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Figuring Factors: Paying Suppliers Probably OK: Dommer

As a consumer bankruptcy attorney, I rarely need to get involved in complicated commercial financing issues, so Judge Kaplan's most recent decision was a primer on factoring in the construction industry. In re Dommer Construction Corporation WDNY Ch. 11 Bk 10-12764; Judge Kaplan decision Feb. 22, 2011.) 

I won't go into all the details, but basically Dommer had been contracted to renovate two Buffalo schools. Dommer sub-contracted MBE to do some drywall work, and MBE sub-sub-contracted some of the work to other suppliers and laborers.

New York lien law says that any funds received by a contractor on a construction project are to be held in trust for the suppliers and laborers. But New York law also says that in certain circumstances factors can trump the rights of suppliers. Factors buy receivables; here a factor called BFG appears to have purchased receivables owed by Dommer to MBE.

At some point Dommer learned that suppliers to MBE weren't getting paid, and paid those suppliers directly, rather than paying the factor. BFG, the factor, sued Dommer in state court, which ruled in favor of the factor. But before the state court ruling was reduced to judgment, Dommer filed Chapter 11.

Judge Kaplan concluded that, as the state court decision was not finalized by entry of a judgment, it was not binding, but was worthy of great deference. And with all due deference, Judge Kaplan concluded that the state court got it wrong, that the factor had not filed necessary notices of its factoring arrangement and so the arrangement was not binding on suppliers unless they had actual knowledge of the factoring agreement before they supplied stuff on the project.

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