eNews August 15, 2019

In the News

August 15, 2019

Catch Them If You Can: Construction Invoice Mistakes

The Fed Announces Launch of Real-Time Payments Service

New Shipping Regulation Only Months Away

Creditors of LPs or LLCs Lack Standing to Sue Derivatively Under Certain State Laws

Catch Them If You Can: Construction Invoice Mistakes

Everyone makes mistakes. No matter how big or small, errors are bound to happen at some point in the business-to-business credit world. The reality is today’s credit managers can educate themselves by analyzing past mistakes, whether it is their own, a colleague’s or by another company. Invoice mistakes are a prime example, particularly in the construction industry, where an incorrect invoice has the potential to bring a project to its knees.

In Construction Dive’s article, “The Dotted Line: 7 invoice mistakes that waste time, money,” author and Florida-based certified general contractor Kim Slowey explains how invoice mistakes pertain to general contractors (GCs) and subcontractors (subs). However, according to Chris Ring and Connie Baker, CBA, of NACM’s Secured Transactions Services (STS), some of Slowey’s points also pertain to credit managers in the construction industry.

The first bullet point in the article may be one of the most common invoice mistakes: not knowing what’s in the contract. GCs, for example, “need to be aware of the requirements attached to their invoicing procedures with the owner,” the article states. Yet, Ring noted, credit managers require a similar understanding because what’s in the contract is of vital importance.

“The credit department should be reviewing any pay-if-paid and pay-when-paid clauses,” Ring said. “Also, if sales accepts a purchase order and it refers to the ‘plans and specs,’ it may be referring to the terms and conditions of the general contract. There may be liquidated damage clauses and other items that, if not ‘lined out,’ can cause hardships beyond just getting paid. And, obtaining a copy of the general contract is no small task.”

There may also be certain criteria the invoice needs to reflect to get paid, he said. For instance, the creditor could be selling structural steel and the customer needs to be invoiced by the ton and, instead, the seller may be invoicing by the foot.

Unfortunately, most credit teams don’t find out about problems with invoices until after they hear from the customer, said Baker, who is also a former credit manager. At that point, a credit manager may have reached out to the customer to ask why the invoice hasn’t been paid only to then hear the story behind it.

“Maybe the pricing is wrong. Perhaps the customer reached out to sales and sales never fixed the error,” Baker said. “Now, it’s up to the credit team to get the pricing error corrected through sales or convince the customer to make a deduction. If you can’t collect and get reasonably paid on time, the pricing error can ultimately affect your days sales outstanding, aging and average days to pay. It could also require the use of the working capital line of credit, if large enough.”

—Andrew Michaels, editorial associate

Credit Congress Call for Proposals

Call for Proposals—Submit Yours Now

The National Association of Credit Management will hold its 124th Credit Congress & Exposition in Las Vegas, Nevada, from June 14-17, 2020. Please visit creditcongress.nacm.org to fill out the form to submit abstracts, proposed sessions and communications pertaining to participating in the program. Submissions must be made using this form.

Please submit ideas by October 1, 2019. Any proposals that are incomplete or are received after this date will not be considered.

The Fed Announces Launch of Real-Time Payments Service

The Federal Reserve announced Aug. 5 it will be engineering a real-time payments (RTP) service, titled “FedNow.” The service will serve as a rival to The Clearing House, a privately operated RTP service, which currently has no other competitors. FedNow will give creditors more access to RTP options, promising “near-instantaneous” fund transfers 24 hours a day, according to a recent article by Reuters.

FedNow will launch by 2023 or 2024—more than five years after the privately run RTP service’s launch.

“Our payment system is a vital part of America's infrastructure that touches everyone,” said Federal Reserve Governor Lael Brainard during a meeting in Kansas City. “… Through the FedNow service, we will provide a foundation for the future—a modern payment infrastructure that allows innovation and competition to flourish and delivers faster payments safely and securely for all.”

While The Clearing House has provided creditors and consumers with the ability to access payments almost immediately, sending and receiving money can take up to 72 hours without the use of RTP, according to a recent article by CNN. This has left businesses in a state of purgatory, making it more difficult to access funds and more difficult for customers to pay creditors in a timely manner—especially when paying with paper checks.

Many smaller banks supported the idea of FedNow, according to Reuters, as a government-regulated RTP option will keep small banks from having to pay larger banks for RTP. Similarly, larger banks remain skeptical of FedNow, as it would topple the monopoly The Clearing House has created.

“Our focus will remain on ensuring that the RTP network has reach to all depository institutions,” The Clearing House said in a statement about FedNow.

The Fed took public comments into account when building FedNow. The Fed has been studying RTP for a number of years, beginning with a task force launch in 2015. Brainard said 90% of public comments supported the system. She also noted the Fed will still be fielding comments and feedback on FedNow. However, Randal Quarles, the Fed’s vice chair for supervision, voted in opposition of FedNow.

While there has been noted pushback from big banks on this development, other business professionals fear the Fed has stepped into the RTP conversation far too late. And with a 2023 or 2024 launch, FedNow may not provide the impact it intends.

Some of the main challenges with RTP include consumer fees, competing payment alternatives and the consumer-bank relationship battle, according to a recent opinion piece by Ron Shevlin in Forbes.

With a few years until the launch, consumers and businesses have the opportunity to embrace other methods of payments, be it through The Clearing House, blockchain or other FinTech payment methods. It may also buy enough time for more competition to enter the field, competition which may address outlying concerns not explored by any RTP method today.

“Community-based financial institutions are between a rock and a hard place. They can choose to wait for the Fed to develop a system, or participate in The Clearing House,” Shevlin said in his Forbes article. “… Here's hoping for a speedy deployment of FedNow. I can't help but think it should be called FedTooLate.”

—Christie Citranglo, editorial associate

Online Courses

Hurry—Courses Start Soon!

There's still time to sign up for the upcoming fall courses! Give your job performance and prospects a boost. Choose from the many upcoming educational courses we offer:

Fall CBA, CBF & CCRA Courses:

Sep. 3 - Dec. 13, 2019

Business Law
Sep. 9 - Dec. 6, 2019

Credit Law
Sep. 9 - Dec. 6, 2019

International Credit:

International Credit & Risk Management Online Course
Sep. 3 - Dec. 6, 2019

Visit www.nacm.org to learn more and register for classes.

New Shipping Regulation Only Months Away

A new shipping regulation is creeping up in the rearview mirror with just months to comply or face penalties. While the new regulation is aimed at protecting the environment and those living near ports, there are many implications surrounding the new guideline for the amount of sulphur in a ship’s fuel oil.

Krista Gauer, credit analyst with Houston-based O’Rourke Petroleum, has started receiving credit line increase requests, but they’re not detailed in regard to pricing and fuel supply and demand. O’Rourke often gets fuel from the refinery and then supplies it to shipping companies either midstream or dockside. IHS Markit expects low sulphur fuel to be priced at roughly $680 a ton, which is 30% higher than regular fuel.

IMO 2020 goes into effect Jan. 1, 2020, and was established several years ago to reduce air pollution and promote healthy living. The sulphur content in fuel will need to be reduced by about 85% from the current levels (3.5% mass by mass to 0.5% m/m). Penalties for carrying noncompliant fuel oil will take effect March 1, 2020. Liquified natural gas, marine gas oil and scrubbed high sulphur fuel are all alternatives to the current fuel in use. Since Jan. 1, 2015, the Emission Control Areas, such as North America and Northern Europe, have limited sulphur emissions to 0.1%.

“There is no free ride to reducing emissions,” states an IHS Markit report, referring to the cost of using safer fuel. Depending on several factors, including the size of the ship, the total cost per ship of scrubbing high sulphur fuel ranges between $2 million and $8 million. “The volatility in prices will create trading opportunities and fuel consumers will need increased credit lines from fuel producers,” said Aftab Saleem, director of risk analytics advisory with KPMG, in a Forbes article.

Gauer started receiving the requests in the last several weeks. She did preliminary credit bumps in March and April prior to the initial requests due to IMO 2020, but she expects the credit line increases to continue as 2020 nears. IHS Markit expects upward of 90% of ships to comply with IMO 2020; however, there is already one country that will not. Indonesia announced in late July it will not enforce IMO 2020.

“Fuel prices for fuel with a maximum of 0.5% is more expensive and will increase operational costs of the ship, that will affect the logistics costs and prices of goods,” said a Ministry of Transportation official, according to Reuters. The country will allow ships flying the Indonesian flag to continue using fuel with a maximum of 3.5% m/m within territorial waters.

—Michael Miller, managing editor

FCIB Summit
Connect With Someone Who Could Impact Your Career

FCIB’s International Credit & Risk Management Summit in Hamburg, Germany, provides an opportunity to learn and grow with like-minded people and industry peers. Be a part of it and hear from the presenters about new techniques and technology while also taking advantage of the many opportunities to ask questions and build on discussions. In the expo, learn about products and services that support your profession by speaking with exhibitors and asking questions about industry trends and today’s business climate.

Strengthen your career and your company by attending this year’s International Credit & Risk Management Summit in Hamburg.

Learn more and register at www.fcibglobal.com/summit-home.html.

Creditors of LPs or LLCs Lack Standing to Sue Derivatively Under Certain State Laws

The Bottom Line

In Gavin/Solmonese LLC, Liquidation Trustee for the Citadel Creditors’ Grantor Trust, successor to Citadel Watford City Disposal Partners, L.P., et al. v. Citadel Energy Partners, LLC, et al., Ch. 11 Case No. 15-11323; Adv. Proc. No. 17-50024 (Bankr. D. Del. May 2, 2019) (“Citadel”), the Bankruptcy Court for the District of Delaware held that creditors of insolvent limited partnerships and limited liability companies do not have standing to sue derivatively on behalf of the company under applicable state law.

What Happened?

The debtors, consisting of four entities formed under the laws of different states—Citadel Watford City Disposal Partners, LP (Delaware), Citadel Energy SWD Holdings LLC (North Dakota), Citadel Energy Services LLC (Wyoming) and Pembroke Fields LLC (North Dakota)—filed voluntary Chapter 11 petitions. The Official Committee of Unsecured Creditors (the “Committee”) commenced an adversary proceeding by filing a complaint (the “Complaint”) against general partner Mark Dunaway (“Dunaway”) for breach of fiduciary duty. After a Chapter 11 plan of liquidation was confirmed and the Committee was dissolved, the court granted the Liquidation Trustee’s motion to amend the caption on the Complaint (the “Amended Complaint”) and substitute the Liquidation Trustee as plaintiff instead of the Committee. Dunaway then filed a motion to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6). The Liquidation Trustee objected. The court entered an order denying the Dunaway motion, but granted the movants, including Dunaway, leave to file motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) (providing that a court may dismiss a complaint for lack of subject matter jurisdiction).

In two recent decisions from the Bankruptcy Court for the District of Delaware, the court held that under Delaware law, creditors of insolvent limited liability companies do not have standing to sue derivatively on behalf of the company. In In re HH Liquidation, the court held that “distinguishing between insolvent corporations, where creditors can sue derivatively, and insolvent LLCs, where they cannot, does not produce an absurd result as different legal principles apply to different corporate entities.” 590 B.R. 211, 283-85 (Bankr. D. Del. 2018). The court in In re PennySaver USA Publishing, LLC reached the same conclusion, while recognizing the confusion between the different treatment of corporations and LLCs. 587 B.R. 445, 466-67 (Bankr. D. Del. 2018).

Importantly, the Delaware Limited Liability Company Act and the Delaware Limited Partnership Act contain substantially similar provisions regarding standing, the only difference being substituting terms relevant to the entity, such as “member” for “partner” and “limited liability company” for “limited partnership.” See 6 Del. C. §§ 17-1001, 17-1002; 6 Del. C. § 18-1001; 6 Del. C. § 18-1002.

Following the Delaware precedent and recognizing the similarities between the standing provisions of the Delaware Limited Partnership Act and the Delaware Limited Liability Company Act, the Citadel court held the same result should apply to limited partnerships, and thus the Committee does not have derivative standing under Delaware law. Moreover, because the Wyoming and North Dakota derivative statutes are also substantially similar to that of Delaware, the court dismissed the remaining claims regarding fiduciary duties for lack of standing as well.

Why This Case Is Interesting

This case follows recent Delaware precedent—In re HH Liquidation and In re PennySaver USA Publishing, LLC—in holding that creditors of insolvent limited partnerships and limited liability companies lack standing to sue derivatively on behalf of the company. This case confirms that the same standing requirements for limited liability companies apply to limited partnerships as well. Notably, the court points out that LP and LLC creditors are presumed to be capable of protecting themselves through the contractual agreements that govern their relationships. Creditors’ committees and liquidating trustees (or other persons tasked with pursuing estate causes of action) should be aware of these decisions to ensure valuable assets preserved for the benefit of creditors can be liquidated and realized.

Reprinted with permission.

Nancy M. Bello, Esq., works on corporate restructuring and bankruptcy matters. She is an associate with Kramer Levin Naftalis & Frankel LLP in New York, New York.

Fall Conferences

Network and Learn With Credit Professionals in Your Region

NACM's fall conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.

Central Credit Conference
September 11-12, 2019
Orlando's Banquet & Event Center
Maryland Heights, MO
Hosted by: NACM Connect - Gateway Region

All South Credit Conference
September 22-24, 2019
Hyatt Regency San Antonio Riverwalk
San Antonio, TX
Hosted by: NACM Southwest

Western Credit Conference and CFDD National Conference
October 23-25, 2019
Sheraton Portland Airport Hotel
Portland, OR
Hosted by: NACM Commercial Services in partnership with CFDD National

For more information and to register, contact the local Affiliate or visit nacm.org/regional-conferences.