Extending Credit to a Chapter 11 Debtor Let the Creditor Beware: The Risk of a Failed Chapter 11

By Nathan, Bruce S. | Business Credit, May 1999 | Go to article overview

Extending Credit to a Chapter 11 Debtor Let the Creditor Beware: The Risk of a Failed Chapter 11


Nathan, Bruce S., Business Credit


Recently, in the Caldor Chapter 11 case, trade creditors who extended credit to Caldor had a rude awakening when they discovered to their surprise that Caldor was terminating its business operations and conducting an orderly liquidation. As part of its liquidation, Caldor announced that it would no longer pay any unpaid postpetition Chapter 11 trade credit claims, such claims would not be paid until the conclusion of the bankruptcy case, and the bankruptcy court stayed Chapter 11 trade creditors from moving to obtain allowance and immediate payment of their unpaid Chapter 11 claims. The only recourse available to Caldor's Chapter 11 trade creditors was to file a proof of their Chapter 11 administrative claims with the bankruptcy court and face the likelihood of payment of a di minimis portion of their unpaid trade claims in the far distant future.

What happened? Unfortunately for Caldor's Chapter 11 trade creditors, their administrative claims will not be paid until the claims of secured and superpriority administrative claimants are paid in full. These superior claimants will eat into most of Caldor's remaining assets, leaving precious little for payment to the mass of unpaid Chapter 11 administrative claims.

What is the trade creditor to do? Being stuck between a rock and a hard place is the dilemma trade creditors face in large Chapter 11 cases like Caldor. If the trade creditor insists on COD terms, it risks loss of sales and the wrath of the creditor's marketing department. And where the creditor sells on credit to a Chapter 11 debtor armed with no protection other than a Chapter 11 administrative claim, the creditor risks nonpayment of its claim (or perhaps delayed payment of a fraction of the claim) if the reorganization fails.

Bankruptcy Priority Scheme

The treatment of a creditor's unpaid claim in a bankruptcy case depends on the priority status of the class of claims to which the creditor belongs. The bankruptcy priority scheme can he compared to rungs on a ladder. Each rung on the ladder represents a class of creditors. All claims of a higher priority class must be satisfied before the creditors in the next lower class or rung on the ladder can receive any distribution. If the debtor has insufficient assets to satisfy a class of creditors, after paying senior classes, the lower priority class will receive a recovery equal to only a fraction of their claims and all lower priority classes of creditors will receive no distribution. This is the fate that will, in all likelihood, befall Caldor's unpaid Chapter 11 trade creditors - senior classes will take most of Caldor's assets and the remaining assets will fund a small recovery to Caldor's Chapter 11 trade creditors.

Secured Claims

Secured creditors have the highest level of priority in a bankruptcy case. The debtor's Chapter 11 lender and/or pre-Chapter 11 lender usually belong to the secured creditor class in connection with court approved Chapter 11 financing or use of cash collateral arrangements. Their claims are often secured by a lien in virtually all of the debtor's assets and the lender is usually granted a superpriority administrative expense claim. Secured creditors have a prior right to the proceeds of their collateral and their superpriority administrative claims are payable ahead of ordinary Chapter 11 administrative expenses claims, such as unpaid Chapter 11 trade credit claims.

When Caldor announced its decision to liquidate, Caldor's Chapter 11 lender had an outstanding secured and superpriority claim in the amount of approximately $150 million and Caldor's pre-Chapter 11 secured creditors had unpaid claims totaling approximately $225 million that are also secured by a security interest in Caldor's assets and a superpriority claim. The bankruptcy court order obtained as part of Caldor's liquidation program also creates a new class of superpriority claims for creditors that provide goods and services during the liquidation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Extending Credit to a Chapter 11 Debtor Let the Creditor Beware: The Risk of a Failed Chapter 11
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.