In the News
August 25, 2016
A recent decision by the U.S. Bankruptcy Court for the Northern District of Illinois has potentially restricted the remedies that sureties—and ultimately contractors and suppliers on construction jobs secured with payment bonds—may have to collect from the owner.
Although subject to future reversal, the decision of In re Glenbrook Group, Inc. doesn’t change the responsibility of the surety to pay, wrote attorney Paul Schrader, of Fullerton & Knowles, PC in Clifton, VA, in a recent article. However, “The practical impact of the surety’s ability to collect can have some significant impact on a number of things including how quickly you are paid and how much you spend in legal fees to collect,” he wrote. Suppliers will need to strictly follow every technicality required for such bond claims, as “even a minor mistake can be costly."
“I think the biggest thing with bond claims is being aware that one size does not always fit all,” Schrader said. “There may be some differences in statute when dealing with Miller Act or Little Miller Act bonds depending on jurisdiction. When dealing with a private bond, you cannot assume that the requirements are consistent with the requirements under the Miller Act or Little Miller Act and really need to see the bond to make sure you are complying with its requirements.”
In Glenbrook Group, the Illinois court decided that several past cases, notably the Supreme Court of the U.S. decision in Pearlman v. Reliance Ins. Co., didn’t apply because they weren’t decided prior to adoption of the current bankruptcy code. Pearlman involved a federal project, whereas Glenbrook Group didn’t, Schrader explained. Glenbrook Group concerned a contractor that filed for bankruptcy while working for a municipal agency, leaving the surety to cover unpaid claims by the subcontractors and suppliers against the payment and performance bonds the contractor supplied for the job.
- Nicholas Stern, editorial associate
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A slip of the tongue or damaging information in a customer’s file could come back to haunt credit professionals and possibly open the door to litigation. Knowing what not to say or include in emails and in one’s file is just as important as knowing what to do, said Bruce Nathan, Esq., a partner with Lowenstein Sandler LLP and speaker of a Sept. 7 NACM teleconference that delves into the don’ts of sharing information.
Nathan pointed out that credit professionals could inadvertently do something that could weaken their company’s ability to invoke the ordinary course of business defense to a preference claim for payments received within 90 days of the bankruptcy filing by a financially distressed customer. Also understanding the risks and consequences of improper communication among credit professionals at trade group meetings, when responding to requests for reference or other information, or in decisions on extending credit can minimize the risk of antitrust and other liability.
“It’s helpful to consider bad practices as a way to build best practices,” he noted. Do you know what types of information in a credit file can make it more difficult and costly to successfully defend against a preference claim?
- Diana Mota, associate editor
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Just less than a third of proprietors of U.S. small businesses knew their respective company credit scores in 2013, according to executive-mentoring firm Visage International, the Wall Street Journal, NACM-National and other sources. A new report suggests even fewer know it today, nor do they know how to fix it.
About 72% of small business owners told Manta, a firm that bills itself as an online resource and community for small businesses, they are unaware of their current business credit scores, according to its whitepaper Why Small Businesses Need Strong Business Credit and How They Can Get There. Of the more than 2,900 small businesses surveyed, a large percentage in certain industries said they do not have access to adequate lines of business credit (e.g., electrical at 88%, insurance at 84%, agriculture at 72%).
“There’s a lack of familiarity with business credit and how to build it,” Manta noted in the report.
It is a similar refrain to that reported in 2013 by the Wall Street Journal, which included interviews with NACM-National representatives. NACM noted in the WSJ and in its own commercial credit fact sheet that small businesses have the right, at no charge, to obtain their respective credit ratings and to fight perceived mistakes through any of the major credit-reporting services. Third-party firms offering to help small businesses gain access to their scores can charge hundreds, sometimes thousands, of dollars for what are simple-to-accomplish tasks. NACM encourages small businesses to be wary of services making claims to fix bad credit scores, to frequently monitor their commercial credit standing and to participate in the open exchange of trade credit (B2B payment) information to help ensure the accuracy of customer information.
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A recent study by the University of Nottingham finds no correlation between U.S. export growth and the markets that have received the most support from the U.S. Export-Import Bank (Ex-Im). Does the U.S. EXIM Bank Really Promote U.S. Exports? aims to determine the impact of Ex-Im on U.S. exports in the wake of international competition from foreign national export credit agencies, but it has drawn criticism for missing the mark in some regards.
“This study chooses a very narrow set of criteria for determining success and not the ones that make up the Ex-Im mandate in the first place,” said NACM Economist Chris Kuehl, Ph.D., who questions its results. “The study fails to understand the actual mandate of the Export-Import Bank and misrepresents the investment made by the U.S. This is not an export promoting authority per se; that is the job done by the foreign and commercial services division of [the U.S. Department of] Commerce and a dozen other branches of the federal government in departments such as agriculture and labor and energy, etc.” Dominant domestic export sectors don’t need this kind of assistance because those companies can easily get private trade financing, he noted.
The bank serves sectors that either don't have that access or governments overseas that want to do business with the U.S. and lack the ability to finance their deals, Kuehl pointed out. “The U.S. is backing a [low interest] loan—not much more than that.”
Ex-Im’s main purpose is to preserve U.S. jobs and companies. “Boeing has been an exemplar for years,” he added. “The planes bought are expensive and generally the orders are for multiple units.” Airbus, which receives direct support from almost every nation in the EU, is the only real competitor, Kuehl explained. “To fight that pure subsidy and the fact that Airbus can undercut Boeing's prices, the Ex-Im bank comes into play by arranging the financing and allowing Boeing to preserve market share. Lots of smaller companies use Ex-Im for the same purpose.”
Connect, Network, Learn and Share
Held each fall, the regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and network with fellow credit professionals from their respective geographic regions.
Eastern Region Credit Conference
September 14-15, 2016
Rochester Airport Marriott
Hosted by: NACM Upstate New York
All South Credit Conference
September 18-20, 2016
Hyatt Place Fort Worth
Fort Worth, TX
Hosted by: NACM Southwest
Western Region Credit Conference
October 12-14, 2016
Renaissance Seattle Hotel
Hosted by: NACM Business Credit Services
Central Region Credit Conference
November 9-10, 2016
Crowne Plaza Hotel
Hosted by: NACM Great Lakes Region
The Kansas Board of Regents could expand its oversight and control over public-private partnership (P3) projects because some legislators in the state have criticized the University of Kansas’s unusual method of getting financing for an on-campus, mixed-use project.
Specifically, the Board of Regents has said it may consider “classifying P3 projects as capital improvement projects and as part of each institution’s capital projects plan,” thus requiring universities in the state to obtain board approval, according to a recent report from the National Council for Public-Private Partnerships (NCPPP).
The Kansas project underscores the fact that subcontractors and suppliers must exercise caution before taking on these types of projects as they do not fall under federal statutes like the Miller Act and may lack a way to secure their receivables through means such as a payment bond, said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services (STS).
Because the projects typically occur on public land, suppliers or others also may not have access to a mechanic’s lien, said James D. Fullerton, Esq., of Fullerton & Knowles, PC in Clifton, VA. Absent of having bond or lien rights on the project, credit managers still have contract rights with their customers. They have to evaluate the creditworthiness of such customers and weigh the potential risks involved, he said. If the customer is insolvent, the supplier has no relief available. The supplier may as a result require money in advance or another type of security before agreeing to the project.
The University of Kansas P3 project, destined for completion in 2018, is for a central district development that will include student housing, a student union, a dining hall and other facilities, the NCPPP said. Kansas legislators grew rankled with the deal, which includes a 40-year lease at an annual fee of about $21.5 million, when the university decided to circumvent the state’s bonding agency by forming a nonprofit that issued about $320 million in bonds through a Wisconsin-based public financing agency, according to NCPPP. The lawmakers argued that the project lacks legislative oversight.
Legislators introduced HB 2703, a bill that died in committee, to prohibit state universities and agencies from borrowing or entering into other agreements without legislative approval or a hearing. The Kansas legislature, however, did move to limit the amount the university can spend using formerly unrestricted fee funds, NCPPP said.
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