April 26, 2012
Attorneys argued the finer points of why credit bidding should or should not be enforced as a right of secured creditors during a bankruptcy-related assets sales before the Supreme Court on Monday. Though a judgment on arguably the most substantive bankruptcy case in a decade could come as late as the end of June, the justices throughout the argument hearing appeared wary of arguments that would undermine the right on the part of secured creditors to use credit bidding tactics.
The case in question is RadLAX Gateway Hotel LLC v. Amalgamated Bank. At stake is whether creditors will be able to use the value of their secured debt as opposed to straight cash, a process called credit bidding, as the U.S. Bankruptcy Court for the Seventh Circuit ruled in RadLAX. However, that view is competing with contrary decisions out of the U.S. Bankruptcy Courts for the Third and Fifth Districts, which preceded it and call to limit credit bidding.
On behalf of the petitioners (RadLAX), David Neff argued that, in a case like RadLAX, the concern lies in the ability of getting other non-secured bidders to even "show up" for an auction if they have knowledge that a secured creditor can best the bid without offering up any new cash, instead of just what is already owed to them. In addition, Neff said federal law notes that the use of the word "or" in one of the clauses guiding bankruptcy actions says the sale can go on without the right of a credit bid if the "indubitable equivalent" of their claim is realized.
Neff's argument drew critical reactions from several judges, who intimated that the argument against credit bidding runs contrary to the essence of the Bankruptcy Code and the intentions of the U.S. Congress:
"You're depriving a secured creditor the opportunity to hold onto an asset if he believes the asset is being undervalued," said Justice Samuel Alito.
"The greatest security is knowing what the courts will do," said Justice Sonia Sotomayor. "What is the value in the business world of us upsetting the norm? Why should we upset the expectations?" She added that the presence of stalking horse bidders in a vast amount of U.S. bankruptcy cases already illustrates the existing "process is working."
"It doesn't take a genius to figure out that, if you allow people to bid cash or credit, you're going to get more bids and higher bids than if they are only allowed to bid cash," said Justice Antonin Scalia.
However, those arguing against credit bidding seemed to find a strong ally in Chief Justice John Roberts, who took attorney Deanne Maynard, arguing on behalf of secured creditors' rights, to task for "avoiding" the fact that language (specifically the word "or") in federal law could be construed to mean that one condition could potentially be used as a substitute for the other. Maynard argued that the condition discussed by Neff was intended by Congress as an "other" condition, one that is supposed to come into the process after an auction is completed, not one that supersedes other conditions guaranteeing the credit bidding right of secured creditors.
"The whole Code is set up to protect secured creditors from the undervaluation of their claim," Maynard said. "If the secured creditor can't raise enough cash, which is a real risk, you're taking out of the marketplace one of the most knowledgeable parties of the property."
Roberts responded by noting the key importance of "the specific over the general" during the Supreme Court review of the issues and statutory language.
Brian Shappell, CBA, NACM staff writer
Credit Bidding Goes to Washington
The May issue of Business Credit features an analysis of RadLAX. For more information and insight into what legal professionals have to say about the coming ruling from the Supreme Court, be sure to look for this issue in your mail, or browse the issue online.
In addition, Warman and Borges, who contributed to the above story, will be among key speakers presenting at the 2012 Credit Congress in Grapevine, TX from June 10-13. For more information or to register, visit http://creditcongress.nacm.org/.
Last year was a good year for NACM's government affairs program.
In addition to meeting with legislators on potential bankruptcy reform and increasing the visibility of commercial trade creditors government-wide, NACM played a role in the final repeal of the long controversial 3% withholding tax. Had it gone into effect, most local, state and federal government contracts would've been subject to a 3% withholding charge on the value of the contract, drastically constricting cash flow for suppliers and vendors involved in such transactions.
NACM fought for repeal of this provision since its enactment in the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. And, as a final gesture signifying the elimination of the 3% withholding tax, the Internal Revenue Service (IRS) issued a document this week removing the regulations requiring government entities to execuate the withholding charge.
"The final regulations are removed because the 3% Withholding Repeal and Job Creation Act repealed the provision of the Internal Revenue Code underlying the final regulations before the provision became effective," said the IRS. "The guidance affects government entities that would have been required to withhold and report tax from payments to persons providing property or services and also affects the persons receiving payments for property or services from these government entities."
President Barack Obama signed H.R.674, the 3% Withholding Repeal and Job Creation Act, into law last November, following a vigorous campaign on the part of NACM and several other business groups to remove the law from the federal record. Although it was originally conceived as a means to reduce the nation's tax gap, representing the $345 billion in tax revenue that annually goes uncollected, the provision would've done more harm than good, shackling small businesses with a disproportionately higher portion of the tax burden and ultimately costing the nation a great deal of potential job growth.
NACM thanks its members once again for their help repealing the 3% withholding law. For more information on NACM's advocacy efforts, click here.
Jacob Barron, CICP, NACM staff writer
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New statistics unveiled by the United States and Chinese governments show significant declines in various manufacturing categories for the last month. But while some mainstream media have covered the happenings with a tone of panic, economists tell NACM that such deep concern is not warranted even if the numbers appear poor on the surface.
China's Purchasing Manager's Index tracked at 49.1 for the most recent period, representing the sixth straight decline in activity out of the manufacturing powerhouse. Meanwhile, the U.S. Commerce Department reported a 4.2% decrease in durable (long-term) goods orders in March. It was the largest slide in about three years and more than doubled the pace of the slowdown predicted by many economists. Despite that and growing concerns tied to fuel and energy prices, NACM Economist Chris Kuehl, PhD and Conference Board Economist Ken Goldstein aren't all that worried about manufacturing seeing a deep downturn in mid- or late-2012.
"Reports for some of the biggest manufacturers and the data I get from the Fabricators and Manufacturers Association are still showing good numbers on capital expenditure," Kuehl said. "The U.S. PMI is still in solid territory even if not quite as good as would be preferred."
Regarding China, Goldstein believes the concern is over China's "tricky" attempt to softly land its economy. However, he doesn't see the manufacturing statistics as foretelling any kind of hard landing there, as feared by some market watchers.
"Industrial production globally had been slowing but appears to be turning around, judging from signals from PMIs across the globe," Goldstein told NACM. "China is the exception, not the rule. That sets up the dynamic where their weakness pulls others down or everyone else turns a corner, allowing China to up their exports and cushion their landing. Besides, South Korea just reported an increase in consumer confidence, suggesting the Koreans are not that worried about contagion. If that is true, why should anyone else be?"
Brian Shappell, CBA, NACM staff writer
New Lien and Bond Course Available in Credit Learning Center
Construction-oriented credit professionals understand the value of knowing the basics of the lien and bond process.
In "Liens and Bonds: The Critical Nature of the Preliminary Notice," the newest module in NACM's Credit Learning Center, the preliminary notice is stripped down to its basic components. This module addresses the when, why and how the preliminary notice relates to retaining lien rights, while leveraging receivables down the ladder of supply. From state-to-state nuances through timeframes and required elements, this must-view module will get you started down the right path.
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A House panel approved legislation last week that would rescind the federal government's authority to unwind failing financial institutions.
In a 31-26 vote, the House Financial Services Committee voted to repeal Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which grants regulators the authority to wind-down faltering firms in the interest of protecting the broader economy. The measure was included as part of bill designed to cut the deficit by $35 billion.
Republicans, including Financial Services Committee Chairman Spencer Bachus (R-AL), have long considered Title II a provision that institutionalizes bailouts. In addition to rolling back several other portions of the Dodd-Frank Act, the bill approved by the committee would repeal the Federal Deposit Insurance Corporation's (FDIC's) authority to lend to a failing firm, purchase the assets of a failing firm and guarantee the obligations of a failing firm. It would also eliminate the FDIC's authority to borrow up to a percentage of the book value of a failed firm's total consolidated assets in the days following its appointment as receiver.
As far as the repeal of Title II's effect on the federal budget, Bachus cited a Congressional Budget Office (CBO) report that pegged the proposal's savings at $22 billion over 10 years. Democrats countered that, as designed, Title II would eventually recoup any money borrowed from the taxpayer, typically by assessing fees on larger financial institutions.
In a letter prior to the committee's vote, Treasury Secretary Tim Geithner urged Chairman Bachus to rethink his attempts to reduce the nation's deficit by essentially gutting the Dodd-Frank Act, arguing that any budget savings would be erased by the costs of future crises. "Title II...prohibits the government from bailing out failing financial institutions, provides authority to break up or unwind those institutions and ensures that major financial institutions, rather than the taxpayer, bear the costs of future financial crises," said Geithner. "By eliminating this authority, this provision would critically undermine the government's ability to limit the damage to the economy in the event of future financial crises."
"This provision was carefully designed to have no cost to the taxpayer over the long run," he added. "Eliminating this provision would increase the risk that future financial crises would increase future deficits."
Despite the committee's approval of the bill, it has little chance of passing the Democratically-controlled Senate. Nonetheless, it could serve as a blueprint for future Republican attempts to undo the Dodd-Frank Act should the party retake the Senate, White House or both in November.
Jacob Barron, CICP, NACM staff writer
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A state Supreme Court decision in a watershed municipal bankruptcy case could serve as a guide for communities there and beyond to eliminate at least one argument for creditors attempting to derail Chapter 9 proceedings.
Regarding the largest Chapter 9 filing in U.S. history, the Alabama Supreme Court ruled this week to uphold Jefferson County's right to declare municipal bankruptcy. At the heart of the issue was whether a municipality had the right to file for bankruptcy if it did not issue bonds. The court held that as long as the municipality in question had the right to issue bonds, even if it didn't actually follow through with such an action, then a Chapter 9 filing was fair game.
"I'm not surprised," said Bruce Nathan, Esq., of Lowenstein Sandler PC. "The judge really did thoroughly analyze Alabama statutory history."
Nathan noted that perhaps the key thing for creditors to watch will be whether Jefferson County pays its vendors, and how much during this process. Unlike in Chapter 11 reorganizations, in Chapter 9 a municipality does not need a judge's permission to pay prepetition claims. The case is almost certainly being monitored by other communities teetering on insolvency. Perhaps chief among them is Stockton, CA, which would become the largest Chapter 9 in U.S. history should it file.
Jefferson County officials and creditors had been fighting for weeks regarding the eligibility of the filing, which exceeded $4 billion. Jefferson County has been reeling financially from the botched sewer retrofit venture that has left the county, which includes the city of Birmingham, with massive debt and little ability to make proper payments while continuing to operate all of its services.
Brian Shappell, CBA, NACM staff writer
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Earlier this week, the U.S. Department of Justice (DOJ) announced that it would investigate Wal-Mart Stores, Inc.'s Mexican subsidiary for violations of the Foreign Corrupt Practices Act (FCPA). Specifically, company officials allegedly spent millions of dollars bribing government officials in order to secure building permits.
A New York Times article originally detailed the company's Mexican business practices. According to a recent letter to Wal-Mart CEO Michael Duke from Reps. Elijah Cummings (D-MD) and Henry Waxman (D-CA), "The Times reported that investigators in the company's Corporate Investigations Unit uncovered evidence of more than $24 million in bribes allegedly used to facilitate the process of obtaining permits to assist with Wal-Mart's rapid expansion in Mexico. According to the article, Wal-Mart's lead investigator concluded: 'There is reasonable suspicion to believe that Mexican and USA laws have been violated.'"
In addition to possibly ensnaring Wal-Mart, the world's largest retailer, in a web of potential fines and years of increased regulatory scrutiny, the DOJ's investigation has already put a spotlight on the FCPA, a frequently overlooked bit of law that can have major consequences for exporters. Debate about the law has been stirred up in recent years regarding its anti-bribery provisions, which forbid the use of "any means of instrumentality of interstate commerce in order to influence [a] foreign official in his or her official capacity."
Proponents of FCPA reform have argued that the law should be amended to tighten its application, recommending a defense for companies whose employees engage in corruption and bribery without the company's knowledge. Similar to the Federal Trade Commission's Red Flags Regulations, the existence of a sound, thorough company policy on the subject would protect the company from extensive prosecution and penalties.
However, the Wal-Mart case, depending on how it ends, could sound the death knell for any hope of reform, as Wal-Mart actually did have an exemplary anti-bribery policy in place, complete with procedures for how to handle such activity on the part of a rogue company official. According to the Times article, Wal-Mart seemed more concerned with damage control than actually righting the illegal activity of the official in question.
No matter the outcome of the case, companies exporting in every country should be mindful of their business practices and aware of their customers' positions in foreign governments. More information on the FCPA can be found in NACM's Resource Library.
Jacob Barron, CICP, NACM staff writer
Do You Have It? Introducing the "NEW" Manual of Credit and Commercial Laws—2012 Edition
Now in four separate volumes to meet your specific needs. Buy whatever volumes you need, or get the complete set at a significant savings!
NACM has re-envisioned and revitalized the Manual of Credit and Commercial Laws. Not only will the new edition continue to provide essential information for credit and finance professionals, it will do so in a highly flexible and more affordable format. In its new form, the Manual of Credit now comprises four volumes that either may purchased separately or as a comprehensive set. Chapters and appendices from the book have been reorganized under the following headings:
• Volume I: General Business Law, Related Statutes and Collections
• Volume II: Commercial and Consumer Credit Topics
• Volume III: Construction Issues
• Volume IV: Bankruptcy and Insolvency Issues
Many sections within the chapters have also been reworked, including those covering cellphone-based collection efforts, FTC rulemaking in terms of decedent estates and data security/breach initiatives at the federal government level.
Click here to visit NACM's online Bookstore for Manual features and updates, and more information about the wide array of resources available to today's credit professionals.
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