Pay Up, Bankrupt Customer!

By Nathan A. Wheatley

Your customer has filed for bankruptcy. Here’s how to assert your claim in court.

Bad news: one of your customers has filed for bankruptcy protection. Worse, the customer owes on an unpaid account receivable for goods you shipped to them before they filed. What do you do now? How do you get paid? The first step is to prepare and file a proof of claim.

A proof of claim is a written statement of a creditor’s claim set out on a standardized bankruptcy form (official bankruptcy form 10). The information contained in the proof of claim includes the creditor’s name and address, the identity of the debtor, the amount of the claim, whether the claim is secured or entitled to priority treatment, the basis for the claim, any additional information relevant to the claim, and redacted copies of any documents that may support the claim, such as promissory notes, invoices, purchase orders, etc.

Once completed, the proof of claim is usually filed with the clerk of courts in the district where the case is pending. The deadline for filing the proof of claim for trade creditors is 90 days after the first date set for the meeting of creditors. The debtor is supposed to provide notice of these dates to its creditors. However, it is best to independently confirm those dates to avoid having to file a late proof of claim. Once a proof of claim is on file, a creditor is generally free to amend the proof of claim based upon subsequent information.

A creditor’s claim can be allowed without filing a proof of claim if the creditor’s claim is listed on the debtor’s schedule of claims and if the claim is not listed by the debtor as disputed, contingent or unliquidated. But because a creditor cannot rely upon a debtor to accurately list the amount and priority of its claim, and because a properly filed proof of claim supersedes the debtor’s schedule of claims, it is generally better to file a proof of claim as soon as possible.

A properly filed proof of claim is prima facie evidence of the validity of the claim. This means that, unless there is an objection to the claim, the creditor’s claim will be allowed in its full amount and in accordance with the claimed priority—administrative, priority, unsecured, etc. If an objection to the proof of claim is filed, then the objecting party has the burden of presenting sufficient evidence to overcome the prima facie validity of the claim. It is important to remember that the creditor always bears the ultimate burden of proof on a claim. Therefore, unless the objection is insufficient to overcome the prima facie validity of the proof of claim, the creditor must be prepared to defend the claim and demonstrate that it should be allowed in its full amount and according to the claimed priority.

Once a claim is allowed, a creditor is entitled to receive payment on the claim on a pro rata basis with other, similarly situated creditors. The key to managing your expectation as a creditor is to understand what treatment your claim will receive. If the claim is entitled to administrative priority treatment, it is more likely that the creditor will receive a full or substantial payment on its claim. Administrative claimants are generally entitled to payment in full, whereas unsecured creditors usually receive 0 to 10 percent on their claims.

Regardless of the type or amount of your claim, it is important to follow these guidelines:
  • Maintain accurate records regarding your claim.
  • If a customer files for bankruptcy protection, carefully review the information you receive to ensure that you can prepare and file a proof of claim in a timely manner.
  • If you are not receiving notices regarding the customer’s bankruptcy proceeding, be proactive in seeking information.
  • Consult with your lawyer, as necessary, to ensure that you assert and defend your claims against the debtor promptly and correctly.

    While there is never a guarantee you will receive reimbursement on claims against an insolvent customer, following these guidelines will improve your chances.

    Nathan A. Wheatley is a senior counsel with the Ohio law firm of Calfee, Halter & Griswold LLP, with special expertise in the areas of creditor’s rights, bankruptcy and insolvency litigation. He can be reached at nwheatley@calfee.com or by phone at 216-622-8573.
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    Monday, February 27, 2017