eNews July 18, 2019
In the News
July 18, 2019
Some of the largest banks in the U.S. are pulling back on loans in the farm sector. JPMorgan Chase & Co. was among the banks named in a recent report from Reuters, which states Wall Street banks have reduced their loan portfolios in the U.S. farm sector following years of growth after the Great Recession. This is in part due to the farming crisis this year among other items, including protectionist tariffs and the trade war with China.
“The reason big banks are pushing away this year is because of the problems in agriculture—extremely wet weather in the Midwest,” said Larry O’Brien, CCE, ICCE, senior director of corporate credit with Nutrien. According to Reuters, loan portfolios of the top 30 banks fell nearly $4 billion between December 2015 and March 2019, a 17.5% decline. Total farm debt is on pace to increase $110 billion this year to $427 billion. However, Reuters states, farm credit is still growing, citing surveys from several Federal Reserve Banks.
“Ten years ago, banks had a tough time lending as many industries were suffering, but ag was doing really well,” said Brendon Misik, CCE, CICP, area credit manager with Nutrien. He was hesitant to say big banks were completely backing out of farming altogether but did mention there is a reduction in dollars. “Today, ag has had its issues, but I don’t think Wall Street banks are necessarily pulling back, just finally getting back to diversifying their portfolios.”
“It seems logical for banks to pull back on lending. It’s a tougher year for the ag sector; crops were planted late and some weren’t planted at all,” O’Brien said. Corn and soybeans did not go in at the proper time due to the weather, resulting in a potential for some type of financial shortfall in the ag sector.
“At the farmer level, a lot still get financing through banks, but more and more are going to other formats since it’s easier and more convenient to get credit from where they buy products,” O’Brien said. “Many larger players in the industry with big balance sheets are having their own financing arms to lend directly to farmers,” added Misik. This is exactly what Nutrien is beginning to do—establish a captive finance company on the retail side.
Another aspect hurting the farm sector are tariffs. While farmers in general are “pretty supportive of tariffs since the Chinese government has taken advantages over the years,” O’Brien said, tariffs hurt the corn and soybean market. Prices of soybeans and corn went down prior to the planting season, and now, there is an uptick in corn pricing with the lower supply from the wet fields. “It’s a mixed bag,” O’Brien said of the tariffs. The soybean market is going to be tough since China has stepped back its importation, but the product is going to other places such as Mexico and Canada. With the “glut” of soybeans, as O’Brien called it, farmers will begin to store the product on the farm and wait until the price gets better to sell.
—Michael Miller, managing editor
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Cash may be king, but according to a recent survey in PYMNTS’ Payables Friction Playbook, paper checks remain the No. 1 payment method by accounts payable (AP) departments—substantially. More than 80% of the AP professionals surveyed use paper checks to pay invoices, despite paper checks being the penultimate preferred method, followed by cryptocurrency.
Of the 2,570 AP professionals surveyed, those with 20,000 or more invoices a month were more likely to pay invoices with paper checks than ACH. Given the number of invoices being processed, using paper checks presumably creates a much slower process than ACH would.
While AP and credit are separate entities in many companies, Douglas Dunlap, CCE, director of credit to cash and treasury operations with Basic Energy Services, said both AP and accounts receivable (AR) have faced similar challenges in transitioning customers and vendors from paper checks to ACH. Dunlap, who oversees both AP and AR, said his company prefers to process ACH payments over paper checks for the sake of efficiency, but certainly not all of his customers and vendors pay with ACH.
“We would like to eliminate checks from an AP point of view, but that will never happen. We will never get 100%, at least not any time soon,” Dunlap said. “It might get to a point where it’s less than 50%, but it’s going to be a while before we see that.”
Some of the pushback comes from a disconnect with remittance advice when using ACH, Dunlap said. Up until recently, banks would charge a significant fee to provide corporate trade exchange information (CTX) along with the ACH process. Now, the fees are “almost the same or a few pennies,” Dunlap said, allowing creditors and AP professionals to more easily make the transition from physical checks to ACH.
Many smaller companies still prefer to pay with paper checks as opposed to ACH, which also creates some hesitation.
Banks also play a key role in the transition from paper to digital. The undertaking of keeping lockboxes, processing checks and providing services for paper checks allows banks to earn extra income, where some of that revenue is lost on ACH payments.
While many companies are moving in the direction of ACH payments, it will continue to be a slow process for both credit and AP.
“As time goes on, I do believe we are going to see the amount of checks decreasing, but I believe that’s going to be a very slow and gradual fall off,” Dunlap said. “And it’s going to be quite some time before it ever goes away.”
—Christie Citranglo, editorial associate
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When someone chooses a mechanic to work on their car or hires a babysitter to watch their children, one hopes these decisions were made after a thorough review of both parties’ backgrounds to ensure the business or individual’s services are legitimate. So, why wouldn’t a credit manager conduct the same due diligence when they select a service vendor on behalf of their company?
Vendor vetting is yet another task on the laundry list of any credit manager’s duties. Its importance is reflected in the well-being of the credit department and company, both of which will suffer if proper precautions are not in place. CIC Credit Account Executive Blake Browder used the example of a data breach with online customer service software 7.ai that occurred in late September and early October 2017.
7.ai was working with large, well-known organizations, including Delta, Best Buy and Kmart, when a data breach compromised the payment information of any customer who completed a transaction using those businesses’ websites. However, 7.ai did not notify the businesses of the breach until April 2018.
“Did they not have a response plan if something like that were to happen?” Browder asked the crowd during his presentation, “Vendor Vetting: Why Screen Your Service Vendors?” during NACM’s 123rd annual Credit Congress in May. “Know who you are working with and make sure they’re open and don’t have any skeletons in their closet that you might need to know about. There are a lot of different questions you can ask when bringing on a new vendor or service provider.”
Some companies still struggle with proper vendor vetting. In January 2019, travel technology company Sabre Airline Solutions fell victim to fraud when authorities learned an executive had created 78 false invoices from a fake vendor to embezzle nearly $6 million over four years, according to the Fort Worth Star-Telegram. Although the former employee had the power to approve the invoices for payment and, therefore, hide the fraudulent activity, it’s reasonable to question whether this would’ve happened had another employee or department exercised a vendor-vetting process.
It’s all about risk management, Browder said. Just as companies run background checks on potential hires, vendors should undergo the same process. Background checks can reveal information that will weigh heavily on a company’s decision to use a vendor, including whether the vendor is on a watch list or sanction list.
“When you start the process, are [vendors] even willing to be screened?” Browder said. “If they’re not willing to be upfront with you when you ask for their policies and procedures and they’re like, ‘Hold on, let me put that together’—that’s not a good sign. Why wouldn’t they be available for a screening? That’s a red flag.”
Even when the vetting process is complete, Browder said, “the job isn’t done.” Companies must monitor their vendors, especially when they handle company data such as customer’s payment information.
“Check the legitimacy of the business,” he said. “An easy way to screen is to pull a business credit report. Check their financial stability and see how they’re trending. It’s 2019; you can search for anything.”
—Andrew Michaels, editorial associate
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In City Electric Supply Co. v. Arch Insurance Co., the Supreme Judicial Court (SJC) vacated a decision of Norfolk Superior Court—refusing to apply the recording requirement of G.L. c. 254 § 5 to G.L. c. 254 § 14.
The plaintiff in City Electric supplied electrical materials for a project in Brookline to a subcontractor, and thereafter perfected a mechanic’s lien on the property by recording a notice of contract with the Registry of Deeds. The general contractor subsequently recorded a lien dissolution bond (also referred to as a target lien bond), which dissolves liens already attached to property.
However, when the supplier/lienholder filed a timely enforcement action against the subcontractor and bond surety, the surety moved for summary judgment—arguing that the lienholder had failed to comply with the strict requirements of Section 14 by failing to record an attested to copy of its complaint with the Registry of Deeds. After the Superior Court ruled in favor of the surety on grounds that the recording requirement of Section 5 applies to lien dissolution bonds, the plaintiff appealed to the SJC.
On appeal, the SJC vacated the decision because the plain language of Section 14 does not require that a claimant record an attested to copy of its complaint with the Registry of Deeds. In so holding, the Court compared the requirements of Section 14 to those of Section 12, which covers blanket lien bonds. Since Section 12 explicitly requires such a recording, the Court regarded its omission from Section 14 as purposeful.
The SJC also found that the legislative history of Section 14 further supports this strict interpretation. Specifically, in its 1973 drafting of Section 14, the legislature opted to delete a reference to Section 5, which would have required the recording of an attested to copy of the complaint with the Registry of Deeds.
The Court next addressed the surety’s argument that Section 14 requires the recording of the complaint because it provides that the recording of a lien dissolution bond does “not create any rights which the claimant would not have had, or impair any defense which the obligors would have had, in an action to enforce a lien.” In other words, the surety argued that this verbiage transferred the recording requirement of Section 5 into Section 14. The Court disagreed. Whereas Section 5 provides for the dissolution of a lien where a plaintiff fails to record its complaint, the Court reasoned that actions to enforce lien dissolution bonds address liens that have already been dissolved by the bond. Therefore, the Court found that the surety’s interpretation of Section 14 would render meaningless the language of Section 5 “or such lien shall be dissolved.”
Lastly, the Court reasoned that its interpretation of Section 14 serves the main purpose of the mechanic’s lien statute. Specifically, it found that the terms of the statute provide that once a bond is recorded under Section 14, the lien is dissolved, and any concern about the uncertainty of title arising from that lien is eliminated. Therefore, recording of a complaint to enforce a lien dissolution bond would not support the statute’s purpose of ensuring that a person searching the property’s land records can determine with certainty whether or not the title is encumbered by a mechanic’s lien.
However, in a footnote to its decision, the Court acknowledged the surety’s valid concern that many entities, including the general contractor and other subcontractors, may have an interest in knowing about a lien dissolution bond’s enforcement action. The surety asserted that since such entities are not named as parties to the action, they would not receive service, and therefore would not have knowledge of it. But the Court said resolution of this issue was for the Legislature (not the courts).
This well-reasoned decision from Massachusetts’ highest court provides clarity for contractors seeking to comply with the statute’s requirements in enforcing lien dissolution bonds. However, in light of the previously mentioned footnote to the decision, it will not come as a surprise if the Legislature amends the statute to include a notice or recording requirement in the near future.
Reprinted with permission.
Tony Starr, Esq., is co-chair of the Mintz Construction Law Practice Group and a member of the Litigation Practice. He represents contractors, owners, developers and public authorities across a wide range of construction-related issues in both the public and private sectors.
Kevin Mortimer, Esq., is an associate with experience in an expansive array of litigation matters, including construction, real estate, securities, class action, insurance and complex business litigation.
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