Protecting Secured Creditor's Rights In Bankruptcy

There are several protections under Bankruptcy Code for individuals or groups that have supplied
services or goods to a debtor on credit before a debtor's bankruptcy filing date. When done
properly, a trade creditor can increase the chances of receiving a distribution from the
bankruptcy estate by invoking these protections. If the trade creditor does not take action, the
debt might be defined as an unsecured claim. There are several different ways in which a creditor
can be protected during a bankruptcy case.

What is a Request for Administrative Expense?

The first protection is offered under Section 503(b)(9) and it is known as a Request for
Administrative Expense. If you have sold goods to a debtor within the 20 day period before the
bankruptcy case is filed, you can apply for your claims to be considered an administrative expense
priority. This is only eligible for goods and not services.

What is a Reclamation Demand?

You may also consider the potential for a Section 546(c) Reclamation Demand. This section is
broader than the first example since it is expanded the goods sold in the 45 day period prior to
the filing of the petition. In this scenario, however, the rights of sellers to reclaim goods are
often subject to prior interests of secured parties. A reclaiming seller will have to file on time
for the reclamation demand but he or she might also need to file an adversary proceeding to
prevent the debtor from using the purchased goods or from commingling the goods with other
supplies.

What is Post-Petition Assertion of Mechanics' Lines?

Finally, another option for a secured creditor is the Post-Petition Assertion of Mechanics' Lines.
States have all adopted laws regarding the protection of creditors whose labor, services,
equipment or materials were used to improve the land of the debtor.

Even when a secured creditor takes all these steps, it is important that no other action is taking
during the bankruptcy case to impair these rights. For example, a debtor might take action to sell
property free and clear of liens, and this sale would include mechanic's liens.

From the perspective of secured creditors, there have been actions taken to protect their
interests when a debtor files for bankruptcy. When used properly by an experienced attorney, the
provisions listed above can be extremely helpful in moving a case forward and having the interests
and rights of the creditor at the forefront of a bankruptcy case. A creditor must take action by
speaking with a qualified attorney from the outset.
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If you want to make sure that your business is secured in case your debtor files for bankruptcy,
please call Ms. Bonnie Hochman Rothell at (202) 293-8200 for legal advice. Ms. Rothell chairs
Krooth & Altman's litigation group in Washington D.C. In addition to an active litigation
practice, she has been sought to find alternative dispute resolutions to complex problems. Visit
http://www.krooth.com for more information.

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