December 12, 2013
Last week's Supreme Court ruling in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas strengthened forum-selection clauses in contracts for most situations. The decision is mostly detrimental for subcontractors who often have less power in contract negotiation, but it does provide some silver linings.
The Supreme Court of the United States reviewed a lower court decision in Atlantic Marine Construction Company, Inc. v. J-Crew Management, Inc. and ruled that the venue of legal proceedings should be the one specified in a contract's forum-selection clause in all but "extraordinary" and the "most unusual" cases of public interest. It underscored the critical importance of knowing what's in a contract, in construction or any other industry.
"You have to pay attention up front with contracts because, at the end of the day, the language in the contract will win out," said Chris Ring, national sales representative with NACM's Secured Transaction Services. "The Supreme Court wasn't willing to plow any fresh fields here." However, subcontractors at least have clarity regarding where a case, in a worst-case scenario of not getting paid without legal action, is going to be heard for states with no limits on forum-selection clauses.
"Because it eliminates the wiggle room, there's more predictability as to what you're looking at if things go off the rail," said Karen Hart, Esq., partner with Bell Nunnally & Martin LLP. "You know where you are going to be: where you agreed to be. The high court has made the forum-selection clause the lynchpin of the analysis." Hart noted the opportunity for subcontractors, who know and understand the importance of contract language, to try to designate a court closer to home, as "some generals might not think it's a big deal if you want to change the contract." Granted, the general contractor may use a "take it or leave it" stance, but the sub at least knows now that arguing on the issue of convenience or cost, as Justice Samuel Alito wrote in the unanimous high court decision, won't be considered with any weight.
Hart and Ring, as well as Bruce Nathan, Esq. of Lowenstein Sandler LLP, also agree that the Supreme Court essentially kicked the can down the road on some points. For instance, the decision said that a forum-selection clause can be countered in "extraordinary" and "most unusual" circumstances, but did not specify what would qualify. As such, there are likely to be future cases where subcontractors challenge what constitutes "most unusual" situations. "The court certainly left an open door," said Nathan.
The court also failed to significantly address the fact that 24 states have statutory limitations on such clauses in contracts. At least in those states, it appears as though subs "haven't really lost anything," Hart noted. The American Subcontractors Association (ASA), which argued on behalf of the subcontractor in J-Crew, said that was a big victory for smaller subs and hinted that failing to directly address states' statutes of limitations was tantamount to preserving those laws.
"Public interests' most certainly would include the laws in the 24 states that limit the use of forum-selection clauses in construction," said ASA Chief Advocacy Officer E. Colette Nelson. "That is, when determining whether a forum-section clause is valid and should be enforced, a court can and, perhaps, should take into consideration public interest as defined by state legislature."
- Brian Shappell, CBA, CICP, NACM staff writer
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One of the more prominent portions of the 2013 Credit Congress was a hearing hosted by the American Bankruptcy Institute's (ABI's) Commission to Study the Reform of Chapter 11. There, before several ABI commissioners, two panels of representatives from the unsecured trade credit community voiced their concerns with the current state of the Bankruptcy Code and offered recommendations on how it could be better amended to rebalance the interests of unsecured and secured creditors.
One of those two panels focused solely on the Code's Section 547, which governs preferences, and according to a recent update the Commission provided to reporters, NACM and unsecured trade creditors aren't the only ones calling for reform to this frustrating aspect of the bankruptcy process.
Near the end of a call this week discussing the Commission's work since it began hosting hearings in 2012, Commission Co-Chair Bob Keach of Bernstein Shur noted how hard the Commission has been working to look into the Code's avoidance provisions, a category into which preferences fall in legal terms. "We're certainly looking at avoidance actions, the right to sue for preferences or fraudulent transfers," he said. "If we've gotten an earful about anything, we've gotten an earful about preferences."
Keach went on to observe, much as the witnesses at Credit Congress did, that the Code's preference statutes were intended to give unsecured creditors a more equal distribution. Now, however, as Keach and several of his colleagues noted earlier in the call, most debtors enter bankruptcy with several tranches of secured debt, and preferences are no longer paid for the exclusive benefit of unsecured creditors. "Most preferences are recovered for other purposes," he noted.
Commission Co-Chair Albert Togut of Togut, Segal & Segal LLP also mentioned the possibility that the Commission could consider recommending that the Code be changed to require preference claimants to meet additional pleading requirements before successfully recovering a preferential payment. This suggestion is similar to NACM's stated belief that the burden of proof in a preference claim should be shifted from the creditor to the debtor, meaning the debtor would have to prove why none of the Code's preference defenses apply to a particular payment before attempting to recover that payment as preferential. However, Keach and Togut were steadfast in asserting that the Commission itself has yet to settle on any specific recommendations.
ABI will be providing another update on the Commission's progress at next year's Credit Congress, scheduled for June 8-11, 2014 at the Rosen Shingle Creek Resort in Orlando, FL. To learn more about next year's program, or to register, click here.
- Jacob Barron, CICP, NACM staff writer
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Federal regulators voted December 10 to approve a new version of the Volcker Rule, a cornerstone of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that strikes at how banks take risks with their own capital.
As expected, all five of the Federal regulatory agencies responsible for implementation and enforcement—the Federal Reserve, the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Commodity Futures Trading Commission (CFTC)—approved a tougher version of the rule than many on Wall Street had hoped. In particular the rule bars banks from trading for their own gain, limits their ability to invest in hedge funds and requires banks to change their compensation policies so that they don't inadvertently reward the kind of proprietary activity the rule specifically aims to end.
The newly-approved version also requires banks to identify the exact risk they're aiming to hedge when they make certain trades or investments to allegedly alleviate risks. This ties back directly to JPMorgan Chase's $6 billion trading loss from 2012, wherein the bank alleged it had taken certain steps in order to broadly hedge their risks, when in reality the trades were speculative and ultimately ended in the aforementioned loss. Regulators don't want banks hiding behind risk-hedging in order to make risky profit-driven trades, hence this provision's inclusion in the final rule.
CEOs of covered institutions must also attest to regulators, on an annual basis, that the bank itself has taken steps to comply with the new rule, which is a new provision designed to make it harder for banks to find loopholes. However, this provision could have been even tougher if it required CEOs to attest that their institutions were actually in compliance with the rule, rather than merely certify that they were making an attempt to comply.
The way it was crafted, however, amounts to one of only a few concessions that regulators made to Wall Street, another being a delay in the date by which institutions would be forced to comply with the new rule. Earlier reports had placed the compliance date by July of next year, but since the rule itself is arriving long after the self-imposed deadlines Dodd-Frank placed on regulators, firms will have until July 21, 2015 to fully comply with the rule. In the meantime, the nation's largest banks are expected to pore over the rule in order to find potential avenues for circumventing the regulations and opportunities for litigation.
Find out more about the new Volcker Rule and what it means for you on NACM's blog.
- Jacob Barron, CICP, NACM staff writer
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Credit professionals and other end users of federal payment systems have until the end of the week to participate in a Federal Reserve survey that will help shape the future of electronic and other payment systems. Solutions proposed in the survey will be discussed at Credit Congress in Orlando next June.
The Federal Reserve continues to work with the business community as part of its study on the perceived problems (and solutions) regarding electronic and other types of payment systems. As part of this effort, the Fed is conducting an online survey until December 13 to learn about the issues that end users have or believe need to be addressed. Questions focus on the increased potential and risk for fraud, international transactions, timeliness of funds availability, efficiency gaps and other topics. More details about the initiative are available in the Federal Reserve report titled Payment System Improvement–Public Consultation Paper. In addition, a sample answer sheet is available on the NACM blog.
Though a final report of guidelines or recommendations is unlikely to be completed by Credit Congress, high-level Federal Reserve representatives will speak during the June 11 educational session "Payment System Priorities: What the Federal Reserve Has Learned." Fed officials tell NACM it will be one of the earliest opportunities to present preliminary findings and, potentially, disclose the solutions to be implemented. Attendees will also have an opportunity to ask the Fed officials questions during the proceedings.
- Brian Shappell, CBA, CICP, NACM staff writer
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More than two-thirds of the 177 countries tracked in the 2013 edition of Transparency International's Corruptions Perceptions Index were found to have serious problems. Perhaps even more troubling is the absence of any of the traditional power economies among the 10 best nations or much improvement in the emerging economies of note.
The two best performing nations in this year's Index, Denmark and New Zealand, tied at 91 on a scale of 100, with 0 indicating highly corrupt and 100 indicating very clean. They were followed closely by Finland, Sweden, Norway and Singapore, representing almost no change from last year. Tied for worst performance, at a level of 8, were Somalia, North Korea and Afghanistan. Just 54 nations scored at or above 50.
"This indicates a serious, worldwide corruption problem," said Huguette Labelle, chair of Transparency International. "The world urgently needs a renewed effort to crack down on money laundering, clean up political finance, pursue the return of stolen assets and build more transparent public institutions."
Among the true power economies, Germany led the way by scoring a 78, placing it 12th in the rankings. The United Kingdom wasn't far behind in 14th (76), trailed by Japan in 18th (74) and the United States in 19th (73). Straddling the line between power players and emerging economies, China again lagged with a score of 40, good for 80th position. It was equal to Greece, which, despite the low level, can take heart in a four-point improvement since last year, according to Transparency International's data. Fellow European Union bailout recipient Ireland posted a similarly impressive improvement and came just short of cracking the top 20. Spain represented one of the worst declines in the index, falling to 59 from a 2012 level of 65.
Other "emerging" economies continued to demonstrate that corruption was holding back their potential in the business world. Turkey registered a score of 50 (53rd place), followed by Brazil's and South Africa's 42 (72nd), India's 36 (94th), Mexico's 34 (106th) and Russia's typically poor 28 (127th).
- Brian Shappell, CBA, CICP, NACM staff writer
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The convergence of U.S. generally accepted accounting principles (GAAP) with International Financial Reporting Standards (IFRS) is a process that continues to be hammered out among domestic and international regulators. In the meantime, however, many firms are choosing to adopt IFRS in full, as the standards have increasingly become what the IFRS Foundation called "the de facto global language for financial reporting."
A recent study on adoption of the standards in 122 jurisdictions conducted by the IFRS Foundation found that 101, or 83%, of those jurisdictions already require all or most of their domestic companies to file their financial statements according to IFRS, and that nearly all jurisdictions have publicly committed to creating global accounting standards with IFRS serving as the standard format of those global standards. Of the remaining countries that do not yet require statements to be filed according to IFRS, the Foundation found that most of them still allow companies to do so, including the U.S.
"More than 450 non-U.S. companies that report in the U.S. are using IFRS," said Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), at a recent conference. "Their combined market cap exceeds $5 trillion. U.S. multinationals also have extensive operations and subsidiaries in IFRS jurisdictions. In summary, there is a very large IFRS footprint in the U.S. and it is growing by the day."
On a global basis, IFRS is also expanding its reach beyond public companies, and the study found that around 60% of the 101 jurisdictions that have adopted IFRS have extended that requirement to unlisted financial institutions or large unlisted companies in addition to listed companies. Ninety percent of countries that have adopted IFRS for listed companies also either require or permit IFRS for unlisted ones as well.
For credit professionals, much of how the shift toward IFRS affects financial statements comes down to the difference between last-in, first-out (LIFO) and first-in, first-out (FIFO) inventory accounting methods. IFRS doesn't permit companies to use LIFO, which, assuming inflation, generally increases the cost of goods sold (COGS) because the unsold inventory is the earliest inventory acquired and the value of that inventory is lower because instead of sitting in the warehouse and accumulating value, it's being sold first. IFRS requires FIFO inventory accounting, meaning the inventory sold is what was most recently acquired. This increases the value of unsold inventory and increases profit, which in turn affects how a company's financial health appears in a financial statement.
- Jacob Barron, CICP, NACM staff writer
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