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2013 Legal Seminar For Credit Professionals


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The annual Legal Seminar For Credit Professionals, presented by Kegler Brown in conjunction with NACM – Great Lakes Region and American Subcontractors Association, was combined with an international business and construction legal program. Topics included selling internationally, post-judgment collection, bankruptcy, bids and pay-if-paid clauses.

Published in: Economy & Finance, Business
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2013 Legal Seminar For Credit Professionals

  1. 1. Post-Judgment Collection: Now What? presented by Dan Bennett Legal Seminar for Credit Professionals October 24, 2013
  2. 2. Which Clubs In the Bag are We Talking About? • Creditors: Secured/Undersecured/Unsecured • Debtors: Consumer (i.e., personal) vs. Business • Debts: Business debts
  3. 3. Old Sayings… • “Obtaining a judgment is easy, collecting one is difficult.” • “A judgment is only a piece of paper unless you can collect on it.”
  4. 4. Procedural Posture • Case has been litigated and creditor has legal pronouncement from court with competent jurisdiction that debt is owed. • Trial, Agreed Entry, Default. • Domestication of Judgments.
  5. 5. #1 Impediment to Collecting • (besides your debtor being broke) Guesses? • The number one impediment to collecting is information. Specifically, precise information of assets classes to collect on.
  6. 6. Non-Judicial Methods • You (the client). The closer a credit manager is to the debtor the more information they can usually provide. • Credit application. Old credit reports. • Public records/asset searches (real estate, cars, boats, other pending lawsuits). • Bank account searches.
  7. 7. Finding a Debtor • Businesses – secretary of state, Dun & Bradstreet, Google, Facebook, other lawsuits. • Individual – Google, Facebook, LinkedIn, court records, marriage/domestic court records, private investigator/process server.
  8. 8. Judicial Methods • Ohio Civ. R. 69 – a judgment creditor may obtain discovery from a judgment debtor in any manner otherwise provided for under the rules. – Third Party Subpoena. – Written discovery requests. – Depositions.
  9. 9. The Judgment Debtor Examination • What is it? An opportunity to ask the judgmentdebtor questions, in person, under oath. • Two versions: Noticed vs. Court Ordered
  10. 10. What If They No-Show? • If noticed, must file Motion to Compel. • If Court-Ordered – Capias procedure. – Inapplicable to corporate officers.
  11. 11. Judgment Liens • Automatically recorded upon filing certified copy of judgment in relevant county. • Foreclosure permitted. • Practical value minimal, except for rare circumstances.
  12. 12. Wage Garnishments • Permitted in all states, but exemptions vary significantly. – Ohio: Greater of 60 x Federal Minimum wage or 75% of “disposable earnings.” – Debtor entitled to hearing. • Depending on personal balance sheet of debtor, could prompt bankruptcy filing.
  13. 13. Non-Wage Garnishments • Most often in the form of a “bank garnishment.” • Streamlined procedure, but not continuous. • Gets the debtors attention, sometimes results in payment plan.
  14. 14. Garnishments, Misc. • Garnishee Liability: What if the bank doesn’t answer? • Joint accounts. • Special types of property: Trusts, Annuities, Exemptions, etc.
  15. 15. Execution • Complicated process, involving more legal fees and • Exemptions are significant, and growing. • For business creditors, usually secured creditors will cause issues with execution.
  16. 16. Charging Orders • ORC 1705.19: Judgment creditor may apply to a court of common pleas to charge the membership interest of the member with payment of the debt. – Creditor receives profits or distributions from LLC. – May still pursue other remedies (i.e., foreclosure sale). • Applies to partnerships. ORC 1776.50.
  17. 17. Creditor’s Bill • Patent’s or intellectual property, money through a will, other intangible assets (legal claims). E.g., In re Estate of Mason, 109 Ohio St.3d 532 (2005). • Take JDE before hand – must present evidence that debtor has insufficient assets. • Remedy is a lien on the intangible property. Will have priority over other creditors who did not pursue a Creditor’s Bill.
  18. 18. Fraudulent Transfers • ORC §1336.04: A transfer (made before or after debt is incurred) is fraudulent if: – There’s actual intent to defraud; or – Debtor does not receive equivalent value AND • Remaining assets are unreasonably small in relation to the transaction; or • Debtor incurred debts beyond his ability to pay as they became due.
  19. 19. “Badges of Fraud” • Actual evidence of fraud unlikely. • The “Badges of Fraud.” Creditor has burden to prove transfer was fraudulent, but if creditor can demonstrate three “badges of fraud,” burden will likely shift to debtor. Blood v. Nofzinger, 162 Ohio App. 3d 545.
  20. 20. Remedies • ORC 1336.07 - provides for various types of relief, including avoidance of the transfer or obligation, attachment, garnishment, injunctive relief, receivership, or such “other relief as the circumstances may require.”
  21. 21. Piercing the Corporate Veil • (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will or existence of its own • (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud, an illegal act, or similarly unlawful act against the person seeking to disregard the corporate entity, and • (3) injury or unjust loss resulted from such control and wrong.”
  22. 22. Thank You! Dan Bennett, Director (614) 462-5448
  23. 23. Bankruptcy Section 365’s Treatment of Executory Contracts & Unexpired Leases presented by Kenneth Cookson and Donald W. Gregory Legal Seminar for Credit Professionals October 24, 2013
  24. 24. What is an Executory Contract? A contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that failure of either to complete performance would constitute a material breach of excusing performance of the other.
  25. 25. Three Instances of an Executory Contract 1. Where the debtor has completed its performance under the contract, the unperformed portion by the other party is not treated as an executory contract. Rather, the completed portion is treated as an asset of the bankruptcy estate. 2. Where the other party has substantially performed, but the debtor has not, there is likewise no executory contract. Rather, the bankruptcy estate already has the benefit of the performance and therefore the performing party has a claim in the bankruptcy. 3. Where both parties still have performance to complete, there is an executory contract.
  26. 26. What is the impact of a bankruptcy filing on a construction project? Someone will replace the debtor, normally at additional cost. Lien and bond rights of suppliers and subtrades of the debtor must be extinguished.
  27. 27. What happens with respect to replacing a defaulting contractor? 1. 2. 3. 4. Has a default occurred under the contract? Has proper notice been given? Can contract be assumed or rejected? How will “double payment” to debtor’s suppliers/subtrades be minimized? Even if “Ipso Facto” clauses are unenforceable there generally are other termination grounds.
  28. 28. What is the impact of the automatic stay? STAY = Automatically stays most efforts to collect debtor’s pre-bankruptcy debts. Violation can result in damages and fees and actions in violation of stay are void.
  29. 29. Should you seek relief from the stay? 1. To foreclose on a private lien. 2. To file lien against public funds. Grounds: 1. Lack of adequate protection. 2. No equity in the property.
  30. 30. What happens with mechanic’s lien rights? Stay does not stop perfection of mechanic’s liens. (at least on private liens) Stay does prohibit actions to foreclose a lien. Secured creditor to extent of equity in property.
  31. 31. What happens with respect to performance and payment bond rights? Bond claims can be perfected and pursued against the bonding company even if debtor is bankrupt.
  32. 32. Is a lien a preference? Generally not. Normally exempted from preference attack. Can provide Lien Waiver in exchange for Direct Payment particularly if Notice of Furnishing Provided.
  33. 33. Are payments to avoid a mechanic’s lien a preference? As to Debtor Property: Generally No, because: • Could have filed a lien anyway so no net difference. As to Third Party Property: Probably No, if: A. Project funds are not really property of debtor; or B. In Exchange for New Value.
  34. 34. “New Value” Defense Best if: 1. Joint Check Agreement; 2. Notice of Furnishing; and/or 3. Lien Waiver. This may constitute “New Value.”
  35. 35. Better to Recover Money in 1st Place And risk partial preference and return later than to never recover money.
  36. 36. What if someone threatens to “bond off” the lien? As Clint Eastwood said: “Make my day!” You will now have security for the lien and be able to pursue a collectable entity. Bond = 1 ½ times the Lien Amount Approved by the Court. Commence suit if given Notice to do so.
  37. 37. What if someone signs a false document? If someone falsely executed a lien waiver, affidavit or other project document → with intent to deceive = PERSONAL LIABILITY. O.R.C. § 1701.93.
  38. 38. Do Chapter 11 reorganizations work for construction companies? Rarely. Credit will no longer be extended. Relationships and reputation matter.
  39. 39. Thank You Kenneth Cookson, Director (614) 462-5445 Don Gregory, Director (614) 462-5416
  40. 40. Breakout Session: Basic Bankruptcy 101 presented by Christy A. Prince Legal Seminar for Credit Professionals October 24, 2013
  41. 41. Purposes of Bankruptcy Law 1. Gives debtors a chance for a “fresh start” by releasing some or all of their debt The bankruptcy code assumes that debtor cannot continue operating as it did in the past, and that the debtor or its assets will be more productive after bankruptcy
  42. 42. Purposes of Bankruptcy Law 2. Provides an orderly manner for payment of creditors, preventing a “race to the courthouse” Bankruptcy gives the debtor an opportunity to negotiate and implement deals with creditors in a protected environment
  43. 43. How Bankruptcy Works • Requires full transparency by debtor as to assets, liabilities, and transfers • Creates a new “estate” which includes all assets and liabilities of the debtor prior to filing for bankruptcy • Sets up a priority system for different types of claims and creditors
  44. 44. Types of Bankruptcy • • • • Chapter 7 – liquidation Chapter 11 – reorganization Chapter 13 – repayment plan Other types – farmers, municipalities
  45. 45. Chapter 7 1. A neutral trustee is appointed by the court 2. The trustee liquidates all of the debtor’s nonexempt assets to raise funds to pay unsecured creditors 3. Chapter 7 is designed for organizations and individuals who have mostly business debt, and for low-income individuals
  46. 46. Chapter 13 1. Debtors repay a percentage of their debts over time for three to five years 2. Debtor generally stays in control of his or her property – a trustee does not take over debtor’s assets 3. Chapter 13 is designed for individuals who receive regular income and who have debt under certain limits 4. Businesses cannot file under chapter 13
  47. 47. Chapter 11 1. Under chapter 11, a troubled business reorganizes while continuing to operate 2. The Debtor-In-Possession (“DIP”) files a Plan outlining how the debtor plans to repay creditors throughout its reorganization
  48. 48. Chapter 11 – Creditor’s role • Creditor participation can influence the case • All creditors have an opportunity to vote – accept or reject this Plan • Large chapter 11 cases may have Creditors’ Committee to give the unsecured creditors another voice
  49. 49. In the Beginning Notice of Bankruptcy – – – – – Debtor’s name Case number and petition date Name and address of trustee Date and location of the creditors’ meeting Deadline for some objections and claims
  50. 50. In the Beginning • Automatic Stay • Section 341 meeting • Filing a claim
  51. 51. Automatic Stay Creditors cannot take action against the debtor or against the property of the estate, or exert control over property of the estate • • • • Can’t make collection calls or send demand letters Can’t file a lawsuit or enforce a judgment Can’t repossess collateral or setoff debt Can’t allow prior actions to proceed – i.e., wage garnishments or bank attachments
  52. 52. Purpose of the Automatic Stay • To provide the debtor with a “breathing spell” from creditor action • To promote an orderly administration of the case, including equality of distribution among claimants and prevention of claims being filed in different forums
  53. 53. Penalties for Violating the Stay 1. Compensatory damages for any violation Lack of actual notice is not a defense 2. Punitive damages for willful violation 3. Courts are very hard on creditors who received notice of bankruptcy, even if creditor didn’t have actual notice (i.e., if creditor’s system didn’t catch the notice)
  54. 54. Stay Safe • Make sure you have a system in place for notices of bankruptcy • Any employee anywhere in your organization who may make collection call against your account debtor must be immediately advised if a bankruptcy has been filed • Especially important if you have multiple offices and mailing addresses
  55. 55. Stay Safe If you use an outside company for collections: – Any notice they receive is imputed to you – Any notice you receive is imputed to them – Any violation they commit is imputed to you
  56. 56. Stay Safe • The automatic stay is interpreted very broadly • Obtain relief from stay if appropriate – To repossess collateral – To proceed with a pre-petition lawsuit against non-debtor parties
  57. 57. Chapter 13 Co-Debtor Stay • Two borrowers are jointly liable on a debt • One borrower files a chapter 13 bankruptcy • Automatic stay prevents creditor from collecting debt from the non-filing co-debtor
  58. 58. Chapter 13 Co-Debtor Stay Creditor can move for relief from co-debtor stay if: • Debtor’s chapter 13 plan does not propose to pay creditor in full, or • Non-filing borrower received consideration for the claim (not just a guarantor, etc.)
  59. 59. Adequate Protection • Secured creditors are entitled to adequate protection to compensate for depreciation of collateral • If collateral has “equity cushion,” that is adequate protection for creditor • Creditor can move for adequate protection payment if necessary
  60. 60. Attend the Creditors Meeting? Consider: • Type of bankruptcy and type of trustee • Whether the claim is secured by collateral • Whether there was some irregularity in the extension of credit, i.e., false lien waivers or credit application
  61. 61. Attend the Creditors Meeting? 1. To verify condition/location of collateral 2. To negotiate with debtor and/or trustee with respect to collateral 3. To question the debtor about any irregularities 4. To gather facts, especially if an objection to discharge is possible
  62. 62. When to File a Claim • Creditors can file a claim as soon as they receive the notice of bankruptcy • Deadline to file claims is stated on the notice of bankruptcy – typically 120 days • You may receive no distribution even if you file a claim
  63. 63. Filing a Claim 1. Use the proof of claim form provided by the clerk’s office 2. File with the clerk of court in the district where the case is pending
  64. 64. Filing a Claim 3. Attach documentation such as invoices or a statement of debtor’s account 4. If documentation provides for interest, creditor gets interest pre-petition only 5. If property of the estate is collateral, attach the security agreement and evidence of the perfection of the security interest
  65. 65. Filing a Claim 6. The creditor or authorized agent must sign the proof of claim 7. Send an additional copy and a SASE to the clerk & request the return of a file-stamped copy
  66. 66. Payment of Claim Payment depends on: • Priority of claim (taxes, wages, etc.) • Existence of collateral • Whether assets are available to liquidate • Treatment of claim class in chapter 11 case • Existence of administrative expenses and priority claims ahead of your claim
  67. 67. Bankruptcy Discharge • Fresh start for debtors • Debtors are allowed to strip away debt that arose prior to the petition in bankruptcy being filed • Individual debtors are allowed to exempt some basic property in order to facilitate the fresh start
  68. 68. Exceptions to Discharge 1. Debtor is not an individual 2. Debtor lies during bankruptcy or conceals assets 3. Debtor received a discharge in a different bankruptcy filed in the past 8 years 4. Debtor fails to cooperate with bankruptcy laws and orders
  69. 69. Dischargeability of Certain Debts • Money/services obtained by false pretenses, false representations, or actual fraud • Embezzlement, larceny, or defalcation • Debts for willful or malicious injury by the debtor to another entity or to the property of another entity • Failure of the debtor to name the creditor in the bankruptcy, unless the creditor had notice or actual knowledge of the case
  70. 70. Dischargeability of Certain Debts • Creditor/claimant must file a complaint in the bankruptcy court by the deadline • Debtor has the opportunity to defend the complaint and try to overcome the presumption • These are hotly contested and can involve a lot of legal costs
  71. 71. Fraudulent Transfer • Debtor transferred property in the four years prior to bankruptcy • Debtor did not receive reasonably equivalent value for the transfer • Debtor was insolvent, or became insolvent or too thinly capitalized because of transfer
  72. 72. Fraudulent Transfer (intentional) • Debtor transferred property in the four years prior to bankruptcy • Transfer was made with intent to hinder, delay, or defraud any creditor
  73. 73. Proving Fraudulent Intent • • • • Whether transfer was to insider of debtor Whether transfer was concealed Whether debtor retained control of asset Whether transfer was of substantially all debtor’s assets • Whether transfer occurred around the time a substantial debt was incurred
  74. 74. Questions?
  75. 75. Thank You! Christy A. Prince, Associate (614) 462-5444
  76. 76. News From Bankruptcy Wars presented by Larry McClatchey Legal Seminar for Credit Professionals October 24, 2013
  77. 77. Preferences A transfer of an interest of the debtor in property – • (1) to or for the benefit of a creditor; • (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; • (3) made while the debtor was insolvent;
  78. 78. Preferences • (4) made – – (A) on or within 90 days before the date of the filing of the petition; or – (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and • (5) that enables such creditor to receive more than such creditor would receive if – – (A) the case were a case under chapter 7 of this title; – (B) the transfer had not been made; and – (C) such creditor received payment of such debt to the extent provided by the provisions of this title.
  79. 79. Preference Defense: Contemporaneous Exchange (c) The trustee may not avoid under this section a transfer – • (1) to the extent that such transfer was – – (A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and – (B) in fact a substantially contemporaneous exchange;
  80. 80. Preference Defense: Ordinary Course of Business • (2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was – – (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or – (B) made according to ordinary business terms;
  81. 81. Preference Defense: New Value • (4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor— – (A) not secured by an otherwise unavoidable security interest; and – (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
  82. 82. “20 Day Goods” and Critical Vendor Issues • Priority administrative expense for goods received by debtor within 20 days before filing in ordinary course of business. • Payments to “critical” prepetition suppliers – continued increased scrutiny.
  83. 83. Current Secured Transactions Issues 1. 2. 3. 4. Unauthorized Terminations Proper Legal Name of Debtor Consignments Possessory Liens
  84. 84. Thank You! Larry McClatchey, Director (614) 462-5463
  85. 85. Basics of Bankruptcy 102 presented by Stephanie P. Union Legal Seminar for Credit Professionals October 24, 2013
  86. 86. Chapter 11 1. “Reorganization” 2. Troubled businesses continue to operate & revitalize 3. Current Management vs. assigned trustee 4. Creditors’ Committee for large Chapter 11’s 5. The Debtor-In-Possession (“the DIP”) files a “Plan” outlining repayment to creditors.
  87. 87. Chapter 11 (cont’d) 6. All creditors have an opportunity to accept or reject the Plan. 7. Once the Plan is confirmed, the debtor is released from all pre-confirmation debts. 8. Creditor Participation is important. 9. Can last 8 months to several years
  88. 88. Types of Chapter 11’s • An individual can file – If outside the debt limits for 13 • Small businesses – Special provisions in code for them • Corporations – Likely what you think of when hear a “Chapter 11”
  89. 89. Creditor’s Committees • Formed at the beginning of the case • Usually solicited by the US Trustee’s office • Typically from the largest unsecured creditors of the debtor • Committee can hire counsel, whose fees are paid by the estate
  90. 90. Creditor’s Committees • How to decide if you’d like to participate? – – – – Amount of money at stake Someone willing to dedicate the time to it? Want to see the company succeed? The experience
  91. 91. The Plan: 11 U.S.C. §1123 • Typically proposed by the DIP – Exceptions, after first several months, other parties in interest may propose it – Court can extend or limit the “exclusivity period” giving debtor the sole ability to file • The plan tells how it proposes to treat creditors • Must propose to treat the same classes of claims in the same manner unless agreed to otherwise
  92. 92. The Plan • It may impair classes of claims or interests • It may modify the rights of secured claims (other than a claim secured by the debtor’s principal residence) or unsecured claims • Need to carefully review the plan to ensure you understand how it is proposing to treat you and whether that is allowed under the law
  93. 93. Plan Options • Plans can propose partial or complete liquidation • They can seek mergers of other companies where creditors are paid from future profits (a “Bootstrap” plan) • Can offer an exchange of debt for new securities • Can offer to distribute assets to third parties or creditors • Options are limitless
  94. 94. Confirmation Requirements • Many requirements • The most important requirements: – That the Plan be feasible (debtor will be able to perform; expert testimony usually required) – That the Plan propose a better result for creditors than would occur in a Chapter 7 liquidation. (“Best interest of creditors” test) – That the creditors “accept” the Plan.
  95. 95. Rights of Creditors • Claims are secured up to the value of the debtor’s interest in the creditor’s collateral. – e.g., if debt of $1,500,000 in real estate and real estate’s value is $1,000,000, secure claim equals $1,000,000. Also have an unsecured claim of $500,000. – Unsecured portion of the claim will be treated the same as other unsecured debts under the plan.
  96. 96. The Disclosure Statement • Usually filed in conjunction with the Plan. • Needs to have adequate information so that creditors can decide whether to accept or reject the plan. • The Court makes that determination • Once approved, Plan, Statement and Ballot sent to each creditor in an impaired class for voting
  97. 97. Voting on the Plan • Creditors will receive a ballot • Have to have an “impaired class” vote to accept the proposed treatment • Majority of the votes cast must be in favor of the Plan • The majority of the votes cast in favor must represent more than 2/3rd of the dollar value of claims actually voting
  98. 98. If impaired class does not accept… • Can still confirm the plan over the objection of a rejecting class • Called a “cram down” • Need to meet certain criteria: – Absolute priority rule • A junior class of interest (e.g., shareholder) or junior class of creditors (e.g., debenture holders) may not receive or retain anything of value under the Plan unless each senior class consents.
  99. 99. Confirmation of the Plan • Must pay all administrative expenses in full. – Court costs – Professional fees – Most tax debts (can be stretched out to repay)
  100. 100. Effect of Confirmation • Binds the debtor and creditors to its terms unless modified later • Vests all property of the estate back in debtor except as otherwise provided in the Plan • Property free of all claims except as provided by the Plan (discharge)
  101. 101. Buying and Selling Claims • Can be done in any chapter of bankruptcy • More typically seen in chapter 11s and larger asset cases • There is a market for claims • Those offering to purchase are making their money on the belief they will get more for them through the bankruptcy than they pay to you
  102. 102. Buying and Selling Claims (cont’d) • Advantage is you get your money in a sum certain now versus waiting for an unspecified distribution at an unknown date. • If want to sell: – Make sure to review the fine print – Often liable if the claim is not allowed – Often liable to defend preference and other claims, including liability for attorney’s fees
  103. 103. Administrative Expenses • Administrative claims are paid first • Section 503(b)(9): – For goods sold within 20 days of the filing of the bankruptcy – Does not apply to services provided to Debtor – Have to be goods sold in the ordinary course of business – Secured creditors can file them too
  104. 104. Administrative Expenses • Section 503(b) allows administrative claim for the actual & necessary costs of preserving the estate – Includes wages (for workers, etc.) – If doing work that is benefiting a non-liquidating estate
  105. 105. Application for Administrative Expense or Proof of Claim? • Application for allowance of the expense – Different than a standard proof of claim – Some chapter 11s instruct administrative claimants to file poc’s instead though – Several lower courts have held that proofs of claim that clearly request administrative expense status may be treated as a request for payment under 503(a), including In re Cardinal Indus., Inc. 151 B.R. 838,841 (Bank. S.D. Ohio 1992).
  106. 106. Executory Contracts and Leases • Governed by 11 U.S.C. §365 • Executory contract: one where obligations not yet fully performed, i.e., supply agreement • Cannot stop performing your obligations under a contract due to automatic stay
  107. 107. Executory Contracts • Debtor or Trustee can assume or reject the contracts. • If assume, have to cure default or provide adequate assurance that it will promptly cure • Compensate for pecuniary loss or provide adequate assurance of same • Provide adequate assurance of future performance
  108. 108. Preferences: 11 U.S.C. §547 Elements: 1. Transfer of property of the debtor. 2. To or for the benefit of a creditor. 3. On account of an antecedent debt. Payment must be made for a past due indebtedness.
  109. 109. Preference Elements Cont’d 4. Made while the debtor was insolvent. – – – There’s a presumption of insolvency in the ninety (90) days prior to bankruptcy if property is transferred to an insider, look back is 1 yr; and 5. Enabling the creditor to receive more than it would have received in a Chapter 7 case if the transfer had not been made.
  110. 110. Affirmative Defenses If all of the elements of the preferential transfer can be proved by the Trustee or DIP, the creditor still may win if the creditor can establish an affirmative defenses in the following categories: 1. 2. 3. 4. 5. 6. 7. Contemporaneous exchange for new value; Enabling loan; Subsequent new value, subsequent advance; Floating lien; Statutory lien; Consumer transaction (aggregate value less than $600.00). Ordinary course of business:
  111. 111. Ordinary Course of Business Designed to encourage creditors to deal with financially troubled companies on normal credit terms by obviating any worry that a subsequent bankruptcy filing might require a creditor to disgorge as a preference a payment it received
  112. 112. Elements of Ordinary Course of Business Exception • A payment of a debt incurred in the ordinary course of the business or financial affairs of the debtor and the transferee; • Made in the ordinary course of business of the debtor and the transferee; or • Made according to ordinary business terms.
  113. 113. New Value Exception • If a creditor gives new value (money or money’s worth in goods, services, or new credit or release of property previously transferred by the transferee) to the debtor after the preferential transfer, that new value can be offset to reduce or eliminate the preference exposure.
  114. 114. New Value Elements • The new value can not be secured by an otherwise unavoidable security interest; – Has to be on an unsecured basis or – Secured by an avoidable security interest and • On account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
  115. 115. New Value Nuances • A transfer by check is deemed to occur when the check is received by the creditor. • Contrast this to the transfer being deemed to occur on the date the check is honored to determine initially if it is preference. • If goods shipped, new value is deemed extended at the time the goods are shipped. • Creditor’s transfer has to be subsequent to the debtor’s preferential payment to qualify for new value defense
  116. 116. Questions? Stephanie P. Union, Director (614) 462-5487 Christy A. Prince, Associate (614) 462-5444
  117. 117. THE BIG IF IN “PAY-IF-PAID” CLAUSES: THE GREAT RISK FOR SUBS & SUPPLIERS presented by Donald W. Gregory Legal Seminar for Credit Professionals October 24, 2013
  121. 121. TWO TYPES OF CONTINGENT PAYMENTS 1. Pay-when-Paid 2. Pay-if-Paid
  122. 122. PAY-IF-PAID Shifts 1. Credit Risk of Owner Non-Payment 2. Risk of Contractor (or other Sub) Non-Performance
  123. 123. PAY-WHEN-PAID • In most states, an implied duty to pay in a REASONABLE PERIOD OF TIME.
  124. 124. EXAMPLE OF A “PAY-WHEN-PAID” CLAUSE 8.2 TIME OF PAYMENT. Progress payments to the Subcontractor for satisfactory performance of the Subcontract Work shall be made no later than seven (7) days after receipt by the Contractor of payment from the Owner for the Subcontract Work. If payment from the Owner for such Subcontract Work is not received by the Contractor, through no fault of the Subcontractor, the Contractor will make payment to the Subcontractor within a reasonable time for the Subcontract Work satisfactorily performed. ConsensusDOCS 750
  125. 125. THE KINDER-GENTLER PAYMENT TERM • Pay-When-Paid – Paid within a reasonable period of time. – General Contractor still obligated to pay even if Owner doesn't make payment.
  126. 126. EXAMPLE OF A PAY-WHEN-PAID CLAUSE AIA A401-2007 §11.3 If Owner fails to pay, payment on demand.
  128. 128. # 1 CONTINGENT PAYMENT THE NOT SO BAD • “Pay When Paid” = • Payment in a Reasonable Time. • Deals with Timing, Not Entitlement. THE UGLY • “Pay If Paid” = • If Owner Never Pays, Subcontractor Never Gets Paid. • Deals with Timing and Entitlement. • Shifts Entire Credit Risk of Owner Insolvency to Subcontractor.
  129. 129. PAY-IF-PAID – THE HARSH PAYMENT TERM • Pay-If-Paid – You don’t get paid IF they don’t get paid.
  131. 131. HOW TO SPOT A PAY-IF-PAID CLAUSE? Condition Precedent
  134. 134. EXAMPLE OF A PAY-IF-PAID CLAUSE The obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner. Final payment to Turner by the Owner shall be an express condition precedent which must occur before Turner shall be obligated to make final payment to the Subcontractor.
  135. 135. TO BE ENFORCEABLE A PAY-IF-PAID CLAUSE MUST BE: • Clear and unambiguous – If not, construed against the drafter – Will render the term Pay-When-Paid • Why is that important? – It must be drafted correctly – If not, “benefit of the doubt” will go to the subcontractor • Construed as the more favorable Pay-When-Paid
  136. 136. WATCH OUT FOR “HYBRID” PAY-WHEN-PAID • Uses Pay-When-Paid Type Language. • But Places Timing So Far In Future To Effectively Become PAY-IF-PAID.
  137. 137. BEWARE OF “A WOLF IN SHEEP’S CLOTHING” Pay-when-Paid extended to be effectively Pay-ifPaid. (i.e. paid after a lawsuit, or over 3 years, etc.)
  138. 138. WATCH OUT FOR PAY-IF-PAID IN CLAUSES GOVERNING: 1. Change Orders 2. Claims or Requests or Equitable Adjustment
  139. 139. EXAMPLE OF A PAY-IF-PAID DELAY CLAIM Except to the extent that the delay, obstruction, hindrance or interference is caused by Turner or another subcontractor of Turner, the Subcontractor agrees that it shall not be entitle to nor claim any cost reimbursement, compensation or damages for any delay, obstruction, hindrance or interference to the Work except to the extent that Turner has actually recovered corresponding cost reimbursement, compensation or damages from the Owner under the Contract Documents for such delay, obstruction, hindrance or interference, and then only to the extent of the amount, if any, which Turner on behalf of the Subcontractor, actually received from the Owner on account of such delay, obstruction, hindrance or interference.
  140. 140. Except to the extent that the delay, obstruction, hindrance or interference is caused by Turner or another subcontractor of Turner, it shall be an express condition precedent to any obligation on the part of Turner to make payment of any such cost, reimbursement, compensation or damages to the Subcontractor hereunder that Turner shall first be determined to be entitled to such compensation on behalf of the Subcontractor and then receive such payment from Owner. The Subcontractor agrees that it shall contribute a fair and proportionate share of the costs of advancing the claims of the Subcontractor for delay, including but not limited to legal and other professional fees.
  141. 141. WHAT STATES BAN PAY-IF-PAID? By Judicial Decision: • New York • California By Legislation: • • • • Illinois North Carolina South Carolina Wisconsin
  142. 142. WHAT ABOUT LIEN OR BOND CLAIMS? Generally cannot recover on payment bond or foreclosure lien (“no money yet due”). Unless your state statute provides otherwise.
  144. 144. TRANSTAR ELECTRIC There is a case now pending in the Ohio Supreme Court that will determine if Pay-if-Paid remains enforceable in Ohio.
  146. 146. WOULD A SUBCONTRACTOR OR SUPPLIER PRICE RISK THE SAME IF: • No lien rights? • No bond rights?
  147. 147. KNOWING THE RISK OF PAY-IF-PAID • Should a Subcontractor Price the Risk the same? • Should a Supplier Extend the Same Credit?
  148. 148. PRACTICAL POINTERS • Look for contracts with good payment terms – Fixed Payment Terms – Pay-When-Paid Language • Try to insert Pay-When-Paid Language – Use AIA A401 or ConsensusDOCS 750 • Modify Pay-If-Paid Language
  149. 149. TRADE ASSOCIATION SUBCONTRACT FORMS • Provide some relief • Can be cited for the reasonableness of your position
  150. 150. AIA SUBCONTRACT • AIA A401 [1997 edition]. • Traditionally endorsed by ASA and ASC, but never by AGC. • Most favorable to Subs. • A401 [2007] less favorable to Subs.
  151. 151. AGC SUBCONTRACTS In the Past: • AGC 650 – Endorsed by ASC, not ASA “Pay-When-Paid” • AGC 655 – Not endorsed by ASC or ASA Now: • ConsensusDOCS 750 – Endorsed by AGC, ASA and others “Pay-If-Paid” “Pay-When-Paid”
  152. 152. IN THE PAST ASA and AGC could not agree on Contingent Payment language.
  153. 153. NOW ASA and AGC agree upon Contingent Payment ConsensusDOCS 750.
  155. 155. PRACTICAL TIPS Qualify Your Bid: • “This bid is conditioned upon use of the ConsensusDOCS 750+ Subcontract Form or other contract form acceptable to Subcontractor.” Educate Your Customer: • Let them know upfront what subcontract forms are acceptable to your company and be prepared to explain why certain language is one-sided and unfair.
  156. 156. MORE PRACTICAL TIPS Negotiate a Fair Agreement: • ASA provides commentary on the AIA and AGC Subcontract forms, as well as an Addendum to neutralize the AGC 650 and 655 forms. • ConsensusDOCS available at Refuse One-Sided Forms (“Principal Costs”) • Nobody needs to work for free or take on a problem project. You must be prepared to “walk away” absent an equitable agreement.
  157. 157. Thank You! Don Gregory, Director (614) 462-5416
  158. 158. Bid Shopping & Bid Protests presented by Eric B. Travers Legal Seminar for Credit Professionals October 24, 2013
  159. 159. Program Agenda • In today’s program we’ll discuss: – Understanding Bid Shopping and Bid Peddling – Why bid shopping and peddling are a legal and ethical problem for subs, contractors, and owner. – Explore practical options construction participants can utilize to protect themselves from bid shopping and peddling. – What a bid contest is. – Legal standard in Ohio for sustaining a bid protest. – Considerations owners, prime contractors, and subcontractors must make when making or defending a bid protest.
  160. 160. What is Bid Shopping? General Contractor discloses a Sub’s bid price to a competitor of the subcontractor in an attempt to get a lower bid than the one on which the General Contractor based its bid to the Owner.
  161. 161. What is Bid Peddling? Sub whose bid was not selected contacts (after the Owner has awarded the Prime Contract) the General Contractor and offers to reduce its bid to induce the General Contractor to give it the subcontract (substitute the reduced bid).
  162. 162. What Does the Industry Say About Bid Shopping? AGC: “abhorrent” “resolutely opposed” From AGC’s website: “Bid shopping or bid peddling are abhorrent business practices that threaten the integrity of the competitive bidding system that serves the construction industry and the economy so well. AGC strongly believes that bid shopping and bid peddling cannot sustain long-term working relationships between prime and subcontractors.” ASA: “abhorrent” “unethical”
  163. 163. Widely Condemned But Widely Practiced ASA/AGC/ASC Joint Guidelines condemn the practice of Bid Shopping. Yet 2008 survey finds: • 80% know of others who have engaged in bid shopping • 32% admit bid shopping or peddling themselves
  164. 164. How is a Contract Formed? Bid = Offer General Contractor gets job relying upon Sub’s bid = Acceptance
  165. 165. What is Promissory Estoppel? If it applies, the General Contractor who relies upon sub’s bid in getting job can force Sub to honor his price … But generally speaking, a sub will not have a right to demand the General Contractor use it on the job. This leverage can result in BID SHOPPING.
  166. 166. What are the Effects of Bid Shopping? • • • • • • Defeats the purpose of the competitive bid system; Promotes lower-quality work; Incentivizes corner-cutting; Increases claims and change orders; Can delay project completion; and Generally worsens the business environment.
  167. 167. What have the Courts said? The Court of Common Pleas of Cuyahoga County, Ohio, noted in Sheet Metal Employers’ Ass’n v. Giordano that: “*m]any hours are invested … in preparing a bid to the … contractor. The latter may then proceed to play one bidder against another, getting each in turn to shave its bid as much as it will. Estimated profit is drastically reduced and financial loss threatens. There is little satisfaction in such a contract. The temptation of the [ultimate subcontractor] to do inferior work and to cheat is strong.”
  168. 168. Terminations for Price Concessions May Be Bad Faith • Bid Shopping (post-contract) in the form of a Termination for Convenience. • Violated Duty of Good Faith and Fair Dealing says MD High Court. • Questar Builders, Inc. v. CB Flooring, LLC
  169. 169. How do General Contractors Justify Shopping? Like Shopping for a Car? “I leverage one supplier against another. Who hasn’t gone to a car dealer and said there is a better deal down the street? Should we be surprised if a G.C. accepts a lower price after a tender closes? This is free money to the [general contractor] and anyone who doesn’t think it will happen is naïve.” • Just free competition that lowers prices • But none of the savings are shared with the Owner (End User)
  170. 170. General Contractor Who Shops Releases Sub From its Bid • “Value Engineering” • Changing Scope • Attempting to Secure Price Concessions
  171. 171. What Measures are Available to Mitigate Bid Shopping? • Bid Listing • Bid Depositories • Unfair Trade Practices
  172. 172. Condition Your Bid: Legal Effects General Contractor that bid shops releases sub from mistaken bids and inequitable contract language (loses promissory estoppel protection). General Contractor decision to bid shop was a rejection of the sub’s low bid and a “counteroffer.” Complete General v. Kard Welding
  173. 173. Condition Your Bid – Examples: • Bid good for earlier of: (a) 30 days from the date of bid; or (b) one business day after opening of the general contractor’s bid and notification of the award of the general contract. • Bid is confidential and any disclosure releases subcontractor from any obligations it may otherwise have (and imposes liquidated damages for x% of bid price). • The general contractor accepts sub’s bid if (1) general uses or relies on the sub’s bid by incorporating any part of it into a bid to the owner and (2) owner notifies general of the owner’s intent to award, or notifies the general of the award.
  174. 174. Owners Can Help Protect themselves Bid Shopping Risks Quality & Provide No Savings to Owners. • Use standard form documents (like ConsensusDOCS) • Require Bid Forms that require sub listing and no change without good cause
  175. 175. Reducing Bid Shopping Starts with You Educate Your Customers (whether contractors, Owners & Competitors)
  176. 176. Bid Protests • Most Ohio public construction work must be awarded through competitive bidding. WHY?
  177. 177. Why a Requirement for Competitive Bidding? “To provide for open and honest competition in bidding for public contracts and to save the public harmless, as well as bidders themselves, from any kind of favoritism or fraud in its varied forms.” Cedar Bay Constr., Inc. v. Fremont (1990), 50 Ohio St.3d 19, 21
  178. 178. What Standard Applies to Counties? “LOWEST AND BEST” BIDDER (more subjective) UNLESS “LOWEST, RESPONSIVE & RESPONSIBLE” BIDDER standard adopted (more objective)
  180. 180. What is a Bid Protest? • A bid “protest” is a formal complaint made against either the: a) methods employed; or b) decisions made by a procurement authority in the process leading to the award of a contract. →In other words, a bid protest is a challenge to either the (1) proposed or actual award of a contract for goods or services, or (2) terms of a Competitive Bidding Process solicitation for such a contract.
  181. 181. Bids Must be Responsive • “Ohio Rev. Code Section 9.312 - Factors to determine whether bid is responsive and bidder is responsible. • (A) If a state agency or political subdivision is required … to award a contract to the lowest responsive and responsible bidder, a bidder on the contract shall be considered responsive if the bidder's proposal responds to bid specifications in all material respects and contains no irregularities or deviations from the specifications which would affect the amount of the bid or otherwise give the bidder a competitive advantage.”
  182. 182. Bids Must be Responsive • R.C. 9.321 also spells out the factors that the state agency or political subdivision must consider in determining whether a bidder is responsible. These factors are: – the experience of the bidder, – the bidder's financial condition, conduct and performance on previous contracts, – the bidder’s facilities, management skills, and ability to execute the contract properly.
  183. 183. What Discretion is Vested with the Public Owner? • Cannot act in arbitrary or unreasonable fashion. • Heavy burden to prove an abuse of discretion. • Courts reluctant to substitute their judgment.
  184. 184. Lower Bidder Entitled to Bid Protest Meeting 1. If Pubic Owner adopts “lowest, responsive and responsible” bidder standard; or 1. Promises this in bid criteria; or 1. IF REQUESTED by low bidder within 5 days of notice of rejection.
  185. 185. Stay of Award • Under the Ohio Revised Code 9.312(B) “*w+here a state agency or a political subdivision” that is required to award to the lowest responsive and responsible bidders decides “to award a contract to a bidder other than the apparent low bidder, it shall meet with the apparent low bidder or bidders upon a filing of a timely written protest.” • The protest must be received within five days of the written notification to the contractor. • Once a bid protest is made, “*n+o final award shall be made until the state agency or political subdivision either affirms or reverses its earlier determination.”
  186. 186. Stay of Award • If the “Administrator determines that the protest merits further investigation, proceedings of the evaluation of the bid or awarding of the contract will be stayed until a final decision is made, unless the Administrator determines that completing the evaluation or award process is necessary to protect the interests of the state.” • See Ohio Communications & Protest Procedures, PUR-007, p. 4.
  187. 187. How Decided? • Bid Protest Meetings
  188. 188. Who Hears the Protest? • The applicable State Agency, political subdivision, or Administrator of Procurement Services, virtually always with assistance from their counsel, will hear and issue a decision on the protest. • See R.C. 9.312, & Ohio Vendor Handbook, p. 14
  189. 189. What Happens at the Bid Protest Meeting? Opportunity to be heard (the contractor’s opportunity to tell its “side of the story”) But no guaranteed due process or constitutional rights such as cross-examination
  190. 190. What “Discovery” is Permitted? • Expect a public records request and unilateral discovery in advance of the bid protest meeting and suit
  192. 192. What Must a Disgruntled Bidder Prove to Obtain an Injunction? 1. Strong likelihood of success on the merits; 2. Irreparable injuries (no adequate remedy at law); 3. Injunction would not cause substantial harm to others; and 4. Injunction would serve the public interest.
  193. 193. What Can a Public Owner Do if Injunction Granted? • Proceed Anyway and Take Chances (Automatic Stay upon Appeal without Bond) • Rebid • Go with Successful Challenger
  194. 194. Can a Contractor Recover Money Damages? Generally, No. No Lost Profits: Cementech But Bid Preparation Costs May Be Recovered: Meccon v. Akron U.
  195. 195. Access to Documents • Once the evaluation process is complete and a contract awarded, the response/contract file will be available for public viewing. • “A bidder may seek clarification regarding the evaluation and award process by contacting State purchasing at the e-mail address listed in the bid.” • See Ohio Communications & Protest Procedures, PUR-007 (part of the Ohio Procurement Handbook for Supplies and Services, p. 170; )
  196. 196. Appeal Rights? • Decision of the awarding authority is reviewable on an abuse of discretion standard.
  197. 197. What About “Quality Contracting” Standards? • Have been enforced when the criteria is expressly referenced in the bid instructions. • Subject to much gamesmanship on labor issues. • Courts reluctant to second-guess even if only minor deviations (i.e. minor prevailing wage violations)….until Associated Builders.
  198. 198. Associated Builders: Huntington Ballpark • TPC was low bidder but rejected due to prevailing wage “violations”. • Injunctions denied and ballpark completed before case arrived in Supreme Court. • Supreme Court found abuse of discretion by Commissioners – substituted their judgment? • TPC seeking bid preparation costs and fees.
  199. 199. Glidepath Case Study • State of Ohio ex re. Glidepath LLC v. Columbus Reg’I Airport Auth., 2012-Ohio-20 (10th Dist.). • In April 2010, the Airport advertised for bid to replace the baggage handling system. • The bidding documents indicated that the project would be awarded to the lowest responsive and responsible bidder under Ohio Rev. Code 9.312
  200. 200. State of Ohio ex re. Glidepath LLC v. Columbus Reg’I Airport Auth. Case Study • Glidepath’s $13.674 Million bid was almost $700,000 low. • Glidepath’s bid was found to be “responsive” but an 11 member committee determined it was not “responsible” so the Airport rejected the bid. • After the first Bid Protest meetings was not successful for Glidepath, it suit to stop the Airport from awarding the contract. • A second bid protest meeting was held, to no avail for Glidepath. • It then lost its lawsuit. And appealed.
  201. 201. Glidepath Bid Protest Case Study • The 10th District Court of Appeals stated that: • “a public authority has considerable discretion in evaluating bidders and awarding contracts under Ohio’s competitive bidding laws.” • And that “Courts … must not substitute their judgment for that of a public authority in evaluating bidders and awarding contracts.” • Finding no abuse of discretion in the Airport’s determination of non-responsibility, the Court rejected Glidepath’s appeal, including its request to recover at least its bid preparation expenses.
  202. 202. Associated Builders and Glidepath Case Studies • What do they mean for you?
  203. 203. Practical Pointers and Considerations • Deciding Whether to File a Bid Protest – Under Ohio law, your time to file a bid protest starts running when you are either: (1) aware of what you consider a protestable error in the Bid process, or (2) are notified that you are not the successful bidder. • Much valuable time will be spent deciding whether to file a protest. – You will have very few hard facts at the beginning of the protest. You thus have to make factual allegations that meet the criteria of a successful bid protest. Because you are challenging your potential customer’s award decision, this is a critical business judgment decision. • You must obtain as much information as you can through all means available.
  204. 204. Practical Pointers and Considerations • Other critical information includes: • The likelihood of success on the merits • Can you establish that you have standing to challenge the award? – You have to show that but for the agency’s error, you would have had a substantial chance of receiving the award. • Are you the party who would have been the lowest responsive and responsible bidder but—for what you believe—was the awarding authority’s abuse of discretion? – If so, particularly if you were LOW and you have a viable protest, you can still receive the contract if the outcome of the protest if favorable. More revenue is a good thing for your company.
  205. 205. Practical Pointers and Considerations • Cost of filing a bid protest. This is a very important part of your decision. – The cost to file a bid protest is very unpredictable. – Things must be done quickly, a lot of information needs to be gathered and analyzed. You do not know: (a) if any motions are going to be filed, (b) whether there will be one or more bid protest meetings or court hearings, (c) how many documents are in the awarding agency’s record, or (d) the time it will take your attorney to file a good brief given the factual and legal issues. • You have to weigh the certain cost to pursue and risks of agency success, against the merit of the protest and ultimate revenues potentially earned if you are successful in getting the government contract
  206. 206. Questions? Eric Travers, Director (614) 462-5473