Collect your claim, realize opportunity when dealing with a financially distressed party
Conducting business with a financially distressed or bankrupt entity can be a risky proposition. Knowing your rights as a creditor and when to timely engage a creditors’ rights attorney may be the difference between suffering significant losses and successfully collecting on your claim or realizing on a business opportunity.
The following summarizes some of the issues that business owners and executives should consider, and consult with a creditors’ rights attorney on, if they find themselves with a non-performing party or looking to buy assets from a bankruptcy estate. When you have good reason to believe that your customer is in financial distress thereby jeopardizing the customer’s ability to pay your invoices, a fair question to ask is, should I continue to extend credit to, and do business with, this customer?
The answer may be yes, but you should ensure to protect your business by: a) requiring the customer to prepay for its goods or services; b) moving to a C.O.D. basis; c) taking a purchase money security interest in the goods sold; and/or d) taking collateral to secure payment, such as a lien on assets or a personal guaranty.
Under the Uniform Commercial Code (UCC), a business has a host of rights and remedies when dealing with a nonperforming counter-party.
For example, a seller of goods may stop the delivery of its goods before a buyer receives them if the seller learns that the buyer is insolvent. If the buyer has received the goods, the seller may have the right to reclaim the goods from the buyer.
If the parties are conducting business pursuant to a contract, a performing party may be able to demand adequate assurance of performance, suspend its obligations under a contract or terminate the contract if that party has good reason to believe that the other party will not or cannot perform its obligations under the contract.
If you have a security interest in your debtor’s accounts receivable, you may have the right under the UCC to issue demand upon your debtor’s account-debtors requiring those account-debtors to pay you what they would otherwise owe and pay to your debtor.
Whether a lease of personal or real property or other contract is involved, if a party to the contract files bankruptcy, the contract is subject to, among other things, the automatic stay and the debtor’s right to assume or reject the contract. For example, as a commercial landlord or contractor who learns that its tenant or subcontractor is sliding into bankruptcy, you should consider terminating the contract prior to your tenant’s bankruptcy filing.
Every state allows for mechanics liens — those liens available to contractors and subcontractors who perform work on a project but are not paid for that work. While these mechanics liens can be a valuable tool in getting contractors and subcontractors paid, there are often notice of work requirements and strict deadlines by which to record and “perfect” a lien, that if not complied with, could render the lien ineffective.
A significant part of protecting your business and ensuring collection of your claims is having up-to-date collection policies and bankruptcy polices that bolster your chances of collection but don’t run afoul of collection or bankruptcy laws.
For example, clear and understandable invoices, along with a simplified payment process, can increase your collection rates. If a customer, vendor or tenant files bankruptcy, do you have an appropriate procedure in place to file claims and otherwise protect your rights without violating the automatic stay?
If your business becomes involved in a bankruptcy case as a creditor, lease party or contract party, there are a myriad of issues that a creditors’ rights attorney can guide you through.
Bankruptcy may also provide business opportunity. Buyers of assets, investors and real estate developers may find great value in bankruptcy sales. Bankruptcy sales are routinely conducted in bankruptcy courts and provide buyers with protections that are not readily available outside of bankruptcy such as sales of assets that are free and clear of any claims and encumbrances.
However, participating in the bankruptcy sales process is not without its pitfalls and utilizing effective creditors’ rights counsel to navigate you through the process may be critical to a successful bid.
Knowing your rights as a creditor and when to timely engage a creditors’ rights attorney adds value to your business by strengthening your ability to collect on accounts, protecting your claims and, under the right circumstances, expanding your business opportunities.
James S. LaMontagne is practice group leader of the bankruptcy, restructuring and creditor’s rights group at Sheehan Phinney.
