eNews November 21, 2013

November 21, 2013


eNews will take a break next week for the holiday and resume on December 5, 2013. For up-to-date credit news, visit NACM's blog . Have a happy and safe Thanksgiving!

News Briefs

  1. NACM Survey: Due Diligence a Priority, but More-With-Less Philosophy Takes Its Toll on Credit Investigations
  2. Industries to Watch: Health Care
  3. Federal Reserve Town Hall Series Ends, Survey Still Open
  4. Texas Supreme Court Hears Arguments in Case on "No Damages for Delay" Clauses
  5. Pension Group Loses Another California Fight
  6. Study Finds Unsecured Creditors Worse Off in Consumer Bankruptcies Post-BAPCPA


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NACM Survey: Due Diligence a Priority, but More-With-Less Philosophy Takes Its Toll on Credit Investigations

Although most companies give their credit departments enough time to feel comfortable with a customer before making a sale, a sizable minority of them are still rushing blindly into potentially risky transactions, and only a few years after the recession taught the world a harsh lesson on the importance of due diligence.

NACM's November survey, which asked "Do you feel that your company provides the credit department with enough time to perform due diligence on a new or prospective customer before selling to them?" found that 67% of respondents felt comfortable with the amount of time they had to investigate new buyers. However, nearly a third of participants answered "no," blaming either an overly sales-driven corporate culture or simply a lingering do-more-with-less attitude for the pressure they felt to approve customers quickly with only a cursory look into their creditworthiness.

"The credit department is pushed to have an almost immediate answer within 24 hours and it is very difficult to obtain any trade reference information in such a short amount of time," said one respondent. "Most companies work 'more with less' in today's market and providing credit history information in a trade reference request is low on everyone's priority list."

However, not all respondents were broken up about this added pressure, noting that it forced them to get more creative with how they secure their sales. "It is more a case of the credit department being responsible for figuring out how, under what terms or protection measures, we can work with the customer and not a matter of refusing to work for the un-creditworthy," they said.

Some noted that the nature of their industry accounted for occasional rushes in the due diligence process. "Most of the time we are given sufficient time but fire drills still occur," said one participant. "It is the nature of the construction industry." Still others noted that collaboration with sales ahead of time was key to ensuring that everyone was comfortable with the customer and with the amount of time it takes to properly check their credit history. "We work with our sales/marketing team on potential 'big deals' to pre-score customers so that we can hopefully avoid any issues," said one. "On large orders, or when negotiating contracts, we are given certain information ahead of time so we can initiate our due diligence before we get an order," said another. "In certain instances the sales team often lets the customer know that they will have to communicate with the credit department before an order can be approved. This helps move the process along."

Look for NACM's next survey question the first week of December. In the meantime, please participate in NACM's Credit Managers' Index (CMI) survey for November, open until 5:00pm EST on November 22.

- Jacob Barron, CICP, NACM staff writer

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Industries to Watch: Health Care

Few topics in American news media would realistically have the power to knock talk of the federal government shutdown almost completely off the front pages and out of the public consciousness. But the epic failure of the progress of the Affordable Care Act ("Obamacare") and associated rollout of the Heathcare.gov website did just that.

Concerns over the cost to businesses of offering insurance to every American haven't gone away, nor has the debate become any less peppered with vitriol. That is especially the case among lawmakers, and it isn't likely to change soon, said NACM Economist Chris Kuehl, PhD. That notwithstanding, the fact that a myriad of problems were unearthed at the time when Americans were supposed to be able to initially enroll for health care plans online has pushed the timetable back, and will continue to do so. That's dangerous for product and service providers, according to Kuehl and Deborah Thorne, Esq., a partner in the Chicago office of Barnes & Thornburg LLP.

"There have been a lot of complaints," Thorne said. "Hospitals and institutions thought it would be all organized by now. They made decisions on things like expansion, thinking it would be up and running. I'm hearing people say 'maybe we shouldn't have done that,' right now." That said, the problems haven't shown up in companies' respective bottom lines yet. However, Thorne believes the numbers could start to bear out by the next quarter.

Additionally, there is the possibility that companies will be exposed to fraud as a result of the new health care effort. Thorne put it simply: much higher demand could mean more fraud. "Things fall through the cracks," she said. "With all these people eligible that didn't have access before, there may be people who take advantage of the system. I think it opens the door. There certainly will be opportunities for fraud with the increased volume."

In short, if selling on terms to a doctor's group, hospital, manufacturer or service provider where the business is highly dependent on stability within the health care industry, credit professionals need to know who these customers are, how they are faring and what their future prospects look like, at least until some clarity about various aspects of the law emerge.

- Brian Shappell, CBA, CICP, NACM staff writer

NACM Members Can Now Save with UPS®

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Federal Reserve Town Hall Series Ends, Survey Still Open

A six-stop tour for Federal Reserve Financial Services representatives working on an initiative to improve payment systems wrapped on November 20. However, a survey for end users of payment systems will remain open for a few more weeks.

The Fed held Town Hall meetings in Atlanta, Chicago, Cleveland, San Francisco, Boston and Dallas over the last two weeks. According to credit professionals who attended at least one of the meetings, some key topics of concern included accelerating the transition away from traditional (paper) check-writing activity, the availability of remittance information on electronic payments/wire transfers and the use of mobile devices for making payments, either from consumers-to-businesses or within trade credit transactions. On the latter, some are concerned that safeguards may not be keeping pace with technological developments, giving the Fed a weighty issue to consider in its eventual set of recommendations or guidance on payment systems.

"I think you've seen the commercials with people making payments with their phones. My thought about it is, I'm a little more old school about protecting information," said Sean Pleva, CCE, ICCE, credit manager with the Sherwin-Williams Company and chairman of the board for NACM Greater Cleveland. "Even if it's coded, it feels like you're on the branch with information. If someone developed the technology, someone could potentially break it and hack the information."

Pleva attended last week's meeting at the Federal Reserve Bank of Cleveland, which drew 100-150 attendees by his estimation. He applauded the collaborative environment and noted it appears that Fed officials are making a concerted effort to hear the voice of those involved in B2B finance. And, more importantly, it's all happening before a set of recommendations or guidance has been crafted.

"If you are reacting, you're at a disadvantage. We're on the cutting edge, the front end of the information here," Pleva said. "If we're plugged in on the front end, it's good because you're able to apply it and affect it."

A key part of the Fed payments improvement issue continues to be the Fed's online survey. The agency hopes the business community can illuminate perceived problems (and solutions) regarding electronic and other types of payment systems. It has released a bit of a primer on the issue in its report titled Payment System Improvement–Public Consultation Paper. NACM urges all credit professionals involved with payment systems to complete the online survey, which will be available through December 13.

- Brian Shappell, CBA, CICP, NACM staff writer

Registration NOW OPEN for Credit Congress 2014

We invite all credit professionals to gather with us at Orlando's Rosen Shingle Creek in June 2014 for our annual Credit Congress & Exposition. For NACM, this marks 118 years of excellence, vision and unity at the nation's largest meeting of business credit practitioners. Share our excitement as the business credit community grows and excels, proving itself as a cornerstone of the world of business.

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Texas Supreme Court Hears Arguments in Case on "No Damages for Delay" Clauses

On November 6, the Texas Supreme Court heard oral arguments in Zachry Construction Company v. Port of Houston Authority of Harris County, Texas, a case that could have severe ramifications for contractors and subcontractors state-wide.

At issue is whether or not an owner can include clauses in their contracts that essentially protect them from ever having to pay delay damages, even when the owner's actions are intentionally or unintentionally responsible for the delay. In other words, the Texas Supreme Court will eventually rule whether "no damages for delay" clauses in construction contracts extend to delays caused willfully by the owner.

A lower court, the 14th Court of Appeals of Texas, ruled that they did just that in August 2012: according to the American Subcontractor's Association (ASA), the court found that Zachry Construction Co. could not recover damages related to a delay that was caused by the owner's breach of contract because of the presence of a "no damages for delay" clause. The court argued that, "parties strike the deal they choose to strike and, thus, voluntarily bind themselves in the manner they choose."

According to Chris Ring of NACM's Secured Transaction Services (STS), "general contractors, subcontractors and material suppliers need to pay particular attention to and support ASA's arguments to overturn the 'no damage for delay ruling,' for if this ruling stands, an owner has the ability to willfully and negligently delay a project with limited or no recourse from downstream contractors and suppliers."

- Jacob Barron, CICP, NACM staff writer

Subscribers to the STS Lien Navigator receive late-breaking updates on construction law changes in all 50 states and Canada. To be one of the first people to know when the Texas Supreme Court actually issues a ruling in this case, learn more about the Lien Navigator and STS' other services here.

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Pension Group Loses Another California Fight

The California Public Employees' Retirement System (CalPERS) continues to fight against the eligibility of Chapter 9 bankruptcy filings for several state municipalities hobbled by debt. Late last week, it was dealt another in a string of losses that could help other municipalities in the state, and perhaps beyond, in future quests to garner eligibility in the courts.

Judge Meredith Jury, who declared the city of San Bernardino eligible for Chapter 9 on August 28 after finding it truly insolvent, turned away CalPERS' latest challenge in the U.S. Court of Appeals for the Ninth Circuit. CalPERS argued that San Bernardino is, in fact, not insolvent, but simply trying to shirk its financial responsibilities. The judge's ruling reflected her belief that this topic was already covered during eligibility hearings in August where she intimated that it was nearly impossible to argue that San Bernardino is anything but insolvent based on what it owes to current and retired city workers. CalPERS is already taking the matter up the chain to the district court level.

CalPERS has been fighting publicly against municipal filings like those of San Bernardino and Stockton, which was also declared eligible for Chapter 9, since escalating debt levels furthered the filing trend. With many cities teetering on insolvency primarily because of expensive health care and pension entitlements, the California cases are under close watch throughout the nation.

- Brian Shappell, CBA, CICP, NACM staff writer

The Lien Waiver Process Needs to Be Managed

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Study Finds Unsecured Creditors Worse Off in Consumer Bankruptcies Post-BAPCPA

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, unsecured creditor recoveries in consumer bankruptcy cases have actually declined according to a new study funded by the American Bankruptcy Institute (ABI) Endowment.

Despite the financial services industry's contention during the debate over BAPCPA that the law would improve unsecured creditor recoveries in consumer filings, Professor Lois Lupica of the University of Maine School of Law found just the opposite to be true in her report, titled "The Consumer Bankruptcy Creditor Distribution Study." Lupica's report also set out to discover whether consumers are able to repay a larger percentage of their unsecured debts under BAPCPA than they were before it became law.

"Our analysis reveals BAPCPA does not appear to have achieved the primary objective of its proponents, as unsecured distributions as a percentage of unsecured claims declined nationally by a statistically significant 3.2 percentage points in the post-BAPCPA time period," Lupica wrote. "Moreover, unsecured distributions as a percentage of total distributions declined by 2.5 percentage points, a result that was also statistically significant."

Unsecured creditors in consumer cases often lost out because BAPCPA significantly increased filing costs for consumers, and also created situations wherein some or all of the Chapter 13 and all of the Chapter 7 attorney's fees are expected to be paid post-petition from estate assets. This often leaves unsecured creditors with little in the way of payment on their claims, much the same as has been anecdotally reported by unsecured creditors in commercial bankruptcy filings, which Lupica's study did not cover.

- Jacob Barron, CICP, NACM staff writer


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