| Re: Creditworthy News
- 6/8/10 Edition
| Site: Creditworthy
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| Editor:Rich Hill richh@creditworthy.com
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CREDITWORTHY TOPICS
Creditworthy News
Reader Questions
Bankruptcy/Distressed Co
Provider of the Week
****** CREDITWORTHY
NEWS ******
IS THERE
ANY REASON NOT TO SELL POST PETITION?
By David Balovich
This may sound as an
odd question to ask. It was recently sent to us by one of our readers who
wrote to say that his firm had been approached by a well known company who
was in Chapter 11 reorganization and they wanted to purchase product on
COD terms. The reader went on to explain that his company had never had
any business dealings with this company although the sales department had
attempted to sell to the company several times prior to the bankruptcy
filing with no success. Prior to the bankruptcy the bankrupt company
purchased product from a competitor but had not had any dealings with them
since the bankruptcy filing. The reader went on to write that the
president of his company was "very excited about doing business with
the bankrupt company" and had personally been involved in negotiating
the contact executed between the two firms. He also wrote that the credit
department had not been asked to participate in the decision to sell to
the bankrupt company. Their only involvement, to date, was to set up an
account for the bankrupt company. Still, he was curious as to whether
there was any reason that his company should avoid selling to the bankrupt
company. The negotiated agreement had the potential of contributing over
seventeen million to his companys’ revenues over the next three years
while the bankrupt company reorganized its’ business.
Our initial response
was that his question was a legal one and he should consult with the
company attorney. A few days
later we heard back from the reader who wrote that his company did not
employ a full time legal department and the attorney the firm used for
this transaction was a friend of the president. Our reader was
uncomfortable contacting her for fear the president would find out and
think he was questioning the presidents’ judgment, especially when he
played no role in the transaction. Well, we thought, this is exactly what
he is doing but then we propositioned he also could have the best interest
of the company in mind as well as his job.
Still, it was a legal
question that we were not qualified to answer. So we went to one of our
legal sources, Gilland Chenault. Gill is not only one of the best civil
lawyers in North Texas but he also teaches business law at one of the
state universities in Denton, Texas.
We presented the
readers question to Gill. Gill's response was that on the surface the
question would bring an immediate no. The company had no prior business
dealings with the bankrupt so there wasn't any issue of pre-petition debt
to consider. There is "new value" along with "exchange of
goods for equivalent value" and most importantly there is no question
that the payments would qualify as "normal course of business"
since the payment terms are COD and there are no pre-petition transactions
involving a different set of terms.
"All in
all", Gill said, "Based on the information provided this appears
to be a clean transaction”. On that note we were ready to bring an end
to our meeting. We had already begun mentally composing a response to our
reader that our legal source saw no opposition to his firm selling
post-petition to the bankrupt company when Gill casually remarked,
"Of course, there is the question of any secured party
collateral".
"What do you
mean”? We asked. "Well, I'm assuming that either the bankrupt
company has no secured creditors with a security interest in cash or the
Court has issued an order allowing for the use of pre-petition cash to pay
for new debt and there is no objection by any secured creditor", he
replied.
“If new value, exchange for goods of equivalent value and normal course of business has been established how does the debtors’ cash, secured or not, affect this transaction”? we asked.
"Sit back
down", Gill said, "I’ll explain how this all really
works". Gill then gave us a condensed course in bankruptcy and
secured assets, specifically cash collateral.
“In a Chapter 11
bankruptcy filing”, he began, “ after the filing has occurred the
debtor now debtor-in-possession usually files a motion and order with the
Court allowing the debtor-in-possession to use, sell, or lease property of
the estate for the purpose of paying all necessary and current expenses to
operate its business to the extent that the payments are necessary to
preserve the assets and/or keep the business afloat while preparing its
plan to exit Bankruptcy. This is found in Bankruptcy Code Section 363. In
fact, Section 363(c)(1) permits a Chapter 11 debtor to use, sell or lease
property of the estate in the ordinary course of the debtor’s business,
without any notice or hearing. However, Section 363(c)(2) says the debtor
may not use a secured creditors cash collateral, even in the ordinary
course of business, to make payments only for post-petition obligations,
unless either the secured creditor or the bankruptcy court has given their
approval”.
He could see that we
understood and were about to ask the question when he put up a hand and
said, “let me continue”. “If there exists a secured creditor who has
a financing statement in cash or the proceeds of account receivable and/or
inventory, the secured creditor has the right, under Section 363(c)(2) to
file a motion to object to their collateral being used to pay post
petition obligations of the debtor-in-possession.” “The Court than has
three choices, rule in favor of the secured creditor, rule in favor of the
debtor-in-possession or take the motion under advisement and rule at a
later date”. “Now, if the Court rules in favor of the
debtor-in-possession they can use the assets of the secured party to pay
those post-petition obligations as conveyed in the Courts order on the
debtor-in-possessions Section 363 motion. But if the Court rules in the
secured parties favor or takes the objection under advisement and does not
rule, then the debtor-in-possession is prohibited from using the secured
parties assets to pay post-petition obligations until the Court rules. So
the original order under Section 363 or Section 363(c)(1) that permits
payments of all necessary and current expenses of operating the business,
excludes the use of any objecting secured parties cash assets.”
“OK”, we said,”
“but let’s say the debtor ignores the Court’s specific order under
Section 363(c)(2) and uses the secured parties cash collateral to pay
post-petition expenses under Section 363 and eventually emerges from
Chapter 11 bankruptcy, where is the harm?” “Or more to the point where
is the risk?” We asked.
A wide grin began to
form at the corners of Gill’s mouth and he quietly said, “What if the
debtor fails to emerge from Chapter 11?” “What if they don’t?” we
challenged. “Well if they don’t”, Gill said, “The majority convert
to a Chapter 7, voluntarily or in-voluntarily, and that’s when the fun
starts”.
“In Chapter 7”,
Gill went on, “The debtor-in-possession is replaced by a trustee. The
role of the trustee is to gather all of the debtors’ assets for
liquidation and to recover all avoidable preferences and post-petition
payments. Any use of secured party cash collateral to pay post-petition
obligations without an order from the Court or the permission of the
secured creditor is an avoidable post-petition preference and the trustee
has the right to recover from the party who received it. This is found in
Bankruptcy Code Section 549(a), the trustee’s right to avoid a debtors’
post-petition transfer, and 550(a), the trustee’s right to
recover improperly transferred property.”
“OK”, we
responded, “That’s a lot of legal jargon. What if the post-petition
creditor was operating in good faith under the purposes of Chapter 11 and
for lack of a better term is an innocent vendor?” Gill started to reply
but we continued. “And what about new value, and equivalent value of
exchange, and ordinary course of business? Would those acceptable defenses
not be a satisfactory response to any avoidable preference brought against
a post-petition creditor by the trustee?”
Gill turned and looked
at the shelves of law books behind him, finally he grabbed one off the
shelf and thumbed through it. He eventually looked up from the page he was
reading and said, “There is nothing in Section 549 or any other section
of the Code I can find or know of that allows for an innocent vendor or
ordinary course of business defense for a vendor who has received an
un-authorized post-petition transfer of estate property.” “Even if an
equivalent value of exchange exists and the creditor was acting in good
faith, there is nothing in the Code that provides the post-petition
payment to be unavoidable.”
“So what would your
counsel be in this type of scenario?” We asked. Gill looked at his watch
and asked “Are we on the clock? Just joking”, he said. “Seriously,
my advice would be to first check for any outstanding UCC filings against
the bankrupt company and determine if there are any secured creditors with
cash or proceeds as security. Secondly, regardless if there are secured
creditors or not I would want a copy of the Bankruptcy Court’s order
giving the debtor-in-possession the right to use all assets including cash
to pay post-petition expenses and obligations. If I did not have that
order in hand I would strongly recommend to walk away from any offer to
sell to the debtor-in-possession regardless of the amount or terms of
sale, simply because there is the risk that one day you may have to return
the money”.
We thanked Gill for
his time and sent an email to the reader informing him what we had
learned. We also asked him to keep in touch and let us know how things
eventually turn out. We’ll provide an update to this story when and if
we hear back from him.
We have been in the
credit profession close to forty years and it never ceases to amaze us how
little we know. We can’t tell you how many times we have sold
post-petition to company’s in bankruptcy believing that our only risk
was the possibility of losing the present outstanding sale amount.
We began this column
with the sentence “This may sound as an odd question to ask”.
We’ll end by saying
there is no such thing as an odd or stupid question. The questions that go
unasked may cost you millions for not asking.
We wish you well.
David
Balovich is an author, speaker, and credit consultant and has been writing
for the Creditworthy News since 1997. He can be
contacted at 3jmcompany@gmail.com
or through Creditworthy.
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****** READER COMMENTS ******
Question:
I found the article on Escheatment very interesting. However, it is hard to imagine that companies would be fined so heavily. Can you provide any examples to support the information regarding fines and penalties mentioned in the article?
Answer:
There are numerous examples, too many to mention
here, and here are just two of the many examples: In January 2000 the Wall
Street Journal reported that Bankers Trust paid $50 million dollars in
fines and penalties for failing to report unclaimed property. In March of
this year CA, Inc formerly known as Computer Associates agreed to pay
$17.6 million dollars to the state of
DB
Question:
Not unlike the reader who wrote to you the last edition, our credit department is also overworked and understaffed. We believe our job would be much easier and our company more profitable if sales and management would just listen to us and heed our advice. Too often they ignore our recommendations and we end up with the results of their not paying attention to us. Do you have any suggestions how can we make them understand our advice is to help the company and not impede sales and profits?
Thanks.
Answer:
How many times have we heard this lament? We have been in the credit profession for close to forty years and this has been a major complaint long before we began our career and we doubt seriously it will ever change. But before you become totally discouraged and begin thinking about a new profession stop and ask this question. What would I be doing if they began to listen to me and follow my advice? In a matter of no time at all the account receivable would be as clean as a new whistle. Customers would pay on time because we would be selling to those customers who have capital and capacity, there would be no unauthorized deductions because the customer would possess character. The fact is the company would no longer have a need for a professional credit department and then where would we be? Credit professionals play an important role in the organization because our job as described in management texts, credit courses and job descriptions does not exist. It is the credit professionals' role to find a way to not only make every sale that is brought to us but also to motivate the customer to pay while keeping them happy and continuing to purchase from our company instead of our competitors. So here's our recommendation, learn as much as you can about the role you play in the organization, be the best credit professional you can be and have fun doing it. This is a great job and the men and women who are really successful in credit and collections understand that it's not whether you win all the time but how you play the game. Good luck. DB
Question:
We have an applicant who has asked for a $50,000 line of credit. We have checked the references provided (3) and although the references have confirmed the applicant has a $50,000 line of credit with each of them, the highest amount the applicant has ever owed any of the three is less than $15,000. Payment history with the three references has been satisfactory. Our question is should we provide the $50,000 line of credit the applicant has requested or $15,000 because that is close to the largest amount of credit the applicant has been extended? We appreciate your comments.
Answer:
You did not include in the information you provided the amount of the applicants' initial order or what the sales department anticipates the annual sales will be for the applicant. These are important factors to take into consideration when setting credit lines or limits. Based solely on the information you did provide we would set the applicants credit line/limit at no more than $20,000. The reason is that credit lines and limits should be set high enough to accommodate the customers' normal purchases but not so high to allow an unusual order amount to get by the credit department without their approval. Our experience is that we find the majority of credit departments set credit lines and limits too high or too low thus causing more work than is necessary either in credit approvals or collections. DB
Question:
We have a UCC financing statement filed from one of our customers who just filed bankruptcy. Does this guarantee that we will be paid?
Answer:
There are no guarantees that any creditors will be paid when a customer files bankruptcy. The type of filing, chapter 11, 13 or 7, will give you an indication as to whether to expect payment or not. Chapter 11 and 13 are reorganizations and creditors can usually expect to receive something. A chapter 7 is liquidation. As a secured creditor the only guarantee you have is that you will be paid before any unsecured creditor receives payment. DB
****** BANKRUPTCY / DISTRESSED
COMPANIES ******
On Friday, April 29th five more banks were closed by
U.S. bank regulators bringing the total number of bank failures during
2010 to 78. There were 140 bank failures in 2009, 25 in 2008 and only 3
bank failures in 2007. Out of the five banks closed Friday, three were in
Since we last reported fifteen publicly held companies have filed for bankruptcy protection in 2010 bringing the year to date total to forty-three since January 1, 2010. The number of publicly held company filings is now greater than the entire number of publicly held filings during 2009.
Since April 23, twenty-one companies, including fifteen publicly held, along with forty-one affiliates totaling sixty-two firms filed for bankruptcy protection in the U.S.
Almatis
American Insulock, Inc.
American Mortgage Acceptance Company
Anpath Group, Inc.
BSML, Inc.
Beach First National Bancshares
Certified Diabetic Services, Inc.
Chem Rx Corporation
Community Bancorp
Copper King Mining Corp.
Ceragenix Corporation
Ceragenix Pharmaceuticals
Evergreen Bancorp
MDI, Inc.
Middlebrook Pharmaceuticals, Inc.
Neff Corporation
Pacific Fuel Cell Corp.
R & G Financial Corporation
Startech Environmental Corporation
Western Utah Copper Company
****** PROVIDER OF THE WEEK
******
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Leib Solutions is one of the nation’s leading Commercial Collections agencies with more than 25 years of experience in Accounts Receivables Management (ARM) domestically and internationally. Our collection specialists are experts in their industry segments and as a result achieve faster and more successful outcomes. We also understand that we are ambassadors for our clients and therefore when we state that Leib Solutions combines Tenacity-Respect-Results we know that only through the combination of these three can we be truly successful.
BUSINESS EDUCATION SERVICES
http://www.creditworthy.com/3jm
The leading provider of credit and collection training
program. All programs presented by BES are developed specifically for each
client. "We do not provide "cookie cutter" programs".
This insures that each client only receives the information they are
interested in and not paying for information they cannot use.
DISCLAIMER
Information provided by the Creditworthy News and Newsletter and any third party contributors and parties of interest, are provided for informational purposes only and is not considered as legal advise. Neither Creditworthy or content providers shall be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
FOR MORE INFORMATION:
Creditworthy Editor:
Rich Hill richh@creditworthy.com
Creditworthy News: Dave Balovich
3jmcompany@gmail.com
Sponsor Info:
Rich Hill richh@creditworthy.com
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