Bankruptcy Rights of Suppliers

What suppliers can do when a customer cannot pay


By Michael J. Viscount, Jr.

Whether you are a supplier of goods or an operator trying to manage cash flow and pay your creditors in these times of tight credit throughout the domestic and global economy, understanding the rights of suppliers in bankruptcy and other insolvency situations is important for your business. This article will address a number of the basic rights and remedies that suppliers have when operators are unable to pay in a timely manner and resort to filing for bankruptcy or other available relief from the credit crunch. Before getting into the supplier’s rights and remedies, some bankruptcy basics will be addressed.

Bankruptcy Primer

Bankruptcy is generally understood as a mechanism by which business operators can seek relief through the courts from the pressures of day-to-day stress placed upon the business by demands of creditors and others to be paid. Bankruptcy is a remedy for “debtors” (those who owe money to others called “creditors”), which is governed by a federal law know as the United States Bankruptcy Code or simply the “Bankruptcy Code.” This law can be found at 11 U.S.C. §§ 101 et seq. Bankruptcy relief is available in three basic scenarios: (1) those who wish to simply liquidate can do so under Chapter 7 of the Bankruptcy Code; (2) businesses and certain individuals who wish to restructure their debts and try to stay in business can reorganize under Chapter 11 of the Bankruptcy Code; and, (3) individuals with jobs can restructure and repay their debts over time through a wage earner plan under Chapter 13 of the Bankruptcy Code.

The Bankruptcy Code supersedes all other law when it comes to the relationship among a debtor and its creditors. However, the Bankruptcy Code is and must be interpreted and applied in the context of the broader relationship among parties to commercial transactions. When the Bankruptcy Code is silent regarding an issue, as it often is, the parties must look to “otherwise applicable non-bankruptcy law” for guidance. This means that other state and federal laws often play major roles in the outcome of matters that are influenced, but not necessarily determined, by the Bankruptcy Code. In the context of the relationship between suppliers and customers in the commercial context, the otherwise applicable non-bankruptcy law generally consulted is the Uniform Commercial Code of the various states in which parties transact their business.

Automatic Stay

The basic objective of bankruptcy is to allow the debtor to have some breathing room for a time while the business seeks professional advice to first determine the best and most appropriate course of action to exit bankruptcy, and then to develop and implement a plan to do just that. The mechanism that allows this breathing room to happen is the automatic stay, which goes into effect immediately upon the filing of a bankruptcy petition without any further action by the Bankruptcy Court.

Typically, in the law, action by a party is not stayed unless a court orders such after specific notice and an opportunity to be heard is afforded to the affected parties. Not so in bankruptcy. Under § 362(a) of the Bankruptcy Code, once a bankruptcy petition is filed with the clerk of the Bankruptcy Court, no action may be taken by any creditor against the debtor or its assets to collect on a debt that arose prior in time. There are some limited exceptions that are beyond the scope of this article, but the general principle stands that once the business operator files bankruptcy, the suppliers and other creditors must cease all efforts to collect on sums due for goods and services supplied prior to the time of filing, which is called the filing date. There are a number of steps suppliers can take to protect their rights and enhance their prospects to ultimately get paid for amounts due for goods and services provided prior to the filing date, or pre-petition.

Supplier Remedies

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