This is Really Funny…On Our Way to The Bankruptcy Court

By Kenneth A. Rosen

In the intricate dance of Chapter 11 bankruptcy, a company's narrative often involves obtaining "debtor in possession" (DIP) financing, followed by appeals to vendors for additional unsecured credit. The promise of administrative claims and 100% payment seems compelling, but, as explored through recent examples like Sears, Barneys, and Toys R Us, this narrative often proves illusory, leaving vendors doubly burned.

The author challenges the common belief that DIP financing implies a significant infusion of liquidity. Instead, he urges vendors to look beyond headline numbers and assess the true increase in liquidity. Critical questions include whether secured lenders are adjusting advance rates and if the aggregate amount owed surpasses pre-bankruptcy levels.

The article exposes the pitfalls of preferences, where vendors unwittingly subsidize secured lenders' recoveries. A call is made for vendors to withhold post-bankruptcy trade credit until assurance is received that the bank won't have a lien on preference recoveries.

While administrative claims theoretically command 100% payment, the evolving landscape prioritizes swift asset sales over plan confirmations. The article highlights the disparity in treatment between vendors and professionals in administrative claims, urging stakeholders to approach such assertions with skepticism.

A pragmatic approach involves filing reservations of rights when selling to debtors post-petition, placing professionals on notice of potential repercussions for non-payment. The article emphasizes the importance of understanding case milestones, urging vendors to adjust claims well in advance of asset sales to maximize recovery.

The conclusion challenges the common rhetoric of every debtor intending to reorganize, exposing the frequent reality of cases deviating from this intent. Lenders, post-sale, often find little incentive to fund bankruptcy cases, challenging the notion that a plan of reorganization must pay all administrative claims for new credit to be extended.

In this landscape where promises can be deceptive, the article closes with a touch of humor, likening the journey of vendors in Chapter 11 to the turtle crossing the road—highlighting the need for caution and strategic decision-making in the bankruptcy realm.