Someone who owes you money files for bankruptcy. Now what?
Mark Powers
You have just learned that your counterparty has filed for bankruptcy. Be aware that deadlines in bankruptcy move quickly, and creditors who sit on their rights may lose them. So what do you need to do and how quickly do you need to act? Just as importantly, what actions are you now prohibited from taking? U.S. Bankruptcy Code prohibits creditors from exercising certain rights after a bankruptcy case is filed. How should creditors navigate this new landscape? These questions apply to a variety of commercial relationships, including banks extending financing to delinquent borrowers, manufacturers selling and delivering goods on credit, and landlords whose tenants seek bankruptcy protection.
When your counterparty files for bankruptcy the normal rules of commerce change. The bankruptcy process invariably delays and sometimes prevents creditors from exercising their bargained-for contractual rights. Contractual provisions enforceable outside of bankruptcy are sometimes unenforceable inside of bankruptcy.
To navigate this process, creditors first need to understand the broad scope of the automatic stay imposed under the bankruptcy code upon the commencement of a bankruptcy case. As the term implies, the stay is automatic (effective immediately upon filing without further order of the court) and prevents creditors from, among other things, commencing or continuing any action to collect a debt. A creditor with notice of its counterparty's bankruptcy filing taking any action to collect its debt (e.g. by sending dunning letters, making phone calls, or filing court documents), may be deemed to have knowingly violated the automatic stay and be subject to sanctions.
Upon the filing of a bankruptcy petition by your counterparty, you should assemble and review all documents relevant to the relationship. If you are a bank that extended credit to a delinquent borrower, you need to review your loan documents, confirm your mortgages and other security documents and instruments are properly signed, valid, enforceable and perfected; educate yourself on the bankruptcy issues unique to your counterparty, and determine whether you can obtain an order from the bankruptcy court granting you relief from the automatic stay to exercise rights and remedies. A customer's bankruptcy filing often causes banks to engage separate bankruptcy counsel to more effectively navigate the bankruptcy process and to identify deficiencies in its loan documents.
If your company sold and delivered goods on credit to a counterparty filing for bankruptcy, you need to identify the relevant contractual documents (purchase orders, invoices, copies of checks, and other contractual documents) and comply with critical deadlines, including deadlines to reclaim goods, to file an administrative expense claim for goods sold and delivered within 20 days of the counterparty's bankruptcy filing, and to file a proof of claim in the bankruptcy case. If you are a landlord and your tenant files for bankruptcy, you need to monitor the case closely, identify any motions to assume or reject leases, respond timely to such motions, confirm whether proposed cure amounts are accurate, and assess whether a proposed assignee can offer adequate assurance of future performance within the meaning of the bankruptcy code.
You should promptly confer with an experienced bankruptcy lawyer when your counterpart files for bankruptcy. An attorney will assess your individual situation, advise you on your legal rights, assure compliance with applicable deadlines, and develop a comprehensive strategy to maximize recovery.
Mark Powers is a partner at Worcester law firm Bowditch & Dewey. Reach him at mpowers@bowditch.com.
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