eNews September 3

In the News

September 3, 2020

	I. Credit Insurance in the Time of COVID-19
	II. NACM’s August Credit Managers’ Index Hits Two-Year High

	III. Eight Issues to Review when Negotiating Construction Contracts in the COVID-19 World
	IV. Bankruptcy Court Holds Committee of Unsecured Creditors Cannot Obtain Derivative Standing When Debtor Is a Delaware Limited Liability Company

Throughout the course of history, people have uttered the phrase “life as we know it” to signify a change in the way of life. There has since been a resurgence of the phrase in 2020 between the COVID-19 pandemic and today’s current economic climate as businesses struggle to let go of what they’ve grown accustomed to and adapt to changes in operation. Business credit insurers are among those learning how to navigate this new way of life, not only for the good of their business, but also the business of those they insure.

Gordon Cessford, president and regional director of North America for Atradius Trade Credit Insurance, Inc., said the use of credit insurance has changed since COVID-19 first reached the U.S. nearly six months ago, as there is no doubt that the pandemic has had a devastating impact across the globe. With the economic downturn, the credit insurance world has been even busier than normal, Cessford said, and Atradius is keeping up with the rising business all while operating in a remote working environment. The credit insurer has had to adapt its technology to the new landscape and, luckily, has been very successful in operating remotely as well as providing support to its customers even during the worst times of the crisis.

“The product and process, however, remain unchanged,” Cessford said. “What is required is a greater level of information and transparency to allow risk underwriters to meet the requirements of our customers. As always, we remain open and transparent in our communications and availability to discuss issues.”

Without a doubt, Cessford said the company has seen an increased appetite for credit insurance policies, with higher inquiry levels both from companies who have never used credit insurance and from those who have used the product in the past but have decided to move away for various reasons. It is now obvious to most businesses that the risk of not getting paid may become a reality at any time for unforeseen reasons. While Atradius agrees the first layer of protection is the solidity of each of its customers’ own credit departments, having the extra safety net of a credit insurance policy is now broadly seen as a valuable addition.

Yet, it isn’t just enough to simply have credit insurance during a crisis such as this, he added. Existing policyholders need to maintain close contact with their underwriter and broker if they use one. From a risk underwriting perspective, sharing information with the insurer on the relationship with the buyer to maximize the coverage levels in a necessity. It is also vital that the policy’s reporting requirements are strictly adhered to, ensuring that if a loss arises, there is nothing to hinder the prompt payment of a claim. Cessford said it is only with a strong relationship between insurers and customers that they can minimize losses.

“[If you have credit insurance], get to know your customers even better than you do now. Information is key in the credit insurance world, and when individual buyer underwriting is being carried out, the support of the policyholder in sharing information is essential,” Cessford said. “[If you don’t have credit insurance], consider where you are with your trade receivables and understand what impact the loss of your largest customer may have on your business. If you have any doubts or you want to have a discussion, do not hesitate to reach out to the experts.”

NACM Credit Congress & Expo – Extended til September 30

We’ve had many requests to extend access to the online Educational Sessions and the Expo Hall, so we’re giving you an extra 30 days!

Everyone is juggling so much right now, and deadlines can slip by us. We hope having a few extra weeks to take advantage of the 50 Educational Sessions and 30 Expo Booths will be a welcome bonus.

Visit the Showcase Now!

The Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM) has left pre-pandemic numbers in the dust. The August CMI reached a more than two-year high with a combined score of 56.5, a slightly better score than January 2020 and the highest reading since May 2018. 

August marks the fourth straight month of gains after emerging from drastic lows in the spring months due to COVID-19 by steadily rising. “Given that credit managers are forward thinkers, this is yet another signal that there may well be better times ahead,” said NACM Economist Chris Kuehl, Ph.D.

All four favorable factors were back in the 60s, with sales leading the way at 65.8, a vast improvement over the 20 it posted in April. New credit applications and the amount of credit extended also sat at 63.4 and 61.3, respectively. While still in the 60s at 61.2, dollar collections dropped more than a point in August. Overall, the favorables were at 62.9, the highest level since November 2018. “The data is more than encouraging and seems to signal there is considerable confidence building as far as the end of the year,” Kuehl noted.

Meanwhile, the combined unfavorables improved from 51.7 to 52.2, mirroring February 2020 scores. All but one factor, filings for bankruptcies, was in expansion territory, a score of 50 and better. Rejections of credit applications improved a point and a half to 51.5, while accounts placed for collection and disputes sat nearby at 51.6 and 51.8, respectively. Dollar amount beyond terms improved just shy of one point to 58.2. Dollar amount of customer deductions dipped slightly to 52.2.

On the manufacturing side, new credit applications dropped four points to 60.4 in August, while sales (67.2), dollar collections (61.3) and amount of credit extended (58.9) all improved slightly. In the unfavorables, rejections of credit applications (52.5), accounts placed for collection (50.9) and disputes (51.7) each improved into expansion territory. Dollar amount beyond terms jumped from 53.7 to 57.8.

New credit applications led the way in the service sector in August, increasing nearly six points to 66.3. Sales improved to 64.3, and the amount of credit extended jumped to 63.6. Dollar collections slipped almost three points to 61. Rejections of credit applications (50.6) and accounts placed for collection (52.3) improved slightly, but disputes (51.8), dollar amount beyond terms (58.5) and dollar amount of customer deductions (52.5) declined although stayed in expansion territory. Filings for bankruptcies dropped to 47.6.

“There has certainly been a period of clawing upwards in the last few months, and that has been more than welcome,” Kuehl said. “That trend had been expected to slow a little, but thus far, that has not been manifesting—at least as far as the credit managers are asserting.”

Keep current with today’s credit and risk management strategies. Save the dates for FCIB’s autumn online workshops: 9-10:30 am ET, Sept. 15 and 17. Sign up for one or both sessions. 

These workshops strive to answer some of the important questions now facing credit managers. How are you adapting to today’s environment? Our experienced panel of speakers will share best practices for managing the big issues and challenges affecting credit and global risk today. FCIB members register free. 

Note: FCIB members gain ICEU points, which count towards their ICCE designation. Nonmembers can register for either workshop for $75 each or $100 for both.

Over recent months, we have all been inundated with webinars, articles and non-stop updates on COVID-19 and how this unprecedented crisis is impacting the construction industry. The term “Force Majeure” has become a common refrain in the COVID-19 era. The issue is that many construction contracts may not even use this term and even more do not use the term “pandemic” prior to 2020. This article will discuss some contract strategies beyond Force Majeure and the best approach in reviewing or negotiating your construction contracts as we continue through these strange times. I’ve also included a checklist for your next construction contract negotiation.

The bottom-line questions being presented from contractors and owners in this new age of the construction industry are:

(a) how do we negotiate construction contracts under the “cloud” of this extraordinary pandemic (or any other event of Force Majeure for that matter); and

(b) what can we do to protect ourselves going forward?

While some projects were allowed to continue operations during the initial stages of COVID-19, others were voluntarily suspended and will soon restart based on existing contracts. As many other construction projects are currently in the planning and contract preparation phases, this is the ideal time for owners and contractors planning for new projects to carefully consider the many lessons learned thus far from the pandemic and seek to revise their new contracts accordingly.

First and foremost, don’t assume you are going to get all possible accommodations or a “blank check” to address these issues arising due to COVID-19 because they are abnormal, an “act of God” or out of your control. Every party in the construction chain needs to prepare for push back by way of fights over liquidated damages, excusable or compensable delays or breach of contract claims. Simply put, not every delay or impact is excusable or compensable in every situation and certainly not under all construction contracts. You need to review your contracts with a keen eye and not just for the Force Majeure provisions. 

Texas law strongly favors interpreting legal disputes by the letter of the contract language (including Force Majeure). Therefore, reviewing and understanding your contract and its legal implications is paramount in this pandemic. With that in mind, how should owners and contractors approach construction contract negotiation in these troubled times?

As noted above, do not rely solely on Force Majeure. In the end, both owners and contractors will be well-served by looking beyond Force Majeure and expanding the definition of ‘excusable’ delays to specifically include “pandemics” and “epidemics.”

Although most delays related to COVID-19 were, at least at the outset, thought to be an excusable delay under your contract, many contractors realized a surprising gap: there was no mention of a pandemic. While there is no way to predict the next Force Majeure event, it is especially prudent to fill this gap by specific mention to pandemics and other widespread communicable diseases given the tremendous impacts of COVID-19. In addition, though many owners will have some pause, contractors may consider adding language that allows for adjustments to compensation when faced with a Force Majeure event. However, in my recent experience, some owners prefer to accommodate contractors with specific COVID-19-related provisions (rather than broader Force Majeure clauses) which may allow for COVID-19, but not all “Force Majeure” events to be considered excusable, compensable delays.

Unfortunately, the only certainty resulting from this pandemic is an eventual increase in construction litigation, arbitration and insurance claims. Early review and careful negotiation of important construction clauses on new or current projects will help dramatically increase the likelihood of a better outcome in the event a project is impacted by COVID-19 and could potentially decrease the likelihood of any eventual disputes resulting from COVID-19.

In addition to addressing Force Majeure in your construction contracts, here are some additional issues and questions to review during negotiations, in light of this pandemic:

1. Time Extension/Delays: Is there general or limited relief for delays, unforeseeable/changed conditions or other time or impact costs? Beware of “no damage for delay” clauses lurking in your “time is of the essence” clauses. What about productivity or sequencing claims?

2. Changes/Claims: Review the contractual requirements for making a timely and proper claim for a change. Review your contractual scope inclusions and exclusions. Is there a limited number of mobilizations? Does the contract require uninterrupted access to the site, making COVID-19 disruptions a potential change in scope?

3. Price Escalation: Some contracts may include clauses that permit contractors to seek additional costs for increases in price due to high demand or other supply chain issues. This type of clause is rare, but worth reviewing to be sure.

4. Change in or Compliance with Laws. Does the contract allow for delays and compensation due to delays or cost impacts due to changes in laws and regulations, or due to an “emergency”? The AIA A201-2017’s “compliance with law” provision is typically silent on which party bears the costs of the contractor complying with a change in law that occurs during contract performance. Some courts have held that where the contract is silent, the risk is on the contractor since the contractor has agreed it shall comply with all Applicable Laws (without qualification). The current COVID-19 crisis has shown us that public authorities will impose additional safety measures on construction and other business operations when confronted with a public health crisis. Therefore, Contractors should take care to include language that addresses the risk of added costs due to a change in law.

5. Notice. At the outset of COVID-19, and particularly in reaction to government mandated stop-work orders, most contractors quickly provided notice of delay to their project owners. Since most administrative staffs were already working from home, emails became the practical way to put owners on notice. However, despite the circumstances, many construction contracts do not address email as a “proper” notice of claims.

6. Suspension of Work. Many contracts have suspension clauses that give owners the right to suspend the project, but also grant the contractor additional time and money in such cases that suspension lasts longer than a specified time.

7. Termination. Most construction contracts give the owner the right to terminate the contract for convenience (without cause). In such case, the contractor is usually entitled to payment for work performed to date, plus additional termination expenses (but not profit on work not performed). Many construction contracts only address termination for convenience by the owner and default by the contractor. If a contractor wants the right to terminate the contract due COVID-19, future contracts should appropriately account for such termination rights.

8. Negotiate a COVID-19 Specific Clause. As noted above, both parties will benefit from the clarity that can be achieved via the addition of a COVID-19-specific provision. This provision should clearly identify which COVID-related delays will be excusable and stipulate the documentation which a contractor must submit in order to prove entitlement to an extension of time. Such a provision may or may not allow COVID-related impacts to be compensable events, again, provided that contractors document their increased expenses, reasonable mitigation efforts, etc.

This is not a comprehensive list and every contract will require a full analysis to address potential issues. 

Mike Cortez’s practice is focused on construction related transactions, including large, complex energy procurement and construction projects, design and construction contracts, project risk management and lien and bond claims.  

Serving a preliminary notice correctly can be the difference between getting paid in full or taking a full write-off.

Before joining the operations team, NACM’s STS managers worked in construction credit. They view your construction projects through the lens of a construction credit professional to assure the reputed owner has been verified and all aspects of the preliminary notice are triple checked. These extra steps assure the preliminary notice we file for you is statutorily compliant and can stand up to the scrutiny of opposing counsel. They’re also available to consult with you by phone or email about your project. 

The likelihood of filing a mechanic’s lien and filing suit is more prevalent during economically uncertain times. Trust the experts to assure your job accounts are paid in full! 

For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com

Recently, in In re Dura Automotive Systems, No. 19-12378 (Bankr. D. Del. June 9, 2020), the Bankruptcy Court for the District of Delaware held that granting the Official Committee of Unsecured Creditors (the Committee) derivative standing on behalf of the debtors—a Delaware limited liability company—was precluded by the Delaware Limited Liability Company Act (the Delaware LLC Act).

What Happened? 

The Committee filed a motion for standing (the right to bring action) to pursue certain claims and causes of action of the bankruptcy estate against certain of the debtors’ prepetition lenders, the debtors’ former CEO Lynn Tilton and other Tilton-affiliated entities that provided purported management and consulting services to the debtors. The Committee’s proposed complaint contemplated state law claims, as well as preference claims under Section 547, recharacterization under Section 502(a) and equitable subordination under Section 510.

The court held that the Committee could not be granted derivative standing, focusing on the following provision of the Delaware LLC Act: “In a derivative action, the plaintiff must be a member or an assignee of a limited liability company interest at the time of bringing the action and: (1) At the time of the transaction of which the plaintiff complains; or (2) The plaintiff’s status as a member or an assignee of a limited liability company interest had devolved upon the plaintiff by operation of law or pursuant to the terms of a limited liability company agreement from a person who was a member or an assignee of a limited liability company interest at the time of the transaction.” According to the court, since the Committee was not a “member of the LLC debtors or an assignee of an LLC interest,” it could not be granted derivative standing. 

In so holding, the court rejected the Committee’s argument that federal, not state, law should control the question of derivative standing in bankruptcy, in particular where the claims at issue are federal law claims (e.g., equitable subordination). The court held that to determine whether a third party may bring a derivative claim, the court must look to the law of the debtors’ state of incorporation—in this case, Delaware, which is clear that members or assignees of an LLC interest have the exclusive authority to sue derivatively. The Committee failed to identify any Bankruptcy Code provision to the contrary. Additionally, the court rejected the Committee’s attempt to distinguish a derivative action brought in bankruptcy on behalf of an estate, rather than outside of bankruptcy on behalf of an LLC.

The court recognized that its ruling could create certain issues, such as undermining the Committee’s role or rendering its investigation rights illusory, if the Committee is unable to sue derivatively. However, the court noted that even without standing, other remedies exist to ensure compliance with fiduciary duties and the Bankruptcy Code. For example, “potential claims and causes of action could be assigned to a trust and a plan or conversion or the appointment of a Chapter 11 Trustee or examiner could be requested.”

Why This Case Is Interesting 

Notably, in The McClatchy Company, Case No. 20-10418-mew (Bankr. S.D.N.Y. July 6, 2020), the Bankruptcy Court for the Southern District of New York reached a different conclusion. There, the court determined that the committee had authority to pursue claims on behalf of the estate as a matter of federal bankruptcy law, not state law—an argument rejected by the Dura court. These decisions create uncertainty for debtors, creditors’ committees and other parties in interest regarding who has standing to pursue certain claims. It is unclear how courts will rule in cases involving debtor entities from various jurisdictions, as well as how courts will reconcile these two conflicting decisions.

Nancy M. Bello is an associate in Kramer Levin’s Bankruptcy and Restructuring department, in which she assists in the representation of significant parties in complex Chapter 11 bankruptcy cases, out-of-court restructurings and other distressed situations.