AuthorDavid J. Cook
The risk of insolvency offers many lessons. The first lesson is that any big
customer or big vendor might become insolvent. One day, the customer
does not pay its outstanding balance or the vendor fails to deliver key inven-
tory. The client, a creditor or purchaser, is placed at risk.
Counsel for a creditor or a buyer embraces insolvency as an eternal
looming threat. The General Motors bankruptcy provides an example of
how this can lead to a ripple effect: Many of its key suppliers likewise filed
bankruptcy. This can happen in either direction: When a major supplier of
key components goes out of business, its big customers stop shipping their
product to their customers, which creates another ripple effect.
Counsel has many lines of defense to protect a client from the repercus-
sions arising from a customer or vendor collapse:
A. Insert security interest in all contracts, invoices, credit applica-
tions, and the terms and conditions of anything.
B. Negotiate for personal guaranties that are drafted with standard
C. Establish a credit regime that minimizes losses.
D. If the customer defaults, quickly seek to invoke rights to suspend
performance or reclaim goods. These are the best remedies under
difficult circumstances.
E. If the parties enter into a payment program, secure the payment
program with a security interest and personal guaranty; ratify and
confirm the amount of the debt; waive set-offs, jury trial rights, and
any other putative defenses.
F. In filing suit, seek a pre-judgment of attachment or claim and deliv-
ery (replevin) at the earliest opportunity in an attempt to reach the
assets of the debtor outside the 90-day claw-back period.
G. If the customer (or vendor) files bankruptcy, makes an assignment
for the benefit of creditors, or proceeds down another insolvency
path, file a proof of claim, request special notice, and “bird dog”
every piece of paper that the courts or the parties generate.
H. Research and provide accurate estimations of probable outcomes.
For example, because bankruptcy and assignments implicate the
rights of the trustee (or debtor in possession) or the assignee
for the benefit of creditors as “lien holders” under the law, the
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