Could this be you?
Imagine your customer pays outstanding warehouse fees, then, shortly thereafter, within 90 days, files for bankruptcy. Will you have to refund that money to the bankruptcy trustee? The answer is: maybe, maybe not.

The Answer is Governed by the Bankruptcy Code
Generally, Section 547(b) of the Bankruptcy Code defines a “preferential transfer,” capable of being “avoided” by the trustee, if the creditor receives it from the debtor within 90 days of the debtor filing for bankruptcy. Thus, a creditor who receives payment within the 90- day “preference period” may have to repay it to the trustee. The rationale for this provision is that a creditor who has been paid during this period, when other similarly-situated creditors have not, gained an unfair advantage in collecting from the debtor. The Bankruptcy Code seeks to treat like creditors alike: unsecured creditors like other unsecured creditors, and secured creditors like other secured creditors.

Defenses you may have as a warehouseman
The warehouseman, however, is not without defenses. If the warehouseman is fully secured, then payments made to the warehouseman during the preference period do not constitute preferential transfers. A warehouse lien is established for goods based on a warehouse receipt, or a storage agreement, or a bill of lading. A warehouse lien can be further extended to include other goods that are not charges for storage or transportation, yet are still in the warehouseman’s possession, but for that to be the case, the lienholder must have expressly reserved such right in writing. Significantly, in order to maintain the lien, the warehouseman must hold possession of the goods, otherwise, the lien will be considered released. The lien is extinguished upon relinquishment of the goods.

The other significant defense available to the warehouseman is the “ordinary course of business” defense. Under Section 547(c)(2) of the Bankruptcy Code, a trustee may not avoid a transfer “in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was (A) made in the ordinary course of business or financial affairs of the debtor and the transferee, or (B) made according to ordinary business terms.”

In determining the ordinary course of dealings between parties, courts place particular importance on the timing of payments. In many jurisdictions, payments made beyond the parties payment terms, beyond “net 30” for example, are considered as falling outside the ordinary course of business. So even if payment is received within the 90-day preference period, so long as it was received in the ordinary course of business, it will not be reversed.

What You Need to Do Now
Unfortunately, customers will inevitably file for bankruptcy because of financial difficulties wrought by the pandemic. For those who have yet to file, but appear to be precariously close, :

  • it’s wise to monitor what’s receivable more closely, and, when necessary,
  • flex the secured-interest muscle in warehoused inventory by insisting on payment before it goes out the door. That would be the preference.

This is tricky stuff. If you have any questions, please feel free to contact Mark Himsworth at MHimsworth@hrmml.com or 215.661.0400.

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