For a surety, the bankruptcy filing of a principal raises a number of issues and several challenges, but it does not necessarily mean a loss. The surety can maximize its recovery by staying vigilant and timely asserting its subrogation rights.
When a principal files for bankruptcy, and the surety is called upon to perform under a performance or payment bond, the surety should determine which goods were supplied to the principal/debtor immediately prior to the filing. Under the Bankruptcy Code,1 not all claims are treated the same. The Bankruptcy Code provides that certain unsecured claims have priority over general unsecured claims, and creates specific rights to recover goods supplied to the debtor immediately prior to the bankruptcy filing. This practice pointer addresses two types of rights to which a surety may be subrogated: (1) reclamation rights and (2) administrative priority claims under § 503(b)(9) of the Bankruptcy Code.
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