guarantee given to the creditor on behalf of the bankrupt debtor, and
sue the guarantor[s] if necessary to collect the entire balance due.
- Attend
the first meeting of creditors and question the debtor in person.
- Bring
to the attention of the trustee or the Bankruptcy Court information
proving that the debtor has hidden assets, or committed some other type
of fraud such as a fraudulent transfer [conveyance] of assets.
- To ask
the Court to appoint a trustee to run and manage the business if the
debtor's management is incompetent, or is involved in some form of theft
or fraud.
- Ask the
court for approval to seize collateralized assets.
- Ask the
debtor to reaffirm the pre-petition debt.
- Ask to
join the creditor's committee.
- Refuse
to join the creditor's committee.
- Refuse
to disgorge payment[s] in response to a reclamation demand received
from the trustee - and instead negotiate or litigate over the validity
of the reclamation claim.
- To petition
the Court to convert a reorganization bankruptcy into a liquidation.
In a Chapter
11 case, the debtor usually remains in possession of its assets and assumes
the duties of a trustee. The debtor in possession in theory acts as a
fiduciary for the creditors of the estate, and the D.I.P. in theory owes
creditors the highest duty of care and loyalty. That being said, credit
professionals that do not actively monitor the activities of the debtor,
or do not carefully review the documents received from the Court, or do
not carefully and frequently evaluate the advisability of selling to the
debtor in possession are placing their employer at risk.
Source:
Michael Dennis, author of "Credit and Collection Handbook" available
at the NACM Bookstore.
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