Critical vendor update: making the critical vendor list and the trade claims cap. (Credit Column).

The credit professional knows all too well that a customer's Chapter 11 means long delays before receiving any payment on the pre-petition account, which payment is usually but a fraction of the claim. Indeed, it is not uncommon for the vendor to receive stock in the reorganized debtor in exchange for its prepetition claim. Traditionally, the vendor would file a proof of claim, perhaps serve on the creditors' committee and press for a meaningful payment. Does a vendor in this situation, especially one with a substantial trade relationship, have any recourse? Fortunately, with the development of the critical vendor doctrine, the credit professional may have a meaningful alternative.

On occasion, a vendor may be a key supplier to a customer which files Chapter 11. Given this key supplier relationship, the vendor often holds a sizeable unsecured claim upon the Chapter 11 filing. The vendor, selling invoice by invoice (as opposed to long term supply contract), may elect not to continue to sell to the debtor postpetition. However, the vendor's product or service may be viewed by the debtor as essential to its continued operations.

In this situation, the debtor may request that the court authorize it to immediately pay the vendor's pre-petition claim, in exchange for the vendor selling to the debtor post-bankruptcy on credit. Under the critical vendor doctrine, a vendor may find that the product or service it provides a Chapter 11 debtor is essential to continued operations. The uniqueness of the product or service may give the vendor leverage in negotiating post-bankruptcy sales.

More and more bankruptcy courts are considering a debtor's request to treat certain vendors as critical and have their pre-bankruptcy claims paid in exchange for post-petition trade credit. As a bankruptcy

court noted, "[p]ayment of the pre-petition claims of these vendors as set out in the Debtor's motion is necessary to realize the possibility of a successful reorganization the Court may authorize the payment of pre-petition claims when such payments are necessary to the continued operations of the Debtor." In re Wehrenberg, 260 B.R. 468 (Bankr. MO 2001).

The Critical Vendor Doctrine

To be classed as "critical" by a Chapter 11 customer is usually an extraordinary result for the vendor, as it means payment in full or a substantial portion or the pre-petition claim, given the alternative of waiting, perhaps for years but for a fraction of the pre-petition claim. However, a Chapter 11 debtor's funds available for the critical vendor class is limited, as well as scrutinized (and perhaps objected to) by lenders, bondholders, noteholders, a creditor's committee, the U.S.Trustee's office and even competing vendors who want to be elevated to critical vendor status.