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Early Risk Assessment Reduces Receivable Problems

If you are in business today, it is inevitable – you will have to deal with people who can’t or won’t pay all they owe.  Remember that prevention is more cost-effective than remediation.

What Can Landlords Do?

Take Care With New Tenants 
Review financial statements and business plans.  Research past performance and credit.  Require a sufficient security deposit, possibly a letter of credit (which may offer advantages over a cash deposit), and structure your rights for maximum access to the funds.  Structure enforceable guarantees.

Work With Troubled Tenants 
Lease modifications may be appropriate.  Structure concessions so that they can be recaptured if the tenant files bankruptcy down the road.  Enhance or enforce guarantees.

Make the Most of Bankruptcy 
Landlords, like vendors, must monitor the case from the inception to prevent overreaching postpetition loan or asset sale terms.  You also have special rights that can be protected in bankruptcy, most notably rights to require payment for postpetition rents, timely assumption or rejection of leases and related protections, and to require that proposed assignees meet certain standards.  Additionally, you need to understand the legal standards for calculating claims if your lease is rejected, and to understand and be prepared to defend any preference attacks (e.g., debtor claims to recover delinquent rent payments received within 90 days of bankruptcy).  During bankruptcy you also may want to enforce guarantees and realize on security deposits/letters of credit.

What Can Vendors Do?

Assess Risk and Performance 
Obtain and review customers’ current financial statements.  Monitor accounts receivable agings, values of guarantees, values of borrowing bases.  Review credit documents and evaluate covenant compliance and enforcement.  Review credit limit amounts and history of enforcement.  Review employee incentives to enhance collections.

Act Now to Mitigate Payment Risk and Improve Performance 
Establish and enforce consistent credit and collection programs.  Base sales staff compensation on actual receipts, not just orders.  Require security agreements and take steps to assure adequate granting, attachment and perfection of liens, including purchase money security interests.  Purchase credit insurance.  Obtain guaranties, possibly secured, to enhance payment and performance prospects.  Enter into letter of credit, COD, or prepayment arrangements.  Educate employees about the importance of complying with established procedures.

Acknowledge and Minimize Bankruptcy Risks 
Changes in credit lines and payment schedules, late payments, and even routine collection practices may leave a creditor open to claims that payments it received within 90 days of a customer’s bankruptcy filing were preferential and must be returned.  Improved credit and collection practices can be structured to minimize the amounts that will be vulnerable to preference attack.  Done wrong, the exposure can be materially increased.

Make the Most of Bankruptcy 
Get involved at the start of the customer’s case.  Monitor the early events in the case – they can be costly if creditors do not protest overreaching by debtors and selected creditors (and their counsel).  Continue selling to the customer in bankruptcy, but only if you get the right court orders and protections in place.  Know your possible exposure for preferences and be prepared to defend any claims that are made.  File claims timely, understand and express your views about proposed asset sales or plans of reorganization.  Sell or buy claims of other creditors, or assets that the debtor is selling.

©2020 Clark & Trevithick. A Professional Corporation. All Rights Reserved.National Law Review, Volume , Number 217
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About this Author

Kevin P. Fiore, Transactional Real Estate Attorney, Clark and Trevithick Law Firm

Joining Clark & Trevithick in February 1994, Kevin Fiore's practice has centered on transactional real estate, including purchase and sale transactions, real estate financing, commercial leasing and the structuring of development and operating real estate entities. Kevin also has experience in general business and corporate law, including the acquisition and disposition of operating business entities.

Kevin attended Loyola University of Los Angeles for both his undergraduate and graduate work. He obtained his law degree in 1969 and his bachelor's degree in business...

213-629-5700
Kimberly S. Winick, Bankruptcy, Commercial Law Attorney, Clark and Trevithick Law firm

Kimberly S. Winick joined Clark & Trevithick in 2008, and has more than twenty years of experience in bankruptcy, commercial law, and real estate. She has written and lectured extensively on UCC Article 9 remedies, single asset real estate, executory contracts, unexpired leases, and asset securitizations. Ms. Winick is the immediate past President of the Board of Governors of the Financial Lawyers Conference, a past president of the Board of Directors of the Los Angeles Bankruptcy Forum, served as a Director of the California Bankruptcy Forum, and as Chair of the Education Committee of...

213-629-5700
James S. Arico, Commercial Real Estate Lawyer, Clark and Trevithick Law Firm

Jim Arico joined Clark & Trevithick in 1994. His experience lies in representing clients in real estate related ventures including, but not limited to acquisition, sales, leasing and finance. During the last few years, Jim has expanded his practice in the field of commercial real estate while remaining active in the business and corporate law areas.

Jim earned his bachelor's degree in real estate finance from the University of Southern California in 1981 and his law degree from Loyola Law School in 1986.

213-629-5700
John A. Lapinski, Creditor's Rights and Insolvency Attorney, Clark and Trevithick Law Firm

Specializing in creditors' rights and cases of insolvency, John Lapinski joined Clark & Trevithick in May 1994. John has extensive experience representing lenders in workout negotiations and in bankruptcy proceedings. Considered an expert in the field of creditors' rights, enforcement of judgments and provisional remedies, John has frequently lectured and authored several articles on these subjects most recently, Debt Collection Practice in California in 2008, published by CEB. John has also participated in drafting local bankruptcy rules and other matters of joint interest for the...

213-629-5700
Leslie R. Horowitz, Debtor Creditor Rights Attorney, Clark and Trevithick Law Firm

Les Horowitz joined Clark & Trevithick in May 1994 with a wide range of experience involving debtor/creditor rights in both the state and federal courts, insolvency, prejudgment remedies and the enforcement of judgments. He has represented clients from a variety of industries, both small and large corporations.  He has served as the president of the Los Angeles Chapter of the Federal Bar Association and is the immediate past Chair of The Executive Committee of the Remedies Section of the Los Angeles County Bar Association.

Les earned his law degree from Southwestern University...

213-629-5700
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