Proactively Protecting Your Company’s Accounts’ Receivable Before Bankruptcy Hits

Presented by BARR Credit Services with Wanda Borges, Esq. – Borges & Associates, LLC

About the Webinar

As the world begins to recover from the COVID-19 pandemic the tsunami of bankruptcy filings is not at an end. It is more important than ever for credit executives to be proactive in protecting their company’s accounts receivable even before they become due.

As companies have reopened their businesses, trade credit grantors are being asked to extend credit, sometimes with larger dollar exposures. Utilizing the tools available to you can safeguard your company from a bad debt exposure in the future even if your customer files for chapter 11 protection.

Credit grantors will also want to insulate themselves from a potential preference attack in a future Chapter 11 proceeding. This program will discuss how to determine which tool is the best option for your company and how to properly document that choice once you have decided.

About the Presenter:  Wanda Borges

Wanda Borges, Esq is the principal member of Borges & Associates, LLC, a law firm based in Syosset, New York. For more than forty years, Ms. Borges has concentrated her practice on commercial litigation and creditors’ rights in bankruptcy matters, representing corporate clients and creditors’ committees throughout the United States in Chapter 11 proceedings, out of court settlements, commercial transactions and preference litigation.

She is a member and Past President of the Commercial Law League of America and has been an Attorney Member of its National Board of Governors, a Chair of the Bankruptcy Section and Creditors’ Rights Section. She is the President of the Commercial Law League Fund for Public Education. She is a member of several bar associations, including the American Bar Association and the American Bankruptcy Institute. Ms. Borges serves on the Board of Directors of the International Association of Commercial Collectors, of which her firm is an associate member.

She is an internationally recognized lecturer and author on various legal topics including Bankruptcy Issues such as 503(b)(9) claims and preferences, the Uniform Commercial Code, ECOA, FCRA, antitrust law, and current legal issues such as Credit Card Surcharge issues, Social Media, Cybersecurity and Ethics for the Trade Credit Grantor and current proposed legislation that may impact trade credit grantors.

Webinar Transcript

Tom (00:00:02):
Welcome everyone to our webinar proactively protecting your accounts receivable with us here today, we have Wanda Borges. She’s a principal member of Borges and associates, a law firm based in Syosset New York for more than 40 years. Ms. Borges has concentrated her practice on commercial litigation and creditors rights and bankruptcy matters. She’s represented corporate clients and creditor committees throughout the United States in chapter 11 proceedings out of course, settlements commercial transactions and preference litigation. Wanda, welcome, and thank you.

Wanda (00:00:41):
Thank you, Tom. Good afternoon. Or good morning to everyone. There were so many bankruptcies taking place today that this webinar is intended to give you some means to protect your accounts receivable long before you have to worry about whether, or if you’re a customer will file a bankruptcy. So I’m going to focus upon in particular five areas. As soon as I can get my screen to behave. There you go. Five areas that are some of them very well known to you, and some of them a little bit unusual. As to what can you do in your office with your customer to protect your accounts receivable long before it ever becomes an accounts receivable. So the first thing we will talk about are secure transactions, which are governed by article nine of the uniform commercial code. Why would you bother with a secure transaction?

Wanda (00:01:42):
This can be a very useful tool for the credit executive. Many of you don’t worry about it and don’t bother with it because it’s just annoying to have to take all the necessary steps. So if you’re dealing with a customer on a purchase order by purchase order basis, and you’re dealing with purchases that are a thousand dollars, $5,000, even perhaps $10,000, you may not want to take a secure position. It may not be appropriate for you. And also if you are in the construction industry and you have mechanics liens rights, you may not want to be bothered with a secure transaction because nine times out of 10, your mechanic lien rights will be even better protection for you to make sure you collect from your customer. However, if you are going to do a secure transaction, you must make sure that you adhere to the law to the letter of the law, but why would you want a secure transaction?

Wanda (00:02:51):
First of all, it could be a new customer and that new customer comes along. Seems fine. They’ve been buying from other of your colleagues and suddenly they want to place a $50,000 order with you. Do you scrunch up your nose and say, I love the idea that it’s a $50,000 order, but how do I know these guys? And do I trust them? And why are they suddenly interested in buying from me or is my salesperson that good? Or is there a reason why my colleague isn’t selling to them anymore? So it may be a new customer. It may be that you are launching a new product and therefore you’re saying, Hey, anybody wants to buy this new product it’s available now. And they may be big price tickets items. So you want your customer to give you some security for you extending that amount of credit.

Wanda (00:03:53):
It could be also that you’ve been selling to your customer for several years. And suddenly you find you’re getting a little slow. Let me run a credit check. You run a credit check. You go to your group credit group meeting, and you say, Hmm, I think they’re starting to tread on some dangerous grounds in some dangerous mortar. So while I don’t want to lose the customer and I want to continue to sell to them, their financial condition, it’s not what I wanted to be. So maybe I’ll sell to them on a security interest basis, or it could be that they used to sell, buy from you $10,000 a week. Suddenly it’s $20,000 a week. Suddenly it’s $40,000 a week. That’s a hefty monthly basis. The volume of sales has increased. You may want and security interest to protect that vitamin sales. So how do you get started?

Wanda (00:04:55):
Well, those of you that have heard me lecture before know that my Cardinal rule of credit is no by customer. In order to have a proper security agreement, you must absolutely have the correct legal structure of your customer. It is not uncommon today to find businesses. JC penny probably was one of the best examples. JC penny, who recently came out of its chapter 11 had went to eight affiliated businesses. And most of them were something like JC penny stores, LLC, JC penny Corp, JC penny of Alabama, LLC, Jay and 28 different names. Most of which started either with JC, penny or JCP. So you need to know if you’re going to take the security agreement that you’re taking security agreement against the correct proper legal entity. So once we’ve done that and weighing check, that is merely by going on the secretary of state website with the customer that you want to set to whom you want to sell.

Wanda (00:06:14):
And you can find that on the secretary of state website where the customer is physically located, because if they’re incorporated in Delaware, but they’re physically doing business in Arkansas, they still have to register with Arkansas as a foreign corporation. So now you know their name and now you want to run a UCC search. Well, exactly the opposite of what I just said, where you will run a secretary of state search to determine their legal structure, where they are physically located. And in this case, let’s say, Arkansas, you run the UCC search where they are actually incorporated or organized. So the Arkansas corporation, secretary of state may show you foreign corporation, D E which of course is Delaware to run your UCC search. You have to go to Delaware and run the UCC search in Delaware. Now I question you, by the way, most States running a UCC search is either free.

Wanda (00:07:29):
You can either do it instantaneously on your computer, or it costs 10, 15 or $20 Delaware. Isn’t that unique animal. It costs a lot of money and you have to hire a specific company who is authorized to hold UCC searches in Delaware. Next you want to review your customer’s financials to determine how much credit you’re willing to expend. Then you already know that. And then to determine what, in fact you are going to take as collateral upon running the UCC search. If you find that there are eight or nine companies already out there with blanket liens against your customer, uh, you may hesitate selling them on any basis, even on a secured basis. But when you run that UCC search and you find that maybe eight or nine other companies have security agreements, well, you need to look at those security agreements because it could be that they have a security agreement on their trucks.

Wanda (00:08:41):
They may have security agreements on their computer equipment, watch out for the ones that have security agreements on everything, which we call blanket liens. And it sounds something like all furniture, fixtures, equipment stock, and trade accounts, receivable inventory work in process. And it could be very, very long now owner here after acquired. Well, only once you have run that UCC search and looked at the financials. Can you determine what collateral do you want to take? Do you want to take a blanket theme? What do you want to take a lien only in those goods, which you are selling. And we’ll talk about those differences. Article nine of the uniform commercial code changed substantially in 2001. And again, in 2020, all 50 States, plus the district of Columbia and Puerto Rico have adopted the article nine with the changes. It is important for you to always keep up to any revisions that article nine may put into effect. And that’s why you rely on webinars such as this for people such as may. And you email me and say, I heard such and such, is it true? What are the changes that went into effect? Is we no longer need paper? You can have everything authenticated well by authenticate either. It means to sign, which means if somebody is still using paper or it means to execute or adoptive symbol encryption or similar process to make sure we know that the documentation is in fact authorized and proper without having to have that physical signature.

Wanda (00:10:40):
The name of the debtor is crucial. You do not need a trade name. And if you only use a trade name, it’s not good. It is insufficient. The debtor is an individual wanted gorgeous. So if I were a Wanda Borgias, DBA, forges law firm, I would be an individual sole proprietor. If that individual is a sole proprietor, if that debtor is a sole proprietor, then you’re going to look to what do I do with, and to that individual, the individual might also be a personal guarantor who has guaranteed the debt of a corporate entity or an LLC. Well, if it’s an individual, you must use their correct legal name. Wanda Borgias, not Wendy Borgias, not windy Borgias, not W Borgins, but Wanda Borgias,

Wanda (00:11:51):
That individual has a driver’s license, the name on the most recent driver’s license should be used. The birth certificate name should only be used if that is what the debtor currently uses as its proof of identity, but they really like driver’s licenses. And I tell you, they like driver’s licenses even more than they like passports. And who’s they the secretary of state with whom you are going to perfect your security interest. So nine 1102 68, makes sure that the name is correct for purposes of article nine, nine, nine 51 provide for surname first name and any additional name or initial. Now through most of my younger years, frankly, until I came out of college, I always went with my middle initial Wanda T Borgias. I don’t use that middle initial at all. And to put that middle initial in, if you were going against me would be incorrect.

Wanda (00:12:59):
So the name has to be taken from what is called a public organic record. This public organic record, without reading the screen to you is basically that record, which is with the state or the spoil United States, which shows who I am. And that’s why they like driver’s licenses. And for those people who do not drive, there are official identification cards that are issued by each state and w organic record of a business is where was that business incorporated or organized. And is that secretary of state’s records that would become the organic, the public organic record.

Wanda (00:13:47):
Where is your customer located? An individual is located at its principal place of business. Now, again, I’ll use myself as an example. I want a board live in Connecticut, want a Borgias Fort. His law firm is in New York. So where do you file a financing statement with an individual and my principal place of residence at an organization with only one place of business at the place of business. So what do you do in that case with individual lives in Connecticut businesses in New York, I recommend you file in both places now in an organization with multiple places that business is located at is chief executive office, a registered organization corporation, an LLC limited liability company, limited liability partnership is located in the state of registration. So my example before of Arkansas and Delaware, it would be, you’re looking at the location of Delaware. Why is location important?

Wanda (00:15:02):
Because the location is where you file your UCC financing statement and the registered organization, the LLC, the LLP, the corporation must be filed at the location where it is actually registered. The whole idea of the changes to article nine in 2001. And then again, in 2010, were that everything would be electronic. So generally the secretary of state is the filing officer for using seeds, but there may be a designated office as in Delaware, where there is a designated office with filings and no Louisiana is still Louisiana. You must still file in the parishes within Louisiana, not strictly with the secretary of state.

Wanda (00:16:06):
So here are some essential components that you need in your security agreement. Bear in mind, you’ve heard me talk about a financing statement. You’ve heard me talk about a security agreement. The security agreement is the contract by which your customer grant to you, a security interest in its collateral. The financing statement is the document you file with the secretary of state that perfects your security interest, social security agreement is a contract security interest is what you get from the contract financing statement is what you file to perfect your secure interest. So these are very important. What indebtedness are you protecting? It’s going to start out with these words to protect and to secure the indebtedness of $50,000 and any other future indebtedness, which may here after come due. And then it talks about the collateral, all furniture, fixtures, equipment, stock, and trade, et cetera, et cetera, et cetera.

Wanda (00:17:27):
You may even, but I really don’t like this today. You aren’t even allowed to say all assets of the debtor. I find that’s confusing when there’s a battle between secured creditor as to, well, you really mean all assets or did you only mean all assets in that location as opposed to all assets located elsewhere. So I stray away from words, full assets, but it’s not improper. The blanket coverage will cover everything. Specific coverage will be a purchase money, security interest. And we’ll talk more about that. Always use the words after your collateral description now own or here after acquired, because you don’t just want the collateral that is there today, but you want all the collateral that may come into their businesses in the future and products and proceeds is always something you want to protect. You may expel rolls of steel and that steel may become window frames may become parts of a car may become widgets.

Wanda (00:18:50):
So you always want the product of what you are selling as well. You always want to make sure you have warranties and covenants and they can be a paragraph or they can be three pages. Typical are, make sure there’s insurance make sure that your customer protect your assets from fire theft, vandalism, terrorism in today’s world. Make sure you have deep wealth divisions. What is a depo? Well, clearly you didn’t pay me on time. That’s the default, but there may be other people such as you allow somebody else to take a superior security interest on like allowance. And then you want whatever general provisions, which could be all of the terms and conditions of your sale, right in your security agreement. And what are your remedies in the event, you have a customer that doesn’t pay you. So these next several slides are for your use and information when you go back to your office, but I am not going to read the slides to you. Each one matches the bullet points on my prior slide, customer warranty, warranties, and covenants, and gives you some ideas of what types of warranties and covenants you may have. And continuing on to this slide, you’ll see, there’s a lot of information as to what you can have your customer give you as it’s Morant and it’s

Wanda (00:20:37):
Deep oil provisions, failure to pay, absolutely failing to comply with any of the warranties and covenants after being given notice and giving an opportunity to cure false or misleading written representation. Yeah, they gave you a financial statement showing their net worth was a million dollars and their net worth is actually a hundred thousand dollars. Big difference

Wanda (00:21:05):
Your collateral to a judgment or a lien of more than $25,000 without getting it relinquished or bonded within 60 days. And this commencement of an insolvency proceeding, I will tell you, this is a good people provision, but while every one of you tends to use it in your security agreements is not much you can do about it because of the bankruptcy rules or any material reduction in the value of the collateral or any default on the obligations. And I’ve given you notice and you haven’t had an opportunity or you haven’t taken that opportunity to fix it.

Wanda (00:21:47):
These are some of the general your visions, what state is going to govern. So the uniform commercial code, where you have an Arkansas and a Delaware, you might want to choose Arkansas, the state where the debtor is doing business and has all of its collateral. Even though the filing will take place in Delaware requiring if there is a deep hole for the data to pull all your collateral together and make it available to you. And to let you sell the collateral at a reasonable time, unless of course we’re talking perishable goods, and these are just some more general provisions specifically, that even if you consent to an extension of time or payment, it doesn’t change anything else. And that all the items of the collateral will remain. Let’s say in Arkansas, except being sold in the ordinary course of business and that even if all the collateral is gone, your customer is still going to be remaining responsible for any deficiency after your collateral has gone. This one is important for the last bullet point, making sure that you are authorized to file the financing statement as executed by the debtor and remember authentication. They don’t have to sign it anymore, that they have to give you the authority basically, to type in their name on the financing statement.

Wanda (00:23:30):
That’s a lot of the basics to adapt to a security agreement.

Wanda (00:23:37):
We talked generally about a blanket security agreement. Now we’ll talk specifically about a money security interest. He differs from a blanket lien in that it covers only goods with you sell or finance and automatically includes products and proceeds by taking a PMSI. That is a security agreement in your goods. You have the ability to become number one. That means you leapfrog over it, all the banks, any other vendors, and you become number one in order to do this, there are certain very strict requirements. Number one, you must notify all prior secured parties. So how do you do that? The UCC search is mandatory because you need to know who else is out there. And then you send a notice by mail, which I do not recommend by facsimile transmission via electronic transmission. Better. I like to send notice by electronic transmission to the best web, uh, email address I can find. And I overnight courier because you’re not protecting $5,000 in goods. You’re probably protecting $50,000 or more in goods. Spend the $10 and send it by overnight courier as well. Here is that whole notification for a purchase money security interest. Sarah is please take notice that stoke feena LLC is about to enter into a purchase money, security interest with image, print company, covering all goods, all Sophina sold and delivered to customer, including all proceeds and products. They’re all.

Wanda (00:25:44):
They don’t have to respond impact. You hope they don’t respond because if they respond to that, probably telling you, you, we’re not going to stand by and let you become number one. So how do you doing? You run your UCC search. You notify everybody, and then you prepare your paperwork and then you file your UCC financing statement. Here is a good checklist for you to use. When you get back to your offices, or many of you are watching this from your offices or home office, determine what kind of security and pitch you want determine whether you have to give notification, make sure you have the correct name for your customer, prepare your security agreement. Know what collateral you want, make sure the document is signed or authenticated. And then you file your UCC financing statement.

Wanda (00:26:44):
Sometimes you have multiple parties. So maybe your customer in Arkansas image print that is actually incorporated in Delaware, but maybe it’s really owned by a image print holding company. So if you have multiple parties and you have cross corporate guarantees, you’re going to make sure that each of the cross corporate guarantors give you a security agreement as well. What do you do when a prior secure party says, no? Well, you have to think very carefully. I have, I had a case. We were about to enter into a PMSI on behalf of the client. We send out notification to the bank. The bank came back and said, we will not permit a PMSI to be taken, granting a PMSI by our customer is an event of default under our loan agreement and security agreement. If you are granted a PMSI and file and secure and file that properly, we will declare a default with your customer.

Wanda (00:28:03):
And frankly, they were on shaky ground to begin with. I said, well, they need, and what it was was x-ray film for a medical office. They need this medical film. They want to buy a hundred thousand dollars worth. The only way my client’s going to sell is with a security agreement and what the bank officer said to me, lawyers said to me was, well, then tell your clients not to waste their paper. Um, not to bother with selling them. If they won’t sell on an open account, don’t bother selling them. Fortunately, my client heeded that advice, they did not sell them for other reasons. The bank called the Depot within a couple of weeks and the business close is yours. So sometimes when a prior security party says, no, we need to listen very carefully.

Wanda (00:29:00):
I’m going to take a look at the Q and a, and if it’s anything relevant to secure it, I answered that one. What is a UCC search? I what’s distinctly you go onto the secretary of state website. You put in the correct name of your debtor, and you will see a listing of everyone that has a secured interest against that debtor. It could be one, it could be 10, it could be 20. And when you see that UCC search number one for a general security interest, it gives you an idea of what kind of collateral you are willing to take. And number two, if you’re doing a PMSI, then you must notify all of those people who had prior UC fees filed against your debtor. What if a customer doesn’t want to provide their financials? You’ve had customers state that they are private company, and won’t give out that information. Well, if they are a private company and won’t give out that information, then your answer very simply is, if I can’t get your financials, then how do I know to give you credit? So your answer, frankly, is if I don’t know what you are worth, I am not willing to sell to you on a credit. I’m not going to bother with the security interest you want to buy for me, cash in advance or Cod,

Wanda (00:30:33):
Hang on two consignments. A consignment is different than a secured transaction. And yet what we find, or what we found is with the 2001 revisions of article nine, consignments are now treated both under article two of the uniform commercial code, which is the sales provisions and under article nine, which is the security provisions, a consignment, our goods would you sell to your customer? And your customer is known to be engaged with selling goods of others. So for example, sports authority, before it closed its doors, Nike was selling to it. High-tech was selling to it. Champion was selling to it. But sports authority was known to be selling Nike and champion. And high-tech known to be selling goods of others. The aggregate value of the goods were a thousand dollars or more. And that means the goods that Nike or high-tech or champion was selling to sports authority.

Wanda (00:31:52):
The goods are not consumer goods when sold by you to the merchant. Although those goods will later on become consumer goods when sold by ports authority, to me, the consumer, the end user, but a confinement does not create a security interest. Article two talks about a retention or reservation by you have the title and article two, three 26 talks about sale or return. In other words, we’ll consign all of our tennis rackets to you, but if you don’t get to sell them, you get to give some of them back and we’ll give you a credit for them. So consignments, like putting them on your shelves. I hope you sell them and pay me. But if you don’t sell them, you can give them back. But in the meantime, why are they sitting on your shelves? And before you sell them to the end user, I still have title to all of those goods.

Wanda (00:32:58):
So you want to run that UCC search to determine if there are any liens against goods that might be sold on different Simons. So for example, if you find that bank of America has a blanket lien on all inventory and you are selling tennis rackets or bicycles that are going to become part of that inventory, well, you don’t want to sell without making sure that your prior secured creditors know that you’re going to be selling on a consigned basis. So you notify prior secure party of the intended consignment and you make it very clear your yours, and you’ll see the language on another slide. We are about to enter into a consignment agreement with sports authority with warehouse, but these are consigned goods. Title to these goods does not pass on until those goods are sold to third parties.

Wanda (00:34:26):
You will then enter into a proper consignment agreement with your customer and file a UCC financing statement. Yes, the same document you file, check your security interests to protect the consignment interests and make sure before I leave that page, make sure all the security interests, it says very bold consignment agreement in place so that there is no mistaking that you are a consignment credit or, and not a secured creditor or a general unsecured creditor. And here is your sample notification verbiage, which I’ve just stated very similar you’ll notice, except for the very bottom. These goods remain the property of the credit creditor and title does not pass until they have been purchased by a third party, consignments work wonderfully while the consigned goods are in the possession of your customer. Once those goods are sold to the consumer, there a lag period. If everything is working the way it should, that those rates, those bicycles, those clothing, whatever you’re selling will be sold to the consumer, your customer will then notify you on a weekly basis. We sold $12,000 worth of your inventory, and we will remit same to you next week or two weeks, whatever your dating might be.

Wanda (00:36:08):
So once those goods are out, they’re not in the debtor’s possession there. So therefore title passes. And if the debtor hasn’t paid you, there is the risk of that $12,000 not being paid on time or at all. So oftentimes you will take a consignment agreement and you will also marry that to a security agreement so that you have the best of both worlds. Now what happened in the sports authority case? And the reason I use that as an example is it wasn’t disaster

Wanda (00:36:50):
Notification and filing is not perfected a prior secured party supersedes the constant norm. So what happened in sports authority was that the consignment vendors immediately came into the bankruptcy court and said, we weren’t fortunate to continue selling our goods. And we want our consignment agreements to continue in place. And the court granted that motion. But even though the court granted that motion, the banks objected and they saw this stay all sales by the sports authority. They said our security agreement is superior to the consignment. They were unperfected and therefore invalid, it went on, it went to the us district court consignment vendors also appealed. And then the district court mandated mediation, but in the meantime, sales were continuing, ultimately a settlement was reached well, what happened? Some of the consignment vendors?

Wanda (00:38:04):
The settlement ended up being anywhere between 25 to 40 and 45 to 50% of the amounts due those creditors. And the great thing was they also released preference claims. Some of them did their due diligence, ran a UCC search notified every prior secured creditor, but never filed a financing statement. Some of them file a financing statement, but never sent notice the prior secured creditors. And some of them notice was sent, but either the notice was defective or was sent to the wrong place. So that’s why settlements vastly differed. Now one unique argument was made that said, everyone knows that sports authority is in fact, a consignment vendor and sells goods that belong to others. And therefore, since it was generally known, I didn’t have to follow the rules or perfecting a consignment interest. And it turned out less than 20% of sports authorities. Total inventory was consignment in inventory.

Wanda (00:39:21):
So therefore that creditor lost in the sports authority case, but in a different case performance sports group, the result was different here. It was true. The bank actually had actual knowledge that there was a consignment agreement in place because the constant or had previously filed its UCC financing statement and had previously given notice what happened was the financing statement lapsed and the constant, or did not renew it. The bank tried to get rid of the constant North and the court said, no, you knew that they were selling goods, belonging to this constant war. And they won on that one.

Wanda (00:40:10):
I don’t know if this is a new question. Yes. So what is the best instrument for a company that provides a service and not goods and products? Uh, Brian, that’s an excellent question. Security agreements work for services as well, just because you’re providing a service doesn’t mean that you cannot take collateral of physical goods. So you can still provide that service. Perhaps you are servicing all of their computer equipment or all their, um, printing equipment. And you are going to service that equipment and your contract could run hundreds of thousands of dollars a year. You still can take a security agreement and PR and cover as collateral, all of their physical assets and the accounts receivable and anything else that they own consignment will not work for you. So security interest is the way to work in that instance. So moving along to guarantees and Brian, a guarantee, um, the debt by principle owner of the business may be the answer. Another answer to your question.

Wanda (00:41:34):
So a guarantee is when the third party and that third party could be an individual, it could be one of the owners of the business. It could be the holding company. And I see that a lot where the holding company will guarantee the debt of its subsidiary or division comes forward and says, I guarantee that it Papi plus doesn’t pay that debt. I image print we’ll pay that debt. So there are certain things you want in that contract party information name, address, what’s a consideration and make sure your guarantee you in some sort of words, for good and valuable consideration,

Wanda (00:42:23):
You need a signature by the individual without a title, not wanting to Borgias, comma precedent strictly want a gorgeous some States. And some judges will void the guarantee. If a title is included, you want a dated and you want it. Witnesses witnessed or notarized. It’s necessary for you to run some background information on the guarantee, the guarantors credit, worthiness, and assets. Don’t take paper for the sake of taking paper and it may not be worth anything. And you’d also like to know, are they involved in the business? What’s their active participation. Be very careful. So caveat warning, some States now Kentucky, as one of them requires an expiration date on the guarantee.

Wanda (00:43:18):
New York, for example, does require an expiration date, but most States require you to have a provision that says, if you wish to revoke this guarantee at any point in the future, you must send me notice of your intent to revoke no less than 30 day notice. And here is my address or, and or email address, make it very clear that any revocation is not retroactive, but only covers future debt to be incurred by that customer. So any of these parties can give a guarantee and you can take a guarantee from any of these parties. Now, there are two types of guarantees. A guarantee of payment is a good guarantee. What that says is I want a gorgeous personally guarantee to pay all the debts with borders and associates immediately upon a default in payment, by forges and associates, LLC.

Wanda (00:44:29):
Here is language for a guarantee of payment. I offer it to you. You may adopt it. You may use it in your documentation or guarantee of collection is a bad guarantee here. You must exhaust everything. Every remedy people are trying to collect from the guarantor. So that could mean you go after the business, you get a judgment. You find out the judgment is uncollectable and then you go after the guarantor or worse, the business files bankruptcy, you file a claim in the bankruptcy. You wait a year, two years for the bankruptcy to be finished only to find out if you’re getting 10 cents on the dollar. And then you can go after the guarantor for the 90 cents bad guarantee. And if your customer says to you, Oh, I have a guarantee for them. Use mine. Don’t is probably a guarantee of collection. Now we are going electronic, but we’re always changing, especially since COVID so many of us are working full or part of the time remotely.

Wanda (00:45:37):
So we’d like to get rid of paper, but on a guarantee, I still recommend you keep the original document. If there’s a claim of forgery or fraud in the future, you’ll have a best opportunity to prove the signature with an original, not a copy, a copy. Isn’t always stable. The best evidence rule says a copy is as good as an original provided. There is no dispute over the authenticity of the original. Well, think about it. If they’re claiming fraud or forgery, then they are disputing the authenticity of the original. Now that was all referenced to individual guarantors. But what if you do in fact, have that Arkansas company with the parent company in Delaware or in Texas anywhere. So you can take from any other corporate entity or any other limited liability company, a cost corporate workforce, LLC, guaranteed. When is it advisable when you have multiple corporate entities or multiple LLCs or a new customer owned by another customer, or of course in a holding company situation.

Wanda (00:47:00):
And here again, I offer you this language, make sure that every one of your books, corporate guarantees start with this paragraph. This should be your opening paragraph. So that it’s strictly completely in States that you’re giving credit to copy plus, and image print, because of that extension of credit is going to make the guarantee again, essential elements of a cross corporate or LLC company guarantee. Make sure it’s continuing and collateralized have something behind it. It’s independent of anything else. So you may have a guarantee, but also go get that security agreement and it won’t be affected by you taking a security agreement and it won’t be impaired by you pursuing the security interests. First, before you pursued the guarantee, you are authorized to renew it, extended, modify it, compromise it discharge a piece of it without your guaranteed failing payment is not a discharge. So if they pay today and you have a continuing guarantee, but you had a zero balance, it doesn’t end. If tomorrow you sell to them another 20,000 or 50,000 or enter into another service agreement for 20 or 50 or a hundred thousand dollars payment to the current liability does not stop the guarantee and make sure that kind of language is in your guarantee and make sure it’s not contingent conditional or exercise only upon other liabilities. And these are more essential elements samples for you. Weigh, present moment, waive notice, or default by the original debtor.

Wanda (00:49:08):
Make sure, however, this is very critical that the person who signs that LLC or cross corporate guarantee is authorized to do so. So you want their assertion. I am the president of this company and I am authorized to sign this guarantee. You want their name and their title, and you want a corporate acknowledgement that that person is the president that he or she executed. The instrument knows the seal of the company and was authorized by the board of directors of that corporation or the board of the LLC. You want either a corporate resolution or a certificate of the secretary in either case. What you’re looking for is a document that says on April 14, a meeting of a board of directors was called and held. And at that meeting, the board passed a resolution authorizing this guarantee to be executed by Wanda Borgias, as president or by John Smith. As CEO doesn’t have to be the precedent definitely should be an op, an officer, the essential elements for any and all guarantees. Where do you Sue and what court has jurisdiction, what laws govern the contract, who pays the court costs and attorney’s fees. How do you serve notice of a future lawsuit? And if there’s any change of address requirement that you need to let me know, have a change of address.

Wanda (00:51:06):
And finally, we’re going to talk about letters of credit letters of credit are governed under the uniform commercial code, article five. I see frankly, letters of credit being used either in very large financial transactions or international transactions. Now I was surprised to be asked, um, just one week ago to do a program strictly on letters of credit for international commerce. And I knew that the credit group was mostly domestic companies. So I asked the question, why do they want this? And some of them are already starting to sell to overseas customers. And some of them are considering expanding their business into overseas transactions. So letters of credit, it’s a commitment by a bank on behalf of its customer, which is your customer. That payment will be provided to you the credit, or as long as the terms and conditions in the letter of credit are met.

Wanda (00:52:24):
And the bank is presented with specified document you, the creditor no longer have to rely on credit with your customer. You rely on the customer’s credit. When it’s bank who is issuing the letter of credit, your customer will pay a fee for its bank to issue that letter of credit. So it’s a contract by which the bank promises to pay upon fulfillment or certain conditions. Those conditions are documents that they want presented. They don’t care about your sales contracts. They don’t care if you’re good to garbage, they care that you present to them prove they can deliver the goods proof that you had a sales contract and prove that you are entitled to be paying. The letters of credit can be for a one-time transaction or a series of transaction. Letters of credit are irrevocable, unless they specifically state otherwise. So an advantage to a letter of credit, as soon as that shipment is made, and you provide the bank with proof that the shipment has been delivered, you are going to get paid.

Wanda (00:53:50):
This is a wonderful tool, risk mitigation to you, the creditor, and a very viable payment option. So you have an irrevocable documentary letter of credit. Again, it’s a firm commitment by the bank to pay a specified sum in a specified currency. You, the beneficiary, the creditor look immediately to the bank for payment. They are going to require a good letter of credit and a letter of credit we’ll set the terms and conditions. They are going to require that you have made a demand for payment. They are going to require documents that you deliver the goods or that you made the service and all the documents that the bank may require. The letter of credit once issued cannot be canceled or nor can its terms be changed without your, the seller, the beneficiary, the creditors prior written approval. Then there’s a standby letter of credit. First, you look to your customer for payment. So a standby letter of credit is a safety net. What happens if your customer doesn’t pay you? So it’s a commitment by the bank that will pay you, but only if something else happens and that’s something else is you didn’t get paid. Once you made the demand, you will have to show to the bank that you made demand for the payment and show that despite the demand for payment, your customer has failed to make such payment.

Wanda (00:55:37):
The document. This is a group of good slide. So the amount of the money is critical. The correct name of the beneficiary, the correct name of the customer conditions upon which that letter of credit can be drawn. And when does it expire? And yes, they will have an expiration date. So you have to be very careful that you don’t continue doing business once that expiration date has passed. So it’s basically a triangle three parties. There’s you at the top, the creditor, there is your customer on one corner of the triangle. And then there’s the bank on the other corner of the triangle, three parties, three contracts. You have a contract to sell your goods or to deliver your services. Your customer has a contract with its bank where the bank agrees to issue a letter of credit. And the letter of credit then is the contract. The third contract between the bank and you, the beneficiary, the credit, or the advantage to a letter of credit is that a huge thing honored within a few business days of the draw or the demand. And you can rely on the banks standing in determining to extend credit.

Wanda (00:57:12):
The issuing bank must honor the letter of credit upon proper documentation. Timely dishonors is necessary. If the bank decides it’s not going to honor that letter of credit, it must set forth the reasons why in a letter to you in a written statement to you as to why it is not going to honor the letter of credit, it could be fraud. The bank has to show irreparable harm. Oh, well, if I pay you this a hundred thousand dollars under this letter of credit where I’ve been defrauded, I will be irreparably harmed. I cannot recoup well, no, go after the fraudster and recoup your money in order to show that it has irreparable harm and that there’s no other, an adequate remedy at law, you’re going to be an important at that point. And a bank is going to have to post a bond to protect you when the bank loses that well, they bonded it. And now you can collect on that bond.

Wanda (00:58:25):
Bankruptcy stay is totally inapplicable when it comes to a letter of credit. And that’s one of the most beautiful things about a letter of credit, even if your customer files bankruptcy, because remember you did not rely on your customer to pay you. You relied on the bank to pay you the bank relied on the customer. The bank probably has a blanket lien already with its customer. So the issuing bank has to pay on a letter of credit despite the customer’s bankruptcy. So this is a wonderful tool to minimize any preference liability on your part. Neither the letter of credit nor its proceeds are property of the debtor’s estate. Those proceeds belong to you, not to your customer. The issuing bank, as I sped generally already secured by the debtor’s assets paying is you on the letter of credit from it’s all assets of standby letter of credit, as long as that is issued more than 90 days before your customer’s bankruptcy and drawn and paid, even then within the 90 days, it’s not a preference because once that letter of credit was issued, more than the 90 days out, that money no longer belongs to the debtor, it belongs to you, a standby letter of credit issued with then the 90 days may be a preference.  So watch when you got the letter of credit on a standby letter of credit basis, and be careful when there is in fact, the bankruptcy as to whether or not you will be protected.

Questions and Answers:

Is there something like a UCC filing we can use for international transactions?

Wanda (01:01:06):

There is actually an international financing statement that is used. It is not under the UCC filing or under the uniform commercial code. It is under the international rules of finance.

We’re still confused about the most reliable use of a UCC filing against specific property or a blanket filing, which one would be considered superior?

Wanda (01:01:58):

The PMSI the purchase money security interest is superior because by doing the two things, number one, notifying every prior secured party and filing that UCC financing statement, you leap frog, and you become number one to the extent of your only, which is like that. Why banks don’t like it because you have now jumped over them on their blanket lien, but I will give you an example. I’ve been in bankruptcy courts.

One of my clients is that zero wall refrigerators, those other appliances, general electric credit company does what we call floor planning. So general electric credit card company has a blanket lien on appliance stores like a PC Richards appliance stores. Sub-Zero Wolf has a purchase money security agreement for his goods that they delivered to PC Richards. We were in bankruptcy several years ago and it wasn’t PC Richards. By the way, it was an appliance company out here on long Island and GECC thief said I’m number one, I’ve got the first security and trust. Everything belongs to me.

We came in, we said, no, you’re not. We are number one with respect to our goods. And GECC said we never got notification. And fortunately, we were able to say, here is a copy of the certified mail receipt signed by somebody at GECC showing that you got notification that Sub-Zero Wolf was taking the purchase money security interest with that. We didn’t even have to litigate GEC things that, okay, you proved me wrong. I’ll back down. And the arrangement was made. And again, that was a bankruptcy. The, her was made on a given day. The trustee opened the doors of the appliance store and GECC said, it’s truck and sub wolf we’ll send each truck. We ended up pulling back or sub wolf pull back its goods first because whatever we couldn’t identify then went to GECC. So that’s the advantage. You become number one to your goods only.

What if a customer doesn’t want to provide their financials? We’ve had customers state they’re private, they’re a private company and don’t give out that information.

Wanda (01:04:37):

Some private companies do say I’m not giving it to you. And my answer is if I can’t get financial information on you, then you’re going to buy from me on cash in advance or COD.  Unless you can get good credit references from them by way of your credit group meeting or by way of running a and frankly, I don’t love DNB, but by way of running some kind of credit report on them, if you cannot get substantial information as to what their financials are simple don’t sell to them on a, on a credit, sell to them, wholly us cash in advance or COD basis.

Are you personally doing collection for your customers?

Wanda (01:05:36):

Yes, I am firstly handling collection work in New York state for my customers and BARR Credit Services collection agency sends me collection work in New York state.  Bankruptcy, I handle anywhere in the country, collection work I handle in New York state only.