eNews May 2, 2019
In the News
May 2, 2019
The combined CMI rose during the month of April, reaching a score of 54, which is up about half a point from March’s index. The manufacturing sector took the biggest hit, while the service sector rose about two points, making up for March’s fallout in the service sector.
“April’s service sector is demonstrating all the growth, while the manufacturing sector slumped,” said NACM Economist Chris Kuehl, Ph.D. “This matches pretty well with other data that has been coming in from the data analysts.”
When looking at the favorables, sales remained comfortably in expansion territory—any reading above 50—at 61, recovering from March’s 58.2 reading. Every other category in the favorables sits comfortably in expansion for April, and the lowest reading sits with dollar collections at 59.1, which is still in expansion.
The unfavorables struggled to stay in expansion in April with the combined readings coming to exactly 50, up one-tenth of a point from March. Only filings for bankruptcies and rejections of credit applications remained in expansion during April. Dollar amount beyond terms saw the biggest slump, dropping to just over 47 from 50 in March.
“By and large, the readings improved this month, but the real news has been the changing position of manufacturing and service sectors,” Kuehl said. “At this stage, it is not clear what is causing the shifts in these sectors, and it is certainly too early to identify any kind of a trend.”
Kuehl said many of the readings in manufacturing have been within the range of 55 to 57 throughout the last few months, but the April reading came in at 53.7—lower than anticipated and lower than observed as of late. Both favorables and unfavorables still sit in expansion, with favorables at 58.9—the first time the reading fell below 60 since January. Unfavorables fell to 50.2.
The service sector bounced back in April after worrying credit professionals in March. The combined reading came to 54.4, up about two points from the previous month. Kuehl said much of the growth came from retail, pointing toward the sales sector climbing from 58 to 63.4. Favorables reached 61, up about three points from March, and unfavorables saw a climb as well, up by about a point. However, unfavorables still sit in contraction at 49.8.
“The good news is that unemployment numbers are still encouraging and there have been some recent pay hikes. The tax cut enthusiasm of last year has faded, but so has fear of rapid inflation and a subsequent slide into recession,” Kuehl said. “On the negative side, there are signs that housing and automotive are stalling as far as economic drivers, while the trade war has started to affect the consumer.”
—Christie Citranglo, editorial associate
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Just as Jeff Goldblum’s Dr. Ian Malcolm knew “life finds a way” to adapt to the environment in the Steven Spielberg classic, “Jurassic Park,” today’s credit managers are learning fraud finds a way to overcome security measures in the credit department. Although businesses are ways away from eliminating fraudulent activity altogether, there are tactics credit departments can implement to shield accounts from the perils of fraud.
According to the Association of Finance Professionals’ (AFP) 2019 Payments Fraud and Control Survey, the number of payments fraud incidents increased 7% in the past year, an alarming 87% of large companies (revenues of more than $1 billion) falling victim to scams. Fraudulent emails were at the heart of these increased scams, affecting 80% of respondents, with more than half of respondents suffering a financial impact.
“Payments fraud is a persistent problem that is only getting worse despite repeated warnings and educational outreach,” AFP President and CEO Jim Kaitz said in the report. “Treasury and finance professionals need to learn the latest scams and educate themselves—and perhaps more importantly—their work colleagues on how to prevent them.”
Understanding business email compromise fraud (BEC) is one of the first steps companies can take to increase fraud awareness. The Federal Bureau of Investigation explained BEC is four steps, beginning with the fraudster’s identification of its target, i.e., a business. Criminals may then use fake email accounts or websites, spear-phishing or malware to learn information about a business in order to gain an employee’s trust. An unknowing employee may see this as a legitimate transaction and exchange financial information, therefore, falling victim to the fraudster’s scheme.
Steve LaFalce, national credit manager at EIS, Inc., in Atlanta, Georgia, said he recently experienced fraudulent activity in his department in the form of phishing. According to Phishing.org, this cybercrime occurs when an email, phone call or text message is used to obtain banking information and/or usernames and passwords, typically leading to financial ramifications. In his case, LaFalce received an email that asked for his help.
“Have you got a minute?” the email states. “I need you to complete a task for me discreetly. P.S. I am in a meeting now and can’t talk, so just reply back. Thanks, Robert.”
LaFalce said he knew the email was fraudulent when he saw it was signed by the company’s former CEO, an individual who LaFalce noted would not reach out to him in such a manner. EIS strives to keep employees aware of what to look for in potentially fraudulent activity, requiring employees to complete security training quizzes.
“There are raffled prizes, so [the IT department] tries to make it fun,” LaFalce said. “From a credit perspective, we have bogus customers attempt to buy material. It works occasionally, and we don’t realize it is fraud until the bill comes due. The sales force has become pretty adept at sniffing these out on the front end and engaging one of our credit managers for a second set of eyes, if needed.”
Communication between the credit and sales department benefits the company, he added. A few times a year, LaFalce said, he will send an email to the sales team as a reminder of ongoing scams. Red flags include bad grammar or broken English, vague or probing requests, and incorrect syntax in the email address.
“If something doesn’t seem right, dig a little, and reach out to your credit manager if you need help,” LaFalce said. “Not all transactions that have these red flags are fraud.”
—Andrew Michaels, editorial associate
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The United Kingdom is cracking down on multiple businesses for failing to uphold prompt payment standards. A dozen businesses were suspended from the Prompt Payment Code (PPC), while five were removed from the PPC altogether for noncompliance. One company, The Go-Ahead Group, was reinstated to the Code.
The quarterly update from the Chartered Institute of Credit Management (CICM) announced the failures for the past quarter late last month. The Code is administered on behalf of the U.K. government by CICM, and companies must be committed to paying 95% of supplier invoices within 60 days.
DHL and Twining and Company Limited were among the five companies removed from the Code for their noncompliance and for not having a plan in place to meet the terms of the Code. The Go-Ahead Group was reinstated because it filed data to show how it was paying 95% of invoices within 60 days. Rolls-Royce and Balfour Beatty were among the dozen firms suspended for not meeting payment expectations; however, they are all committed to meet PPC terms in the future.
“The Board is disappointed with the actions of a minority who continue to treat their suppliers unfairly, and has no satisfaction in having to name them publicly,” said CICM Chief Executive and PPC Board Chair Philip King in a release. “As part of our work driving culture change to end late payments, we will continue to challenge signatories to the Code if the obligatory Payment Practice Reporting data suggests that their practices are not compliant with the Code.”
Rolls-Royce said in a statement, “The significant volume of invoices we receive from our large suppliers—and the removal of the consideration of our preferential treatment for smaller suppliers—has pushed us below the compliance criteria…” They did announce they pay roughly 90% of invoices on time; however, that is below the 95% required by the PPC, and it’s unknown if that is within 60 days also spelled out by the Code.
Companies that fail to meet prompt payment standards could also soon be missing out on large government contracts. Starting Sept. 1, suppliers bidding on contracts over 5 million pounds will be required to reveal payment practices and performances with the expectation to follow the 95%/60-day rule. “Any supplier who is unable to demonstrate that they have systems in place that are effective and ensure a fair and responsible approach to payment of their supply chain may be excluded from bidding,” the CICM release states.
“We remain committed to supporting small businesses against poor payment practice and are delighted to see that the Prompt Payment Code Compliance Board has acted to expose those whose payment practices fall outside of their obligations to treat suppliers fairly,” said Minister for Small Business Kelly Tolhurst in the release.
—Michael Miller, managing editor
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There is no magic language or legalese that is required for a financing statement collateral description. Under the Uniform Commercial Code (“UCC”) (which is identical in most states), a description of collateral in a financing statement “is sufficient, whether or not it is specific, if it reasonably identifies what is described.” Furthermore, even if there are errors or omissions in the collateral description, the financing statement can still be effective—unless the errors or omissions make the financing statement “seriously misleading.”
Fortunately, the policy behind the law governing secured transactions under the UCC explains financing statements are meant to simply provide notice of the transaction and give enough information to subsequent potential creditors that the debtor’s property may be covered by a prior creditor’s security interest. Essentially, a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.
In re 8760 Service Group, LLC is a clear illustration of how the liberal policy behind the law governing UCC financing statement collateral descriptions functions in an actual dispute. U.S. Bankruptcy Judge Dennis Dow faced the issue of whether an “address restrictor”—including a specific address location within the collateral description—rendered a financing statement defective to the point where it was considered seriously misleading.
In the case, the financing statement of the prior-filed creditor described the collateral as “All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.” The debtor and subsequent-filed secured creditor argued that the financing statement was seriously misleading because the inclusion of the address limited the scope of the collateral to only property located at the address contained in the collateral description.
Citing to the prevailing law, Judge Dow noted that the “UCC does not require a perfect collateral description,” but rather “only an ‘indication’ of such coverage.” Furthermore, Judge Dow held that if there is ambiguity in the interpretation of the property description of a financing statement, the subsequent creditor is on notice that the property may be the collateral of the prior-filed creditor, and “the burden is on the subsequent creditor to inquire further.”
In an interesting twist, Judge Dow found that the existence of an ambiguity in the collateral description of the financing statement did not prejudice the prior-filed creditor, but instead, provided sufficient notice to the subsequent-filed creditor to impose a duty of further inquiry into the nature of the secured transaction covered under the financing statement. Judge Dow pointed out that the court does not employ traditional means of statutory construction in analyzing an ambiguous financing statement because the court does not proceed to interpret the language. Instead, the court inquires whether the financing statement sufficiently describes the collateral such that “the subsequent creditor should have been on notice to inquire further into the collateral.”
While it is important to prepare financing statements clearly and correctly, the policy with respect to financing statement collateral descriptions under the UCC is meant to be flexible and fundamentally fair. Unlike the wisdom of Mrs. Gump’s, “Stupid is as stupid does,” in the film, “Forrest Gump,” some careless errors in financing statement collateral descriptions can be overcome to save the priority position of a prior-filed secured creditor.
In contrast, the UCC policies of flexibility and fairness shown in 8760 Service Group are lost on the former secured creditors of General Motors. The mistaken termination of a financing statement can have catastrophic consequences. See, e.g., In re Motors Liquidation Co., 777 F.3d 100 (2d. Cir. 2015) (erroneous filing of termination statement that related to collateral given in connection with unrelated loan, other than that which Chapter 11 debtor was paying off, resulted in debtor's indebtedness of roughly $1.5 billion on this other loan being unsecured).
Reprinted with permission.
Frank Buckley is a partner with Thompson Coburn LLP and maintains offices in Chicago and St. Louis. His practice emphasizes business bankruptcy, insolvency, reorganization and creditors' rights. He represents financial institutions, lessors and creditors in a wide range of matters but has developed particular expertise in the area of motor vehicle and equipment floor plan and troubled credit issues.
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