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Group Collection Strategy for Dealing with Delinquent Accounts.

The credit teams key mission is managing credit risk. But managing risk assumes access to information, whether from the debtor, third parties, such as reporting agencies, or suppliers, especially where they are industry group members. Access to timely financial reporting from these sources to reassess credit risk is even more challenging where the customer is a small- to mid-sized business which does not publicly disclose its financials.

Given this, the credit team may find itself having delivered product or provided service on terms to an insolvent customer, resulting in a delinquent account. The topic may then be a collection strategy for the delinquent account: go-it-alone or use a supplier team approach.

Identifying a Customer's Shift Away from Paying Suppliers and Ensuring Lender is Paid

The near universal capital structure for the small- and mid-sized customer is a lender that secures all of the customer's assets in exchange for working capital and revolving financing. The lender also requires the principals personally guarantee the financing, a guarantee that ties up all of the principals' personal assets. Where the customer is cash flowing and meeting the lender's loan covenants, the personal guarantee pledged to the lender serves more as a reminder to principals of the lenders leverage over their personal assets.

However, where the customer's financial position weakens, and perhaps starts backsliding into insolvency, the customer's principals often shift their focus of preserving a supplier relationship to one of maximizing the company's assets for the benefit of the lender, with an eye to ensuring the lender is paid in full and the personal guarantee is released, to the detriment of suppliers and their open invoices.

This conflict of interest between the principals of the customer, suppliers and lender may include principals ordering more inventory on terms from key suppliers if they perceive the lender is undersecured, and the inventory liquidated to pay the lender (again, the principal's focus on obtaining a guarantee release). The customer may place these credit terms POs even where the principals may have an agreement with the lender for a forced liquidation, which means those invoices go unpaid.

The principals' incentive is to keep from suppliers their deteriorating financial condition, which would likely show an inability to meet suppliers invoice terms when due.

The Value of Timely Information

With the small- and mid-sized customer and their backslide into insolvency, customers commonly go silent to key supplier requests for information. For the supplier, third-party reporting sources commonly don't have real-time updates reflecting increased supplier risks. In this setting where the credit team (and sales) is attempting to confirm the financial standing of the customer, industry group reporting on the customer may be the only reliable--and timely--source of information, especially if several members are reporting.

The industry reporting not only includes the days beyond terms, but buying patterns of the customer. The topic for the credit team is then the collection strategy with the delinquent account.

Go-It-Alone vs. Supplier Group Collection Strategy

In the face of a delinquent account and customer silence, the credit team's collection strategy may be a go-it-alone strategy or teaming with other suppliers, commonly industry group members, to collect on the group members' delinquent accounts--a supplier pact.

In balancing the collection alternatives, the go-it-alone strategy may lead to a greater recovery if the supplier provides a unique product or service so that the customer may agree to some form of repayment, even in a forced liquidation. Alternatively, if the supplier views a collection suit as being first to the customers assets, that may result in a greater recovery or leverage for settlement. But there are several factors that may negatively impact the recovery or even a response with the go-it-alone strategy, including the expense, resources, customer silence, and if successful with recovery, preference risk.

The supplier group collection strategy consists of teaming up with other suppliers, commonly industry group members, with delinquent accounts to collect payment. This may be done by an industry group member reaching out to other members to act together to collect their debts. The supplier group, or pact, adopts a team approach to collect their delinquent accounts through a singular voice to leverage information and payments. Why would an insolvent customer ignore a supplier employing a go-it-alone collection strategy, but respond to a demand from a supplier group? Its the implied threat of an involuntary bankruptcy filing. Sophisticated debtors, attempting to liquidate their assets outside of supplier scrutiny, appreciate that an involuntary bankruptcy filing disrupts the liquidation and forces transparency for the entire creditor body.

The group approach also allows for suppliers holding smaller balances to cost effectively collect in a group setting. The supplier group can save on legal expenses as well by having one counsel represent its interests, which may possibly be paid by the customer. But supplier group members must be aware of antitrust issues under the Sherman Act when collecting as a group.

The Supplier Group Collection Strategy and Antitrust Laws

In interpreting the scope of the Sherman Act and its restraint on supplier group action, courts appear uniform in distinguishing two types of group conduct: group action to collect debts is permissible, while group action to restrain trade, such as collectively refusing to sell a customer, is not permissible.

Group action to collect debts is permissible, while group action to restrain trade, such as collectively refusing to sell a customer, is not permissible.

For example, the courts in Burtch v. Milberg Factors, Inc., (1) United Airlines, Inc. v. U.S. Bank N.A., (2) CompuCredit Holdings Corporation v. Akanthos Capital Management LLC, (3) and Anderson News, LLC v. American Media, Inc. (4) recognize that a group collection strategy does not violate the Sherman Act. The key for group collection action is group members do not agree to refuse to sell to the customer or extend terms as a strategy to collect their debt. Rather, the decision whether to continue to sell to the customer is a decision by each member.

Where suppliers act collectively to fix prices, or refuse to sell to a customer so as to extract concessions, courts have found that form of supplier group action to violate the Sherman Act.

Best Practices for Supplier Group Collection Strategy

The supplier group should adopt bylaws which outline the duties and restrictions of members, including that members may not discuss pending purchase orders or a collection strategy that includes holding orders. Credit teams may find that a supplier group approach to collecting debts not only leverages their relationship as an industry group member, but leads to greater recovery on the delinquent account, and transparency of the customer's financial condition to report to management.

NACM's 122nd

CREDIT CONGRESS AND EXPO

JUNE 10-13, 2018 PHOENIX. AZ

Scott will be presenting

27071. Dealing with Customers' Terms Pushback

Scott Blakeley, Esq.

Scott Blakeley, Esq., practices creditor's rights and bankruptcy law and can be reached at seb@blakeleyllp.com.

(1.) Burtch v. Milberg Factors, Inc., 662 F.3d 212 (3d Cir. 2011).

(2.) United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918, 925 (7th Cir. 2005).

(3.) See CompuCredit Holdings Corporation v. Akanthos Capital Management LLC, 916 F. Supp.2d 1326 (N.D. GA, 2011).

(4.) Anderson News, LLC v. American Media, Inc., 123 F. Supp.3d 478 (S.D.N.Y. 2015).
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Date:Mar 1, 2018
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