In the News

January 24, 2019

 

‘Winning Together’ Through Communication, Leadership in the Credit Department

---

Combatting Construction Fraud Is Easier Said Than Done

---

Global Insolvency vs. US Bankruptcy: Tale of Two Financials

---

Creditors With Partially Disputed Claims Have Standing to File an Involuntary Bankruptcy, Part II

---

‘Winning Together’ Through Communication, Leadership in the Credit Department

When advancing in the credit field, having a keen eye for interpersonal communication and effective leadership can easily be the next step in moving forward. Being aware of how each department talks to one another, how the team members within the credit department work together and how to grow as a better communicator helps tear down communication barriers and adapt to the ever-changing credit field.

NACM’s 123rd annual Credit Congress and Expo from May 19-22 in Aurora, Colorado, will feature a series on interpersonal communication and personal development, titled “Winning Together.” The sessions are run by Rick Hernandez, president of Syntesis Global, LLC. He said each of the four sessions breaks down what he calls “communication silos,” opening up office culture for clearer communication of ideas and adaptations to change.

“The sessions are predicated on the work we do globally and locally,” Hernandez said. “The spirit of our work is really the balance of the pragmatism of business and the psycho-emotional piece many people on teams have to manage and adapt to in order to meet the demands of daily tasks, growth and personal development.”

Each session approaches leadership, personal growth and communication through a different lens. The sessions will focus on adapting to future endeavors, leading with effective communication, conducting difficult conversations and delegating and optimizing teams.

While it’s not required to attend all four sessions, each individual session will tackle the main premise of “Winning Together” but with a different twist. Themes of conscious leadership, personal growth, communication and more will be emphasized. Each class will be interactive, so the sessions will vary depending on who is in attendance.

Emotional intelligence is another key takeaway for the sessions. Hernandez pushes understanding others’ emotions as one of the main successors to leadership and communication. If someone has a better understanding of another person’s feelings and reactions to suggestions and ideas, both parties can more easily communicate with each other.

“Emotional intelligence is really important, particularly with an audience like finance folks or people in engineering—for everyone, really—for developing these personal skill sets and enhancing their ability to accomplish two things: influence and credibility,” Hernandez said.

The “Winning Together” courses take a global perspective in addition to a national perspective, combining information applicable to workers dealing with customers from all regions of the world. Combining precision, agility and resilience in a global market, these sessions will help employees work better with their co-workers, customers and even themselves.

“In understanding the business, we help individuals better align themselves not just with the organization’s goals but with their own personal development piece,” Hernandez said. “It has to do with understanding their role, career management and emotional intelligence.”

—Christie Citranglo, editorial associate

Combatting Construction Fraud Is Easier Said Than Done

To successfully perform their jobs, credit managers require information from their customers. It’s possible the applicant’s name, address or contact information is public knowledge, but what about bank and trade references and the underlying details, such as checking and saving account numbers, current credit limits or loans? How can credit managers ensure they’re keeping this sensitive information safe from fraud?

“In construction credit, especially when selling to a subcontractor who has a contract with a general contractor who has a contract with the owner, it’s more difficult to spot fraud as there are multiple parties,” said Chris Ring of NACM’s Secured Transaction Services (STS). “So, knowing who those parties are and keeping an eye on the workings of the project is critical to spot and/or limit liability of fraud.”

Fraud is commonly perpetrated by an employee who has multiple responsibilities for funds management, Ring said, such as an accountant or a bookkeeper who may be responsible for receivables and payables. In this scenario, fraud can go unchecked for long periods of time if the employee is savvy at covering their tracks. The construction industry is the latest to take matters into its own hands, as officials establish construction fraud task forces to monitor growing concerns in the sector.

According to the 2017/18 Kroll Annual Global Fraud & Risk Report, the construction, engineering and infrastructure sector saw an unsettling increase in fraud incidents year-over-year (YOY), up 13% over the past two years. The sector had the third-highest likelihood of fraud at 83%, not far behind manufacturing (86%) and financial services (91%).

“Information theft, loss or attack was the most reported type of fraud (33%), with regulatory breaches and vendor/supplier fraud close behind at 30% each,” the survey states. While nearly half of respondents said junior employees were the most common perpetrators, vendors and suppliers topped at 38% in the construction sector, almost 10% above the global average.

Security and cybersecurity incidents also impacted the construction industry in the past year, the former affecting 93% of respondents. Construction credit managers will want to take note that customer records were at the heart of common targets at 52%.

In an effort to combat fraud, officials in Manhattan and Pittsburgh have formed tasks forces to investigate reported incidences. Construction Dive reports Manhattan District Attorney Cyrus Vance Jr. leads its Construction Fraud Task Force, which celebrated its latest victory in December when former Bloomberg LP and Turner Construction Co. executives, subcontractors and vendors were indicted on charges of conspiracy, bribery and bid-rigging.

Those involved “allegedly tried to steal approximately $15 million from Bloomberg during a major renovation of the financial media giant’s New York City offices,” the report states, with charges against 14 individuals and three corporations. Subcontractors were allegedly given “inside information” to win contracts, in addition to giving Bloomberg and Turner executives incentives, including cash for contracts.

“The defendants, he said, inflated their budgets with fake invoices and purchase orders and even filed phony applications for women-owned business status,” Construction Dive states.

Meanwhile, the Pittsburgh Post-Gazette reported the Pittsburgh City Council created its task force on Dec. 27, 2018, to investigate concerns over tax fraud and “unfair” construction industry practices. The bill notes the construction industry grew 7.3% with 57,000 jobs in Pittsburgh in 2017.

—Andrew Michaels, editorial associate

Global Insolvency vs. US Bankruptcy: Tale of Two Financials

Global insolvencies are on the rise, yet bankruptcy in the United States continues to post declines on a year-over-year (YOY) basis. According to the latest economic research from Euler Hermes, the Global Insolvency Index is forecasted to jump 6% in 2019 following a 10% (YOY) increase in business insolvencies. This marks the third straight year with an increase.

Much of the insolvency growth falls on China (60% YOY) and Western Europe (2% YOY). China is expected to have another double-digit increase at 20% in 2019, but zombie, state-owned enterprises will be cleaned out, according to Euler Hermes.

“All in all, this insolvency outlook calls for more selectivity and preventive actions such as stellar credit management practices by risk managers and business leaders worldwide,” said Ludovic Subran, global head of macroeconomic research at Allianz and chief economist at Euler Hermes, in a release. “It also calls for a close monitoring of the political and policy-related risks which will nurture volatility all through 2019, even if we expect positive outcomes for most of them in our base-line scenario.”

Two out of three countries will have a rise in insolvencies this year, but Brazil and the U.S. are exceptions with a 6% decline and a 0% change from last year, respectively. Real GDP growth in the U.S. is also expected to take a step back in 2019 by nearly half a percent, according to Euler Hermes. U.S. insolvencies fell for the ninth consecutive year; however, half of the top 10 insolvencies in the world were from the U.S. during the first three quarters of 2018.

Meanwhile, U.S. bankruptcy filings declined 2% in 2018 compared to 2017, and commercial Chapter 11 filings dropped 5% in 2018, according to the American Bankruptcy Institute (ABI). Total commercial filings also dipped 2% last year. This was after November data saw a 50% increase in commercial Chapter 11 filings compared to the previous November. The change in monthly year-over-year bankruptcy filings also dropped—commercial Chapter 11 filings sank 36% in December compared to December 2017.

“Total filings fell for the ninth consecutive year as high filing costs continue to weigh on struggling businesses and families,” said ABI Executive Director Samuel J. Gerdano in a release. According to Bloomberg, an increase in filings could be on the horizon, as there was a proposed change (the Small Business Reorganization Act of 2018) to make filing for bankruptcy more accessible to smaller companies by amending Chapter 11 of Title 11 of the U.S. Code.

—Michael Miller, managing editor

Creditors With Partially Disputed Claims Have Standing to File an Involuntary Bankruptcy, Part II

Analysis

The Bankruptcy Court in General Aeronautics agreed with the line of cases that interpreted BAPCPA’s amendment to Section 303(b)(1) as permitting creditors to have standing provided a portion of their claims are undisputed.

The Court first reasoned that when Congress enacted the BAPCPA amendment, it was presumed to act with knowledge of the existing law and judicial concepts. See In re VistaCare Grp., LLC, 678 F.3d 218, 226 (3d Cir. 2012). Indeed, the Supreme Court has stated that “[p]re-BAPCPA bankruptcy practice is telling because [courts] ‘will not read the Bankruptcy Code to erode past bankruptcy practice absent clear indication that Congress intended such a departure.'” Hamilton v. Lanning, 560 U.S. 505, 517 (2010) (internal citation omitted) (emphasis added).

The Court found that BAPCPA’s amendment did not alter the operation of Section 303(b)(1), which, per the 1984 amendment, already struck a balance between the interests of petitioning creditors to have access to bankruptcy courts and the interests of debtors to avoid being bullied into bankruptcy by creditors with questionable claims. According to the Court, to view the BAPCPA amendment as disqualifying a creditor where any amount of its claim is disputed would shift the balance struck in 1984, but there was no clear indication that Congress intended such departure from pre-BAPCPA practice. See In re DemirCo Holdings, Inc., No. 06-70122, 2006 WL 1663237, at *3 (Bankr. C.D. Ill. June 9, 2006) (finding dearth of legislative history to clearly indicate drastic shift in practice); 2 Collier on Bankruptcy para. 303.11[2].

In addition, the Court found that viewing the BAPCPA amendment as disqualifying a creditor with a partially disputed claim would lead to absurd results; “so bizarre that Congress could not have intended it.” See Robbins v. Chronister, 435 F.3d 1238, 1241 (10th Cir. 2006). The Court reasoned that a strict plain meaning interpretation of Section 303(b)(1) would unjustly disqualify many petitioning creditors who have inconsequential portions of their claims disputed.

The Court then turned to the standard for determining a “bona fide dispute,” which in the 10th Circuit means an “objective basis for either a factual or legal dispute as to the validity of [the] debt.” Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir. 1988).

In General Aeronautics, the preponderance of the evidence revealed that, based on promises made by the officers of GAC, the nonexecutive employees were entitled to claims for deferred compensation and bonuses. The fact that several of those petitioning creditors had already been awarded certain sums by the Utah Labor Commission did not result in a waiver of their deficiency claims against GAC.

With respect to separate claims for unpaid compensation and loans by former executives, the Court found that, at least, one of the executives held an undisputed claim of $69,099.95 for unpaid loans, but the remaining executives’ claims were subject to bona fide dispute–or, at least, it was unnecessary to determine their status.

GAC argued that many of the petitioning creditors’ claims for unpaid compensation and loans were subject to dispute because GAC’s board had not previously approved them. But, the Court found that the board had ceded such authority to its officers, who, in fact, approved certain undisputed amounts claimed by the petitioning creditors.

The last petitioning creditor was the landlord. GAC argued that the landlord’s claim was disputed because GAC never entered into or assumed the lease with the landlord and GAC’s predecessor continued to occupy the leased space. The Court found, however, that GAC had already acknowledged a portion of the liability for rent in correspondence with the landlord and its own accounts payable report.

Some of the petitioning creditors argued that GAC had assumed certain liabilities that were incurred by GAC’s predecessor, given that GAC had set up its own payment plan for such debt. But, the Court rejected this argument, finding that GAC had not expressly assumed such liabilities and thus such debt would not be counted for purposes of Section 303(b).

The Court ultimately held that the landlord, five former nonexecutives and one executive had partially undisputed claims, in excess of $330,000, well above the statutory limit to confer standing under Section 303(b).

The Court then went on to find that GAC was not paying its debts as they come due, because, even though GAC was paying its current monthly expenses, (a) it had substantial, years-old debts that remained unpaid, (b) its remaining cash reserve was dwindling quickly and (c) no new revenues were coming in the door. Under the totality of circumstances, the petitioning creditors demonstrated that the requirements under Section 303(h)(1) had been met.

Conclusion

The General Aeronautics opinion appears to reach the appropriate result under the circumstances. When an insolvent company amasses so much debt, it is sometimes hard simply to sweep that liability under the rug. In GAC’s case, 19 current and former employees, a landlord and numerous third parties had waited many years to get paid. The Bankruptcy Court could not ignore the existence of such significant liabilities, even though GAC argued that not all of it was owed.

Reprinted with permission. Part I of this article appeared in last week’s eNews on Thursday, Jan. 17.

H. Joseph Acosta is a partner in the Corporate Restructuring and Commercial Litigation Departments at the national firm of FisherBroyles, LLP. After 20-plus 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.