United States: Landlords, Vendors, And Trade Creditors Beware: Protecting Your Interests During A Retail Meltdown

Last Updated: July 4 2017
Article by Richard Costella

As cautioned in my recently co-authored article, "The Future Isn't Promising for Retailers", that appeared in the Baltimore Business Journal on March 10, 2017, the retail sector may be primed to see numerous more going out of business sales as the shakeup in traditional "bricks and mortar" retailing continues unabated. With brands such as Gymboree, Ann Taylor, Payless Shoes, and other household names making headlines for their bankruptcy filings, store closings, and restructurings, it is critical that landlords and trade creditors doing business in the retail sector protect their interests long before any bankruptcy filing. Specifically, landlords and vendors can protect themselves from their tenant and customers' potential insolvency issues by taking various, fairly simple, actions:

  1. Know your customer/tenant. Know the tenant's or customer's business and business plan before granting any credit, including but not limited to knowing how the tenant's or customers' business is financed. Vendors should also evaluate the amount of financing/debt carried by the customer in relation to the total amount of trade credit and capital invested in the business. Moreover, the relationship should be formalized in written documents such as credit applications and credit agreements. Request trade and bank references, as well as reports from one of the many providers of international and U.S. business credit information and credit reports (i.e., Dun & Bradstreet). Any refusal or hesitancy to provide references should be viewed with suspicion.
  2. Monitor your customer relationships and know the early warning signs of distress. These early warning signs often lead to future payment problems that will need to be promptly addressed by the vigilant landlord and trade creditor. Although the following list is not exhaustive, it does contain many of the early warning signs that landlords and trade creditors should be aware of such as: (i) continually dishonored check(s); (ii) customer issuing post-dated checks; (iii) customer changing payment patterns; i.e. , customer begins paying outside of terms agreed to by the parties; (iv) customer experiencing reduced or low stock levels; and (v) stories or rumors about your customer or tenant that are circulating in the industry. Keep your eyes and ears open and talk to others in the industry about your customer!
  3. Become a secured creditor. Secured creditors enjoy an advantage over unsecured creditors in the event that a customer files for bankruptcy protection, as well as when the customer is delinquent. One of the more effective ways to ensure that you are a secured creditor in the event a customer defaults on its accounts is to insist that the customer grant you a Purchase Money Security Interest ("PMSI") in the goods sold pursuant to Article 9 of the Uniform Commercial Code (the "UCC"). Article 9 of the UCC, which has been enacted in some form in all fifty U.S. states, governs the perfection and priority of competing creditors on personal property. More particularly, Article 9 of the UCC establishes a scheme that provides maximum protection to the trade creditor who has followed the applicable provisions of Article 9, while also providing a predictable system of creditor priorities.
  4. Consider consignments. The consigning of goods to customers is another manner in which you can protect yourself against defaulting customers and ensure payment of your invoices (or the return of your goods). The protections afforded by a consignment of goods, as well as the methods for perfecting your security interest in consigned goods, are similar to those present when utilizing a PMSI, except there is no actual sale of the goods to the customer. Instead, the goods are, in essence, loaned to the customer and, as the goods are sold or used, the customer pays for what is used or sold. If the debtor defaults in payment for the goods, you are entitled to foreclose on the goods in the same manner that a secured creditor would foreclose.
  5. Insist on COD or PIA. One of the best (and probably most obvious) methods to ensure payment on your invoices is to require the customer to pay cash on delivery ("COD") or make payments in advance of shipping ("PIA"). When it appears that a customer may be having financial difficulties and is heading for bankruptcy, the use of COD and PIA can also help minimize the prospects of being sued later for a preferential payment in the customer's bankruptcy matter.1
  6. Use of Letters of Credit. Letters of credit are another way to ensure that timely payment is made on the trade credit you extend to your customers. A letter of credit is a document issued by your customer's bank that essentially acts as a guarantee of payment to you as the beneficiary under the letter of credit. Specifically, the issuance of a letter of credit for your benefit means that if your customer does not timely pay your invoices, the bank issuing the letter of credit steps in and pays the open invoices.


1. Other than to note that in some circumstance a vendor can be sued for payments received from its customer within the ninety (90) days prior to a bankruptcy filing, the concept of preferential payments is beyond the scope of this blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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