Doing business with these troubled companies can result in your own company incurring significant losses. The following article will address what you should do to protect your business against a customer.s bankruptcy; what pre-bankruptcy remedies are available upon a customer.s default; and what impact bankruptcy may have on your collection strategies?
- Review Your Credit Documents. Too often, credit documents fail to provide for a default rate of interest, attorneys. fees and, in some cases such with perishable agricultural products, lien rights. A quick review of your credit documents should be made to ensure that these provisions are included. Further, creditors with a security interest in certain goods or equipment should check to see that their security interest is properly perfected (i.e. is the customer.s name and address correct, has the collateral been moved, has the financing statement or deed of trust been properly recorded in all places, and is the financing statement still current?)
- Obtain Additional Security. A creditor should obtain a security deposit, a security interest in goods, or C.O.D. payment. Where a transaction relates to the sale of goods, Article 2 of the Uniform Commercial Code (.UCC.) allows a creditor to demand adequate assurance of performance, stop goods in transit or reserve to itself, under the terms of shipping, a security interest in the goods as security for the buyer's performance.
- If Appropriate, Give Notice of Reclamation. Article 2 of the UCC further provides that if a creditor becomes aware of a company's insolvency after shipment of goods, the creditor can reclaim the goods under state law, provided that written notice is given to the debtor within 10 days from the date of delivery. When the buyer has furnished written representation of solvency, this 10-day period can be extended for an additional 3 months.
- Require Third-Party Guaranty. A creditor also should obtain the personal guaranty of the customer.s principal or other third parties, and security for the guaranty. While it is advisable to obtain the guaranty of the principal.s spouse, a creditor is prohibited from doing so unless the creditor determines, under its own credit standards, that the principal was not independently creditworthy.
- Consider Pre-bankruptcy Options. There are a number of legal and "self help" remedies available prior to a customer.s bankruptcy which can help alleviate or minimize your company.s losses. a. Claim and delivery. This is an ancillary remedy to a pending state court action to recover possession of specific personal property. In order to bring this action, a creditor must establish that it is entitled to possession of the property by reason of ownership or some other contractual right. Such would be the case where a vehicle lease or security agreement covering a vehicle provides that the lessor or secured party has the right to recover the vehicle in the event of a default.
b. Pre-judgment Attachment. This procedure is generally used when a customer is either (i) a nonresident, (ii) a foreign corporation, (iii) a domestic corporation whose officers cannot be found, (iv) concealing itself with the intent to defraud creditors or to avoid service of summons, or (v) concealing or removing property with intent to defraud creditors. If any of these grounds can be shown, the sheriff will seize the customer's property so that it potentially may be used to satisfy a creditor's money judgment.
c. Foreclosure. Foreclosure under a power of sale in a deed of trust is the usual method of realizing a secured creditor's interest in real property and extinguishing a customer's right of redemption. During the pendency of the foreclosure proceeding, the customer remains in possession of the property and is entitled to the property.s rents and profits unless the loan documents provide otherwise or a receiver is appointed. A foreclosure sale conducted pursuant to a duly perfected security interest in the property and in accordance with statutory procedure generally is not subject to attack by a bankruptcy trustee.
d. Receivership. A receiver may be appointed before a judgment is entered to collect rents and profits or to take possession of the customer's assets. Receivers may also be appointed after judgment to recover assets of the customer sufficient to satisfy the judgment. Finally, receivers can be appointed to liquidate or operate the business of a customer.
e. Workouts. Out-of-court settlements or workouts have an advantage of speed and substantial flexibility over bankruptcy. Typical types of workout agreements include composition agreements, loan extension agreements, standby or moratorium agreements with a creditors. committee, trade trustee, third-party trustee, debtor as trustee, or any combination thereof.
- Impact of Bankruptcy On Your Collection Strategies. The Bankruptcy Code gives a debtor or bankruptcy trustee certain "strong-arm" powers to recover pre-petition payments deemed to be preferential, to avoid pre-petition transfers or obligations which are fraudulent and to reverse pre-petition setoffs in which a creditor has improved its net position. Creditors do have some relief. For example, a creditor can defeat a preferential action or reduce the amount to be recovered if the creditor can show that the transfer was made in the ordinary course of business, the transfer was a contemporaneous exchange of value (i.e. COD), or that the creditor provided goods or .new value. to the debtor for which the creditor has not been paid after the creditor received the preferential transfer.
- Conclusion. When the times get tough for customers, tough creditors can, and should, get going. If you have questions about your rights as a creditor, consult an attorney.