Fifty Ways to Leave Your Debtor

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Strategies for suppliers on how to leave your debtor.

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Fifty Ways to Leave Your Debtor

  1. 1. Fifty Ways to Leave Your Debtor: Strategies for Suppliers Deborah L. Thorne, Esq. Barnes & Thornburg LLP (312) 357-1313 [email_address]
  2. 2. Offer <ul><li>Supply agreement </li></ul><ul><li>Purchase order </li></ul><ul><li>Purchase agreement </li></ul><ul><li>Telephone call (Parol Evidence Rule) </li></ul><ul><li>Email </li></ul><ul><li>Anything that invites acceptance by the seller </li></ul>
  3. 3. Acceptance <ul><li>Action that is made in a reasonable time evidencing acceptance </li></ul><ul><li>Promise to ship by certain date </li></ul><ul><li>Shipment </li></ul><ul><li>Note: offer and acceptance may be by electronic means </li></ul>
  4. 4. Conflicting Terms (Battle of the Forms) <ul><li>Written acceptance can add additional terms to contract that are different from the original offer. </li></ul><ul><li>Additional terms may not alter the terms unless expressly consented to by the parties– although conduct by the accepting party may signal acceptance of the additional terms </li></ul><ul><li>Required Terms: quantity and term </li></ul><ul><li>Other terms may remain open: exact time of contract formation and certain nonmaterial contract terms (so long as intent to form a contract is shown) </li></ul>
  5. 5. Terms & Conditions <ul><li>Must be consistent on all of your company documents. </li></ul><ul><li>If internet orders accepted must agree to T&C before order is accepted. </li></ul>
  6. 6. Credit Application <ul><li>May be method to slip in terms and conditions early in the relationship </li></ul><ul><li>By signing the credit application the buyer agrees to terms and conditions </li></ul>
  7. 7. Credit Applications <ul><li>Know your customer </li></ul><ul><ul><li>Gather accurate information </li></ul></ul><ul><ul><ul><li>Type of entity </li></ul></ul></ul><ul><ul><ul><li>Date of organization </li></ul></ul></ul><ul><ul><ul><li>State of organization </li></ul></ul></ul><ul><ul><ul><li>Federal tax identification number </li></ul></ul></ul><ul><ul><li>Ownership Details </li></ul></ul><ul><ul><ul><li>Officers’ (managers’) names, titles, home address and ownership interest </li></ul></ul></ul><ul><ul><li>References </li></ul></ul><ul><ul><ul><li>Bank references and information </li></ul></ul></ul><ul><ul><ul><li>Certification that information is true and correct and that buyer is authorizing seller to obtain information about buyer’s credit history and to contact its references </li></ul></ul></ul>
  8. 8. Credit Applications <ul><li>Other terms and conditions </li></ul><ul><ul><li>Interest/Service charges </li></ul></ul><ul><ul><li>Attorneys’ fees </li></ul></ul><ul><ul><li>Jurisdiction and venue </li></ul></ul><ul><ul><li>Credit Reports </li></ul></ul><ul><ul><ul><li>Individuals </li></ul></ul></ul><ul><ul><ul><li>Individual partners (if partnership is buyer) </li></ul></ul></ul>
  9. 9. Personal Guaranty <ul><li>Clear delineation from the credit application </li></ul><ul><li>Guaranty should be signed without any designation of title </li></ul><ul><li>Credit application should be signed separately </li></ul>
  10. 10. Remedies Available to Nondefaulting Party
  11. 11. Request for Adequate Assurance (when your customer is in financial difficulty) <ul><ul><ul><li>Demand Adequate Assurance of due performance </li></ul></ul></ul><ul><ul><ul><li>If Adequate Assurance is not provided, performance may be suspended </li></ul></ul></ul><ul><ul><ul><li>Uniform Commercial Code (UCC) requires a clear demand for adequate assurance and the customer must respond within 30 days </li></ul></ul></ul><ul><ul><ul><li>What are reasonable grounds for insecurity? </li></ul></ul></ul><ul><ul><ul><li>Question of fact </li></ul></ul></ul><ul><ul><ul><li>Objective factual basis must exist </li></ul></ul></ul>
  12. 12. Anticipatory Repudiation <ul><li>To qualify for anticipatory repudiation, the performance repudiated must substantially impair the value of the contract </li></ul><ul><li>Easily satisfied in cases of non-payment under a non-requirements contract </li></ul><ul><li>In a Requirements Contract, customer may not have repudiated if it does not order its yearly requirements </li></ul><ul><li>Aggrieved supplier is better off requesting adequate assurance of performance first </li></ul>
  13. 13. Sellers’ Remedies Under UCC <ul><li>Termination of Credit Terms </li></ul>
  14. 14. Sellers’ Remedies Under UCC <ul><li>State Law Reclamation </li></ul><ul><ul><li>10 day delivery of goods </li></ul></ul><ul><ul><li>Demand should be in writing </li></ul></ul><ul><ul><ul><li>Identify the goods by invoice number, bill of lading number </li></ul></ul></ul><ul><ul><li>Send or deliver demand to those in command of buyer and those with knowledge of delivery </li></ul></ul><ul><ul><li>Subject to liens of secured creditors </li></ul></ul>
  15. 15. Sellers’ Remedies Under UCC <ul><li>Bankruptcy Reclamation </li></ul><ul><ul><li>45 day delivery of goods prior to petition date </li></ul></ul><ul><ul><li>Written demand required </li></ul></ul><ul><ul><li>Send to Debtor’s attorney, Debtor’s principal and others with knowledge of delivery </li></ul></ul><ul><ul><li>Subject to liens of secured creditors </li></ul></ul><ul><ul><li>Goods must be in existence </li></ul></ul><ul><li>Don’t forget the 20-day administrative claim </li></ul>
  16. 16. Sellers’ Remedies Under UCC <ul><li>Stoppage of Goods in Transit </li></ul><ul><ul><li>Send, Deliver Notice to Shipper, to Buyer </li></ul></ul><ul><ul><li>Shipper must stop delivery and hold the goods </li></ul></ul><ul><ul><li>Seller will be responsible for cost of return of goods </li></ul></ul><ul><ul><li>This remedy is good in or outside of bankruptcy case </li></ul></ul>
  17. 17. Sellers’ Remedies Under UCC <ul><li>Identification and Salvage of Goods </li></ul>
  18. 18. Executory Contract Issues <ul><li>What is an executory contract? </li></ul><ul><ul><li>Contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other </li></ul></ul>
  19. 19. General Bankruptcy Code Provisions Governing Executory Contracts <ul><ul><li>“ Limbo” Period </li></ul></ul><ul><ul><li>When can a contract be assumed or rejected? </li></ul></ul><ul><ul><li>What can be assumed or rejected? </li></ul></ul><ul><ul><li>Prerequisites for assumption </li></ul></ul><ul><ul><li>Assignment of executory contracts </li></ul></ul>
  20. 20. Strategies for Customers with Executory Contracts <ul><li>Customers entitled to adequate assurance of performance if contract is to be assumed plus cure </li></ul><ul><li>Assumption is good defense to preference recovery action </li></ul><ul><li>Compel rejection if customer lacks confidence in the ability of the debtor to perform </li></ul>
  21. 21. Strategies for Suppliers with Executory Contracts <ul><li>If terms of contract are unsatisfactory to the supplier, urge rejection </li></ul><ul><li>If debtor customer is unlikely to be able to perform, urge rejection </li></ul><ul><li>If sales have been substantial, urge assumption (with cure of payment of past due) </li></ul><ul><li>Beware of attempts of customer debtor who tries to renegotiate terms </li></ul><ul><ul><li>May seek extension of term </li></ul></ul><ul><ul><li>May seek more favorable terms </li></ul></ul><ul><ul><li>May seek waiver of supplier’s right to seek adequate assurance of future performance </li></ul></ul><ul><ul><li>May seek assumption without the cure </li></ul></ul>
  22. 22. Thank You Deborah L. Thorne, Esq. Barnes & Thornburg LLP (312) 357-1313 [email_address]

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