Wanda Borges 00:04
Hi, I am Wanda Porges. My law firm is Borders and Associates, LLC. I’ve been practicing law for over 40 years. I concentrate my practice on commercial litigation, which basically includes a lot of contract work. I also specialize or I concentrate my practice in representing corporate creditors in corporate bankruptcies, including a lot of defensive preference cases. Unlike Bill, who you will hear has written actually your dad wrote the original book on bankruptcy. I was thrilled to hear that Bill was going to be speaking today. I knew of Bill Norton Senior for many, many years. He really did write the Bible on bankruptcy. I only write the Bible on New York law. I’m also editor in chief and lead author of New York Practice Enforcing Judgments and Collecting Other Debts, also published by Thomson Reuters. So and Bill, to you.
Bill Norton III 00:59
Well, welcome, everyone. I’m from Nashville. I originally grew up in North Georgia, where my father was a bankruptcy judge. And so I probably the only guy that ever went to law school actually thinking that you’re going to be a bankruptcy lawyer. You know, most people evolve into that through who knows how. But in any case, father got him started on the bench and there happened to be a lot of real estate bankruptcies in Atlanta during the seventies when he was in his heyday as a judge. So he started writing opinions. And then after a few opinions, a publisher came to him and said, How about writing a treatise? And so he did. And that’s the Norton bankruptcy law in practice, which is now 13 volumes. So do carry that on, and we have, in addition, a newsletter and then we do seminars to on an annual basis. So bankruptcy’s been a big part of my life throughout my whole 40-plus years of practice. But I have been here in Nashville the whole time. Dealing primarily started off more collection, representing a lot of financial institutions, but have evolved a little bit more lately into representing companies either in Chapter 11 or trustees or committees or whatever in the Chapter 11 context. But I’m with the law firm Bradley Arant Boult Cummings. We have now I was around the 30th lawyer, and now there are 500 lawyers. So they’ve grown a lot over the years, but Nashville has pretty much been the same. So we’ve got a good little practice here that we enjoy. So welcome to Nashville. And if anything I can do to help you there, I’ll be glad to answer some questions there too.
Moderator 03:06
Okay. So we’ve done the introductions. We’ve got some questions that credit managers have submitted, and we’re going to also have some time for some Q&A. So if you’ve brought any questions, we’ll get to those. And I’m going to get things started now with a question on UCC agreements. So I’m going to have Bill start off on this one. What’s the best way to execute a UCC security when a customer goes delinquent? And that’s would be a security-based on receivables?
Bill Norton III 03:41
Well, it was a little bit not sure about that one as far as what was being asked, but I’ll respond and then see if there’s any other follow-up that anybody has to ask. You know, primarily, I would imagine that you’re looking at trying to collect and getting a lien on someone’s accounts receivables. Obviously, you can get a lien on equipment, inventory, all kinds of assets, but it requires initially a security agreement that has to be the first document that needs to be signed. And that can be everything from just a simple document that says, I pledge this to secure that, or it can be very involved with a bunch of covenants and all kinds of other provisions that you would want to include. So. You know, the time to get that done is when they’re wanting needing something from you. And that’s either where you’ve got to be giving them credit or some kind of sale, an on credit or a loan on credit or something of that nature. And because then you’ve got their attention, once it gets into default, then it’s if you haven’t gotten that security agreement, then it gets a little bit harder because at that point, you’re going to probably hopefully, you know, be in a position maybe to say, okay, I’m going to sue you, I’m going to pursue this. But if you give me a lien on an asset that helps me, protects me, then I might be able to start, in other words, a forbearance of some sort where you agree that you will not pursue your legal rights to go after them, and instead they’ll give you a lien on an asset. So that would be a good time for that to be accomplished. But the once there is a default and they’re ready to move into the collection phase, then it’s you should hope that you’ve already gotten your lien on that asset. There are some steps that you have to take. You got to perfect that asset, that lien by filing with the Secretary of State, which is simplified a little bit these days, where it’s now where the business charter is located. So you can always kind of find out where you need to do it. But you should check the Secretary of State’s Office, find out the full name of the company where their charter is. That’s where you do the filing of the principal place of business for them. And once you’ve perfected that and the be it and the necessity for that is that if they file bankruptcy, then you’re unsecured, you’re going to lose to a trustee in bankruptcy. And you want to you want to defeat that. You want to get better than what the the trustee has. And the trustee has a hypothetical judgment, lien creditor. This is just a hypothetical that the statute gives them. So you got to be a judgment lien creditor and then in a perfected security interest beats that judgment lean creditor. So that’s what you’ve got to try to accomplish. Then you can perhaps take some serious actions against that collateral, whatever that you’ve received, but and not be so fearful of them filing bankruptcy and trumping your efforts to either collect or go against. But if it’s not of tangible assets that you’re looking to try to collect. Then one of the best ways of getting is getting a lien on their account, whoever owes them money. You have a lien on. Then you can notify those parties and start collecting the monies that are owed to them. And having a lean on their accounts can be a valuable way to try to collect. You’ve done a lot of efforts in collecting and stuff. What would you add to that?
Wanda Borges 08:31
Thank you. What I’d like to add to that is to go back to the beginning. One of the one thing Bill said and my cardinal rule of credit is know your customer. If you have not run your Secretary of State search and you don’t know with whom you are doing business, I have a bankruptcy right now pending. And the bankruptcy was filed under the name of just to create a name. You know, David Smith, DBA Country Boys and Tool. And it turned out the Country Boys and Tool is an LLC and the client thinks they were dealing with an LLC. And these two partners filed as individuals and the trustee is now telling them, no, no, we’re going to dig a little deeper as to who you really were. So, first and foremost, know thy customer. Second, and even more important. So many of you have a terrible habit. You put security agreements into your credit applications. Now, there’s nothing theoretically wrong with that, except that you usually don’t word it correctly. So somewhere buried in your terms and conditions is one little statement that says in exchange for the credit granted by xyz corporation I the customer ABC company grant you a security interest in and to all of my collateral consisting of and it could be furniture, fixtures, equipment, stock & trade, inventory, customer lists, accounts receivables, etc. And you have it there. And then you come to Bill or myself and you say, well, they granted me a security interest. Go collect. Well, just because they granted it to you, if you did not, as Bill said, perfect your security interest by filing properly in the proper state where the debtor is located, or, as Bill said, where the debtor has its charter, you haven’t perfected at all. So number one, many of you have it in your credit applications. Number two, many of you who even have good wording don’t perfect it. And then you’ll come to me and you’ll say, well, can we file now? Well, the danger there is that instead of having done it at the beginning of the case when you were giving them credit and they were good and they were honest and they were telling you everything you wanted. Now you’re at the end of the case where they owe you money. They’re dodging you, they’re trying not to pay you, and you’re trying to figure out what can I do now to perfect my lien and go after them? Well, on a rare occasion, we have, in fact, perfected that lien, started a lawsuit to foreclose on the security agreement, and been successful on a rare occasion. More often than not, if you’ve waited too long, by the time you do that, they file bankruptcy.
Bill Norton III 11:35
And we’ll be talking about in-minute preferences and stuff. But 90 days is your cutoff. If you and if they file within 90 days, they’re going to be able to avoid your lien.
Wanda Borges 11:45
Absolutely. So they knocked that lean right out of the ballpark and you have nothing. So those are the points that I really want to emphasize. Know who you’re dealing with? Perfect. Your lean properly. We have a situation right now in a bankruptcy. In fact, I’ll have a full-blown deposition on thursday because our client was granted the right to take a security interest in, of all things, silver metal credits, not even a physical tangible, and they never perfected. And what did the bank do? They swept the account and gave those silver medal credits to another customer. And we are fighting over it in the bankruptcy court in the Southern District of New York.
Bill Norton III 12:26
And the other thing I would say about that is understand what it is that this company either manufactures or whether they have a value because. And that needs to be described. Don’t there’s some people that may list the type of equipment that they have. You don’t need to do that. It’s very general terms. You can get a lien on goods, but then within the category of goods, you’ve got equipment, you’ve got inventory and then you start getting into maybe some promissory notes and instruments. And it’s amazing the UCC and I teach it at Vanderbilt, the number, the types of collateral that you’ve got is can be very confusing and each has its own little traits. The reason that they’re described or defined differently is because they are different and they’re different little aspects of it that may affect whether you have perfection or not. And also it could be real estate. And if it is, then we’re talking about a whole nother world where instead of filing under the Uniform Commercial Code under the Secretary of State’s office, now you’re having to deal with real property law and recording a lien on some real property. Now, that can be very valuable for you, but you need to understand what it is that this company has that is of value, what it is the next thing you’ve got to worry about is you can do a UCC search. They will tell you who else has liens out there and then you can find out. All right. Well, the equipment’s covered or the you know, these areas are covered. If you it’s the first to file windows. So if there’s somebody else out there, then, you know, it might not do you any good, I get a junior laying on top of somebody that already has a lead. So those are the kind of background information that you’ve got to find out, not know. Not just knowing their name, knowing what kind of collateral that they have a value, knowing what other creditors may be out there that have liens. And then once you can gather to gather all that information, then you can start targeting what you need to do.
Wanda Borges 15:04
And to add one up. One last thought or another thought. If, in fact, you run your UCC search and you find that there are ten liens in front of you and you’re scratching your head and you’re saying, Well, why would I want it to be number 11 as a general secured creditor, if in fact you sell something specific, you can take what is called a purchase money security interest, and you can leapfrog everyone else and become number one, but only to the extent of your own goods. So, for example, let’s. Say that you make purple widgets, and if you’re selling those purple widgets and you see that a bank or two or three have a lean against all inventory, well, you’re purple widgets. And of course, I pick purple because I’m staring at your backpack. Your purple widgets are our inventory. But now, if you notify every prior secured creditor, that has to lean on those same assets along the lines of this. Dear Sirs, please take notice that we are about to enter into a purchase money security agreement with xyz company covering all purple widgets manufactured and sold by my company. And by giving them notification, you give them the opportunity to object. More often than not, you won’t hear from them. Sometimes you will, and you’ll end up getting into subordination agreements. But we don’t need to get into that today. And that will give you number one. Now, how does this work? I’ve been standing in bankruptcy court. One of my clients is Sub-Zero. They make those great refrigerators. Well, General Electric Credit Corp does floor planning. They cover the same subzero refrigerators that my client sells. And we both stood up in court and GECC counsel saying, I’m first secured. And me saying, no, you’re not. We’re first secured as to our refrigerators. And GECC said, we never got notice. And we said, Yeah, you did. Here’s our copy of our notice and here’s our certified mail return, you see? Requested, you forgot. And GECC said, sorry, Judge, she’s right. So if you have a PMSI, you can get your goods back. And that can be a very valuable resource. And the last thing is, believe it or not, I’m sure Bill will say Wanda, but it never works. The UCC actually allows self-help. If you can once 40 years plus I’ve been practicing once. A landlord allowed us into a drugstore and we emptied out the drugstore As a secured creditor. It doesn’t work very often.
Moderator 17:51
We don’t want to.
Bill Norton III 17:53
Yeah. The other thing that I would say is to add a little bit of complication is that you also have to if you’re dealing with vehicles or and actually, I’ve got a case which we’re dealing with big-rig trailers and I didn’t realize this, but big-rig trailers are all titled separately. So that means the lanes are put on those trailers and and your UCC will not be effective against them. Same thing with cars. Anything that has title, they preempt the UCC and to the extent that those are allowed, there is one exception. And that’s my case that I’ve got in Knoxville right now where a dealer that sells trailers you perfect by UCC. So now what we’ve got we’ve got trailers with one dealer that will have UCC lane and the inventory of that of all the sales of that dealer. But they had a leasing company that they kept moving trailers over to the leasing company. The leasing company doesn’t deal with sales, so the UCC doesn’t apply to them. All the other vendors came in and got recorded lanes and now you’ve got a huge battle going on between all the lenders as to who has priority. But, you know, that can bring in some very interesting offers. It pays us lawyers a lot of money, but you want to try to avoid that by understanding what your legal rights are regarding that collateral before it happens.
Moderator 19:34
Very simply, if you have leverage, you have options.
Bill Norton III :19:36
That’s true. All right.
Moderator 19:38
Let’s move on. Next question. I’m going to start off with Wanda here.So if we a creditor process a purchase order that states different terms of sale than our system-generated invoices, are we legally bound by the terms of the purchase order? And we’ll add a second question do invoice terms Trump purchase order terms and or are governed by the creditors’ terms and conditions. So who rolls which paper counts?
Wanda Borges 20:10
I’ll give you what you hate to hear. It depends in theory, if your purchase order, in fact says all terms and conditions of sale as appears on this purchase order shall govern, and no other terms or conditions shall rule unless in writing and agreed to by both parties. Then the terms and conditions on the purchase order control. What we see too often are purchase orders that you have put out, perhaps a bid or your customer has contacted you and simply said, we want to buy a thousand tons of cement. What’s your price? And you give them a price quotation, and you tell them when they’ll deliver it, and you’ll tell them what kind of grade cement it is, and you will deliver it, never realizing what their purchase order actually said and never knowing what your terms and conditions are actually intended to be. Too many times these purchase orders come over telephonically or through an email that’s in half english, and I don’t mean foreign language, I just mean bad english, and therefore you’re not getting the true picture of what the purchase order is all about. So now you get a purchase order, you do get a written document and it says they want to buy a thousand tons of steel of cement from you at $50 a ton. I know I’m using ridiculous numbers and to be delivered to my plant on such and such a date at such and such a time. You go back to them with a confirmation order and you say, well, we will sell you those thousand tons. We will deliver them to the job site, not to your plant, because then you’re only going to have to move them anyway. We will sell them on net 30-day terms. We’ll give you 2% if you pay in ten days. And that is how we will ship to you. But that’s not what you wanted or your customer wanted. Now your customer comes back and says, No, no, no, no, no, we need 60-day terms, not 2% and net-30. And you don’t do anything. Now you’ve got a third document which 60-day terms, and the next thing you do is you ship. That third document controls. You’ve granted them, in my opinion. You know, attorneys do disagree, and I don’t know what Bill is going to say, but that third document has now bought them 60-day terms on what they wanted, not what you wanted to do. So generally, the rule of thumb is the last document rules. I argue that if you put into effect a language that says these terms and conditions apply and no other terms and conditions shall apply unless in writing an ugly agreed to by both parties, you have an argument in the court that we would not accept any change. But if you don’t have language like that and you start getting two and three documents, that last document before the final delivery is what will rule. Both of you just looked at each other and whispered, please share with us what’s the issue. Um, Okay.
Moderator 23:37
And there’s also the problem. If you send a notice that, no, that’s not what we want, but then also ship the things in before they get the notice because they’ve mailed it.
Wanda Borges 23:49
Yeah. You know, in today in today’s world and we’re going to talk a little bit about electronics later on. But in today’s world, there really is no reason to be using snail mail. You know, use your emails. Emails are binding. Presumably, everything we would talk about later would be binding. But emails are very good. Use faxes if you have to. If you’re dealing with mom and pops, they may not have emails. You may have to go to use a fax machine but use something concrete. So sequential in writing. Don’t rely on snail mail because yes, you could very well have your shipping department shipping without knowing what you’re doing. And she, does that never happen to you in credit that the shipping department has done something it hasn’t bothered telling you?
Bill Norton III 24:38
Well, and I think what Juan is telling you is that ultimately the courts are going to try to figure out what was the agreement of the parties and with going back and forth and back and forth. Ultimately, the last one, there was no response. So the presumption is, well, they must have agreed. They didn’t they didn’t object. So if you allow that last one to go and then next thing you know, you’re shipping on, the court’s going to take the assumption that, you know, that’s what you agreed to. Now, I guess there was one aspect of it that. When I heard the term purchase order, that’s somebody saying, I want to purchase these goods. Then I see an invoice that’s generally from the seller saying, All right, you’ve purchased it, it’s delivered. Now pay. Here’s the invoice. Now, if that invoice does not match with the purchase order, then even though that invoice is the last thing, it’s probably not going to control because the agreement was based on the purchase order. After the invoices they’re after, it’s all ready. The deal has already been shipped and delivered. You’re not going to be able to change the terms of the purchase order. In other words, whatever that what those terms were and, and buy a later invoice just sending it in.
Wanda Borges 26:10
Yeah. The invoice generally will follow the delivery of the goods or I know a lot of my clients send the invoice out the date they are delivering the goods. So the delivery has taken place, the deal is done, the invoice doesn’t change anything. Which brings me to another point on invoices, which is a little bit sideways from the question, but some of you have a habit of putting on your invoice and only on your invoice that failure to pay this invoice upon when it’s due will we will charge you 2% per a month. Yeah, 2% per month in interest, which could be 24%. Some states is one and a half percent per month, which will give you your 18% or whatever rate of interest is allowable at the lowest point of law in the state where the customer is located as a service charge or as a late fee. Putting that on your invoice after you’ve delivered the goods and it’s nowhere else on your terms and conditions does not bind your customer.
Moderator 27:13
So this one’s on piercing the corporate fail and. We’ll start out with Wanda again on this for companies that have been purchased by a private equity firm. How does one assess the strength of the PE firm? Though they never share financials and as a cross corporate guarantee required for the firm to honor the obligation of the company they own in the event of that company’s filing bankruptcy.
Wanda Borges 27:42
You know, Dave, these three little questions are about 20. But let’s talk first about a little bit about piercing the corporate veil. Obviously, you should all know what that means. A company has a corporation, it’s a corp, it’s an Inc., or it’s an LLC. So even though a corporation is a corporation and an LLC is a limited liability company, it has the same protections as a corporation that the individual does not become liable unless they’re doing something such as a guarantee. And you expect that the corporate entity is a standalone entity, that it is in fact buying and selling goods. It has equity infused into it. It has owners of that company, either members of an LLC or partners or owners of the corporation. But now you find and I love these cases and fortunately, there are few and far between, but you find that there can be real thieves in the world. Did I say, thieves? Oh, my goodness. Are we talking about bad debtors? Mhm. But we had a situation and I’ll give you an example because I think that helps explain it, mister. And it’s a court case, so I’m allowed to use the name Mr. Stammu, who had a corporate entity, and he completely ignored the fact that it was a corporate entity and money came in from his investors and he used the money for vacations, he used money to buy cars, he used the money to pay his phone bills, his cable bills at home. He used the money to pay his children’s tuition, and they were all in private schools. And then he said, But it’s an LLC, you can’t touch me, and the LLC has no money and too bad, go away. Well, I worked with a colleague. It happened to be in bankruptcy court. He had started the litigation in state court. So we worked in tandem and we went into the bankruptcy court and we said, judge, we would either like you to lift the automatic stay to allow the case in the state court to proceed to pierce to corporate veil. And it happened to be a bankruptcy judge that used to practice law. And I knew him and he looked at me and he said, Miss Borges, do you think I’m not capable of handling a piercing of a corporate veil? And I said, Oh, and I wanted him to actually. And I said, judge, you’re perfectly capable. He said, fine, I’ll hold the trial here. And he held a trial in the bankruptcy court. And in fact, we proved that this man used the corporation as his own personal bank account. So the words we look at when we’re looking at pressuring the corporate veil is, is there a unity of interest? So is really the corporate entity or the LLC and me, are we really one and the same? And is the ownership and that unity of interest so tightly interwoven that they can never really be separated? Because I’m just writing out checks willy-nilly. The entity, the corporation or the LLC becomes what we call my alter ego. So it is just part of me but another part of me. And we have to see a complete co-mingling of funds. That is what the courts are going to look at, when they’re going to try to determine if, in fact, you are, you can pierce the corporate veil. So what happens when you’ve got a private equity firm and we’re Bill and I both will see this is what you’re seeing sales of assets in bankruptcy court under 363 and you get a new entity coming in and they are nothing other than money. There’s no substance there. They’ve never done business. They just develop it as a private equity firm that they are going to come in and they are going to buy out the Debtor Corporation. Well, that could be a good thing. That could be a good thing. But if you’re not in a bankruptcy court where there are a lot of bells and whistles and a lot of control, but you’re just in a situation where your entity is sliding away, and along comes a private equity firm. So how do you assess the strength of the private equity firm? Pure dollars and cents. That’s the only thing you’re going to have when they open a shell company and they must tell you what do they have? What amount of money has been infused into that private equity firm? Well, I know that I think at some point you said, you know, they never want to share the financials. Well, very simple. If you’re not sharing the financials, we’re not doing business with you. That’s really what you have to say. We are not going to sell to you unless you show us how much money has been infused into that shell company because as far as we’re concerned, there is nothing there. There are no assets for us to get and we’re not going to sell and then worry about collecting it later on. And then how about a cross-corporate guarantee for a PE firm to honor the obligation? Again, if the PR firm doesn’t show you financials and you don’t know how much money is in there, the cross-corporate guarantee is not worth the paper it’s written on. So don’t think about getting it. Can you get a cross-corporate guarantee under other circumstances from a solvent, good, steady company? Absolutely. But with these equity firms very shaky, all there is money. That’s all there is, trade extremely carefully.
Bill Norton III 33:18
And I would just add that it is important for you to kind of understand the kind of the corporate tree, so to speak, because they may have babies. You may be doing business with an entity that is kind of a holding company with a bunch of subsidiaries. And you need to understand from all of those who it is, which of these entities are owning what assets and which ones may be the money maker of the whole family tree. And because and to make sure that each of those entities exist and you can find that out, you can do a UCC and Secretary of state look under the business name. They should have their charter. All those records should be in record of the state that they’re doing business. And then from that you can identify but things like what we were talking about before getting a UCC if you’re if you get a UCC from the parent and the parent is not the one that owns the asset, you don’t have a lien on any you got to get a lien on the entity that owns those assets. Now, you know, you might be able to if you missed if you got it wrong, you might be able to argue that the parent is really an alter ego or the subsidiary is an alter ego of the parent, and they can kind of combine and get them that way by piercing the corporate veil. But that’s a whole lot more difficult then getting that proof. Then having been able to establish from the very beginning which of these entities have the assets, which are the ones that we want to lean on and making sure that they’re valid entities that you’re dealing business with. And you got to get a guarantee if there’s one of them has income and they’re all separately, you may need to get all of them one loan document, but all of them guaranteeing that debt so that you that way you know, that you’ve got them all connected. And there will be claims that you could assert against whichever entity turns out to be the more profitable one toward the end when it all starts unraveling.
Moderator 35:47
We have another question related and you know, so this one, we recently filed a lawsuit against the company that set up his company as a shell. We won the skirmish, but they lost the battle on the $10,000 debt. We’ve since gone back and taken a few other measures to see about collecting from another angle, but we had no idea he did not have what I consider a legitimate corporation. Is there a way to identify a shell versus a legitimate corporation? If so, please explain. People are continually finding new and different ways to cheat their vendors.
Bill Norton III 36:22
Well, you got Dun and Bradstreet, maybe in a few other things, but until you get financial statements, you know it’s going to. That’s the kind of information that you do need to have and you need to have it on the front end because it’s going to be hard to get on the back end.
Wanda Borges 36:37
Yeah, yeah. I think we went into that quite a bit, but absolutely correct. And who are you? What are you? Who? Who owns you? What? What’s property is there? What assets are there? But. Yeah, I think we, I think we pretty much covered that.
Moderator 36:52
Yeah. It, it all comes back to know your customer and that’s so important. Well past this went on to build as we start to get more into the bankruptcy area. So with the evolution of the administrative claim 503b9 portion of the bankruptcy code, are reclamation claims still ever used, and if so, in what scenario?
Bill Norton III 37:12
Well, in let me just explain the reclamation. That is a contract type, right, that you’ve got. And when you when you may be sold a good or retained to lien on an item or there was a contract of a sale of a good, you can maybe go and reclaim that good and bring it back if they default under that contract. The problem with reclamation and it’s still a remedy but it’s junior to the UCC and so if someone has a perfected security interest in the good, you may have sold a piece of equipment to someone, and contractually you may want to go and reclaim it. But while it’s in the hands of this other buyer, there’s a bank that has now got to lean on that asset and you’re going to be junior to that. So it I don’t guess I’ve ever had to where it was been effective to go and actually a reclaim because inevitably they’re seen to be either the bankruptcy trustee had priority over the item or a lienholder had priority over that item. Now the other thing that’s mentioned is 503b9 that’s a new provision that was many of you may have heard about critical vendors. And we all want to be a critical vendor because that means that in bankruptcy we may get our payment whatever is owed us pay. And that was one of these horses that got out of the barn, and it was hard to reel in and hold for a while. They’re all the court or allowing these critical vendor payments. They originally it was just the doctrine of necessity. As long as you could show that it was critical to the business, then you could go to the court and say, all right, I know we’re not supposed to pay for prepetition obligations, but in anything, anything prepetition, obviously, is something that occurred before the filing of the bankruptcy. So you can’t pay those obligations. But this is a critical vendor. And if we didn’t have this widget, we can’t make this car. And so they were courts were allowing this to be sold. Ultimately the starting with the test circuit and others said, no, this is a we’re going to put an end to this or at least curtail it. And at the same time, they decided, well, we’re going to pass a provision in the bankruptcy code that allows as long as you shipped in delivered goods within 20 days of the filing of the bankruptcy, you’ll have priority claim and you can get paid for that goods. And so the idea was to kind of circumvent and do away with the critical vendor, that critical vendor still exist, but only under special circumstances, with a lot of proof showing that is in truly the only way in which they could do business. But so what I would recommend now is that if you’re shipping goods, particularly to someone who you’re concerned about, don’t let the payment terms go out beyond 20 days. Always stick within 20 days because once they file bankruptcy, it’s only the goods that have been delivered within 20 days are the ones that you’re going to get priority and get paid for. And if you stuck within that 20 days and said, all right, you’re I ship the goods 30 days, I’m not shipping another thing to you until you bring me current up to the 20-day limit, then I’ll ship some more goods to you and you continue staying within those terms. Then you’re reducing your risk so that if they file bankruptcy, you at least be a priority claim. And I think there’s a lot of credit managers are doing. I know that in Circuit City when they file their critical their 503b9 claims were so large they couldn’t even do a bankruptcy plan because it was millions of dollars and it was requirement that they had to pay those as priority claims. They didn’t have the ability to do it. So I know that the people are out there paying close attention to 503b9, but it’s totally different from the reclamation. And I would say reclamation probably is kind of, you know, you get a lane or if you can’t get a lane, then stay within 20 days.
Wanda Borges 42:14
As a second statement on Circuit City. Boy, Bill couldn’t have said it better. One of my clients was owed millions, millions of dollars about a year before Circuit City filed bankruptcy. And they realized they were going to get stuck and they started bringing Circuit City down to its credit limit. And, of course, they were at risk of preference every step of the way. But they kept doing it and they kept doing it and they kept doing it. And by the time that Circuit City actually filed, they ended up going into the bankruptcy court with a $1.9 million proof of claim. They had gotten it down that far and they had a huge I would have huge 503b9 priority administration claims that they got paid on. They also had received another $17 million pre-petition cash in advance purchase money. So they did very well for themselves. Circuit City didn’t last eight months before it died, but the one thing to any of you do drop shipments. Okay. None of you in this room do drop shipments. The 503b9 does not work for drop shipments. So typically those are companies such as lane furniture that I would buy a bedroom set and instead of it being delivered to Raymond Flanagan, a department store, it’s delivered to my home that’s called drop shipment. And the courts have ruled that drop shipment does not work. And you don’t get a 503b9 claim priority claim for that.
Bill Norton III 43:40
Well, the issue becomes when is it delivered.
Wanda Borges 43:43
Or to whom it is delivered.
Bill Norton III 43:44
And that becomes very vague when you start getting with different types of shipment programs. Right.
Wanda Borges 43:53
Can we squeeze in one last?
Moderator 43:54
Yeah, we can squeeze in one more. Maybe, maybe two if we go quickly. So this is the question on the loss of goods on a collect shipment. So a vendor ship collects and what is the legal position of the customer’s chosen carrier to the vendor? Should the customer claim non-receipt of goods and not pay the invoice?
Wanda Borges 44:15
Yeah. This was a question submitted by a credit person and the question was really much longer than has been abbreviated up here. But let’s talk about these shipments. When we’re dealing with a transportation company, most of the transportation companies are using seals. I’m not talking about LTL where you’re talking less than load. I’m talking about full-load shipments. And you’ve got a truck that is shipper loaded and shipper counted. And when it shipper loaded and shipper counted and the seal goes on that truck and you give it to the common carrier or truck or freight car, and it goes on to that common carrier, and it is then delivered. If that seal is applied and that seal has not been damaged in any way, shape, or form, and the customer accepts the sealed truck, there is no recourse to the carrier whatsoever. The argument is between the shipper and the customer, period. That’s it. If there is any trace or any indication whatsoever that the seal has not been intact and that there is some manipulation of the goods that are inside, yes. Then you have a claim against your carrier and your claim against the carrier can be a back claim for lost goods and damages. But if that seal is intact, it is you, the shipper, and the customer. And only that way.
Moderator 45:39
And here, here’s a fun one. Maybe this is what we’ll end with. So what’s the best way to minimize attorney fees, especially if your business is spread across different states and jurisdictions? You know, and we got some chuckles out here kind of thing. And that’s because it is an issue. So. Bill?
Bill Norton III 45:59
Well, I would say what one way to reduce it is obviously may be to think about mediation. If, you know, mediation is an opportunity where you the parties agree upon a neutral party and instead of going to court, instead of trying the matter in the courtroom where you’ve got all the legal fees accruing discovery and everything, you get the parties to sit down and try to work it out. And I we have Tennessee, what we call rule 31 mediation. I do a lot of mediations. And because bankruptcy, frankly, is a product of mediation, we’re always trying to work things out. And it, I think, is a now, you know, you can start it. It is an art to when you begin it, you can start it before you’ve had enough discovery and know the facts and all of that. But the earlier you can begin a mediation, I think the better.
Wanda Borges 47:06
I think that’s an excellent, excellent suggestion. And the other suggestion I would make is, don’t be foolhardy. I’m in New York and but I’m not in New York City. And some of my colleagues in New York City that are practicing law less time than I am are billing much higher than I am. Don’t make a mistake of saying, Oh, that’s $1,000 an hour lawyer. He must be good. Don’t make the mistake of saying, Oh, that’s a $400 an hour lawyer. They must be good. Choose an attorney that can show you that they know their field. No question in my mind. Bankruptcy, Bill is a bankruptcy expert. Find somebody that, you know, knows your field, that you know, knows your industry, and that you think to get the job done as efficiently as possible. Besides the mediation, which, as I said, is an excellent choice, make sure that who you’re getting is not going to waste time not knowing what they’re doing or having to do extra research because they don’t know the law or they don’t know the industry or they don’t know the circumstances. And that way you’ll be able to minimize your fees somewhat.
Bill Norton III 48:15
The thing that I’ve learned in mediation is that if you can get it down to dollars where it’s not just a bunch of hate of two people with principles and but you get it down to dollars, you I’d say about 90% of them get resolved. You know, it’s just a matter of time.
Moderator 48:33
Okay. We really don’t have time for another question unless there’s any that you folks might have give you a chance to ask anymore.
Bill Norton III 48:40
The only other thing I would I would throw in is kind of similar to the 503b9 is just a suggestion because often it’s in a language dealing with that is worried about when you’re getting a payment, there may be a preference and you know that’s where there a couple of it’s nice to know what your defenses are and preference litigation one is in the ordinary course of business so sometimes using email and making all these damning accusations and I won’t come to get you, I’m going to come to sue you. Not quite the best idea, because what’s going to happen at the end of the day is the trustee or somebody who’s taking over this company is going to not have any employees there. They’re all gone now. But what he does have is emails. So he’ll go through and start looking at the transcript of what’s something, what was going on in the last 90 days. So first of all, grab all the 90-day payments, and then they’ll start looking at what emails were related. And if there’s a whole bunch of emails out there with the dunning letter, you know that you’re going to come to collect and all of that. Then your ordinary course of business may be out of the window. So you got to watch that. And maybe the old-fashioned way of just calling them up and talking to him on the phone may be better than sending that email.
Wanda Borges 50:11
And in fact, you know, over the last couple of years, bankruptcy has been somewhat slow. And the trustees are out there and the liquidating agents are out there and they’re looking to get as much money as possible back into the estate so that, A, they can make their fee and B, that they can distribute as much money to the creditors. And I am finding more and more liquidating agents and trustees coming back at me and saying, Oh, but your client wouldn’t have gotten paid if they hadn’t threatened. And that’s what they’re saying. My one of my associates just spend a couple of days going through emails because there were thousands of emails between the debtor and my client. And she came back and she said, Wanda, she never threatened. She just did the ordinary. You know, when do you want your goods? When do you are we going to get you your goods? When are you going to get when are we going to get paid? You know, you always pay, but we always talk to you. Just there was no threat there whatsoever. So I contacted the attorney, who’s a very well-known attorney in California, who does a lot of preference litigation. And I said, Jason, I said, we’re going to send you every single email and you’re not going to find a threat there. He said, All right, I’ll take a look at it. But on the other hand, we got another case recently where we had to settle because in fact, we did have an email from our client to the debtor saying, you know, we’ve already cut you off, we are not shipping you anymore and we have to have that payment in our hand. If you want us to release a shipment that was sitting on our docks and they got the payment and they released a shipment, which of course is somewhat new value. Except it wasn’t enough, unfortunately.
Bill Norton III 51:51
And they had the one thing about new value. There is another defense. In other words, after that, after you received a payment, you get to offset any new shipments that you make, but you got to do it after you receive the payment. Don’t say don’t take them. Okay. I’m still federal expressing you this check and here’s a copy of it and then you ship the goods before you get the Federal Express, check you ship before the delivery of the payment.
Wanda Borges 52:19
And also wire transfers. Exactly that. I got a client who said, Wanda, they’re bugging me. Everything is loaded. We’re ready to release it. I said, don’t you dare let it out of your gate. And he said, but I got the confirmation that the wire transfer was sent. I said, Do you have the confirmation that the wire transfer was received? And he said, No. I said You don’t let those goods go until the wire transfer was received. We ended up defending his preference because the wire hit at 11 a.m. and they released the goods at 12 noon. And we were able to show the clock at the dock and at the bank. And we said, no, they released the goods one hour after the new value money and therefore it was not a preference.
Bill Norton III 53:04
To receiving wire. That can be your friend because that is immediate and the other issue that comes into play sometimes with this is that the delivery of a check. Well, when does the transfer take place, when it’s deposited, when it’s delivered or when it’s cleared? And fortunately, most courts are saying for the purposes of new value, it’s when you receive the check, it’s not when you have to clear it, but by wire, wire transfer limit. It’s that whole argument altogether.
Wanda Borges 53:34
Yeah. And that could be a little confusing because the courts ruled the Supreme Court decision said that the date of clearance trigger the 90 days for counting preferences. But Bill’s correct also that most courts are looking at it, that you got the check in-house and then you released the goods, and that’s the date for new value. And of course, Mike is standing over there saying.
Bill Norton III 53:53
You’re getting ready to have the hook.
Wanda Borges 53:55
Get the hook.
Bill Norton III 53:56
Yeah, yeah. If anybody’s got any questions, I’ll be around. So. Yeah.
Wanda Borges 54:07
And I think I can speak for Bill as well. If anybody has a question that they want to send to you or me, we’ll be happy to take that question and get back to you.
Moderator 54:18
Thank you.
Bill Norton III 54:19
Thank you.
Moderator 54:19
Thank you, Bill and Wanda.
