LAWDOG BANKRUPTCY: CHAPTER 7

LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.

Some general information concerning bankruptcy may prove to be helpful. The status of a creditor as a party to an executory contract, a secured creditor, or an unsecured creditor, may determine some of the options available to a creditor. Creditors should discuss actual cases with legal counsel as soon as they are made aware of a bankruptcy filing.

When a creditor first learns of a bankruptcy, even if it has not received formal notice, it should avoid doing any acts which might violate the automatic stay. As long as the stay is in effect, creditors generally cannot even make telephone calls to a debtor demanding payment. CONTACT LEGAL COUNSEL and obtain a professional opinion immediately to avoid missing a deadline, failing to take appropriate action, or taking inappropriate action.

When a creditor first learns of a bankruptcy by receipt of a notice by mail, information such as the date of filing, the chapter number, the Bankruptcy Court location, and case number may be included in the notice. When advised by telephone of a bankruptcy, the creditor should attempt to obtain this information. The filing date is a key date by which certain other bankrutpcy deadlines may be determined. Contact legal counsel immediately because deadlines may be matters of only a few days.

It may be advisable to clearly distinguish bankruptcy files from other accounts receivable files. If not, someone in your organization may attempt to collect a debt which may be subject to an automatic stay or has been discharged. Section 362 (h) provides that an individual injured by any willful violation of a stay shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. Alternatively, if claims in a bankruptcy are not carefully monitored, the short time deadlines in a bankruptcy case may cause the loss of a claim.

If a creditor is a party to an executory contract or a true lease, the creditor may seek to expedite determination of whether the debtor will assume or reject the agreement. See Executory Contracts and Unexpired Lease from Lawdog Bankruptcy Introduction, or click here. Link does not return to this page.

Under Uniform Commercial Code Section 2-705(1), a seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent. Thus, when a creditor discovers the insolvency of a buyer after shipment of goods, it may be possible to retrieve the goods still in "transit" at the time. Obviously, such matters should be discussed immediately with your legal counsel, since time may be extremely important in such situations.

The Bankruptcy Code incorporates the concept of reclamation, whereby a seller of goods may reclaim goods delivered to the debtor immediately before the bankruptcy filing. A written notice of reclamation must generally be served on the debtor within 10 days of the delivery of the goods. This may be extended to twenty days under certain circumstances. Generally, if the notice is provided timely, the creditor is entitled to recover any goods which are still separately identifiable, and which were delivered within the applicable time period. The seller may alternately be given an administrative expense claim for payment of the goods. Such matters should be discussed immediately with your legal counsel, since time may be extremely important in such situations, and the goods must generally still be in the possession of the debtor. See Reclamation linked here. Link does not return to this page.

In a bankruptcy action, a creditor with a state law right of setoff, may be entitled to offset a mutual debt owing by the creditor to the debtor, that arose before the commencement of the case, against a claim of the creditor against the debtor that arose before the commencement of the claim, unless the claim of the creditor against the debtor is disallowed, or if certain other conditions described in Section 553 of the Bankruptcy Code apply. The automatic stay applies to a setoff, so the creditor must obtain relief from stay before writing off the offsetting account. See A Creditor's Right To Setoff linked here. Link does not return to this page.

Uniform Commercial Code

§ 2-705. Seller's Stoppage of Delivery in Transit or Otherwise.

(1) The seller may stop delivery of goods in the possession of a carrier or other bailee when he discovers the buyer to be insolvent (Section 2-702) and may stop delivery of carload, truckload, planeload or larger shipments of express or freight when the buyer repudiates or fails to make a payment due before delivery or if for any other reason the seller has a right to withhold or reclaim the goods.

(2) As against such buyer the seller may stop delivery until

(a) receipt of the goods by the buyer; or

(b) acknowledgment to the buyer by any bailee of the goods except a carrier that the bailee holds the goods for the buyer; or

(c) such acknowledgment to the buyer by a carrier by reshipment or as warehouseman; or

(d) negotiation to the buyer of any negotiable document of title covering the goods.

(3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable diligence to prevent delivery of the goods.

(b) After such notification the bailee must hold and deliver the goods according to the directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.

(c) If a negotiable document of title has been issued for goods the bailee is not obliged to obey a notification to stop until surrender of the document.

(d) A carrier who has issued a non-negotiable bill of lading is not obliged to obey a notification to stop received from a person other than the consignor.

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