In the News

Dec. 6, 2018

 

New Bankruptcy Bill Aims to Expedite SMB Chapter 11 Cases

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Chinese Suppliers Feel Strain from US Tariffs

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Real-Time Payments at Forefront of Technology

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Is It Harder to Pierce the Corporate Veil of a Limited Liability Company? Part I

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New Bankruptcy Bill Aims to Expedite SMB Chapter 11 Cases

U.S. lawmakers proposed a new bill on Nov. 29 that plans to change the way small businesses (SMBs) file for bankruptcy, should they be $2.5 million or less in debt. The bill is titled, The Small Business Reorganization Act of 2018.

The act will expedite the process of SMBs filing for Chapter 11 bankruptcy, making the time for creditors seeking payments much shorter, while also cutting back on attorney’s fees due to quicker turnarounds in court. The proposition builds upon changes to the Ch. 11 Bankruptcy Code made in 2005 for SMBs, which voluntarily expedited the Ch. 11 process (for SMBs, with restrictions) among other protections.

The Ch. 11 Bankruptcy Code is currently written with large corporations in mind, said Jim Wise, managing partner with Pace LLP. When looking at smaller bankruptcies consisting of a limited number of secured and unsecured creditors, not much needs to get caught up in the pitfalls of larger bankruptcies. The current legislation does not account for much in the SMB-sphere, leaving little regulation for SMBs and the creditors attempting to collect on SMBs.

“[The bill] tries to understand—without impairing the rights of creditors or debtors in Ch. 11—how can we make this process a little more expeditious and a cost saving for debtors and creditors, if you are a genuine small business?” Wise said. “That’s a big challenge I think for creditors that are out there seeing so many expenses in Ch. 11 chewed up by administrative court costs.”

Administrative costs remain another sticking point in SMB bankruptcy filings: The longer an SMB stays in bankruptcy, the more it costs for the debtor and the creditor in attorney and court fees. Even after so much time, all of these expenditures don’t satisfy the needs of a creditor, Lauren Wilson, vice president of Pace LLP, said. About 91% of funds recovered from a bankruptcy case pay for lawyers who settled a preference case, meaning “the majority of the money is not going back to the debtor anyway,” she added.

Preferences—another huge obstacle Wise and Wilson noted in SMB bankruptcy cases—are addressed in this new bill. The bill amends the current Code by adding “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses,” which Wise and Wilson hope will resolve the current issues around preferences in bankruptcy cases.

“The issue of preferences that seeks to be resolved here is the practice of these letters being sent out by the trustee who is handling the bankruptcy. They send out a letter to every person who has received a payment in the preceding 90 days,” Wilson said. “What a lot of folks do, as opposed to paying for lawyers and taking it to court and fighting it, is just to settle because it’s a lot cheaper that way.”

Before this bill gets passed, it must receive support from the House of Representatives and the Senate, alike. Since the bill was introduced at the end of the year, Wilson and Wise speculate it will not pass before the new House and Senate take office in January 2019. While it cannot be determined how the new Congress will feel about this bill, Chuck Grassley, whom the bill was introduced to and who is currently the chair of the judiciary committee, will not be the chairman come 2019. Grassley is a sponsor of the bill, and Wise said this bill is a priority for him; but without Grassley in his current position, the bill may not get picked up by the new judiciary committee. Grassley was also a principal author for the 2005 Bankruptcy Code amendments.

Should the bill pass into law in 2019, Wise and Wilson predict creditors will have an easier time getting paid from SMBs that filed for bankruptcy.

“I think the last thing any entity wants to do is to continue to have to pay taxes or administrative fees that really don’t go to the potential for economic activity,” Wise said. “The more revenues that are chewed up by a debtor in Ch. 11 court costs is that much less money for the creditor community that is still owed money by this debtor.”

—Christie Citranglo, editorial associate

Chinese Suppliers Feel Strain from US Tariffs

With the holiday season in full swing, U.S. retailers are beginning to revise their order contracts with Chinese suppliers, who, The Wall Street Journal (WSJ) reported, are starting to feel the pressure of President Donald Trump’s trade tariffs. High-profile retailers, such as Walmart, Home Depot and Amazon, are among the chains retooling their orders—an effort that started just before Trump’s meeting with China President Xi Jinping last weekend at the G-20 summit in Argentina.

Import taxes began at 10% and 25% on $250 billion worth of Chinese goods in September and October, respectively. The 10% tariffs were expected to rise to 25% at the beginning of 2019; however, the White House issued a statement on Dec. 1 to announce no escalation will occur at this time. The statement also noted “structural changes with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture,” Reuters reported. If not completed in 90 days, the tariffs will increase as originally planned.

On Nov. 28, WSJ reported Walmart and Home Depot were making advanced purchases in anticipation of the tariff hike. In a separate move, Amazon “cut back purchases and orders for certain of its private-label products that, because of the tariffs, it can no longer sell profitably if priced below competitors,” the article states. Meanwhile, Dollar Tree Inc. announced it is not only negotiating current pricing with its Chinese suppliers, but also canceling orders and exploring other products.

“U.S. companies have stressed to investors that they are trying to mitigate the impact of tariffs on their margins—for example, by passing cost increases along to customers when concessions can’t be squeezed out of suppliers,” WSJ states. “Retailers, in particular, say that although tariffs so far haven’t had a huge impact on their operations, that could change if the levies get steeper or are applied to more products.”

However, the retail sector’s price hikes come as no surprise considering they were predicted at the end of September when the first round of U.S. tariffs took hold. In a September email to Retail Dive, GlobalData Retail Managing Director Neil Saunders told the publication retailers were faced with a couple of options: increase costs or suffer in the margins.

“The exact response will vary from retailer to retailer, both strategies are likely to be used,” Saunders said, leaving retailers with less money to spend on “technology, elevated logistics costs, higher gas prices and rising labor expenses.”

As U.S. retailers’ orders fluctuate, so do Chinese manufacturers’ sales, WSJ added. Affected companies include camping chairs manufacturer Sunshine Leisure Products, furniture manufacturer Homegard International as well as an LED decorative lights supplier.

The U.S. steel and aluminum tariffs also returned to news headlines last week after the country’s No. 1 carmaker, General Motors Co., announced plans to stop all production at Ohio, Michigan and Ontario assembly plants in 2019 and then cease production on certain car models when the plants are up and running again. Workforce cuts will soon follow, but Reuters reported job cuts were not related to the tariffs. This follows a similar announcement from Ford Motor Company in October.

—Andrew Michaels, editorial associate

Real-Time Payments at Forefront of Technology

Technology is changing the world. From self-checkout lanes at the grocery store to self-parking cars, advancements in technology are making the world an easier place for productivity, or at least that is the idea behind tech innovation. Consumer tech progress has spilled over into the business-to-business (B2B) arena, making way for numerous developments across the sector.

The growth of B2B technology is at the forefront of credit departments. Finding new ways to process credit applications, receive trade and bank references, and make credit decisions is on the minds of credit professionals. Furthermore, payment technologies are the catalyst driving much of this growth and innovation in the consumer and B2B worlds.

According to PYMNTS.com and Mastercard’s Real-Time Payments Innovation Playbook, which collected data from roughly 400 financial decision-makers, real-time payments (RTP) are widely viewed as the next step in B2B payment innovation, with a third of respondents saying their companies will adopt RTP within the next three years.

“While the United States may be late to the real-time payments game, businesses’ appetites for accessing faster payments, including in real time, have seemingly increased,” the Playbook states.

While checks have all but gone by the wayside for consumers, many businesses, large and small, are still accepting checks as their main form of payment. In fact, small- and medium-sized businesses (SMBs) use checks nearly half of the time for B2B payments, according to the report. This is by far the preferred payment method of businesses compared to ACH, credit cards, wire, etc. Roughly a quarter of medium and large businesses are using regular ACH, while a similarly small number use same-day ACH, debit cards or virtual cards.

However, nearly a third of businesses said checks are neither easy nor convenient. Another downfall of the paper check is the likelihood of fraud (20%) and the higher cost (18%) compared to other payment methods. The data for the ways businesses receive payments is also similar—nearly half of SMBs take checks for payment. More than two-fifths of companies still accept checks because of legacy systems. Other planned payment innovations include automated payables (32%), enabling payment from invoices (26%) and automated receivables (25%).

RTP technology isn’t only for large, multi-national corporations either. According to the Playbook, small companies (less than $10 million in revenue) and large companies ($100 million to $1 billion) are equally likely to implement RTP at 38% and 39%, respectively. Companies with more than $1 billion in revenue are the least likely to implement RTP.

Nearly three-quarters of company leaders believe B2B payments will improve with the application of RTP. The most perceived benefit of RTP was improved cash flow followed by flexibility, process efficiency and lower costs. Almost 80% of businesses ranked enhanced security and fraud controls as the most important feature of RTP. The instant availability of funds was third.

Among the major concerns for RTP are the lack of knowledge as well as fraud. “Education is key. Understanding what it is, how it works and the benefits it provides is imperative,” the report states.

—Michael Miller, managing editor

Is It Harder to Pierce the Corporate Veil of a Limited Liability Company? Part I

Piercing the corporate veil (PCV) is a remedy often pursued by a creditor of an insolvent entity against the entity’s parent or principal. While the corporate veil generally shields a shareholder from the general obligations of his or her corporation, PCV allows a creditor to look beyond the corporate shield and, in certain instances, hold a shareholder liable for the corporation’s debts.

Common factors that warrant PVC include the lack of adherence to corporate formalities, the level of shareholder control and the commingling of assets and business among the shareholder and corporation. When such factors are present, a creditor is able to argue that a corporation is a mere sham or instrumentality of its parent or principal. These factors, however, may be less indicative of a sham when applied to an entity that is not a corporation and is not governed by regimented corporate laws. For example, a limited liability company (LLC) is by design a more flexible entity, which is allowed, among other things, to maintain less formalities and to be managed by its members (owners). These distinctions and others may necessitate a different analysis when attempting to pierce the veil of an LLC.

In Steve Baldwin, et al. v. Atlantis Water Solutions, LLC, et al. (In re Atlantis Water Solutions, LLC), Adv. No. 18-00016-BPH (D. Mont. Nov. 5, 2018), the United States Bankruptcy Court for the District of Montana discussed the different analysis required to pierce the veil of a limited liability company. The Court ultimately found that a creditor could not pierce the veil of a Montana LLC, using traditional PCV factors applicable to corporations.

Facts

Iofina Resources, Inc. (Iofina) is a corporation engaged in the exploration and production of iodine. Sometime in 2011, it formed Atlantis Water Solutions, LLC (Atlantis), as a single-member, member-managed LLC, to pursue the development of a fresh water depot in eastern Montana to serve the oil and gas industry in that area. Atlantis’ business plan was to take water from the Missouri River and distribute it from a depot that would accommodate tanker trucks. This water depot project was clearly outside of Iofina’s core business.

While Atlantis maintained good standing in Montana as a separate entity (LLC), in reality, there was not much separateness between Iofina and Atlantis. Among other things, Atlantis: (a) shared its president with Iofina’s chief operating officer; (b) never had its own bank accounts; (c) never generated revenue; (d) was provided all its operating funds by Iofina; (e) had no employees; (f) had no hard assets and only had contract rights and studies/surveys; (g) did not file its own tax returns; (h) had no credit; and (i) had no corporate minutes or resolutions.

After it was formed, Atlantis entered into a surface lease with a Montana landowner, pursuant to which the landowner agreed to lease the surface area on its property to Atlantis for the purpose of building a pump station, obtaining easements and running a water processing operation. The surface lease had a 10-year term. In connection with the surface lease, Atlantis also entered into an option agreement, which granted Atlantis the option of obtaining a lease and access to the Missouri River from the sub-surface of the landowner’s property.

The Atlantis water project was always dependent upon Atlantis receiving a water permit from the Montana Department of Natural Resources (DNRC). The landowner understood that at the time it entered into the surface lease.

Unfortunately, the permitting process took much longer than expected. Due to pressures from the landowner, Atlantis was forced to exercise the sub-surface option and pay the landowner an access fee of $175,000, before ever obtaining the requisite permit.

Shortly thereafter, Atlantis was informed that the DNRC denied its request for a water permit. Although Atlantis appealed the DNRC’s decision, by that time, due to the delays, Atlantis was operating at losses in excess of $400,000. Approximately a year later, Atlantis lost the appeal.

Following the loss, Iofina’s COO (also Atlantis’ president) informed the landowner that Atlantis was abandoning the water project and would no longer be making lease payments to the landowner. Although Atlantis had already paid almost $460,000 in option money, fees and rent, over $700,000 was still due under the various agreements with the landowner.

The landowner subsequently filed suit in state court against Atlantis for breach of contract and further sought to hold Iofina liable on the theory that Atlantis was its alter ego. This action was eventually removed to bankruptcy court when Atlantis filed for Chapter 7 relief.

Reprinted with permission. Part II will appear in next week’s eNews on Thursday, Dec. 13.

H. Joseph Acosta is a partner in the Corporate Restructuring and Commercial Litigation Departments at the national firm of FisherBroyles, LLP. After more than 20 years of practicing, he has a broad range of experience representing companies, banks, committees, trustees, landlords and other parties in complex restructurings and commercial litigation matters, both in and out of court.