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| vol 19, num 1 | October 2021 |
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| Current Developments in “Critical Vendor” Payments |
| In the days leading up to a chapter 11 filing, companies seeking bankruptcy protection commonly ask whether they can continue to pay some of their vendors after the bankruptcy case is filed. On the flip side, in the days following a chapter 11 filing, vendors whose customer recently filed a bankruptcy case have the same question: Can we still get paid?
The baseline rule is clear: The company can, and must, pay its suppliers in the ordinary course for goods or services that it receives after the case is filed. These goods or services, to the extent they benefit the estate, would provide the basis for an administrative claim if unpaid. But what about bills for goods or services that were provided before the case was filed? In general, the answer is no. The company generally cannot pay “prepetition” claims without court authorization. In practice, companies filing a chapter 11 case have obtained emergency orders from the bankruptcy court permitting them to pay certain “critical vendors.” These are suppliers or other parties whose ongoing relationship with the company is key to the company’s attempted reorganization and who therefore have some leverage to demand payment.
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| The “Critical Vendor” Preference Defense Still Not a Panacea for Trade Creditors |
| Through a preference claim, a debtor or trustee seeks to recover, subject to certain creditor defenses, payments that a trade creditor received within the 90-day period prior to a bankruptcy filing. Preference claims have always been an unfortunate reality for trade creditors. However, the frustration of having to return money has recently been exacerbated, because in many high-profile cases trade creditors’ § 503(b)(9) claims and post-petition administrative claims that historically had been paid in full have been materially impaired to varying degrees, resulting in general unsecured claims being virtually worthless. Many trade creditors
are familiar with the most common preference defenses: the new value and ordinary course of business defenses. However, there are other potentially valuable preference defenses about which creditors should be familiar that can help mitigate preference risk. These defenses relate to the post-petition payment of a pre-petition claim and/or the impact of the assumption of an executory contract on preference liability. |
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| Third Circuit Rejects Triangular Setoffs as Not Satisfying Mutuality Requirement of § 553 of the Bankruptcy Code |
| In its recent decision in In re Orexigen Therapeutics Inc., the Third Circuit Court of Appeals held that triangular setoffs are not permissible in bankruptcy because they do not satisfy the mutuality requirement of § 553 of the Bankruptcy Code. In doing so, the court categorically rejected the argument that parties can contract around the requirement of strict bilateral mutuality.
Background
McKesson Corp. and Orexigen Therapeutics entered into an agreement under which McKesson would distribute a drug manufactured by Orexigen, which included a provision that McKesson could set off amounts owed to Orexigen against amounts owed by Orexigen to McKesson or any McKesson subsidiary. Later, a McKesson subsidiary, McKesson Patient Relationship Solutions (MPRS), entered into a customer loyalty program agreement with Orexigen under which MPRS would advance funds to pharmacies for price discounts that Orexigen would later reimburse.
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| Upcoming Webinar - Special Committees and Creditors’ Committees: Friends or Foes? |
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| Monday, October 18, 2021 • 12:30-1:45 pm EDT |
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Sponsored by the Unsecured Trade Creditors Committee
Independent directors are taking on larger and more frequent roles in complex commercial cases. What role do official committees have in these cases, where special committees have often been appointed prepetition to consider and authorize transactions, or may be tasked post-petition with investigating transactions authorized before their appointment? This webinar will explore how the roles and incentives of independent directors/special committees differ from those of official committees; analyze the hurdles each type of entity faces when investigating and raising challenges to company transactions; and consider how each serves the estate—and whether there is room for cooperation.
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