Magazine article Business Credit

The Great and Wonderful §341 Hearing

Magazine article Business Credit

The Great and Wonderful §341 Hearing

Article excerpt

The check came from my collection agency.

They had received a cashier's check the week before for $30,000. Our share, after collection commission and attorney suit fees, was $20,850. It was only 55 percent of our claim, but it was all bad debt recovery. In other words, it was all profit.

Pretty good for a no asset Chapter 7 bankruptcy, huh?

All of this because I got off my duff and attended the §341 Meeting of Creditors. It's a fun story, so sit back, have a cup of joe and hear how all of this went down.

Bobbins Electric (a fake name in order to protect my former customer from the consequences of his own actions) opened an account with us in 1982. The company was a pretty slow payer, and was what I refer to as a "yo-yo" account, meaning they got past due, got put on hold, caught up, and then did it all over again.

After about 10 years of this, we had had enough and closed their account in 1992.

Half a decade later, they caught us in a weak moment, and we reopened their account, but only after obtaining financials and the principal's personal guarantee. By 2000, they regularly carried balances in the low six figures, but then they started running past due again.

For about a year, we worked closely with them, protecting our lien rights, selling COD-roll, anything we could do to keep the risk palatable and still try to keep their profitable business. I met with "Bob," the owner, on a regular basis, and after each meeting I would write down anything that sounded interesting.

One afternoon, Bob told me about two family cottages upstate that he was trying to sell. He thought he'd get enough to get totally out of debt. He also told me about a house near one of our stores, in which he had gone 50/50 with one of his salesmen. He was trying to sell this too, but two contracts had fallen through. He regularly hired accountants and attorneys to try to keep his many businesses corralled. I diligently wrote this kind of stuff down, dating and signing it, figuring I'd probably never need it.

By 2001, they were in financial distress. We still worked with them, and they started paying on a weekly basis and as-needed, to avoid passing critical lien expirations. Because they were in such obvious financial straits, I decided to add bankruptcy to my regular list of concerns (i.e. raising teenaged daughters and trying to stay off Rogaine's Most Wanted list). And not just bankruptcy, but preference claims as well. We were being paid on an irregular basis and I didn't think we could use the "normal course of business" defense if bankruptcy was filed and preference claims followed. So we became very diligent in making sure that we sent them a waiver of lien for every single payment.

How did this help?

Well, this satisfied "contemporaneous exchange." Since we had lien rights at the time of payment, we could prove that we relinquished these rights when we were paid. I was mindful of a case in Ohio, Brownie Insulation Contractors, Inc. 134 B.R. 261, 266 (Bkrty. S.D. Oh. 1991), where a subcontractor's contemporaneous exchange defense was defeated because the subcontractor did not have a lien against the project; and the simple fact that they had lien rights at the time of payment was not enough to prove that they gave something in value for the payment. A waiver shows that you are actually relinquishing these rights in exchange for the payment.

In 2002, their accounts payable person stopped returning my calls. Bob couldn't be reached either. They owed $38,000, down from a recent high of $170,000. The word on the street was that Bobbins' doors were closed, and a "For Sale" sign was seen out front. One of our competitors filed suit for $18,000. The buzzards were circling.

Since the company was out of business, I decided that I didn't want my attorney chasing what we were owed for an hourly fee. So, I placed it with my collection agency, to pursue Bob based on his personal guarantee. …

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