Is C.O.D. Really "Cash on Delivery"?

By: Douglas G. Fox, CCE
Rexroth Hydraulics

When selling to difficult or non-credit-worthy customers, the conventional wisdom holds that it is a good idea to sell on a cash-on-delivery (C.O.D.) basis. The underlying assumption of requiring C.O.D. is that it eliminates any risk of payment. However, it appears this assumption may be incorrect. A recent bankruptcy filing has led to the conclusion that C.O.D. does not require "cash" to the carrier on delivery, but instead requires only "collection" by the carrier. In re McFadden Systems Inc., Case No. LA 98-12143 AA (Bankr. C.D. Cal. 1998).

In this case, a Pennsylvania manufacturer (vendor) sold to McFadden (debtor) a product used to manufacture 27-passenger motion simulators used worldwide in the entertainment industry. The vendor's product was a custom-made cushion, which in McFadden's manufacturing process was usually the last item installed prior to delivery. Without the cushion, the motion platform would not be useable. Competing vendors were not an issue because of the customized nature of the product.

Due to slow payments, the vendor was reluctant to continue to sell on an open-account basis, so the parties agreed to C.O.D., with a bank check required for payment. The vendor added to its invoice $10,000 in air freight charges, which were also to be collected by a bank check at time of delivery.

The cushion was delivered during the busy holiday season, when the freight carrier was employing temporary workers. When the shipment arrived at McFadden, instead of requiring payment by bank check, the driver accepted a McFadden company check for $60,000 (which included the $10,000 air freight charge). The check later bounced, and shortly thereafter McFadden filed chapter 11.

The vendor then demanded that the freight carrier pay the entire $60,000. The freight carrier refused and contended that its understanding of the term "C.O.D." means "collect on delivery," not "cash on delivery." The vendor was surprised by the response and inquired further. The freight carrier responded that its service manual clearly stated that it was acting solely as an agent of the shipper (i.e., the vendor), and that no liability would be assumed for bad checks, counterfeit bills, etc.

Adding further insult to injury, the freight carrier demanded payment of the $10,000 in air freight charges from the vendor. The carrier argued that it had performed the delivery service, and so the vendor was required to pay. Both parties agreed to put the matter "on hold" pending the outcome of the McFadden bankruptcy case. It has still not been resolved.

Clearly, this situation is a grave warning to those of us who ship on a C.O.D. basis. As a result of the vendor's experience, I reviewed the terms and conditions of the major freight carriers. Essentially, all use similar language, define C.O.D. as "collect on delivery" and disclaim any liability for bad checks or any problems in collecting payment.

On a C.O.D. tag, there is typically a box marked "check here if cash only; see instructions." In this case, the vendor did check the box marked "cash only," but failed to insert any wording in the instruction box. The freight carrier asserted that the vendor should have added the words "bank check only" or similar wording in that instruction box to alert the carrier to require payment by bank check.

Who is right? The instructions for C.O.D. tags typically state:

• "Cash only" must be entered on the instructions line and the box checked on receipts if the driver is not to accept a check issued by or on behalf of consignee (i.e., McFadden).
• If the "cash only" box is checked, the carrier reserves the right to collect cash, cashier's check, certified check, money order or similar instrument.
• All payments are collected at shipper's (vendor's) risk.

Each carrier's service manual has similar instructions concerning C.O.D. shipments, such as the following:

...will be accepted by the carrier at the shipper's risk including, but not limited to, risk of non-payment and forgery, and the carrier shall not be liable upon any such instrument.

What else could have been done? Hindsight is usually 20-20. Looking back, if the debtor had the funds on hand to pay C.O.D., then it could have paid by cash in advance a few days earlier. Because even a certified check could have been stopped, advance payment via a bank check or perhaps by wire could have been required. Further, the vendor may have missed a second valuable opportunity. At the moment the check first bounced, the vendor could have sent a reclamation demand to the debtor. The debtor then would have had to return the goods or, alternatively, the vendor might have ended up with an administrative claim, with its higher priority status, rather than an unsecured claim.

As a result of this experience, the vendor now has a new C.O.D. policy in place, including a reclamation letter ready to go out if the need arises. Perhaps other vendors need to "dust off" their C.O.D. policies as well.

Revisions to Article 9 of the Uniform Commercial Code

By: Lynnette R. Warman
Jenkens & Gilchrist PC

Last year, this newsletter provided a progress report about the ongoing revision of Article 9 of the Uniform Commercial Code, the article that governs secured transactions. The revised Article 9 has now been completed; it was approved late last year by the Uniform Law Commissioners, who recently published a list of states to which the revised Article 9 will be supplied for consideration this year. These states include Arizona, California, Hawaii, Indiana, Maine, Montana, Nebraska, Nevada, Oklahoma, Vermont and West Virginia.

Those of you who live in these states should obtain a copy of the revised Article 9 and take a look at it while your legislative committees are reviewing it. It is a wholesale revision, and in the words of one of the drafters, anyone who is now familiar with Article 9 should forget everything they know and literally "go to school" on the revision. The section numbers have changed, the headings are new, the organization has been changed and there are new concepts. If anyone is interested in reviewing the revised Article 9, please give me a call at (214) 855-4792 or send me an e-mail at lwarman@jenkens.com; I will be happy to send you a comparison of the old and new Article 9, as well as a complete copy of the revised Article 9.

"Log On" to ABI World

For those of you who are just beginning to use the computer for legal and credit research, ABI's web site, ABI World (http://www.abiworld.org), is a place that you should visit often. When you arrive at ABI World, you will see a variety of choices. If you click on "Today's Headlines," you will see summaries of current events that are pertinent to bankruptcy, collection and credit issues. Today's Headlines also provides up-to-date information about the status of proposed changes to the Bankruptcy Code. Other choices at the web site include the legislative function, which allows you to see the text of legislation as it is submitted, and the statistics section, which shows the numbers of bankruptcy filings, their locations, types of filings and other statistical information.

Those of you who are ABI members can log in to ABI Online and participate in ongoing online discussions about various bankruptcy topics, look at current and back issues of the ABI Journal, this newsletter and other resources. ABI World is continually being updated with new information, as well as links to other helpful sites. Next time you are surfing on the web, be sure to check out ABI World. Happy surfing!

CHAIRPERSON'S CORNER

By: Judy Thompson
Poyner & Spruill LLP

The UTC Committee met on March 13, 1999 in conjunction with the NACM Legislative Conference. The meeting convened at 3:00 p.m. at the Crystal Gateway Marriott in Washington. Present were committee Co-chairs Sandra Schirmang (Kraft Foods Inc., Northfield, Ill.) and Judy Thompson (Poyner & Spruill LLP, Charlotte, N.C.), Douglas G. Fox (Rexroth Corp., Lehigh Valley, Pa.), Michael R. Lastowski (Saul, Ewing, Remick & Saul LLP, Philadelphia), Rodney Wheeland (NACM-Oregon Inc., Portland, Ore.), Lynnette Warman (Jenkens & Gilchrist PC, Dallas), Joseph Bodoff (Schechtman, Levy & Halperin, Boston), Stephen Darr (KPMG Peat Marwick LLP, Boston), Bruce Nathan (Kreindler & Relkin PC, New York), Geoffrey Berman (Development Specialists Inc., Los Angeles), Steve Blakely (Blakely & Brinkman, Los Angeles) and Thomas Grace (Liddell Sapp, Dallas).

Grace reported on the work of the Ad Hoc Task Force on Membership, which was established at the committee meeting held during ABI's Winter Leadership Conference in December to consider how we can be more responsive to trade creditor members and encourage them to be more active in ABI and this committee. Grace reported on the deliberations of his task force thus far, and the entire committee joined in generating and discussing the following ideas:

• Include an article in each News & Views Newsletter that addresses itself to the nuts-and-bolts issues of interest to the credit professional.
• Set up a working group of committee members to make contact with each NACM regional level organization to inform them about ABI and this committee, and attempt to get an educational spot on each regional program. Members of this committee could then be used to provide the substantive program.
• Acquire a list of the regional NACM organizations with contact persons.
• Broaden circulation of News & Views.
• Obtain list of all senior credit managers (CCEs) with e-mail addresses and send a copy of the UTC newsletter to them.
• Better market the committee meetings and activities.
• Identify projects of interest to credit managers that this committee can undertake.
• Send information about the Southeast Bankruptcy Workshop's Creditors' Forum to all regional workshop coordinators and the Vice President of Education, and encourage the development of this sort of program at all regional ABI workshops.
• Develop web site links between the NACM's 53 affiliate organizations and regional organizations to the ABI web page, and check ABI World to see if it currently has any links to them.
• Send News & Views to the heads of all 53 NACM affiliates and encourage them to freely extract material for their newsletters, giving credit to our committee.
• Be sure NACM CEU credit is available for ABI national and regional programs.
• Contact the Credit Research Foundation (CRF) to obtain its mailing list and extend an offer to CRF for UTC members to make educational presentations to their members.
• Get in touch with the editor for P.B. News, the newsletter for CCEs, and determine whether there is a possibility of our committee submitting articles for that newsletter or at least listing our programs and activities.
• Investigate http://www.creditworthy.com to see if there is a way to develop affiliations with that group.

Geoff Berman reported on the status of the Assignment for the Benefit of Creditors publications. The ABC manual has been drafted and submitted for review to ABI Vice President of Publications Richard Meth (Friedman Siegelbaum, Roseland, N.J.). The manual has also been provided for review to a number of ABI members, including Mike Williamson (Maguire, Voorhis & Wells PA, Orlando, Fla.). It is expected that the manual will go to press sometime in early summer. Berman also reported on the drafting of the model ABC statute.

Bruce Nathan reported on the Reclamation Task Force, which met prior to the committee meeting and is in the process of preparing an outline for the Reclamation Manual. He will draft the outline and forward it for editing and comments. As soon as the outline is finished, a draft article will be prepared. An ABI Law Review article regarding reclamation and the model reclamation programs that the committee reviewed is also on the drawing boards.

Lynnette Warman reported on publications, and requested committee members to submit articles for the UTC newsletter. The group identified specific topics, including letters of credit, retention of title, purchase money security interests, pre-packaged plans and others. Warman agreed to become more active in reminding committee members to flag interesting topics. Committee members were requested to alert her to potential topics of interest. When articles are needed, Warman will send out a call for articles with a list of the potential topics; members will be asked to respond. We urged fewer, shorter articles in order to provide more information and appeal more broadly to the credit manager readers. The deadline to submit articles for the next issue of the newsletter will be Oct. 1, 1999.

There was a discussion regarding whether the name of the committee should be changed in order to broaden the scope of the committee to include bondholders, claims traders and other claimants. There were diverse feelings in the group regarding whether bondholders would be interested in becoming involved in our committee, even if we changed its name to the Unsecured Creditors Committee. Steve Darr and Tom Grace agreed to bring representatives of bondholders to discuss these matters at the Annual Spring Meeting in April.

The meeting adjourned at 5:00 p.m., and most of those present attended the meeting of the NACM-Oregon Insolvency Committee, which followed shortly after our adjournment.

The "Nuts & Bolts Creditors' Forum" is a new feature that will contain questions relating to credit issues and their suggested solutions. Questions or comments to be included in future newsletters are welcome. Questions: A credit manager recently received a letter from a customer advising that the customer was planning to file bankruptcy due to a huge amount of bond debt that was coming due and could not be paid from the customer's current cash flow. The customer said the bankruptcy filing would involve a pre-agreed plan, including a provision that all unsecured creditors would be paid in full, and therefore asked the credit manager to continue to extend credit on regular terms. The credit manager has posed two questions: "Can a debtor file a pre-agreed plan of reorganization? Secondly, should I continue to extend credit based on the customer's representation that all unsecured creditors will be paid in full in the bankruptcy?" Answers: It is possible for a company to file a "pre-packaged" or "pre-pack" plan that was agreed to and accepted before the bankruptcy filing by all of the company's creditors. In a pre-pack plan situation, the company must solicit votes from all of its creditors on a proposed plan before a bankruptcy case is filed. If all of the creditors accept the plan, the company then files a bankruptcy petition, and the pre-pack plan is reviewed and hopefully approved by the bankruptcy court after the bankruptcy filing. The answer to the second question is more difficult. It is hard to predict whether your customer will succeed in reaching agreements with its creditors before a bankruptcy filing, or whether your customer has the ability to pay all of its debts. As a consequence, the decision of whether to extend credit must be made based upon the information currently available to you.

UTC Committee Meeting Calendar

The UTC Committee will meet at the following upcoming 1999 conferences:

• April 18: ABI Annual Spring Meeting, J.W. Marriott, Washington, DC, 8:00 a.m.
• December 2-4: ABI Winter Leadership Conference, La Quinta Resort & Club, La Quinta, Calif.

Other Conferences to Note:

• May 16-19: 103rd NACM National Credit Conference, San Francisco, Calif.

The next issue of News & Views will be published in late October. Call Lynnette Warman at (214) 855-4792 or send an e-mail message to lwarman@jenkens.com for more information.