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FACTORING PROBLEM SCENARIOS (THAT REALLY HAPPENED)

FACTORING PROBLEM SCENARIOS (THAT REALLY HAPPENED) THAT CAN CAUSE YOU TO HAVE NIGHTMARES — HOW DO YOU PROTECT YOURSELF? THINKING OF SENDING A BROADCAST FAX TO POTENTIAL CLIENTS — IS THIS LEGAL? ________________________________________________________________________________________

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FACTORING PROBLEM SCENARIOS (THAT REALLY HAPPENED)

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  1. FACTORING PROBLEM SCENARIOS (THAT REALLY HAPPENED) THAT CAN CAUSE YOU TO HAVE NIGHTMARES — HOW DO YOU PROTECT YOURSELF? THINKING OF SENDING A BROADCAST FAX TO POTENTIAL CLIENTS — IS THIS LEGAL? ________________________________________________________________________________________ Distinctive Solutions 9th Annual Factoring Conference Salt Lake City, Utah April 2 – 5, 2003 Publication Prepared By: Michael W. Ullman, Esquire Ullman Ullman & Vazquez, P.A. 150 East Palmetto Park Road Suite 650 Boca Raton, Florida 33432 Telephone: (561) 338-3535 Facsimile: (561) 338-3581 E-MAIL: mullman@uuvlaw.com

  2. I. PROBLEM SCENARIOS: Scenario 1 – The not-out-of business/out-of business personnel placement factoring client: Your personnel placement factoring Client telephones you to tell you that it will cease factoring with you and is shutting down its operations. Nobody in this room believes they are shutting down. We all know better. They are lying about shutting down. Your Factoring Agreement gives you a security interest in the collateral you, the factor, care about — all of the Factoring Client’s accounts. As soon as you get the call, you immediately determine that you have $575,000.00 in outstanding accounts and $460,000.00 in funds employed. Feeling pretty good. What do you do the minute you get this information?

  3. You begin to do your collector calls to verify accounts and payments. You discover that $315,000.00 of the outstanding account receivables are disputed or were paid directly, leaving a balance of $250,000.00 in collectable accounts (i.e., you are underwater). Not feeling so good anymore. • You also come to learn that your Factoring Client turned over everything they owned to this company we’ll call “Nasty SOB,” and when you call Nasty SOB to let them know about your security interest in the accounts, Nasty SOB tells you to “take a hike.” Nasty SOB tells you that “it acquired by purchase all of the assets of your Factoring Client, including its customer good will and customer lists and that principal of your Factoring Client is now a sales rep and that all of the new accounts created belong to Nasty SOB. Adios, hasta la vista, baby.” • Besides hitting the Johnny Walker or Dewars, what do you do?

  4. We all know that pursuant to 9-102(a)(2), an account is: • A right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold . . . (ii) for services rendered or to be rendered, and so on and so forth.

  5. We also know that pursuant to § 9-203(c), a security interest becomes enforceable against the Factoring Client the moment it attaches, and that pursuant to 9-203(b), attachment only requires the following: • (1) that value be given; • (2) That the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and insofar as accounts are concerned, • (3) the debtor has authenticated a security agreement that provides a description of the collateral,

  6. Does the security interest you got from your Factoring Client include the accounts created after you got notice of termination and notice that Nasty SOB bought the company’s assets and began servicing the customers in its name?

  7. What assets did Nasty SOB have to take from your Factoring Client in order to continue servicing the customers? • The customer lists • Any underlying agreements • The underlying customer relationships

  8. General Intangibles

  9. Now, if we assume you never got a security interest in the general intangibles, what non-UCC remedies might be available to you? • 1. The Uniform Fraudulent Transfer Law.

  10. Generally, the relevant statement applicable to Fraudulent Transfer Law reads as follows: • A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

  11. So what will you look for to see if you recover against Nasty SOB? • Nasty SOB’s failure to provide a reasonably equivalent value and the debtor’s solvency.

  12. What other non-UCC remedy might be available? • General Partnership Law

  13. Scenario 2 – The Lowly Judgment Creditor (or so you thought): • You filed your correctly completed UCC financing statement and you filed it in the proper location. Your security interest attached and became duly perfected in all of your Factoring Client’s accounts and inventory as of January 2001. • It’s April, 2003, more than two years later, and some lowly unsecured creditor gets a Final Judgment against your Factoring Client in the State of Florida and sends you a copy. • Assume that in accordance with Florida law, the judgment creditor correctly perfects the recording of its Final Judgment by sending it to the Secretary of State’s office in Tallahassee with a Judgment Certificate at the same time he sent the letter to you. • Sixty days after the judgment creditor delivered the above letter to you, the Factoring Client sends you $100,000.00 in accounts and requests an 80% advance. • Do you make it? • Why / Why not?

  14. 9-102(a)(52)(A) defines “lien creditor” to mean: • A creditor that has acquired a lien on the property involved by attachment, levy, or the like . . .

  15. 9-317(a)(2) reads: • A security interest . . . is subordinate to (i.e., loses to) the rights of: • (2) . . . a person that becomes a lien creditor before the earlier of the time: • (A) the security interest . . . is perfected; or • (B) the debtor has authenticated a proper security agreement and a financing statement covering the collateral is filed.

  16. (b) Lien creditor. Except as otherwise provided in subsection (c), a security interest is subordinate to the rights of a person that becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after the person becomes a lien creditor unless the advance is made: • (1) without knowledge of the lien; or • (2) pursuant to a commitment entered into without knowledge of the lien.

  17. Subsection (c) reads: • Subsections (a) and (b) do not apply to a security interest held by a secured party that is a buyer of accounts . . .

  18. The Scared Approach is easy: • You come to learn that someone got a final judgment against your factoring client. • The final judgment is in existence for at least 45 days. • You cease all advances and take no more accounts.

  19. The Bulldog - yet -Intelligent Approach? • Here it is: • 1. You come to learn that someone got a final judgment against your factoring client. • 2. You evaluate if under state law the entry of that final judgment, What . . . • . results in the creditor acquiring any lien rights in your collateral and we all know the collateral we care about. • 3. Let’s take Florida law, for example. • a. Fla. Stat. § 55.202(2) reads: • A judgment lien may be acquired on a judgment debtor’s interest in all personal property in this state subject to execution under § 56.061, other than fixtures, money, negotiable instruments, and mortgages. • b. Fla. Stat. § 56.061 reads: • Lands and tenants, goods and chattels, equities of redemption in real and personal property, and stock in corporations, shall be subject to levy and sale under execution . . • 4. Under Florida law, in my humble opinion, a recorded final judgment does not create a lien in accounts. • 5. If the final judgment does not create a lien in accounts, the judgment creditor never becomes a “lien creditor,” as defined by the UCC, and your security interest never becomes subordinated either within or outside the 45 day window.

  20. Scenario 3 – So you thought Revised Article 9’s priority scheme was all you needed to know. Think again, because what you don’t know about Article 3 can really cost you. • Let’s address one issue arising under Article 3 of the Uniform Commercial Code (“UCC”) and its interplay with Article 9 of the UCC. This Article 3 issue may be stated as follows: • We all know that: • 1. When you take a security interest in Accounts (you know, a right to payment of a monetary obligation for property that has been sold or for services rendered or to be rendered) Article 9 requires that you perfect that security interest if you want to be, with limited exceptions, in first place over all other creditors and prevail over a trustee in bankruptcy, and • 2. Perfection of a security interest in Accounts is accomplished by filing a financing statement, and • 3. Perfection means that so long as your security interest attaches, the secured party wins over almost everyone, every general, unsecured creditor and every lien creditor (except as to some special conditions regarding future advances). • BUT, can a pesky secured party who has a lien inferior to yours get paid by your account debtor and win? • As die-hard counsel to factors, I hate to say it, but yes – depending . . . .

  21. Section 9-331(a) of the UCC, entitled, “Priority of Rights of Purchasers of Instruments, Documents and Securities under Other Articles; Priority of Interests in Financial Assets and Security Entitlements under Article 8, reads as follows: • Rights under Articles 3, 7, and 8 not limited. This article does not limit • the rights of a holder in due course of a negotiable instrument . . . . These • holders . . . take priority over an earlier security interest, even if perfected, • to the extent provided in Articles 3, 7, and 8.

  22. Section 3-302(a)(2), of the UCC is the principal statute we need to address insofar as the rights of a holder in due course. That statute reads as follows: • . . . “holder in due course” means the holder of an instrument if: • the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

  23. What are the two most important things for you to make sure the junior secured creditor cannot attain when getting your checks? • 1. Value? • No, nothing you can do about that. • 2. Without notice that the instrument is overdue or has been dishonored or that there is an unsecured default with respect to payment of another instrument issued as part of the same series? • Not likely. • 3. Without notice that any party as a defense or claim in recoupment described in Section 3-305(a)? • Nothing you can do about that. • 4. Which two are left? • The (1) “in good faith” and (2) “without notice of any claim to the instrument” elements.

  24. Section 9-331(c) of the UCC reads: • Filing under this Article does [not] constitute notice of a claim . . . to the holders . . . described in subsection (a) . . . .

  25. Scenario 4 – Freddy Kruger move over – if you think you’re a nightmare, try dealing with a governmental account debtor that has administrative procedures. • Your factoring client provides high-end software application and software programming to the Government of the District of Columbia in Washington, D.C. You correctly give notice of the Factoring Client’s assignment of its accounts and that payment is to be made to no one other than you. • You begin to advance against the invoices and receive some payments but the checks were made payable to your Factoring Client, not you. After a couple of months you finally call and ask about other unpaid invoices and you are told that the Factoring Client got paid directly. In fact, what you’re told by the District of Columbia’s Contracting Officer is, “we paid ________” (your factoring client directly) and you have no leg to stand on because, in his opinion: (1) its regulations allow it to request certain information before any payment need be made including a certification of the claim and the regular notice failed to contain any certification. (2) it had to accept your notice before it could become effective and (3) that only the contractor itself can request payment and not the assignee since any claim must exist under the contract and as assignee you have no contract.

  26. You check it out and find that 9-406(6)(a) says: • A rule of law, statute, or regulation that prohibits, restricts, or requires the consent of a government, governmental body or official, or account debtor to the assignment or transfer of, or creation of a security interest in, an account . . . is ineffectiveto the extent that the rule of law, statute, or regulation: • (a) Prohibits, restricts, or requires the consent of the government, governmental body or official, or account debtor to the assignment or transfer of, or the creation, attachment, perfection, or enforcement of a security interest in the account…; or

  27. II. UNSOLICITED FAXES: • IN THE FACTORING MARKETPLACE WE HAVE TODAY, ADVERTISING MAY BE AN IMPORTANT BUSINESS GENERATOR, BUT, YOU WALK A TIGHTROPE IF YOU DO IT BY SENDING UNSOLICITED FACSIMILE TRANSMISSIONS.

  28. VIA CERTIFIED MAIL, R.R.R. and REGULAR U.S. MAIL • ______________________ • ______________________ • RE: • To Whom This May Concern: • Our law firm has been engaged by _________________ in connection with your transmitting unsolicited facsimile (“fax”) advertisements to our clients on ____________ at _____ a.m./p.m. Copies of the faxes are enclosed for your reference. • It is a violation of the Telephone Consumer Protection Act (47 U.S.C. § 227) for any person to transmit an unsolicited fax advertisement. See 47 U.S.C. § 227(b)(1)(c). This law further provides for automatic minimum damages in the amount of $500.00 per unsolicited fax advertisement, and triple damages in the sum of $1,500.00 per fax if the fax was sent “willfully.” See 47 U.S.C. § 227(3)(B). • The term “willful” when used in the commission or omission of any act, means the conscious and deliberate commission or omission of such act, irrespective of any intent to violate any provision of the law. Simply put, “willful” means that the actor knew what he or she was doing whether or not he or she knew that his or her actions were a violation of the law. • _____________ has authorized this office to offer you an opportunity to resolve this matter by __________________, by delivering a cashier’s check to this office in the full amount of $_________. Otherwise, _________ is prepared to pursue all available remedies, including certifying the claim as a class action, which could result in a court ordering payment of $__________ by you for each and every fax advertisement you delivered to anyone. • PLEASE GOVERN YOURSELF ACCORDINGLY. •   Very truly yours,

  29. Subsection (b)(1)(c) of the statute is the one we are interested in and it reads as follows: • (b) Restrictions on use of automated telephone equipment. • (1) Prohibitions. It shall be unlawful for any person within the United States - - • (C) to use any telephone facsimile machine, computer, or other device to send an unsolicited advertisement to a telephone facsimile machine, or

  30. The portion of the statute that addresses the private right of action is 47 U.S.C. § 227(b)(3) and it reads as follows: • (3) Private right of action • A person or entity may, if otherwise permitted by the laws or rules of court of a State, bring in an appropriate court of that State - - • (A) an action based on a violation of this subsection or the regulations prescribed under this subsection to enjoin such violation. • (B) an action to recover for actual monetary loss from such a violation, or to receive $500 in damages for each such violation, whichever is greater, or • (C) both such actions.

  31. What does the language, “if otherwise permitted by the laws or rules of court of a State” mean to all of you? • 1. It means that the first issue to deal with under the statute is whether the state you want to advertise in is an opt-in/opt-out state.

  32. 2. The second issue to deal with is the constitutionality issue.

  33. N.Y. Gen. Bus § 396-aa entitled, Unsolicited telefacsimile advertising, reads as follows: • It shall be unlawful for a person, corporation, partnership or association to initiate the unsolicited transmission of telefacsimile messages promoting goods or services for purchase by the recipient of such messages. . . . This section shall not apply to telefacsimile . . . transmissions not exceeding five pages received between the hours of 9:00 p.m. and 6:00 a.m. local time. . . . • Any person who has received a telefacsimile transmission in violation of this section may bring an action in his own name to recover his actual damages or one hundred dollars, whichever is greater.

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