Corporate Turnaround Artistry

Chapter 7Insolvency and the Law

In 2010 I was liquidating a lumberyard for the bank and owners; it's not unusual for a beleaguered entrepreneur and bank to agree to a voluntary liquidation in exchange for something like releasing the entrepreneur from a personal guarantee. We were selling off inventory and had already contracted an auctioneer to sell off whatever remained after 30 days. I got a call from a local business owner who had recently sold a bunch of product to the store but was never paid. My heart went out to the guy; he'd gotten screwed. I explained the situation, that the secured lender (bank) had liened every asset and was still likely to come up short, so there would be no recovery for him. He said, “I was just in your store, I've seen my product on your shelf, let me just take it back and sell it to someone else.” Gosh, it made so much sense and I really felt for the guy, but the inventory, his product, now belonged to the bank. They had the liens on it.

“No, it belongs to me! I was never paid for it,” he declared.

“Well, actually not. It belongs to the bank,” I responded.

You can imagine his response.

I explained: “They ordered, you delivered, and you delivered on credit terms. You transferred the ownership to them when they obligated themselves for it and they gave you a receivable in exchange. In doing that you completed the transaction and subordinated your interests to that of the bank. I know, this is the downside of vendor financing, and it is terrible. ...