May 19, 2022


A Commercial Bankruptcy Wave May Be Approaching

Annacaroline Caruso, editorial associate

Bankruptcy filings have steadily dropped since the start of the pandemic, with business bankruptcies down roughly 34% in the period from March 2021 to March 2022, according to data released Tuesday from the Administrative Office of U.S. Courts. However, some signs indicate a commercial bankruptcy tsunami is upon us.

“It’s like we are still waiting for the other shoe to drop,” said Karen Hart, attorney and partner at Bell Nunnally & Martin LLP (Dallas). “It’s all a guessing game, but I think we are going to start seeing this extreme inflation, supply and labor issues impact businesses. It seems like we are gearing up for a potential bankruptcy storm in the making.”

Many companies are still sitting on a lot of cash left over from the COVID stimulus, which has allowed them to survive so far. Businesses in the U.S. collectively hold about $5.8 trillion today compared to $1.6 trillion in 2000, according to Kellogg Insight. But with sky-high inflation, that cash is likely to dwindle quickly.

“There is every indication that inflation will continue because wages and input prices continue to increase, and that will cut into company margins,” said Bruce Nathan, partner at Lowenstein Sandler LLP (New York). “So now what happens with the Fed tightening monetary policy is that marginal companies that have survived with low interest rates and the inability to increase prices could be pushed over the edge.”

For example, Armstrong Flooring recently filed for Chapter 11 bankruptcy partly because “they could not successfully pass product and transportation cost increases to their customers,” Nathan explained. “There are a few other companies I have been closely watching; and if those also file, I think we will start to see more bankruptcies sooner rather than later.”

Both Hart and Nathan predict commercial insolvencies will start edging upward for the remainder of 2022 and into 2023. While it is impossible to prevent your customers from filing, there are some steps you can take now to minimize potential losses. Hart recommends:

  • Keep a close eye on your AR
  • Collect payments proactively
  • Obtain personal guarantees as another avenue for collection
  • Look for ways to collateralize—especially if your customer is already behind on payments

If you want to learn more about where bankruptcies are headed in 2022 and beyond, be sure to attend the educational session on Out of the Abyss: Distress and Bankruptcy After the COVID-19 Pandemic! at NACM’s 126th Credit Congress in Louisville, KY.

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Document, Document, Document

Diana Mota, editor in chief

Documentation is critical for supporting your mechanic’s lien, especially when the stakes are high—as a recent New York case demonstrates. The case in question involves a mechanic’s lien for $2.5 million filed in November 2018. The owner, Red Hook 160, LLC (Red Hook), maintains the documentation presented by Borough Construction Group, LLC, does not support the lien amount.

“The more dollars owed, the more legal dollars a property owner will spend to fight a lien,” said Chris Ring, of NACM’s Secured Transaction Services.

Facts of the Case

Fall 2016, Red Hook and BCG entered into certain agreements for the renovation and construction of a six-story building in Brooklyn. Around Nov. 20, 2018, BCG filed a notice of mechanic’s lien against the property for outstanding services and materials in the amount of $2,542,806.20. Red Hook then demanded an itemized statement substantiating the mechanic’s lien. New York State Lien Law §38 provides that “[a] lienor who has filed a notice of lien shall, on demand in writing, deliver to the owner or contractor making such demand a statement in writing which shall set forth the items of labor and/or material and the value thereof which make up the amount for which he [or she] claims a lien, and which shall also set forth the terms of the contract under which such items were furnished.”

On Nov. 30, 2018, BCG provided a brief itemization. On Dec. 11, 2018, Red Hook filed a motion to compel BCG to provide a revised verified itemized statement. BCG then submitted numerous documents purportedly setting forth the items of labor and materials for the value of its lien; however, Red Hook asserted the itemization it provided remained deficient and requested that the trial court—the Supreme Court of New York—require further itemization of the lien or discharge it.

On Feb. 27, 2019, oral argument on the petition took place before the state’s Supreme Court, and the matter was fully submitted. On March 6, 2019, BCG submitted a letter to the court, requesting that the court consider certain exhibits annexed to its letter in its determination of the petition. And on March 19, 2019, the Supreme Court, in effect, denied Red Hook’s petition and dismissed the proceeding, which Red Hook appealed.

On review, the appellate court, the Appellate Division for the Second Department, determined the Supreme Court should not have considered the exhibits BCG submitted in its March 6, 2019 letter, which was an improper sur-reply. The appellate court further determined that the documents provided by BCG to the petition failed to comply with the requirements of NYS Lien Law §38. The documents, among other things, failed to sufficiently set forth “the items and cost of labor, or the items and cost of materials. Accordingly, the Supreme Court should have granted the petition and directed BCG to provide a revised itemized statement pursuant to Lien Law §38. In light of our determination, we need not address the petitioner’s remaining contention.”

Why It Matters

“New York’s statute states that on demand a lienor has to send an itemized statement to set forth the basis for the amount of the mechanic’s lien,” said Kevin Laurilliard, of O’Connell & Aronowitz (Albany, NY). “If they do not do that, a court can dismiss a mechanic’s lien for failure to provide a proper itemized statement.” In this case, the appellate division did not dismiss the lien; it sent it back to the trial judge to reevaluate the situation to determine the mechanic lien’s fate.

Although the statute does not define what constitutes a proper itemized statement, “the appellate court’s opinion demonstrates that the bar is a bit higher than people probably thought,” Laurilliard added. The bottom line is that if you are going to go to court to enforce your lien, you are going to have to substantiate that your lien is proper, he said. “You should be able to substantiate with your books and records. Today a lot of companies have software that makes it easy to just print out labor, material and ancillary costs so that you can show that the mechanic’s lien amount is accurate and not exaggerated.”

Laurilliard acknowledged that some “lienors have been known to inflate their mechanic’s lien because they think it could provide leverage to get paid and then they back into a more realistic number at settlement. That’s a very dangerous game to play. In New York, if the factfinder—either the judge or jury—determines that you willfully exaggerated your mechanic’s lien the statutory penalties in New York are pretty severe.”

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Inflation Continues to Wreak Havoc Despite Slight Slowdown

Annacaroline Caruso, editorial associate

Inflation remained high in April at 8.3%. However, it fell by 0.2% month on month and sits well above the Federal Reserve's 2% target rate.

“April's consumer price data give some weight to the notion that inflation may have peaked in the United States, with the CPI decelerating on both a month-on-month and a year-over-year basis,” reads a note from Wells Fargo. “While the directional improvement is welcome, inflation continues on at a blistering pace with prices up 8.3% over the past year. … What's more, we expect progress on the inflation front to come dangerously close to stalling this summer.”

Prices are expected to remain elevated for some time as the war in Ukraine, supply disruptions and labor challenges continue. And some goods are expected to remain more inflated than others. For example, U.S. diesel prices are up roughly 77% from last year, according to Markets Insider.

“The current almost universal product shortage, low inventories and refinery capacity bottlenecks have led to inelastic short-term supply, pushing cracks for almost all products to extraordinarily high levels,” the International Energy Agency said per CNBC.

If you remove more volatile food and energy costs, core inflation rose 0.6% in April, double what it rose the month prior. “Far stronger than expected, especially on the core measure, suggests that underlying inflation pressures remain quite strong and quite persistent,” Karl Schamotta, chief market strategist at Cambridge Global Payments told Reuters.

Credit professionals are dealing with price increases across the board. According to a recent eNews poll, 82% of credit professionals are extending more credit as a direct response to price increases. “Higher prices mean customers may get closer to their credit limit or even breach their credit limit sooner than they would have in the past just for buying the same amount of product,” said Courtney Brightman, CCE, credit manager with Sensata Technologies, Inc. (Attleboro, MA). “By having more credit out there, the more you potentially have to lose. Hopefully, all your customers are low risk; but as we all know, that is not always the case.”

The Federal Reserve raised interest rates by 75 basis points so far this year to combat stubborn inflation, and more rate hikes are expected. It is yet to be seen whether the Fed will be able to pull off a soft landing or send the U.S. economy into a recession, which many economists say is a more likely outcome. When asked about the chances of a recession on CBS’s Face the Nation, former Goldman Sachs CEO Lloyd Blankfein called it a “very, very high risk factor. If I were running a big company, I’d be very prepared for it.”

Most consumers and businesses also are not optimistic about today’s economy. According the University of Michigan, consumer sentiment fell to 59.1 in May, its lowest point since August 2011. And 36% of consumers surveyed by the university say their negative outlook was due to inflation.

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Aspirational vs Desperational Leadership

Ron Price, TTI Success Insights

After decades in leadership, I’ve noticed that often what you become most passionate about are the things you realize you didn’t do quite right yourself.

Thinking back on the first couple of decades of my leadership career, I was always trying to fix myself. I had trouble with time management, so I’d take every course and read every book on the skill that I came across. I was always focused on those things that I thought were keeping me from becoming the complete leader. But eventually I realized I was doing it all wrong.

It’s not that you should ignore your weaknesses, but in spending so much time and focus on fixing them, you often forget about developing your strengths—even take them for granted. You think that since something comes naturally, you don’t need to work on it.

When I realized this was a desperational leadership mindset (when you’re always trying to fix yourself) and shifted my focus to an aspirational leadership mindset (when you ask yourself, what you are capable of if you focus on developing your strengths to their highest level) it had a huge impact on the rest of my career.

What Is Aspirational Leadership?

An aspirational leadership mindset is all about discovering your unique potential and making the commitment to see how far you can grow that potential.

Personally, I look back on the skills that came naturally to me, like communication. I love encouraging and promoting others, and discussing the things I truly believe in. But I never thought about taking a class or finding a communications coach—I was already comfortable doing these things!

It’s all about balance. I didn’t stop taking those time management courses because I still needed to develop the skill and learn to use the tools. I did, however, reevaluate how I spent my time so that I could work on both my weaknesses and go deeper into my communication skills.

When I think about developing strengths, I am always reminded of an old friend, Glenn Basham. Glenn was 12 years old when he took up violin as a hobby. For professional violinists, this is far too late a start, but Glenn fell in love with the violin and would practice four, five, six hours a day as a teenager. He both recognized his natural affinity and had the passion to grow his skill as much as he could.

As an adult, Glenn became the concert master of the Naples Philharmonic and a professor of violin at the University of Miami. He is such a great example to me of what it means to organize around your strengths—and proves that it’s never too late to get better.

Often when I work with other leaders, they get frustrated when they aren’t where they think they should be. I always tell them, all that matters is that you are further than you were yesterday. And there are methods to build your strengths and your mindset of aspirational leadership.

Three ways to become an aspirational leader:

  1. Get to know yourself and your strengths better. You have to be willing to take an honest look at yourself and admit what your true strengths are. I think sometimes we can be afraid of thinking about what we could be really good at, but if we can embrace our strengths we can then ask ourselves how we can use those strengths to create value for others. There are many ways to increase self-awareness: You can read books about developing yourself or take online assessments. Commit to going deeper in your self-evaluation and self-reflection.
  2. Let others help you. Ask them what they think your strengths are, particularly those that come naturally to you. These are great clues about your natural talents and offer another way to learn about yourself.
  3. Have the courage to embrace your potential. Once you know your strengths, ask how you can build on them again and again. Read more about what you are good at, take courses, find thought leaders, mentors or coaches. As you work to be an aspirational leader and become the best version of yourself that you can be, you must have the courage to stick it out, to fail and get back up to reach your full potential.

You have to be intentional in doing these things and asking yourself what more you are capable of. I believe that after we’ve spent the first 16 to 20 years of our lives being told what not to do—as a child the ratio of nos to yeses is high; and while we are in school, we get papers back with everything we did wrong marked in red—we have to unlearn that focus on weakness. But we can reprogram our thinking to focus on aspiring rather than fixing.

Reprinted with permission Price Associates.

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