In the News

February 28, 2019

 

Positive Turnaround Lifts the February Credit Managers’ Index

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PG&E Files for Bankruptcy, Am I Secured?

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US and China Continue to Postpone Tariff Agreements

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Federal Court in Maryland Holds Subcontractor Waived Right to Bring Labor Inefficiency Claim Despite Objections of Mismanagement

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Positive Turnaround Lifts the February Credit Managers’ Index

Credit managers were pleasantly surprised in NACM’s February Credit Managers’ Index (CMI), where the manufacturing and service sectors showed subtle signs of recovery after two months of decline. Improvements to each of the sector’s unfavorable factors brought the combined CMI score to 54.9.

CMI readings haven’t fared well since November 2018, ending the year with one of its lowest scores only to plummet further in the new year. However, the combined manufacturing and service sector readings brought a glimpse of hope to February’s results, with the combined unfavorables climbing out of contraction territory (a score below 50). Dollar amount beyond terms and dollar amount of customer deductions moved out of contraction and into the low 50s, while credit application rejections and bankruptcy filings maintained scores in the low- to mid-50s. Disputes decreased but continued to plague the unfavorables at 48.5, joined in contraction territory by accounts placed for collection at 49.

Meanwhile, combined favorables thrived with an increase to 60.7, the highest reading since November 2018. Sales and the amount of credit extended saw the most success with readings in the low 60s, followed by minor increases in new credit applications and dollar collections.

“The combination of improved performance in the favorable factors and a real recovery in the unfavorable index casts a different light on the start of 2019,” said NACM Economist Chris Kuehl, Ph.D. “It is not that the concerns voiced at the start of the year are not valid—there is plenty to worry about as far as inflation is concerned and the issues of a trade and tariff war will be biting sooner than later. What this does seem to show is continued resilience in many businesses, which suggests they could survive a bit of downturn this year.”

Manufacturing (54.8) bounced back nearly two points in February—its biggest redemption since May 2018’s three-point gain—largely in part by advances in favorable factors, particularly the five-point bump in new credit applications to 58.6. Sales and dollar collections also increased, the latter having declined in January, while the amount of credit extended fell slightly in February. Overall, manufacturing unfavorables (51.4) left contraction territory, where disputes and dollar amount of customer deductions remained in the high 40s. All unfavorables but bankruptcy filings rose month-over-month (MoM).

The service sector also showed promising results in February, albeit less so than manufacturing, at 55. Unlike manufacturing, the unfavorable factors are to thank for the service sector’s gains as all six unfavorables improved. Bankruptcy filings is the only unfavorable to hold a reading in the high 50s; whereas the remaining are either on the cusp of or in contraction territory. In favorables, sales and the amount of credit extended increased MoM; however, new credit applications and dollar collections dipped.

“The rest of the year promises to be a challenge for the retail sector as the levels of consumer confidence are dropping steadily,” Kuehl said. “There will likely be additional inflation pressure as the trade wars and tariff battles continue to heat up.”

—Andrew Michaels, editorial associate

PG&E Files for Bankruptcy, Am I Secured?

Mechanic’s liens, while intricate and often time consuming, are rather simple in nature. Claimants must follow steps as laid out in state statutes. Yet, there are instances when a wrench is thrown into the works as seen recently with the Chapter 11 bankruptcy filing of Pacific Gas and Electric Company (PG&E) due to the wildfires in Northern California over the last two years. Meanwhile, PG&E said it will “not be going out of business” as a result of the filing, and will “pay vendors and suppliers under normal terms for goods and services provided on or after the filing date of January 29, 2019.”

One of the biggest questions suppliers for PG&E should ask is, “Do I infringe on the automatic stay?” said Chris Ring of NACM’s Secured Transaction Services. Ring and Bruce Nathan, Esq., partner in Lowenstein Sandler’s Bankruptcy, Financial Reorganization and Creditors' Rights Department, will answer this question and many others on March 11 during an NACM webinar.

“The automatic stay precludes you from doing any collection efforts, but most states allow you to file a mechanic’s lien to protect your security interest. What’s precluded is typically enforcing lien rights,” explained Ring. Also important is which party files bankruptcy and the mechanic’s lien.

More than $3 million in mechanic’s liens have been filed by nine companies working on PG&E pipeline and renovation projects in Solano County, and more than half were filed after Jan. 29, according to the Daily Republic. Companies working on projects in Fairfield and Vallejo, among other cities, are also waiting for payment.

“Creditors who don’t have a lien are general unsecured creditors,” said Tracy Green, Esq., partner for Wendel Rosen Black & Dean LLP in their insolvency practice, in a recent article. “Creditors that obtain a lien within 90 days of the commencement of the bankruptcy case, may find their liens avoided as preferences if creditors are not paid in full, thus turning them back into unsecured creditors.”

PG&E has already received approval for up to $1.5 billion in debtor-in-possession financing to continue operating during the bankruptcy filing. However, “the Bankruptcy Code does not permit payment for goods and services received prior to the filing date except in very limited circumstances that must be authorized by an order of the Bankruptcy Court,” states PG&E.

Bankruptcy filings and the automatic stay work slightly different on the public side. When the general contractor who put in place the payment bond files for bankruptcy, that shifts the burden of financial responsibility to the bonding company, noted Ring. Subcontractors and suppliers of materials must assure their claims are filed timely and accurately with the bonding company to assure claims are paid.

—Michael Miller, managing editor

The webinar “Navigating Lien and Trust Fund Rights, When a Party in the Construction Supply Chain Files Bankruptcy” will be presented at 3 p.m. Eastern on Monday, March 11 by Bruce Nathan, Esq. and Chris Ring. Registration is now open on the NACM website.

US and China Continue to Postpone Tariff Agreements

The U.S. and China trade wars continue, with U.S. President Donald Trump postponing the decision of the tariff rate on $200 billion of imports from China. A decision was set to be made by September 2018, then rescheduled to January and then to March 2. Trump announced on Feb. 24 that the March 2 deadline will also be pushed back.

Despite the decision to halt the trade deals, the tensions between the two economic powers still persist. Since the uncertainty surrounding this deal still exists—and has existed since talks of the tariffs began—global growth continues to face risks, according to a recent news release by Moody’s. This postponement serves as a temporary halt on the trade tensions. Even if a trade deal is reached, both sides will likely not remain amicable.

When U.S. negotiators met with China, many of the topics discussed veered away from more controversial items and focused on ideas that hadn’t been brought up in a few months, according to NACM Economist Chris Kuehl, Ph.D. Major concerns the U.S. fixated on dealt with intellectual property and technology transfer, avoiding talks of tariffs on certain goods and focusing on how those goods reached the U.S.

“The Chinese had seemed willing to move in the direction the U.S. favored and an agreement seemed possible last October. That was when the U.S. began to demand ‘structural reforms,’ which amount to radical changes in how the country handles its business community and exports,” said Kuehl. “This was clearly too much for China and the whole process stalled.”

A 10% tariff rate on Chinese imports into the U.S. already exists, and raising the rate to the proposed 25% would see a negative effect on the imports, according to Moody’s. China is already coping with a slowing economy, and keeping the rate at the lower level of 10% will help to ease some pressure off the Chinese economy.

On the U.S. side, higher tariffs will lead to “higher input costs for U.S. producers,” a release by Moody’s said. The success of the tariffs on the U.S. market will hinge on each companies’ tolerance to the increased costs and how consumers’ buying habits may change because of the tariffs as well.

With the decision postponed, credit professionals will not have to worry about the rising price of goods or the response from customers. Until the countries reach an agreement, credit managers can continue operating as usual.

“The official commentary indicated that ‘substantial progress’ had been made by the negotiators, but most analysts have indicated that nothing much changed as far as the Chinese position,” Kuehl said. “Now it looks like these larger demands have been shelved and the focus has been on the more practical issues.”

—Christie Citranglo, editorial associate

Federal Court in Maryland Holds Subcontractor Waived Right to Bring Labor Inefficiency Claim Despite Objections of Mismanagement

The case [of Hagen Constr. Inc. v. Whiting-Turner Contracting Co., No. JKB-18-1201, 2019 BL 36862 (D. Md. Feb. 04, 2019)] arises out of the construction of a pediatric outpatient center in southern New Jersey. Plaintiff subcontractor Hagen Construction, Inc. (“Hagen”) filed suit in New Jersey state Court against defendant general contractor Whiting-Turner Construction Co. (“W-T”), seeking reimbursement for labor inefficiency costs incurred as a result of W-T’s alleged project mismanagement. Hagen claimed it incurred additional costs to repeat work and remobilize to multiple areas because it was not afforded unimpeded access or timely supply of necessary materials and information. Once the case was removed and transferred to Maryland federal Court, W-T moved for partial summary judgment on the portion of Hagen’s breach of contract claim reflecting labor inefficiency costs.

W-T asserted that Hagen’s claim was barred because: (i) it failed to provide timely notice and substantiation for the claim in accordance with the Subcontract; (ii) Hagen executed releases with its payment applications in which it represented it was not aware of any claims or occurrences giving rise to claims through a period beyond the dates of events giving rise to the labor inefficiency claim; and (iii) the claim was a delay claim barred by the Subcontract’s “no damages for delay” clause. While the Court rejected W-T’s third argument, it granted the motion, concluding that Hagen had waived its right to assert the claim because (i) it failed to provide notice of the claim in the form required by the Subcontract, and (ii) it executed unqualified Partial Releases with its payment applications.

The Court first explained that the Subcontract was “unequivocal” that W-T would not be liable to Hagen for payment for additional work unless the work was first expressly authorized in writing by W-T, and W-T received payment for it from the owner. These were, according to the Court, conditions precedent to W-T’s obligation to pay Hagen for additional work. The Court concluded that while Hagen had proffered evidence that it “frequently, and apparently justifiably, complained to W-T about problems preventing Hagen from executing its work in an efficient manner,” including through conversations, letters and emails, it found no writing in the record that could constitute an actual written claim by Hagen for compensation that provided the detailed information and substantiation required by the Subcontract. Hagen’s “expressions of frustration” and “[g]eneral complaints” of mismanagement did not constitute claims.

The Court also concluded that Hagen’s claim was barred by the Partial Releases it executed throughout the project. Hagen argued that its claim was for work which it was authorized to do, but for which payment had not yet been approved, and therefore, was excepted by the text of the Release. The Court, however, concluded that this exception applied only to extra work which was authorized by W-T and because Hagen’s additional work was not so authorized, it was not excepted from the release. The Court also rejected Hagen’s argument that the release applied only to liens and not claims as “disingenuous,” noting that the text of the release unambiguously included “all claims and demands against Contractor.” By failing to list any exceptions to the Partial Releases, Hagen released its claim for labor inefficiency.

Accordingly, the Court granted W-T’s motion for partial summary judgment, holding that Hagen’s labor inefficiency claim was barred by its failure to give proper and timely notice thereof and by its execution of unqualified Partial Releases.

Reprinted with permission.

John J. Gazzola is an associate in the Construction Law Practice Group of Pepper Hamilton LLP. His practice focuses on litigation associated with construction projects. He represents project owners, EPC contractors, construction managers, general contractors, subcontractors and material suppliers in disputes arising from a wide array of construction projects, including pipelines, mass transit systems and large commercial and residential buildings. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..