Bankruptcy Wave Hits Retail: What Trade Creditors Need to Know

Part one of the Trade Creditor’s Corner series.

 

Toy’s “R” Us. The Limited. Hhgregg. Radio Shack. In 2017, the pace of chapter 11 retail filings picked up significantly. So did store closings by Sears and Kmart, J.C. Penney’s, and Payless Shoes, to name a few. The uptick in activity reflects increased competition between “bricks and clicks” retailers and changes in how and where customers shop. With the anticipated rise in interest rates, bankruptcy filings and store closings are expected to continue in 2018, according to Moody’s and Fitch Ratings.

If you are a trade creditor who supplied goods or services to a customer before or after the customer enters bankruptcy, it is time to revisit what you need to know. Consider the following tips:

Tip 1 – Read Your Contract  

• Bankruptcy laws and rules generally apply to and protect only the entity/person in bankruptcy.
• Ask yourself the following questions:
  • Who is liable on the debt?
  • When is payment due?
  • How is payment made? (cash in advance, COD, wire or credit)
  • Is there security? (deposit, letter of credit, a debtor or non-debtor guaranty)

Tip 2 – Learn Your Contract Status

• Ask yourself the following questions:
  • Is the debtor current or in arrears?
  • Are goods in transit?
  • When was the last time the goods or services were supplied?
  • Are you under contract to continue to supply goods or services?

Tip 3 – Pick A Case Monitor and Advocate

• Decide who will retrieve and review court pleadings, relevant documents, and calendar deadlines.
• Access the PACER (Public Access to Court Electronic Records) system to view and obtain copies from the court docket. In large cases, dockets and documents may be available through a link set up by the debtor’s claims and notice agent at NO cost to you.
• Decide who will attend hearings and, if needed, file and pursue objections for you.

Tip 4 – Respect the Automatic Stay

• An automatic statutory stay goes into effect on the filing of the case and halts all actions by creditors to collect prepetition debt from the debtor or against its property, with limited exceptions.
• This means you must:
  1. Stop all collection activity for prepetition debt and advise your employees and agents to do so.
  2. Put a “hold” on pending litigation, administrative, or other proceedings against the debtor.
  3. Separate prepetition debt and invoices from post-petition debt and invoices and only apply post-petition payments against post-petition invoices.
  4. Seek court permission to terminate or modify a contract post-petition or to exercise a contractual or state law right of set off (I.e. to apply a security deposit against a delinquent lease payment).
  5. Avoid monetary sanctions that may be imposed against you by the court if you knowingly violate the bankruptcy stay.

Tip 5 – Figure Out If You Can Claim “Priority” Status

• Decide whether you have a preferred status you could assert without violating the automatic stay and:
  1. Perfect mechanics’ liens within the periods required under nonbankruptcy law.
  2. Make bond claims timely.
  3. Decide whether to stop goods in transit not yet in the debtor’s possession, unless the debtor is paying cash for delivery and then make sure the Debtor has the authority to make the payment.
  4. Determine the value of goods the debtor received within 20 days of case commencement you sold to the debtor in the ordinary course of business as this claim may be a priority claim in the case.
  5. Investigate if you could be a “critical vendor” entitled to be paid for unpaid prepetition services or goods early, because you are critical to the reorganization effort.

Once you take these basic “get smart” steps, you should be primed to navigate the bankruptcy world of 2018. Our next segment will explore tips for the smart “landlord” to maximize recovery and minimize loss when its tenant files.

If you have any questions about this topic or any other bankruptcy matter, please contact Joyce at[email protected]