Suppliers and other bankruptcy creditors must resist the tendency to think that they are “along for the ride” in a customer’s bankruptcy. In fact, after a customer files bankruptcy, asking the right questions and getting the right answers before it is too late can make a big difference.
Consider the following 10 questions. There are many other questions that might be equally important to those below. We have chosen these questions because we believe they address issues that more often arise.
- Who was your company’s “customer” for the goods or services provided?
- What goods were received by the customer in the 20 days prior to the bankruptcy filing?
- What goods were delivered to the customer in the 45 days prior to the bankruptcy filing?
- Were there any goods that left your company’s facilities but are not yet delivered to the customer at the time the customer filed bankruptcy?
- Does your company have any state law lien rights on the goods delivered to or with respect to the services provided to the customer?
- Were any bankruptcy court orders entered on “first day motions” that might benefit your company and what steps need to be taken to get in line for these benefits?
- Does your company have a contract for the provision of goods and services with the bankruptcy customer that survived the bankruptcy filing and, if so, what would be the “cure cost” to cure all defaults under the contract if it were assumed and assigned?
- What terms can or should your company offer to the customer on a going forward basis?
- Are your company’s pre-petition receivables correctly listed in your Customer’s claims schedule?
- Are the payments to your company in the 90 days prior to bankruptcy correctly listed in your customer’s statement of financial affairs?
By clicking on the above question you can access additional materials, where we examine in more detail the question; we provide an explanation as to why we think getting the right answer is important; and we also give some suggestions on where the answers to the questions might be found.
You might think that some of these questions are simplistic. In some bankruptcies, you might be right. In others you would be wrong and the error could be very costly.
Look at the first question. The name of your “customer”. You might be thinking: “How can someone misidentify the customer?” Consider the following:
- Many businesses isolate operations in subsidiaries or brother/sister entities.
- The corporate names of affiliates are often very similar – consider our post on the recent bankruptcy of Noble International, Ltd. where 12 of 14 of the debtor subsidiaries were also “Nobles”.
- Multiple entities may operate under a single trade name
- A “master agreement” may cover sales of goods and services to multiple companies under common ownership as well as with entities outside of the common ownership – e.g. joint ventures, subcontractors, and other suppliers.
- In the Chrysler Bankruptcy, see our posts on the Chrysler cure costs fiasco where Chrysler repeatedly did not use the correct name of its own subsidiary when providing cure cost notifications to its suppliers.
Now look at your own company’s books and records. Cross check the “customer’s name” on the following:
- releases and purchase orders
- the contract your company signed with the customer signed
- the customer name on your invoices
- the name on the bank account from which your company was paid;
- business name of the location where you shipped goods or provided services (check delivery records)
- any 1099s issued to your company for the prior year’s payments
If the customer’s name in this material is not consistent, then your company is like many.
So why is it important to correctly identify your customer in bankruptcy?
- your company must confirm if your “customer” filed or did not file bankruptcy .
- in a multi-debtor bankruptcy which of the multiple debtors is your “customer” may affect your company’s recovery of pre-petition claims and other bankruptcy creditor rights and obligations.
- if one of the entities you have identified as being a possible “customer” did not file bankruptcy, you need to be careful not to give up or weaken the argument that the non-bankrupt entity is responsible for paying your company’s invoices,
- splitting up payments among multiple customers can actually create or enhance defenses to bankruptcy preference claims.
And there are still other reasons to get the name of your customer right from the start.
The educational materials on this web site are intended to give insight into why asking these questions and getting the right answers quickly is important.