eNews August 26, 2021

 

Graphical icon based on title

A year ago, checks were the most common method of payment used by your customers. Choose the top three methods your customers use today to pay open account invoices:

ACH

Check

Credit card

Debit card

Wire transfer

Cash

Digital currency

Other (fill in)

In the News

 

 

Commercial Bankruptcies at Record Low, but a Filing Surge May Be Around the Corner

Annacaroline Caruso, editorial associate

The number of business bankruptcy cases filed in the last year dropped to an unexpected low despite financial hardship brought on by the pandemic. Commercial bankruptcies fell 17.7% in the year leading up to June 2021, a low not seen since 1985, according to data released by the Administrative Office of the U.S. Courts earlier this month.

Many companies were able to stay afloat thanks to PPP loans, eviction moratoriums, the CARES Act and other forms of government aid, said Jay Tenney, managing director at Trade Risk Group (Houston, TX). “When we went into the COVID economy last year, everyone was expecting bankruptcies to skyrocket, but they did not. That doesn’t mean that all of the companies thrived, but they got through last year with a ton of [government subsidies].”

However, the financial stimulus likely did not permanently save these companies, but instead only postponed the inevitable. Many businesses will face challenges as government aid comes to end, causing a new wave of bankruptcy filings to emerge, Tenney explained.

While a spike in bankruptcies may not be seen right away, now is the time for creditors to prepare in order to avoid consequences, he added. “We’re going to see more bankruptcies; it’s just a matter of time. If you’re busy managing credit, I would recommend looking at your customers—and your customers’ customers.”

Bankruptcies also are more complicated now than they were pre-pandemic because most “restructurings involved companies with strong asset bases,” U.S. Bankruptcy Chief Judge David Jones told The Texas Lawbook. “The cases now are much harder because the pie is much smaller,” he said. “We are no longer talking 60 or 70 cents on the dollar. There’s not enough potential in the business to make all sides happy.”

Creditors, insurers and lawyers will need to find strategic ways to tackle these cases. Tenney suggested using more forward-looking risk assessment models to help predict where your customers might be financially once government aid stops.

The bankruptcy tsunami—prior to the pandemic—is expected to restart in early 2022, said Wanda Borges, attorney and member of Borges & Associates, LLC (Syosset, NY). Trade creditors are usually next to last in line to collect in a bankruptcy proceeding, Borges said. “Without preparation now, the chance of collecting or avoiding the situation altogether is slim. By the time the bankruptcy spike hits, it’s too late. It’s about proactively protecting the accounts receivable.”

Among those protections are obtaining and perfecting security interests, obtaining personal guaranties, selling on a cash-on-demand or cash-in-advance basis and obtaining a letter of credit, in specific circumstances. These can be the key to hedging the risk to your company’s profits, she said.

Creditors must be more diligent about gathering financial information and double-checking the correct legal entity to whom products are being sold or services are being rendered so that contracts are recognized in the bankruptcy court. In supporting a claim, solid documentation such as delivery receipts and bills of lading are essential, Borges said. And equally important, she added, is “understanding your customer’s financial status.” It will let you know that your customer can afford to pay for the goods you are selling.

Iowa Court Addresses Notice of Commencement Issues in Residential Mechanic's Lien Case

Stephen Marso, Whitfield & Eddy Law

In Borst Constr., Inc. v. Finance of Am. Commercial, Inc., 2021 WL 3661426 (Iowa Ct. App. 2021), the Iowa Court of Appeals addressed the following three issues under Iowa’s mechanic’s lien statute in a residential construction dispute: the applicable deadline for a subcontractor to post a notice of commencement; whether work performed by a subcontractor prior to the posting of a notice of commencement is lienable; and a priority dispute between mortgages and mechanic’s liens.

Thomas Dostal Developers, Inc., owned a residential construction project, and it obtained five commercial loans for the construction of it through Finance of America Commercial, LLC (FAC). The mortgages were recorded on Nov. 13, 2017. Dostal Developers contracted with Borst Brothers Construction, Inc., and Kelly Concrete Co. to furnish labor and materials for the project. Borst Brothers performed its work from July 3, 2017, to Dec. 19, 2017, and it posted its notice of commencement and mechanic’s lien on Feb. 2, 2018, and its preliminary notice on Nov. 8, 2018. Kelly Concrete performed its work between September 2017 and Jan. 15, 2018, and it posted its notice of commencement, preliminary notice and mechanic’s lien on Feb. 1, 2018.

A priority dispute arose between FAC (and its mortgages) on the one hand and Borst Brothers and Kelly Concrete (and their mechanic’s liens) on the other hand. Seeking to establish its mortgages as having priority over the mechanic’s liens, FAC filed a motion for summary judgment and argued that “a subcontractor must post a notice of commencement of work within 10 days of beginning work on a project and ‘work performed by the subcontractor prior to the posting of the notice of commencement is not subject to any subsequent mechanic’s lien even if the subcontractor later posts a preliminary notice.’” The district court rejected FAC’s arguments and held that Borst Brothers’ and Kelly Concrete’s mechanic’s liens had priority over FAC’s mortgages.

On appeal, the Iowa Court of Appeals agreed with the district court’s rulings on these issues. On the notice of commencement deadline issue, the court of appeals stated that Iowa Code “Section 573.13A(1) requires the general contractor/owner-builder—not the subcontractor—to post a notice of commencement of work within 10 days of the commencement of work,” and “Section 572.13A(2) allows a subcontractor to make the posting if the general contractor/owner-builder does not.” The court of appeals interpreted these provisions as not imposing the 10-day posting deadline upon subcontractors, but only upon general contractors and owner-builders. It reasoned that the “subcontractor might not know whether the general contractor/owner-builder satisfied its obligation to post the notice of commencement of work until after the 10-day period set forth in section 572A.13A(1) expires. The subcontractor’s first opportunity to post its notice of commencement would be on the 11th day after commencement of work.”

On the lienability issue, the court of appeals provided no analysis or explanation of its decision, but only stated, “We discern no error in the district court's interpretation of Iowa Code section 572.13. On our de novo review, we further conclude the court’s findings of fact and application of law to fact are supported by the record and are equitable.” There is no analysis by the court of appeals of the following provision in Iowa Code Section 572.13A(1), which reads, “A notice of commencement of work is effective only  as to any labor, service, equipment, or material furnished  to the property subsequent to the posting of the notice of commencement of work.”  (Italics added.) On its face, this language appears relevant to the lienability issue in the case because both Borst Brothers’ and Kelly Concrete’s notices of commencement were posted after both of their last dates of work. The court of appeals also did not address how its ruling squares with the purpose of the notice of commencement requirement, which it had previously held was “twofold. It requires identification of ‘who was working on the property’ and notice of any claims by those persons. In short, the statute is intended to provide the owner with the identity of subcontractors unknown to the owner who might have potential claims against the property and provide a mechanism to force the subcontractors to file notice of any potential claims.” Standard Water Control Sys., Inc. v. Jones, 888 N.W.2d 673, 676 (Iowa Ct. App. 2016). It is unclear if allowing a subcontractor to lien for work performed prior to the posting of a notice of commencement furthers the purpose of the notice of commencement requirement.

Finally, on the priority issue, the court of appeals affirmed the mechanic’s liens’ priority over the mortgages under Section 572.18(1) because Borst Brothers and Kelly Concrete “began their work in July and September 2017 respectively, well before FAC recorded its mortgages.” This statement indicates that the court of appeals applied Section 572.18’s “relation-back” rule to both mechanic’s liens so that their priority dates related back to Borst Brothers’ and Kelly Concrete’s first dates of work, both of which were prior to the filing of the mortgages. Midland Sav. Bank FSB v. Stewart Group, LC, 533 N.W.2d 191 (Iowa 1995); Barker’s, Inc. v. B.D.J. Dev. Co., 308 N.W.2d 78 (Iowa 1981), superseded by statute as recognized in Midland. Relation-back treatment of the liens was critical to Borst Brothers’ and Kelly Concrete’s success on the priority dispute because if they had not posted their liens within 90 days of their last dates of work then their liens’ priority dates would have been the dates the owner received written notice of the posted liens. Iowa Code Sections 572.11, 572.14, 572.16, 572.18(3), and 572.33A(1). Their lien postings were Feb. 1 and 2, 2018, both of which were after the mortgage filings, which would have given the mortgages priority over the liens.

FAC has the right to ask the Iowa Supreme Court to hear a further appeal in this case, so it remains to be seen if the court of appeals’ decision will stand. If the Supreme Court declines to hear a further appeal in this case, then the court of appeals’ decision will apply to these issues until and unless the Supreme Court addresses them in another case.

Why Construction Creditors Must Pay Close Attention to Change Orders

Bryan Mason, editorial associate

Construction projects do not always go according to plans and are often prone to delays or supply changes. When one of the parties to a contract requests changes to the agreement, a written change order is an effective tool to keep track of these changes; however, they must be carefully executed to ensure payment in a timely manner.

A change order should be created whenever terms in the original contract are amended. The most common changes that occur include the scope of work, completion time and price. During the most recent meeting of NACM’s Construction Thought Leadership Discussion Group, Sam Smith, regional finance manager of Crescent Electric Supply Company (East Dubuque, IL), shared some of his experiences with change orders over the years as a supplier.

According to Smith, one of the biggest challenges is not knowing when you are going to receive a written change order that supports a verbal request. “Many times, a request for additional materials is received and we need to ship the material as soon as possible, but it takes weeks to get a written change order from the customer,” he said. Suppliers that act on changes to an original contract without documentation could open themselves up to a dispute later on.

Change orders are often rushed to the extent that neither the supplier nor its customer has adequate time to carefully review the amendments to the contract, Smith said. Many credit professionals want to satisfy their customers to the best of their ability, but “when we don’t [take the time to] ask, pushback or follow up on the written change order, we put ourselves at risk for delayed payment or even no payment,” he added. Because change orders modify the original contract, the change order must be reviewed to understand the impact of the changes to the original agreement.

Much like the original contract, a change order could contain unfavorable language for the seller. If they are not carefully reviewed, a material supplier under the general contractor may find themselves at a disadvantage. Change orders can often be a “lightening rod” for disputes, said Randall Lindley, partner at Bell Nunnally (Dallas, TX). “If a client isn’t getting paid, we must carefully review both the terms of the original contract and the change order,” Lindley said.

Since the purpose of a change order is to document “additional work” not covered by the original contract, Lindley recommends that credit professionals carefully identify the new scope of work. “Using vague or unclear language in a change order, increases the likelihood there will be a dispute,” he said.

Creditors also have the leverage of stopping work to encourage payment. However, Lindley cautions that material suppliers may be exposed to high risks by taking this route because they may be subject to claims of breach of contract. Instead, Lindley advises doing the following if a dispute surfaces:

  • Start with an email objection to work requested without a signed change order.
  • Ask for confirmation when following up.
  • Keep careful documentation throughout every step.
  • Obtain legal guidance.

In addition to Lindley’s recommendations, Smith advises paying attention to:

  • Time is of the essence clauses. These clauses can commit sellers to challenging deadlines that can lead to more disputes down the road. Timetables are negotiable so make sure you have enough time to honor the change order and keep yourself from being liable for damages.
  • Additional orders require a written change order clauses. If the contract specifies that changes or additional orders to the original contract be submitted as a change order, then the supplier should flag the customer account to reflect the written-change-order requirement. Otherwise, the seller may be at risk for delayed payments or worse, nonpayment, for not following the terms of the original contract.
  • Notice requirements. If the change order includes a notice requirement with a deadline and you miss it, your company’s rights might expire.
  • Freight issues. If the completion schedule is tight and you need to use express shipping, ensure the written change order includes express freight. If not, this is often disputed in the end.
  • Additional terms. Language that ties your company to additional terms and conditions not previously agreed to in the original contract.

Note: NACM’s Construction Thought Leadership Discussion Group meets on the third Tuesday of the month to collaborate with other forward-thinking experts in the construction credit industry. If you would like more information about the group, contact Education Director Tracey Lerminiaux at This email address is being protected from spambots. You need JavaScript enabled to view it..

Continued Global Economic Uncertainty Drives FX Risks

Annacaroline Caruso, editorial associate

Today’s global economy is creating a variety of challenges for creditors. Governments around the world pumped massive amounts of money into the economy in an effort to help businesses survive the pandemic and now that support has come to an end, for the most part.

All of the government aid has distorted the marketplace, said Fred Dons, director at Deutsche Bank (Amsterdam), during FCIB’s members-only Global Expert Briefing last week. “It is difficult to gauge how a client or company is doing right now and how sound they are financially. That means banks are not as willing to take on new clients.” So, creditors that take on new clients or markets could face situations where banks are not willing to partner on trade transactions.

“There is some mistrust in the market, and it is driving the current situation,” Dons added. He suggests contacting a bank as early as possible to find out if it has any reservations about doing business within a certain market, country or currency today. “The market is opaque right now,” he said. “It is difficult for anyone to see exactly what is happening in any one country right now.”

In addition, it has become increasingly difficult to predict the probability of collecting payment in a business’s desired currency. For example, in order to get U.S. dollars out of Nigeria, companies have to go to an auction, Dons said. A customer may have sufficient funds in its local currency, but it may not have the ability to pay its contracts in other currencies.

Current instability and fluctuations in the value of different currencies also affect the probability of payment. Dons used fixed interest rates as an example. If a currency rate changes on a fixed interest rate, it can cause “major losses,” he said. For example, a loan of $8 million with a 100th of a cent difference over two days would equal a $50k loss.

So, imagine the potential loss on a standard 60-, 180- and 360-day terms, while currency values are so unpredictable, Dons said. “Banks are willing to take some risk, but only short-term.” India, Bangladesh and Turkey pose some of the greatest FX and currency risk today due to their inability to control COVID-19 and high inflation, he pointed out. Dons recommended working closely with your bank, obtaining letters of credit and getting bank guarantees to help mitigate some of these risks.

CurrentHeadacheIntSupplyChain EE rev2 111121

UPCOMING WEBINARS


Unlimited Webinars for One Year!