Michigan Bankruptcy Court Upholds Rights of Sellers of Goods

Article excerpt

A recent opinion in a Michigan bankruptcy court has upheld the rights of creditors delivering goods to a debtor during the 20-day period prior to a bankruptcy petition. The debtor objected to the allowance of the 20-Day Claims because the creditor "might" have liability for preferential transfers. The opinion, which was rendered on September 16, 2008, is an important decision for sellers of goods.

How did it come to be that the 20-Day Claims were questioned? A short history of the provision in the Bankruptcy Code may help put things in perspective.

20-Day Claims and BAPCPA

The Bankruptcy Abuse Prevention and Creditor Protection Act ("BAPCPA"), which became effective in October of 2005, elevated claims for the delivery of goods to a debtor during the 20 days prior to a bankruptcy petition date. What this means is the value of the goods delivered during the 20 days prior to bankruptcy must be paid prior to all other unsecured claims, along with other administrative expense claims, which are listed in Section 503 of the Bankruptcy Code. All administrative expense claims listed in Section 503 must be paid at the time of confirmation.

To assert a claim for the delivery of goods during the 20 days before the petition date ("20-Day Claim") (1), the creditor is required to file a motion to have its claim allowed and paid as a 20-Day Claim. After notice and a hearing, the Bankruptcy Court may allow a 20-Day Claim. Unlike general unsecured claims, however, the 20-Day Claim cannot be asserted on a proof of claim.

Although the method of asserting a 20-Day Claim is clear in the new sections of the Bankruptcy Code, certain other questions about the treatment of 20-Day Claims have not produced easy answers for the bankruptcy courts. Recently in the Plastech Engineered Products case, Judge Shefferly of the Eastern District of

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Michigan Bankruptcy Court was required to determine what Congress really meant in enacting this new section of the Bankruptcy Code. The specific question that he addressed was whether a 20-Day Claim could be barred if the same creditor had alleged liability for a preferential transfer.

The case and decision, which was rendered on September 16, 2008 in Michigan, illustrate not only one court's interpretation of the treatment of 20-Day Claims, but the way a court looks at a statute when Congress has not provided any legislative history stating what the statute is trying to achieve.

Plastech Engineered Products, Inc.

Plastech, a tier one automotive supplier, filed a Chapter 11 petition on February 1, 2008. It designed and made blow- and injection-molded plastic products and manufactured its products in 36 facilities in North America while employing more than 7,700 individuals. As an automotive supplier, Plastech delivered its manufactured goods "just in time" and its suppliers delivered raw material to Plastech "just in time." Plastech had thousands of creditors, hundreds of whom had delivered goods during the 20 days prior to February 1. Hundreds of these creditors filed 20-Day Claims shortly after the case was filed. After reviewing the 20-Day Claims, Plastech objected to the claims for a number of reasons, including that 20-Day creditors might be subject to a preference claim by Plastech and therefore the 20-Day Claims should be barred. Although there were many other objections asserted by Plastech to the 20-Day Claims, the Bankruptcy Court agreed to address first whether the possibility that the same creditor might have preference exposure was a reason to deny a 20-Day Claim.

Bankruptcy Code Section 502(d)

Section 502(d) of the Bankruptcy Code provides that a general unsecured claim cannot be paid if the same creditor is liable for a preference claim owed to the bankruptcy estate. This section is generally used to bar the claim and is asserted as part of a preference complaint or asserted as one of the objections to a specific unsecured claim. …