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INSOLVENT CUSTOMERS, SUPPLIER
PACTS AND THE ANTITRUST LAWS:
TIPS FOR THE CREDIT TEAM TO
MAXIMIZE TRANSPARENCY AND
LEVERAGE PAYMENTS
Scott Blakeley, Esq.
[email protected]
Ronald Clifford, Esq.
[email protected]
18500 Von Karman Ave, 5th Floor
Irvine, CA 92612
V. (949) 260-0611 | F. (949) 260-0613
www.BlakeleyLLP.com
Orange County | Los Angeles | New York | Delaware
Industry Groups
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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
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Reading the Risk Flags: Surprise
Insolvency or Anticipated?
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Credit team’s mission to identify and evaluate credit
risk
Evaluate information traditional and modern sources
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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
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Prompts supplier’s credit team to rescore the
customer reflecting a higher credit risk and to evaluate
a collection strategy
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Traditional Information Sources
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Social Media Sites for The Credit Team
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The Dynamics of Insiders, Lenders
and Personal Guaranties
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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
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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.
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Supplier Strategy with Insolvent
Customer: Alone or Team Approach
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Decision based on a number of factors
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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
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Delinquent Account Decision Tree
Credit Hold
Report to
Industry Group
Late Penalty
Payment
Delinquent
Accounts
Termination of
Contract
UCC Protections
Setoff/
Recoupment
Customer
Divorce
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The Credit Team and the Antitrust Laws
Flow Chart
Sherman Act: (SA)
Robinson-Patman: (RPA)
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Supplier Pact and Antitrust Overlay
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Sherman Act
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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
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Supplier Pact and Holding POs
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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
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Supplier Pacts: A Tool to Get
Information and Strategy for Payment
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Unifying themes
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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
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Industry Group Bylaws
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Does not prevent group members from
joining SP to attempt to collect a customer’s
debt
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Supplier Pact Bylaws
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Adopt bylaws that state the duties and
restrictions on members
Restrict members from discussing orders
pending by the insolvent customer
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Insolvent Customer Alternatives
Close Shop
Secured Creditor
Sale
Negotiated
Settlement with
Suppliers
Customer Out-ofCourt Workout and
Liquidation Choices
Customer’s
Lenders’ Liquidation
Alternatives
Receivership
Bulk Sale
To work with
Customers and
Lenders
Assignment for the
Benefit of Creditors
Supplier Pact
Alternatives
In-Court Solvency
Proceedings –
Chapter 11
Involuntary
Bankruptcy Petition
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Insolvent Customer Alternatives
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Close Shop
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Key suppliers may get notice of closing
SP strategy
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recover from assets that remain
SP may have difficulty getting information from the
debtor and may conduct their own asset search
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Insolvent Customer Alternatives
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Negotiated Settlement with Suppliers
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Customer unable to meet supplier debts when
due, but tries to operate by shedding liabilities by
agreement with its suppliers and creditors
SP strategy
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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.
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Insolvent Customer Alternatives
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Bulk Sale
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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
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May investigate whether the buyer of the assets
complied with the Bulk Sale statue.
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Insolvent Customer Alternatives
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Assignment for the Benefit of Creditors
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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
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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.
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Insolvent Customer Alternatives
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In-Court Insolvency Proceedings – Chapter
11
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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
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If a committee is not appointed or does not fairly
represent the interest of suppliers, SP may create value
for the supplier class.
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The Customer’s Lender’s Choices
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Secured Creditor Sale
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Sale can be private or by public auction.
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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
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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
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The Customer’s Lender’s Choices
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Receivership
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Criteria for the Appointment of a Receiver
Role of the Receiver
Control over Receivership Property
Sale of Assets
SP strategy
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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.
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The Takeaway with Supplier Pacts
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SP may create value for members on a
number of fronts
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Access to financial information
Payment as a result of trade leverage
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The Involuntary Bankruptcy Petition
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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
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