Critical Vendor Treatment May Not Absolve Trade Creditors from Preference Risk

As any trade creditor familiar with bankruptcy cases is aware, a customer’s bankruptcy filing comes with the frustrating reality that any payment made by that customer within 90 days of the bankruptcy filing may be clawed back as an avoidable preference. This reality is particularly frustrating where the customer designated the creditor as a critical vendor and induced the creditor to continue providing goods and/or services on credit terms following the customer’s payment of the creditor’s prepetition claim pursuant to a critical vendor order. Debtors frequently seek, and obtain, authority to pay the prepetition claims of “critical vendors” on the premise that the debtors’ business would be irreparably disrupted, and the debtors’ efforts to maximize value for their estates and creditors would be severely impaired, if a critical vendor refuses to provide goods and services to the debtors post-petition.

When defending against a preference complaint, critical vendors have asserted their critical vendor status as a full defense to the claim. Vendors raising this “critical vendor defense” have argued that the plaintiff cannot prove one of the required elements of a preference claim—that the prepetition payment resulted in the creditor receiving more than it would have received in a hypothetical Chapter 7 liquidation—because the debtor had previously obtained court approval to pay the creditor’s outstanding prepetition invoices during the bankruptcy case. However, successfully asserting this “critical vendor defense” is a difficult task, as illustrated by the recent decision of the United States Bankruptcy Court for the District of Delaware in the bankruptcy cases of Maxus Energy Corporation, et al. (“Maxus Energy”).