eNews July 9
In the News
July 9, 2020
|I. Avoid Name Discrepancies on Security Agreements|
|II. Current Economic Climate Eases Many Companies into Digitization|
Avoid Name Discrepancies on Security Agreements
—Michael Miller, managing editor
Accuracy is key in the credit industry as it is in many aspects of life. Being successful 30% of the time at hitting a baseball can land a player in the Hall of Fame, but only successfully taking risks or being paid 30% of the time in credit can lead to disaster. The best way to ensure 100% accuracy in credit is to verify the item in question.
One situation where 100% accuracy matters the most is when filing under the Uniform Commercial Code (UCC) to become a secured creditor. A creditor’s security agreement and the UCC-1 financing statement must have the exact same debtor name. And creditors must have both documents: the security agreement and the UCC-1 financing statement—one or the other won’t do. Chris Ring of NACM’s Secured Transaction Services likened this to owning a home. “You sign a loan document with the intent of borrowing money to buy a house. That document can be signed, but if the bank does not have the required specific language in the loan agreement to allow them to place the mortgage on your house, then they legally can’t do it.
It’s similar on the UCC side related to the security agreement. The security agreement must contain a granting clause and define what collateral is being pledged as collateral. The required security language can appear in a credit application, vendor agreement, sales agreement, etc. It’s not about what the document is labeled; the important aspect is the language. UCC filings are consensual and must have the consent language for the debtor to explicitly consent to allowing the creditor to have a secured position and explain what the security interest is in.
The problem with nonmatching documents means the creditor could be left in an unsecured position—that’s how important the details are. “The devil is in the details, and the lack of attention to detail often comes to light during a default or bankruptcy. That’s the worst time to find out there is a flaw in the process,” Ring said.
A credit department not doing its due diligence is no excuse when a simple information check can help avoid any issues. One common reason why names don’t match on the two documents is because the language is in the credit application and the name and address of the customer is a “fill-in-the-blank” section. The sales rep “fills” in that section but has not verified the corporate legal name and uses a doing-business-as name. The UCC-1 is filed with the correct corporate legal name, but the name is not correct on the “agreement.” The names have to match. A good rule of thumb is to verify the correct corporate legal name and use that name on any legal documents (e.g. Credit App, Sales agreement, etc.) prior to extending credit.
How do you verify a corporate legal name? For registered entities, a common practice is to use the Secretary of State. But beware, in 2013 Revised Article 9 states that you must verify the corporate legal name of a registered entity via the “organic record.” This means you have to use the name on the formation document, e.g., articles of incorporation. Simply cutting and pasting the name from the Secretary of State database is not an option. You have to pull formation documents. Some Secretaries of State allow you to view these documents for little or no charge, but others charge a hefty fee.
Ways to rectify the name discrepancy include having the customer sign a new security agreement to amend it or amend the UCC-1 financing statement. The problem with this is that if there winds up being a bankruptcy, the potential of preference laws come into effect.
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Current Economic Climate Eases
Many Companies into Digitization
—Andrew Michaels, editorial associate
We are living in a digital world where pretty much anything is available at the click of a button. People are switching from brick-and-mortar stores to online shopping, while also ditching cash and checks for credit/debit cards through online payment portals. Although some adopted these methods long ago, many business credit professionals find themselves and their companies somewhere in the transition phase. According to Diana Eagen and Frank Cook, both with automation software solution company Esker, the current economic climate has eased more credit departments into the digital era when many don’t have a choice but to work from home.
During the duo’s Credit Congress educational session, “Building a Business Case & Managing Change in a Digital World,” Eagen and Cook walked viewers through the process of why digitization in the credit department is important, but also how to maintain the technological processes once they’re underway. In an interview with NACM, Eagen said the first step to bringing any level of digital transformation into an organization or making any new investments into technology is the development of “rock-solid business case.”
There are a lot of common payment processes that aren’t seen in all companies, such as e-invoicing, billing and dunning, and online self-service payment portals. Eagen said companies may feel they have gone electronic or have handled payments in a digital way because they have a lockbox service or ACH. Although those companies might get their reporting online every day on ACH payments that have been made, that doesn’t exactly mean they have a digital process.
“A lot of organizations are still having to manually print out deposit reports and then manually match payer and payee receipts for the appropriate invoices for the cash application,” she said. “A lot of the old [processes] still exist, but people are realizing there’s even more beyond what they’re currently getting.”
Digitization is a good step forward, Cook added, especially in an industry that’s remained largely the same during the whole technological revolution in the past couple of decades. A lot of companies are managing change from a paper process to a more digital paradigm. This includes a primary focus on the order-to-cash cycle, which Eagen said starts with digitizing the order process. Order-to-cash can begin with accepting a sales order in any format, but then digitally capturing the information off of any formatted document and validating it against the organization’s material master and terms for accuracy before that order is even submitted.”
Invoicing automation can then get kicked off and intelligently send an invoice to the customer in the delivery method of the customer’s choice. For most organizations, Eagen said there’s an easy online option where payment is there and customers can manage multiple payment types, like virtual wallets, and turn over the payment process to potentially set up the customer with reoccurring payments or autopayments or their own ACH.
“There’s no better time to look at this process because of the sheer amount of benefits it’s providing,” Eagen said. “Companies can save money throughout the payment cycle. Receiving physical checks cost twice as much as it would to process that same payment electronically. Companies that have digitized this workflow are able to track and know in real-time when payments are approved and paid and, obviously, save themselves time to focus on more important tasks. Ultimately, it cuts down on errors.”
Cook described today’s current economic climate as a “strike-while-the-iron-is-hot situation” because of the shift in resilience as people are forced to work at home and adopt a new culture. Once everybody can go back to the office and they have the option to change, he noted, there is likely to be a spike in resistance.
“It’s the best time to get change started,” he said. “The most comments I get is, ‘We should’ve started this sooner.’”
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Key Concepts for When Your Customer or
Supplier Files for Bankruptcy
—Michael P. O’Neil , Esq.
As businesses continue to feel the impact of COVID-19, many vendors and service providers should be aware of what actions they should take if their customer files for bankruptcy. Taft attorneys offer several key concepts for vendors and suppliers:
- Vendors and service providers have no obligation to extend credit to a company that has filed for bankruptcy. However, if you are in the middle of an unexpired supply contract that is critical to the debtor’s business, be careful and note the next point below.
- You may not require payment of pre-bankruptcy accounts as a condition of providing post-bankruptcy services. This would be a violation of the “automatic stay.”
- If you can be assured that the debtor company has Debtor-in-Possession (DIP) financing in place, this provides some assurance that you will be paid for post-petition deliveries. If the DIP lender is also the senior secured lender, it may be entitled to be paid in full before post-bankruptcy invoices are paid. If the case is not successful, there is no guarantee that post-petition vendors will be paid.
- Even with a DIP loan in place, vendors may still require cash in advance or cash on delivery for goods or services.
- While the automatic stay in bankruptcy prevents you from seeking to reclaim goods shipped to the debtor company immediately before its bankruptcy filing, you still may have special rights under Bankruptcy Code § 503(b)(9). That is, goods actually received by the debtor (as opposed to goods drop-shipped to the debtor’s own customer) received within a 20-day period preceding the bankruptcy filing are entitled to “administrative expense” status, which means those sums should be paid 100 cents on the dollar, unlike pre-petition claims that usually receive little or nothing.
- If you are a sole source supplier or in an otherwise unique relationship with the debtor company, in certain jurisdictions you might be presented (usually pre-bankruptcy) with a critical vendor program. The upside is that critical vendors are generally paid a significant portion of their pre-bankruptcy balances. The downside is that they have to agree to continue to provide services according to specified terms. In some court-approved arrangements, critical vendors are actually required to disgorge payments received in respect of pre-bankruptcy debts if they do not provide goods and services post-petition according to the critical vendor terms.
- As noted above, any payments received in the 90 days preceding the bankruptcy filing will be scrutinized and assumed to be preferential. If you received payments outside of the ordinary course of business that improved your position relative to the rest of the creditor body in that 90-day period, you may have to return all or a portion of the payments received in the 90-day window.
- If you are among the 20 or 30 largest unsecured creditors, you might be asked to serve as a representative on the unsecured creditors’ committee. While some find this to be a valuable learning experience, committee members are not compensated for their time, only for actual out-of-pocket (travel) expenses incurred in that role. You will be subject to strict confidentiality requirements and potential prohibitions on selling your claim. The most worthwhile occasion to serve on a committee is where the debtor company is a critical partner in some area of your business, so you want to help that company to succeed in its re-organization or sale.
With a focus on areas such as mergers and acquisitions, debt refinancing and restructuring, and business workouts and turnarounds, Practice Group Chair and Partner Michael P. O’Neil helps business owners, lenders and other stakeholders when companies are in transition. He represents both healthy and distressed companies in connection with sales, refinancing and liquidations, as well as in Chapter 11 Section 363 asset sales and “true reorganization” bankruptcy cases where judicial remedies are needed.
What do I have to do? When do I have to do it?
The STS Lien Navigator has the answers and will guide you through the entire process!
Credit professionals can rely on the Navigator to determine when and how action needs to be taken to protect lien rights across the 50 states, DC and Canada. The real-time Navigator ensures that you’ll always have the current information.
Specific questions are also answered for subscribers through the Navigator Answer Line. The Navigator is a web-based service, accessed through our website and available from any computer with internet access.
Navigating the Way—On Time, Every Time
For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.
The current coronavirus crisis has created unprecedented challenges for those in the construction industry. As a result, contractors, subcontractors, and suppliers must be vigilant to protect their ability to receive payment on projects where cash flow might become problematic. One such way to ensure payment is by availing oneself of the various states’ mechanics’ lien laws. Mechanics’ lien laws vary from state to state but often have rigid requirements. Subtle differences in notice, service, and filing requirements can make or break one’s ability to preserve their lien rights.
Dinsmore’s construction law practice group is prepared to navigate industry members through these turbulent times. Our group members’ practices span the United States, and we have an intricate understanding of the mechanics’ lien laws in a variety of jurisdictions. NACM will be publishing each state covered individually.
Who Can File a Lien?
Contractors, subcontractors, sub-subcontractor, material suppliers, architects, landscape architects, interior designers, surveyors, mappers, or civil site contractors.
• Contractors: N/A.
• Subcontractors: Yes (713.06)
Pre-Lien Notice: To Whom Must It Be Served?
- Contractors: N/A
- Subcontractors: The property owner and any other parties listed on the notice of commencement.
Pre-Lien Notice: Time to Serve
• Contractors: N/A.
- Subcontractors: Within 45 days of first furnishing labor, materials, or services to the project site, unless you are making specially manufactured goods (goods that cannot be used for another project). In that case, it is 45 days from when manufacturing begins.
Time to File Lien
- Contractors and Subcontractors: Within 90 days of final furnishing of labor, materials, or services at the property. Generally, punch out work or warranty work does not count to extend the final furnishing date.
Information Required to File Lien
All information required by the statutory form, including dates of first and last furnishing, dates of service of the notice to owner (if applicable) total contract amount and amount due, property description, and property owner’s information.
When Must Lien Be Served?
- Contractors and subcontractors: Lien must be served no later than 15 days following recording.
To Whom Must Lien be Served?
- Contractors and subcontractors: Lien must be served on the property owner.
Liens cannot be renewed. You must file suit within 12 months of recording, otherwise the lien goes away.
Reprinted with permission.
Jason Lambert, Esq., is a partner in the Tampa office of Dinsmore & Shohl LLP.