TRICKS OF THE TRADE CREDITOR IN DEALING WITH THE INSOLVENT CUSTOMER

1. TRICKS OF THE TRADE CREDITOR IN DEALING WITH THE INSOLVENT CUSTOMER Scott Blakeley, Esq. seb@blakeleyllp.com Orange County| Los Angeles| New York New Jersey| Pennsylvania www.BlakeleyLLP.com

2. Best General Practices • Require signed financial statements at the outset of trade agreements • Require customers to comply with GAAP • Require large accounts to submit updated financial statements on a periodic basis

3. Uniform Commercial Code Remedies – Adequate Assurance Demand • UCC §2-609 governs for a seller of goods • Upon reasonable grounds for insecurity, a supplier can demand adequate assurance of performance from financially distressed customer

4. Credit Enhancements

5. Out of Court • Customer Has Not Defaulted, But Concerns About Financial Condition • Credit evaluation: • Real time disclosure of public company and investigation of private company • Right to convert credit sale to cash • Credit application provision • Demand for adequate assurance

6. Out of Court • Customer Has Defaulted • Stopping goods in transit • Stoppage in transit under the bankruptcy code

7. Out of Court • State law reclamation • Goods sold on credit to insolvent debtor in the ordinary course • Written demand for the return of the goods; and • The debtor has possession of the goods at the time of the reclamation demand or the goods were not in the hands of a buyer in the ordinary course or a good faith purchaser at the time of demand • Issues for the Supplier

8. Out of Court • Workout • Repayment agreement • Payment over time • Fix the indebtedness • Waiver of counter claims and disputes • Ordinary course preference defense • Secured (cure any defects in documents, UCC filings, or recordation, increase the amount of security, add additional guarantees, self-help) • Unsecured (obtain security and guarantees, judgment pursuant to stipulation, confession of judgment)

9. Out of Court • Accord and Satisfaction • Payment Alternatives • Credit cards • Joint check • Set Off • Litigation Alternative • Arbitration Demand

10. Into Bankruptcy • The Major Players • Management • Secured creditors • Unsecured creditors • Creditors' committee

11. Into Bankruptcy • The Critical Trade Vendor Doctrine

12. Into Bankruptcy Sale of Claim

13. Preferences • Elements • Supplier Defenses • Recent developments with defenses • Critical vendor doctrine • Selling the reorganized debtor on credit and waiver of preference claim • Restructuring agreement • Assumption of executory contract • Credit card • Personal guarantee • Administrative insolvency • No disclosure in plan • Special issues for lien creditors • Jury Trial

14. Return of Inventory • Section 546(g)* • Allows for returns to credit against pre-petition claim • Supplier not forced to accept returns • Motion filed within the first 120 days of the case

15. Set Off • Three requirements: • The parties must be the same legal entities • Only pre-petition claims • The parties must hold their debts in the same capacity • Economic Effect of Bankruptcy and Set Off • Changes the economics of an open-account relationship involving the setoff of mutual debts • Bankruptcy Dollars • Credit application provision

16. Trade Creditors and Discrimination at the Plan Stage • Separate classification and “fair” discrimination • Suppliers continuing to sell and those that are not • Inter-creditor agreements pursuant to which dividends are redistributed among creditors independent of the plan of reorganization • The Plan Process and Voting • Separate Classification of Unsecured Claims • “Fair” discrimination • These issues involving trade claims are different than whether a deficiency claim can be separately classified because of the supposedly different legal nature of that claim • Creditor’s Aggressive Conduct and Voting • Sharing Agreements between Trade Creditors and Secured Creditors