Blakeley & Blakeley LLP Fall 2006 THE TRADE www.bandblaw.com VENDOR QUARTERLY Developments in Commercial, Creditors’ Rights, E-Commerce, and Bankruptcy Law of Interest to the Credit and Financial Professional IMMUNIZING PAYMENTS should the vendor receive payment by RETURNED INVENTORY AS FROM PREFERENCE RISK: credit card during the preference period? A PREFERENCE CLAIM: THE CREDIT CARD DE- The bankruptcy court in In re Perry2 WHAT IS THE VALUE? FENSE? recently considered whether a vendor must disgorge payments as a preference, even Bradley Blakeley though the payment was made by credit [email protected] Scott Blakeley [email protected] card. The court dismissed the preference Preference claims are suit. While the Bankruptcy Reform Act one of the more fre- The credit executive is gives greater protection to vendors in chal- quently litigated issues well aware of the skill lenging a preference suit under the ordinary in bankruptcy, and the needed to collect on a course of business defense, the vendor still typical preference claim delinquent account, yet has several hurdles to overcome the prefer- is based on a debtor's maintain the trade credit ence challenge using the ordinary course of payment of antecedent debt. However, relationship, if manage- business defense. The goods news for sometimes a preference claim is based on ment is concerned about possibly losing the credit executive’s with the Perry ruling is the debtor's return of inventory to the credi- customer to a competitor. With new orders, that the vendor is not required to prove up tor in return for a reduction of the creditor's the credit executive’s job is to ensure that the common preference defenses, but dis- claim. The few reported decisions concern- the debtor pays close to the invoice due missed the case based on the trustee’s fail- ing return-of-inventory preference claims date. However, should the customer face a ure to prove up the preference elements. have addressed the determination of the cash crisis, they likely do not have suffi- The court’s ruling and its meaning to ven- value of the inventory returned by applying cient liquid assets to pay the vendor’s in- dors is considered. various methods. The most recent case voice. Given this, the credit executive may from the U.S. District Court for the Western look to alternative payment methods. The A. Accepting Payment By Credit Card District of Virginia in Active Wear Inc. v. credit executive, in implementing a strategy in B2B Transactions Parkdale Mills Inc. applies yet another to collect the delinquent account, may need method of valuation, limiting a chapter 11 to balance ways to minimize the risk of a Not so long ago, a credit executive debtor's recovery on a return-of-inventory bankruptcy preference suit (or strengthen accepting payment by credit card for a B2B preference claim to the amount the debtor defenses) should the customer later file transaction was an aberration. Not so to- would have realized from a liquidation sale bankruptcy within 90 days of receiving pay- day. Payment by credit cards involving B2B of the inventory. ment. Payment by credit card may be the transactions continues to increase, with over answer. But what of the preference risk, $100 billion in payments this year. Ven- The debtor, Active Wear Inc., turned dors, as sellers, accepting payment by credit yarn into cloth and purchased substantial CONTENTS card consider several advantages to pay- amounts of yarn from Parkdale Mills Inc. ment by check or other forms of payment, Immunizing Payments from Preference Risk 1 During its period of operation, the debtor such as: immediate payment and therefore purchased substantial quantities of yarn on Returned Inventory as a Preference Claim: What is improved cashflow, increased sales, facili- the Value? 1 open account from the creditor, Parkdale tates collections as there is no accounts re- Mills, Inc. When the debtor ceased opera- Court May Refuse Ordinary Course of Business 2 ceivable, reduced administrative costs, tions, it had unused yarn in its possession Defense Based on the Method Used in Applying minimize documents, improve financial Payment to Outstanding Invoice which it had purchased from the creditor, at planning and reporting and customer con- U.S. Automotive Industry: Credit Executives’ Latest 2 which time it owed on its account with the venience. creditor at least $2 million. Challenge Protect the Helping Hand: When Keeping the Debtor 3 B. The Preference Action and Property Afloat to Help Yourself, Do it Right When the debtor ceased operating, the of the Estate creditor sent a reclamation demand to the You’ve Been Selected as a Critical Vendor, Now 3 What? Negotiating Points debtor for recovery of yarn having the value Should the credit executive receive Bankruptcy Preference and State Mechanic’s Lien 4 payment by credit card and the customer Laws (Continued on page 13) (Continued on page 12) www.bandblaw.com Fall 2006 Blakeley & Blakeley LLP www.bandblaw.com Page 2 COURT MAY REFUSE ORDI- Guest Column NARY COURSE OF BUSI- FROM THE PUBLISHER : U.S. AUTOMOTIVE INDUS- TRY: CREDIT EXECUTIVES’ NESS DEFENSE BASED ON The Trade Vendor Quarterly is published THE METHOD USED IN AP- by the law firm of Blakeley & Blakeley LATEST CHALLENGE PLYING PAYMENT TO OUT- LLP and is distributed as a service to cli- ents and other parties interested in credi- Dorman Wood, CEW, CCE STANDING INVOICE tor issues. This information is not in- [email protected] tended to constitute legal advice, nor a Shirley Chen substitute for legal advice. At one time or an- [email protected] other, most everyone has Blakeley & Blakeley LLP cannot be held seen the video of a long A primary policy under- responsible for the accuracy of informa- serpentine chain of falling lying section 547(c)(2) tion contained in articles written by guest dominos. With this image (C) of the Bankruptcy contributors. Readers’ comments and in mind, picture the falling Code is to prevent par- questions are welcome and should be ad- dominos labeled with the ties from creating unique dressed to: names of the companies payment terms that within the U. S. automotive would allow the debtor to manipulate the Scott Blakeley industry who have filed bankruptcy within the timing of the payments so that it appears Blakeley & Blakeley LLP, past year: Tower Automotive, Inc. (2/05); that those payments are consistent with Wells Fargo Tower, Meridian Automotive Systems Composites debtor's overall payment history. In In re 2030 Main Street, Suite 210, Operations, Inc. (4/05); Collins & Aikman Bridge Information Systems, 331 B.R. 774, Irvine, CA 92614. Corp. (5/05); Delphi Corp. (10/05); Dana the court concluded that the supplier failed Corp. (3/06), and most recently, Dura Aut o- to establish its practice of allowing the Telephone: 949-260-0611 motive Systems, Inc. (10/06). debtor to direct which payments should Facsimile: 949-260-0613 apply to which invoices was objectively How many more “automotive industry” ordinary within the computer resale indus- dominos will fall is subject to analysis and try. debtor made each of the payment during the speculation by industry experts. ninety day preference period, and the debtor In Bridge, the plan administrator for made each of the payments to the supplier. “The shake-out of General Motors and the debtor filed an adversary complaint Ford Motor during 2005 has caused the most against the supplier seeking to recover pay- The court stated that the plan adminis- violent and wide-spread dismantling of the U. ments that the debtor made to the supplier trator must also show that the debtor made S. auto parts supplier sector in the more than as preferential transfers. The supplier each of the payments on account of an ante- century-old history of the automobile. The claimed that the plan administrator may not cedent debt as required by 11 U.S.C. § 547 suppliers sector represents the ‘undercarriage’ avoid the payments under the ordinary (b)(2). The payment summary provided by of the auto industry: It produces the brakes, course of business defense. the supplier's general manger indicated that electrical wiring, shocks/struts, seats and the debtor remitted payment to the supplier other vital components. The debtor and the supplier entered after the thirty day due date for the vast into an agreement where the supplier agreed majority of invoices in both the pre- The automotive suppliers’ collapse re- to resell computer components parts and preference and preference period. How- minds us that the auto sector crisis is not systems to the debtor. The terms of the ever, the debtor also made some of the pay- months away, but upon us.” agreement required the debtor to remit pay- ments before the thirty day due date. ment on each invoice within thirty days of “During recent years, the Big Three U. its receipt of the invoice. The agreement The court reasoned that a debt is in- S. automakers Ford, GM and DaimlerChrys- also mandated that the debtor remit pay- curred on the date upon which the debtor ler have been under tremendous pressure to ment directly to supplier’s bank. The first becomes legally obligated to pay it. A reduce costs. Viewed by some within the agreement also allowed the debtor to match debtor incurred a debt on an obligation once industry as relentlessness, their cost cutting each payment with any outstanding invoice. the creditor would have a claim against the efforts included plant closures, worker lay- debtor’s estate if the debtor fails to pay for offs, and demands on suppliers to reduce During the ninety day preference pe- the goods or services provided. Because prices. riod the debtor made eight payments to the the debtor’s obligation to pay the creditor supplier totaling $2,155,105.80.