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Tuesday, July 10, 2012

CUSTOMER FILES FOR BANKRUPTCY: WHAT NEXT?

Customers filing for Chapter 11 or 7 Bankruptcy are a fact of life, yet few companies have any standard procedures to monitor for such filings or alert them as to what procedures should be followed with the bankruptcy court.

Bankruptcy provides Debtors [formerly known as your customer] with various tools to shed contracts and financial obligations.  It also permits them to reorganize their business and sell valuable assets.  Suppliers which find themselves thrown in the mix of creditors and otherwise interested parties of the Debtor often have very little time to respond and properly determine if they should even be involved.

The First Steps of Bankruptcy:

Subsequent to the Bankruptcy petition filing and the dreaded “Automatic Stay” which freezes collection efforts against the Debtor, the Debtor will file the bankruptcy petition along with what are termed the “first day orders”.  These orders are filed to have the court approve retention of employees, special treatment for some vendors, and financing. There is very little notice of these filings/hearings.  Despite the relative lack of notice, these initial pleadings provide important clues as to the reasons for the bankruptcy and how the Debtor plans to reorganize.

Suppliers should review these filings, the schedule of assets, list of creditors and their own customer records to determine what monies are owed, whether you have interests as a critical vendor, or have received substantial payments in the 90 days prior to the filing (what could be deemed as “preferential payments”).

The first order of business for the supplier/vendor should be to determine if filing a proof of claim is appropriate.  Filing a proof of claim without first analyzing the potential risks involved is poor practice.  An avoidance action can sometimes be avoided by simply not getting involved in the bankruptcy.  Other times, filing a proof of claim will be necessary and in those cases, there are deadlines to be observed.

 Critical vendors/suppliers must act quickly in the first days of the filing to establish orders on payment for prepetition debts, wavier of avoidance actions by the Debtor and go forward credit terms.

The Proof of Claim:

Throughout the bankruptcy the court will issue orders setting deadlines for creditors to file proofs of claim.   To do so, the correct proof of claim forms with relevant contracts/invoices must be filed.  However, before filing suppliers should weight in on the possibility of recovery versus the exposure to potential preference actions.  If substantial payments were received in the months prior to the bankruptcy petition and they are arguably not in the ordinary course of business, filing a proof of claim may not be a good idea.

 While not filing a proof of claim is by no means a guarantee of avoiding a possible preference action, the act of filing the proof of claim with the court may actually result in alerting the trustee to a potential preference action against you.

A Debtor’s Assumption of Certain Contracts

A Bankruptcy Court can authorize a Debtor to assume certain contracts during the petition, assuming it meets certain conditions.  While this may sound appealing, the process is actually quite dangerous.  Suppliers seeking payment under this option must first determine what deadlines exist for them to file cure amounts.  Under this process the Debtor lists the amounts it claims are due to the supplier under the contract.  These lists however, may differ from what the supplier claims is actually owed.  Pursuant to deadlines established by the court, the supplier must object to the amounts claimed by the Debtor and identify what it believes are the correct “cure amounts”.  In the event the deadline is not met the supplier runs the risk of accepting what the Debtor claimed was owed.

Selling Assets Free and Clear

As part of a petition, Debtors often seek to sell the vast majority of their assets and file a liquidation plan.  For a supplier that has an ongoing relationship with the Debtor and has an interest in the Debtor’s assets/equipment, it is imperative to act quickly and identify the assets or equipment in which the supplier has an interest secured or otherwise.  By doing so, you put any potential purchaser on notice that there is a lien/security interest in the asset/equipment being sold.  This will be necessary in order to avoid being estopped from claiming that your interest has been extinguished by the sale.

Selling Materials Postpetition

Suppliers which have provided materials postpetition may be entitled to what is termed an administrative claim.  Such a claim, as opposed to an unsecured prepetition claim, is of higher priority.  Thus, when filing a proof of claim it is important to distinguish between materials sold prepetition and postpetition. 

Rights of Reclamation

Another scenario facing Suppliers with a Customer in Bankruptcy are potential “Rights of Reclamation.” Rights of Reclamation are defined as the right to reclaim goods shipped to a customer in financial distress (subject to certain time frames and limitations). Typically once the Debtor has filed for bankruptcy, a supplier that has not made a written demand of reclamation has a limited time frame within which to do so.

The demand must be made in writing, 45 days immediately preceding a Customer’s Chapter 11 bankruptcy filing. If however, the 45 day period expires after the bankruptcy filing, an additional 20 days is given within which to make the demand. 

 However, a Supplier can lose its Rights of Reclamation if the Debtor sells the goods, either before or after receiving the written notice of reclamation. Thus, it may become necessary to seek proper court action to prevent such sales.

 Dealing with a Customer that has declared bankruptcy can be a treacherous course to navigate. Suppliers are highly encouraged to consult their legal counsel for assistance in determining the proper course of action needed to ensure their interests.

By:       Jose A. Rodriguez, Esquire
             The Soto Law Group, P.A.






Friday, February 10, 2012

FIRST SEALORD SURETY BEING LIQUIDATED

OWNERS, CONTRACTORS AND SUPPLIERS BEWARE

            In response to legal action taken by The Pennsylvania Insurance Department, The Commonwealth Court of Pennsylvania issued an Order of Liquidation for First Sealord Surety on February 8, 2012. The Department’s actions were likely prompted by A.M. Best’s downgrading of First Sealord’s insurer ratings from an A- rating to a C- rating late last year amidst growing concerns of the company’s declining capitalization.

            This news will necessarily create significant concern throughout the construction/surety industry as surety bonds are not themselves typically re-insured against company failure. Owners whose Contractors or Subcontractors are currently bonded with First Sealord should contact them as soon as possible to arrange for substitute bonding on any ongoing projects. Contractors, Subcontractors and Materialman with potential bond rights against a First Sealord Surety bond should likewise consult with legal counsel as soon as practicable to determine what alternative lien rights they might have on any such projects and other measures that might be taken to preserve their interests and claims.  

By:
Jose A. Rodriguez, Esq.
The Soto Law Group, P.A.

Thursday, February 9, 2012

DID YOU COPY/SCAN THOSE CHECKS?

You get an email from your lawyer to the tune of “a final judgment was entered,” to which you likely respond, great!!! So where is my money?!?! Followed by, “Got any copy of checks”?

Obtaining an order of final judgment against a customer in default only entitles you to enforce the judgment; it does not per say “give” you any money. While there are many collection methods, the typical vehicle of collection for Suppliers and Materialman are Writs of Garnishment. Florida Statutes § 77.01 provides that “every person or entity who has sued to recover a debt or has recovered judgment in any court against any person or entity has a right to a writ of garnishment . . .”

The writ can generally be issued against 3rd parties who have a monetary obligation to the defendant, typically a bank. In essence the writ of garnishment acts as a lien. Once the “lien” has attached to the debtors property (in this case a bank account), the property or money in that account is frozen until the court or parties determine who is in fact entitled to the money. Some garnishments are heavily contested, either because another creditor has laid claim to the account or the defendant themselves claims the property is exempt. In cases where another creditor is or has laid claim to the account, who served the garnishment first usually wins.

However, situations may arise where the embattled creditors will have to prove who “perfected” their rights first. In this respect the time when the final judgment was recorded may be extremely important. It is always a good idea to record your judgments, but it is an even better practice when perfecting your garnishment action. Assuming your counsel knows what banks to garnish, Writs of Garnishment are not free and getting the Bank to release the money may or may not be easy. Typically, the defendant is set for a deposition in an effort to gather information leading to possible sources of collection.

Defendants do not always appear at their deposition, making it even more difficult to collect on a judgment. However, Suppliers and Materialman can greatly increase their chance of success of enforcing a judgment by simply retaining copies of customer checks used to pay for their materials. Being able to provide your lawyer with such copies not only gives them an immediate source to garnish but can prove to be a cost saving exercise. Make it a practice to have checks received from customers stored in hard copy or scanned and e-saved to their files.

By: Jose A. Rodriguez, Esq.
The Soto Law Group, P.A.