detailed table of contents - bnaa third-party pledgee or by placing an endorsed bill of lading...

Detailed Table of Contents

Main Supple- Volume ment

ForeWord............................................................................... vii —

PreFace................................................................................... ix v

summarytabLeoFcontents.............................................. xiii xvii

chaPter1: historyoFamericanFactoringLaW....... 1 1

Introductory Discussion [New Topic] .................................. — 8A. Roots of Early American Factoring Law

Grounded in the Practice of English Factors in the 14th, 15th, 16th, and 17th Centuries [New Topic] ............................................................ — 8

B. Early English Law on Factoring, 1220–1900 [New Topic] ............................................................ — 301. The Earliest Reference to Factors in

English Case Law ............................................. — 312. Factors Generally .............................................. — 313. Blackwell Hall Factors ...................................... — 324. Factors Could Sell on Credit Unless

Barred by Contract From Doing So ............... — 345. Del Credere Commissions ............................... — 376. Factors Defined in the Early English

Case Law ........................................................... — 477. Factors and Brokers Distinguished ................. — 498. English Common Law Gave Factors Acting

as Commissioned Sales Agents a Lien on the Consigned Inventory Held by the Factor, and a Property “Interest,” More Than a Lien, in Accounts Receivable Due the Factor’s Client, Representing Uncollected Proceeds Arising From the Sale of Consigned Goods, to the Extent of the Factor’s Open Advances and Unpaid Fees ........ — 49

xix

xx American Factoring Law, 2016 Cum. Supp.


9. In England, Factors Who Purchased for Their Principal and Advanced the Factor’s Own Funds To Do So Apparently Did Not Hold a Lien on the Goods So Acquired; Early American Law on This Point to the Contrary ............................................................ — 59

10. Home Factors and Foreign Factors Defined. Ruled, in 1796, That a Factor’s Lien Extended to a Bill of Lading Held by Both Foreign and Domestic Factors ............... — 63

11. Factors at Early English Common Law Could Not Pledge Consigned Goods, Either by Depositing the Goods With a Third-Party Pledgee or by Placing an Endorsed Bill of Lading Evidencing the Goods in a Pledgee’s Hands, Even to Raise Cash to Satisfy the Factor’s Advances, Without Express Client Consent ... — 66

12. The English Factor’s Acts of 1823, 1825, 1842, 1847, 1889, and 1892 .............................. — 74

13. In Certain Events, Factors in England Were Allowed to Sue Without Physical Possession of the Consigned Goods Where They Held a Bill of Lading for the Goods, Endorsed to Them, and It Was Specifically Agreed That the Bill of Lading Would Secure the Factor’s Own Advances ..................................... — 76

14. Factors at English Common Law Had “Quality Recourse,” Meaning Ordinary and Del Credere Factors Both Had Recourse to Their Clients in Respect of Factored Accounts That Could Not Be Collected Because the Account Debtor Disputed and Refused to Pay the Same, Due to Issues With the Quality or Quantity of Goods or Services Provided to It by the Factor’s Client .................................... — 81

15. English Case Law Was Split on Whether or Not a Factor’s Advances Represented Debt to Be Repaid to the Factor on Demand; The Earliest Authority Was That the Factor First Had to Look to Goods and Their Sales Proceeds and Could Only Sue the Factor’s Principal for Open Advances if That Source Proved Insufficient; Later Case Law Recognized a Loan .................................................................. — 83

Detailed Table of Contents xxi


16. Early English Case Law Regarding Factors and Usury ......................................................... — 88

17. Before 1873, Title to Trade Accounts (Book Debts) Could Generally Be Assigned Only in Equity, But Not at Law; In 1828, in Dearle v. Hall, English Courts Determined That, Generally Speaking, Priority Among Competing Assignees Depended on Whomever Notified the Account Debtor of the Subject Assignment First ............................ — 90a. English Factors in the Period Before

1873 Did Not, in Form, Buy Factored Accounts Outright ...................................... — 92

b. English Law Before 1873 Recognized That Book Accounts of a Trader Could Be Sold and Assigned, but Only in the Sense of Passing Equitable Title, Not Full Legal Title ......................... — 92

c. The Rule of Dearle v. Hall, That the First Assignee to Notify the Account Debtor Takes Priority ................................. — 103

d. In Bankruptcy, the Factor’s Principal Was Treated as Owner of the Accounts Under English Common Law, at Least Before a Del Credere Factor Had Performed on its Assumed Credit Risk, After Which the Factor Became Subrogated and Stepped Into the Owner’s Rights and Remedies as Against the Account Debtor ...................... — 104

18. The Bill of Sale Acts of 1854, 1878, and 1882 Did Not Cover the Sale of Accounts ...... — 114

19. Holyrod v. Marshal (1862) Recognizes, in Equity, a Collateral Assignment of After-Acquired Tangible Property ............................ — 115

20. Statutory Recognition That Existing (Not Future) Accounts Receivable Could Be Sold in the Supreme Court Judicature Act of 1873 (Later Supplanted by §136(1) of the Law of Property Act, 1925) ....................... — 123

21. Recognition of the Assignment of Future Accounts Not Yet Existing, in Equity, in Tailby v. Official Receiver (1888); This Is Still the Law in England Today, if No Notice of The Assignment Has Been Given to The Account Debtor ......................... — 125

22. Factor’s Set-Off Rights Under English Law .... — 135

xxii American Factoring Law, 2016 Cum. Supp.


I. Summary of the Historical Development of American Factoring Law .............................................. 8 145A. 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 Supplemental 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 —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] ... — 145 II. The History of American Factoring Law .................... 18 151

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 —

Detailed Table of Contents xxiii


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 1511. Advances by Del Credere Factors Were

Nonrecourse to the Principal.......................... 25 1512. 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 —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 —

xxiv American Factoring Law, 2016 Cum. Supp.


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 .......... 50 152

A. Birth of the Modern American Factor ................. 50 1521. New York City as the Historic Center of

American Factoring ......................................... 50 —2. American Factors of the Early 1800s Were

Largely European Immigrants ........................ 51 1523. 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 —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 —

Detailed Table of Contents xxv


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 Volume, by an Ever Smaller Number of Major Factors; and the Beginning of the International Market .......... 81 160a. Export of Modern Factoring From

America Back to England and to the Continent in the 1960s [New Topic] ........ — 161

b. Comparison of Modern English Case Law on the True Sale of Accounts [New Topic] ................................................ — 165

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 Volume

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 177a. New Developments Since August 2009

[New Topic] ................................................ — 177b. Developments Since Summer 2013

[New Topic] ................................................ — 204i. Factoring Market Statistics

[New Topic] ........................................ — 204ii. American Stock Market

[New Topic] ........................................ — 205iii. Real Estate Markets [New Topic] ..... — 206

xxvi American Factoring Law, 2016 Cum. Supp.


iv. The Scope of QE [New Topic] ......... — 206v. Overview of Adverse Effects From

QE, and From Other Forces, on the American Economy (and American Factors) [New Topic] ........ — 207

vi. Benefits of QE, So Far (A Mixed Bag) [New Topic] ............................... — 212

vii. Some Critics of QE; Risk of a Bond Market Bubble; Fallout Effects Thereof [New Topic] ............. — 216

viii. Stock Market Bubble [New Topic] ... — 222ix. America’s Budget Deficit [New

Topic] .................................................. — 226x. “Excess” Reserves at the Fed and

“Normalizing” the Fed’s Balance Sheet [New Topic] ............................. — 228

xi. Implications for Future Economic Activity in America, Looking Forward; Related Effects on Factors [New Topic] ........................... — 230

B. Modern American Nonrecourse Factors as Owners of Purchased Accounts ............................ 103 238

V. Modern Factoring Today—Basic Concepts ................ 114 241A. Factoring Defined .................................................. 114 241B. Who Today’s Factors Are ....................................... 115 242C. 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 243G. Securitization Distinguished ................................. 126 243

chaPter2: theVariousroLesoFFactors.................. 129 251

I. The Factor as Purchaser of Accounts at a Discount ........................................................................ 129 253

II. Spot Factoring ............................................................... 131 256 III. Factors as Lenders ........................................................ 131 262

A. Factors as Providers of Accounts Receivable Financing, Lending Against Client-Owned Accounts .................................................................. 131 262

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 —

Detailed Table of Contents xxvii


IV. Purchase Order Financing........................................... 132 262 V. Import-Export Financiers ............................................ 133 264 VI. Structured Settlements: Outside the Role of

Traditional Factors ....................................................... 133 — VII. Deeply Discounted Purchases of Troubled

Accounts: Outside the Role of Traditional Factors ........................................................................... 133 265

VIII. Other Exclusions From Factoring [New Topic] ......... — 266A. Sales of Personal Injury and Workmen’s

Compensation Claims, Lottery Winnings, Future Annuity, and Settlement Payments ........... — 266

B. Litigation Funding Transactions ........................... — 270C. Merchant Cash Advance Financing

Transactions (MCA Transactions) ........................ — 2791. Differences Between Traditional Factoring

and MCA Transactions .................................. — 2802. Early English Law Did Not Recognize a

Sale of Book Accounts Not Yet Existing; However, a Contract to Purchase Accounts Was Recognized in Equity and Created Equitable Title in the Assignee When the Accounts Arose ................................................. — 285

3. Before Adoption of the U.C.C., Some States Did Not Recognize as Valid the Sale of Future Accounts Not Arising From an Existing Contract or Other Property in Which the Assignor Had a Present Interest .... — 286

4. Before Adoption of the U.C.C., Some States Recognized That a Contract to Sell Future Accounts Not Tied to an Existing Contract Created an “Equity’ in the Assignee That Ripened Into “Equitable” Title as and When the Accounts Arose, i.e., When the Assignor Delivered the Goods or Services; the Assignee Then Took “Perfected” Legal Title by Notifying the Account Debtors of its Interest in and Collecting the Accounts or by Receiving a Further Specific Assignment of the Accounts From the Assignor; yet Other States Treated Assignments of Book Accounts as Valid Even if They Were Not Tied to an Existing Contract .......................... — 295

5. The Impact of the U.C.C. and its Express Recognition of Security Interests in After-Acquired Property; Analysis of What Constitutes “Accounts,” “General Intangibles,” and the “Proceeds” Thereof ...... — 302

xxviii American Factoring Law, 2016 Cum. Supp.


6. The Achilles Heel of MCA Transactions—Bankruptcy Cases Treating MCA Financiers as Mere Unsecured Creditors Due to the Financier’s Security Interest in “Future” Accounts Not Yet Collected Not Having Attached on the Petition Date ........... — 321

7. Cases, Outside Bankruptcy, Questioning Whether MCA Transactions Create “True Sales” of “Future” Accounts ............................. — 330

8. Cases, Outside Bankruptcy, Recognizing MCA Financing Transactions as True Sales of Future Accounts ............................... — 338

9. Impact of Choice of Law ................................. — 348 IX. Reverse Factoring/Supply Chain Financing ............... — 348

chaPter3: theFactoringcontract........................... 136 351

I. Overview ........................................................................ 140 — II. The Factor’s Underwriting and Due Diligence,

Pre-Contract .................................................................. 140 357 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 359A. 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] .............................. — 359 VIII. Formal Assignment to Factor of Accounts

Accepted for Purchase ................................................. 151 360A. Batches/Schedules .................................................. 151 360B. Sample Purchase Language [New Topic] ............ — 361C. Invoicing of Purchased Accounts [New Topic] .... — 363

IX. Amount of Purchase Price and Timing of Payment ......................................................................... 152 364A. Determination of the Purchase Price ................... 152 364B. Payment Date in Maturity Factoring .................... 153 —C. Payment Date in Collection Factoring .................. 155 365

Detailed Table of Contents xxix


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” ................................. 159 365

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 —

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 Non-Notification 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 372A. Credit Risk in General ........................................... 182 372

xxx American Factoring Law, 2016 Cum. Supp.


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’s 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 3761. 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” ................................................ 187 376

3. “Financial Inability to Pay” Contractually Defined as Balance Sheet Insolvency ............. 188 —

4. “Insolvency” Does Not Necessarily Equate to “Financial Inability to Pay” ......................... 189 376

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 3761. 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 ... 191 376

3. Partial Nonrecourse Factoring, Where the Factor’s Assumption of Credit Risk Lapses After an Agreed Period of Time ..................... 191 376Exhibit 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 ........... 199 376

Exhibit 3-3. All Accounts Not Yet Collected Treated as Converted to a Secured Borrowing if Charged Back and the Chargeback Is Satisfied ...... 199 —

Detailed Table of Contents xxxi


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 —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 ............................ 215 377

xxxii American Factoring Law, 2016 Cum. Supp.


XII. The Reserve .............................................................. 215 379A. In General ........................................................... 215 —B. The Reserve as Security ..................................... 216 —C. Debits and Credits to the Reserve;

Minimum Reserve Levels ................................... 217 379D. 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 —F. Servicing Fees ..................................................... 230 —G. Early Termination Fees ...................................... 230 —

XIV. Representations and Warranties of the Client Regarding Accounts ................................................. 231 381A. In General ........................................................... 231 381B. Evergreen Clauses .............................................. 232 —

XV. Client’s Grant of Security Interests to the Factor .... 232 382A. 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 ..... 233 382

C. Protective Language Regarding Re-Characterization ........................................... 234 —

XVI. Billing and Collection Procedures .......................... 235 383A. In General ........................................................... 235 —B. Factor’s Collection Duties .................................. 235 383C. Factor’s Client as Servicer .................................. 236 —D. Notification Versus Non-Notification Factoring ... 237 —E. Lockboxes ........................................................... 237 —F. Collections on Non-Purchased Accounts

(Non-Factored Funds) ........................................ 237 383 XVII. Other Factor Protections and Rights ...................... 238 383

A. Miscellaneous Factor Protection Mechanisms and Other Rights .......................... 238 383

B. Conditions to Factor’s Fundings ....................... 240 — XVIII. Chargebacks .............................................................. 241 —

A. In General ........................................................... 241 —B. Automatic and Non-Automatic 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 —

Detailed Table of Contents xxxiii


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 —

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 ....................................................................... 258 384

A. Events of Default ................................................ 258 —B. Default Remedies ............................................... 259 384C. Factor’s Analysis Prior to Declaring

Default ................................................................. 259 — XXI. Termination of the Factoring Contract .................. 260 384

A. Per Contractual Terms ....................................... 260 —B. Deemed Termination ......................................... 260 384C. 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 385A. Lender’s License ................................................. 262 385B. Usury ................................................................... 262 —C. Financial Privacy Laws ....................................... 263 —D. Place of Contracting and Place of

Acceptance .......................................................... 263 —

xxxiv American Factoring Law, 2016 Cum. Supp.


E. Requirement of Written Modifications/Merger Clause ..................................................... 263 —

F. Signatories .......................................................... 263 — XXIV. Multiple-Client Factoring Transactions .................. 264 —

chaPter4: treatmentoFcreditriskand“truesaLe”issues................................................... 265 387

I. Overview ........................................................................ 267 — II. Factor’s Purchase of Accounts “Without

Recourse” to the Client as “True Sales” Under State Law ....................................................................... 269 390A. Nonrecourse Factor’s Assumption of Credit

Risk .......................................................................... 269 —B. Economics of the Credit Risk Assumed in

Purchasing Accounts Without Recourse ............... 270 3901. 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 390Exhibit 4.3. Nonrecourse Factoring; One

Batch of Accounts ....................... 275 390Exhibit 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 390F. 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 391A. Partial Nonrecourse Factoring Defined ............... 307 —

Detailed Table of Contents xxxv


B. Partial Nonrecourse Factoring as a True Sale ..... 308 391 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 391A. Full Recourse Factoring Treated as a Secured

Borrowing ............................................................... 319 391B. Full Recourse Factoring Treated as a “True

Sale” of Accounts .................................................... 326 406 VI. Facts and Circumstances in True Sale Analysis

Under State Law ........................................................... 339 407A. Elements of the Facts and Circumstances Test .... 339 407

1. The Parties’ Stated Intent to Make a True Sale .................................................................... 340 407

2. The Extent to Which the Purchasing Factor Assumes Credit Risk ............................. 343 411a. Applying Boulder Fruit [New Topic] .......... — 422

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 ......................................... 344 437

5. The Factor’s Right to Surplus ......................... 345 4376. The Factor’s Right to Control Collection

of Accounts ....................................................... 346 4387. 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 43811. Adequacy of the Purchase Price ..................... 348 —

xxxvi American Factoring Law, 2016 Cum. Supp.


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 .......................................................... 355 438

A. SFAS No. 77 (1983–1996) [Revised Heading] ..... 355 438B. 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 —

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] .................................................................. — 439A. Authors’ Commentary on Selected Material

[New Topic] ............................................................ — 439

Detailed Table of Contents xxxvii


chaPter5: sPeciaLtyFactoringandnon-FactoringFinanciaLserVices........... 393 447

I. Specialty Factoring ....................................................... 394 448A. Government Accounts ............................................ 394 448

1. The Federal Assignment of Claims Act .......... 395 4492. Assignment Under Federal Law Is of the

Right to Payment Only .................................... 397 4503. 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 4528. Governmental Units as Account Debtors

Under the U.C.C. ............................................. 407 —9. State Restrictions on the Assignment of

State, County, and Municipal Government Contracts ........................................................... 408 456

B. Healthcare Accounts .............................................. 408 4571. Business Complexities ...................................... 408 4572. Anti-Assignment Rules of Medicare and

Medicaid ........................................................... 414 4653. True Sales of Healthcare Accounts ................. 418 467

C. Transportation Factoring ....................................... 423 468D. Construction Factoring .......................................... 424 471E. Agricultural Factoring ........................................... 425 472F. International Factoring .......................................... 426 473

1. Export Factoring .............................................. 426 —2. Import Factoring .............................................. 427 —3. Factor Chains .................................................... 427 473

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 —

xxxviii American Factoring Law, 2016 Cum. Supp.


B. Letters of Credit ..................................................... 432 —C. Factoring Loans and Accounts Receivable

Financing ................................................................ 437 —

chaPter6: LitigationbetWeentheFactoranditscLient...................................................... 439 477

I. Possible Responses by Factor to Client Defaults ........ 441 479A. Acceleration of Underlying Obligations ............... 441 —B. Reducing or Ceasing Further Purchases of

Accounts .................................................................. 441 479C. 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 ......................................... 451 480

II. Personal Jurisdiction .................................................... 451 —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 480A. Breach of Contract ................................................. 457 480B. Account Stated and Other Non-Tort Claims ........ 460 —C. Attorney’s Fee Claims ............................................. 464 483D. Arbitration [New Topic] ........................................ — 484

IV. Tort Claims by Factors Against Their Clients ............ 464 484A. Conversion and Unjust Enrichment ..................... 464 484B. Fraud and Negligent Misrepresentation ............... 465 484

1. A Representation [New Topic] ........................ — 4912. Falsity [New Topic] ........................................... — 4913. Materiality [New Topic] ................................... — 491

Detailed Table of Contents xxxix


4. The Speaker’s Knowledge [New Topic] .......... — 4925. The Speaker’s Intent [New Topic] .................. — 4936. The Hearer’s Ignorance [New Topic] ............. — 4937. The Hearer’s Reliance [New Topic] ............... — 4938. The Hearer’s Right to Rely [New Topic] ........ — 4939. Consequent and Proximate Injury

[New Topic] ...................................................... — 49310. Corporate Officer Liability [New Topic] ....... — 494

C. Intentional Interference With Contractual Relationships ........................................................... 465 —

D. Piercing the Corporate Veil of the Client ............ 465 —E. RICO Violations [New Topic] ............................... — 495F. Client Violation of State Law Barring

Deceptive Practices [New Topic] ........................... — 501G. Tort Claims Against Client’s Professionals

[New Topic] ............................................................ — 501 V. Client’s Defenses, Claims, and Counterclaims

Against the Factor ........................................................ 466 501A. Improper Failure to Fund...................................... 467 501

1. Was a Binding Contract Formed? ................... 467 —2. Factor’s Discretion to Refuse to Purchase

Proffered Accounts ........................................... 468 501B. Claims That a Factor Improperly Charged

Back ......................................................................... 469 5021. Claims That a Nonrecourse Factor

Charged Back Accounts That Were Not Disputed by the Account Debtor .................... 469 502

2. Claims That a Nonrecourse Factor Charged Back Accounts Within Its Assumption of Credit Risk .............................. 470 502

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 —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 502K. Breach of Fiduciary Duty ....................................... 478 —

xl American Factoring Law, 2016 Cum. Supp.


L. Fraudulent Inducement/Negligent Misrepresentation ................................................... 479 503

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] ........ — 505Q. Injunctive Relief [New Topic] ............................... — 510R. Petition to Open Confessed Judgment

[New Topic] ............................................................ — 516S. Improper Service [New Topic] .............................. — 517

VI. Corporate Client Must Appear by Counsel ................ 486 — VII. Injunctive Relief for the Factor ................................... 486 518 VIII. Forum-Selection Clauses .............................................. 488 524 IX. Choice of Law Litigation.............................................. 488 525 X. Jury Trial Waivers ......................................................... 489 — XI. Factor’s Exercise of Post-Judgment Remedies

[New Topic] .................................................................. — 525 XII. Third Party Actions [New Topic] ................................ — 526 XIII. Discovery [New Topic] ................................................. — 529 XIV. Res Judicata [New Topic] ............................................. — 530

chaPter7: LitigationbetWeenFactorsandaccountdebtors......................................... 491 535

I. Factor’s Affirmative Claims Against the Account Debtor in Collection Litigation ................................... 492 537A. Breach of Contract ................................................. 492 537B. Estoppel Created by Account Debtor’s

Verification of the Account ................................... 493 5541. Verification in General; Common Law

Estoppel Created Thereby ............................... 493 5542. Statutory Waiver and Limitations of

Payor’s Defenses—U.C.C. §9-403(b) ............... 495 —3. Selected Cases .................................................. 496 567

C. Tort and Other Affirmative Claims by the Factor ....................................................................... 499 571

D. U.C.C. §9-406 ......................................................... 501 5771. General Rules of U.C.C. §9-406 ...................... 501 —2. Case Law Under U.C.C. §9-406 ...................... 503 5773. Special Rules of U.C.C. §9-408 ....................... 508 —

E. Attorney’s Fees [New Topic] .................................. — 613 II. Defenses of the Account Debtor ................................. 509 614

A. U.C.C. §9-404.......................................................... 509 6141. General Rule .................................................... 509 —

Detailed Table of Contents xli


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 [Amended Heading] ...................................... 514 614

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 653B. Account Debtor’s Defenses to Verifications

Given Under U.C.C. §9-403(b) .............................. 515 6551. 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 6555. 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] ........................... — 655

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 —

xlii American Factoring Law, 2016 Cum. Supp.


IV. Forum Selection Clauses and the Account Debtor ............................................................................ 535 —

V. Arbitration Clauses and the Account Debtor ............. 536 — VI. Bankruptcy of the Account Debtor ............................. 536 — VII. Negotiation of Checks Payable to “Stacked”

Payees............................................................................. 537 —

chaPter8: theFactorandguarantorsoFcLientobLigations................................................... 541 661

I. Scope of Guarantor’s Guarantee ................................. 542 662A. Full Guarantee........................................................ 542 —B. Limited Guarantee ................................................. 543 662C. Validity Guarantee ................................................. 543 —D. Guarantees of Payment vs. Guarantees of

Collection ................................................................ 547 — II. Factors’ Claims Against Guarantors ............................ 548 665

A. Breach of Contract ................................................. 548 665B. Account Stated ........................................................ 552 671C. Attorney’s Fees ........................................................ 554 672D. Tort Claims ............................................................. 554 673

III. Guarantors’ Defenses and Counterclaims Against Factors ........................................................................... 555 674A. 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 674K. Objections to Jurisdiction and Venue Chosen

by the Factor ........................................................... 572 —L. Payment of the Underlying Debt .......................... 574 —

Detailed Table of Contents xliii


M. Signature in a Representative Capacity Only; Execution in Blank ................................................. 574 —

N. Guarantee Voided by Factor’s Charge Back ......... 576 —O. Release [New Topic]... ............................................ — 675P. Default Judgment by Collusion [New Topic] ....... — 677Q. Failure of Proof [New Topic] ................................ — 680

IV. Waivers of Counterclaims and Defenses ..................... 577 681 V. Confessed Judgments ................................................... 577 681 VI. Effect of Guarantees on the True Sale of Accounts .... 577 — VII. Jury Demands by Guarantors [New Topic] ................ — 682 VIII. Actions by Guarantors against Factors

[New Topic]. . .. .............................................................. — 682 IX. Effect of the Principal Obligor Whose Debt was

Guaranteed Becoming Bankrupt [New Topic] .......... — 683

chaPter9: theFactoranditsFundingsources...... 581 685

I. Rediscounting Lines of Credit: Asset-Based Lending to Factors ....................................................... 581 685

II. Re-Factoring: Sale of Accounts to Another Factor .... 583 686 III. Participation Interests .................................................. 584 687 IV. Funding via Securitization Transactions .................... 588 692 V. Equity Offerings by Factors ......................................... 589 694 VI. Litigation Between the Factor and Its Funding

Sources .......................................................................... 590 694A. Litigation Between the Factor and Its Lender ..... 590 694

1. Actions by Factors (or Their Successors and Assigns) Against Lenders [New Topic] ... — 694

2. Actions by Lenders Against Factors [New Topic] ...................................................... — 700

B. Litigation Between the Factor and Its Re-Factor ................................................................. 591 703

C. Litigation Related to Participation Interests ........ 591 — VII. Factors and Their Funding Costs [New Topic] .......... — 705

chaPter10: take-outsandotherreLationshiPissuesbetWeenFactorsoFthesamecLient............................................................ 595 707

I. Take-Out of an Existing Factor ................................... 595 707A. Direct Purchase of the Old Factor’s Position ....... 596 707B. Client’s Repurchase of the Subject Accounts

and Termination of the Existing Factoring Agreement ............................................................... 598 —

xliv American Factoring Law, 2016 Cum. Supp.


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 .............................................................. 608 708

IV. Priority Disputes Between Factors ............................... 615 — V. Split Factoring ............................................................... 617 —

Appendix 10.A: Letter of Indemnity ........................... 618 —

chaPter11: Factorsandthird-PartyLenders/creditors...................................................... 623 731

I. Factor’s Take-Out of an Existing Lender’s Position ... 625 733A. 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 .............................. 626 733

B. Assignment of Existing Lender’s Position to the New Factor ........................................................ 628 —

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 733A. Priority Disputes ..................................................... 633 733

1. General Rule: First to File or Perfect Is First in Right ..................................................... 633 733

2. Factor’s Perfected Security Interest Prevails Over Client’s Unsecured Creditors ... 635 —

Detailed Table of Contents xlv


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 ............................................................ 638 736

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 .............. 639 736

7. Factor’s Cause of Action for Conversion Against the Holder of a Junior Security Interest: Holder in Due Course Defense ........ 641 737

8. Factor Takes “Subject to” Unreleased or Unsubordinated Existing Liens ...................... 644 740

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] .......................................... — 74015. Loss of Security Interest Due to

Trademark Violation [New Topic] .................. — 740B. Factor’s Failure to Perfect Its Security Interest .... 650 740C. Disputes Between Factors and Lenders With

Respect to Intercreditor and Subordination Agreements ............................................................. 651 744

IV. Lender’s Take-Out of Factor’s Position ....................... 653 — V. Factor and Third-Party Purchase Order Financier ... 653 747 VI. Priority Disputes Between Two Lenders to a Factor .... 653 — VII. Fraudulent Conveyance and Other Risks to

Consider [New Topic] .................................................. — 748A. Fraudulent Conveyance Risks [New Topic] .......... — 748B. PACA and Unpaid Produce Sellers

[New Topic] ............................................................ — 752C. Buyers in the Ordinary Course of Business

[New Topic] ............................................................ — 752

xlvi American Factoring Law, 2016 Cum. Supp.


D. Judgment Lien Creditors Who Garnish Either the Factor or the Factor’s Client [New Topic] .......................................................... — 752

E. Transferees of Funds From a Depository Account in the Name of the Factoring Client [New Topic] ............................................................ — 755

F. Conversion of Goods by the Factoring Client [New Topic] ............................................................ — 757

chaPter12: bankruPtcyissues....................................... 655 761

I. General Bankruptcy Concepts and Terminology ...... 657 764A. Chapters of the Bankruptcy Code ........................ 657 —B. The Bankruptcy Court and Its Limited

Jurisdiction .............................................................. 658 764C. 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 Non-Bankruptcy Forum ........................... 663 —

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 7661. 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 —6. Validity of a Claim [New Topic] ..................... — 766

G. Cash Collateral ....................................................... 668 7671. 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 ....... 673 767

Detailed Table of Contents xlvii


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 ....................... 685 768

1. Individual Debtor’s General Discharge in Chapters 11 and 7 ............................................ 685 768

2. Dischargeability of Particular Debts in Chapters 11 and 7 ............................................ 685 774

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 778A. 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 —

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 ............................................... 691 778

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 7831. 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 7834. “True Sale” Finding; Sale of Accounts to

the Factor “Free and Clear” ............................ 703 —

xlviii American Factoring Law, 2016 Cum. Supp.


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 .................................................. 706 784

G. Factor’s Motions for Relief From the Automatic Stay ........................................................ 708 7851. To Foreclose Collateral .................................... 708 —2. For Permission to Set Off ................................ 709 7853. To Collect on a Nondischargeable Claim ...... 709 —4. Recoupment and Setoff Distinguished;

No Need to Lift Stay to Exercise Recoupment Rights That Do Not Create Affirmative Money Debts of the Client to the Factor [New Topic] .................................... — 788

5. Protective Lift-Stay Motion to Permit Post-Petition Setoffs of the Mutual Obligations Between Nonrecourse Factors and Their Clients (But Not to Collect the Factor’s Interest in Purchased Accounts, Not Barred by the Automatic Stay) [New Topic] ...................................................... — 795

H. Factor’s Filing of a Proof of Claim; Client’s Objections Thereto ................................................ 710 —

I. Preference Claims .................................................. 711 798J. Fraudulent Conveyance Claims ............................. 714 804K. 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] ................... — 804M. Voidable Post-Petition Transfers to the Factor

[New Topic] ............................................................ — 805N. Return of Non-Factored Funds [New Topic] ....... — 805O. Challenges by the Bankrupt to Fees and

Commissions of the Factor [New Topic] .............. — 807P. Letters of Credit [New Topic] ............................... — 810

III. Lender Liability and Other Claims ............................. 718 —A. Factor’s Unperfected Security Interest Falls to

Trustee’s Strong-Arm Powers ................................. 718 —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 —

Detailed Table of Contents xlix


IV. Bankruptcy of the Client’s Guarantors and Its Principals ....................................................................... 719 810

V. Bankruptcy of a Client’s Account Debtor ................... 722 813 VI. Bankruptcy of the Factor ............................................. 723 816

chaPter13: theFactorandtaxauthorities............. 729 819

I. The Federal Tax Lien ................................................... 730 819 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 ................ 733 820 IV. The Factor and Section 3505(b) Liability .................. 736 — V. Intercreditor and Subordination Agreements

With the IRS ................................................................. 736 821A. Subordination of Federal Tax Liens ..................... 737 821B. 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 — VII. Factoring and State Taxation [New Topic] ................ — 822

chaPter14: Factoringaccounting............................... 747 825

I. Sources That Discuss Accounting for Factoring Transactions .................................................................. 748 826A. FASB Statements of Financial Accounting

Standards (SFAS) ................................................... 748 826B. AICPA Statements of Position (SOP) .................... 749 —C. AICPA Accounting and Audit Guides ................... 751 851D. Books and Articles ................................................. 760 851

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 8514. Relevant Literature [New Topic] .................... — 852

E. Statements of the Government Accounting Standards Board [New Topic] ............................... — 852

II. Examples of Actual GAAP Reporting ........................ 769 854A. Examples of GAAP Reporting by Factors ............ 769 854

1. Accounts Purchased Both With and Without Recourse as “True Sales” .................. 770 —

l American Factoring Law, 2016 Cum. 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 8581. Servicing Assets and Liabilities

[New Topic] ...................................................... — 859

chaPter15: misceLLaneousmatters............................. 755 863

I. Factoring as a Tax-Planning Device ............................ 775 863 II. Factoring and Securities Laws Matters ....................... 776 873 III. Factoring and Criminal Law Matters .......................... 780 874 IV. Factors and Antitrust Litigation .................................. 780 876 V. Litigation Involving Factors and Third-Party

Professionals .................................................................. 781 877 VI. Federal and State Regulation of Commercial

Factors [New Topic] ............................................... — 879A. Federal Regulation [New Topic] ........................... — 879B. State Regulation [New Topic] ............................... — 879

1. Lender’s License [New Topic] ......................... — 8792. Collection Agency License [New Topic] ........ — 880

aPPendices.............................................................................. — —

gLossaryoFFactoringterms............................................ 783 883

bibLiograPhy.......................................................................... 811 913

tabLeoFcases....................................................................... 815 917

index....................................................................................... 831 —

abouttheauthors............................................................. 855 931

detailed table of contents - bnaa third-party pledgee or by placing an endorsed bill of lading...

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