Detailed Table of Contents

Transcription

1 Detailed Table of Contents xxiii Foreword... vii Preface... ix v Summary Table of Contents... xiii Chapter 1: History of American Factoring Law Introductory Discussion A. Roots of Early American Factoring Law Grounded in the Practice of English Factors in the 14th, 15th, 16th, and 17th Centuries [New Topic]... 5 I. Summary of the Historical Development of American Factoring Law A. The Factor as a Commissioned Sales Agent... 8 B. The Factor as Financier... 9 C. Factor s Right to Sue on Accounts in Its Own Name... 9 D. Factor s Assumption of Credit Risk in Consideration of a al Del Credere Commission on Credit Sales Only... 9 E. The Scope of the Del Credere Factor s Duties at English Common Law F. Emerging American View of the Del Credere Factor as More Than a Mere Guarantor G. Consequences of the Del Credere Factor s Absolute Liability to Its Principal Oral Factoring Agreements Are Legally Enforceable Duty of the Del Credere Factor to Safely Transport Collected Sales Proceeds Principal s Right to Sue the Del Credere Factor if Not Paid at Maturity xxi

2 xxiv American Factoring Law, 2013 Supp. 4. Del Credere Commissions Were Earned Immediately Upon Entry Into the Factoring Contract, Before the Factor s Performance Was Due H. Characterization of Factor s Advances I. Del Credere Factor s Right of Subrogation Upon Payment to Its Principal J. No Assumption of Quality Risk by the Del Credere Factor K. Emergence of the Modern Factor, Solely as Financier L. Del Credere Factors and Commission Merchants Were They Different? [New Topic] II. The History of American Factoring Law A. The Historic Position of Ordinary (Non-Del Credere) Factors in Early American Factoring Law Responsibility of the Ordinary Factor to Strictly Follow the Instructions of Its Principal Losses Other Than Credit Losses Responsibility of Ordinary Factor to Its Principal for Credit Losses if Factor Sold on Unreasonable Credit Terms Responsibility of the Ordinary Factor to Give Seasonable Notice of Credit Losses to Its Principal Principal s Obligation to Cover Any Shortfall Between Sales Proceeds Received and the Ordinary Factor s Advances Against the Goods Ordinary Factor Not Allowed to Commingle Sales Proceeds With Its Own Assets Ordinary Factor Not Permitted to Unilaterally Extend or Modify Credit Originally Given B. The Role and Duties of the Del Credere Factor in Early American Factoring Law Advances by Del Credere Factors Were Nonrecourse to the Principal The Factor s Acceptance of a Del Credere Commission Had to Be Express Del Credere Factors Had No Right to Assign Factored Accounts to a Third Party Early View of the Del Credere Factor as a Mere Guarantor of the Buyer s Credit... 27

3 Detailed Table of Contents xxv 5. The Del Credere Factor s Obligation to Pay Its Client on Maturity of the Factored Accounts The Del Credere Factor as an Obligor for the Sales Price of Goods (Net of the Del Credere Factor s Advances and Costs) Advances by the Del Credere Factor Above Contractually Required Advances Created Immediate Indebtedness Due to the Del Credere Factor From Its Principal Factoring Agreements With Del Credere Factors Were Outside the Statute of Frauds The Right to a Del Credere Commission Arose When the Factor s Credit Guarantee Was Given Were Advances by the Del Credere Factor a Loan by the Factor to Its Client or a Partial Prepayment of the Purchase Price of the Underlying Goods? Right of the Del Credere Factor to Sue in Its Own Name; Factor s Lien on the Consigned Goods and Their Proceeds Limitations on Rights of the Del Credere Factor Risk of Quality Defects Rested on the Principal, Not the Del Credere Factor; the Del Credere Factor s Obligation to Safely Transmit Collected Sales Proceeds Subrogation Rights of the Del Credere Factor III. Further Developments in English Factoring Law Around the Turn of the Twentieth Century A. Del Credere Factor s Assumption of Credit Risk, Alone, Under English Law IV. Evolution of Modern American Factoring Law A. Birth of the Modern American Factor New York City as the Historic Center of American Factoring American Factors of the Early 1800s Were Largely European Immigrants A Leading American-Born Factor Emerges Growth in Factoring From the Civil War Through The Modern American Factor Emerges: 1889 to Enactment of the First American Factor s Lien Statute... 58

4 xxvi American Factoring Law, 2013 Supp. 7. Emergence of Competition From Asset-Based Receivables Financiers in the Early Twentieth Century Expansion of the Modern Factor s Client Base in the 1920s and Beyond Judicial Recognition of Differences Between the Modern American Nonrecourse Factor and the Del Credere Factor at Common Law Initial Industry Consolidation in the Late 1920s and Early 1930s; Asset-Based Financiers Move In; Major Factors Raise Equity Capital via the Public Markets; Banks Also Start to Enter the Market Growth in, and Enhancements to, Factoring Lien Laws From the 1930s Forward Factoring Growth Continues in the 1940s and 1950s; Inception of Full Recourse Factoring; a Leading Factor Diversifies Into Accounts Receivable Financing Exhibit 1-1. Comparison of the Roles of an Old-Line Factor and a Commercial Finance Company or Bank Exhibit 1-2. Assets and Liabilities of Seven Leading Factors for the Years 1941 and Exhibit 1-3. Leading Companies Engaged Only in Old-Line Factoring in Exhibit 1-4. The Largest Commercial Finance Companies in Continued Evolution of the Factoring Industry From the 1960s Through the 1980s; Entry of the Money-Center Banks; a New Wave of Consolidations and Emergence of a Two-Tiered Industry Dominated, in, by an Ever Smaller Number of Major Factors; and the Beginning of the International Market a. Export of Modern Factoring From America Back to England and to the Continent in the 1960s [New Topic] b. Comparison of Modern English Case Law on the True Sale of Accounts [New Topic]... 45

5 Detailed Table of Contents xxvii 14. The 1990s and Beyond Entry of Some Industrial Giants, Continued Contraction in the Number of Major Factors, Growth in the Number of Smaller Factors, and Increasing Focus on the Global Economy Exhibit 1-5. Domestic Factoring of Selected Larger American Domestic Factors for the Six Months Ending June The Crash of 2008 and a Look Into the Future a. New Developments Since August 2009 [New Topic] B. Modern American Nonrecourse Factors as Owners of Purchased Accounts V. Modern Factoring Today Basic Concepts A. Factoring Defined B. Who Today s Factors Are C. Benefits From Factoring D. Companies That May Not Be Well Positioned for Factoring: Points to Consider E. Overview of a Modern Factoring Agreement F. Factoring and the Uniform Commercial Code G. Securitization Distinguished Chapter 2: The Various Roles of Factors I. The Factor as Purchaser of Accounts at a Discount II. Spot Factoring III. Factors as Lenders A. Factors as Providers of Accounts Receivable Financing, Lending Against Client-Owned Accounts B. Factors as Makers of Advances in Excess of Formulas (i.e., Overadvances), Term Loans, Equipment Loans, Mortgage Loans, and Other Asset-Based Loans C. Factors Advances as Independent Loans IV. Purchase Order Financing V. Import-Export Financiers VI. Structured Settlements: Outside the Role of Traditional Factors VII. Deeply Discounted Purchases of Troubled Accounts: Outside the Role of Traditional Factors VIII. Other Exclusions from Factoring [New Topic]

6 xxviii American Factoring Law, 2013 Supp. Chapter 3: The Factoring Contract I. Overview II. The Factor s Underwriting and Due Diligence, Pre-Contract III. Title of the Factoring Agreement IV. Term of the Factoring Contract V. Funding Limits VI. Oral Agreements to Factor Accounts VII. Client s Offer of Eligible Accounts for Factor s Discretionary Purchase A. Client s Offer of Accounts B. Eligible Accounts C. Factor s Discretion to Purchase Proffered Accounts D. Case Law Regarding the Factor s Exercise of Discretion E. Potential Treatment of Certain Contracts as Option Contracts [New Topic] VIII. Formal Assignment to Factor of Accounts Accepted for Purchase A. Batches/Schedules B. Sample Purchase Language [New Topic] C. Invoicing of Purchased Accounts [New Topic] IX. Amount of Purchase Price and Timing of Payment A. Determination of the Purchase Price B. Payment Date in Maturity Factoring C. Payment Date in Collection Factoring Agreement to Deem Any Undisputed Credit-Approved Account, Factored Without Recourse, to Have Been Collected Within an Agreed Period After Contractual Maturity Absence of Any Evidence That an Account Is Disputed as a Condition to Factor s Payment of an Uncollected Account: Definition of a Dispute Payment Where Nonrecourse Factoring Agreement Does Not Expressly Limit Assumed Credit Risk to the Factor s Initial Advance and There Is No Outside Deemed Paid Date No Deemed Collection of a Purchased Account if the Factor s Assumption of Credit Risk Is Expressly Limited to Its Initial Advance

7 Detailed Table of Contents xxix 5. Effect of Contractual Presumption That Accounts Not Collected Within an Agreed Post-Maturity Period Are Deemed Disputed by the Account Debtor Treatment, in a Partial Nonrecourse Factoring Agreement, of Purchased Accounts as Definitively Disputed, or Otherwise Giving the Factor an Absolute Right of Chargeback, if a Purchased Account Does Not Suffer an Event of Credit Risk Within a Defined Period No Deemed Collection of Purchased Accounts for Which the Factor Did Not Assume (or No Longer Has) the Credit Risk Accelerated Cash Flow to Client D. Payment Date in Advance Factoring (and in Discount Factoring) E. Payment Date in Nonnotification Factoring X. Advances A. Interest-Bearing Advances as Independent Loans B. Discounted or Non-Interest-Bearing Advances C. Discretionary Nature of the Factor s Advances D. Effect of Characterization of Advances on Preference Issues XI. The Form in Which and the Extent to Which the Factor Assumes Credit Risk A. Credit Risk in General B. Full Recourse Factoring No Assumption of Credit Risk by the Factor C. Nonrecourse Factoring Full Assumption of Credit Risk by the Factor Factor Assumption of Full Credit Risk Requires Only the Use of the Words Without Recourse or Nonrecourse D. Varying Definitions of the Credit Risk Assumed by Modern Nonrecourse Factors Credit Risk Defined as the Account Debtor s Financial Inability to Pay a Purchased Account When Due, at Its Maturity The Meaning of the Term Financial Inability to Pay Financial Inability to Pay Contractually Defined as Balance Sheet Insolvency

8 xxx American Factoring Law, 2013 Supp. 4. Insolvency Does Not Necessarily Equate to Financial Inability to Pay Assumed Credit Risk Defined as Either an Account Debtor s Financial Inability to Pay or an Account Debtor s Insolvency Assumed Credit Risk Tied to Discrete Events, Such as Account Debtor Bankruptcy E. Duration of the Nonrecourse Factor s Assumption of Credit Risk The Del Credere Factor s Assumption of Credit Risk at Common Law Was Unlimited in Duration Generally Unlimited Duration of the Modern Factor s Assumption of Credit Risk Partial Nonrecourse Factoring, Where the Factor s Assumption of Credit Risk Lapses After an Agreed Period of Time Exhibit 3-1. All Accounts Not Yet Collected Treated as Converting to a Secured Borrowing Immediately Exhibit 3-2. All Accounts Not Yet Collected Treated as Converted to a Secured Borrowing if Charged Back Exhibit 3-3. All Accounts Not Yet Collected Treated as Converted to a Secured Borrowing if Charged Back and the Chargeback Is Satisfied Factoring Agreements Which Convert Over Time From Full Recourse to Nonrecourse Effect of Limitations on the Duration of Assumed Credit Risk on the True Sale Analysis F. Partial Recourse Factoring Credit Risk Shared Between Factor and Its Client Split Risk Factoring Assumed Credit Risk Shared by Client Up to a Specific Dollar Amount Credit Risk Shared in Specific Percentages Limitation on Factor s Assumption of Credit Risk

9 Detailed Table of Contents xxxi G. Limitations on, and Cancellations of, Credit Risk Assumed by the Nonrecourse Factor Dispute by Account Debtor Cancellation of Assumed Credit Risk by the Factor Prior to Delivery of Goods or Rendering of Services by the Factor s Client No Limitation of Assumed Credit Risk From the Nonrecourse Factor s Ability to Set Off Its Balance Payment Due on Purchased Accounts Against Monies Due From Its Client, Such as Expense Reimbursements or Fees Due to the Factor Assumption of Credit Risk Extends Only to Approved Accounts H. The Nonrecourse Factor s Assumption of Full Credit Risk and the True Sale of Purchased Accounts I. Factor s Credit Check Is Solely for Its Own Benefit J. Factors Never Assume Quality Recourse K. Factor s Retention of a Unilateral Right to Raise or Replenish Withheld Reserves L. Factor s Limitation of Assumed Credit Risk by Taking Third-Party Guarantees M. No Assumption of Credit Risk by the Factor Where Accounts Are Purchased With Full Recourse to the Client N. Effect on Credit Risk of the Factor s Purchasing a Partial Interest in Accounts, With the Client Retaining a Junior Participation Interest Therein O. Credit Insurance for the Factor XII. The Reserve A. In General B. The Reserve as Security C. Debits and Credits to the Reserve; Minimum Reserve Levels D. Payover of Credit Balances in the Reserve XIII. Fees A. Commitment Fees B. Discount Fees/Commissions C. Interest and Default Interest D. Total Cost of Funding E. The Cost of Factoring Compared to Bank Financing

10 xxxii American Factoring Law, 2013 Supp. F. Servicing Fees G. Early Termination Fees XIV. Representations and Warranties of the Client Regarding Accounts A. In General B. Evergreen Clauses XV. Client s Grant of Security Interests to the Factor A. Grant of Security Interest to the Factor in Purchased Accounts as Evidence of the Factor s Ownership Interest B. Grant of Security Interest to the Factor in Non-Purchased Accounts and Other Assets C. Protective Language Regarding Re-Characterization XVI. Billing and Collection Procedures A. In General B. Factor s Collection Duties C. Factor s Client as Servicer D. Notification Versus Nonnotification Factoring E. Lockboxes F. Collections on Non-Purchased Accounts (Non-Factored Funds) XVII. Other Factor Protections and Rights A. Miscellaneous Factor Protection Mechanisms and Other Rights B. Conditions to Factor s Fundings XVIII. Chargebacks A. In General B. Automatic and Nonautomatic Chargebacks of Ineligible and Disputed Accounts C. The Factor s Absolute Right to Exercise Its Contractual Right to Chargeback Accounts That Are the Subject of Disputes, Regardless of the Merits of the Dispute D. The Repurchase Price Payable Upon Chargeback E. Methods of Paying the Repurchase Price F. Chargebacks for Quality Recourse Do Not Affect the True Sale of Accounts G. Effect of Full Recourse Purchases on the Concept of a True Sale of Accounts H. Title to Purchased Accounts When Charged Back I. Upon a Chargeback, a Security Interest Is Retained in the Factor Until the Indebtedness Is Paid in Full

11 Detailed Table of Contents xxxiii XIX. Existing Liens and Security Interests Against the Client s Accounts A. Tax Liens B. Unreleased or Unterminated Financing Statements C. Release of Existing Security Interests D. Sales of Accounts Free and Clear From a Client s Bankruptcy Estate E. Contractual Subordination of Existing Security Interests F. Inter-Factor Agreements G. Contractual Bar on Junior Liens and Security Interests H. Recoupment and Setoff Rights of Account Debtors XX. Default A. Events of Default B. Default Remedies C. Factor s Analysis Prior to Declaring Default XXI. Termination of the Factoring Contract A. Per Contractual Terms B. Deemed Termination C. Retention of Rights Post-Termination XXII. Miscellaneous Contract Issues A. Choice of Law B. Jury Trial Waivers C. Forum Selection Clauses D. Arbitration Clauses XXIII. Special Requirements of Local Law A. Lender s License B. Usury C. Financial Privacy Laws D. Place of Contracting and Place of Acceptance E. Requirement of Written Modifications/Merger Clause F. Signatories XXIV. Multiple-Client Factoring Transactions Chapter 4: Treatment of Credit Risk and True Sale Issues I. Overview II. Factor s Purchase of Accounts Without Recourse to the Client as True Sales Under State Law A. Nonrecourse Factor s Assumption of Credit Risk

12 xxxiv American Factoring Law, 2013 Supp. B. Economics of the Credit Risk Assumed in Purchasing Accounts Without Recourse Single-Invoice Factoring, Without Recourse Exhibit 4.1. Nonrecourse Spot Factoring Exhibit 4.2. Nonrecourse Loan With One Account as Collateral Multiple Accounts Purchased in a Single Batch Without Recourse Exhibit 4.3. Nonrecourse Factoring; One Batch of Accounts Exhibit 4.4. Nonrecourse Loan With Multiple Accounts as Collateral Invoices Purchased in a Batch With Partial Recourse Exhibit 4.5. Factoring on a Partial Recourse Basis With 5% Partial Client Recourse for Credit Losses Conclusion C. The Factor s Retention of Quality Recourse Does Not Bar a True Sale of Accounts D. Official Comments to the Uniform Commercial Code E. State Law Judicial Recognition of Accounts Factored Without Recourse as True Sales F. Is a Factoring of Accounts on a Split Risk Basis a True Sale of All Accounts? III. Accounts Factored on a Partial Nonrecourse Basis as True Sales A. Partial Nonrecourse Factoring Defined B. Partial Nonrecourse Factoring as a True Sale IV. Factoring Accounts With Partial Recourse as True Sales A. Effect on the True Sale Analysis of Client s Acceptance of the First Credit Risk, Up to an Agreed Amount B. Sales of Accounts With Partial Recourse as True Sales Where the Factor Assumes 50 Percent or More of Credit Risk C. True Sales Where the Factor s Credit Risk Is Limited to Its Initial Advance D. True Sales Where the Client Shares Credit Risk via a Withheld Credit Reserve V. Full Recourse Factoring Sometimes a True Sale, Sometimes Not A. Full Recourse Factoring Treated as a Secured Borrowing

13 Detailed Table of Contents xxxv B. Full Recourse Factoring Treated as a True Sale of Accounts VI. Facts and Circumstances in True Sale Analysis Under State Law A. Elements of the Facts and Circumstances Test The Parties Stated Intent to Make a True Sale The Extent to Which the Purchasing Factor Assumes Credit Risk a. Applying Boulder Fruit [New Topic] The Factor s Right to Resell and Pledge the Factored Accounts Without the Seller s Consent Whether the Seller Has the Right (or the Obligation) to Redeem or Re-Purchase the Sold Accounts The Factor s Right to Surplus The Factor s Right to Control Collection of Accounts The Factor s Control Over Settlement of Accounts Treatment of the Transaction by the Parties for Accounting Purposes Treatment of the Transaction by the Parties for Tax Purposes Notice of the Sale of Accounts to the Account Debtors Adequacy of the Purchase Price Sale of Associated Books and Records Size of Reserves; Unilateral Ability to Adjust Reserves Protective Language Regarding Characterization The Nature of Factor s Legal Fees Payable by the Client The Nature of Seller and Third-Party Guarantees Held by the Factor The Client as Collection Agent for the Factor B. Effect of Non-Uniform State Law Provisions Where Intent Alone Controls VII. GAAP True Sales A. SFAS No. 77 ( ) [Revised Heading] B. SFAS No. 125 (1997 March 31, 2001) C. SFAS No. 140 (April 1, 2001, to Date) Sales of Accounts With Full Recourse Treated as True Sales Under SFAS No

14 xxxvi American Factoring Law, 2013 Supp. 2. Sales of Accounts With Full Recourse Treated as Secured Borrowings Under SFAS No Sales of Accounts to a Factor Without Recourse as True Sales Under SFAS No Bifurcated Accounting Under SFAS No. 140 for Accounts Sold to a Factor on a Split Risk Basis D. SFAS No. 166 (Effective for Annual Reporting Periods Starting After November 15, 2009) E. True Sales of Accounts by Governmental Entities F. Summary VIII. Factoring Agreements as True Sales for Federal Tax Purposes A. Overview B. Federal Tax Treatment of Accounts Factored Without Recourse C. Federal Tax Treatment of Accounts Factored With Full Recourse D. Federal Tax Treatment of Accounts Factored With Partial Recourse IX. Literature on the Topic of True Sale Issue [New Topic] A. Authors Commentary on Selected Material [New Topic] Chapter 5: Specialty Factoring and Non-Factoring Financial Services I. Specialty Factoring A. Government Accounts The Federal Assignment of Claims Act Assignment Under Federal Law Is of the Right to Payment Only Worthless Collateral Factors and the Assignment of Federal Claims Governmental Waiver of Compliance With the Federal Act; Estoppel Factoring Is Effective Between Parties to the Factoring Agreement Despite Non-Compliance With the Anti-Assignment Acts True Sales of Governmental Accounts Governmental Units as Account Debtors Under the U.C.C

15 Detailed Table of Contents xxxvii 9. State Restrictions on the Assignment of State, County, and Municipal Government Contracts B. Healthcare Accounts Business Complexities Anti-Assignment Rules of Medicare and Medicaid True Sales of Healthcare Accounts C. Transportation Factoring D. Construction Factoring E. Agricultural Factoring F. International Factoring Export Factoring Import Factoring Factor Chains G. Spot Factoring II. Nonfactoring Financial Services A. Purchase Order Financing Overview The Basics of Purchase Order Financing Inter-Creditor Agreements Between the Factor and the Non-Factor Purchase Order Financier Costs of Purchase Order Financing Requirements for Purchase Order Financing B. Letters of Credit C. Factoring Loans and Accounts Receivable Financing Chapter 6: Litigation Between the Factor and Its Client I. Possible Responses by Factor to Client Defaults A. Acceleration of Underlying Obligations B. Reducing or Ceasing Further Purchases of Accounts C. Forbearance D. Factor s Foreclosure E. Factor s Exercise of Recoupment and Setoff Rights F. Factor s Takeover of Client Servicing Functions G. Taking an Ownership Interest in the Client; Requiring the Client to Raise Equity H. Pursuit of Third-Party Guarantors I. Pre-Judgment Remedies II. Personal Jurisdiction

16 xxxviii American Factoring Law, 2013 Supp. A. Establishing Jurisdiction Over the Client and/or Its Principals Jurisdiction in General Long-Arm Jurisdiction Over a Nonresident Defendant General and Specific Jurisdiction Alternative Forms: Alter-Ego, Agency, and Conspiracy Jurisdiction Representative Case Law B. Establishing Personal Jurisdiction Over the Factor III. Contract Claims by Factors Against Their Clients A. Breach of Contract B. Account Stated and Other Non-Tort Claims C. Attorney s Fee Claims D. Arbitration [New Topic] IV. Tort Claims by Factors Against Their Clients A. Conversion and Unjust Enrichment B. Fraud and Negligent Misrepresentation C. Intentional Interference With Contractual Relationships D. Piercing the Corporate Veil of the Client E. RICO Violations [New Topic] F. Client Violation of State Law Barring Deceptive Practices [New Topic] G. Tort Claims Against Client s Professionals [New Topic] V. Client s Defenses, Claims, and Counterclaims Against the Factor A. Improper Failure to Fund Was a Binding Contract Formed? Factor s Discretion to Refuse to Purchase Proffered Accounts B. Claims That a Factor Improperly Charged Back Claims That a Nonrecourse Factor Charged Back Accounts That Were Not Disputed by the Account Debtor Claims That a Nonrecourse Factor Charged Back Accounts Within Its Assumption of Credit Risk Claim That Accounts Factored With Full Recourse Were Improperly Charged Back C. Goods Sold and Delivered D. Unjust Enrichment E. Claim for Return of Factor s Commitment/ Diligence Fee

17 Detailed Table of Contents xxxix F. Oral Modifications, Before or After the Contract Is Signed;Parol Evidence Rule G. Payment H. Demand for Factor to Release Its UCC-1 Financing Statement I. Statute of Limitations J. Factor s Alleged Breach of Covenant of Good Faith and Fair Dealing K. Breach of Fiduciary Duty L. Fraudulent Inducement/Negligent Misrepresentation M. Usury N. Truth in Lending O. Improper Venue P. Excuse of Client s Performance Due to Factor s Prior Material Breach [New Topic] VI. Corporate Client Must Appear by Counsel VII. Injunctive Relief for the Factor VIII. Forum-Selection Clauses IX. Choice of Law Litigation X. Jury Trial Waivers XI. Factor s Exercise of Post-Judgment Remedies [New Topic] Chapter 7: Litigation Between Factors and Account Debtors I. Factor s Affirmative Claims Against the Account Debtor in Collection Litigation A. Breach of Contract B. Estoppel Created by Account Debtor s Verification of the Account Verification in General; Common Law Estoppel Created Thereby Statutory Waiver and Limitations of Payor s Defenses U.C.C (b) Selected Cases C. Tort and Other Affirmative Claims by the Factor D. U.C.C General Rules of U.C.C Case Law Under U.C.C Special Rules of U.C.C E. Attorney s Fees [New Topic] II. Defenses of the Account Debtor A. U.C.C

18 xl American Factoring Law, 2013 Supp. 1. General Rule Recoupment Defenses Can Arise at Any Time; Other Defenses and Claims Are Cut Off if They Arise After the Account Debtor Receives Notice of the Assignment; Material Breach by the Factor s Client Creating a Right of Recoupment in the Account Debtor; Material Breach by the Account Debtor as Barring Recoupment Defense [Revised Heading] U.C.C Inapplicable if Account Debtor Has Already Made Payment to the Client Rather Than the Factor Other Limitations on U.C.C B. Account Debtor s Defenses to Verifications Given Under U.C.C (b) Lack of Consideration Account Debtor s Claim That Factor Lacked Good Faith Adequacy of Factor s Notice Signatory s Lack of Authority Waiver U.C.C Defenses and Claims in Recoupment Effect of Delayed Notice to the Account Debtor Special Rules Where a Government Obligor Is the Account Debtor Other Defenses [New Topic] C. Lack of Personal Jurisdiction Over the Account Debtor In General Long-Arm Jurisdiction Over a Nonresident Account Debtor General and Specific Jurisdiction Alternative Forms of Alter-Ego, Agency, and Conspiracy Jurisdiction Issues in Diversity Jurisdiction Selected Cases D. Failure to State a Claim E. Statute of Limitations III. Account Debtor s Mistaken Payment A. Mistaken Payment to the Factor s Client After Notice U.C.C B. Payments Received by the Factor After Termination of the Factoring Agreement IV. Forum Selection Clauses and the Account Debtor

19 Detailed Table of Contents xli V. Arbitration Clauses and the Account Debtor VI. Bankruptcy of the Account Debtor VII. Negotiation of Checks Payable to Stacked Payees Chapter 8: The Factor and Guarantors of Client Obligations I. Scope of Guarantor s Guarantee A. Full Guarantee B. Limited Guarantee C. Validity Guarantee D. Guarantees of Payment vs. Guarantees of Collection II. Factors Claims Against Guarantors A. Breach of Contract B. Account Stated C. Attorney s Fees D. Tort Claims III. Guarantors Defenses and Counterclaims Against Factors A. Unreasonable Commercial Disposition of Collateral Under the U.C.C B. Failure to Diligently Collect C. Improper Chargebacks Accounts Improperly Charged Back as Disputed Accounts Subject to Factor s Assumed Credit Risk Improperly Charged Back D. Inadequate Consideration E. Oral Modifications Before or After the Guaranty Was Signed; Parol Evidence Rule F. Factor s Breach of the Covenant of Good Faith and Fair Dealing G. Fraudulent Inducement/Negligent Misrepresentation; Fraud; Did Not Read Defense H. Breach of Fiduciary Duty I. Intentional Infliction of Emotional Distress J. Usury K. Objections to Jurisdiction and Venue Chosen by the Factor L. Payment of the Underlying Debt M. Signature in a Representative Capacity Only; Execution in Blank N. Guarantee Voided by Factor s Charge Back IV. Waivers of Counterclaims and Defenses

20 xlii American Factoring Law, 2013 Supp. V. Confessed Judgments VI. Effect of Guarantees on the True Sale of Accounts VII. Jury Demands by Guarantors [New Topic] Chapter 9: The Factor and Its Funding Sources I. Rediscounting Lines of Credit: Asset-Based Lending to Factors II. Re-Factoring: Sale of Accounts to Another Factor III. Participation Interests IV. Funding via Securitization Transactions V. Equity Offerings by Factors VI. Litigation Between the Factor and Its Funding Sources A. Litigation Between the Factor and Its Lender B. Litigation Between the Factor and Its Re-Factor C. Litigation Related to Participation Interests Chapter 10: Take-Outs and Other Relationship Issues Between Factors of the Same Client I. Take-Out of an Existing Factor A. Direct Purchase of the Old Factor s Position B. Client s Repurchase of the Subject Accounts and Termination of the Existing Factoring Agreement C. New Factor Comes in on Top of the Old Factor s Position II. Legal and Business Issues to Be Addressed in the Take-Out Transaction III. Litigation Arising From Take-Out of an Existing Factor IV. Priority Disputes Between Factors V. Split Factoring Appendix 10.A: Letter of Indemnity Chapter 11: Factors and Third-Party Lenders/Creditors I. Factor s Take-Out of an Existing Lender s Position A. Payoff Letters: Existing Lender Paid Off From the New Factor s Funding Proceeds, or Existing Factor Paid Off by Client With Proceeds of Lender Financing B. Assignment of Existing Lender s Position to the New Factor

21 Detailed Table of Contents xliii C. Existing Lienholder and Client s Sale of Accounts to the Factor Free and Clear of Existing Liens D. Sale of Accounts Out of the Client s Bankruptcy Estate, Under Section 363 of the Bankruptcy Code, Free and Clear of Existing Liens II. Existing Lienholder s Subordination to an Incoming Factor s Security Interest: In General A. Lien Subordination B. Debt Subordination C. Assignment of Factoring Credit Balances D. Standstill E. Treatment of Ledger Debt F. Turnover of Funds G. Client Acknowledgement H. Prohibition of Subordination and Assignment I. Bankruptcy III. Priority, Intercreditor, and Subordination Disputes A. Priority Disputes General Rule: First to File or Perfect Is First in Right Factor s Perfected Security Interest Prevails Over Client s Unsecured Creditors Factor s Perfected Security Interest Prevails Over Later Perfecting Purchaser or Lien Creditor; Special 45-Day Rule of Section Applicable to Recourse Factors Lien Creditor or Purchaser That Perfects Its Interest Prevails Over Later Perfecting Factor Effect of a Third-Party Lender s Subordination to a New Factor if Other Lenders Also Hold Liens on the Subject Accounts A Junior Creditor Who Levies on Accounts Purchased by a Factor Holding a Senior Security Interest Takes Subject to the Factor s Security Interest; the 45-Day Rule Applicable to Recourse Factors Factor s Cause of Action for Conversion Against the Holder of a Junior Security Interest: Holder in Due Course Defense Factor Takes Subject to Unreleased or Unsubordinated Existing Liens

22 xliv American Factoring Law, 2013 Supp. 9. Naked Transfers of Security Interests Are Legally Ineffective Factor s Actual Knowledge of Unperfected Prior Lien Client s Trade Names Priority of Bank s Setoff Rights Purchase Money Security Interests Unauthorized Termination of Factor s UCC-1 [New Topic] Loss of Security Interest Due to Trademark Violation [New Topic] B. Factor s Failure to Perfect Its Security Interest C. Disputes Between Factors and Lenders With Respect to Intercreditor and Subordination Agreements IV. Lender s Take-Out of Factor s Position V. Factor and Third-Party Purchase Order Financier VI. Priority Disputes Between Two Lenders to a Factor VII. Fraudulent Conveyance and Other Risks to Consider[New Topic] A. Fraudulent Conveyance Risks [New Topic] B. PACA and Unpaid Produce Sellers [New Topic] C. Buyers in the Ordinary Course of Business [New Topic] D. Judgment Lien Creditors Who Garnish Either the Factor or the Factor s Client [New Topic] E. Transferee of Funds From a Depository Account in the Name of the Factoring Client [New Topic] Chapter 12: Bankruptcy Issues I. General Bankruptcy Concepts and Terminology A. Chapters of the Bankruptcy Code B. The Bankruptcy Court and Its Limited Jurisdiction C. The Players D. The Bankruptcy Estate and Property of the Estate E. Automatic Stay General Concepts Relief From Stay to Recover a Secured Creditor s Collateral Relief From Stay to Liquidate Pre-Petition Claims of the Creditor Against the Debtor in a Nonbankruptcy Forum

23 Detailed Table of Contents xlv 4. The Automatic Stay Does Not Apply to Any Affirmative Claims by the Debtor/Client Against Its Factor The Automatic Stay Does Not Bar Claims by the Factor Against the Client s Guarantors F. Claims and Collateral Valuation Proof of Claim and the Bar Date Collateral Valuation; Possible Bifurcation of Secured Claims Types of Claims; Priority of Distribution Filing a Proof of Claim: Pros and Cons for Factors Multiple Claims G. Cash Collateral Forms of Possible Adequate Protection for the Debtor s Use of Cash Collateral Valuation and Adequate Protection, Including for the Use of Cash Collateral H. Executory Contracts I. Post-Petition Operation of Debtor s Business J. Post-Petition DIP Financing K. Asset Sales Out of Bankruptcy L. The Chapter 11 Process First-Day Motions Stabilizing the Ship Plans and Disclosure Statements in Chapter M. Discharge of Corporate Debtors N. Discharge of an Individual Debtor Individual Debtor s General Discharge in Chapters 11 and Dischargeability of Particular Debts in Chapters 11 and Individual Debtor s Discharge in Chapter O. Bankruptcy Litigation Contested Matters Adversary Proceedings Debtor s Exercise of Avoiding Powers P. Conversion and Dismissal Q. Bankruptcy Rules II. Bankruptcy of the Factor s Client A. Debtor s Motion for Permission to Use Cash Collateral, and the Factor s Opposition Thereto B. Debtor/Client s Efforts to Directly Collect Factored Accounts

24 xlvi American Factoring Law, 2013 Supp. C. Debtor/Client s Suit Against Its Factor for Turnover of Collected Proceeds Received by the Factor on Factored Accounts; Debtor s Demand for Turnover of Factor s Reserves and Credit Balances D. Factor s Post-Petition Collect-Out of Pre-Petition Factored Accounts E. Factor s Post-Petition Sale of Accounts Back to the Debtor F. Factoring as a Form of DIP Financing Historic DIP Financing by Factors Factoring the DIP in Connection With a Securitization Facility Recent Examples of Factors Providing DIP Financing True Sale Finding; Sale of Accounts to the Factor Free and Clear Post-Petition Factoring as Outside the Ordinary Course of Business; Need for Authorizing Order Need to Seek Relief Under Both 11 U.S.C. 363 and The Issue of Existing Liens Recoupment and Setoff Claims Exit Financing G. Factor s Motions for Relief From the Automatic Stay To Foreclose Collateral For Permission to Set Off To Collect on a Nondischargeable Claim H. Factor s Filing of a Proof of Claim; Client s Objections Thereto I. Preference Claims J. Fraudulent Conveyance Claims K. Is the Factoring Agreement an Executory Contract That Cannot Be Assumed? L. Involuntary Bankruptcy Petition Filed by a Factor Against its Client [New Topic] M. Voidable Post-petition Transfers to the Factor [New Topic] N. Return of Non-factored Funds [New Topic] O. Challenges by the Bankrupt to Fees and Commissions of the Factor [New Topic] P. Letters of Credit [New Topic] III. Lender Liability and Other Claims A. Factor s Unperfected Security Interest Falls to Trustee s Strong-Arm Powers

25 Detailed Table of Contents xlvii B. Factor Continues Post-Petition Advances, Unaware of the Client s Bankruptcy C. Claims Against Client s Principals for Sale of Fraudulent Accounts IV. Bankruptcy of the Client s Guarantors and Its Principals V. Bankruptcy of a Client s Account Debtor VI. Bankruptcy of the Factor Chapter 13: The Factor and Tax Authorities I. The Federal Tax Lien II. Effect of the Automatic Stay on the IRS s Right to a Lien on Post-Petition Accounts III. The Factor s Response to an IRS Tax Levy IV. The Factor and Section 3505(b) Liability V. Intercreditor and Subordination Agreements With the IRS A. Subordination of Federal Tax Liens B. Withdrawal of Notice of Federal Tax Lien C. Release of Federal Tax Lien D. Examples of IRS Subordinations to Factors VI. Successor Liability Chapter 14: Factoring Accounting I. Sources That Discuss Accounting for Factoring Transactions A. FASB Statements of Financial Accounting Standards (SFAS) B. AICPA Statements of Position (SOP) C. AICPA Accounting and Audit Guides D. Books and Articles Review of Example in the GAAP Implementation Guide Exhibit 2-1. Sample Factoring Journal Entry Review of Accounting Proposed by Mr. Ratcliffe Review of Accounting Proposed in Intermediate Accounting Relevant Literature [New Topic] E. Statements of the Government Accounting Standards Board [New Topic] II. Examples of Actual GAAP Reporting A. Examples of GAAP Reporting by Factors Accounts Purchased Both With and Without Recourse as True Sales

26 xlviii American Factoring Law, 2013 Supp. 2. Recognition of Income From Discount Fees (Factoring Commissions) Client Advances Balance Sheet Reporting B. Client Accounting for Factoring Transactions Under GAAP Servicing Assets and Liabilities [New Topic] Chapter 15: Miscellaneous Matters I. Factoring as a Tax-Planning Device II. Factoring and Securities Laws Matters III. Factoring and Criminal Law Matters IV. Factors and Antitrust Litigation V. Litigation Involving Factors and Third-Party Professionals Appendices... Glossary of Factoring Terms Bibliography Table of Cases Index About the Authors