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COPYRIGHT 2001 National Association of Credit Management
A supplier considering extending credit to a customer in chapter 11 is faced with a dilemma. The supplier can either sell on cash in advance or cash on delivery terms and risk the loss of sales to other suppliers willing to ship on credit terms. Alternatively, the supplier could sell to the debtor on credit terms and risk nonpayment or delayed payment of the supplier's claim if the debtor's business fails.
A recent bankruptcy court decision in Delaware addressed an additional risk facing a supplier that extends credit to a chapter 11 debtor. The debtor had resisted payment of a creditor's chapter 11 administrative expense claim because of a preference claim asserted against the creditor. Fortunately for the creditor, the bankruptcy court directed the debtor to pay the creditor's unpaid administrative claim and held that the debtor could not raise the existence of a preference claim as a defense to payment of the administrative claim. Score this one for the creditor!
Chapter 11 Credit Grantor's Administrative Priority Claim
A trade creditor that extends post-petition credit to a chapter 11 debtor is granted an administrative expense priority claim under the Bankruptcy Code. As a result, the creditor with an unpaid post-petition claim for goods sold on credit to the debtor during the chapter 11 is entitled to priority in payment ahead of most pre-petition claims.
A trade creditor that sells on credit to a chapter 11 debtor faces risk despite being granted an administrative priority claim against the debtor. Most chapter 11 debtors' businesses fail. What follows is the liquidation of the debtor's assets, either in the chapter 11 case--usually under the control of management, or in a chapter 7 case, under the control of...
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