AS ECONOMIC TIMES get tougher, we are seeing more and more instances where banks are getting nervous about large outstanding lines of credit to their customers. One reaction to this nervousness is to invoke a clause in the fine print of that credit agreement the customer signed, which gives the bank the right to ask creditors to make payments directly to the bank and not to the customer. If the bank and the customer are still on good terms, the customer will sign the letter to the creditor, but if they are not, the letter may come directly from the bank.

Last week, I received three copies of the same bank letter from three different clients, all of whom were dealing with the same electrical subcontractor. That subcontractor did not file for bankruptcy (yet), but if any of the firms had ignored the letter and paid the subcontractor anyway (which the subcontractor had suggested), they would have been in trouble.

These letters are very serious events. First and foremost, this is a sign that a firm is in financial trouble. Both the customer who has bought goods or services from the firm and the vendor who has sold goods to the firm need to immediately take steps upon learning that a bank has invoked its assignment rights.

The customer has to worry about getting claims from unpaid vendors of the troubled firm. Its first reaction should be to ask itself what other creditors of the vendor might show up on its doorstep seeking payment — such as union pension funds, material vendors, employee leasing firms, equipment rental firms. It will want to take all prudent steps to try to protect its project from lien or bond claims.

The vendor has to worry about how it will get paid because the bank has no obligation to see to it that vendors get paid. The bank can use the money to pay off its loan and other expenses. If there is money left over after that (which generally doesn’t happen), the bank would probably turn that money over to its troubled customer, but that still doesn’t assure a vendor that it will be paid.

No one should take comfort in the fact that there is a clause in the contract, purchase order or other order document that says that the other party cannot assign the contract or any of its proceeds to another party without your consent. While this kind of clause is generally enforceable, it is not enforceable against a bank or other lending institution under the Uniform Commercial Code Section 9-406(d). Thus, for example, if you pay one of your subcontractors after receiving such a letter, you may have to pay its bank too.

Nevertheless, don’t automatically pay the bank. Banks under these assignments have no better rights than the firm that supposedly earned the money. If you get a notice of an assignment, make sure you talk to your attorney before sending money to the bank. It may be that you have no obligation to do so.

Customers can generally protect themselves by putting clauses in their contracts that give them the right to demand proof that all vendors have been paid and, absent such proof, the right to pay by joint check. (In some states, the owner/contractor has this right as a matter of law anyway.) Only after all obligations arising out of your project have been satisfied would the vendor be entitled to any funds.

Vendors of the troubled firm can also protect themselves by insisting on payment by joint check, or if they are really dubious about the firm (suspecting an imminent bankruptcy, for example), insisting on selling their products to the general contractor directly, rather than through a subcontract. Vendors also should check to make sure that they keep track of the time for exercising lien rights or making payment bond claims.

One additional caution should be given here: Be very, very cautious about signing letters upfront that require you, as a purchaser, to agree to make payments to the lender as “consideration” to the lender for extending credit to this particular firm. We see this more often coming from finance companies rather than traditional banks, but in either case, the lender is probably going to be able later to force you to pay all money earned to it, and leave you possibly exposed to paying the vendor’s bills too. In other words, don’t sign any of these documents without the advice of your lawyer!

It would always be preferable, of course, to avoid this whole mess. The best (but not perfect) way to do this is be selective about with whom you do business. Firms you have known for a long time and respect will generally not give you the same exposure as unfamiliar firms. You can ask for references and perform some due diligence that will reduce your risk as well.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to susan.mcgreevy@husch.com.