Lawyer Up: As Retail Bankruptcies Increase, Creditors Must Be Vigilant
While much has been written about the future of brick-and-mortar retailing as a result of the large number of retail bankruptcies during 2016 and even during the first weeks of 2017, virtually no attention has been paid to what will be a significant problem for creditors of those retailers that have sought bankruptcy court protection—even if some of the retail locations remain open.
The US Bankruptcy Code, to create an even playing field and equality of treatment among similarly-situated creditors, has consistently contained a provision that allows the bankruptcy estate to recover what are deemed to be preferential transfers to creditors that were made on the eve of bankruptcy. The current version of the law provides that any transfers—including the payment of money, the return of inventory or the granting of a lien—which occurred within 90 days before the filing of the bankruptcy proceeding can be avoided and set aside. In concept, this provision has been enacted and maintained to preclude favoritism being directed to friendly creditors or even relatives.
Notwithstanding the laudable intentions of the provisions of the Bankruptcy Code, in practicality, this creates a quagmire for suppliers of goods and services and other creditors in dealing with financially distressed business, especially those in retailing. Vigilant creditors will always take steps to minimize potential losses as a result of a subsequent bankruptcy filing when it is known that the customer is in financial difficulty. Very often, the availability of new goods or services on credit is conditioned upon the payment of then-outstanding balances. Unless the suppliers of goods and services take proactive and preemptive steps when dealing with the financially distressed retailer, not only can they wind up being unsecured creditors for the continued extension of credit, but they can also be a target for a preference recovery for the payments received within the 90 days prior to the bankruptcy filing.