Dore Law - January 2020

THE D or É R eport

D ore L aw G roup . net

JANUARY 2020

ARE YOU A CRITICAL VENDOR?

With industry bankruptcies being a weekly news story, every business has begun to pay more attention to the credit it extends to customers. In the oil and gas sector, it is almost impossible to avoid becoming a creditor in the bankruptcy of one of your customers these days. At Doré Rothberg McKay, some of the ways we help our clients deal with bankruptcies are by filing liens to maximize recovery and negotiating or working with the debtor or trustee, including defending any preference claims brought against your company. In the past few years, trade creditors have found another way to get paid when their customer files for bankruptcy — being named a critical vendor . In a Chapter 11 bankruptcy, creditors who are designated “critical” generally get full payment for labor and materials supplied both before and during the bankruptcy. So, how do you become a critical vendor? First, critical vendors are those that are vital to the bankrupt company’s continued operations. A critical vendor provides goods or services that cannot be easily replaced, or has a special skill set, certification, or proprietary product that would significantly impact operations if discontinued. Second, it is the bankrupt company that must name its critical vendors. The courts have shown more and more willingness to allow critical vendors in business bankruptcies. If named critical, that company’s pre-petition claims get paid in full. In exchange for such

payment, the vendor agrees to continue working with the debtor on favorable preexisting trade terms. While you cannot ask the bankruptcy court or force the debtor to make your company a critical vendor, you can discuss the effect of losing your product or service with your customer before or during a bankruptcy. While your company is ordinarily under no legal obligation to continue doing business with a customer who files for bankruptcy (unless you have a contract that has not been terminated), it is important not to frame your effort to become a critical vendor as an ultimatum or otherwise risk violating the automatic stay. Other advantages to being named a critical vendor in a bankruptcy include the recognition of your company’s importance

to the customer and leverage in future negotiations. As a critical vendor, you are under less pressure to renegotiate trade terms or reduce prices as the bankrupt debtor tries to cut costs. However, as a part of representing our clients who find themselves trade creditors who are not deemed critical in a bankruptcy, Doré Rothberg McKay often argues to limit the number of critical vendors. Fewer critical vendors results in a larger remaining pool of funds allowable to the other creditor groups and potentially a greater recovery. Because navigating through critical vendor issues requires a delicate balance of efforts, we look forward to guiding you through the process. -Zachary McKay

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