United States: Our Customer Has Filed Bankruptcy But Demands That We Continue To Extend Trade Credit! Are We Obligated To Do So?

Last Updated: August 14 2015
Article by T. Parker Griffin, Jr.

Trade creditors often face the issue of whether they are required to continue providing goods or services on credit to a customer that has filed chapter 11 bankruptcy. Unfortunately, the Bankruptcy Code fails to specifically address the rights and obligations of a trade creditor facing this dilemma, resulting in a tug-of-war created by the debtor's need for continued goods and services and the creditor's need for assurance of payment. Further complicating the problem is that the case law is relatively undeveloped in this arena.

As a precursor, trade creditors must understand the interplay between their supply agreement and the immediate consequences arising from the debtor's bankruptcy filing. The supply agreement is likely an "executory contract" under the Bankruptcy Code, which has generally been interpreted by courts as a contract under which material performance remains due from both parties. Section 365 of the Bankruptcy Code governs executory contracts and provides the debtor with the option of either (i) "assuming" the contract, which requires the debtor's payment of any arrearages as a precondition to assumption, or (ii) "rejecting" the contract, which results in an unsecured claim for the trade creditor. The problem, however, is that under Section 365, the debtor has until confirmation of the chapter 11 plan to assume or reject the contract, which in complex chapter 11 cases could equate to several months or even years after the bankruptcy filing. Compounding the problem is the fact that the Bankruptcy Code does not address the parties' respective rights and obligations under the contract during this time period. And, to make matters worse, the "automatic stay" arises under Section 362 of the Bankruptcy Code on the date of the bankruptcy filing and generally prohibits the trade creditor from unilaterally canceling or modifying the contract after the petition date. Accordingly, if the trade creditor suspends performance or attempts to modify the terms of the supply agreement so as to require cash-on-delivery in response to the debtor's bankruptcy, the debtor may threaten to sue the trade creditor for breach of contract or for violation of the automatic stay.

This is certainly not the situation the trade creditor envisioned when it originally entered into its supply agreement. However, as discussed herein, all is not lost as the trade creditor does have options under both the Bankruptcy Code and applicable state law.

First, if the debtor is in default as of the bankruptcy filing, the trade creditor's leverage is vastly improved as courts have held that the defaulted debtor cannot compel the creditor to continue to provide goods or services on credit. These courts have relied on basic contract law, which prevents the defaulting party from enforcing a contract against the non-defaulting party. Thus, if the debtor wants the trade creditor to continue to supply goods or services, the debtor will be required to assume the trade creditor's contract early in the case, which, as noted above, requires the debtor to cure the pre-petition default and provide adequate assurance of future performance. Similarly, a trade creditor who distinguishes itself as a "critical vendor" is often included by the court early in the bankruptcy as part of a designated group of vendors whose pre-petition claims are paid in full in return for their continued services.

But what if the debtor is not in default as of the bankruptcy filing, and yet the trade creditor still has grave concerns as to its now-bankrupt customer's ability to make its payments moving forward? While the creditor does not have the same leverage as discussed in the preceding paragraph, the creditor is not without options.

First, the trade creditor always has the option of filing a motion under Section 362(d) of the Bankruptcy Code requesting relief from the automatic stay to either cancel the supply agreement or modify the terms of the supply agreement (such as from net 30 days to cash-on-delivery). In order to obtain stay relief, the trade creditor must show "cause" which includes, without limitation, a showing of lack of "adequate protection" — i.e. that the debtor lacks adequate financing to pay for the goods or services in the future and/or is administratively insolvent. Similarly, Section 363(e) of the Bankruptcy Code allows a creditor with an interest in property used, sold or leased by the debtor to file a motion requesting that such use, sale or lease be conditioned upon the debtor providing the creditor with adequate protection. Accordingly, both Section 362(d) and Section 363(e) provide the trade creditor with potential means of forcing the debtor to provide adequate protection, such as cash-on-delivery, as a precondition to the trade creditor's obligation to continue supplying goods or services. Moreover, the filing of the motion alone often creates leverage for negotiating cash-on-delivery terms with the debtor.

In addition to these options provided by the Bankruptcy Code, a trade creditor that providesgoods (but not services) under its supply agreement also has state law remedies available under Article 2 of the Uniform Commercial Code. First, UCC § 2-609 allows a trade vendor who has "reasonable grounds" for questioning its customer's ability to pay for the goods to send a written demand to its customer to provide "adequate assurance" of its ability to perform under the contract. If the customer does not timely respond within 30 days or provide adequate assurance of its ability to perform, the trade creditor can treat the contract as repudiated. Second, the trade creditor has the right to suspend performance under the contract where the requirements of UCC §§ 2-702, 2-703, and 2-705 are satisfied. Generally speaking, the trade creditor can stop delivery where its customer is insolvent (satisfied by a showing that the debtor's liabilities exceed its assets or that the debtor cannot pay its debts as they become due) and demand cash-on-delivery in exchange for continued performance.

These options hopefully provide trade creditors with ideas of how to obtain cash-on-delivery terms with a bankrupt customer. However, as a final note, trade creditors must make sure that the debtor has obtained approval to use its cash collateral to make such payments, otherwise the trade creditor runs the risk of having to disgorge unauthorized payments. Accordingly, in addition to monitoring the debtor's ability to pay for future deliveries, the trade creditor must also confirm that the debtor has obtained approval to use its cash collateral for such payments.

This article first appeared in Inside Counsel on August 11, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.