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Dos and don’ts for the unsecured creditor

A succession of builder bankruptcies around the country have tightened credit policies at most lumberyards, but dealers can still find themselves holding a Chapter 11 notification. Commercial bankruptcy attorneys offer a few tips on how LBM suppliers can minimize their losses when customers go belly up.

File a “proof of claim” as soon as possible. This is a simple form, available from the Web site of any federal bankruptcy court, that explains what a debtor owes you and why. “Don’t wait to figure out what the deadline is,” advises Annie Catmull, a bankruptcy attorney with Walker Wilcox Matousek in Houston.

Don’t ignore demands for payment. Under the law, a bankruptcy trustee can demand that you return payments received from a debtor during a 90-day period prior to the bankruptcy filing. These demands can be contested, but dealers who ignore them can be sued by the bankruptcy trustee.

Join the committee of unsecured creditors. Peter Davidson, managing partner of Moldo Davidson Fraioli Seror & Sestanovich in Los Angeles, points out that the unsecured creditors committee has considerable influence over how a company’s assets are distributed -- and the committee is represented by its own attorney, paid for by the debtor. The downside? “It involves a time commitment, especially in the beginning of a case,” Davidson warns.

Do some of the legwork. Diana Perenza, a paralegal who is also the creditor manager at Florence Building Materials in Huntington, N.Y., always attends the initial gathering of the creditors, called a “341 meeting,” and orders copies of the court files. Then she decides whether to bring in a bankruptcy attorney. On a recent bad debt of 11,000, Perenza advised her company to take a loss after reviewing the contractor’s assets, liabilities and drug rehab history. “I realized there was nothing to go after,” she said. “But it would have cost us $2,000 [in legal fees] to find that out.”

Walk softly. Once bankruptcy papers are filed, any attempts to collect a debt or take back materials is verboten. But the courts also frown on collection methods they deem “outside the ordinary course of action” in the period before a bankruptcy filing. “These can be deemed a preference action,” said Boston attorney Steven Reingold of Jager Smith. He warns that “outside the ordinary course of action” does not have a clear definition. But “preference” means you jumped ahead of the other creditors, and the court may ask for the money back.

Check your mechanic’s liens. Provided they were filed properly, a mechanic’s lien can bump you ahead of unsecured creditors -- and put you in a good bargaining position. Evan Smiley, a Costa Mesa, Calif., commercial bankruptcy attorney, says a lot of bankers “learned their lessons in the ‘90s -- it’s better to work it out than take over a partially built project.” Smiley, who devotes 75 percent of his practice to floundering real estate developments, finds that lenders are often willing to extend payments to suppliers to get the job done. “The banks don’t want mechanics’ liens on a project because it mucks it up,” he explains.

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