Publication

July 23, 2009Guide & Reference Material, Brochure

Best Practices – Don’t Sell Goods on Credit Until You’ve Read This

Clients that sell and deliver goods to customers on standard 30 or 45-day terms are experiencing a recurring problem in these tough economic times – the “slow pay” customer - or the one that does not pay at all. Unfortunately, if the customer closes its doors or files bankruptcy, you have lost all but very limited rights to the delivered but unpaid goods and will receive pennies on the dollar, if paid anything at all.

There are some “best practices” steps our clients (“Sellers”) should take on the front-end to increase the likelihood of either having their goods returned or better yet, paid. Sellers should create and perfect purchase money security interests (“PMSI”) in their goods before the goods are out the door:

  1. First, Sellers of goods (goods are defined as all things movable; this includes crops, livestock, airplanes and even component parts of goods) should include in their Purchase Orders or other sale documents, specific language that the Customer agrees to grant Seller a purchase money security interest in the goods sold until paid in full.

  1. Second, the Customer must sign (authenticate) the purchase order or other document containing this language.

  1. Third, Sellers of goods must then timely file a Uniform Commercial Code (“UCC”) financing statement, and in some cases notify third parties of the PMSI as follows:

    1. For Sellers of goods that are inventory (inventory is generally raw materials, work in process or materials used or consumed in a business), the Seller must (i) file a UCC financing statement in the proper filing office before the Customer receives the inventory; and (ii) within five years before the inventory is delivered, notify any lender that has a previously-filed security interest in the Customer’s inventory that the Seller has or expects to acquire a PMSI.

    1. For Sellers of goods that are livestock, the Seller must (i) file a UCC financing statement in the proper filing office before the Customer receives the livestock; and (ii) within six months before the livestock is delivered to the Customer, notify any lender that has a previously-filed security interest governing the Customer’s livestock that the Seller has or expects to acquire a PMSI.

    1. For Sellers of all other goods, the Seller must merely file a UCC financing statement in the proper filing office before or within 20 days after the Customer receives the goods.

Having a properly perfected PMSI gives you an advantage over other trade creditors and even over banks and other lenders that typically have blanket liens. If your goods are essential to the Customer’s business, your PMSI gives you leverage to demand payment on threat of enforcing your lien and taking back the goods.

And in the bankruptcy arena, while unsecured creditors receive little to nothing, your properly perfected PMSI entitles you to a secured claim for the amount owed and/or, in some circumstances, return of the collateral. Your lien also protects you from the dreaded “preferential transfer” rule that requires unsecured creditors to pay back certain payments they received from the debtor in the past 90 days before the debtor filed.

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