In Delaware if not elsewhere, a so-called critical vendor order does “not in and of itself . . . bar a preference claim” to recover a payment made before bankruptcy, according to Bankruptcy Judge John T. Dorsey.
In chapter 11, the debtor obtained the equivalent of a critical vendor order allowing but not requiring the debtor to pay prepetition unsecured obligations owing to customers whose cooperation was deemed necessary to the continued receipt of services provided by those customers. The order did not list or identify the customers destined to be paid.
After confirmation, the liquidation trust sued two customers under Section 547 to recover payments made before bankruptcy during the 90-day preference window. The customers responded with a motion to dismiss, claiming there was no preference because they would have been paid in full under the critical vendor order had they not been paid before bankruptcy.
Judge Dorsey denied the dismissal motion in his July 21 opinion. Judge Dorsey was appointed to the Delaware bankruptcy bench two years ago.
The liquidation trustee argued that two aspects of the critical vendor order meant it was no defense to a preference: (1) Payments under the critical vendor order were discretionary, not mandatory; and (2) the critical vendor order said it was not “a waiver of any claims or causes of action that may exist against any creditor.”
Judge Dorsey agreed on both counts. He cited “a string of cases from [the Delaware bankruptcy court] for the proposition that orders like the [critical vendor order] do not automatically bar preference claims.”
In large part, Judge Dorsey adopted the rationale employed by Bankruptcy Judge Mary F. Walrath in In re Hayes Lemmerz Int’l, Inc., 313 B.R. 189 (Bankr. D. Del. 2004).
Judge Walrath observed that the challenged payments were made before the critical vendor order was signed. Furthermore, the order was permissive, not mandatory.
Judge Dorsey quoted Judge Walrath, who said that the critical vendor order “did not identify [the preference defendant] as a critical vendor, did not require that [the defendant’s] pre-petition claims be paid in full and did not provide that any preferential payments previously made to [the defendant] could not be recovered” Id. at 193-4.
The facts were the same in the case before him, Judge Dorsey said.
Judge Dorsey distinguished one case were a critical vendor order was a successful defense. There, the defendants were holders of pre-petition priority claims who would have been paid in full. In that case, the preference defendants didn’t receive a dime more than they would have received as priority creditors.
In his case, Judge Dorsey said that the preference defendants held unsecured claims, not priority claims destined for full payment.
Otherwise, Judge Dorsey said that a critical vendor order had been a successful defense to a preference claim only if the order or a stipulation required full payment of prepetition claims.
Explaining her decision to deny the motion to dismiss, Judge Dorsey said that “the fact that a creditor was named in a court order as a ‘critical’ or otherwise important customer of a debtor is not in and of itself enough to bar a preference claim; something more is required.”
In Delaware if not elsewhere, a so-called critical vendor order does “not in and of itself . . . bar a preference claim” to recover a payment made before bankruptcy, according to Bankruptcy Judge John T. Dorsey.
In chapter 11, the debtor obtained the equivalent of a critical vendor order allowing but not requiring the debtor to pay prepetition unsecured obligations owing to customers whose cooperation was deemed necessary to the continued receipt of services provided by those customers. The order did not list or identify the customers destined to be paid.
After confirmation, the liquidation trust sued two customers under Section 547 to recover payments made before bankruptcy during the 90-day preference window. The customers responded with a motion to dismiss, claiming there was no preference because they would have been paid in full under the critical vendor order had they not been paid before bankruptcy.
Judge Dorsey denied the dismissal motion in his July 21 opinion. Judge Dorsey was appointed to the Delaware bankruptcy bench two years ago.