Creditors Get Sound Legal Advice on Bankruptcy Issues

Knowing the law can help creditors enhance their chances of getting paid or overcoming a preference demand from a bankrupt customer. Important legal tips and advice on the subject were provided to attendees of an NACM educational teleconference July 16, 2007 entitled, "Bankruptcy — The Nuts and Bolts for Credit Professionals," presented by Robert Mercer, Esq.

Mercer, partner in the national Bankruptcy & Financial Restructuring Group at the law firm of Powell Goldstein, LLP, has an active Chapter 11 practice, which includes the representation of unsecured creditors' committees. A large portion of Mr. Mercer's practice is focused on representing trade creditors around the country both inside and outside of bankruptcy.

A number of strategies to better position creditors for payment from a financially distressed or bankrupt company were offered. For example, when using a Letter of Credit (LC), Mercer advised including language in the agreement with the issuing bank that will trigger payment in the event of a bankruptcy, rather than in the agreement with the customer. Such language should define that payment on the LC is to be made from bank funds. Also, Mercer said, "Make sure there are no notices that have to be given or no approval that has to be made [from the customer]." Such notices or approvals could tie up funds due to the automatic stay provision in the bankruptcy law. As for guarantees, Mercer said that a provision should be placed in the guarantee that "the guarantor is responsible for [payment] if the customer sues the creditor for a preference." On security deposits Mercer said, "The beautiful thing about a security deposit is that if it is larger than any debt at the time of bankruptcy, it will ensure you get paid and insulate you from your preference claims."

Mercer outlined a number of strategies to use in order to manage preference exposure. One way to help eliminate preference exposure is to not extend credit to a financially distressed company but instead get paid in advance or COD. "Make sure when you get paid, you get paid by your customer," he added. He pointed out that if a debtor gets paid by an insolvent subsidiary of the customer, it could result in a successful preference demand. Another tip he offered was that if an insolvent debtor makes a payment, the creditor should apply the payment to the most current debt, not debt outstanding on 60 or 90 day-old invoices. By doing this, Mercer noted this could bolster the claim that the payment was made in the ordinary course of business, which is one of the defenses against a preference claim. He also advised requesting payments by phone instead of in writing. "There's no reason to create of paper trail of evidence demanding payment." He also recommended keeping good records of payment history, especially within 90 days of the filing of bankruptcy by a company. Even if a debtor is to get paid by a bankrupt company, Mercer advised checking PACER (http://pacer.psc.uscourts.gov/), the online source of the Administrative Office of the U.S. Courts, for that particular bankruptcy filing status to make sure the payment was included in the budget by the bankruptcy trustees.
Source: Tom Diana, NACM staff writer