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Tuesday, March 1, 2011

Protecting Yourself in the Face of Bankrupt Customers

Knowing your rights when it comes to dealing with bankrupt customers has become crucial for many business owners in recent times in getting paid for goods and services. Understanding the basics of “reclamation rights” and “critical vendor” status is a good place to start in protecting your business while still moving forward in this economy.


Reclamation permits a vendor to take back a certain amount of goods that it sold to a customer who is unable to pay, either before or after filing for bankruptcy.

Before filing Bankruptcy:

If the customer has not yet filed, the vendor shall look to the Uniform Commercial Code (UCC) for the required reclamation guidelines. The UCC allows for a vendor to reclaim goods bought on credit “while insolvent” if the demand is made within 10 days after the customer received the goods, and is limited to only those goods received during the prior 10 days.

The written demand must be:
• in writing
• identify the specific goods, and
• served on the vendor (i.e. certified mail, or some other method that allows for delivery confirmation).

After Filing Bankruptcy:

Reclamation after the debtor has filed for bankruptcy is governed by the Bankruptcy Code.

A vendor has 45 days to demand reclamation of the goods, given the transaction(s) fall within certain guidelines:
• first, the goods must have been sold during the “ordinary course” of the vendor’s business;
• second, the goods must have been received while the debtor was insolvent.
• The demand must also be in writing and served within 45 days of receipt of the goods by the debtor. If the 45 day period expires after the bankruptcy is filed, the vendor must make the reclamation demand within 20 days after the filing.

Any creditors of the company in bankruptcy will be notified by the bankruptcy court. It is always in the best interest of the creditor to make the reclamation demand as early as possible.

However, the Bankruptcy Code has provided a section that allows for an administrative priority claim for the value of any goods received by the debtor within 20 days prior to the filing for those goods sold in the “ordinary course” of business.


“Critical Vendor” status applies when certain vendors are “critical” to the ongoing business of the debtor after the bankruptcy filing as it applies to reorganization.

Typically, under the Bankruptcy Code, a debtor is not permitted to pay any of the amounts that were owed prior to the filing.

However, the courts have created an exception for certain vendors who prove to be essential to the ongoing business.

The vendor must demonstrate to the debtor, and eventually to the court, that they will only continue to provide said goods and/or services if:

• They are paid for their pre-petition claim, and
• that without the vendor’s continued business, reorganization would be exceedingly difficult, if not impossible

Obtaining “critical vendor” status is never guaranteed and should not be relied upon.

Rather, a vendor is better off acting quickly in exercising its reclamation rights, while pursuing a parallel path towards becoming a critical vendor.

By Kimberly A. Gessner, Esq. of The Soto Law Group, P.A.

Hot Topics on the Roof


Five Hialeah homeowners have sued FPL and a local Broward roofing contractor alleging roof failures and leaks following application of reflective paint to their shingled roofs. The paint was applied as part of a FPL painting program aimed at lowering homeowner’s electrical bills. As part of a FPL sponsored program, over 400,000 homeowners allegedly contracted with roofing contractors to fit their roofs with reflective paint.

An elastomeric paint, approved for use by FPL, has been blamed for the damage. The particular type of paint at issue in the case has been cited by the Asphalt Roofing Manufacturers Association as problematic. Although never recommended or approved by either the Federal Department of Energy or the Asphalt Roofing Manufactures Association, FPL began reimbursing Florida contractors which had painted residential shingle roofs with the paint. In their December 30, 2010 article titled “FPL sued over roof painting program,” the Sun Sentinel reported that the paint was barred from use by both Broward and Dade building codes. Apparently the paint causes moisture to become trapped, thereby allowing the shingles to rot. The Sun Sentinel also reported that FPL has disclaimed any responsibility for the damages suffered by the homeowners, arguing that it does not hire the contractors but merely reimburses the contractors for their work.

FLP Sued Over Roof Painting Program,

SUN SENTINAL, December 31, 2010 at A1.


Did FPL list, as approved for use the particular type of paint used in the case?

If so, a contractor in a similar situation may seek indemnification and damages from FPL for liabilities it has incurred by using the paint. In such a scenario, FPL may be liable for negligently misrepresenting the quality and appropriateness of the paint used.

Did Contractor comply with building codes?

Under Florida law, a violation of the building code is evidence of negligence and could make defending a lawsuit brought by an owner more difficult. Furthermore, a code violation could lead to civil penalties.

What role does the manufacturer/seller have in all this?

Under the UCC of Florida, where a seller of goods knows the intended use for which the goods will be applied or utilized, they are held to impliedly warrant that the product will be suitable for the intended purpose. So, if it turns out that the product has failed at no fault of the contractor, the contractor may be able to bring suit against the seller and/or the manufacturer of the product.

What about my insurance policy?

If you were involved in similar FPL programs you may be sued for up to 10 years from the date the work was performed. Plaintiff’s lawyer will in all likelihood assert claims for negligence as they may claim damages to the roof, structure and contents over which the paint was applied. If you receive such a claim, immediately report it to your GL insurance carrier/broker as these types of claims may be covered by your insurance policy or at a minimum trigger the duty to defend by the insurer.


ENR reports that the “largest sloping green roof [grass covered] in North America” suffered a partial failure/collapse due to an ice dam that prevented water from draining off the roof. Chicago is home to more than 600 green roofs. The collapse is being investigated by structural engineers to determine if loads applied by plants, soil, grass and heavy snows exceeded the roof’s performance criteria.


Utah School Districts have installed the first of approximately 70 solar panels using Federal Stimulus monies as part of a green energy education program. Johnson Controls is identified as the design builder. Roofers for purely business purposes must stay current on solar roof trends and opportunity at all levels.

See School Construction News Vol. 17, No. 1, 2011