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Seller, Beware

By Ann Marie Uetz and Jennifer Hayes
June 18, 2010

Companies that continue to supply to a customer after the customer files for Chapter 11 bankruptcy protection should take note of a recent decision from the Eleventh Circuit that required a supplier to return the money it was paid by a Chapter 11 debtor ' for goods shipped to the debtor post-petition ' because the debtor did not have authority to make the payment in the first place. The case, In re Delco Oil, Inc. (Marathon Petroleum Co., LLC v. Cohen), 599 F.3d 1255 (11th Cir. 2010), serves as an important reminder for suppliers to monitor a customer's bankruptcy filing and to confirm the rules for doing business before delivering goods to a debtor.

A Chapter 11 debtor must obtain the consent of certain parties or the permission of the bankruptcy court before it can do many things it was able to do on its own prior to filing a petition for bankruptcy. Chief among these is that, if anyone has a lien on the debtor's cash (including a blanket lien on accounts receivable, as is often the case with a secured lender), the debtor must obtain either the lender's consent or bankruptcy court approval in order to use that cash for any purpose ' including to pay for goods received in the ordinary course of business. Seeking such permission is known as a request or motion for the debtor's use of cash collateral.

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