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Bankruptcy Brief - May 13, 2010

Receiving notice that a company has filed a Chapter 11 reorganization bankruptcy case is not welcome news for general unsecured creditors, such as the debtor's suppliers, customers or vendors.  The key to success in addressing any unwelcome news is the creditor's response.  Unsecured creditors should consider proactive steps to protect their interests, rather than merely ignoring the bankruptcy.  One course of action that is sometimes available to bolster an unsecured creditor’s likelihood of payment is "critical vendor" treatment.

Too often, a chapter 11 debtor pays a small percentage of an unsecured creditor's claim at the conclusion of its reorganization.  Even worse, the debtor's reorganization effort may fail and leave the unsecured creditor with no payment at all.  An exception to these general outcomes occurs when the debtor obtains court approval to immediately pay unsecured claims of creditors the debtor designates as critical vendors, which induces the creditors to continue conducting business with the debtor.

Early in the bankruptcy proceeding, the debtor identifies creditors with goods or services that are vital to the debtor's on-going business.  Critical vendors provide unique goods or services not otherwise available, or not otherwise available except at a significantly higher price.  Once critical vendors are identified, the debtor must seek court approval to allow the debtor to pay them out of turn. 

Additional consideration supporting such a request usually includes a requirement that the creditor agree to payment terms and continue to transact business with the debtor for a period of time.  Whether a vendor is critical is solely the debtor’s decision, but creditors may have success lobbying for such treatment.  The authority for critical vendor treatment is now generally found in the ability of a court to allow actions outside the ordinary course of business.

While critical vendor treatment has significant upside for an unsecured creditor, it is not without risk.  For example, if critical vendor treatment is tied to continued business with the debtor, the creditor must assess the risks of continuing business with a debtor in bankruptcy.  Also, critical vendor arrangements do not necessarily insulate the debtor from the risk of suit for receiving prepetition preferential payments.  Preferential payments include those received from the debtor within ninety days prior to the bankruptcy filing.  The critical vendor should, therefore, attempt to insist on a provision that releases potential preferential claims.

If you have questions regarding your rights as a creditor in a chapter 11 bankruptcy, please contact any of the attorneys listed on Greenebaum's Bankruptcy and Workout Team.

Even though the content of the above Greenebaum Doll & McDonald e-bulletin is primarily informative, state and federal law obligates us to inform you that THIS IS AN ADVERTISEMENT. You have received this advisory because you are a client or friend of the firm.

About Greenebaum Doll & McDonald PLLC
Greenebaum Doll & McDonald PLLC is a widely-respected business law firm with approximately 170 professionals in five offices, serving local, national and international clients in virtually every industry. A forward-thinking business law firm, Greenebaum is committed to the practice of Breakthrough Law®.

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