In the News
February 8, 2018
Follow Statutory Deadlines in Order to Become Secured
“A promise made is a debt unpaid.”
–Robert W. Service
Nothing could be closer to the truth in construction credit. Unfortunately, for one mechanic’s lien claimant, this recently proved to be the case.
Massachusetts is an unpaid balance lien state, meaning lien claimants only have rights to the unpaid funds between the owner and prime or general contractor. Once funds are paid, liens would become ineffective. This is why serving a notice of identification within 30 days of first furnishing is so important in the state. It starts the process of becoming a secured creditor. To enforce a lien in Massachusetts, a notice of contract and statement of account must be filed within their respective timeframes, which can depend on many factors. Claimants have 90 days after recording the statement of account to foreclose.
A recent case in the state, D5 Iron Works, Inc. v. Danvers Fish & Game Club, Inc., shows how significant it can be to miss a deadline or not take one of the steps to try to secure payment from a customer. D5 Iron Works, Inc. (D5) stated it was promised payment by Danvers Fish & Game Club, Inc. (DFG) for the work it completed in January 2014; however, DFG denied that it ever represented payment would occur. According to court documents, D5 owner Richard Lidner testified that mechanic’s lien rights were pursued “in case things didn’t pan out.” D5 recorded the required notice of subcontract and statement of account in February and April of 2014. A second notice of contract and statement of account were filed in December 2014. D5 then commenced action in February 2015, but summary judgment was awarded to DFG on the grounds that D5 failed to comply with statutory requirement deadlines.
Even if the initial filing requirements were timely, D5 waited until Feb. 3, 2015, to take action, which is well past the 90-day deadline. “To the extent D5 relies on its second notice of contract and statement of account filed Dec. 19, 2014, that filing was untimely as it occurred at least eight months after D5 or [general contractor] Patriot had stopped doing work on the property,” according to court documents. Also, the second statement of account was ineffective since D5 failed to enforce action within 90 days of the first notice of contract and statement of account. Filing a second statement of account does not extend the deadlines nor does it revise the lien when the deadlines pass, the appeals court stated.
Mechanic’s liens are designed to give contractors, subcontractors, material suppliers and others working on a construction project security for providing labor and services, but built into the statutory requirements are the steps and deadlines that must be adhered to, which in turn protect property owners. The appeals court affirmed the Superior Court’s summary judgment. This demonstrates that notice, lien and foreclosure statutory requirements should be obeyed and not ignored no matter what a customer might say. It is important to note that each state’s requirements can differ.
– Michael Miller, associate editor
Credit Congress: Session Highlight
27054. A Cautionary Tale of the 4 Cs of Credit in the Age of Electronic Transactions and Social Media—The 4 Cs: Credit, Contracts, Collections and Connected
Speakers: Val Venable, CCE, Ascend Performance Materials, Bruce Nathan, Esq., and Andrew Behlmann, Esq., Lowenstein Sandler LLP
The internet has expanded the landscape of credit, contracts and collections by requiring credit professionals to now be connected (the 4th C) like never before. With electronic B2B transactions and social media becoming increasingly prevalent, credit professionals first need to be aware of the risks of moving from paper credit applications, terms and conditions, contracts and other documents, and pen and paper signatures to their electronic equivalents and the problems that could arise in the event of a dispute or default that leads to litigation.
Credit professionals also need to know what they can and cannot do in utilizing the vast amount of information provided by social media as credit evaluation and collection tools. Starting with electronic signatures and transactions, this program first focuses on the requirements for a valid and enforceable electronic contract, the unique risks posed by electronic credit applications, contracts and other transactions, the state and federal laws governing electronic signatures and transactions, recent court cases addressing electronic signatures and contract formation and enforceability, and the tools, strategies and best practices to help mitigate these risks.
There will then be a discussion of the various sources of credit information available in social media, the pros and cons of relying on social media for credit evaluation and collections, and the legal risks of acting inappropriately.
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Debt Collection in Western Europe Ranked ‘Least Complex’
Payment conflicts are inevitable in the credit world and it is safe to say that most creditors have encountered their fair share of collection disputes at one point in their business experience. Debt collection complexities vary across the globe, but the lack thereof in Western Europe makes business that much more appealing to creditors, according to trade credit insurer Euler Hermes.
While scoring collection complexities on a scale of 0 to 100 for 2018—0 indicating the least complex—Euler Hermes found Western Europe on the lower end of the spectrum. Germany was ranked at 30 as one of the “least complex” countries for debt collection, followed by Sweden, also at 30, and Ireland at 31. The global average was 51, with the most complex debt collection recorded in Middle Eastern countries such as Saudi Arabia and the United Arab Emirates (UAE).
The recent analysis, which was comprised of 50 countries, provided an in-depth look into each country’s local payment practices as well as court and insolvency proceedings. The Euler Hermes survey reported that 14 out of 16 countries in Western Europe were at the “less severe level.”
During an FCIB webinar on Feb. 6, Antje Seiffert-Murphy, CFA, of Equinox Global, discussed doing business in Germany as well as Western Europe as a whole. According to data from Creditreform, she said that the number of insolvencies drastically decreased in Western Europe in 2015/2016, most notably in Greece, Spain and the Netherlands. Insolvencies spiked in Denmark, but were recorded at -7% in Germany.
“ was the seventh consecutive year of decreases in insolvencies [in Germany],” Seiffert-Murphy said in her presentation. “Creditreform has projected [just over] 20,000 insolvencies for 2017—that is well below the 2003 peak of 40,000 insolvencies.”
The average recovery in Western Europe was recorded at almost 4%. Seiffert-Murphy said the World Bank Group’s Doing Business 2018 report ranked Germany at 20 out of 190 on its ease-of-doing-business scale. The country also ranked fourth for resolving insolvencies, which she described as a “fairly easy” process thanks to the well-developed legal system and low corruption.
“There has been a general ease of collecting debt,” Seiffert-Murphy said. “I would say it’s related to the aspect of the contract certainty of the country’s legal system—the setup of the court system, which is well set up to take insolvency cases. Those aspects certainly help for resolving those things.”
Euler Hermes backed up this data in its collection profile of Germany. However, the trade credit insurer said that while courts deliver decisions in a timely manner, “professional pre-legal negotiation efforts” to collect debt reign “most efficient.”
Later in the webinar, Seiffert-Murphy said the payment experience in Germany as of summer 2017 averaged about 32 days; 35 days on average for large customers and 29 days on average for small firms.
– Andrew Michaels, editorial associate
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China’s PMI Increases to Six-Year High, But Trend is Uncertain
The fast-paced expansion in China’s services sector so far this year has economists linking the “sharp improvement” in overall business conditions to better access to financing. The question remains whether the country’s trade outlook will hold on to such a positive note throughout the year.
The January reading on the Caixin/Markit services purchasing managers’ index (PMI) increased by nearly one point over the previous month, according to a recent report from Reuters, which included commentary from Wendy Chen, a Shanghai-based economist at Nomura. The latest PMI score was the highest reading in nearly six years.
The survey indicated that access to financing improved for small- and medium-sized businesses (SMBs) that, compared to larger businesses, usually have a harder time securing funds. China’s bank lending in January is expected to reach its highest point in the past year at about 2 trillion yuan, or $317.7 billion.
“Banks normally dole out more credit at the start of the year, as opposed to being restrained by the lending quota last year,” Chen said in the Reuters report.
Economists expect this momentum to slow as borrowing costs rise. Reuters reported that a more concrete trend can’t be predicted until March at the earliest, once economists have had the chance to analyze the impacts, if any, caused by shutdowns during the Lunar New Year holiday on Feb. 16.
Byron Shoulton, an economist for FCIA Management Company (a member of the Greater American Insurance Group), said reported payment delays from Chinese entities to U.S. companies can be attributed to Chinese creditors’ difficulties in accessing foreign exchange from Chinese banks to service overseas debts. However, it is unknown whether the payment delays are caused by bureaucratic interference or the ongoing anticorruption campaign.
“Not far from peoples' thinking—whenever they attempt to understand what's happening in China—are constant reminders of a looming domestic credit bubble in China. In particular, [there] are concerns over the size and scope of the so-called 'shadow banking' system,” Shoulton said. “Whatever the true reasons for the reported payment delays, the matter requires greater clarification.”
Since so much uncertainty still remains, Shoulton added, the willingness to sell in China dampens and “creates a climate that could test whether sales to China shift to letters of credit opened by select Chinese banks.”
– Andrew Michaels, editorial associate
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Accounting Standards Roundup
New Guidance on Land Easement Lease Standards
The Financial Accounting Standards Board (FASB) recently eased some of the adoption efforts of the new leases guidance to land easements and clarified the standard.
Land easements, commonly referred to as rights-of-way, represent the right to use, access or cross another entity’s land for a specified purpose. They’re used by utility and telecommunications companies, for instance, when they take a small strip of land—known as an easement—to bury wires. Not all companies have historically accounted for them as leases.
But stakeholders have noted that the requirement to evaluate all old and existing land easements, which can number into the tens of thousands, to determine if they meet the definition of a lease under the new standard could be expensive, the FASB said. Also, stakeholders said there’d be limited benefit to applying this requirement because many land easements would not meet the definition of a lease. And even if they did, many of the easements are prepaid and already recognized on the balance sheet.
“The new ASU [Accounting Standard Update] reduces the cost of adopting the new leases standard for certain land easements,” said FASB Chairman Russell Golden. “Additionally, it helps ensure that companies can make a successful transition to the standard without compromising the quality of information provided to investors about these transactions.”
The FASB’s Accounting Standard Update addressed this by providing an optional transition practical expedient that, if elected, would not require an organization to reconsider their accounting for existing land easements that aren’t currently accounted for under the old leases standard. The update also clarifies that new or modified land easements should be evaluated under the new leases standard, after an entity has adopted the new standard.
Q&A on Tax Law
The FASB staff recently answered questions about the Tax Cuts and Jobs Act, and provided the following guidance:
- Tax liability on the deemed repatriation of foreign earnings and profits shouldn’t be discounted. The new law allows a company to pay the one-time transition tax over eight years on an interest-free basis, but the FASB staff notes that paragraph 740-10-30-7 prohibits discounting of deferred amounts. Also, the staff believes the tax liability may not be a fixed obligation because it may be subject to further estimation and future resolution of uncertain tax positions.
- Any Alternative Minimum Tax (AMT) credit carryforwards presented as a deferred tax would not be discounted. Likewise, any AMT credit carryforward presented as a receivable should not be discounted because the FASB staff doesn’t believe the imputation of interest applies. Under the new tax law, the AMT tax regime is repealed. An existing AMT credit carryforward can be used to reduce the regular tax obligation from 2018 through 2020. These credit carryforwards that don’t reduce regular taxes generally are eligible for a 50% refund in 2018 through 2020 and a 100% refund in 2021.
– Nicholas Stern, managing editor
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Held in conjunction with NACM's Credit Congress, this is the premier educational and networking event for international credit and trade finance professionals worldwide. Learn about the latest credit trends and technology, review market intelligence and share practical experiences and solutions with your peers. Get country-specific forecasts, hear the latest tips on international credit risk management and gather resources on trade finance.
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Online Retail Outlook Strong Despite Store Closures
Consumers are changing the way companies do business, and it is putting a strain on performance and outlooks in the retail industry. Leveraged retailers, despite a modest growth in spending, are being squeezed by online storefronts and consumer spending shifts, according to Fitch Ratings. As a creditor in the retail industry, it is important to have a watchful eye on business financials especially when making decisions about a potential customer or determining to continue selling to a current customer.
The change from brick-and-mortar to e-commerce shopping has already been felt by many businesses. E-commerce grew to $430 billion in 2017, which is 12% of all retail sales, minus auto and gasoline, noted Fitch. If grocery and drug stores are also excluded, online retail sales would be closer to a quarter of total sales. It’s expected this will reach about 30% by 2020, which will be pushing toward $600 billion in online sales.
“Retailers with strong cash flow are increasingly shifting capital and operating expenditures toward building robust omnichannel models and finding ways to deepen their relationships with customers, while proactively reducing their retail footprint,” said Fitch’s release. Unfortunately, companies that aren’t reinvesting have seen market shares decline and debt restructuring. Recent bankruptcy filings include Toys R Us, American Apparel, Wet Seal and Gymboree. However, improved credit metrics are predicted for issuers with positive trajectory. These include Burlington Stores and Levi Strauss & Co, said Fitch.
Bon-Ton Stores announced this month it was filing for Chapter 11. Earlier this year, it indicated that about 16% of its stores would close. Bon-Ton secured up to $725 million in financing to continue operations, but as of late October, the company was $1.74 billion in debt with $1.59 billion in assets, according to USA Today. “Like other retailers, the company blamed digital competition, nimble physical competitors and smartphone shopping for its demise,” added the news outlet. Large brands, such as Michael Kors and Ralph Lauren, are among Bon-Ton’s top unsecured creditors.
While the U.S. retail and restaurant sectors have a stable outlook, Fitch believes there are multiple factors to watch out for in 2018. These include, but are not limited to: continued debt restructuring and potential bankruptcies for challenged retailers; new e-commerce strategies to combat Amazon.com; and a change in shopping habits that could affect corporate policies surrounding omnichannel investments and real estate portfolio analysis.
“By all accounts, the retail sector had a very good finish to the year and there has been some momentum in 2018,” said NACM Economist Chris Kuehl, Ph.D., about the sector in the latest Credit Managers’ Index.
– Michael Miller, associate editor
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