July 17, 2014
The Obama Administration announced on July 11 the launch of a new partnership aimed at speeding business-to-business payments to small companies. NACM members contacted stopped short of calling it a guaranteed game-changer, but did say it's a positive step that "can't hurt."
Dubbed SupplierPay, the initiative is being spearheaded by the Obama White House, US Small Business Administration and 26 notable corporations, including some of the biggest brands in the world. The purported aim is to improve the supply and payment chain to spur healthier companies that are more likely to invest in new opportunities, equipment and staff. The companies signed on to SupplierPayâ€”which include Apple, AT&T, Toyota, Johnson & Johnson, Philips and Coca-Colaâ€”have pledged to pay smaller suppliers faster and to share best practices.
"I believe the program will be helpful," said Ed Bell, PhD, CBA, ICCE, national credit manager with W.W. Grainger, Inc. "Small businesses, suppliers don't have the financial resources to compete effectively without some sort of assistance because large corporations often require suppliers to provide them with liberal trade credit. I believe a program such as this will help level the playing field somewhat. I also agree that having several large corporations signing onto the program will help it become more supported and effective."
SupplierPay builds on the Federal Governmentâ€™s QuickPay initiative, which President Obama launched in 2011. That program mandated that federal agencies make payments to small business contractors more quickly with the goal of paying within 15 days. A White House press release noted "as a result of QuickPay, we have already seen well over $1 billion in cost savings for small businesses since 2011, leading to greater investment and job creation. SupplierPay is the private sectorâ€™s equivalent, where companies have committed to pay small suppliers faster or help them get access to lower cost capital."
Kyle Grose, CCE, CICP, director of credit at Ferguson Enterprises, Inc., said the effort seems like a no-lose proposition, one that would be hard to assail even for those that are typically highly critical of the Obama Administration. "At a quick glance, certainly the influx of faster capital would help them tremendously," Grose said. "You're always going to have some people who are skeptical, especially because of their personal political views. But, to me, I don't see what the downside of this could be. Companies with better cash flow can go invest the dollars in other ways for their businesses. It will also create jobs, which will help the economy and everyone involved. That said, I think the proof will be in the pudding. Even if it speeds payments by only 5 days or 10 days, thatâ€™s a big help. A lot of the small companies in the NACM network can certainly see some help because of this."
- Brian Shappell, CBA, CICP, NACM staff writer
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The House Judiciary Committee Subcommittee on Regulatory Reform, Commercial and Antitrust Law considered a discussion draft this week that would create a new procedure for liquidating too-big-to-fail financial companies. Named the Financial Institution Bankruptcy Act of 2014, the draft has yet to be numbered, but represents the latest in an effort by lawmakers to establish a workable procedure for unwinding failing financial institutions in a way that's fair, fast and easy on the American economy.
Discussion of the process of liquidating financial institutions centers on Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Enacted in an effort to prevent a meltdown similar to the 2008 financial crisis, Title II instituted an "orderly liquidation authority" (OLA) that provides a process for quickly and efficiently liquidating a large, complex, systemically-important financial institution (SIFI) thatâ€™s on the verge of collapse. Title II works around the nation's existing bankruptcy laws, stipulating that when a SIFI fails, the Federal Deposit Insurance Corporation (FDIC) is appointed as a receiver to carry out the liquidation and wind-down of the company.
Competing bills have emerged to replace or supplement Title II with something nearer to or expressly within the Bankruptcy Code. S. 1861, introduced in December last year, would replace Title II with Chapter 14, which would explicitly forbid government bailouts and be used to reorganize large financial holding companies. The Financial Institution Bankruptcy Act, on the other hand, would leave Title II intact but also permit bank regulators to put the institution's holding company and its equity and bond debt into resolution, while transferring its assets to a new bridge company that can be restructured.
Dodd-Frank makes it clear that the FDIC's OLA only applies in instances where Chapter 11 or the Bankruptcy Code is insufficient to handle the reorganization of a bank holding company. However, many in the bankruptcy community are skeptical that Chapter 11 currently possesses all of the tools it would need to successfully accomplish such a task. The bill considered by the House this week aims to remedy that by adding Subchapter 5 to Chapter 11, which outlines a number of new provisions that financial institutions can avail themselves of in order to, in a way, save themselves rather than be forced into a Title II proceeding by federal regulators.
"A proceeding under Title II is commenced by the Federal Government," said witness Stephen Hessler of Kirkland & Ellis LLP in his prepared testimony. "In partial contrast, under Subchapter V, a case may be commenced voluntarily by the covered financial corporationâ€”or involuntarily by the Federal Reserve Board, upon its determination that the covered financial corporation is (or will soon be) insolvent, 'such that the immediate commencement of a case under this subchapter is necessary to prevent imminent substantial harm to financial stability in the United States.'"
Offering SIFIs the opportunity to file themselves creates a great deal more flexibility when it comes to winding them down, which is not afforded to them under Title II. Subchapter V also stipulates that when a SIFI files under a revised form of Chapter 11, the case is to be administered by bankruptcy judges, as opposed to Title II which uses "politically sensitive regulators to decide issues that should be ruled upon by neutral arbiters," according to Hessler.
More on the hearing and on the discussion draft can be found here.
- Jacob Barron, CICP, NACM staff writer
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A new study by Atradius Economic Research, titled "Is the Euro Crisis Over?," finds reasons to support a newfound confidence in a continuing European Union rebound from a harrowing lack of growth in recent years, but also sees reasons to keep the champagne bottles corked for the foreseeable future.
Atradius analysts found that the austerity measures, structural and institutional reforms in high-debt nations and better supervision in the banking sector have all contributed to a return of positive momentum and growth in many countries where it once looked like there was no light at the end of the tunnel. "European politicians are right to point out that the stress and imminent crisis has faded," the report argued. "The existence of the euro is no longer questioned."
The dangers of a slip backward, however, are ongoing. Atradius noted that the debt problem, while showing improvement in the last few years, has yet to be properly resolved. The debt-to-economic-output ratio still exceeds 100% in Ireland, Portugal, Belgium, Italy and Greece. Unemployment also remains at record levels in multiple Southern European nations. In addition, even though the years of sacrifice and positive reports about the economic situation are apparent, other reforms are still needed. However, the political will to make tough choices is fading.
"The institutional framework remains insufficient and reform efforts are hindered by complacency and reform fatigueâ€¦this leaves the euro area vulnerable to a new crisis in the future."
- Brian Shappell, CBA, CICP, NACM staff writer
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The 11th Circuit Court of Appeals in Crawford v. LVNV Funding, LLC held earlier this month that even the act of filing a proof of claim on a time-barred debt is a violation of the Fair Debt Collection Practices Act (FDCPA).
A time-barred debt is a debt that has outlasted the statute of limitations of the state where it was first incurred. In all likelihood, such debt will have been written off by a creditor as bad debt before this happens, but statutes of limitations vary from state to state and in some cases can be shorter when applying specifically to the collection of existing debts. If the debtor fails to pay the creditor and the debt stretches beyond however many years in the statute, the debtor could then file bankruptcy, as it did in Crawford, and the mere filing of the proof of claim could put the creditor at odds with the FDCPA.
In the case, the debtor last made payment on the debt in question in 2001 in Alabama, which has a three-year statute of limitations. This rendered the debt invalid at some point in 2004.
The debtor ultimately filed bankruptcy in 2008 and the owner of the old debt, LVNV Funding LLC, filed a proof of claim for the expired debt, which received no objection at the time and resulted in LVNV receiving payments during the bankruptcy case. Four years later, however, the debtor complained that the debt in question was time-barred and that the creditor's filing of a proof of claim was a violation of the FDCPA, which prohibits creditors from filing suit or threatening to file suit on just such a debt.
The Bankruptcy Court dismissed the complaint, and the District Court affirmed the dismissal, but the 11th Circuit Court reversed the ruling, finding that filing a proof of claim on a time-barred debt "creates the misleading impression to the debtor that the debt collector can legally enforce the debt." The creditor in the case argued that filing a proof of claim was not "collection activity" as it's defined by the FDCPA, but the court disagreed, relying on a broad definition of what's considered "collection activity" that's increasingly common in terms of FDCPA enforcement.
Generally, businesses attempting to collect business debts are exempt from the FDCPA, but regulators have often ignored the distinction between businesses and consumers and the case serves as a warning for creditors aiming to collect on years-old debt. Furthermore, according to NACM's Manual of Credit and Commercial Laws, "the Federal Trade Commission (FTC) has taken the position that the FDCPA may set standards for fair trade practices by creditors. The Commission has stated that under Section 5 of the FTC Act, it could pursue creditors and collectors of commercial debts for the type of conduct that is prohibited by the FDCPA, even though such businesses are exempt from the FDCPA itself."
- Jacob Barron, CICP, NACM staff writer
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Standard & Poor's (S&P) may be willing to settle a 2013 civil suit with the US Department of Justice shifting its previously recalcitrant stance to a suit it characterized as a glorified revenge tactic related to a rating downgrade.
Sources report that S&P may be willing to begin out-of-court negotiations and pay a fine of up to $1 billion in the federal government suit, filed against S&P alleging fraud in its business practices and poor performance in rating companies and investments during the run-up to last decade's housing collapse and subsequent deep recession. The Wall Street Journal theorized this week that S&P's shift in its approach stems from a change in general counsel at its parent company, McGraw Hill Financials, Inc., and that it is trying to broker a settlement that includes no official admission of unlawful behavior.
The switch is shocking because of S&P's dogged public relations campaign to paint the suit as baseless. The ratings agency previously alleged the civil suit was government retribution for its previous, sharply-worded downgrade to the US' "AAA" sovereign rating amid partisan gridlock between Congress and the Obama Administration. Moody's Investment Service and Fitch Ratings, both also lampooned for similar business practices and ratings performances in the lead-up to the recession last decade, did not lower the US rating and, perhaps notably, were not sued by the Justice Department. One high-ranking member of McGraw Hill Financials, Inc. went so far as to accuse former Treasury Secretary Timothy Geithner of personally threatening government retaliation in a private conversation between the two not long after the downgrade. Geithner refuted the accusation.
The change of strategy also caught analysts off guard because of S&P's May victory in US District Court requiring the release of documents tied to the government's civil suit against them.
- Brian Shappell, CBA, CICP, NACM staff writer
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The US Department of Justice (DOJ) called Discover Chief Operating Officer Roger Hochschild to the stand last week in its ongoing suit against American Express (AmEx) for antitrust violations.
At issue in the case is AmEx's institution of anti-steering policies on merchants who want to accept their credit cards. These policies forbid AmEx-accepting companies from offering incentives to customers who choose to pay with cards or other forms of payment that have lower processing costs for the accepting merchant. The DOJ has argued that these rules deny other card processors, like Visa, MasterCard and Discover, the competitive benefits of offering merchants lower processing costs, which simultaneously keeps prices on card-accepting merchants artificially high.
In his testimony before Judge Nicholas Garaufis in US District Court for the Eastern District of New York, Hochschild accused AmEx of "taking the merchants' money and using it against them." Essentially, by forcing merchants into a situation where AmEx can raise their fees without the fear that they'll lose customers because of their anti-steering requirements, AmEx has been able to take the billions of dollars in fees it collects and put it to use further increasing customer loyalty and solidifying their market position.
AmEx has argued that their fees, which are on average the highest in the business, are justified because of the additional services they provide to cardholders and card-accepting merchants. Preventing them from instituting anti-steering rules would put their entire business model in jeopardy, AmEx has said, which could certainly be true; the fees AmEx collects from card-accepting merchants, known as interchange or "swipe" fees, amount to about 65% of their revenue.
The DOJ has held that such an argument is legally irrelevant and that the company's fears of failure are not enough to justify its operation outside the boundaries of a free market.
AmEx's trial is expected to last through the summer.
- Jacob Barron, CICP, NACM staff writer
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