Glossary of Business and Credit Terms, Part II
Packing List: A document that lists and describes to the buyer the merchandise contained in the box. Payment on Sight, or at Sight: Payment on demand. Plan of Reorganization: In a Chapter 11 bankruptcy case, the Plan of Reorganization must define the classes into which creditors have been grouped, a description of the treatment or recovery to each class of claim, a comparison of how each class of creditor would be treated were the debtor to liquidate, and an explanation of how the DIP plans to carry out the Plan. Political Risk: In export transactions, political risk involves the possibility of expropriation or confiscation of assets, war, changes in tax policy or foreign policy, restrictions on the exchange of foreign currency, and other changes that heighten the risk of late payment or payment default. Postpetition Claim: A claim arising after the date of the bankruptcy filing against the estate. Pre-authorized Electronic Debits: PEDs allow creditors to debit the bank account of a customer based on a signed pre-authorization by the debtor. The Payer's bank normally sends payment of PEDs to the seller through the ACH clearinghouse system. PEDs are sometimes called ACH Debits. Preferential Transfers: Certain transfers or payments made within 90 days of a bankruptcy filing may be reversed and recovered by the bankruptcy court on behalf of the debtor's estate. If the recipient is an insider, the 90-day period is expanded to one year. Payments or returns made to trade creditors are normally subject to a 90-day look back or preference period. The Bankruptcy Prevention and Consumer Protection Act of 2005 (the "Act") contains many changes in the bankruptcy laws that impact business credit. The Act was passed by Congress and signed into law on April 20, 2005. Most provisions of the Act become effective on October 17, 2005. The main impact for business creditors is in three areas:
I. Preference Defense
II. Reclamation in Bankruptcy
III. Changes in Chapter 11 Bankruptcy Rules I. Preference Defense The Act makes three major changes to preference defense law: The Ordinary Course Defense is broadened;
Suits for preferences under $5,000 are barred; and
Actions for preferences under $10,000 must be filed in the creditor's (defendant's) home district.
Each of these changes helps business creditors. Ordinary Course Defense: The ordinary course defense is codified in section 547(c) of the Bankruptcy Code. It provides an absolute defense against a preference claim if the transfer (usually payment of money to the creditor) was made in the "ordinary course" of business. Under current law, to quality for the ordinary course defense the transfer may not be avoided: "(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was made in the ordinary course of business or financial affairs of the debtor and the transferee; and made according to ordinary business terms" This means that a creditor must satisfy the standards of both 547 (c) 2 (A) and (B) under current law. This entails meeting the "Subjective test" concerning the ordinary course between the debtor and creditor and the "Objective test" concerning the ordinary course terms in that type of business. The current law often has been criticized on four basic grounds: It requires creditors to find and present evidence about "ordinary business terms" in their industry. The scope of the industry is not defined and may be difficult to identify for many. For example, if a manufacturer sells unique children's accessories to a large retailer which sells the items in its apparel department, is the relevant industry gift items, children's wear, general apparel, or a unique category? The ambiguity about how the objective ordinary course standard should be defined makes it expensive to litigate preference defense cases, as most cases require extensive discovery and expert witness testimony including an expert hired by the creditor. The ambiguity about how the objective ordinary course standard should be defined makes it expensive to litigate preference defense cases, as most cases require extensive discovery and expert witness testimony including an expert hired by the creditor. Antitrust laws make inquiries into competitor's terms a dangerous practice, even if the purpose is to assemble evidence for a preference defense. The Antitrust and Bankruptcy Laws appear contradictory in this area because the Robinson Patman Act and other antitrust laws create potential liability for competitors who work together to fix and determine sales terms to customers, while the existing bankruptcy preference laws effectively require competitors to check continually with others about sales terms and programs and to extend the same terms as are standard in the industry. The imposition of the "objective" portion of the test puts you (the creditor) in preference danger if you establish terms different from the standard terms in your industry Uniform Unclaimed Property Act: This is an act relevant to the issues of Unclaimed Property or "Escheatment." Originally adopted in 1954 by 32 states with the purpose of reuniting owners with their property. Its purpose is also expressly noted that the act can be a source of revenue for states, as well as simplifying regulations, helping states cooperate, and shortening periods of abandonment. It was updated in 1981 and again in 1995, and it brings some uniformity to the various escheatment acts put into law by individual states. For more info on unclaimed property and escheatment, see Credit Today's Unclaimed Property & Escheatment Resources Center
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