Service Area: UCC Services

Construction Notice of Delay and COVID-19

Posted on April 27, 2020 by - In Other Commercial Credit News

Construction Notice of Delay and COVID-19

Are you furnishing to a construction project? If so, should you send a Notice of Delay? The National Law Review posted an article entitled “Contractors:  It’s Time to Send Your COVID-19 Notice” written by R. Thomas Dunn of Pierce Atwood LLC, suggesting that contractors send a formal COVID-19 Notice of Delay as soon as possible to notify their contracting party of any delays and/or additional costs on their construction projects.

In his article, Dunn explains the time to send the notice is now. The notice is an opportunity to maintain open lines of communication during this uncertain time.

“This is not an adversarial notice. Your contracting party will understand the impacts experienced and should appreciate the proactive approach in communicating the COVID-19 impacts.  If discussions have occurred between your contracting party, I would still send a formal notice as to avoid further legal defenses down the line.  Also, providing the formal notice creates a structure that is helpful in creating a productive communication pathway regarding the delays/costs incurred and ways to mitigate them.”

Review the Notice of Delay with Your Legal Team

We recommend that you and your legal team review your contracts to determine whether a Notice of Delay is required. If a Notice of Delay is required, confirm the terms of your agreement to ensure the correct parties are served and served by the appropriate method (fax, email, certified mail, registered mail, etc.).

In addition to the information required to be included per your contract, it is recommended, to include a description of the expected impact of the delays and/or additional costs, the impact on the supply chain or labor chain, if applicable, and when you expect to be back to normal. Updates to the notice should be provided as additional information is known.

Notice of Delay Samples

Dunn provides a template for the Notice of Delay in his article:

[VIA EMAIL / FED EX / CERTIFIED MAIL – Contract Requirement]

[Name/address listed in contract]

RE:  Notice of Delay and Increased Cost Due to COVID-19 Pandemic on Project _____________

Dear ___________:

The COVID-19 Pandemic, which has been declared a national emergency by President Trump on March 13, 2020 [and _______________ (local authorities)] has caused unanticipated delays and increased costs to the above-referenced Project that were beyond the Contractor’s control.  See Sections _____ of the Contract.

In particular, Contractor has experienced the following delays and impacts to project performance: _________________.  [If applicable,] the project has been suspended since ____________(date).

Contractor requests a time extension of ____ days at this time in response to the COVID-19 delays and impacts.  Contractor invites the Owner to participate in a conference call to discuss this request for a time extension and to outline a plan to reduce the impact on the Contract Time and Contract Price.

In addition, Contractor is experiencing increased costs resulting from the COVID-19 pandemic including ______________ (explain).  Contractor is collecting its costs and will provide updated information to the Owner in the near future.  In the meantime, we are available to discuss different options to reduce the amount of costs incurred in connection with the Project.

Contractor reserves all rights and remedies it has pursuant to the Contract and is confident it will be able to get through these events with Owner and all project participants.  Please contact me to discuss these issues and, again, we will provide periodic updates as soon as possible.

The Associated General Contractors of America have also provided a sample copy of the Notice of Delay COVID-19 letter.

NOTICE OF POTENTIAL DELAY AND RESERVATION OF RIGHTS

(Check Contract for person(s) to send letter and manner required to send i.e. fax, email, certified or registered mail)
Insert Date

Re: COVID-19 Pandemic

To Whom It May Concern:

We are all aware of the ongoing outbreak of the Coronavirus 2019 (COVID-19), which was recently declared a pandemic by the World Health Organization and the President and Governor have declared a national and state emergency, respectively. Although the situation continues to evolve rapidly, (Insert Company Name) remains fully committed to pursuing the completion of our work in a safe, diligent and reasonable manner under the current circumstances. We must recognize, however, there is a strong likelihood that we will encounter certain delays as a result of this pandemic.

We anticipate our work will be delayed and our productivity will be negatively impacted by the cumulative effect of this outbreak. Potential impacts may include, but are not limited to, labor shortages due to infection or quarantine as well as material shortages and significant delays in lead times as a result of factory closings across the globe. In addition, we are monitoring whether there will be a mandatory shut down. At this time, it is not be possible to quantify the delay or compute the impact costs.

While this notice may seem premature, our contract requires that we furnish you written notice of any delays in a timely fashion. Accordingly, pursuant to the terms of our contract, please consider this correspondence to be our formal notice of potential delays to our performance through no fault of our own and that are beyond our control, including, but not limited to, changed conditions, constructive suspension of work, constructive change, force majeure/act of God, etc. (Insert Company Name) hereby reserves all rights it may have under our contract and applicable law to protect its legal and commercial interests, including without limitation the right to seek an extension of time and an increase in our contract price. Please keep records as you deem appropriate to confirm any extensions or increased or unabsorbed costs if we do, in fact, submit same. I can assure you that we are evaluating all options to minimize and mitigate the impact to your Project. As more information becomes available, we would like to discuss our options for successfully completing this Project.

We will continue to keep your project representatives informed of these delays and their effect on overall job completion. We will diligently seek to minimize to the best of our ability, the effects of these delays on our work. Your cooperation in minimizing these impacts are appreciated as work our way through this unprecedented event.

NCS Stands Ready to Protect Your Rights During this Difficult Time

NCS has included the basic template from the Associated General Contractors of America within our Online Services Account Management portal for our clients.

Adjustments will need to be made based on the requirements of your contract and/or the information that is available to you. When finalized, the document should be signed by a person who is authorized to bind your company.

Call 800-826-5256 or email SecureYourTomorrow@ncscredit.com with any questions.

What Happens if You List the Wrong Debtor Name in Kansas?

Posted on April 20, 2020 by - UCC Financing Statements

The Accuracy of the Debtor’s Name Is a BIG Deal

Filing UCCs may seem simple. I often hear folks say “Meh, it’s no big deal. I just gotta fill in the blanks.” But those folks are wrong. The details of UCC filings are absolutely a BIG deal – the details are the difference between being a secured creditor and an unsecured creditor. The details are the difference in recovering hundreds of thousands and collecting pennies, or worse. One creditor learned a hard lesson with their Kansas UCC filing, when they failed to heed the accuracy warning: the difference is in the details.

The Case

of Dewey Dennis Preston or D. Dennis Preston or Dennis Preston?

CNH Industrial Capital of America, LLC (CNH) entered into two Retail Installment Sale and Security Agreements with Dewey Dennis Preston (Preston) for the finance of farm equipment. CNH filed two UCCs, and on each of the UCCs CNH listed Preston’s name as Preston D.Dennis (with a period & no space between D. and Dennis). According to the court opinion, CNH listed Preston in the surname box and D.Dennis in the first personal name box.

Let me back up a second & give you a bit of information on Preston’s name. His full legal name is Dewey Dennis Preston, but he goes by D. Dennis Preston (a period after D and a space between D. & Dennis). Preston’s Kansas driver’s license lists his name as Preston D Dennis (no period after D and a space between D & Dennis).

Kansas UCC 9-503 specifically states the UCC sufficiently identifies the debtor if the name on the UCC is as it appears on the unexpired driver’s license: “if the debtor is an individual to whom this state has issued a driver’s license or identification card that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.”

CNH argued its security interest is valid, however, CNH did not list the debtor’s name on the Kansas UCC exactly as it appears on the individual’s unexpired driver’s license:

Court Findings

“…the Court finds that under Article 9 of the Kansas Uniform Commercial Code, which requires the use of Debtor’s name on financing statements as stated on his driver’s license, CNH’s security interest in untitled personal property is unperfected and therefor CNH’s claim is properly treated as unsecured in Debtor’s proposed plan.” Ouch!

The court furthered “Both of CNH’s financing statements state Debtor’s name as “Preston D.Dennis.” “Preston” is in the box for Surname, and “D.Dennis” is in the box for First Personal Name. The “Additional name(s)/initial(s)” box is blank. Because Debtor’s name stated on his driver’s license is “Preston D Dennis,” without a period and with a space, Article 9 of the Kansas Uniform Commercial Code regarding financing statements requires the conclusion that CNH’s financing statements were was “seriously misleading,” and not saved from that fate by the “safe harbor.” CNH’s financing statements are therefore ineffective.

Remember UCC 9-503(a)?

You must correctly identify and list the debtor’s name on the Financing Statement in compliance with UCC 9-503(a). Whether it is a registered entity or an individual, Article 9 says:

  • Registered Entity: list the name on the Financing Statement as it appears in the public organic record
  • Individual: Alternative A or Alternative B
    • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license.
    • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

It’s straightforward. If it is an individual, review their driver’s license and list their name on the Financing Statement exactly as it appears on the unexpired driver’s license.

Compliance is King with Kansas UCC

Use caution when identifying your customer on the UCC filing, whether it is an organization or an individual. If it’s an individual, carefully list their name exactly as it appears on their unexpired driver’s license.

Personal Guarantee Enhanced by UCC Filing

Posted on March 30, 2020 by - UCC Financing Statements

Did You Know a UCC Filing Enhances a Personal Guarantee?

A personal guarantee (PG) is an individual’s legal promise to repay credit issued to a business for which they serve as a representative. Then, in the event the business is unable to repay its debt, the individual is personally responsible to pay the debt.

A PG signifies that the lender (obligee) can lay claim to the guarantor’s assets in case of the borrower (obligor) default. It is equivalent to a signed, blank check without a date. The obligee is generally not required to seek payment from the obligor’s assets before going after guarantor’s assets. (see BusinessDictionary)

The lender’s actions are usually based on whose assets are easier to take control of and sell. Once signed, a PG can only be cancelled by the obligee.

Personal Guarantees are Effective

PGs are an effective and popular credit tool; however, there are some things to take into consideration.

  • A PG is just that — a guarantee by that person. It gives the creditor a chance to attach to the assets of the individual. If the personal guarantee has been signed individually, but the assets are in the names of both spouses of a married couple, the PG could be limited. Additionally, most states have homestead protection laws which protect homeowners from losing their homes to creditors. In this case, the debtor’s largest asset (their home) may be excluded from the personal guarantee.
  • In order to enact its rights to a personal guarantee, the creditor must sue and get a judgement against the PG. This can be costly and time consuming.
  • You don’t know how many personal guarantees the debtor has signed. The debtor may give you a personal guarantee, but they may have given the same guarantee to several other creditors.

UCCs Enhance Personal Guarantees

A properly perfected security interest can reduce risks associated with personal guarantees.

  • A UCC filing gives you an interest against the assets of the business — not just the individual. If the business is a registered entity or partnership, chances are the assets of the business are much more plentiful than the assets of the individual.
  • UCC filings create a system that establishes the priority of creditor claims, without going to court and suing each other. This minimizes the time and costs involved.
  • With UCC filings, you know who has a stake the debtor’s assets (collateral), because UCCs are registered in the public record.

Remember, a personal guarantee is an individual’s promise to repay credit issued to a business for which they serve as a representative. This means, the personal guarantee attaches to the assets of the individual. Whereas, a properly perfected security interest grants you an interest in the assets of the business. (The assets of the business are most likely greater than the assets of the individual.)

Don’t assume a personal guarantee is enough; file a UCC!

Your Credit Management Arsenal & COVID-19

Posted on March 19, 2020 by - Credit Risk Management, In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

COVID-19 and Your Credit Management Arsenal

If you extend credit, you are vulnerable to risk — whether furnishing to a single construction project or selling on revolving terms. This vulnerability grows exponentially in the midst of tragic events, such as the COVID-19 pandemic. Although economic loss is inevitable, you have the power to mitigate the loss through UCC filings, mechanic’s liens, and a fully loaded credit management arsenal.

Credit Management Requires Innovation

Credit Management isn’t simply about reducing risk. It’s reducing risk while promoting long term growth and improving sales. Now more than ever, credit requires innovation. Fortunately, in the era of Big Data, innovation is at your fingertips.

It is imperative to examine and fully understand the data and the potential implications. Listen to industry experts and analysts; review credit indexes, credit reports and bankruptcy reports, as well as lien filings & foreclosures. It’s vital to analyze the collective opinions and statistics to effectively create a comprehensive credit picture.

Technology and Data Sources that Assist Credit Professionals

Technology has proven to be an immense asset; mining the right data is a challenge faced by many. Credit reports, state and county recording offices, industry trade/credit groups and message boards, and even online reviews provide pertinent information. Keep these in your credit management arsenal —

Credit Reports

Credit bureaus have compiled information relevant to a business’s credit, analyzed the data, and provided it for consumption as a trustworthy recommendation. Credit professionals use credit reports to review an entity’s viability.

Credit reports are likely to include general financials (payment trends, debt to income, outstanding collections/judgments, UCC filings, DBT), though some comprehensive reports provide additional bits of relevant data, such as the entity’s status with the Secretary of State.

Compliance with Secretary of State

A business should be in good standing with the Secretary of State. A lapse in compliance with the Secretary of State can be an early warning sign of an entity’s financial distress, though this information is frequently overlooked. If a corporate search reveals a status of anything other than “active,” it is worth further exploration.

A company’s corporate status could change for a multitude of reasons, including a change in the company name, the dissolution of the company or neglecting to file an annual report or changing the formation type.

Our research discovered, in an average year, 23% of businesses experience a change in their corporate status with the Secretary of State. Of these changes, over 10% of businesses dissolve or close their doors. As we navigate the current crisis, these numbers are likely to increase exponentially.

Industry Trade & Credit Groups

In many instances, your peers could be one of your greatest resources. Although credit-granting processes and credit management have evolved, common issues remain: debtor isn’t paying timely, debtor is providing a “pay-when-paid” excuse, debtor has little credit history, etc. These aren’t new issues for credit professionals and your peers have encountered them time & time again. Take advantage of the experiences of others – of course, please do so at a safe distance! (Too soon?)

Mechanic’s Lien Activity

A review of mechanic’s lien filings may uncover, among other valuable information, significant financial distress. If a business has been party to several mechanic’s lien filings, red flags fly, as this party has been unpaid. Unless they have an abundance of working capital, several filings should raise concern.

Accounts Receivable

Don’t overlook the valuable information within your own accounts receivable (AR) payment trends and behaviors provide additional insights. The trend of accounts 30 days beyond terms (or 60, 90, 120), is an early warning sign of stifled cash flow.

When negative trends appear in AR, it provides an early opportunity to evaluate the collectability of past due accounts. If collection efforts are necessary, creditors should leverage the security of mechanic’s liens and UCC filings.

Keep in mind, trends from AR do not have to be negative to provide valuable information. Data is what you make of it. Positive trends in AR (i.e. fewer clients 30+ DBT) likely correlate to a company’s growth and/or improved working capital.

Competitive Intel

Credit reports and mechanic’s lien activity provide obvious benefits for analyzing credit, but they can also provide valuable competitive intelligence. Know what your competitors are doing. Are they filing UCCs? How much credit are they extending via open and/or revolving lines of credit? Are they filing mechanic’s liens? Are they entangled in mechanic’s liens, indicating money issues?

Bankruptcy Information

In the fall of 2018, retail and restaurants landed at the top of Standard & Poor’s Distress Ratio list: “As of Nov. 15, the retail and restaurants sector has the highest distress ratio at 19.5%, followed by telecommunications at 15.6%.”

Several major restaurant chains and retailers have filed for bankruptcy in an economic boom; imagine what will happen over the next 6 months – 1 year.  Some experts believe the restaurant industry is an early predictor of the overall economy — if restaurants are down, other facets of the economy will soon follow.

Of course, restaurants aren’t the only entities filing for bankruptcy. The healthcare industry is facing the enormous task of caring for those who have fallen/will fall ill. As if caring for the ill wasn’t enough, hospitals were already struggling financially.  There have been nearly 5,000 healthcare industry bankruptcies in the last 5 years. Unsecured creditors have been receiving, if anything, pennies on the dollar – pennies!

Regardless of the economic state of the country, understand and remember that bankruptcy will always be a risk. Do not become complacent. Remain vigilant and take precautions to ensure you are a secured creditor.

Credit Management Arsenal

Credit Management requires an array of accessible resources and considerations. Credit reports should provide a company’s net worth, payment history, likelihood of default, and credit limit recommendations, even UCC filings and collection placements. Periodically review the company’s status with the Secretary of State. Monitor and review mechanic’s lien activity, whether related to your customer, project or competitors. File UCCs on all customers and monitor for bankruptcies.

We are here to help you establish and maintain a successful credit risk mitigation program. I feel like an infomercial when I say this, but don’t wait – you need to get these processes in place now.

We are in this together!

UCC Collateral Description: What You Should Include

Posted on March 16, 2020 by - UCC Financing Statements

What Should You Include in Your UCC Collateral Description?

A perfected security interest is nothing without a collateral description. A properly perfected security interest requires compliance with Article 9, which includes a Security Agreement and the subsequent filing of the UCC-1 Financing Statement with collateral descriptions in both. In today’s post, we’ll review what to include in a UCC collateral description.

What Is a Sufficient Collateral Description According to Article 9?

First, what is collateral? Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

Then, what makes a collateral description sufficient? Article 9-108 provides the following:

(a) Except as otherwise provided… a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

(b) [Examples of reasonable identification.]

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

Watch Out for these Common Collateral Mistakes

Collateral descriptions will vary based on the collateral used to secure the credit; however, there are key pieces of information that are sometimes overlooked or inadvertently omitted.

  • Don’t Forget the After-Acquired Collateral: phrases like “now owned or hereafter acquired” or “now existing and hereafter arising” are technically not required under Article 9, but experts agree it is smart to include the phrasing so as to not limit recovery.
  • Don’t Add Limiting Language: be careful when identifying collateral located at a specific address or acquired within a certain time frame. Adding limits to the language could do more harm than good. (Check out this post for an example of limitation by address.)
  • Say What You Mean, Mean What You Say: be aware of what may or may not be included in “all compassing” phrases such as “all proceeds thereof.” If you expect the security interest to include all accounts/accounts receivable, it’s best to include those terms in the collateral description.

Remember 1st Source Bank?

Remember the 1st Source Bank case? In this case, the key issue was whether the language describing specific heavy machinery and “all proceeds thereof” included the debtor’s accounts and accounts receivable.

1st Source Bank arranged for the lease or sale of certain equipment to K & K Trucking and J.E.A. Leasing (Debtors), which was subject to a security interest that was described in the UCC filing according to the above language. The terms “accounts” and “accounts receivable” were not included in the description of the collateral.

Subsequent to the 1st Source Bank UCC filing, the Debtors entered financing contracts with several other banks. These other banks, in turn, filed UCCs which specifically identified “all accounts receivable now outstanding or hereafter arising” as part of the collateral description.  When the debtor defaulted, these banks took control of the collateral, including the accounts receivable.  1st Source Bank objected based on its claimed priority security interest.

The issue before the court was whether the language referring to “all proceeds thereof” was sufficient to put future creditors on notice that 1st Source Bank held a security interest in “accounts” and “accounts receivable.”

The court determined “all proceeds thereof” did not include “accounts” and “accounts receivable.”

Why? Because “Although the statutory definition of the term ‘proceeds’ appears admittedly broad, accepting [1st Source Bank]’s interpretation of the statute would render the term ‘accounts’—a category defined separately in Chapter 9—meaningless. See Tenn. Code Ann. § 47-9-102(a)(2).”

Consequently, 1st Source Bank’s security interest was not perfected with respect to accounts and accounts receivable, providing the other banks a priority status even though their filings were recorded after 1st Source Bank.

Collateral is Key

Because the collateral that underlies a security interest is the key protection afforded to creditors in the case of debtor default or bankruptcy, collateral must be properly described in UCC filings. The description of collateral needs to put prospective creditors on notice so that prospective creditors have reason to inquire further about existing security interests. Be careful, there’s a fine line between being too specific and too generic.

Commercial Credit Management Tips for UCCs

Posted on January 27, 2020 by - Credit Risk Management, UCC Financing Statements

10 Tips for Commercial Credit Management of UCC Filings

It’s part two of our three-part series of Commercial Credit Management Tips from NCS. Previously we provided favorite tips for Collections, today let’s review UCCs.

Commercial Credit Management Tips for UCCs

Tip #1: Timely File Your UCCs

You should always file your UCC-1 before you ship goods to your customer. As soon as you have the signed Security Agreement, file your UCC to ensure you’re a secured creditor. To properly perfect your security interest, you must understand the different types of UCC filings and the respective filing deadlines. Failure to meet deadline requirements may jeopardize your position as a secured creditor.

  • PMSI in Equipment (US Filing)– the UCC-1 must be filed no later than 20 days from the date your customer receives the equipment.
  • PMSI in Equipment (Canadian filing)– the PPSA must be filed no later than 15 days from the date your customer receives the equipment.
  • The definition of “receipt” is hotly contested in courts; to be most conservative, NCS calculates based on the date you first shipped equipment to your customer.
  • PMSI in Inventory or Consignment– the UCC-1 must be filed, a reflective UCC search performed, and notification letters should be sent and received prior to shipping inventory to your customer. Shipping inventory before you’ve completed these steps may result in an unsecured status.
  • Blanket– the UCC-1 should be filed prior to shipping goods to your customer.

 Tip #2: The Proper Time to Terminate a UCC Filing

When should you terminate the original UCC Financing Statement? Section 9-513 of the Uniform Commercial Code states that a secured party must terminate a UCC filing within 20 days of a request from the debtor if any of the following exist:

  • There is no obligation secured by the collateral and no indication there will be a future obligation
  • The financing statement covered consigned goods that are no longer in the debtor’s possession
  • The debtor never authorized the filing of the original financing statement

Otherwise, the UCC filing will remain active until the 5-year lapse date. This can cause financial complications between the debtor and their bank. NCS Tip: Terminate your UCC filings in a timely manner.

Tip #3: Understand the Difference Between A Corporate Certificate and Articles of Incorporation

The UCC 2010 Amendment changes to Article 9 regarding the debtor name state that when filing a UCC on a registered organization, you must review the “public organic record” (i.e. Articles of Incorporation) to verify the entity legal name including any amendments and reinstatements.

The state’s public record (Corporate Certificate) is a representation of the public organic record that has been data entered. This is insufficient because there can be clerical errors in the name that could deem the UCC filing seriously misleading and may leave you unsecured.

Tip #4: Monitor for Name Changes

Are you aware that if your customer changes their name you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not amended, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Tip #5: Maintain Priority in Inventory

When continuing a Purchase Money Security Interest in inventory filing, be aware of the requirement to re-notify the previously secured creditors. Section 9-324 of the Uniform Commercial Code outlines the requirements to establish priority in inventory. It states that the secured party must send notification to the holders of any conflicting security interests, and that the holders of these conflicting security interests receive the notification within five years before the debtor receives possession of the inventory. This means in order to maintain priority upon continuation, all previously secured parties will again need to be notified. Failing to do so will jeopardize your priority position in your goods. NCS Tip: Make sure you are searching and notifying when you continue your PMSI UCC Filings

Tip #6: Protect Your Inventory with Warehouse Filings

Are you storing your inventory in a third-party warehouse? If so, you should file a UCC-1 Financing Statement to publicly announce your ownership. Under Article 7 of The Uniform Commercial Code, the warehouseman may have a lien against your inventory. If the warehouseman’s business were to fail, their bank may unknowingly liquidate your inventory. Filing a UCC-1 Financing Statement will let everyone know who the inventory belongs to and keep your interest safe.

Tip #7: When Selling Under Consignment, Review the Secured Transaction Provisions

If you are selling under consignment you may want to review the secured transaction provisions. Consignment falls under Revised Article 9. In order to have priority rights over a previous secured interest, the consignor must now comply with the same rules that apply to a Purchase Money Security Interest in inventory. Meaning, if you are selling under consignment, you must get a consignment agreement signed; file a financing statement; and search and notify all previously secured creditors. If you do not, you risk losing your inventory to previously secured creditors.

Tip #8: When should I file a Fixture Filing?

A fixture is defined as goods that have become so related to real property that an interest in them arises under real property law (Article 9-102[41]). A few examples are gas/fuel pumps, ovens, and external signs. If your UCC Security Agreement calls out “fixtures,” you should consider filing a UCC Fixture. The Fixture filing will be filed at the county level against the real estate and will appear on a title search. This will alert potential buyers/sellers that the debt needs to be paid before the title of the property can be transferred.

Tip #9: Conduct A Reflective Search After Every UCC Filing

Often, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will appear in a UCC-11 search? Each Secretary of State office has their own software to house UCC filings that sometimes can be unreliable or outdated. The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

Tip #10: UCC and Default

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest UCC, you need to determine whether you would like your equipment/inventory (aka goods) back.

  • If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets.
  • If you do want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace.

If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

The Retail Bankruptcy Apocalypse

Posted on November 15, 2019 by - In Other Commercial Credit News

Run! It’s the Retail Bankruptcy Apocalypse

“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?

Secured Transactions – Even on Consignment

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.

In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.

How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.

But Wait, There’s More!

In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy.  Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips. 

Up first? Recognize the warning signs of default or financial distress.

“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”

Next? Ensure you have established terms & conditions.

“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”

And? Consider withholding shipments until the account is current.

“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”

Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.

Then? Watch deliveries & mind the 20-day clock.

“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”

Lastly? Maintain communication.

“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”

  Questions? NCS can help!

Not a Secured Creditor? Aim To Be Critical Vendor

Posted on October 4, 2019 by - In Other Commercial Credit News

If You Aren’t a Secured Creditor, Maybe You Can Be a Critical Vendor

You want to be a secured creditor! This is our mantra, it’s what we do: Securing Your Tomorrow. We want your company to always be in the best possible position to get paid, but we know there may be times when you will opt out of securing your receivable. If your customer files for bankruptcy protection, and you are not a secured creditor, do you know which creditor class you fall into? I hear your eyes rolling… I mean, I hear you saying, “We’d be an unsecured creditor, Kristin.” But, did you know that might not be the case? You may be a critical vendor.

You Always Want to Be a Secured Creditor

Secured creditors are at the front of the payment line when a debtor files for bankruptcy protection. You always want to be a secured creditor. (Yes, I’m going to hammer that notion home!) So who gets paid after the secured creditors?

#1: secured creditors

#2: administrative expenses

#3: unsecured creditors

The classes of secured & unsecured creditors are self-explanatory; secured creditors have perfected a security interest, whereas unsecured creditors are creditors without a security interest. The second group of people — “administrative expenses” — can encompass many different creditors.

Jason B. Binford recently wrote an article on critical vendors in bankruptcy & he said “Creditors will jostle for position in an attempt to be included in claim classes that take priority over general unsecured claims.”

I now picture creditors as concert goers, jostling their way through a sea of people trying desperately to get to the stage. I think the only way I could be more entertained is if they were jousting creditors!

Who Are These Jostling Creditors?

According to Binford:  “A creditor who provides goods and services to a debtor following the bankruptcy filing is entitled to administrative expense claims that must be paid in full in order for debtor to confirm a plan of reorganization,” or “A creditor who provides goods delivered to the debtor within 20 days prior to the bankruptcy filing is entitled to an administrative expense claim for the value of such goods.” (Psst! These creditors that delivered goods within 20 days prior to the bankruptcy filing may try to rely on 503(b) 9 claims.)

Then There Are Creditors Who Aim to be a Critical Vendor

Oooohhhh, sounds… well, it sounds critical. For creditors that don’t qualify under the administrative claims class or as priority for providing goods within 20 days, being identified as a critical vendor may be the only way to avoid the pit of general unsecured creditors.

So, how can a creditor become a critical vendor? First the creditor needs to convince the debtor that it should be designated as a critical vendor. Once the debtor is convinced and the creditor has been added to the ‘elite list’ of critical vendors, the court must be convinced.

While each jurisdiction determines critical-ness differently, here are the common tests applied by the courts, according to Binford.

  • dealing with the creditor is virtually indispensable to the profitable operations of the debtor;
  • a failure to deal with the creditor risks probable harm or eliminates an economic advantage disproportional to the amount of the claim; and
  • there is no practical or legal alternative to payment of the claim.

Passing these common tests will likely earn you a spot as a critical vendor. But, being a critical vendor may not be all glitz and glamour.

“Designating a claim as critical will usually come with strings attached. As a condition to being paid, the creditor likely will be required to provide the debtor with reasonable credit terms for a particular period of time. Thus, debtors can use critical vendor motions as leverage to obtain post-bankruptcy credit terms from parties that otherwise would likely require the debtor to pay in advance. Critical vendors incur a relatively small amount of risk in providing credit on a go-forward basis to the debtor. If the debtor later falters in bankruptcy and is forced to liquidate, the creditor will have an administrative expense claim for such post-bankruptcy receivables. While administrative expense claims will not be paid in full if a debtor is ‘administratively insolvent,’ such a claim is greatly preferred to general unsecured status.”

Don’t Be a Threat – Actually, Just Don’t Be Unsecured

Binford warns creditors about threatening to stop supplying to the bankrupt debtor. These threats, such as “Pay this pre-bankruptcy-past-due-amount or I stop all shipments to you”, can be viewed as a violation of the automatic stay. Creditors vying for critical vendor status should probably hire an attorney to assist them to avoid any missteps. However, I stand by my opening statement: you should always be a secured creditor! Then, as a secured creditor, you won’t have to jostle or joust to win over the powers that be.