"Interestingly enough," one of our subscribers shared a while back, "reading the bankruptcy filing paperwork can change your mind about how you want to sell to the company. We had a Chapter 11 bankruptcy filing a few years ago that I will never forget."
"In the filing itself, there was a paragraph that stated that if we changed payment terms more than one time after they filed (we changed them only once after their filing, requiring a 100% deposit -- in certified funds -- prior to shipment) that any balance shipped to them would be incorporated into the bankruptcy and subject to any repayment arrangement that was determined for unsecured creditors in the bankruptcy. I had never seen anything like that before -- or since! But, it is certainly worth a read of the bankruptcy filing."
In this case, she found a paragraph from the bankruptcy filing that read as follows:
She did not know at the time she first received the notification, that it was a pre-packaged Chapter 11 by the parent company, done in order to shed some unprofitable leases on over 150 locations -- just as a recession was kicking in. "Our customer was not even told they were filing bankruptcy until the afternoon before the filing occurred and they were asked not to contact any suppliers until after the bankruptcy had actually been filed." And their sales team received a vendor letter that discussed "exciting changes" (!) in the business, never mentioning that those were, in fact, reorganization and bankruptcy. "Of course, we did not see anything until we received an alert from D&B that the bankruptcy had occurred. Our customer was generally paying us in anticipation to earn our cash discount and at the time of the filing was current with us."
Amazingly, this did work out in their favor. On the day of the filing, they notified the customer that, per their policy, they had changed their payment terms to a 100% deposit and notified them of that as they pulled trucks off the road. "So, had we then later changed our payment terms with them, we would have gotten caught in the clause shown above and our debt would have been deemed an 'avoidable post-petition transfer'. It took a bit of explaining to my independent contractor sales rep and sales management, but in the end, we were all on the same page. We started out with 7 figure exposure, including preference payments, and ended up collecting 100%. This does not always happen that way and certainly came with a lot of work. Because of this one, I always encourage reading the actual filing (not fun, but worth it!), especially when exposure is high.
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