The Six Flags debtors (the “Debtors”) have sought only limited relief for suppliers as part of their first day motions. The Debtors estimate that they owed approximately $17 million for goods and services when the bankruptcy petitions were filed. However, the Debtors seek initial authority to pay critical vendor claims in an amount not to exceed $604,543, Section 503(b)(9) claims in an amount not to exceed $4,043,780 and claims of foreign vendors, shippers and warehousemen and potential lien claimants in the approximate amount of $1,408,000.   This means that suppliers holding about $11 million in trade debt will have to wait to see if there are any distributions at the end of this bankruptcy.

While the limited amount of the critical supplier relief sought is disappointing, it is not surprising. Based on a preliminary analysis of the petitions it is apparent that the $17 million in trade debt is spread out over a large number of suppliers of goods and services. There are 13 trade debts listed in the top 20 list of unsecured creditors but the total of all their claims is only approximately $1.7 million. The smallest trade debt to make the list was in the amount of only $32 thousand. This means that the bulk of the Six Flags suppliers are smaller, likely local vendors.

These demographics mean that no supplier is going to have a lot of leverage. The goods or services provided are unlikely to be unique. There are going to be multiple other suppliers anxious to pick up a new customer the size of Six Flags, even with it being in bankruptcy.

In an additional motion filed by the Debtors will provide some relief to some suppliers. The Debtors have asked for authority to pay up to $4,043,780 for pre-petition claims for goods delivered to the Debtors within the 20 days immediately preceding the bankruptcy filing date. Payment of these claims in any event is authorized as an administrative expense under Section 503(b)(9) of the Bankruptcy Code. However, the payment of these expenses can take months or years. The significance of Debtors’ motion is to allow payment of those claims according to pre-petition payment terms.

There are two major limitations on this type of relief for suppliers:

  1. Payment is only available for the payment of goods – payment for services is not allowed; and
  2. Payment is discretionary – Six Flags is authorized but not required to pay the claims.

Finally, Six Flags has moved for authority to pay foreign vendors (in an amount up to $559,224), shippers, warehousemen (in an amount up to $47,261), and other lien claimants (in an amount of up to $801,759).   The category of lien claimants deserves elaboration.

The Bankruptcy Code recognizes and protects certain rights that are created by state law.  These preserved state law rights include rights to assert and prefect mechanics’ or artisans’ liens (collectively, the “Mechanics’ Liens”) against the Debtors’ goods.  Most suppliers of goods or services are aware of these lien rights.  However, in the context of a customer bankruptcy, there is uncertainty as to whether these rights are preserved and whether steps still can be taken to preserve those lien rights in the face of the automatic stay.

The existence of liens arising under state law and perfection of those liens after a bankruptcy filing are matters that must involve consultation with your counsel.  Simply, these are matters that require the involvement of a legal professional.  However, suppliers should be aware that lien rights may exist and steps usually need to be taken to preserve those lien rights.  Suppliers should also be aware that some of these steps may not be prohibited by the automatic stay. (See for example Section 362(b)(3) of the Bankruptcy Code.)

When Six Flags seeks to pay the claims of lien claimants, they are not paying anything that they would otherwise not be required to pay.  However, they are seeking to make that payment without requiring the supplier to assert the lien claim.

As in the case of the critical supplier payments, Six Flags is only seeing authority to pay  lien claimants.   Whether Six Flags pays a particular supplier remains in its discretion.  So, suppliers should beware.  Suppliers should not let entry of a lien claimant payment order keep them, in consultation with counsel, from determining, evaluating and preserving their lien claims.

For more post on the Six Flags Bankruptcy, click the Filed under Six Flags Bankruptcy link below.