Golf Dispute Resolution

[This article is scheduled to be published in the May 2013 edition of the National Golf Foundation's Dashboard magazine.]

By: Jeffrey R. Waxman

A few years ago, I took a golf lesson from a local professional.  Not that I didn’t need it before then, but it was the first lesson I had taken in years.  Aside from the (obvious) technical issues with my swing, one of the issues that we discussed – even before the pro had seen me strike a ball – was my inability to score well (or at least, better).  One of the issues we identified was that, aside from the occasional duffs, skulls, and missed putts, I often found myself having to scramble to get the ball to a better position on the hole.  Accordingly, my poor scores may have been caused as much by poor course management as any technical flaw with my swing.  The answer, the pro said, is to play each hole backward.  That is, look at the pin placement and figure out where on the green you want to be to give yourself the best chance at birdie (or, in my case, par).  The next step is to look back to the fairway and figure out where your ball should be in order to give you the best opportunity to get to that spot on the green, and then finally, to get your ball from the tee box to that spot on the fairway.  Putting aside for a moment the obvious need to actually be able to hit the ball where you want to hit it, it is also important to figure out how to best give yourself a chance to succeed on each hole.

As a bankruptcy attorney, I am often contacted by clients who sell goods on credit to their customers.  Most frequently, I am contacted after the customer has filed for bankruptcy, and occasionally, after the customer files for bankruptcy and the bankruptcy trustee has filed an avoidance action against my client.  For those of you who don’t know, avoidance actions are lawsuits filed by a trustee on behalf of a bankruptcy estate to avoid and recover all payments made by the debtor during the ninety days immediately prior to the debtor filing for bankruptcy.  Such lawsuits are filed regularly, and the trustee often seeks the return of hundreds of thousands of dollars that the debtor paid to its biggest suppliers immediately prior to its bankruptcy filing.

Where a client has already been sued (or has been threatened to be sued), we attempt to determine whether the client has good defenses.  Two of the most common defenses are the ordinary course of business defense and the subsequent new value defense.  Without getting too technical, generally speaking, the trustee cannot not avoid payments which were made in the ordinary course of business (i.e., no demands for payment, no change in the number of days to pay, payment by the same method, and no constriction of the debtor’s line of credit).  Where everything has remained the same, the payments cannot be avoided.  The second defense, the subsequent new value defense, provides (again, generally speaking) that, where a supplier has provided new goods to the debtor after receiving a payment, the supplier is entitled to a dollar for dollar reduction of the amount that can be recovered by the estate.  So once a client’s customer has filed for bankruptcy and the client has been sued for an avoidance action, we often have to review the client’s records to see what was done – and, of course –what could have been done differently with the perspective of hindsight.

Occasionally, a client comes to me and says that it believes that one of its customers is in financial difficulty, and it is concerned about not being paid (or in the case of some of my more sophisticated clients, about being sued in an avoidance action).  In those cases, we have to create a plan by which the client will be able to continue to do business with the customer, and importantly, get paid by the customer, but minimize the chance that any amounts that it will receive will result in a future avoidance action.  In such cases, I am reminded of the lesson by the golf pro: play the hole backwards.  Where a client thinks a customer may file for bankruptcy (and that he may get subsequently sued by a trustee to avoid payments received), it is best to figure out ahead of time how to continue to maximize sales to and payments from the customer, but stay within the ordinary course of business.  How to maximize sales payments from someone who may file for bankruptcy without getting sued is easier said than done, but my recommendations generally include at least a few of the following:

• establish a pattern of sales;
• establish a pattern of payment so that they regularly pay invoices;
• establish and maintain a firm credit limit;
• avoid changing the terms of days to pay, either to give the client more time to pay, or requiring it to pay more quickly than usual; and
• avoid sending the dreaded “pay up, or else” email that trustees love to find in the debtor’s electronic files.

Obviously, establishing patterns with a customer cannot be accomplished in a week or a month or even three months prior to the customer filing for bankruptcy.  It is done as far ahead of time as possible by regularly reviewing customer files to see the average length that it takes for the customer to remit payment, the amounts sold to the customer, and the amounts due and owing by the customer.  The sooner that the client begins its evaluation, and begins to maintain that pattern and the established limits, the better off client will be, should the customer suddenly file for bankruptcy.  And, like the good drive begets the good approach which begets the birdie putt, the best strategy is to begin planning early!

About the author: Jeffrey R. Waxman is a partner in the Bankruptcy Department of the law firm of Morris James LLP, in Wilmington, DE.  Jeff regularly represents creditors, trustees and other parties to bankruptcy proceedings both in and out of Delaware.  When he is not practicing law, Jeff is often busy practicing his golf swing or looking for his lost golf balls in the woods.  Jeff can be reached at jwaxman@morrisjames.com.