Ohio Practical Business Law : Columbus Ohio Business Lawyer & Attorney : Teri Rasmussen : Plunkett Cooney Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Ever think there's got to be a better way than wasting time wrangling with another party with which you're doing business when there's a dispute over the amount really owed?  I’ve warned before about the risks of accepting checks intended as FINAL payment on a disputed obligation on my Fun with “Payment in Full” Checks post.  Now a couple of Ohio appellate decisions illustrate the “right” and “wrong” way to go about using a “payment in full” check to resolve a dispute and/or bring finality to the transaction. 

Two situationa in particular are addressed:

• When a landlord makes deductions from a security deposit, sending the balance to the former tenant, it assumes the relationship is now over.  So what happens if the former tenant cashes the check sent by the landlord, but then sues the landlord for the balance of its security deposit?
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• A customer complains to its vendor/supplier about the quality of the goods shipped to it and believes it is entitled to some sort of discount as a result.  If the vendor/supplier does not agree, what can a customer do?

Whichever side of the table you’re on, it’s important to understand the practical side of the legal concept of “accord and satisfaction” and how it can affect the ability of the tenant to get the rest of the security deposit back or of the supplier to receive full payment after cashing a partial payment check from the customer.   

Tourville v.Terzuoli, 2009–Ohio-2743 (Montgomery Cty) illustrates an ineffective use of "accord and satisfaction".  After the tenant moved out, the landlord sent the tenant a check for a refund of a portion of the security deposit originally made by the tenant, together with an itemization of the deductions made from the security deposit.  The tenant immediately called the landlord to discuss the itemized deductions and then cashed the check.  A few weeks later, the tenant sued the landlord for a refund of the remainder of the security deposit withheld.   

The trial court held that the tenant was barred from recovering the rest of the security deposit by the doctrine of “accord and satisfaction” because they cashed the check for a lesser amount.  The Court of Appeals reversed and said the tenant should have been allowed to present evidence showing it was entitled to the balance of the security deposit.

The Court explained the “accord and satisfaction” concept this way:

First the defendant must show that the parties went through a process of offer and acceptance – an accord.  Second. the accord must have been carried out – a satisfaction.  Third, if there was an accord and satisfaction, it must have been supported by consideration.

The Court further explained that when a check cashing is involved, there must have been reasonable advance notice that the check was intended to be in full satisfaction of the outstanding debt.  Because “there was no evidence that the check was the product of a negotiation between [the landlord and the tenant] regarding the amount of the security deposit that should be refunded,” the Court held no accord and satisfaction occurred.  In other words, merely cashing a check for a lesser amount did not preclude the tenant from getting the full security deposit back.

By contrast, the case of Barmar Enterprises, L.L.C. v. Benco Industries, Inc., 2009–Ohio-366 (8^th App. Dist. Cuyahoga Cty) is an example of an effective use of the accord and satisfaction doctrine to prevent recovery of the larger amount.  Here, a steel brokerage delivered product to a distributor.  Because the distributor’s end users rejected shipments on the basis of poor quality, the distributor issued itself six debit memos against the steel brokerage’s invoices.  The distributor eventually sent the steel brokerage a reconciliation showing the debit memos accompanied with the following statement:

Enclosed please find our reconciliation of your account.  In a show of good faith we have drafted a check in the amount of $30,892.96 representing  full and final payment to [the steel brokerage of invoices totaling more than $100,000] thus clearing our account to a zero (0) balance.  Upon your acceptance, [the distributor] will release your 44,860 lbs of steel [product in the possession of the distributor]. *** Please sign and fax back your acceptance of this accord and satisfaction in order to conclude this matter immediately.

The steel brokerage signed the document, the distributor sent the steel brokerage the specified check, and the check was cashed.  Later the steel brokerage sued the distributor for the difference, alleging it sustained damages when it resold the rejected steel to a third party at a reduced cost.  The Court said no dice and barred the steel brokerage from any recovery.

What these two cases illustrate is that putting a little thought into handling a dispute over an obligation can pay off – literally.  Had the landlord accompanied the check for a partial refund of the security deposit with a statement indicating that it was intended as full and final payment of all amounts due from the landlord, it might have gotten the same result as the distributor did, i.e. by cashing the check when it had notice that it was intended to resolve the entire issue of the amount of the refund, the tenant would be barred from any further recovery of the amount withheld. 

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So it's been SIX whole days (counting the Petition Date) now that Chrysler LLC has been in Chapter 11 bankruptcy, there's been two hearings before the bankruptcy judge, and even Chrysler isn't claiming anything of any true lasting importance has been determined so far.  Its latest press release  spills as much ink describing the company as it does trumpheting the  interim approval  by the Bankruptcy Court of DIP (aka debtor-in-possession) financing and permission to use "cash collateral" (i.e. proceeds from collection of accounts receivable and disposition of other collateral)  And as bankruptcy insiders know, if you don't get these pretty quick after you file, the case will soon be DOA.    

Center Stage - The 363 Motion

The 363 Sale Motion, a 250 page submission in total, was  filed the evening of Sunday, May 2.  For an excellent concise summary of the contemplated timeline (surprise!! it's more than two weeks!) and transactions encompassed in the proposed sale, visit "Chrysler Seeks  the ultimate 363 Sale as the Treasury Department Dictates the Pace" posted by Stephen Sathers at his A Texas Bankruptcy Lawyer's Blog

Even the Motion's title sounds like there's a lot to do.  Leaving off the begining part referencing a bunch of Bankruptcy Code and Bankruptcy Rules, the Motion indicates that it seeks

(i) AN ORDER (A) APPROVING BIDDING PROCEDURES AND BIDDER PROTECTIONS FOR THE SALE OF ALL OF THE DEBTORS' ASSETS AND (B) SCHEDULING A FINAL SALE HEARING  AND APPROVING THE FORM AND MANNER OF NOTICE THEREOF; AND (II) AN ORDER (A) AUTHORIZING THE SALE OF SUBSTANTIALLY ALL OF THE DEBTOR'S' ASSETS, FREE AND CLEAR OF LIENS, CLAIMS, INTERESTS AND ENCUMBRANCES, (b) AUTHORIZING THE ASSUMPTION AND ASSIGNMENT OF CERTAIN EXECUTORY CONTRACTS AND UNEXPIRED LEASES IN CONNECTION THEREWITH AND RELATED PROCEDURES, AND (C) GRANTING CERTAIN RELATED RELIEF  

• The Summary of the transaction (well, really transactionS, plural), found beginning at the bottom of page 25, is 6 1/2 pages alone.
• The Motion itself is 52 pages
• The Purchase Agreement, attached as an exhibit, is nearly 100 pages long, even excluding the multiple signature pages, and that  DOES NOT include any exhibits to the Purchase Agreement
• The proposed Bidding Procedure Order is more than 25 pages, not counting various forms of proposed notices
• And then there's the additional 35-page supporting Memorandum of Law 

And Trying to Steal the Scene, the Objections....

>>>>>  so with all that, it's probably not too surprising that a few Objections to the proposed sale and otherwise have been filed.  Many fall back on the old chestnuts that bankruptcy lawyers always bring out in these situations and which to me seem particularly apt for the current circumstances - namely:

• due process requires that we be given more time to figure out what's been proposed and figure out whether we like it and if not, why 
  • things are just moving too fast
  • we're going to need more time to get organized here
• the debtor has stacked the proposed bidding procedures to favor the initial "stalking horse" , thereby making it exceedingly and unreasonably difficult for anyone else to participate

The Biggie by the NonTARP Lenders.  The earliest and most interesting  (in the sense that this is one to watch) objection to the bidding procedures and proposed 363 sale are the pleadings filed by a group calling itself the Non-TARP Lenders  (would that be a good name for a band?  I'm thinking that just "TARP Lenders" sounds like it has more promise).  These include  the initial "preliminary" objection filed May 4, followed by a "First Supplemental" objection filed today.  in addition to making the sort of objections referenced above  - which i really do think have lots of merit in this case -- the objections also contend that because of the number and complexity of actions and transactions involved, Chrysler is impermissibly trying to get what is really a "disguised" 'sub rosa plan of reorganization approved . 

This is an important objection and basically complains that Chrysler is trying to do a comprehensive plan of reorganization without complying with the procedures and protections for creditors which would usually accompany that process.  And while it's not specifically mentioned, that absolutely WOULD slow things down given that there are statutory minimum 25 day periods for circulation of a "Disclosure Statement" as well as mandatory hearings that would almost certainly be fierce brawls.  WATCH THIS ISSUE as a ruling on it could completely transform the Chapter 11 process for even the most humble and ordinary Chapter 11 out here in the fly-over states those of us who live here call the Midwest.

Other Objections to Sale.  There are also some objections by vendors (click here for one of them) focusing on on the part of the propsed sale where supply contracts with them are to be sold to Fiat or whoever the successful purchaser is.  According to these objections, the new purchaser would have up to 90 days to decide whether to assume of reject the contract, but the supplier would still be obligated to deliver goods during this period.  There's also one by Plast-o-Foam whcih appears to deal with reclamation claims with respect to goods recently supplied to Chrysler, but not paid for. 

Objections Apropo  of Nothing.  Then there's a new objection today by Chrysler Financial Services Americas LLC regarding the part of the deal where Chrysler wants to enter into a financing arrangement with GMAC Master Financial Services.  According to the Objection, Debtor Chrysler won't show them the Term Sheet even thought they would be directly affected.  Sounds like the sort of thing any sensible debtor would not want to be distracted by.

And now, quite literally in the last hour or so while I've been writing this post, a Motion for Adequate Protection by CSX Transportation , Inc., a rail carrier concerned about its status, has been filed   The Motion seeks adequate protection for its "common carrier" lien which it alleges can prime security interests.

>>>>>>>  These are only the highlights in the last couple of days.  And, really, the bankruptcy process and players aren't  even warmed up yet.  Everyone's in for a heckuva a rollercoaster of a ride!

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Sooner or later every business experiences the bankruptcy of one of its customers.  If the customer has a large unpaid balance, this can be an especially unnerving experience.  There are, however, some basic things to know and do.

            1.  Don't Ignore the Filing.  The most important thing not to do is continue collection action against the debtor.  When a bankruptcy is filed, it triggers an "automatic stay".  The "automatic stay" prohibits any further action or activities against -- or affecting -- the debtor, the debtor's interest, or the debtor's property.  This includes foreclosures or sheriff's sales, garnishments, collection calls and, of course, the commencement or continuation of a lawsuit.  Violation of the "automatic stay" can result in monetary fines and sanctions against the offender.

One important "exception" to the "automatic stay" does exist for creditors who have shipped goods to the debtor which have not yet been delivered at the time the bankruptcy is filed.  In this situation, the creditor may stop the goods in transit and refuse delivery unless paid in cash.

            2.  Document the Debt Owed by Filing a "Proof of Claim".  To have any reasonable hope or expectation of receiving any payment on the debt owed, a "proof of claim" must be filed with the Bankruptcy Court by the designated deadline.  Frequently, though not always, a "proof of claim" must be filed within the first four to six months after the bankruptcy has been filed so prompt action is often necessary.  You do not have to be a lawyer to complete and file the proof of claim.

The initial notice of the bankruptcy will often contain a proof of claim form that can be filed out.  The "proof of claim" should set forth the basis for the debt (i.e. the service or product purchased), attaching copies of any written contracts or documents giving rise to the debt, identify any collateral pledged to secure the debt and specify the exact amount owed to the creditor. 

Filing this document with the bankruptcy court ensures that a creditor will share in any subsequent distribution of the debtor's assets.  It also makes it more likely that the creditor will receive notice of important events and deadlines in the bankruptcy. 

            3.  Read and Analyze the Initial Basic Documents.  At the time the bankruptcy is filed, or shortly thereafter, the debtor is required to file its "Statement of Financial Affairs" and "Schedules of Assets and Liabilities".  These documents list the names of creditors and amounts owed to each.  They also provide insight into the recent history and current state of the debtor's financial affairs and can be useful in determining the prospects and potential amount of any repayment of the debt owed.    

            4.  Attend the "First Meeting of Creditors".  Within the first month or so after the bankruptcy has been filed, a "first meeting of creditors" will be held.  Creditors who have been listed by the debtor will receive written notice of the time and place of this meeting; others can check with the bankruptcy court or the office of the United States Trustee for the district.  Attendance at this meeting is not mandatory for creditors.  However, the debtor is required to appear and answer questions under oath by the United States Trustee and any creditor in attendance about events causing the bankruptcy, prospects for repayment and other matters related to the bankruptcy.  You do not have to have a lawyer to participate and ask questions.   Thus, a creditor who fails to attend loses a valuable opportunity to learn about the debtor's financial situation and intentions.

            5.  Don't Expect Prompt Payment of Past Debt.  What happens next in the bankruptcy depends upon what type it is and the number and type of creditors affected by the filing. 

• In Chapter 7 liquidation proceedings, a trustee in bankruptcy (not the United States Trustee) will evaluate and dispose of the debtor's unencumbered assets, if any; after analyzing the claims made by creditors, the Chapter 7 trustee will then distribute those assets pro rata among eligible creditors who have filed a proof of claim. 

•  In a Chapter 13 "wage earner" proceeding, designed for individuals with ongoing income, a portion of the debtor's "regular income" over a period of generally three years, though sometimes longer, will be paid to a Chapter 13 Trustee to repay creditors in accordance with the terms of a "plan" approved by the bankruptcy court.

• In Chapter 11 reorganization proceedings, the debtor remains in control of its financial affairs and operation of its business while it attempts to develop and negotiate a "plan of reorganization" which provides for the treatment of creditor's claims; this treatment frequently involves large discounts of the amounts owed.  Chapter 11 proceedings are often complex and take months, or even years, to reach a conclusion.  The largest creditors in these cases may be invited by the United States Trustee to serve on an Unsecured Creditors Committee which acts as a fiduciary on behalf of the general creditor body with respect to evaluation of the "plan of reorganization" and other events during the course of the bankruptcy. 

            6.  Decide How to Participate.  A creditor's appropriate level of participation will naturally depend upon the nature and amount of the indebtedness, as well as upon the perceived prospects for repayment.  Creditors holding collateral will generally have the most leverage and the highest level of interest in the case; they may want to seek a lifting of the automatic stay so they can pursue their state court remedies and will undoubtedly have a number of other concerns raised by the bankruptcy.  Landlords and lessors are also afforded significant rights under federal bankruptcy law.  Trade creditors and other owed relatively small amounts may often find it cost effective to restrict their involvement to filing a proof of claim.

Many creditors view the "fresh start" philosophy of the federal bankruptcy laws as just another dodge for delinquent debtors.  However, there are also many provisions designed to protect creditors and assure an equitable distribution of the debtor's assets among all creditors.  A basic understanding of the fundamental aspects of bankruptcy can help avoid inadvertent pitfalls while maximizing the possibilities of at least some recovery of a bad debt.

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