eNews October 4, 2018

Credit and Accounting: A Give-and-Take Relationship

Time is money. Most credit managers and society in general know this adage, the former encountering the phrase on a literal basis. When and how money is spent determines a business’ financial health and long-term viability. Like the sales team, the accounting department must work closely with creditors to ensure payments are collected in a timely fashion and inform the credit team when a problem is on the horizon. The slightest accounting error can create a ripple effect throughout the company, as proven in a recent study from Massachusetts-based research firm Audit Analytics.

For more than a decade, accountants working for U.S. public companies have been at the top of their game, each year showing less and less material accounting mistakes. A financial item is considered material when there’s a possibility the error could impact an economic decision, such as estimated income and earnings trends, states management consulting and publishing firm Solution Matrix Ltd. on its website. If the impact is deemed “too small,” the error may be ignored.

According to Audit Analytics’ latest finding, the number of accounting mistakes not only rose during the first half of 2018 but also led to the restating and refiling of several companies’ finances. Changes to U.S. tax law, specifically the Tax Cuts and Jobs Act (TCJA) passed in December 2017, were said to have contributed to the rise in errors.

“Errors can be anything from a misapplication of accounting principles to an error in inputs in accounting software or an error in [Microsoft] Excel schedules,” Michael Burke, partner at accounting firm UHY LLP, told The Wall Street Journal (WSJ) on Sept. 20.

The WSJ article revealed results from the study of more than 9,000 U.S. public companies, 65 of which made accounting mistakes that required restating and refiling “entire financial filings to regulators, compared with 60 companies for the same period last year.”

In a separate study, completed by business and financial software company Intuit and released in mid-September, the majority of accounting errors were due to inefficient record-keeping. More than half of the 500-plus small- to medium-sized businesses that responded said a lack of accounting software and falling behind on bills contributed to mistakes.

Toni Drake, CCE, president of TRM Financial Services in Midland, Texas, said credit managers must have a strong line of communication between the credit and accounting departments. Drake, who is also an instructor for NACM’s Financial Statement Analysis I course at the national headquarters in Columbia, Maryland, reiterated the importance for credit managers to thoroughly review financial statements and any accompanying notes.

“Go to your own accounting department and say, ‘Explain this to me. Does this make sense to you? Is what this customer is saying something you think could and probably did happen?’” Drake said. “If a credit manager just looks at the surface of a financial statement and at what we call ‘the bottom line,’ the net income, without considering all the factors that contributed to that, they would probably not get a true picture of that company’s financial condition and financial performance.”

—Andrew Michaels, editorial associate


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Federal Court in Pennsylvania Holds Pay-If-Paid Clause Unenforceable

Connelly Constr. Corp. v. Travelers Cas. & Surety Co. of Am., 2018 U.S. Dist. LEXIS 123009 (E.D. Pa. July 24, 2018).

The Commonwealth of Pennsylvania Department of General Services undertook a project for the construction of a new maximum security prison facility in Montgomery County, Pennsylvania. Walsh Heery Joint Venture (WHJV) was the prime contractor and it retained Connelly Construction Corporation as its masonry subcontractor.

The prime contract permitted the Commonwealth to withhold retainage from WHJV until completion of the project. Similarly, the subcontract permitted WHJV to withhold retainage from Connelly in proportion to the retainage held by the Commonwealth. The subcontract also included a pay-if-paid clause under which Connelly agreed it was not entitled to payment unless, as an express condition precedent, WHJV was paid by the Commonwealth.

Completion of the project was delayed for more than two years. As a result, the Commonwealth continued to withhold retainage from WHJV, and WHJV thus withheld more than $200,000 in retainage from Connelly, long after Connelly completed its scope of work.

Connelly disputed WHJV’s continued withholding of payment and commenced litigation in the Federal District Court for the Eastern District of Pennsylvania. WHJV moved for summary judgment on Connelly’s claim for retainage. Citing the subcontract’s pay-if-paid clause, WHJV argued it had no duty to pay Connelly until it was paid its retainage by the Commonwealth. Connelly opposed the motion, arguing that WHJV’s own failures to prosecute the work contributed to the project’s delays. Thus, it argued that a common law doctrine known as the “prevention doctrine” barred WHJV from relying on the pay-if-paid clause. The District Court agreed with Connelly and denied WHJV’s motion.

In deciding the motion, the District Court recognized that pay-if-paid clauses are valid and enforceable under Pennsylvania law. However, that principle did not end the Court’s inquiry. Instead, the issue before the Court was whether the prevention doctrine prevented WHJV from relying on the pay-if-paid clause to justify its withholding of payment under the circumstances. The Court cited to the Supreme Court of Pennsylvania’s decision in Howley v. Scranton Life Ins. Co., 257 Pa. 243 (1947) to summarize the prevention doctrine as follows: “If a promisor is himself the cause of the failure of performance … of a condition upon which his own liability depends, he cannot take advantage of the failure.” The Court then undertook to decide whether the doctrine applied to prevent WHJV from relying on the pay-if-paid clause.

WHJV argued that the prevention doctrine is triggered only where a party’s failure to trigger a condition precedent is deliberate, while its own delays to the project were merely inadvertent. By contrast, Connelly argued that the prevention doctrine applies regardless of whether the conduct is deliberate or inadvertent. The Court agreed with Connelly, concluding that “inadvertently preventing the satisfaction of the condition precedent, when that condition persists over time as it has here, is enough to trigger the prevention doctrine.”

The Court therefore held that the prevention doctrine barred WHJV from relying on the pay-if-paid clause. Citing two letters issued by the Commonwealth expressing “serious concerns” regarding WHJV’s delays and deficient work, the Court reasoned that a factfinder could conclude that WHJV contributed to delays and, therefore, to its own nonpayment. While there was no evidence that these delays were deliberate, WHJV’s inadvertent delays were enough to trigger the prevention doctrine because, as prime contractor, it had “complete control” over the work. To hold otherwise, the Court concluded, would render Connelly “a hostage to WHJV’s sloth.” Accordingly, WHJV was barred by the prevention doctrine from relying on the pay-if-paid clause because, whether or not its delays were deliberate or inadvertent, it “has still prevented a condition precedent to its duty to pay Connelly the retainage.”

To view the article in its entirety, click here.

Reprinted with permission.

Kristopher Berr, an associate with Pepper Hamilton LLP, focuses his practice on construction-related matters. He counsels and represents owners, construction managers, EPC contractors, general contractors and subcontractors in all phases of the construction process on a wide range of projects including, process plants, mass transit systems, highways, transmission lines, locks and dams and other commercial and government construction projects. He represents clients in state and federal court litigation and alternative dispute resolution proceedings.


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Connect and Learn with Credit Professionals in your Region

Regional conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.

Western Region Credit Conference
October 10-12, 2018
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All-South Credit Conference
October 21-23, 2018
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Electronic Signatures: Valid or Not?

Do I have an enforceable electronic agreement with a valid electronic signature, or not? When someone denies they intended to sign an electronic document, it can be difficult to enforce an electronic agreement.

The problem in determining whether there is a valid electronic signature is similar to the age-old problem of proving that someone’s signature is genuine when that party denies that he or she signed the document. With the written signature, you would need handwriting experts to prove the authenticity. When someone denies they intended to sign an electronic document, proving the intent and authenticity can be even more challenging.

No, really! I didn’t mean it!

Thomas Fair, an attorney, founded three companies that owned apartments in Arizona. J.B.B. Investments Partners, Ltd. v. Fair, 182 Cal.Rptr.3d 154, 156 (Cal.App. 2014). Silvester Rabic and J.B.B. Investment Partners, Ltd. (JBB) invested a total of $250,000 in Fair’s companies. Rabic and JBB thought they had been defrauded by Fair. They sued.

The parties tried to settle the dispute. The attorney for Rabic and JBB sent Fair a settlement offer by email, demanding that Fair stipulate to a judgment for $350,000. The email settlement offer said, “We require a ‘yes’ or ‘no’ on this proposal; you need to say ‘I accept,’ Let me know your decision.”

Fair sent an email from his mobile phone saying that the facts would not justify the claim of fraud against him, but went on to say, “So I agree.” The plaintiffs’ lawyer responded, “Please be unambiguous, because I am about to file the complaint and ex parte papers unless we hear an unambiguous acceptance.”

Plaintiffs filed the lawsuit against Fair and others the next day and emailed a copy of the complaint and ex parte application to Fair. After he received the copy of the complaint, Fair sent a message from his mobile phone, “I said I agree. Took wording right from [lawyer’s] email. I agree.” Rabic’s lawyer responded by email, “This confirms full agreement.” Fair sent a text message, “I have accepted by phone and [email]. Stop proceeding. I said I accept, which is same as ‘agreed.’”

Fair admitted that he deliberately typed his name at the end of the email accepting the settlement. He said there was no deal, however, because plaintiffs’ lawyers had put him under “severe duress” by their “threatening” communications. He asserted “there was no meeting of the minds” on the settlement.

Was there an “electronic signature” or not?

The court quoted the Uniform Electronic Transactions Act (UETA) as follows:

  1. “A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.
  2. A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.
  3. If a law requires a record to be in writing, an electronic record satisfies the law.
  4. If a law requires a signature, an electronic signature satisfies the law.”

But, the court also quoted from the UETA: “An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner.” Moreover, an electronic signature is defined as “an electronic sound, symbol, or process attached to or logically associated with an electronic record and executed or adopted by a person with the intent to sign the electronic record.”

The UETA only applies when parties consent to conduct the transaction by electronic means. The court said that Fair’s printed name at the end of the email was not a signature because the settlement offer did not say that a printed name at the bottom of an email would be an electronic signature for purposes of the settlement agreement.

The court stated that any kind of signature, including electronic, needed to be placed on the document “with the intention of authenticating the writing.” There was no evidence that Fair intended to sign the settlement agreement by electronic means “when he printed his name at the end of his email,” according to the court.

The court refused to enforce the settlement and the case had to start over.

If an electronic signature is any “sound, symbol, or process … adopted by a person with the intent to sign the record,” why wasn’t it an electronic signature when Fair deliberately printed his name at the end of the email? It’s because the court didn’t think so.

What can we learn from the cases about the enforceability of electronic signatures?

Complicated electronic applications using “clickwrap,” “browsewrap,” or other complicated website arrangements will likely be enforceable electronic signatures, even if you need to click through three different screens to find the language to which your electronic signature agrees. Spencer Meyer v. Uber Technologies, Inc., Docket Nos. 16-2750-cv, 16-2752-cv (2d Cir. Aug. 17, 2017).

On the other hand, less sophisticated and less complicated electronic signatures, although more obvious to the reader, are less likely to be valid electronic transactions. The JBB v. Fair case shows the problem of trying to enforce less complicated and less sophisticated electronic signature processes.

If you wish to make sure that you have a valid electronic transaction, you should work with the computer nerds and lawyers to make sure you have a good and enforceable system.

Reprinted with permission.

Michael King is a founding member of Gammage & Burnham in Phoenix. His practice emphasizes creditors’ rights and construction issues, and also includes consulting and supervising throughout the firm’s areas of business. These include emphasis on creditors’ rights—bankruptcy cases, general litigation, loan documentation, workouts, foreclosures and forcible detainers—as well as deficiency collection and accounts collection. His client list includes banks, mortgage companies, distributors in various industries and leasing companies.

Mike is experienced in handling large lawsuits involving complex legal issues from crop damage claims and construction litigation to sophisticated Uniform Commercial Code cases.


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New Tennessee Lien Law Can Leave Suppliers With More than $100,000 in Penalties

Suppliers in Tennessee need to be cautious when filing liens as new legislation passed will grant owners more opportunities to seek reimbursement, should a lien be filed incorrectly.

According to Tenn. Code Ann. § 66-21-108—introduced to Congress in January, signed by Gov. Bill Haslam in May and put into effect in July—real property owners who succeed in challenging the validity of a lien can now recover damages from the supplier. The “validity of a lien” can translate to slander of a title or simply any misinformation found on a job information sheet.

And the costs to suppliers can be steep—in some cases more than $100,000. Under the new law, the real property owner has the potential to recover attorney’s fees, “reasonable costs” incurred by the owner, liquidated damages “in an amount equal to 10% of the fair market value of the property not to exceed $100,000” and any actual damages incurred by the owner.

“There were no statutes like this before this law was passed,” said David Huff, a Tennessee attorney at Smythe Huff and Hayden, PC. “If it was declared the lien was not good, obviously the lien had to be removed, but that was it. In other words, they couldn’t get their attorney fees reimbursed or anything like that. It’s a huge change.”

This law doesn’t alter anything for the filing process nor if a supplier receives lien rights, but it does leave suppliers with the decision of whether to file on certain projects. For example, if a supplier is uncertain about whether to file, pushing forward without hesitation can land the supplier in hot water, should anything in the lien be filed incorrectly. Real causes for concern in the new law are the attorney’s fees and 10% of the fair market value, which depending on the project, can amount to hefty and expensive penalties.

Huff said he has not seen this law penalize suppliers yet, but he does warn of the potential downfalls to the supplier. Huff is working with a case involving a new hotel in Tennessee, a project he said is likely worth about $150 million. Should the supplier incorrectly record an address, title or anything else on the job information sheet, the supplier would then be out $100,000 right away—and that’s before attorney’s fees.

Suppliers in Tennessee need to be more mindful now than in the past when filing liens. Huff said there are staunch opposers to this law who have been making their voices heard in Congress to encourage a repeal. But in the foreseeable future, Tennessee suppliers should be vigilant.

“No. 1 is cross all your t’s and dot all your i’s as you work through the lien process,” Huff said. “Then, before you file the suit on that, you want to be as sure as you can be that it’s going to be upheld, because when you read the statute, if you lose for any reason, you can get these potentially expensive penalties.”

—Christie Citranglo, editorial associate


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Ontario GC Impacting Project Delays, Supply Chain

In a perfect world, general contractors (GCs), subcontractors, material suppliers and so on would sign contracts with their customers and be paid on time and in full for every transaction with that customer. Unfortunately, this is not the case in the construction industry. There are many reasons why the sector is not a perfect world, and the imperfect situations that arise impact all parties involved on a construction project.

For example, if an owner does not pay a general contractor, odds are that general contractor is not paying its subcontractors, and those subcontractors are not paying their material suppliers. Another scenario that can affect the supply chain occurs when projects are delayed, which was recently seen on several public projects in Ontario, Canada, with Bondfield Construction Company.

One of the most impacted projects is Cambridge Memorial Hospital, which is 22 months behind schedule, according to the Globe and Mail. Despite 19 completion date push backs, the hospital is expected to be finished Dec. 3, states the Waterloo Region Record.

“Let me stress that we are profoundly disappointed and frustrated with the delays,” said Infrastructure Ontario Spokesman Alan Findlay in the Globe and Mail. “We are working with each project owner to protect taxpayers from cost overruns caused by the delays. We are determined to make sure the projects get done.”

The list of liens and lawsuits has also grown against the Vaughan-based GC, according to a Globe study. Since the start of 2017, Bondfield has been named as the defendant in 207 Toronto lawsuits. In addition, Bondfield has been named as the defendant in 277 lawsuits in all of Ontario during the same time period. In comparison, its top two competitors, PCL Constructors Canada and EllisDon, have been named as defendants 62 times combined. This has hurt the flow of cash moving downstream to Bondfield subcontractors and material suppliers.

Ontario has already put in place a plan to help with payment delays; however, it will not go into effect for another year. The first phase of the Construction Lien Act became law this past July, but the prompt payment legislation and adjudication sections of the Act start Oct. 1, 2019. The passing of the Act has led other provinces to follow suit with bills introduced or grassroot movements taking place.

The Nova Scotia Prompt Payment Coalition (Coalition) recently called on the government to act and enact prompt payment legislation. “Our province needs a prompt payment solution that works for everyone including tradespeople, contractors, government and consumers,” said Tim Houtsma, Canadian Institute of Steel Construction board member, in a joint release from the Coalition and the Construction Association of Nova Scotia (Association).

According to an Association survey, three-fourths of members said payment delays increase the cost of project delivery, and more than nine out of 10 reported payment delays increase the cost of doing business.

“The existing law in Nova Scotia—the Builders Lien Act—is costly, cumbersome and inaccessible to 65% of the construction industry,” said Association President Duncan Williams in the release. “It addresses nonpayment as opposed to delinquent payment and the lien rights of many in the industry will expire long before they realize they will not get paid.”

The Coalition hopes to begin working with the government on a solution before the end of the year.

—Michael Miller, managing editor


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