If your customer files its bankruptcy petition after October 17, 2005, you may be entitled to the benefit of some new or changed rules resulting from revisions recently made to the United States Bankruptcy Code. In fact, some of the provisions are significantly more friendly to creditors, so you may find yourself in a much better position than you would have been under the prior version of the Bankruptcy Code.

New Provisions Applicable to Preference Actions

If you received payments from your customer within 90 days before the bankruptcy filing, you have always been at risk of being required to return those payments. While you have also always had a potential defense if the payments were made in the “ordinary course of business,” you previously needed to show that the payments were ordinary between you and the particular customer, and for the relevant industry. Now you may have a valid defense if you can establish either of those factors. You may also have a new complete defense if you received less than $5,000 within that 90 day period and your customer is a business.

Furthermore, all new preference actions seeking to recover less than $15,000 arising out of consumer debts, or less than $10,000 arising out of business debts, must be filed only in the district where the defendant resides. This amendment will make it less likely that debtors will pursue small preference actions against creditors located outside of the district where the bankruptcy is pending. Even if these actions are pursued, at least you will be able to avoid the added cost and inconvenience of proceeding in a forum far from your own location.

New Provisions Applicable to Vendors

Vendors have always had the right to “reclaim” goods from a customer if they were delivered while the customer was insolvent. Previously, you had to make an appropriate demand for return of the goods within 10-20 days, depending on how close to the bankruptcy filing the goods were received. Now, you generally have up to 45 days from delivery to make that demand.

Even if you miss the deadline, you can still take advantage of another new protection. If you delivered any goods to the debtor in the ordinary course of its business within 20 days before the bankruptcy filing, you are entitled to a higher “administrative” priority for the cost of the goods. This is a very valuable protection, because creditors almost always receive full payment of administrative priority amounts. Other creditors who are owed money from before the bankruptcy filing, on the other hand, generally will only receive a small percentage of what they are owed.

While these new protections for creditors could be very helpful to you, you need to act promptly and appropriately to protect your rights. As soon as you discover that your customer has filed for bankruptcy protection, contact legal counsel to discuss your options. If you simply “write off” what your customer owes you, or you fail to comply with the specific requirements of the Bankruptcy Code, you may lose certain opportunities that might otherwise have been available.

Authored by:

Alan H. Martin

(714) 513-5100