The so-called 20-day administrative priority claim (set forth in Section 503(b)(9) of the Bankruptcy Code) is perhaps the best remedy available to vendor creditors in Chapter 11 cases.
In Reichhold Holdings US, Inc., on August 24, 2016, the Delaware Bankruptcy Court ruled that a vendor's reclamation trumped a lender's lien on inventory, arising from a post-petition DIP loan (that was used to repay the prepetition loan).
Generally, reclamation claims are subject to existing liens on inventory. However, where a prior loan is paid, the underlying liens are extinguished, and the existing reclamation claim becomes the first "lien" on the inventory. Liens arising from a subsequent DIP loan are junior to the pre-existing reclamation claim.
Companies that sell goods or extend credit to customers expect to be paid. When customers become insolvent, or file for Chapter 11 protection, those expectations are no longer realistic. Yet, there are a number of "creditor remedies" that can be utilized to maximize recovery from the insolvent customer. This article addresses one such "remedy": a carve-out from the pre-petition secured lender.
In Bankruptcy Code Section 363 sales of assets, there are winners and losers.
Chapter 11 is known as a forum for reorganizing or selling a financially distressed business. If a Chapter 11 reorganization is not possible, a sale of assets may create investment opportunities for strategic buyers, investment banks, and private equity to take advantage of the “distress” normally associated with Chapter 11 to acquire assets at a discount, exemplifying Warren Buffet’s “value” buying.
Picture the scene: You have just received word that your customer has filed Chapter 11. You had followed my ad-vice (see article Reducing a Customer’s Accounts Receiva-ble in the Zone of Insolvency), and put the customer on a cash-before-delivery basis and demanded assurances of performance. You were successful in reducing the ac-counts receivable owed, and avoiding preference liability in doing so.
The customer, now a Chapter 11 debtor, calls and de-mands that you continue to ship, and resume credit terms.
The 10th U.S. Circuit Court of Appeals issued an important preference decision on August 10, 2015.
What You Need to Know
Payments to creditors arising from a recent, single business transaction can be protected by the ordinary course of business defense.
C.W. Mining Company Case
The debtor C.W. Mining Company was failing. In an attempt to survive, it decided to try something new, specifically to increase coal production by converting its mining operations from continuous mining to a long wall system.
On June 15, 2015, the US Supreme Court ruled that a law firm could not recover fees it incurred in defending its own fee application.
THE ASARCO CASE
The case involved the copper company ASARCO LLC that filed for Chapter 11 protection in 2005 to deal with cash flow and environmental issues, among others.