1. Orange County | Los Angeles | New York | Delaware
INSOLVENT CUSTOMERS, SUPPLIER PACTS AND THE ANTITRUST LAWS: TIPS FOR THE CREDIT TEAM TO MAXIMIZE TRANSPARENCY AND LEVERAGE PAYMENTS
Scott Blakeley, Esq.
Ronald Clifford, Esq.
18500 Von Karman Ave, 5th Floor
Irvine, CA 92612
V. (949) | F. (949)
Orange County | Los Angeles | New York | Delaware

2. Industry Groups
Unique forum for credit team to share customer account information, including delinquent accounts
Supplier pact (SP): Suppliers act as team to leverage information and payments through a single voice
Can achieve cost savings of one counsel representing the SP’s interest and possibly have the debtor pay costs

3. Reading the Risk Flags: Surprise Insolvency or Anticipated?
Credit team’s mission to identify and evaluate credit risk
Evaluate information traditional and modern sources
Trade data from industry group members
The customer’s payables team likely instructed to hold payment of supplier’s invoices to improve their cash flow
Prompts supplier’s credit team to rescore the customer reflecting a higher credit risk and to evaluate a collection strategy

4. Traditional Information Sources

5. Social Media Sites for The Credit Team

6. The Dynamics of Insiders, Lenders and Personal Guaranties
Small- and mid-sized customer: lender conditions financing on principals guarantying the financing
Principal’s focus is on maximizing the company’s assets to ensure that the lender is paid in full and the guaranty is released
May include principals ordering more inventory on terms from key suppliers if they perceive the lender is undersecured, and the inventory can be liquidated to pay down the lender.

7. Supplier Strategy with Insolvent Customer: Alone or Team Approach
Decision based on a number of factors
Whether the supplier’s claim is unique
If not unique, whether have the resources to act alone
Industry group members and suppliers often share the same priority, face a similar contingent lability, and their collection costs are comparable
Can share costs
Opportunities and risks of individual collection strategy vs. SP approach

8. Delinquent Account Decision Tree
Delinquent Accounts
Credit Hold
Report to Industry Group
Late Penalty Payment
Termination of Contract
UCC Protections
Setoff/ Recoupment
Customer Divorce

9. The Credit Team and the Antitrust Laws Flow Chart
Sherman Act: (SA)
Robinson-Patman: (RPA)

11. Supplier Pact and Antitrust Overlay
Sherman Act
Prohibits competitors, including industry group members, from agreeing to restrain trade
Applies whether the customer is meeting its debts when due or is insolvent
SP members cannot collectively agree to refuse to extend credit or fix credit terms

12. Supplier Pact and Holding POs
Sherman Act does not prohibit an SP for the purpose of collecting a delinquent account
An SP cannot have its members agree to refuse credit requested by the customer, even where the customer is delinquent and may be liquidating its assets
The decision to extend credit is with each SP member, and they must act independently

13. Supplier Pacts: A Tool to Get Information and Strategy for Payment
Unifying themes
Threat of litigation by an SP may create leverage in a negotiation with the customer
Members of an SP to limit collection costs by sharing
May be able to leverage the trade debt as tool to get financial and payment information from debtor

14. Industry Group Bylaws
Does not prevent group members from joining SP to attempt to collect a customer’s debt

15. Supplier Pact Bylaws
Adopt bylaws that state the duties and restrictions on members
Restrict members from discussing orders pending by the insolvent customer

16. Insolvent Customer Alternatives
Customer’s Lenders’ Liquidation Alternatives
Secured Creditor Sale
Receivership
Customer Out-of-Court Workout and Liquidation Choices
Close Shop
Negotiated Settlement with Suppliers
Bulk Sale
Assignment for the Benefit of Creditors
In-Court Solvency Proceedings – Chapter 11
Supplier Pact Alternatives
To work with Customers and Lenders
Involuntary Bankruptcy Petition

17. Insolvent Customer Alternatives
Close Shop
Key suppliers may get notice of closing
SP strategy
recover from assets that remain
SP may have difficulty getting information from the debtor and may conduct their own asset search

18. Insolvent Customer Alternatives
Negotiated Settlement with Suppliers
Customer unable to meet supplier debts when due, but tries to operate by shedding liabilities by agreement with its suppliers and creditors
SP strategy
Access to key financial and creditor information is necessary to make their own evaluation as to the merits of suppliers discounting their invoices.
Evaluation of the information may lead the SP to propose an alternative payout.

19. Insolvent Customer Alternatives
Bulk Sale
Customer sells assets to a third party
Subject to existing liens
Seller’s suppliers must be notified of sale
Because sale is not supervised, most states have repealed the bulk sale statute
SP strategy
May investigate whether the buyer of the assets complied with the Bulk Sale statue.

20. Insolvent Customer Alternatives
Assignment for the Benefit of Creditors
Customer elects a formal out-of-court liquidation where a third party, selected by the customer, takes title to the assets and liquidates them for the benefit of the creditors
SP strategy
If the assignee does not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure is met.

21. Insolvent Customer Alternatives
In-Court Insolvency Proceedings – Chapter 11
Customer elects a formal court insolvency proceeding
Can be a sale of assets
Bankruptcy Code mandates the debtor to make a number of financial disclosures
SP strategy
If a committee is not appointed or does not fairly represent the interest of suppliers, SP may create value for the supplier class.

22. The Customer’s Lender’s Choices
Secured Creditor Sale
Sale can be private or by public auction.
Private sales generally are not advertised
Often, the principals of the debtor or an entity affiliated with the principals of the debtor, are the purchasers at a private sale
Sale must be conducted in a commercially reasonable manner, usually with at least 10 days’ notice
SP strategy
If the debtor and secured creditor do not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure

23. The Customer’s Lender’s Choices
Receivership
Criteria for the Appointment of a Receiver
Role of the Receiver
Control over Receivership Property
Sale of Assets
SP strategy
If the Receiver does not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure.

24. The Takeaway with Supplier Pacts
SP may create value for members on a number of fronts
Access to financial information
Payment as a result of trade leverage

25. The Involuntary Bankruptcy Petition
The Petitioner's Due Diligence
Eligibility to file:
Claims subject to bona fide dispute
Contingent claims
Unsecured claims aggregate $10,000
The number of petitioning creditors
The Standard: The debtor generally not paying its non-disputed debts as they come due
Bad Faith filings