Getting First in Line When Your Dot-Com Fails to Pay.

Dot-coms, whether they are distributors or e-tailers, now proliferate the business community and provide a new sales opportunity for vendors. However, as headlines highlight, liquidation is a growth industry for dot-coms. It appears that the name of the game for dot-coms, at least for the near future, is consolidation. Given the uncertain climate for selling to a dot-com and the fleeting value of the dot-com when it runs into financial difficulty, a vendor may be forced to act quickly when the dot-com unequivocally indicates it may not pay or fails to pay on the credit sale. While terms such as "race to the courthouse" and "dismembering the debtor" may have negative connotations to the fast-acting vendor, the nature of the dot-com's perishable value may require prompt action. What must the vendor do to get first in line?

A. THE FLEETING VALUE OF A FINANCIALLY STRUGGLING DOT-COM PROMPTS VENDOR TO ACT QUICKLY

The value of most dot-coms is intellectual property, such as customer lists, licensed technology and engineering teams. In comparison, vendors selling to a "bricks-and- mortar" company, such as a manufacturer, that runs into financial difficulty may act collectively and agree to support the company by consenting to an out-of-court workout that calls for a moratorium on payment of all vendor debt in an attempt to allow the debtor to work through its financial difficulties. This does not generally happen for the dot-com. Vendors dealing with a dot-com that runs into financial difficulty usually cannot work together to support the dot-com because of its fleeting value. Further, the hallmark of an out-of-court workout is consensus with vendors. However, as the dot-com generally lacks sufficient assets and operating history, recalcitrant vendors may upend the out-of-court.

Underscoring the need of a vendor to act early when the dot-com fails to pay, or the vendor obtains information that the dot-com may not pay on its account, is that Chapter 11 bankruptcy is also generally not a viable alternative for a dot-com. If financing and merger efforts by the dot-com fail and it is forced to file an e- bankruptcy, it is probably already too late to preserve these assets for the benefit of vendors for a bankruptcy sale or reorganization.

In many cases, the going concern value is gone when key personnel are gone--chasing stock options of another dot-com. With a dot-com Chapter 11, a creditors' committee, in which vendors act collectively, may not be appointed given the short duration of the case or lack of interest.

B. GETTING FIRST IN LINE WHEN YOUR DOT-COM FAILS TO PAY

Given that a credit professional may be forced to act quickly when a dot-com has financial problems, what are the vendor's next steps to get first in line? Did the vendor provide goods or services? If the vendor provided goods to the dot-com, Article 2 of the Uniform Commercial Code provides the selling vendor with a number of remedies. If the goods have been consumed, or the vendor has provided services, the vendor has a number of remedies under state law, and possibly federal law, to obtain a money judgment.