July/August 2006
For years you’ve been shipping loads of foundry steel on credit terms to We Adore Scrap Co. To your surprise, one day WAS announces that it has filed for Chapter 11 reorganization and, as a result, it can’t pay your pre-petition invoices. Fear not, the company says. Post-petition, it will be back to “business as usual.” As a debtor in possession, it says, it will have the resources to pay you for scrap that you provide post-petition. WAS also says it intends to reorganize so it can pay at least part of its pre-petition debt and emerge from bankruptcy stronger than ever.
Naturally, you’re upset to hear this news. WAS owes you a lot of money for loads you delivered pre-petition. As a matter of principle, you don’t want to continue to deal with the company. Plus, you’re worried that WAS won’t pay for scrap you deliver post-petition.
You contact your bankruptcy attorney to assess your rights and obligations. You note that your business with WAS has been based on standalone purchase orders that conclude after you deliver each load, thus there’s no contract obligating you to continue supplying the company. You also note that, post-petition, WAS has submitted purchase orders for four loads of foundry steel on net 30-day credit terms, and you’re concerned about extending that credit.
In this set of circumstances, it’s up to you whether to accept the purchase orders and continue doing business with WAS post-petition. But two steps can help you make the right decision.
First, you and your attorney should assess available information to determine if WAS will be able to pay your post-petition invoices. Though you won’t get any iron-clad assurances, you can get a better sense of the company’s financial soundness. Your attorney can review the bankruptcy filings, particularly the financing order, to assess whether WAS will have sufficient cash flow to pay vendors in the ordinary course of business. Your attorney also can request information from the unsecured creditors’ committee. The amended bankruptcy code might now require that the committee furnish such information. In addition, as the case progresses, your attorney might be able to assess the company’s reorganization prospects.
Second, if you’re satisfied with what you find and decide to accept the post-petition purchase orders, you and your attorney should determine if you need to obtain a court order. If the post-
petition transaction is consistent with your pre-petition transactions with the company, a court order isn’t necessary. If the post-petition transaction doesn’t satisfy this test, you should insist that WAS, as a debtor in possession, file a motion with the bankruptcy court seeking authorization to enter into the transaction. Otherwise, when WAS pays you, you might have to repay the estate on the grounds that WAS made an unauthorized post-petition transfer.
Once you provide the post-petition scrap, WAS is authorized to pay your invoices for that material in the ordinary course of business. If it fails to do so, you and your attorney should consider whether to file a motion to seek allowance and payment of the post-petition amounts you’re owed as an administrative expense. To be entitled to such an allowance, you must show that you entered into a post-petition contract with WAS and that the expense was actual and necessary to preserve and benefit the WAS estate.
If the court allows the administrative expense, it will require WAS to pay 100 percent of the expense as a top payment priority (second only to secured creditors) as a condition of it confirming the company’s reorganization. WAS must make this payment at the time it enters the confirmation order or, in limited instances, earlier if the court is satisfied that the estate will be administratively solvent (thus able to pay 100 percent of all administrative expenses) at the time of confirmation.
Unfortunately, if WAS can’t get the court to confirm a restructuring plan, and its Chapter 11 ultimately becomes a Chapter 7 proceeding, you probably won’t receive payment of your administrative expense—the estate is most likely administratively insolvent. Further, Chapter 11 administrative expenses are subordinate to Chapter 7 administrative expenses.
The bottom line is this: Doing business with a debtor in possession isn’t all doom and gloom. You and your attorney should review available information to decide whether supplying WAS as a debtor in possession is a sound business decision—or a case of pouring good money after bad.
Larry Burick is a Dayton, Ohio-based partner in the bankruptcy practice group and Mark Weintraub is an associate in the Cleveland office of Thompson Hine LLP. Reach Burick at 937/443-6625 or larry.burick@thompsonhine.com and Weintraub at 216/566-5663 or mark.weintraub@thompsonhine.com.
For years you’ve been shipping loads of foundry steel on credit terms to We Adore Scrap Co. To your surprise, one day WAS announces that it has filed for Chapter 11 reorganization and, as a result, it can’t pay your pre-petition invoices. Fear not, the company says. Post-petition, it will be back to “business as usual.” As a debtor in possession, it says, it will have the resources to pay you for scrap that you provide post-petition. WAS also says it intends to reorganize so it can pay at least part of its pre-petition debt and emerge from bankruptcy stronger than ever.