CMA Daily News

Bankruptcy Point/Counterpoint NACM

Two of NACM's most popular legal minds went head-to-head during the recent "Bankruptcy Update: Point/Counterpoint" teleconference, where they discussed several BAPCPA protections for trade creditors, along with the most current related case law and the administrative ambiguities that accompany some creditor defenses. Bruce Nathan, Esq. of Lowenstein Sandler PC acted as the voice of the courts, while Wanda Borges, Esq. of Borges & Associates LLC acted as the voice of the trade creditor.

Several topics were discussed throughout the program, most notably the 503(b)(9) 20-day administrative claim and the increasing use of executory contracts among trade creditors. Speaking about the 20-day administrative claim, Nathan noted, "This is one of the biggest amendments of the BAPCPA," adding, "This has become a safety net for suppliers." He then discussed how trade creditors have to go about getting the actual claim. "This 20-day priority is not automatic," he said. "The Bankruptcy Code requires that this priority be granted after a notice and a hearing."

Problems arise with the 20-day administrative claim in terms of when the claim is actually supposed to be paid. "There's nothing in the statute that talks about when this claim is paid," said Nathan, noting that payment times differ from district to district. "It's the court that makes the decision."

Borges responded with her opinion of when the claim should technically be paid. "The Code is silent, but I think it should be paid now and should be paid in full," she said, offering advice to trade creditors when filing this claim. "You've got to move, you've got to move fast, and you've got to move furious." Later, Borges discussed her own personal experiences with executory contracts and their idiosyncrasies. "In the last six months, I have seen more issues with executory contracts with my clients and with trade creditors," she said. "It's effectively a contract where something has to be done on both sides. In order to have a Chapter 11 debtor agree to stay in the executory contract, the debtor has to pay, in full, all arrearages or provide adequate insurance that you're going to get paid." After hearing that, trade creditors might find the prospect of an executory contract quite alluring, but Borges and Nathan discussed the other issues and prerequisites that complicate the issue.

Other topics discussed included preferences, changes in the ordinary course of business defense and issues associated with the contemporaneous exchange for new value defense. For more information on NACM's teleconferences, or to register, click here.

Jacob Barron, NACM staff writer

Structuring LCs to Protect Your Company

"The letter of credit (LC) is an obligation that banks have to your company if certain conditions set forth in the LC are met," said Robert Mercer, Esq. of law firm Powell Goldstein, LLP. "This is an attempt to isolate your company from the customer."

Mercer, a partner at Powell Goldstein's Atlanta office who practices in its Bankruptcy & Financial Restructuring Group, discussed LCs and the best ways to structure them at a recent NACM teleconference entitled "Structuring Letters of Credit That Won't Leave You Stranded in a Customer Bankruptcy." Over the course of his presentation, Mercer outlined common stipulations that creditors should include as well as some that they should avoid when drafting their LCs.

Most importantly, Mercer noted, a vendor using an LC should be sure to include a Bankruptcy trigger in the LC, rather than just in the supply contract. Since the revisions made to the bankruptcy Code in the 1970s, provisions in contracts that attempt to construe a customer bankruptcy as a form of default have been unenforceable, meaning that when a customer files, the vendor is left open to preferences and placed in the running with the rest of the customer's unsecured creditors. Still, these provisions are used very frequently. "You see them in many commercial documents," said Mercer. "Put in the LC that, if the customer files bankruptcy, it's a basis under which your company can draw on the LC." In this way, when a customer files bankruptcy, under the terms of the LC, the bank is still obligated to pay your company.

"This is a really simple fix," he added. "That's a provision you want in the LC."

Mercer also discussed the importance of removing as many conditions as possible from the LC, including provisions that require a vendor to give a bank or the customer a few days notice before drawing on the LC or provisions that require the vendor to seek consent before drawing.

For more information on NACM's teleconferences, or to register, click here.

Jacob Barron, NACM staff writer

NACM BACPA Survey results & May Survey

The results of NACM's April survey are in:

Have you received a preference claim for less than $5,000 since the passage of the BAPCPA in 2005?
Yes: 5%
No: 95%

Participate in the May Survey:

Have you dealt with a debtor going through a “fast track” bankruptcy, the provisions under BAPCPA which allow expedited proceedings for Chapter 11 small business filings?

Click Here

Are You Viewed As a Leader?

Company executives are fully aware of the impact sales has on their company's future, but many of them might not be so aware of how close accounts receivable (A/R) relates to the organization's sustainability and potential for growth. "It's really important to show them how credit can affect them," said Susan Archibeque, CCE in a recent NACM-sponsored teleconference entitled "Credit Leadership."

Archibeque noted that while sales may have the most obvious tie to a company's position, it's important for the business' decision makers to understand how important credit is to help the company make more sound strategic decisions and also to increase the profile and clout of the credit department within the organization. Archibeque noted that the relationship between credit and sales should be an equal and mutually-beneficial one. "The only way that we can change perception of credit is to have a positive experience with sales," she said. "It's important that sales and credit are on the same committee." Archibeque even noted that, in some instances, sales should be tied to credit and suffer the consequences when one of their customers fails to pay.

Before any of these options are put into place, however, Archibeque noted that a credit department needs to take stock both of how they're performing and how they relate to the rest of their company. "We need to look at your company internally," she said. "Look at the impact A/R is having. You need to know where improvements need to be made… to change the philosophy of credit in [your] organization." Archibeque also added that it's important for credit staff to be involved in the company's future as much as its present situation. "You need to be on the strategic planning committee so you can be in on your company's growth," she said. "You need to know where your company's going in terms of expansion."

For more information on NACM's teleconferences, or to register, click here.

Jacob Barron, NACM staff writer

House Committee Examines Small Business Credit Card Use

The House Committee on Small Business, chaired by Rep. Nydia Velázquez (D-NY), recently held a hearing on the increasing role of credit cards in the financing of small businesses. As the U.S. marketplace continues to weather a credit crunch, small businesses have found affordable financing exceedingly scarce, and have thus reached to credit cards to get the financing they need.

"When a small firm can't buy equipment, or has to lay off its workers, our entire economy suffers," said Velázquez. "These businesses are the principal drivers of our economic growth, but without capital they can't lead us back to recovery."

According to a Federal Reserve survey of senior loan officers, 65% of respondents reported tightening standards in the first quarter of 2008, a problem compounded by an increase in fees related to popular small business loans, including the Small Business Administration's (SBA) 7(a) initiative. "With fewer options in the private market, and in the midst of an economic downturn, it is inexcusable for SBA to make it tougher for small firms to get capital," said Velázquez. "Affordable financing means access to opportunity. That's why many are turning to plastic—to keep their businesses and our economy going."

Witnesses testified that in the past five years alone, it is estimated that small firms' use of credit cards has jumped by 14% and that 70% of small businesses pay off their full balances monthly, giving them the equivalent of 30-day interest-free loans.

"Small firms are facing a considerable financing gap," said Velázquez. "Viewing credit cards as the tools they've become for small firms just makes sense."

Jacob Barron, NACM staff writer

NACM Credit Manager's Index for March 2008

or the first time since the seasonally adjusted Credit Manager’s Index (CMI) was calculated in February 2002, the combined index has fallen below the crucial 50 level, indicating an economic contraction. It was the sixth decline in seven months, and a record six of 10 components fell. The service sector fell below 50 for the second consecutive month, while the manufacturing sector tied a record low of 51.0. “It was an unhappy report,” said Daniel North, chief economist for credit insurer Euler Hermes ACI.

“The information in the report confirms other national data, such as negative growth in non-farm payrolls, record home foreclosures and real retail sales falling year over year, which indicate that the economy is almost certainly in recession,” North said. While the Federal Reserve Bank has reacted quickly to soothe the turbulent financial markets, it takes up to a year for Fed interest rate cuts to have their full effect. “When that happens, and when the housing market finally regains its footing, then the economy will begin to recover, perhaps by the end of 2008 or the beginning of 2009,” he concluded.

Click here to download the full report in PDF

Three Percent Withholding Measure—Your Comments Needed

Over the past year, NACM has informed you that on January 1, 2011, a mandatory 3% withholding measure on the value of most contracts for goods and services sold by businesses to federal and state governments, including local political subdivisions with contracting expenditures of $100 million or more, will go into effect.

NACM opposes this 3% withholding measure:

1. It will adversely impact businesses, which do not have the administrative or financial capacity to withstand this new withholding mechanism.

2. It will place a proportionately higher financial burden on all businesses engaging in commerce with these governments because it is not a progressive measure and places an undue burden on the already-squeezed cash flows of many small- and medium-sized businesses.

3. It may force those who currently do business with these governments to cease doing so, leading to less competition and driving up prices that the government has to pay for goods and services.

4. It could further weaken the U.S. economy, which depends a great deal on jobs and growth created by the business community, including the small and medium-sized businesses that are responsible for the majority of new job creation.

The IRS is now requesting comments about this mandatory withholding. NACM urges you to email Notice.Comments@irscounsel.treas.gov with your comments. Be sure to include "Notice 2008-38" as the subject line.

You can also send a letter in opposition to the 3% withholding measure to:

CCPA:LPD:PR (Notice 2008-38)
Room 5203
Internal Revenue Service
Ben Franklin Station
P.O. Box 7604
Washington, DC 20044

Please act quickly! The comment period closes on April 25, 2008.

For your convenience, click here for a sample letter.

Learn more here.

Breaking Ground on UCP600

Somewhere between 11-15% of international trade uses letters of credit (LCs), representing trillions of dollars each year. As such, there has been a need for consistency in the rules and regulations that govern this form of documentary credit. The latest in a long line of these standards is Uniform Customs and Practice No. 600 (UCP600), which went into effect last July. After more than three years of crafting and compiling feedback, it was the first revision to the rules governing documentary credits since 1993, which began 60 years prior. UCP600 is part of the International Chamber of Commerce's (ICC) ongoing agenda to help manage regulations governing the use of commercial LCs and to eradicate some of the redundancies in older statutes as commerce changes.

In the NACM teleconference, "Everything You Wanted to Know About UCP 600, but Were Afraid to Ask," JPMorgan Chase's Madeline Sprague, CTP, vice president, Global Trade and Logistics, walked members through the basics of the latest regulation.

"Electronic changes in commerce were the driving force behind the revision," commented Sprague. "The old UCP500 was very cumbersome and said the same thing over and over again. UCP600 now provides for a variety of defaults and conditions. By far and away, UCP600 is going to be the driving regulation and it's very easy to make an LC customized to your transaction. The previous versions were very nit-picky and it drove beneficiaries insane."

Sprague said that it was imperative that members realize that a letter of credit is fundamentally a specialized payment, and that UCP600 defines a large portion of that payment as contract law. As such, LCs are not always intuitive and are basically a conditional payment contract. The credit agreement is also separate from any other commercial contract with payments made against the LC only, but must be in sync with other commercial contract terms.

"The devil is in the details in letters of credit, as with any contract," said Sprague.

UCP600 is now the primary international regulation governing commercial LCs although, in the United States, Uniform Commercial Code (UCC) Article 5 also shares rule over the documents. The international regulation provides which parties are committed to payment, what the obligations of banks are, which party has the final say, as well as defines what types of payment commitments there are and when they go into effect. Unlike UCP500, the new rule provides defaults and standards for the styling of documents and what those documents must contain. But it's not something credit managers are going to conquer overnight.

"It's really a version of contract law and you're not going to learn it quickly," explained Sprague. "You're going to need someone to coach you through it."

She suggested that a good starting point is the ICC website, which provides a wealth of information on the revision. The NACM Bookstore also carries The Comparison of UCP600 & UCP500, published in 2007.

Matthew Carr, NACM staff writer

Credit Applications and Related Legal Issues

After a number of years in the industry, it might be easy for a credit professional to overlook the credit application as something that’s more a part of the landscape than anything else. However, if an account goes bad, a haphazard credit application could make the collection process a lot more difficult. “Credit executives seem to have an attitude of ‘I’ve been around for a long time, I know everything there is to know about credit applications,’” said Wanda Borges, Esq. of Borges & Associates, LLP in a recent NACM-sponsored teleconference.

Borges noted that while this may be the case, she’s noticed seasoned credit professionals in other presentations obviously being reminded, enlightened and refreshed about some easily overlooked and commonly forgotten credit application strategies. “I hope today for all of you on the line I will either refresh you as to some things you forgot about or teach you some things you never thought about with credit applications,” she added.

Borges delivered on this wish in her teleconference, entitled “Credit Applications and Related Legal Issues,” by offering attendees a quick and effective guide to all the ways a company should protect itself from customer default and legal exposure using its credit application.

One of the first considerations to make when constructing a credit application is what information needs to be collected. “My primary rule of credit is ‘know thy customer,’” said Borges, who offered a thorough list of what details should be collected up front to put the creditor in a more advantageous position. Specifically, Borges discussed the importance of getting corporation details, ownership details and to include stipulations about references.

Ownership details, Borges noted, can be of great use should a collection effort be necessary. “You want that information so you can go find them,” she said, adding that every application should require home addresses and ownership interest information for each owner of the business entity. For references, Borges suggested that credit grantors require at least three trade references and also stipulate that they can get references from the customer’s bank. “The trade credit reference is actually going to be the best of their trade credit references,” she said. “You are not limited to the references they give you.”

Borges’ presentation also offered participants text to include in a credit application to protect a creditor from exposure to laws like the Fair Credit Reporting Act, the Equal Credit Opportunity Act and the Fair and Accurate Credit Transactions Act’s disposal rule. She also offered tips on how to clearly organize the application to make sure the customer understands it and can’t reasonably plead ignorance in a court case.

For more information on NACM’s teleconference series, click here.

Jacob Barron, NACM staff writer

Industry Day Sessions at NACM Credit Congress

Monday, May 19, 2:00–5:00pm

Industry day sessions are designed for attendees to gather and network by like industries. Please note that these are not “closed” group meetings (unless indicated) and anyone is welcome to attend any of these sessions, should the topic/speaker be of interest.

10621.	Advertising/Media
10622.	Agri-Business
10623.	Apparel/Footwear
10624.	Building/Construction
10625.	Drugs/Cosmetics/Pharmaceuticals
10626.	Electrical Wholesalers & Distributors
10627.	Food
10628.	International
10629.	Metals
10631.	Publishing
10632.	Wholesale/Distribution

10619. International Utilities Group Meeting will be held 1:15-5:00pm. This is a closed meeting for those involved in the International Utilities Group.

Please note that Industry Day topics and speakers are subject to change based on circumstances beyond NACM’s control. You may check the NACM website for updates. Also, some Industry Day groups may opt to attend the Executive Forum rather than holding a separate group meeting.