Two Trucks and Recourse Factoring

So nine freight and transportation companies filed for bankruptcy in the last two weeks. One of them was two trucks and two drivers.

Now let's play a game, where they were using a factor to advance their invoices. When a client like that goes under, the factor isn't looking to chargeback or enforce recourse in a situation this bleak. The question becomes, does the debtor still pay the outstanding invoices to a client that's gone bust?

What protects the lender is the paperwork done on every invoice. If it was a true sale and you served a notice of assignment the debtor provably received, under UCC 9-406, they must pay you - the bankrupt client's Chapter 7 doesn't come into it.

UCC 9-404 however, is where things get quirky - it allows a debtor to make a claim from the underlying contract that predates the notice. Their argument becomes "that work was for a company that's now bankrupt; prove the amount and that it was delivered." Without a verification trail - POD/ rate con/ signed BOL, etc, - 9-406 hands you a legal right you as a lender can't actually collect on, especially once Chapter 7 makes verifying after the fact impossible.

And recourse won't save you. As bankruptcies hit bigger and bigger carriers, recourse just charges the invoice back to a client who no longer exists. In a client failure, it's an audit trail that saves you.

Which is why the next move belongs to the capital layer. A factor's verification rigor is becoming a credit input on the factor itself - the shops running 5-8% loss ratios out of spreadsheets are the ones warehouse lenders now hesitate to fund.

So, for the factors and lenders: when a client files Chapter 7, does your team scramble to reconstruct proof on every open invoice - or is it sitting there, ready to go? And are your warehouse lenders starting to ask about verification and loss rates (outside of recourse) when they set your terms?

A slightly cleaner wind-down than Chapter 7 is the new UABCA. Delaware just became the sixth state to adopt it, and it allows factors to keep collecting in an orderly wind-down. Useful one to keep in mind when dealing with any clients en route to a shutdown.