eNews December 17

 

In the News

December 17, 2020

 

Can Checks and Electronic Payments Coexist?

 

—Andrew Michaels, NACM editorial associate

When you ask a credit professional the difference between checks and electronic, or digital, payments, rarely will you hear the same answer. Perhaps one is faster, or maybe credit departments feel more secure using one over the other. Despite the various answers, most parties will agree that checks and electronic payments have coexisted well into the 21st century. However, the advancement of technology has some credit departments questioning the future of these payment platforms’ coexistence, leading credit professionals to reassess the value and detriments of each to determine the best path for their companies and its customers.

First, a brief overview: Checks are physical documents containing written orders for a bank to pay the person whose name is listed using money from the issuer’s account. Meanwhile, an electronic, or digital payment, is the transaction of goods or services that is completed through electronic means, i.e., an online payment platform. Today, thousands of companies around the world have acquired some form of electronic payments, notably mobile payments, either leaving behind old payment platforms (such as the check), avoiding electronic payment adoption altogether, or finding a middle ground.

At Hatco Corporation & Ovention, Credit Manager Susan Merschdorf said the latter rings true as the credit department currently uses a mixture of checks and electronic payment.

“Digital payments and checks certainly do coexist in our department,” Merschdorf said. “We are seeing more and more companies utilizing ACH as a form of payment; however, the allure to pay by check will not go away any time soon. We transact business with many small companies and they are not all that willing to change to digital forms of payment.”

Merschdorf’s department has accepted payment via ACH and electronic funds transfer (EFT) for many years, utilizing a program over the past two years that allows the bank to apply payments direct to customer accounts. Not only have electronic payments reduced the time spent manually applying payments, they have also eliminated the “mail waiting time” experienced with checks. Yet, the company receives checks via lockbox, using an auto-posting program with the bank that generally posts approximately 75% to 80% of the total checks received.

In a perfect world, Merschdorf said “checks would be a thing of the past,” but customers are slow to adopt electronic methods because abandoning mail payment would eliminate their ability to play the “float game,” i.e., “the check is in the mail.”

PPG Group Credit Manager Richard Place, CBF, concurred with Merschdorf. Although he believes checks and electronic payments will continue to coexist, Place said checks are a burden, requiring more time from the department and increasing negative float. Place’s company began using electronic payments around 2016 in an effort to improve cash flow.

“My finance department is currently using both, and [we] are trying to push our vendors into using digital/ACH payments,” he said. “[It’s] cheaper to process than doing a check run. [Checks] go directly to our bank for processing and we download a file into our system.”

While digital payments are becoming more popular, Place said checks will always have a place in the credit department “because it increases [the customer’s] cash float and they like to have proof (cancelled checks) of payment.”

For a more in-depth read about the coexistence of checks and electronic payments, be sure to check out the February 2021 issue of Business Credit magazine.

 

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Federal Prompt Pay Act Does Not Afford Subcontractors Right to Sue General Contractor

 

—Doug Patin, Esq., and Aman Kahlon, Esq.

On October 15, 2020, in EMTA Insaat Taahhut ve Ticaret A.S. v. Cosmopolitan Incorporated, a federal district court held that the federal Prompt Pay Act (PPA) (31 U.S.C. §§ 3901, et al.) does not create a private right of action for a subcontractor against a general contractor. The dispute arose from a project for the installation of hardened trailer systems at the U.S. consulate in Turkey. The subcontractor alleged that the general contractor failed to make payments, including interest penalties required by the PPA, under the parties’ subcontract.

The subcontractor sued the general contractor for breach of contract and breach of the PPA. The general contractor moved to dismiss the breach of the PPA claim arguing that the PPA did not provide the subcontractor with a private right of action. Opposing the motion, the subcontractor contended that, because the subcontract incorporated the terms of the prime contract and the prime contract was governed by the PPA, the subcontract was also governed by the PPA. The subcontractor, therefore, alleged that the right to collect interest was a matter of contract—not statute. The federal district court rejected the subcontractor’s argument and granted the motion to dismiss. The court found that “courts have repeatedly rejected the argument that the PPA contains either an explicit or implied private cause of action in favor of subcontractors” and that neither the statutory text nor the legislative history supported the subcontractor’s argument.

The result in EMTA underscores the importance of understanding the rights and remedies available for contractors and subcontractors on federal projects. Here, if the subcontractor had rested solely on the PPA to support its lawsuit, it may have been left with no recourse against the general contractor for nonpayment. In other contexts, understanding federal law may be even more important for preserving a subcontractor’s rights. For example, subcontractors must comply with Miller Act requirements to preserve bond rights on federal projects. If a subcontractor encounters an insolvent general contractor, those bond rights may be the only security the subcontractor has available for nonpayment or other claims.

Doug Patin is a partner in Bradley’s Construction Practice Group. His extensive government contracts and construction litigation practice has involved the entire spectrum of traditional government contract disputes, and he has experience in various aspects of government and construction contract law, including claims, appeals, bid protests, international arbitration, insurance coverage, federal fraud and False Claims Act issues.

Aman Kahlon is a partner in Bradley’s Construction Practice Group. He represents owners, general contractors, and subcontractors in construction and government contracts matters. His litigation experience covers a wide variety of disputes, including substantial experience in power and energy matters, and he advises clients on delay, interference, defective design and negligence claims.

 

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Construction Disruptions Settle After Initial Impacts

 

—Michael Miller, NACM managing editor

The ever-changing atmosphere of 2020 is nearing an end; however, only the calendar will be what is changing. As 2021 approaches, it is important to review the last several months as the economy plummeted and sharply rebounded to prepare for what the new year might bring. The construction industry, like many other sectors, saw its ups and downs with project delays, shut downs, nonpayment and late deliveries among the impacts.

One of the biggest disruptions for many, not just in construction, was the transition to remote work. Dwight McCombs, credit manager with Highland Tank, said his credit department began working remotely in March. With older computer systems and being very paper-driven, the office had to determine how to operate. “Processes that were set up to operate from home were an improvement,” he said. The department didn’t go back to paper files once it was safe to return to the office.

Duane Schwartz, CCE, credit manager with The Tile Shop, LLC, is working remotely until June. He is still going into the office roughly three times per month for a half a day to handle paperwork. He said it’s easier to do lien waivers and similar items in the office than at home without essential devices like a printer and scanner.

When the pandemic first hit, “We took a hard look at our slow-paying customers,” McCombs said. They made calls to customers, finding the owners to have conversations about getting paid on future shipments as well as current open accounts. By being proactive with customer outreach, the credit department was able to let customers know their options for late invoices. “For the most part, customers saw the logic and offered payment quickly.”

It was a different story for Schwartz. Jobs were taking longer—mainly in the remodeling sector—as more time was needed to work, clean and sanitize the job sites. This was also impacting how many subcontractors could be on the job at one time. This, in turn, resulted in slower payments depending on the overall size of the job. Yet, Schwartz said many customers have improved communications about the additional time delays.

No major changes were made in the credit decision process, but these processes were tweaked, noted McCombs. Faxing paper documents became virtual faxes. “From a credit perspective, things never really slowed down. We continued to see credit applications regularly, and we continued to approve credit as products were released to the plant to be manufactured.”

It was business as usual for McCombs as far as the documents that were needed when looking to become more secure on a project. “We are very careful to gather documents to file notices in case we need to file a lien on the project.” These notices allow everyone to know their company is on the job, and by filing preliminary notices, it often gets payment in more promptly.

Shipments have been fairly steady and order releases have been steady as well even with a majority of the products being customized. “Plants were not impacted as far as production is concerned, but some shipments and deliveries were impacted,” said McCombs. “Our plants were open, so we were very fortunate.”

At the start of the pandemic, there was plenty of inventory for Schwartz and The Tile Shop. However, as restrictions tightened, production stopped in some countries and some factories shut down or scaled back production. Schwartz says they are now close to pre-pandemic production numbers.

Another credit professional in the metal supply sector is fearful of a rise in COVID-19 cases in the new year after the holidays. This could potentially lead to more shutdowns and impact material supply.

For a more in-depth look at the construction industry, pick up the January 2021 issue of Business Credit magazine.

 

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Yeah, About That Consignment Agreement… How You Can Lose Your Goods in a Retail Bankruptcy

 

—Allen J. Guon, Esq., Robert M. Fishman, Esq., Danielle N. Garno, Esq.

You just heard a rumor that your largest retail customer is in financial distress and may file for bankruptcy. After a moment of panic, you review your consignment agreement with the retailer (this assumes that you have a written agreement) and you are relieved to see that it clearly provides that you still own the goods that you delivered to your customer and you are entitled to pick them up at any time. All good, right? Not necessarily. If you have not taken all of the necessary steps to properly perfect your consignment under the Uniform Commercial Code (UCC), your feeling of relief will be short lived. The failure to take these crucial steps could have devastating consequences in a bankruptcy case because creditors have a significant incentive to challenge the validity of your consignment arrangement in an effort to increase their own recoveries.

In a typical consignment transaction, a seller (you, the consignor) delivers goods to a reseller (your customer, the consignee) who holds the goods until they are sold to a buyer, and then a portion of the proceeds are transferred back to the seller. Article 9 of the UCC governs most typical consignment transactions and treats the consignee as having an ownership interest even though the consignee doesn’t really own the goods. As a result, if a consignee files a bankruptcy case, any consigned goods then in its possession may become property of the bankruptcy estate unless the consignor has properly protected its interests in those consigned goods.

There are a number of steps a seller must take to protect its interests in consigned goods under the UCC. First, a consignor must have a written consignment agreement with the consignee that grants the consignor a purchase money security interest (PMSI) in the consigned goods. The consignment agreement should also provide that title to and ownership of the consigned goods remain with the consignor until the goods are sold, but the risk of loss remains with the consignee. To protect the value of the consignor’s interests, the consignment agreement should also address other material terms such as inventory controls, sales and inventory reporting, insurance requirements, and payment terms. Second, the consignor must take a few additional actions to perfect its security interest in the consigned goods prior to their delivery to the consignee. These steps include: (1) filing a UCC-1 financing statement in the appropriate jurisdiction describing the consigned goods and (2) sending a written notice to all other parties with a lien in the consignee’s inventory that describes the consignment arrangement (including the fact that you will take a PMSI security interest in the consigned goods), describes the consigned goods, and indicates when you will begin delivery of the consigned goods. Third, every five years, the consignor must also file a continuation UCC financing statement and provide new notices to each party with a lien in the consignee’s inventory. Each of these steps is critical because the failure of the consignor to properly perfect its security interest prior to the bankruptcy filing may relegate the consignor to the status of a general unsecured creditor with no ownership interest in the consigned goods.

All hope may not be lost, however, if a consignor fails to properly perfect its consignment under the UCC. There are a number of transactions that are not deemed consignments under the UCC, but may still be deemed a “true consignment” under applicable state law. For example, goods consigned to a merchant that is generally known by its creditors to be “substantially engaged” in the selling of goods on consignment falls outside of the UCC and may still be entitled to protection. However, such arguments are fact intensive, generally require a significant legal expense, and are very risky to assess. The ultimate legal outcome is very uncertain—and unless a settlement is reached—may or may not result in a successful economic outcome. Therefore, even if you believe that your transaction falls outside of the UCC, you should still comply with all of the requirements of the UCC, just in case the particular consignment arrangement is challenged in court.

Allen J. Guon is a member of the Bankruptcy, Insolvency & Restructuring Practice at Cozen O’Connor where he represents debtors, creditors, purchasers, lenders, and other parties in interest in Chapter 11 reorganizations, Chapter 7 liquidations, and out-of-court workouts.

Robert M. Fishman, a member of Cozen O’Connor’s Bankruptcy, Insolvency & Restructuring Practice, represents trustees, debtors, equity committees, secured and unsecured creditors, receivers and asset buyers, and litigants in various insolvency proceedings, including informal out-of-court workouts.

Danielle N. Garno, Co-Chair of the Retail Industry Group at Cozen O’Connor, represents fashion clients of all sizes, ranging from startups to multinational, global brands. Danielle helps retail clients navigate legal issues as well as provides counsel on growing and sustaining a successful brand.

 

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