eNews May 9, 2019
In the News
May 9, 2019
“Doveryai, no proveryai.” Those keeping up on their Russian may know this to be the famous saying from President Ronald Reagan, “trust, but verify,” translated from the Russian proverb. While the Reagan administration was focused on tearing down walls, it’s also important to know how they were built and the background of their construction. Information surrounding construction projects can often be scarce, so it is the job of material suppliers and others within the project’s supply chain to uncover this data and put it to good use.
One of the first questions a construction creditor can ask a potential customer, whether they are a subcontractor, general contractor, etc., is, “Who owns the property?” This question refers to the actual land of the project and not the building; however, they could be the same entity. In real estate, it’s all about “location, location, location,” but the same can be said for construction. Knowing where the project is located and who owns that land is of the greatest importance since it tells unsecured creditors and others looking for payment what type of security they can use.
A prime example of this is the nearly finished luxury hotel at San Francisco International Airport: Grand Hyatt at SFO. This 12-story, 351-room hotel is slated to open in July after breaking ground in 2016. So, what type of project is this? Private, public, federal? On the surface, with some basic information gathered by material suppliers and others with a potential to file a mechanic’s lien or bond claim, it may seem this is a Hyatt hotel owned by the corporation. However, without all the facts, those potential lien claimants would be left in the dust and without payment if they started the lien process.
With a little searching of their own (verifying what the customer has told them), it would be learned this $237 million project is actually airport-owned, i.e., a public project since the airport is owned by the city and county of San Francisco. With that said, mechanic’s liens are not valid on public land, leaving a claim against a bond, if there is one, one way of becoming secured as long as the statutory deadlines are met (20-day preliminary notice to original contractor, etc.).
Another potential way claimants can become secured is through a lien on funds known as a stop notice in California. This tool is available in a handful of states—Colorado, Illinois and New York, among others—known by different names including public improvement lien. The stop notice puts a lien on unpaid funds between the owner and the prime contractor, once again, as long as the statutory guidelines are met. Claimants must give a withholding notice to the original contractor and the public agency within 20 days of first furnishing, with the stop payment notice and possible suit action to follow if nonpayment continues.
—Michael Miller, managing editor
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For credit managers, late payments have always been a problem in the world of business-to-business credit. Sometimes, customers cite their forgetful nature, while others try to stretch the same payment terms they initially agreed upon at the beginning of the transaction. No matter the reasons behind late payments, organizations around the globe are taking a stand to address late-paying customers, one of the more recent cases taking place in the United Kingdom.
Late payments struck a cord in the U.K. construction industry in 2018 when construction company Carillion collapsed, leaving thousands of suppliers without payment. Now, the discussion of how to tackle late payers was reignited with the collapse of Welsh construction company Dawnus in March. According to the BBC, current Welsh government policy “requires all public construction projects worth more than $2.6 million to disburse payouts to subcontractors from project bank accounts (PBAs)” rather than have large companies disburse payments to the lower-tier parties. However, the Federation of Master Builders (FMB) said this policy doesn’t, but should, protect suppliers with lesser financial involvement.
“Poor payment practices amongst many large construction firms are rife—project bank accounts have the potential to curb some of that behavior, but currently, it’s only Welsh government projects over the value of £2m when they are mandated,” FMB Director Ifan Glyn said in the BBC article. “We would like to see that threshold potentially lowered and look at extending that to other public sector contracts and, long term, rolling it out across the private sector too.”
PBAs are relatively new in Wales, with only one project having used it. England and Scotland, however, have used PBAs for much longer, the BBC states.
FCIB’s International Credit and Collections U.K. survey for March 2019 indicates troublesome cash flow is often behind late payments, affecting 27% of customers, followed by 27% affected by billing disputes and 16% affected by customer payment policy. In a prior survey, in April 2018, only 9% of respondents felt payment delays were increasing. More than a year later, 16% more respondents saw an increase in payment delays.
“[Late payments are] probably equal [between] cash flow and cultural norms,” a respondent said in the April 2018 survey. “They will only typically pay at the end of the month or the 15th of the month and will not typically pay invoices early to account for their internal processes. As everywhere, you always end up with some customers that have cash flow issues.”
Another respondent expressed similar sentiments in March 2019, saying, “We have noticed a cultural tendency to pay late on terms (90 days late with unsubstantiated dispute and/or no explanation).”
When asked about the average payment terms granted, more than half of respondents said they offer 31- to 60-day terms, while 41% offer zero- to 30-day terms. The remaining 8% said they offer 61- to 90-day terms.
“Be clear on terms and resolve any disputes promptly,” said one respondent regarding advice to selling into the U.K. “Don't sit on disputes. It’s a pleasure to deal in the U.K. You will have no challenges in collecting if you are clear on what you want initially.”
—Andrew Michaels, editorial associate
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The U.S. and China trade war continues, this time with the U.S. threatening to raise tariffs from 10% on $200 billion worth of Chinese goods up to 25% by May 10. The Office of the United States Trade Representative released an official statement May 8 saying the 15% hike will take place. This decision is one of the largest tariff increases to date, according to a release from Wells Fargo.
Chinese and U.S. representatives met during the week of May 6 to negotiate in Washington, DC; this comes after recent trade talks in Beijing between the two countries. The exact goods that will be tariffed still have not been disclosed, leaving economists and credit managers guessing, while customers will likely continue to over buy products amid the fear of the tariffs.
“A lot of companies started doing inventory over-order, and that’s where the biggest impact will fall onto credit managers, since there’s more preparation for tariffs,” said NACM Economist Chris Kuehl, Ph.D. “Companies are buying a lot more than they normally do, both on the Chinese and American sides.”
With the tariffs set to increase, Kuehl said credit managers should analyze customers with a more critical eye than usual should their companies be affected by the tariffs. Creditors should consider that their customers may be over-stretching their dollars to avoid the fallout from the tariffs, and they may not be able to handle the amount of inventory they are about to purchase.
Many companies—according to a report from Wells Fargo and an analysis from Kuehl—continue to absorb the costs of the tariffs rather than pass the extra expenses onto the consumer. While Kuehl said most companies have margins to work with on the consumer side, the companies will still have less money in their accounts, which may also be a factor in determining if a customer is able or willing to pay for goods.
“It doesn’t help when Trump lies and says the Chinese are going to pay the U.S.—no, they’re not, that’s not how tariffs work,” Kuehl said. “Tariffs are going to raise the prices on the consumer, so people get the wrong idea. Companies are going to have to make a choice: They’re either going to have to raise the prices if they think the consumers can handle it, but more often than not, they absorb part of it.”
Different companies will be making decisions throughout the next few weeks and days, and Kuehl advised credit managers to remain mindful of how these tariffs will be affecting their customers and their business as well.
“You have to prepare for the worst,” Kuehl said. “But you also have to be ready for this all to be smoke and mirrors again.”
—Christie Citranglo, editorial associate
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[On May 2], the Ninth Circuit Court of Appeals issued its long-awaited ruling in the Gregory Garvin v. Cook Investments, NW, SPNWY case. This opinion is certain to be of great interest to both companies operating in the cannabis space and those attorneys representing them.
In Garvin, the U.S. Trustee appealed confirmation of a plan of reorganization under which one of the debtors leased property to a marijuana grower licensed under Washington law. The U.S. Trustee argued that the plan should not have been confirmed because it was proposed by means forbidden by law in violation of Section 1129(a)(3) of the Bankruptcy Code since the lease to the grower violated federal drug law, i.e., the Controlled Substances Act.
The Ninth Circuit rejected the U.S. Trustee’s argument, holding that Section 1129(a)(3) forbids confirmation of a plan that is proposed in an unlawful manner, but does not forbid confirmation of a plan that has substantive provisions that depend on illegality. In other words, Section 1129(a)(3) requires the court only to look at the proposal of a plan and not the terms of the plan. Because there was nothing in the proposal of the plan at issue that was unlawful, the Ninth Circuit affirmed the orders of the District Court and Bankruptcy Court confirming the plan.
Nonetheless, the Court’s ruling is not a complete victory for the cannabis industry. Courts may still consider whether cannabis companies are engaged in “gross mismanagement” under Section 1112(b) of the Bankruptcy Code by virtue of their cannabis-related work. In this case, the U.S. Trustee had waived its argument under Section 1112(b). Moreover, the Ninth Circuit made clear that confirmation of a plan does not insulate a debtor from prosecution for criminal activity, even if that criminal activity is part of the plan itself. Thus, while the Garvin opinion provides some comfort to cannabis companies and their insolvency counsel, it does not cure the tension that exists between state law legalizing cannabis and the Controlled Substances Act.
Reprinted with permission.
Mark Salzberg, Esq., is a partner in Squire Patton Boggs’ Washington, DC, office and a member of the firm’s Restructuring & Insolvency practice group. He focuses his practice on bankruptcy litigation, creditors’ rights, debtor reorganizations and complex commercial litigation.
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