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How To Deal With A Bankrupt Customer:
Be Quick To Reclaim Your Goods

BY KEITH MILES AURZADA

Learning that a customer has filed bankruptcy strikes fear in the heart of any company, especially when it is discovered that the now bankrupt customer has an outstanding balance that could impact cash flow and profits. Companies are especially vulnerable since most customers pay their expenses on revolving credit terms. As a result, preparedness for a customer's bankruptcy is critical.

Quick action by a manufacturer is necessary to minimize losses due to a customer's financial collapse and its desire to stop the collection of debts. Once the customer files for bankruptcy, the company that provided it with goods must cease any attempt to collect what it is owed. No more invoices may be sent, no more telephone calls can be made, and no collection agencies can be employed.

In light of the heavy restrictions imposed in bankruptcy, a company should immediately verify whether deliverables were made in the 10 days before the customer filed bankruptcy. If the company delivered goods to the bankrupt customer in that time, it may recover those goods with a written demand for reclamation.

In a successful reclamation, the customer must have been insolvent when it received the goods. In most cases, this can be proven without trouble. That is probably why the company filed bankruptcy in the first place.

Once the company demands reclamation, it may, subject to the bankrupt customer's response, collect the manufactured goods and resell them. This allows the company to recoup some losses that it might otherwise incur. If a company has been diligent in working the customer's accounts receivables, the 10 days prior to a customer's bankruptcy may very well be a substantial portion of the entire debt owed by the now bankrupt firm.

In some cases, the bankrupt customer may wish to keep the recently delivered goods. This may be possible in some reorganization cases, but not without a price. The bankrupt firm will only be allowed to keep the goods after giving a priority claim to the manufacturer or a lien. Before the company writes this off as insignificant, the potential for these protections should be considered. First, an administrative claim must be paid in full in cash before a bankrupt customer can reorganize. This allows for a complete recapture of value advanced immediately prior to the bankruptcy. Second, a lien allows the supplier security for payment including the right to foreclose in order to force payment. As a result, quick action in demanding reclamation may result in significant recapture of losses in bankruptcy. The important item here is that the bankrupt customer does not have to provide anything unless a proper reclamation demand is timely made. Without the demand, the bankrupt customer keeps the goods, sells them, and keeps the proceeds at the expense of the unsecured manufacturer.

Once a proper reclamation demand is made, the company in most cases should file a proof of claim. The proof of claim is a standard federal form that is filed with the bankruptcy court. It verifies the amount of money owed to the company and should be filed in most cases involving trade accounts. In many instances, it may be cost effective to employ an attorney to make reclamation demands and file proofs of claim. However, if a manufacturer anticipates filing many proofs of claim or claims in amounts that do not justify hiring an attorney, it can be cost effective to train an in-house bookkeeper or accountant to prepare these documents.

It should be noted that the rules of reclamation can vary from state to state. Legal representation should be sought initially to verify that all reclamation demands or proofs of claim contain the appropriate information and are in proper form.

No one likes to consider the possibility that their customer might go bankrupt. However, being prepared and acting quickly will help any manufacturer minimize losses in these unfortunate situations.

--Keith Miles Aurzada is with the firm of Akin, Gump, Strauss, Hauer & Feld in Dallas, Texas. He can be reached at 214-969-2792.