by Scott Schuster, Esq.

According to a recent article in the New York Times, individual and corporate bankruptcies are at a five-year high. As a creditor, here are three things to keep in mind during these difficult financial times:

1)      With the increase in “under water” secured creditors, unsecured creditors are receiving less and less on their claims through bankruptcy. It may be a good idea to have a backup if a customer fails to pay its bills. Letters of credit, lien rights, and partial payments on delivery are all ways to mitigate the damage that can be caused by a failing customer’s bankruptcy.

2)      Just because a customer has always paid its bills in the past does not mean it will do so in the future. Increasingly, even healthy companies are struggling financially. Keep an  eye on credit terms that you extend to all of your customers, both big and small. It never hurts to reevaluate the terms on which you extend credit to your largest customers. If you conduct a credit worthiness analysis and find something troubling, it may cause you to take additional action to protect yourself from unpaid bills. If the credit check reveals no problems, at least you can sleep soundly knowing that those customers are healthy enough to pay their bills in the future.

3)      Preference actions are on the rise. Debtors and trustees are looking to preference actions as a means to fund distributions to unsecured creditors. This means creditors should be aware of the defenses to those actions and should review their “danger” clients to make sure that payment times are not getting too high. Ideally, payments should be made within (or very close to) payment terms (“NET 30,” etc.). If customers are not doing so, it may be prudent to limit the amount of credit that you extend now to protect yourself from a preference action in the future.

by Shawn P. McClure 

Under Pennsylvania common law, “the primary difference between a surety and a guarantor is the time at which a creditor can collect from each.  With regard to suretyship, the creditor can look to the surety for immediate payment upon the occurrence of a default by the principal obligor or debtor … However, where an individual is a guarantor, the creditor must first attempt to collect the debt from the principal debtor/obligor before demanding performance from the guarantor.”  Reuter v. Citizens & Northern Bank, 410 Pa.Super 199, 208, 599 A.2d 673, 678 (Pa. Super. 1991). 

Sounds troubling for a creditor.  After reading that statement, there is probably one question that quickly comes to mind.  What constitutes an “attempt?”  This question could be argued a hundred times over.  Thankfully, the Pennsylvania legislature has brought some clarity to this question. 

Under 13 Pa.C.S. § 1201, which is Pennsylvania’s codified version of the Uniform Commercial Code’s general definitional section, “[s]urety. Includes a guarantor or other secondary obligor.” 13 Pa.C.S. § 1201.  Thus, no “timing” requirement exists as to when a creditor can look to a guarantor for payment of a debt.      

Moreover, Pennsylvania statute provides that:                                                  

“[e]very written agreement hereafter made by one person to answer for the default of another shall subject such person to the liabilities of a suretyship, and shall confer upon him the rights incident thereto, unless such agreement shall contain in substance the words: “This is not intended to be a contract of suretyship,” or unless each portion of such agreement intended to modify the rights and liabilities of suretyship shall contain in substance the words: “This portion of the agreement is not intended to impose the liability of a suretyship.”

      8 P.S. § 1. See, also, Keystone Bank v. Flooring Specialists, Inc., 513 Pa. 103, 113, 518 A.2d 1179, 1184 (1986) (“section 1201 of the UCC is not the sole authority for treating a guarantor, especially where he has ‘guaranteed payment,’ as a surety.”).

      Accordingly, where Pennsylvania law applies, a creditor with adequately drafted documents does not have to first look to the principal debtor/obligor for payment before pursuing a guarantor.    

by Scott Schuster, Esq.

Since clients ask about this all the time, I thought it would be a good time to give a quick refresher on 20-day claims and briefly discuss how creditors are faring in Bankruptcy cases when it comes to 20-day claims.

Under most state laws, a credit seller has the right to “reclaim” goods (get them back or get a lien for the value), from a defaulting buyer. Most state laws require a reclamation notice be given within 20 days of the delivery. Some require as few as 10 days. Recognizing the difficulty with these short timeframes, earlier changes to the Bankruptcy Code enabled creditors to give notice within 20 days after the bankruptcy filing. The right still only covered deliveries in the 10 days before the bankruptcy.

The 2005 amendments expanded the notice rights to provide that, when goods are sold to a debtor within 45 days of a bankruptcy filing, the seller has a right to reclaim those goods, so long as the seller gives notice within the first 20 days of the bankruptcy. Failure to provide this notice results in a waiver of the reclamation right. Sellers often miss this “notice deadline” and lose their right to reclaim their goods. Further, because the rights of a reclaiming seller are subject to the rights of a prior, properly perfected lienholder on the type of goods sold, this reclamation right is often illusory. Section 503(b)(9) was inserted into the Bankruptcy Code as a way of offering relief to sellers of goods whose reclamation right is rendered meaningless - either by failing to give the required notice or because of a prior lienholder’s rights.

Creditors have had mixed results in the first three years following the addition of section 503(b)(9) to the Code. For starters, obtaining an allowed administrative claim requires an upfront investment. The creditor must do one of two things: 1) get the debtor to agree to allow the 503(b)(9) claim; or, 2) if the debtor refuses to agree, file a motion with the court. This means that the creditor often has to hire an attorney and expend resources upfront.

More importantly, debtors will often challenge the 503(b)(9) claim in an attempt to get the creditor to negotiate the amount. Debtors will often claim that they received the goods outside of the required 20-day window. This forces the creditor to show evidence, through supporting documentation and testimony. Debtors sometimes take this position solely as a negotiation tactic. Debtors know that it will cost the creditor valuable time and money to litigate the case and that the creditor may be willing to settle for less in order to avoid litigation.

Be sure to check back for A Refresher on 503 (b)(9) “20-Day Claims” Part 2

by Shawn P. McClure, Esq.

So you’ve met with an attorney and you have been informed that you have a “strong” case. Of course you instruct your attorney to immediately run to the nearest courthouse and file a writ, summons, complaint or whatever legal document is necessary in order to immediately get the ball rolling. In the words of a certain sports broadcaster on crisp fall mornings, “Not so fast my friend!”¹

Almost as important to the determination of whether or not you have a factual basis for a lawsuit, is the decision of what court to file that lawsuit in.² However, before narrowing in on a particular court, there is the question of what type of court you will file in.

Our country has a dual court system; we have both state and federal courts. Generally, the difference between the two court systems boils down to jurisdiction. Jurisdiction is a court’s ability to hear a particular matter. State and local courts are, for the most part, courts of general jurisdiction with the ability to hear almost every type of dispute. Federal courts are established under the U.S. Constitution for the purpose of deciding disputes involving the Constitution and laws passed by Congress. However, there are certain scenarios where a particular matter may fall within both the jurisdiction of the state and federal court systems.

For the entire article please visit: http://www.bernsteinlaw.com/publications/021810_1.htm and tell us what you think.

By Scott E. Schuster, Esq.

I read this article in the Pittsburgh Tribune Review:(http://www.pittsburghlive.com/x/pittsburghtrib/news/s_672744.html) and it got me thinking about state oversight of financially distressed municipalities. Under Pennsylvania state law (commonly referred to as Act 47), municipalities in the Commonwealth are not eligible to file for federal bankruptcy protection without first implementing a financial recovery plan overseen by a state appointed board.

This approach to municipal reorganization stands in stark contrast to the federal bankruptcy code. Under the state law, a distressed municipality attempts to cut expenses and increase revenue in an effort to pay off its debts. The result is often a myriad of political “quick-fixes,” such as new taxes, elimination of social programs, and the sale or lease of municipal assets, such as parking garages.

The state system lacks two significant components that the bankruptcy code provides to distressed companies or municipalities to assist in reorganization. First, Act 47 does not allow for the discharge of debts. Instead, Act 47 requires that the municipality attempt to restructure certain debts or pay them off with a lump sum. Of course, financially distressed municipalities usually lack the cash flow to make lump sum payments on large debts. Similarly, Act 47 does not allow municipalities to cancel unfavorable contracts. The inability to discharge debts and cancel unprofitable contracts would have proven fatal to several big companies that have emerged from Chapter 11 Bankruptcy over the past two decades; GM, US Airways, and the Pittsburgh Penguins, just to name a few.

Second, the Bankruptcy Code gives corporate debtors the ability to “cram down” union contracts for the best interest of all creditors. In other words, the Bankruptcy Code allows union contracts to be reasonably restructured so that the company’s employees do not sap all of the company’s future revenue, leaving nothing for creditors. Act 47 system has no such provision and, in fact, relies exclusively on the political leaders of the municipality - often unions’ closest allies - to enact changes in applicable collective bargaining agreements. Such a system is destined to fail and has done so, repeatedly.

The Tribune Review reports that 25 municipalities have entered Act 47 oversight but only 6 have escaped. Proof of Act 47’s shortcomings can be seen right here in Pittsburgh, which was forced into this state form of receivership in 2004 and has spent nearly 6 years attempting to right its financial ship, but to no avail. As of this writing, Pittsburgh’s employee pensions have only 30% of the money necessary to fund future payouts. Unions have refused to agree to reduce their benefits and the politicians responsible for forcing such concessions lack the political backbone to press for change. In short, politics has taken over and, 6 years later, the City is still on the verge of bankruptcy. How has Act 47 helped the City of Pittsburgh? It hasn’t.

With the economic downturn and lack of revenue, more and more municipalities in Pennsylvania are at risk of falling into Act 47 protection. Those municipalities are staring at five to ten years of financial purgatory, during which no meaningful changes take place and bankruptcy continues to loom on the horizon. I say let Pennsylvania municipalities file bankruptcy.

by Shawn P. McClure, Esq.

In a perfect world, a creditor would never have to file a lawsuit to collect on balances due and owing from debtors.  In a great world, any judgment obtained as a result of a lawsuit would immediately be paid by the judgment debtor.  In reality, creditors are often forced to sit on a judgment and hope that their judgment debtor either comes into some money or tries to sell a piece of real estate encumbered by their judgment lien.  This can take years. 

    Does this judgment simply sit interest free?  If not, then what interest rate is applicable to the judgment?  The answer to the first question is easy.  Under Pennsylvania law, at a minimum, interest will acrue on the judgment at the rate of six percent per annum.  As a creditor you have the ability to determine whether that rate is higher or lower when contracting with your future debtor at the beginning of your relationship.  

    Pennsylvania law provides that a plaintiff is entitled to interest on a judgment for a specific sum of money from the date of the verdict.  42 Pa.C.S.A. § 8101, (“Except as otherwise provided by another statute, a judgment for a specific sum of money shall bear interest at the lawful rate from the date of the verdict or award, or from the date of the judgment, if the judgment is not entered upon a verdict or award.”).  “Thus the general rule is that a plaintiff is entitled to interest on a judgment from the date of the verdict, and for purposes of computing interest, judgment and verdict are synonymous.” Osial v. Cook, 2002 PA Super 214, 803 A.2d 209, 215 (Pa. Super. 1994).

    A plaintiff receives statutory post-judgment interest as a matter of right where the damages are ascertainable by computation. Pittsburgh Constr. Co. v. Griffith, 2003 PA Super 374 (Pa. Super. 2003).

    Currently, the statutory rate of interest in the Commonwealth of Pennsylvania is fixed at six percent (6%) per annum, “but parties to a contract may agree to a higher rate.” Id; See, 41 P.S. § 202; In re Estate of Braun, 437 Pa. Super. 372, 650 A.2d 73, 78 (Pa. Super. 1994) (“the courts of this Commonwealth have found that the parties may agree to a post-judgment interest rate in excess of that provided by statute”); see, e.g., Miller v. City of Reading, 369 Pa. $71, 473-474, 87 A.2d 223, 226 (1952) (party who illegally fails to pay a debt is liable to pay interest thereon at the statutory rate unless the parties expressly agree otherwise); Smith v. Mitchell, 420 Pa. Super. at 144, 616 A.2d at 21 (Pa. Super. 1992) (quoting Daset Mining Corp. v. Industrial Fuels Corp., 326 Pa. Super. 14, 36, 473 A.2d 584, 595 (1984) and recognizing that in contracts concerning the payment of the sum of money at a rate higher or lower than the legal rate, they can agree to have the agreed upon interest rate continue after the debt becomes due; in the absence of an agreement, the interest rate fixed by law attaches); Cumberland Valley Cooperative Association v. Martin, 11 D.& C. 4^th 10, 12 (C.C.P. Cumberland County 1991) (specific intent of the parties prevails over the statutory rate; parties’ agreement to pay post-judgment interest rate of 15% was upheld).

    Therefore, if the parties’ agreement is silent as to interest or refers to “legal” or “lawful” interest, the judgment creditor is limited to six percent (6%) per annum in post-judgment interest.  However, where the parties’ agreement expressly provides for a higher interest rate and the plaintiff has plead this higher rate, Pennsylvania law allows for the imposition of post-judgment interest at the higher, agreed upon rate.  Once again, another example of why it is better to plan for the worst and hope for the best when entering into a creditor/debtor relationship.   

by Scott E. Schuster, Esq.

by Shawn P. McClure

A couple of months ago, I attended a presentation by a well known trial attorney.  He opened the seminar by stating that he had never represented a Plaintiff/Creditor in a breach of contract action.  Given the fact that the audience consisted of creditors’ rights attorneys, collection agencies and credit managers, this statement raised some eyebrows. 

This gentleman was quick to qualify this statement by saying that he has tried thousands of “broken promise” cases, but never a breach of contract case.  His point was that it is important to remember that these breach of contract cases (i.e. broken promises) are being heard and decided by people just like you and me.  As such, it is important not only to keep things as simple as possible, but to make sure that we don’t exclude the human element to such cases.

I think that this lesson translates to all stages of any collection effort.  It is something that everyone in the credit industry needs to remember.  From the initial telephone call to your Debtor, through the closing argument your attorney makes during a jury trial, all that is at issue is a broken promise.  The key is conveying to those involved, the Debtor, Debtor’s Counsel, Judge, Jury, etc., the simplicity and humanity of the situation.

Webster’s Dictionary defines a “promise” as, “a declaration that one will do or refrain from doing something specified.”  It is as simple as that.  Once you learn to communicate this characterization of your claim to the Debtor or their attorney, your successful collections will undoubtedly increase.  Just remember, don’t break any promises of your own.  If settlement discussions break down and you have threatened legal action, be sure to act promptly by contacting your creditors’ rights attorney.”  

by Scott Schuster, Esq.

There is nothing more frustrating that having one of your biggest customers file for bankruptcy, leaving your company holding a large unpaid debt, and then to be sued later for a “preference.” Clients often ask us: “I was not getting preferential treatment by the debtor, why am I being sued for a preference?” The answer to that question lies at the root of the supposed purposes of preference statutes in the bankruptcy code.

Congress enacted preference statutes for two reasons: 1) to prevent creditors from “dismembering” a struggling debtor during the debtor’s slide into insolvency; 2) to promote equality of distribution (of debtor’s assets) amongst debtor’s creditors.

The former is based on the premise that creditors typically realize when a debtor is struggling financially. Concerned that they debts may not be paid if the debtor enters bankruptcy, those creditors threaten the debtor (with lawsuits) until the debtor agrees to pay the debt. The debtor, at a time when cash flow is already a major problem, pays the debt in hopes of staying afloat by avoiding legal expenses.

If multiple creditors take the same action, the debtor’s limited assets are haphazardly distributed amongst a few select creditors to the detriment of debtor’s other creditors. In the meantime, debtor is stripped of its operating capital and forced into bankruptcy, leaving most of its creditors with unpaid debts.

In theory, the threat of bankruptcy preference actions may prevent creditors from demanding payment once a debtor is in financial turmoil. In reality, the creditor takes whatever action it would normally take and then hopes that more than ninety days pass before the bankruptcy is filed.

The second foundation for preference statutes is equally dubious. More often than not, preference payments are made to unsecured creditors. When money is recovered through preference actions during the preference case, significantly less than 100% of that money is paid to unsecured creditors. Usually, a substantial portion of the recovered assets are paid to administrative creditors (i.e. those that provided goods and services after the bankruptcy was filed) and priority creditors (like taxing authorities and employees).

In fairness, preference actions usually benefit more creditors than they hurt. Again, more often than not, those receiving payments during the 90-days preceding the bankruptcy filing are less in number than creditors that did not receive such payments. Consequently, the end result of preference actions is usually some benefit to unsecured creditors as a whole, but often very little.

In any event, the dual aims of preference statutes described above are rarely achieved.

by Shawn P. McClure

“A quick question for all creditors out there. How many of you require a signature from your customers upon receipt of delivered goods? Better yet, how many of you actually deliver the goods that have been sold?

The more likely scenario is that delivery of your goods to customers is done via a “common carrier.” Generally, a common carrier is a third party business that exists for the transportation of goods and/or people. More specifically, I am referring to all of the goods that you, as a creditor, have sold and shipped to customers via FedEx or UPS.

In those cases, the customer receives the goods from the common carrier and signs for them. As we all know, this signature is often electronic. The common carrier then charges either your or the customer’s account for the shipping depending on the parties’ agreement, and business continues as usual.

Then the customer’s payments start coming late, then payments cease altogether. The customer ignores your demands for payment, and you decide to retain a creditors’ rights attorney.

Suit is filed, and your former customer, now a defendant, files a response denying that the alleged goods were ever received. Your creditors rights attorney provides you with a copy of the defendant’s response, and asks you to address the dispute regarding receipt of the goods.

Once your blood stops boiling and the cursing subsides, you respond that will simply contact the common carrier used, FedEX, and obtain copies of the signed delivery forms. However, your frustration continues to mount when you are told that your common carrier only retains records for a period of six months.

Therein lies the problem. By the time suit is filed and discovery is initiated, it is very likely that the common carrier you used for delivery of the goods has since purged their records in accordance with their own documentation retention system. Even if you were able to contact the common carrier and obtain copies of the documents, there are still a number of evidentiary hurdles present, such as hearsay, authentication and foundation.

One possible solution may be to implement a document retention process regarding signed delivery forms from common carriers into your regular business practices. This may allow you to take advantage of the “Business Records Exception” of evidence. This rule allows for the entry of certain documents, in this case the commone carrier signature documents, in cases where there is not a first hand witness, in this case the FedEx or UPS man, available to testify as to those documents. The rationale for the exception being that employees are under a duty to be accurate in observing, reporting and recording business facts, so that typical concerns regarding reliability of such third party documents are somewhat limited.

In order for a record to meet the requirements of the Business Records Exception, four general requirements must be met: 1) The record was made and kept in the course of a regularly conducted business activity; 2) It was the regular practice of the business activity to make the record; 3) The record was made at or near the time of the event that it records; 4) The record was made by, or from information transmitted by, a person with knowledge acting in the regular course of business.

While the implementation of such a system may seem like a troublesome task, once in place it could easily be maintained, and will allow you, as a plaintiff/creditor, to prove your case a lot easier.”