Detailed Table of Contents

Detailed Table of Contents xxiii Foreword... vii Preface... ix v Summary Table of Contents... xiii Chapter 1: History of American Factoring Law... 1 1 Introductory Discussion... 4 5 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... 8 27 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... 10 F. Emerging American View of the Del Credere Factor as More Than a Mere Guarantor... 13 G. Consequences of the Del Credere Factor s Absolute Liability to Its Principal... 13 1. Oral Factoring Agreements Are Legally Enforceable... 14 2. Duty of the Del Credere Factor to Safely Transport Collected Sales Proceeds... 14 3. Principal s Right to Sue the Del Credere Factor if Not Paid at Maturity... 14 xxi

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... 14 H. Characterization of Factor s Advances... 14 I. Del Credere Factor s Right of Subrogation Upon Payment to Its Principal... 15 J. No Assumption of Quality Risk by the Del Credere Factor... 15 K. Emergence of the Modern Factor, Solely as Financier... 15 L. Del Credere Factors and Commission Merchants Were They Different? [New Topic]... 27 II. The History of American Factoring Law... 18 33 A. The Historic Position of Ordinary (Non-Del Credere) Factors in Early American Factoring Law... 18 1. Responsibility of the Ordinary Factor to Strictly Follow the Instructions of Its Principal... 18 2. Losses Other Than Credit Losses... 18 3. Responsibility of Ordinary Factor to Its Principal for Credit Losses if Factor Sold on Unreasonable Credit Terms... 19 4. Responsibility of the Ordinary Factor to Give Seasonable Notice of Credit Losses to Its Principal... 21 5. Principal s Obligation to Cover Any Shortfall Between Sales Proceeds Received and the Ordinary Factor s Advances Against the Goods... 22 6. Ordinary Factor Not Allowed to Commingle Sales Proceeds With Its Own Assets... 24 7. Ordinary Factor Not Permitted to Unilaterally Extend or Modify Credit Originally Given... 24 B. The Role and Duties of the Del Credere Factor in Early American Factoring Law... 25 33 1. Advances by Del Credere Factors Were Nonrecourse to the Principal... 25 33 2. The Factor s Acceptance of a Del Credere Commission Had to Be Express... 25 3. Del Credere Factors Had No Right to Assign Factored Accounts to a Third Party... 26 4. Early View of the Del Credere Factor as a Mere Guarantor of the Buyer s Credit... 27

Detailed Table of Contents xxv 5. The Del Credere Factor s Obligation to Pay Its Client on Maturity of the Factored Accounts... 28 6. The Del Credere Factor as an Obligor for the Sales Price of Goods (Net of the Del Credere Factor s Advances and Costs)... 28 7. Advances by the Del Credere Factor Above Contractually Required Advances Created Immediate Indebtedness Due to the Del Credere Factor From Its Principal... 31 8. Factoring Agreements With Del Credere Factors Were Outside the Statute of Frauds... 32 9. The Right to a Del Credere Commission Arose When the Factor s Credit Guarantee Was Given... 33 10. 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?... 33 11. Right of the Del Credere Factor to Sue in Its Own Name; Factor s Lien on the Consigned Goods and Their Proceeds... 35 12. Limitations on Rights of the Del Credere Factor... 36 13. 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... 36 14. Subrogation Rights of the Del Credere Factor... 44 III. Further Developments in English Factoring Law Around the Turn of the Twentieth Century... 47 A. Del Credere Factor s Assumption of Credit Risk, Alone, Under English Law... 47 IV. Evolution of Modern American Factoring Law... 50 33 A. Birth of the Modern American Factor... 50 33 1. New York City as the Historic Center of American Factoring... 50 2. American Factors of the Early 1800s Were Largely European Immigrants... 51 33 3. A Leading American-Born Factor Emerges... 53 4. Growth in Factoring From the Civil War Through 1889... 53 5. The Modern American Factor Emerges: 1889 to 1905... 55 6. Enactment of the First American Factor s Lien Statute... 58

xxvi American Factoring Law, 2013 Supp. 7. Emergence of Competition From Asset-Based Receivables Financiers in the Early Twentieth Century... 58 8. Expansion of the Modern Factor s Client Base in the 1920s and Beyond... 60 9. Judicial Recognition of Differences Between the Modern American Nonrecourse Factor and the Del Credere Factor at Common Law... 61 10. 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... 70 11. Growth in, and Enhancements to, Factoring Lien Laws From the 1930s Forward... 74 12. Factoring Growth Continues in the 1940s and 1950s; Inception of Full Recourse Factoring; a Leading Factor Diversifies Into Accounts Receivable Financing... 75 Exhibit 1-1. Comparison of the Roles of an Old-Line Factor and a Commercial Finance Company or Bank... 78 Exhibit 1-2. Assets and Liabilities of Seven Leading Factors for the Years 1941 and 1948... 79 Exhibit 1-3. Leading Companies Engaged Only in Old-Line Factoring in 1950... 80 Exhibit 1-4. The Largest Commercial Finance Companies in 1950... 80 13. 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... 81 41 a. Export of Modern Factoring From America Back to England and to the Continent in the 1960s [New Topic]... 41 b. Comparison of Modern English Case Law on the True Sale of Accounts [New Topic]... 45

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... 88 Exhibit 1-5. Domestic Factoring of Selected Larger American Domestic Factors for the Six Months Ending June 1993... 89 15. The Crash of 2008 and a Look Into the Future... 96 57 a. New Developments Since August 2009 [New Topic]... 57 B. Modern American Nonrecourse Factors as Owners of Purchased Accounts... 103 81 V. Modern Factoring Today Basic Concepts... 114 82 A. Factoring Defined... 114 82 B. Who Today s Factors Are... 115 83 C. Benefits From Factoring... 116 D. Companies That May Not Be Well Positioned for Factoring: Points to Consider... 118 E. Overview of a Modern Factoring Agreement... 120 F. Factoring and the Uniform Commercial Code... 122 84 G. Securitization Distinguished... 126 84 Chapter 2: The Various Roles of Factors... 129 91 I. The Factor as Purchaser of Accounts at a Discount... 129 91 II. Spot Factoring... 131 94 III. Factors as Lenders... 131 100 A. Factors as Providers of Accounts Receivable Financing, Lending Against Client-Owned Accounts... 131 100 B. Factors as Makers of Advances in Excess of Formulas (i.e., Overadvances), Term Loans, Equipment Loans, Mortgage Loans, and Other Asset-Based Loans... 131 C. Factors Advances as Independent Loans... 132 IV. Purchase Order Financing... 132 100 V. Import-Export Financiers... 133 101 VI. Structured Settlements: Outside the Role of Traditional Factors... 133 VII. Deeply Discounted Purchases of Troubled Accounts: Outside the Role of Traditional Factors... 133 101 VIII. Other Exclusions from Factoring [New Topic]... 102

xxviii American Factoring Law, 2013 Supp. Chapter 3: The Factoring Contract... 136 119 I. Overview... 140 II. The Factor s Underwriting and Due Diligence, Pre-Contract... 140 125 III. Title of the Factoring Agreement... 144 IV. Term of the Factoring Contract... 144 V. Funding Limits... 144 VI. Oral Agreements to Factor Accounts... 145 VII. Client s Offer of Eligible Accounts for Factor s Discretionary Purchase... 145 127 A. Client s Offer of Accounts... 145 B. Eligible Accounts... 146 C. Factor s Discretion to Purchase Proffered Accounts... 146 D. Case Law Regarding the Factor s Exercise of Discretion... 146 E. Potential Treatment of Certain Contracts as Option Contracts [New Topic]... 127 VIII. Formal Assignment to Factor of Accounts Accepted for Purchase... 151 128 A. Batches/Schedules... 151 128 B. Sample Purchase Language [New Topic]... 128 C. Invoicing of Purchased Accounts [New Topic]... 130 IX. Amount of Purchase Price and Timing of Payment... 152 132 A. Determination of the Purchase Price... 152 132 B. Payment Date in Maturity Factoring... 153 C. Payment Date in Collection Factoring... 155 132 1. Agreement to Deem Any Undisputed Credit-Approved Account, Factored Without Recourse, to Have Been Collected Within an Agreed Period After Contractual Maturity... 155 2. Absence of Any Evidence That an Account Is Disputed as a Condition to Factor s Payment of an Uncollected Account: Definition of a Dispute... 159 132 3. 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... 162 4. No Deemed Collection of a Purchased Account if the Factor s Assumption of Credit Risk Is Expressly Limited to Its Initial Advance... 163

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... 163 6. 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... 164 7. No Deemed Collection of Purchased Accounts for Which the Factor Did Not Assume (or No Longer Has) the Credit Risk... 165 8. Accelerated Cash Flow to Client... 166 D. Payment Date in Advance Factoring (and in Discount Factoring)... 166 E. Payment Date in Nonnotification Factoring... 166 X. Advances... 167 A. Interest-Bearing Advances as Independent Loans... 167 B. Discounted or Non-Interest-Bearing Advances... 169 C. Discretionary Nature of the Factor s Advances... 181 D. Effect of Characterization of Advances on Preference Issues... 181 XI. The Form in Which and the Extent to Which the Factor Assumes Credit Risk... 182 139 A. Credit Risk in General... 182 B. Full Recourse Factoring No Assumption of Credit Risk by the Factor... 183 C. Nonrecourse Factoring Full Assumption of Credit Risk by the Factor... 184 1. Factor Assumption of Full Credit Risk Requires Only the Use of the Words Without Recourse or Nonrecourse... 184 D. Varying Definitions of the Credit Risk Assumed by Modern Nonrecourse Factors... 186 139 1. Credit Risk Defined as the Account Debtor s Financial Inability to Pay a Purchased Account When Due, at Its Maturity... 186 2. The Meaning of the Term Financial Inability to Pay... 187 139 3. Financial Inability to Pay Contractually Defined as Balance Sheet Insolvency... 188

xxx American Factoring Law, 2013 Supp. 4. Insolvency Does Not Necessarily Equate to Financial Inability to Pay... 189 139 5. Assumed Credit Risk Defined as Either an Account Debtor s Financial Inability to Pay or an Account Debtor s Insolvency... 190 6. Assumed Credit Risk Tied to Discrete Events, Such as Account Debtor Bankruptcy... 191 E. Duration of the Nonrecourse Factor s Assumption of Credit Risk... 191 139 1. The Del Credere Factor s Assumption of Credit Risk at Common Law Was Unlimited in Duration... 191 2. Generally Unlimited Duration of the Modern Factor s Assumption of Credit Risk... 191 139 3. Partial Nonrecourse Factoring, Where the Factor s Assumption of Credit Risk Lapses After an Agreed Period of Time... 191 139 Exhibit 3-1. All Accounts Not Yet Collected Treated as Converting to a Secured Borrowing Immediately... 198 Exhibit 3-2. All Accounts Not Yet Collected Treated as Converted to a Secured Borrowing if Charged Back... 199 140 Exhibit 3-3. All Accounts Not Yet Collected Treated as Converted to a Secured Borrowing if Charged Back and the Chargeback Is Satisfied... 199 4. Factoring Agreements Which Convert Over Time From Full Recourse to Nonrecourse... 203 5. Effect of Limitations on the Duration of Assumed Credit Risk on the True Sale Analysis... 204 F. Partial Recourse Factoring Credit Risk Shared Between Factor and Its Client... 205 1. Split Risk Factoring... 205 2. Assumed Credit Risk Shared by Client Up to a Specific Dollar Amount... 206 3. Credit Risk Shared in Specific Percentages... 206 4. Limitation on Factor s Assumption of Credit Risk... 209

Detailed Table of Contents xxxi G. Limitations on, and Cancellations of, Credit Risk Assumed by the Nonrecourse Factor... 209 1. Dispute by Account Debtor... 209 2. Cancellation of Assumed Credit Risk by the Factor Prior to Delivery of Goods or Rendering of Services by the Factor s Client... 210 3. 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... 210 4. Assumption of Credit Risk Extends Only to Approved Accounts... 211 H. The Nonrecourse Factor s Assumption of Full Credit Risk and the True Sale of Purchased Accounts... 211 I. Factor s Credit Check Is Solely for Its Own Benefit... 212 J. Factors Never Assume Quality Recourse... 212 K. Factor s Retention of a Unilateral Right to Raise or Replenish Withheld Reserves... 213 L. Factor s Limitation of Assumed Credit Risk by Taking Third-Party Guarantees... 214 M. No Assumption of Credit Risk by the Factor Where Accounts Are Purchased With Full Recourse to the Client... 215 N. Effect on Credit Risk of the Factor s Purchasing a Partial Interest in Accounts, With the Client Retaining a Junior Participation Interest Therein... 215 O. Credit Insurance for the Factor... 215 140 XII. The Reserve... 215 142 A. In General... 215 B. The Reserve as Security... 216 C. Debits and Credits to the Reserve; Minimum Reserve Levels... 217 142 D. Payover of Credit Balances in the Reserve... 218 XIII. Fees... 219 A. Commitment Fees... 219 B. Discount Fees/Commissions... 220 C. Interest and Default Interest... 226 D. Total Cost of Funding... 227 E. The Cost of Factoring Compared to Bank Financing... 229

xxxii American Factoring Law, 2013 Supp. F. Servicing Fees... 230 G. Early Termination Fees... 230 XIV. Representations and Warranties of the Client Regarding Accounts... 231 144 A. In General... 231 144 B. Evergreen Clauses... 232 XV. Client s Grant of Security Interests to the Factor... 232 145 A. Grant of Security Interest to the Factor in Purchased Accounts as Evidence of the Factor s Ownership Interest... 232 B. Grant of Security Interest to the Factor in Non-Purchased Accounts and Other Assets... 233 145 C. Protective Language Regarding Re-Characterization... 234 XVI. Billing and Collection Procedures... 235 146 A. In General... 235 B. Factor s Collection Duties... 235 146 C. Factor s Client as Servicer... 236 D. Notification Versus Nonnotification Factoring... 237 E. Lockboxes... 237 F. Collections on Non-Purchased Accounts (Non-Factored Funds)... 237 146 XVII. Other Factor Protections and Rights... 238 146 A. Miscellaneous Factor Protection Mechanisms and Other Rights... 238 146 B. Conditions to Factor s Fundings... 240 XVIII. Chargebacks... 241 A. In General... 241 B. Automatic and Nonautomatic Chargebacks of Ineligible and Disputed Accounts... 243 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... 246 D. The Repurchase Price Payable Upon Chargeback... 249 E. Methods of Paying the Repurchase Price... 249 F. Chargebacks for Quality Recourse Do Not Affect the True Sale of Accounts... 249 G. Effect of Full Recourse Purchases on the Concept of a True Sale of Accounts... 250 H. Title to Purchased Accounts When Charged Back... 252 I. Upon a Chargeback, a Security Interest Is Retained in the Factor Until the Indebtedness Is Paid in Full... 254

Detailed Table of Contents xxxiii XIX. Existing Liens and Security Interests Against the Client s Accounts... 255 A. Tax Liens... 255 B. Unreleased or Unterminated Financing Statements... 255 C. Release of Existing Security Interests... 255 D. Sales of Accounts Free and Clear From a Client s Bankruptcy Estate... 256 E. Contractual Subordination of Existing Security Interests... 257 F. Inter-Factor Agreements... 258 G. Contractual Bar on Junior Liens and Security Interests... 258 H. Recoupment and Setoff Rights of Account Debtors... 258 XX. Default... 258 146 A. Events of Default... 258 B. Default Remedies... 259 146 C. Factor s Analysis Prior to Declaring Default... 259 XXI. Termination of the Factoring Contract... 260 147 A. Per Contractual Terms... 260 B. Deemed Termination... 260 147 C. Retention of Rights Post-Termination... 260 XXII. Miscellaneous Contract Issues... 260 A. Choice of Law... 260 B. Jury Trial Waivers... 261 C. Forum Selection Clauses... 261 D. Arbitration Clauses... 261 XXIII. Special Requirements of Local Law... 262 A. Lender s License... 262 B. Usury... 262 C. Financial Privacy Laws... 263 D. Place of Contracting and Place of Acceptance... 263 E. Requirement of Written Modifications/Merger Clause... 263 F. Signatories... 263 XXIV. Multiple-Client Factoring Transactions... 264 Chapter 4: Treatment of Credit Risk and True Sale Issues... 265 149 I. Overview... 267 II. Factor s Purchase of Accounts Without Recourse to the Client as True Sales Under State Law... 269 152 A. Nonrecourse Factor s Assumption of Credit Risk... 269

xxxiv American Factoring Law, 2013 Supp. B. Economics of the Credit Risk Assumed in Purchasing Accounts Without Recourse... 270 152 1. Single-Invoice Factoring, Without Recourse... 271 Exhibit 4.1. Nonrecourse Spot Factoring... 272 Exhibit 4.2. Nonrecourse Loan With One Account as Collateral... 273 2. Multiple Accounts Purchased in a Single Batch Without Recourse... 274 152 Exhibit 4.3. Nonrecourse Factoring; One Batch of Accounts... 275 152 Exhibit 4.4. Nonrecourse Loan With Multiple Accounts as Collateral... 277 3. Invoices Purchased in a Batch With Partial Recourse... 279 Exhibit 4.5. Factoring on a Partial Recourse Basis With 5% Partial Client Recourse for Credit Losses... 281 4. Conclusion... 284 C. The Factor s Retention of Quality Recourse Does Not Bar a True Sale of Accounts... 286 D. Official Comments to the Uniform Commercial Code... 286 E. State Law Judicial Recognition of Accounts Factored Without Recourse as True Sales... 287 152 F. Is a Factoring of Accounts on a Split Risk Basis a True Sale of All Accounts?... 293 III. Accounts Factored on a Partial Nonrecourse Basis as True Sales... 307 153 A. Partial Nonrecourse Factoring Defined... 307 B. Partial Nonrecourse Factoring as a True Sale... 308 153 IV. Factoring Accounts With Partial Recourse as True Sales... 309 A. Effect on the True Sale Analysis of Client s Acceptance of the First Credit Risk, Up to an Agreed Amount... 310 B. Sales of Accounts With Partial Recourse as True Sales Where the Factor Assumes 50 Percent or More of Credit Risk... 311 C. True Sales Where the Factor s Credit Risk Is Limited to Its Initial Advance... 313 D. True Sales Where the Client Shares Credit Risk via a Withheld Credit Reserve... 315 V. Full Recourse Factoring Sometimes a True Sale, Sometimes Not... 318 153 A. Full Recourse Factoring Treated as a Secured Borrowing... 319

Detailed Table of Contents xxxv B. Full Recourse Factoring Treated as a True Sale of Accounts... 326 VI. Facts and Circumstances in True Sale Analysis Under State Law... 339 167 A. Elements of the Facts and Circumstances Test... 339 167 1. The Parties Stated Intent to Make a True Sale... 340 167 2. The Extent to Which the Purchasing Factor Assumes Credit Risk... 343 168 a. Applying Boulder Fruit [New Topic]... 178 3. The Factor s Right to Resell and Pledge the Factored Accounts Without the Seller s Consent... 343 4. Whether the Seller Has the Right (or the Obligation) to Redeem or Re-Purchase the Sold Accounts... 344 184 5. The Factor s Right to Surplus... 345 6. The Factor s Right to Control Collection of Accounts... 346 7. The Factor s Control Over Settlement of Accounts... 347 8. Treatment of the Transaction by the Parties for Accounting Purposes... 347 9. Treatment of the Transaction by the Parties for Tax Purposes... 347 10. Notice of the Sale of Accounts to the Account Debtors... 347 11. Adequacy of the Purchase Price... 348 12. Sale of Associated Books and Records... 349 13. Size of Reserves; Unilateral Ability to Adjust Reserves... 350 14. Protective Language Regarding Characterization... 350 15. The Nature of Factor s Legal Fees Payable by the Client... 350 16. The Nature of Seller and Third-Party Guarantees Held by the Factor... 351 17. The Client as Collection Agent for the Factor... 353 B. Effect of Non-Uniform State Law Provisions Where Intent Alone Controls... 353 VII. GAAP True Sales... 355 184 A. SFAS No. 77 (1983 1996) [Revised Heading]... 355 184 B. SFAS No. 125 (1997 March 31, 2001)... 356 C. SFAS No. 140 (April 1, 2001, to Date)... 360 1. Sales of Accounts With Full Recourse Treated as True Sales Under SFAS No. 140... 363

xxxvi American Factoring Law, 2013 Supp. 2. Sales of Accounts With Full Recourse Treated as Secured Borrowings Under SFAS No. 140... 365 3. Sales of Accounts to a Factor Without Recourse as True Sales Under SFAS No. 140... 366 4. Bifurcated Accounting Under SFAS No. 140 for Accounts Sold to a Factor on a Split Risk Basis... 368 D. SFAS No. 166 (Effective for Annual Reporting Periods Starting After November 15, 2009)... 371 E. True Sales of Accounts by Governmental Entities... 372 F. Summary... 372 VIII. Factoring Agreements as True Sales for Federal Tax Purposes... 373 A. Overview... 373 B. Federal Tax Treatment of Accounts Factored Without Recourse... 375 C. Federal Tax Treatment of Accounts Factored With Full Recourse... 379 D. Federal Tax Treatment of Accounts Factored With Partial Recourse... 383 IX. Literature on the Topic of True Sale Issue [New Topic]... 185 A. Authors Commentary on Selected Material [New Topic]... 185 Chapter 5: Specialty Factoring and Non-Factoring Financial Services... 393 193 I. Specialty Factoring... 394 194 A. Government Accounts... 394 194 1. The Federal Assignment of Claims Act... 395 2. Assignment Under Federal Law Is of the Right to Payment Only... 397 195 3. Worthless Collateral... 398 4. Factors and the Assignment of Federal Claims... 398 5. Governmental Waiver of Compliance With the Federal Act; Estoppel... 398 6. Factoring Is Effective Between Parties to the Factoring Agreement Despite Non-Compliance With the Anti-Assignment Acts... 399 7. True Sales of Governmental Accounts... 400 197 8. Governmental Units as Account Debtors Under the U.C.C... 407

Detailed Table of Contents xxxvii 9. State Restrictions on the Assignment of State, County, and Municipal Government Contracts... 408 201 B. Healthcare Accounts... 408 202 1. Business Complexities... 408 202 2. Anti-Assignment Rules of Medicare and Medicaid... 414 209 3. True Sales of Healthcare Accounts... 418 211 C. Transportation Factoring... 423 212 D. Construction Factoring... 424 214 E. Agricultural Factoring... 425 215 F. International Factoring... 426 216 1. Export Factoring... 426 2. Import Factoring... 427 3. Factor Chains... 427 216 G. Spot Factoring... 427 II. Nonfactoring Financial Services... 427 A. Purchase Order Financing... 428 1. Overview... 428 2. The Basics of Purchase Order Financing... 429 3. Inter-Creditor Agreements Between the Factor and the Non-Factor Purchase Order Financier... 431 4. Costs of Purchase Order Financing... 432 5. Requirements for Purchase Order Financing... 432 B. Letters of Credit... 432 C. Factoring Loans and Accounts Receivable Financing... 437 Chapter 6: Litigation Between the Factor and Its Client... 439 221 I. Possible Responses by Factor to Client Defaults... 441 223 A. Acceleration of Underlying Obligations... 441 B. Reducing or Ceasing Further Purchases of Accounts... 441 223 C. Forbearance... 442 D. Factor s Foreclosure... 442 E. Factor s Exercise of Recoupment and Setoff Rights... 447 F. Factor s Takeover of Client Servicing Functions... 450 G. Taking an Ownership Interest in the Client; Requiring the Client to Raise Equity... 450 H. Pursuit of Third-Party Guarantors... 451 I. Pre-Judgment Remedies... 451 224 II. Personal Jurisdiction... 451

xxxviii American Factoring Law, 2013 Supp. A. Establishing Jurisdiction Over the Client and/or Its Principals... 451 1. Jurisdiction in General... 451 2. Long-Arm Jurisdiction Over a Nonresident Defendant... 452 3. General and Specific Jurisdiction... 452 4. Alternative Forms: Alter-Ego, Agency, and Conspiracy Jurisdiction... 453 5. Representative Case Law... 454 B. Establishing Personal Jurisdiction Over the Factor... 455 III. Contract Claims by Factors Against Their Clients... 457 224 A. Breach of Contract... 457 B. Account Stated and Other Non-Tort Claims... 460 C. Attorney s Fee Claims... 464 224 D. Arbitration [New Topic]... 225 IV. Tort Claims by Factors Against Their Clients... 464 225 A. Conversion and Unjust Enrichment... 464 225 B. Fraud and Negligent Misrepresentation... 465 226 C. Intentional Interference With Contractual Relationships... 465 D. Piercing the Corporate Veil of the Client... 465 E. RICO Violations [New Topic]... 230 F. Client Violation of State Law Barring Deceptive Practices [New Topic]... 236 G. Tort Claims Against Client s Professionals [New Topic]... 236 V. Client s Defenses, Claims, and Counterclaims Against the Factor... 466 236 A. Improper Failure to Fund... 467 236 1. Was a Binding Contract Formed?... 467 2. Factor s Discretion to Refuse to Purchase Proffered Accounts... 468 236 B. Claims That a Factor Improperly Charged Back... 469 237 1. Claims That a Nonrecourse Factor Charged Back Accounts That Were Not Disputed by the Account Debtor... 469 237 2. Claims That a Nonrecourse Factor Charged Back Accounts Within Its Assumption of Credit Risk... 470 237 3. Claim That Accounts Factored With Full Recourse Were Improperly Charged Back... 474 C. Goods Sold and Delivered... 474 D. Unjust Enrichment... 475 E. Claim for Return of Factor s Commitment/ Diligence Fee... 475

Detailed Table of Contents xxxix F. Oral Modifications, Before or After the Contract Is Signed;Parol Evidence Rule... 476 G. Payment... 476 H. Demand for Factor to Release Its UCC-1 Financing Statement... 477 I. Statute of Limitations... 477 J. Factor s Alleged Breach of Covenant of Good Faith and Fair Dealing... 477 237 K. Breach of Fiduciary Duty... 478 L. Fraudulent Inducement/Negligent Misrepresentation... 479 M. Usury... 479 N. Truth in Lending... 482 O. Improper Venue... 483 P. Excuse of Client s Performance Due to Factor s Prior Material Breach [New Topic]... 238 VI. Corporate Client Must Appear by Counsel... 486 VII. Injunctive Relief for the Factor... 486 242 VIII. Forum-Selection Clauses... 488 IX. Choice of Law Litigation... 488 X. Jury Trial Waivers... 489 XI. Factor s Exercise of Post-Judgment Remedies [New Topic]... 248 Chapter 7: Litigation Between Factors and Account Debtors... 491 251 I. Factor s Affirmative Claims Against the Account Debtor in Collection Litigation... 492 252 A. Breach of Contract... 492 252 B. Estoppel Created by Account Debtor s Verification of the Account... 493 262 1. Verification in General; Common Law Estoppel Created Thereby... 493 262 2. Statutory Waiver and Limitations of Payor s Defenses U.C.C. 9-403(b)... 495 3. Selected Cases... 496 C. Tort and Other Affirmative Claims by the Factor... 499 D. U.C.C. 9-406... 501 270 1. General Rules of U.C.C. 9-406... 501 2. Case Law Under U.C.C. 9-406... 503 270 3. Special Rules of U.C.C. 9-408... 508 E. Attorney s Fees [New Topic]... 273 II. Defenses of the Account Debtor... 509 274 A. U.C.C. 9-404... 509 274

xl American Factoring Law, 2013 Supp. 1. General Rule... 509 2. 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]... 514 274 3. U.C.C. 9-404 Inapplicable if Account Debtor Has Already Made Payment to the Client Rather Than the Factor... 514 4. Other Limitations on U.C.C. 9-404... 515 B. Account Debtor s Defenses to Verifications Given Under U.C.C. 9-403(b)... 515 284 1. Lack of Consideration... 515 2. Account Debtor s Claim That Factor Lacked Good Faith... 518 3. Adequacy of Factor s Notice... 518 4. Signatory s Lack of Authority... 521 284 5. Waiver... 523 6. U.C.C. 3-305 Defenses and Claims in Recoupment... 525 7. Effect of Delayed Notice to the Account Debtor... 526 8. Special Rules Where a Government Obligor Is the Account Debtor... 526 9. Other Defenses [New Topic]... 284 C. Lack of Personal Jurisdiction Over the Account Debtor... 526 1. In General... 526 2. Long-Arm Jurisdiction Over a Nonresident Account Debtor... 527 3. General and Specific Jurisdiction... 528 4. Alternative Forms of Alter-Ego, Agency, and Conspiracy Jurisdiction... 529 5. Issues in Diversity Jurisdiction... 530 6. Selected Cases... 531 D. Failure to State a Claim... 534 E. Statute of Limitations... 535 III. Account Debtor s Mistaken Payment... 535 A. Mistaken Payment to the Factor s Client After Notice U.C.C. 9-406... 535 B. Payments Received by the Factor After Termination of the Factoring Agreement... 535 IV. Forum Selection Clauses and the Account Debtor... 535

Detailed Table of Contents xli V. Arbitration Clauses and the Account Debtor... 536 VI. Bankruptcy of the Account Debtor... 536 VII. Negotiation of Checks Payable to Stacked Payees... 537 Chapter 8: The Factor and Guarantors of Client Obligations... 541 291 I. Scope of Guarantor s Guarantee... 542 292 A. Full Guarantee... 542 B. Limited Guarantee... 543 292 C. Validity Guarantee... 543 D. Guarantees of Payment vs. Guarantees of Collection... 547 II. Factors Claims Against Guarantors... 548 294 A. Breach of Contract... 548 294 B. Account Stated... 552 298 C. Attorney s Fees... 554 299 D. Tort Claims... 554 300 III. Guarantors Defenses and Counterclaims Against Factors... 555 A. Unreasonable Commercial Disposition of Collateral Under the U.C.C... 555 B. Failure to Diligently Collect... 556 C. Improper Chargebacks... 556 1. Accounts Improperly Charged Back as Disputed... 557 2. Accounts Subject to Factor s Assumed Credit Risk Improperly Charged Back... 557 D. Inadequate Consideration... 558 E. Oral Modifications Before or After the Guaranty Was Signed; Parol Evidence Rule... 561 F. Factor s Breach of the Covenant of Good Faith and Fair Dealing... 563 G. Fraudulent Inducement/Negligent Misrepresentation; Fraud; Did Not Read Defense... 563 H. Breach of Fiduciary Duty... 571 I. Intentional Infliction of Emotional Distress... 571 J. Usury... 572 K. Objections to Jurisdiction and Venue Chosen by the Factor... 572 L. Payment of the Underlying Debt... 574 M. Signature in a Representative Capacity Only; Execution in Blank... 574 N. Guarantee Voided by Factor s Charge Back... 576 IV. Waivers of Counterclaims and Defenses... 577 301

xlii American Factoring Law, 2013 Supp. V. Confessed Judgments... 577 VI. Effect of Guarantees on the True Sale of Accounts... 577 VII. Jury Demands by Guarantors [New Topic]... 302 Chapter 9: The Factor and Its Funding Sources... 581 305 I. Rediscounting Lines of Credit: Asset-Based Lending to Factors... 581 305 II. Re-Factoring: Sale of Accounts to Another Factor... 583 III. Participation Interests... 584 306 IV. Funding via Securitization Transactions... 588 312 V. Equity Offerings by Factors... 589 313 VI. Litigation Between the Factor and Its Funding Sources... 590 313 A. Litigation Between the Factor and Its Lender... 590 B. Litigation Between the Factor and Its Re-Factor... 591 C. Litigation Related to Participation Interests... 591 Chapter 10: Take-Outs and Other Relationship Issues Between Factors of the Same Client... 595 315 I. Take-Out of an Existing Factor... 595 315 A. Direct Purchase of the Old Factor s Position... 596 315 B. Client s Repurchase of the Subject Accounts and Termination of the Existing Factoring Agreement... 598 C. New Factor Comes in on Top of the Old Factor s Position... 602 II. Legal and Business Issues to Be Addressed in the Take-Out Transaction... 606 III. Litigation Arising From Take-Out of an Existing Factor... 608 316 IV. Priority Disputes Between Factors... 615 V. Split Factoring... 617 Appendix 10.A: Letter of Indemnity... 618 Chapter 11: Factors and Third-Party Lenders/Creditors... 623 331 I. Factor s Take-Out of an Existing Lender s Position... 625 333 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... 626 333 B. Assignment of Existing Lender s Position to the New Factor... 628

Detailed Table of Contents xliii C. Existing Lienholder and Client s Sale of Accounts to the Factor Free and Clear of Existing Liens... 629 D. Sale of Accounts Out of the Client s Bankruptcy Estate, Under Section 363 of the Bankruptcy Code, Free and Clear of Existing Liens... 630 II. Existing Lienholder s Subordination to an Incoming Factor s Security Interest: In General... 630 A. Lien Subordination... 630 B. Debt Subordination... 631 C. Assignment of Factoring Credit Balances... 631 D. Standstill... 632 E. Treatment of Ledger Debt... 632 F. Turnover of Funds... 632 G. Client Acknowledgement... 632 H. Prohibition of Subordination and Assignment... 632 I. Bankruptcy... 632 III. Priority, Intercreditor, and Subordination Disputes... 633 333 A. Priority Disputes... 633 333 1. General Rule: First to File or Perfect Is First in Right... 633 333 2. Factor s Perfected Security Interest Prevails Over Client s Unsecured Creditors... 635 3. Factor s Perfected Security Interest Prevails Over Later Perfecting Purchaser or Lien Creditor; Special 45-Day Rule of Section 9-323 Applicable to Recourse Factors... 635 4. Lien Creditor or Purchaser That Perfects Its Interest Prevails Over Later Perfecting Factor... 636 5. Effect of a Third-Party Lender s Subordination to a New Factor if Other Lenders Also Hold Liens on the Subject Accounts... 638 335 6. 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... 639 336 7. Factor s Cause of Action for Conversion Against the Holder of a Junior Security Interest: Holder in Due Course Defense... 641 337 8. Factor Takes Subject to Unreleased or Unsubordinated Existing Liens... 644 339

xliv American Factoring Law, 2013 Supp. 9. Naked Transfers of Security Interests Are Legally Ineffective... 645 10. Factor s Actual Knowledge of Unperfected Prior Lien... 646 11. Client s Trade Names... 648 12. Priority of Bank s Setoff Rights... 648 13. Purchase Money Security Interests... 650 14. Unauthorized Termination of Factor s UCC-1 [New Topic]... 340 15. Loss of Security Interest Due to Trademark Violation [New Topic]... 340 B. Factor s Failure to Perfect Its Security Interest... 650 C. Disputes Between Factors and Lenders With Respect to Intercreditor and Subordination Agreements... 651 340 IV. Lender s Take-Out of Factor s Position... 653 V. Factor and Third-Party Purchase Order Financier... 653 344 VI. Priority Disputes Between Two Lenders to a Factor... 653 VII. Fraudulent Conveyance and Other Risks to Consider[New Topic]... 346 A. Fraudulent Conveyance Risks [New Topic]... 346 B. PACA and Unpaid Produce Sellers [New Topic]... 349 C. Buyers in the Ordinary Course of Business [New Topic]... 349 D. Judgment Lien Creditors Who Garnish Either the Factor or the Factor s Client [New Topic]... 350 E. Transferee of Funds From a Depository Account in the Name of the Factoring Client [New Topic]... 353 Chapter 12: Bankruptcy Issues... 655 357 I. General Bankruptcy Concepts and Terminology... 657 A. Chapters of the Bankruptcy Code... 657 B. The Bankruptcy Court and Its Limited Jurisdiction... 658 C. The Players... 660 D. The Bankruptcy Estate and Property of the Estate... 660 E. Automatic Stay... 661 1. General Concepts... 661 2. Relief From Stay to Recover a Secured Creditor s Collateral... 662 3. Relief From Stay to Liquidate Pre-Petition Claims of the Creditor Against the Debtor in a Nonbankruptcy Forum... 663

Detailed Table of Contents xlv 4. The Automatic Stay Does Not Apply to Any Affirmative Claims by the Debtor/Client Against Its Factor... 663 5. The Automatic Stay Does Not Bar Claims by the Factor Against the Client s Guarantors... 664 F. Claims and Collateral Valuation... 664 1. Proof of Claim and the Bar Date... 664 2. Collateral Valuation; Possible Bifurcation of Secured Claims... 665 3. Types of Claims; Priority of Distribution... 667 4. Filing a Proof of Claim: Pros and Cons for Factors... 667 5. Multiple Claims... 668 G. Cash Collateral... 668 1. Forms of Possible Adequate Protection for the Debtor s Use of Cash Collateral... 668 2. Valuation and Adequate Protection, Including for the Use of Cash Collateral... 673 H. Executory Contracts... 677 I. Post-Petition Operation of Debtor s Business... 678 J. Post-Petition DIP Financing... 678 K. Asset Sales Out of Bankruptcy... 679 L. The Chapter 11 Process... 680 1. First-Day Motions... 680 2. Stabilizing the Ship... 681 3. Plans and Disclosure Statements in Chapter 11... 681 M. Discharge of Corporate Debtors... 684 N. Discharge of an Individual Debtor... 685 1. Individual Debtor s General Discharge in Chapters 11 and 7... 685 2. Dischargeability of Particular Debts in Chapters 11 and 7... 685 3. Individual Debtor s Discharge in Chapter 13... 686 O. Bankruptcy Litigation... 686 1. Contested Matters... 686 2. Adversary Proceedings... 686 3. Debtor s Exercise of Avoiding Powers... 686 P. Conversion and Dismissal... 687 Q. Bankruptcy Rules... 687 II. Bankruptcy of the Factor s Client... 687 360 A. Debtor s Motion for Permission to Use Cash Collateral, and the Factor s Opposition Thereto... 687 B. Debtor/Client s Efforts to Directly Collect Factored Accounts... 691

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... 691 360 D. Factor s Post-Petition Collect-Out of Pre-Petition Factored Accounts... 695 E. Factor s Post-Petition Sale of Accounts Back to the Debtor... 698 F. Factoring as a Form of DIP Financing... 699 363 1. Historic DIP Financing by Factors... 699 2. Factoring the DIP in Connection With a Securitization Facility... 701 3. Recent Examples of Factors Providing DIP Financing... 702 363 4. True Sale Finding; Sale of Accounts to the Factor Free and Clear... 703 5. Post-Petition Factoring as Outside the Ordinary Course of Business; Need for Authorizing Order... 704 6. Need to Seek Relief Under Both 11 U.S.C. 363 and 364... 704 7. The Issue of Existing Liens... 705 8. Recoupment and Setoff Claims... 705 9. Exit Financing... 706 364 G. Factor s Motions for Relief From the Automatic Stay... 708 365 1. To Foreclose Collateral... 708 2. For Permission to Set Off... 709 365 3. To Collect on a Nondischargeable Claim... 709 H. Factor s Filing of a Proof of Claim; Client s Objections Thereto... 710 I. Preference Claims... 711 368 J. Fraudulent Conveyance Claims... 714 374 K. Is the Factoring Agreement an Executory Contract That Cannot Be Assumed?... 715 L. Involuntary Bankruptcy Petition Filed by a Factor Against its Client [New Topic]... 374 M. Voidable Post-petition Transfers to the Factor [New Topic]... 375 N. Return of Non-factored Funds [New Topic]... 376 O. Challenges by the Bankrupt to Fees and Commissions of the Factor [New Topic]... 377 P. Letters of Credit [New Topic]... 380 III. Lender Liability and Other Claims... 718 A. Factor s Unperfected Security Interest Falls to Trustee s Strong-Arm Powers... 718

Detailed Table of Contents xlvii B. Factor Continues Post-Petition Advances, Unaware of the Client s Bankruptcy... 718 C. Claims Against Client s Principals for Sale of Fraudulent Accounts... 719 IV. Bankruptcy of the Client s Guarantors and Its Principals... 719 380 V. Bankruptcy of a Client s Account Debtor... 722 VI. Bankruptcy of the Factor... 723 382 Chapter 13: The Factor and Tax Authorities... 729 383 I. The Federal Tax Lien... 730 383 II. Effect of the Automatic Stay on the IRS s Right to a Lien on Post-Petition Accounts... 732 III. The Factor s Response to an IRS Tax Levy... 733 IV. The Factor and Section 3505(b) Liability... 736 V. Intercreditor and Subordination Agreements With the IRS... 736 384 A. Subordination of Federal Tax Liens... 737 384 B. Withdrawal of Notice of Federal Tax Lien... 739 C. Release of Federal Tax Lien... 742 D. Examples of IRS Subordinations to Factors... 742 VI. Successor Liability... 745 Chapter 14: Factoring Accounting... 747 387 I. Sources That Discuss Accounting for Factoring Transactions... 748 388 A. FASB Statements of Financial Accounting Standards (SFAS)... 748 388 B. AICPA Statements of Position (SOP)... 749 C. AICPA Accounting and Audit Guides... 751 410 D. Books and Articles... 760 410 1. Review of Example in the GAAP Implementation Guide... 760 Exhibit 2-1. Sample Factoring Journal Entry... 761 2. Review of Accounting Proposed by Mr. Ratcliffe... 762 3. Review of Accounting Proposed in Intermediate Accounting... 763 410 4. Relevant Literature [New Topic]... 411 E. Statements of the Government Accounting Standards Board [New Topic]... 411 II. Examples of Actual GAAP Reporting... 769 413 A. Examples of GAAP Reporting by Factors... 769 413 1. Accounts Purchased Both With and Without Recourse as True Sales... 770

xlviii American Factoring Law, 2013 Supp. 2. Recognition of Income From Discount Fees (Factoring Commissions)... 770 3. Client Advances... 771 4. Balance Sheet Reporting... 772 B. Client Accounting for Factoring Transactions Under GAAP... 774 417 1. Servicing Assets and Liabilities [New Topic]... 418 Chapter 15: Miscellaneous Matters... 755 421 I. Factoring as a Tax-Planning Device... 775 421 II. Factoring and Securities Laws Matters... 776 424 III. Factoring and Criminal Law Matters... 780 425 IV. Factors and Antitrust Litigation... 780 426 V. Litigation Involving Factors and Third-Party Professionals... 781 427 Appendices... Glossary of Factoring Terms... 783 429 Bibliography... 811 459 Table of Cases... 815 463 Index... 831 About the Authors... 855 471