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Three Critical Issues for Suppliers
On May 2, 2008, Linens-N-Things and its affiliated entities filed for Chapter 11 bankruptcy protection in the District of Delaware. Linens-N-Things has a number of different suppliers that are effected by this bankruptcy filing. Following are three (3) very important issues that suppliers should know about to ensure their rights in the bankruptcy proceeding.

RECLAMATION
Certain suppliers have the right to reclaim goods that they have shipped a bankrupt debtor. A creditor may attempt reclamation of their goods sold in the ordinary course under Bankruptcy Code § 546 (c). However a supplier must move quickly on their right to reclaim any of these goods that are lost. The supplier must make a demand in writing for reclamation of the goods no later than 45 days after delivery. If the 45 day period has not expired as of the date of the filing of the bankruptcy petition, the supplier will be provided an additional 20 days to demand reclamation of the goods sold.

ADMINISTRATIVE EXPENSE
In addition to reclamation, suppliers also have the ability to seek a priority administrative expense under Bankruptcy Code §503 (b). This claim is for the “value of any goods” received in the ordinary course of business by a debtor within 20 days prior to the bankruptcy filing. To obtain this expense, the supplier must make a request, often by motion. A supplier who exercises their rights, can be in a better position than unsecured creditors since the Chapter 11 Plan of Reorganization cannot be confirmed unless all administrative expense claims are paid in cash on the effective date of the bankruptcy plan.

PROOF OF CLAIM
In addition to the other rights mentioned, suppliers should also file a Proof of Claim for any amounts due and owing prior to the petition date. The Bankruptcy Code allows creditors to be paid with other similar situated creditors through the Bankruptcy Plan. The Proof of Claim deadline is usually provided at the beginning of the case and will allow creditors to exercise these rights. It is important to file a Proof of Claim properly and prior to the deadline.

For my information on supplier’s rights in the Linens-N-Things bankruptcy case or any other bankruptcy matters, please feel free to contact either Tom Onder or Jeff Posta in the Bankruptcy &  Creditor’s Rights Group at (609) 219-7458 or tonder@stark-stark.com, and (609) 791-7021 or jposta@stark-stark.com.

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With the recent downturn in the market, a number of commercial tenants are experiencing financial difficulties. In turn, this can lead to problems for commercial landlords, most importantly, the tenant staying current with lease payments. This may then lead to the tenant filing for bankruptcy protection. If your commercial tenant files for bankruptcy, it is wise to have a strategy in place to not only minimize the time of non-payment, but also maximize the ability to receive rents and damages allowed under the Bankruptcy Code. 

Following are four (4) questions for commercial landlords to review with an attorney  whenever a commercial tenant files for bankruptcy protection:

1.    Have You Filed a Proof of Claim(s)?  As soon as the tenant/debtor files for bankruptcy protection, commercial landlords should ensure their rights to payment(s) by filing appropriate proofs of claim.  It is advisable to review with your attorney the current account history and lease to ensure all fees are being accounted. Landlords may be able to file upto three (3) different types of claims:

    a.    Pre-petition Claim. Section 502 of the Bankruptcy Code provides that creditors are permitted to file a proof of claim for all pre-petition charges and assessments owed.  If a tenant files for bankruptcy, the landlord is permitted to file a proof of claim for all fees and charges incurred prior to the filing date;

 

    b.    Post-Petition Administrative Claim.  Section 503(b)(1) of the Bankruptcy Code provides a creditor a priority claim for all “actual, necessary costs and expenses of preserving the estate”.  If the tenant remains in the premises after the bankruptcy and does not reject the lease, the commercial landlord may be allowed payment  ahead of other creditors for amounts incurred during this period; and

 

    c.    Post-Rejection Damage Claim. Section 503(b)(7) of the Bankruptcy Code provides a commercial landlord the right to be paid for “post bankruptcy rejection” damages. If the tenant rejects the lease, certain damages incurred and the remainder of the lease may be permitted priority before payment of certain claims.

2.    Is the Debtor/Tenant Assuming or Rejecting the Lease?  Landlords should inquire whether the debtor/tenant intends to assume or reject the lease.  Bankruptcy Code Section 365 provides that tenants are permitted to assume a commercial lease, as long as they cure all post-petition defaults. If they reject the lease, then the landlord may be able to proceed with an eviction action to remove the tenant. However, landlords should know that the Bankruptcy Code permits the debtor 120 days to decide whether to assume or reject the lease, with an additional 90 day extension.  All told, this can leave the landlord sitting around for more than 7 months without payment.  If your not being paid, it may be advisable to have the Bankruptcy Court allow you to proceed with an eviction action. 

3.    Should you File a Motion for Stay Relief to Proceed with an Eviction?   The debtor/tenant may not advise their intent to assume or reject the lease.  As noted, during this time, the debtor/tenant can use the premises without paying anything.  The landlord is permitted to file a motion for “Relief from the Automatic Stay”.  This Motion, if granted,  permits the landlord to resume or commence with a state court eviction action.

4.    What to Do with Items Left by a Tenant?  If the debtor/tenant leaves equipment, inventory or equipment at the premises, can you just throw it away? Does anyone have an interest in the left over items, like the debtor/tenants’ bank?   Can you recover storage fees? When a tenant/debtor files for bankruptcy, these left over items may be part of the bankruptcy estate. Gaining proper approval from the Bankruptcy Court, before disposing of the left over “junk” is essential to limiting liability.  For instance, the left over property may be secured by a bank, financial institution or creditor. You may want to have a UCC Search conducted to ascertain whether any security interest exists.  If security interests are discovered, it is advisable to give notice to those entities, possibly through a motion with the Bankruptcy Court.

These are just a few of the questions a landlord should ask when a debtor files for bankruptcy.  By asking these questions at the start of the bankruptcy, landlords can limit the loss or liability, as well ensure their right to payment through the Bankruptcy Code.

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Bankruptcy filings increased in February 2008 by 18% from January, and by 28% from a year earlier. In fact, February was the busiest month for filings since Congress overhauled bankruptcy law in October 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA").  This increase in filings also increases the chance that you will be faced with bankruptcy issues. Some of the revisions contained in BAPCPA that you may encounter are set forth below.

Pre-Petition Shipments Of Goods. BAPCPA created substantial additional rights for suppliers that sold goods to a debtor prior to the bankruptcy filing.  Section 503(b) of the Bankruptcy Code allows administrative-expense status to all claims for "the value of any goods" received in the ordinary course of business by a debtor within 20 days before the bankruptcy filing. The supplier must request administrative-expense status. By doing this, the supplier is in a better position than unsecured creditors to be paid, since a Chapter 11 plan of reorganization cannot be confirmed unless administrative claims are fully paid in cash on the effective date of the plan. Unsecured creditors typically receive only a fraction of their claims.

Reclamation Claims.Suppliers may now exercise their right to reclaim goods 45 days after the debtor's receipt of the goods under Section 546(c) of the Bankruptcy Code. Prior law limited the period for reclamation to 10 days after receipt of the goods. A written demand for reclamation of such goods must be made not later than 45 days after delivery. Suppliers must move quickly or their right to reclaim will be lost. If the 45-day period has not expired as of the filing of a bankruptcy case, a supplier will have an additional 20 days after the filing of the case to demand reclamation of the goods sold. A reclamation demand is "subject to the prior rights" of a holder of a security interest in the goods sold.

Preferences:  Small Claim Threshold and Venue. Creditors of a debtor who received small payments during the 90-day pre-bankruptcy preference look-back period are protected by BAPCPA.  Aggregate payments received by a creditor not exceeding $5,000 are now exempt from preference liability.  Also, creditors who have received potential preference payments in an amount less than $10,000 will no longer have to defend themselves in the home bankruptcy court of the debtor, which could be located in another state.  Instead, such preference actions must now be commenced in the creditor's home district.  

Preferences: Ordinary Course Defense. Prior to BAPCPA, to avoid preference liability, a creditor had to prove that the payment it received from the debtor was made in the ordinary course of business of both parties and that the payment was made in accordance with "ordinary" industry terms.  In other words, a creditor had to establish both defenses to prevail.  BAPCPA made it easier to defend a preference action, since a creditor now has to prove only one of the two defenses, thereby reducing the creditor's burden of proof.

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Timothy P. Duggan, Shareholder and Chair of Stark & Stark's Bankruptcy & Creditor's Rights Group will present at this year's 10th Annual William H. Gindin Bankruptcy Bench Bar Conference and will discuss the sale of assets in bankruptcy cases.

The conference will take place Friday May 2, 2008 at the Bunswick Hilton, in New Brunswick, New Jersey. Additional information, registration forms and CLE credit information can be found here.

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Jeffrey S. Posta, Shareholder and member of Stark & Stark's Bankruptcy & Creditor's Rights Group authored the article, Enforcing Liens on Real Estate Projects: Creditors must be diligent to protect their rights, for the January 14, 2008 edition of the New Jersey Law Journal.

The article discusses the dramatic decrease in home sales over the past few years and the consequential downturn in homebuilding. The increased number of companies subsequently filing for bankruptcy, slashing prices, and selling assets only indicates that those still in the business need to be more aware of what the short, or possibly, long-term effects of a decrease in homebuilding can mean for their business.

You can read the full article here.

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Many businesses are receiving “preference” demand letters directing the return of money received from bankrupt debtors. Among the more notable bankruptcy cases in New Jersey from where such preference demands may arise include: Best Manufacturing Group, New Jersey Affordable Homes, Rockaway Bedding, Marcal Paper Mills, Kara Homes, Elliot Building Group and Ash Holdings. Although this may seem an odd demand - return money for perfectly delivered goods or services -  the practice of recovering “preferences” in bankruptcy is allowed under the Bankruptcy Code.  However, before you go writing a check to return hard earned money, you should consult with a bankruptcy attorney to find out if the transaction qualifies for defenses, as well as your best possible negotiating position.
   

What is Preference?
A potential preference is a payment received from a debtor, made within 90 days of the bankruptcy filing.  Bankruptcy Code section 547(b) allows a bankruptcy trustee or debtor-in-possession to avoid this payment, if the transfer was to or for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent.  When Congress enacted the Bankruptcy Code, the policy behind preferences was to level the playing field for all creditors by not allowing a creditor to receive more than it would have within the debtor’s bankruptcy case. 

Proper Response to the Preference Demand Letter Critical
Although the Bankruptcy Code gives the power to recover these transfers, your business may have certain defenses to eliminate, or at least lessen, your exposure. These defenses include: payments made within the ordinary course of business; contemporaneous exchange for new value; payments made outside of the 90 day preference period; settlements during the bankruptcy case; and/or payments made via C.O.D.  To determine if your transaction qualifies for one of these defenses and make the proper response, it is imperative review the account information.

Information Needed to Determine Defenses
Prior to contacting your attorney, you should gather the full payment history at least a year before the bankruptcy filing.  This information includes:
1.    all correspondence, contracts, emails and the like with the debtor;
2.    a copy of all invoices, showing invoice date, terms, and amount of each invoice;
3.    a copy of the payments received (i.e. checks, wires, cash deposit slip) and date posted to your bank account;
4.    number of days elapsed between date of invoice and date payment was received; and
5.    personnel involved with the debtor’s account, so they can advise how payments were made, applied and any unique issues with the debtor. 

Once your attorney has this information, it will raise a number of questions  For instance, are some of the payments alleged as preferential outside the 90 day period?  Or, are the payments made within the ordinary course of your industry?  However, how do you determine your industry compared to a similar industry? Do you need an expert witness?  These and many more questions should be addressed with your bankruptcy attorney prior to sending any response.   

Stay tuned for future posts within the coming weeks dealing with a more detailed discussion on specific preference defenses, including ordinary course of dealings, contemporaneous exchange for new value and industry specific issues for the building and construction, REITs and commercial developers, and other service providers.

In the interim, for more information on defending a preference action, or other bankruptcy issues, please feel free to contact Tom Onder, Stark & Stark’s Bankruptcy & Creditor’s Rights Group at (609) 219-7458 or via email a tonder@Stark-Stark.com.

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Timothy P. Duggan, Chair and Shareholder of Stark & Stark's Bankruptcy & Creditor's Rights Group, will be a guest on the November 12, 2007 episode of The American Law Journal. The show will air tonight at 8:00 PM on WFMZ-TV CHANNEL 69.

The episode will feature Mr. Duggan, and weekly host Christopher Naughton, Esq., as they discuss bankruptcy filings and the recent increase in foreclosures. Mr. Duggan will focus on the important issues creditors will face due to the recent increase in foreclosures, how the increase can impact their company, and what this will mean for the future of their business.

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Timothy P. Duggan, Shareholder and member of Stark & Starks Bankruptchy & Creditor's Rights group was quoted in the October 12, 2007 Star Ledger article, A new battle of Waterloo is under way.

You can read the full article here.

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Timothy P. Duggan, Chair of Stark & Stark's Bankruptcy & Creditor's Rights Group, was quoted in the article, Recall forces NJ meat firm to close doors, in the October 6, 2007 issue of the Star Ledger.

You can read the full article here. 

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Timothy P. Duggan, Shareholder and Chair of Stark & Stark's Bankruptcy and Creditor's Rights Group was quoted in the article Domino-Like Bankruptcies Offer Lessons, in the September 17, 2007edition of NJ Biz.

You can read the full article here.

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