eNews July 29 2010

July 29, 2010

News Briefs

  1. FTC Files Brief Asking D.C. Court to Apply "Red Flags" Rules to Lawyers
  2. Judge Asks for Amended Filings in Delphi Preference Suit on Heels of Supreme Court Decisions
  3. Export LCs: The Essentials of LC Instructions
  4. Study: Cities Hold Potential to Spike in Exports
  5. FASB Issues Accounting Standard Update for Credit Quality of Financing Receivables
  6. Two Words from Bernanke, Lackluster Regional Roundup Shake Confidence in Recovery
  7. New Unclaimed Property Survey Results

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FTC Files Brief Asking D.C. Court to Apply "Red Flags" Rules to Lawyers

The battle between the Federal Trade Commission (FTC) and the American Bar Association (ABA) over the agency's "Red Flags" Rules rages on, as the FTC recently filed a brief urging the D.C. Court of Appeals to overturn a lower court's ruling that said the regulations don't apply to the nation's lawyers.

Originally, the FTC included legal practices within its definition of a creditor, making them subject to the "Red Flags" identity theft prevention regulations. The ABA then sued the FTC in August 2009, arguing that the agency's definition of "creditor" was far too broad and exceeded its authority. Three months later, Judge Reggie Walton of the U.S. District Court for the District of Columbia found in the ABA's favor.

In February 2010, the FTC noted that it would appeal the ruling and filed a brief last week with the Court of Appeals for the District of Columbia, listing why they want Walton's ruling overturned.

"The district court's ruling improperly grants a blanket exemption to all attorneys from the 'Red Flags' Rules protections, even where an attorney engages in financial arrangements with her client that would unquestionably constitute a grant of credit if done by any other service provider," said the brief. "The plain language of the Fair and Accurate Credit Transactions Act (FACTA) mandates that any service provider who defers the payment of a bill—including lawyers—is subject to the 'Red Flags' Rules. Congress intended the important FACTA identity theft provisions to cover both traditional financial institutions and any entity that provides credit."

"Not only does the statute provide no exception for lawyers, but its legislative history indicates that Congress intentionally chose a broad definition for 'credit,' and subjecting lawyers who extend credit is entirely consistent with the statutory purposes," the FTC added.

The ABA has yet to respond to the brief, which can be found in its entirety here.

Jacob Barron, NACM staff writer

Industry Credit Groups

Credit groups are an effective management tool. They permit credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data as to the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so competent and realistic credit decisions about a customer can be made.

Managed and operated by NACM Affiliates nationwide, NACM-Canada and FCIB internationally, credit groups:

  • Provide unparalleled networking opportunities
  • Assist in the exchange of credit information on common customers
  • Facilitate the receipt and analysis of information to make unilateral credit decisions
  • Provide a forum to discuss the latest developments on credit department procedures,
    equipment and other credit management functions
  • Support the discussion of account information and delinquent account reports
  • Adhere to federal antitrust guidelines

Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.

Judge Asks for Amended Filings in Delphi Preference Suit on Heels of Supreme Court Decisions

A judge has asked Delphi Corp.'s post-confirmation entity to file amended claims in its preference lawsuits against hundreds of companies/vendors that dealt with the company prior to and during its bankruptcy reorganization more than three years ago. Meanwhile, a group of the defendants' attorneys are arguing the case should be thrown out because the identities of the defendants and news of the suits were kept secret for an exhorbitant amount of time.

On July 22, Judge Robert Drain of the Bankruptcy Court for the Southern District of New York instructed the entity, DPH Holdings, to amend its claim to include specific recipients of the preference transfers it alleges in addition to various other details on the cases. In essence, Drain is following a pair of recent higher court rulings that suggest plaintiffs need to clearly state specific information in such claims (e.g., the amount to be recovered, the purchase order or invoice the transfer paid, actual recipient of the transfer and secondary recipient of the transfer). DPH/Delphi has 45 days from that hearing to re-file.

The post confirmation entity for auto-parts supplier Delphi, which declared bankruptcy in 2005 and exited in 2009, is suing various companies/vendors for a total that some estimate is as large as $500 million for taking payments outside the regular course of business. Delphi was formerly the largest supplier to General Motors.

Attorneys for the defendants raised objections to the lawsuits at the hearing, citing that they were filed under seal in 2007. Because the companies were unaware for years that they would be required to mount a defense against DPH/Delphi, they may not have kept key documents, may have entirely new employees that don't know details of the bankruptcy proceedings/business dealings at around that time or may have completely changed computer systems figuring that agreements were made and plans were confirmed. The argument to dismiss also included that DPH/Delphi's lawsuits do not meet the standards for pleading cases that the Supreme Court of the United States set in the aforementioned rulings—the most recent occurred on July 14 when U.S. Bankruptcy Court Judge Brendan Linehan Shannon ruled such suits need to more clearly identify the underlying facts of a preference claim. Drain reportedly indicated that the plaintiff's amended complaints should comply with said standard.

Meanwhile, the Supreme Court ruling could prove to be a headache for credit departments/managers, especially those at companies with various divisions and/or those regularly receiving large payments. To have to go back through records for a 90-day period, for example, to determine which division one particular payment may have gone to and what specific invoice it was intended for to meet the court standard could prove "aggravating beyond belief" and like "looking for a needle in a haystack" for credit departments, one source close to the case noted.

Brian Shappell, NACM staff writer

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Then check out NACM's Credit Real-Time Blog! There's no better place for latebreaking news on all things B2B credit, from legislative changes and analysis to economic updates to domestic and international strategies. To subscribe today, click here.

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Export LCs: The Essentials of LC Instructions

"LCs are intimidating but they don't have to be," said Danielle Austin of Export Trade Associates (ETA). "They're complicated but they shouldn't be."

Indeed, many creditor companies looking to do sales internationally know that letters of credit (LCs) offer them security, but aren't quite sure how to take advantage of this frequently misunderstood instrument. Austin, however, an LC industrialist and former senior vice president at Bank of America, knows that there's a way for all exporters to use LCs efficiently and effectively.

After 15 plus years of hands-on experience working with hundreds of companies, Austin has learned the best ways for companies to leverage LCs, noting that the process starts with the company's LC instructions. "From day one it's so important that they have a system in place," she said, "versus using a template that the bank has provided, or one that they've used for 17 years and they don't even know why."

Exporters with a standard set of LC instructions can better ensure that each payment, no matter where it comes from, will be taken care of according to the seller's instructions. "You can ship anywhere in the world and that LC should be in the same format," she noted. "They don't have to reinvent the wheel." This, in turn, can allow sellers to extend their payment terms to customers and gain an advantage over their competitors, because although the customer's terms are longer, the seller can still get paid "at sight" because of the security the LC provides.

Now is the time to take control of your export LC process. To learn more about creating and tailoring your own LC instructions, equipping your sales team to ship anywhere in the world, understanding the impact of Incoterms and controlling funds without affecting your customer, join Austin on August 4 at 3:00pm EST for her NACM teleconference, "Export LCs: The Essentials of LC Instructions." In addition to all the topics listed above, Austin will also show attendees a generic set of LC instructions, or bank template, and show them how to tailor their own LC instructions to fit their company's specific needs.

To learn more about this teleconference, or to register, click here.

Jacob Barron, NACM staff writer

MLBS Offers Complete Lien and Bond Services and More

NACM's Mechanic's Lien and Bond Services (MLBS) brings best-in-class service options to today's construction credit professional.

MLBS' Lien Navigator is a web-based service that provides up-to-date information for all 50 states and Canada, including notice, lien, payment bond and suit timelines, procedures and other relevant information in a state-by-state/province-by-province format.

MLBS also offers two preliminary notice to owner (NTO) services, deadline tracking, a lien and bond filing program, and a suit against bond and foreclosure service. Both NTO services include, at no additional charge, a Next Action Notification Email. These reminders are sent automatically to ensure that your lien and suit deadlines are met during each step of the lien process.

For more information on NACM's MLBS, click here.

Study: Cities Hold Potential to Spike in Exports

Echoing the recent sentiments of the Obama White House, a new study finds massive potential for exporting in a number of U.S. metropolitan areas.

A July study unveiled by the left-leaning Brookings Institution suggested that significant growth in exports could be found in several U.S. cities in recent years—most notably Wichita, KS; Portland, OR; New Orleans and Houston—despite the ongoing slow recovery from the recession. It also found that more metropolitan-based companies and lawmakers need to collectively "look overseas to fill the gap in demand."

"Increasing a metropolitan area's export orientation is likely to create higher paying jobs—and not just for the most highly educated," the study states. "Local metropolitan leaders should be concerned with increasing the export intensity of existing companies rather than simply recruiting new ones, and in recruiting should target industries that overlap with existing firms in the area. There is evidence that exporting firms located in the same county as other firms in their industry experience higher productivity growth."

Brookings found the industries with the highest export totals during a five-year period ending in 2008 were transportation equipment ($202 billion), chemicals ($165.8 billion), computer/electronic products ($136.4 billion), machinery ($133.7 billion) and business/professional/technical services such as consulting, advertising or architecture services ($113.5 billion). Exports from U.S. cities most often, by a large margin, were sent to Canada ($255 billion in exports) and Mexico ($149 billion). They were followed, in order, by the United Kingdom, Japan, Germany and China.

Other interesting Brookings findings include:

Top Metropolitan Areas Ranked by Total Export Value and Top Industry in Area

1. New York - $85 billion, chemicals
2. Los Angeles - $78.54 billion, computer/electronics
3. Chicago - $52.8 billion, machinery
4. Houston - $51.5 billion, chemicals
5. Dallas - $44.5 billion, computer/electronics

Top Areas Ranked by Share of Exports Related to Area Gross Metropolitan Product and Top Industry

1. Wichita, KS - 27.8%, transportation equipment
2. Portland, OR - 20.6%, computer/electronic products
3. San Jose, CA - 20.1%, computer/electronic products
4. Baton Rouge, LA - 18.8%, chemicals
5. New Orleans - 18.1%, petroleum/coal products

Brian Shappell, NACM staff writer

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FASB Issues Accounting Standard Update for Credit Quality of Financing Receivables

The Financial Accounting Standards Board (FASB) recently issued a new standard that governs how companies account for the quality of their receivables.

As its title would imply, Update No. 2010-20, Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses, requires companies to provide more information in their disclosures about the credit quality of their financing receivables, as well as the credit reserves held against them. FASB, which has established accounting standards for the United States since 1973, hopes the move will restore market confidence by increasing transparency in both public and nonpublic companies that hold loans, leases and other long-term receivables.

"The global financial crisis highlighted the need for additional information about a company's financial instruments, including loans and other financing receivables," stated FASB Chairman Robert Herz. "This Update provides greater transparency for investors and other users of financial statements by requiring more information from companies about credit risk exposures for financing receivables and the related credit reserves."

Specifically, the update will require companies to make additional disclosures, such as ones pertaining to aging of past due receivables, the state of any credit quality indicators and modifications made to financing receivables. Companies will also have to disaggregate new and existing disclosures based on how the company develops its allowance for credit losses and how it manages exposure.

Items exempt from the updated standard include short-term accounts receivables, receivables measured at fair value or lower of cost or fair value and debt securities.

For more information, visit the FASB website at www.fasb.org.

Jacob Barron, NACM staff writer

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Two Words from Bernanke, Lackluster Regional Roundup Shake Confidence in Recovery

In many circles, former Federal Reserve Chairman Alan Greenspan was defined by and/or mocked for using the word "frothy" to describe the overheated housing market's fueling of the economy last decade. His successor, who remains keenly concerned about ongoing small businesses and commercial real estate problems, may now find himself defined by two: "unusual uncertainty."

The two words were the primary talking point coming out of Fed Chairman Ben Bernanke's presentation of the "Semiannual Monetary Policy Report to the Congress" before the Senate Banking Committee on July 21. Such "unusual uncertainty" was the trigger behind scaled-back economic projections of the already tepid recovery's strength by the Fed and many non-agency analysts. Bernanke noted small businesses have been "particularly hard hit" among ongoing overall economic struggles because of factors such as tight credit standards, newer regulations that are better suited for large banks and ongoing elevated unemployment levels. He again talked of the more than 40 meetings Fed officials have had with small businesses and lenders in recent months in an attempt to help matters.

Various problems with real estate were also noted by Bernanke: "The housing market remains weak, with the overhang of vacant or foreclosed houses weighing on home prices and construction...spending on nonresidential structures—weighed down by high vacancy rates and tight credit—has continued to contract."

However, Bernanke, who has been panned of late for being less clear and detailed with lawmakers than when he first took the chair position, did note several reasons to hold on to some optimism for the rebound to continue, even if at a slower-than-desired pace. Bernanke outlined predictions for low inflationary pressure and Fed rates for the next year-plus, an unemployment rate that is likely to drop by nearly 3 full percentage points by the end of 2012 and vague signs that the rate of decline in commercial real estate is ready to abate.

"We don't think a double-dip [recession] is a likely event," said Bernanke.

On the heels of the confidence-shaking testimony, the Fed released its Beige Book report on conditions from the last six weeks within its 12 regions on Wednesday. The report's economic roundup painted a less optimistic picture than previously in 2010, as Fed contacts noted the pace of economic growth slowing in regions that had been improving, albeit slightly; two districts experiencing stagnation (Cleveland, Kansas City) and a pair where activity was actually failing to remain stable, let alone make gains (Atlanta, Chicago).

Granted the negative news was nothing new to the commercial real estate sector, indentified as a drag on the recovery in all regions throughout much of this year. And though banks' lending criteria for businesses to garner loans remained restrictive, the bigger issue is that actual borrower demand has fallen to very low levels. Still, the Fed contends that "on balance," the economy still is still in a growth period, a very slow one. Some pieces of positive news came from at least half the nation's regions in manufacturing, especially in those tied to the automotive industry; tourism, save the oil-spill wrought Gulf Coast; and employment opportunities, though there's a lot more part-time (non-benefits) work available.

For a breakdown from each of the Fed's 12 regions, visit the NACM blog section, Credit Real-Time.

Brian Shappell, NACM staff writer

New Unclaimed Property Survey Results

The Tax & Accounting business of Thomson Reuters has announced findings from a recent unclaimed property survey indicating that as they face rising state enforcement and audits, only slightly more than half of all companies are filing their unclaimed property reports and less than 50% have written policies and procedures in place. The survey conducted during a continual professional educational (CPE) web seminar in June 2010 attended by 82 energy executives found that:

  • 56% file unclaimed property reports
  • 32% have been or are currently being audited
  • 41% are incorporated in Delaware
  • 42% have developed and implemented written policies and procedures related to unclaimed property compliance

Unclaimed property collections exceed hundreds of millions of dollars in annual receipts for the various states and with the majority still in deficit (source: Center on Budget and Policy Priorities, "Recession Continues to Batter State Budgets; State Responses Could Slow Recovery," July 15, 2010), states are expected to more stringently enforce and expand the scope of existing unclaimed property laws.

The survey also found that a large portion of companies are incorporated in Delaware, which has a higher risk of unclaimed property audits.

"Delaware is one of the more proactive states in terms of unclaimed property enforcement," said Valerie Jundt, director for the Unclaimed Property Group of Thomson Reuters Tax & Accounting. "With a large majority of the Fortune 500 companies incorporated in that state, we expect the number of audits to rise. Since unclaimed property is not a tax, in recent years, it has been used as an additional avenue for states to shore up their massive deficits without raising taxes."

Other states such as New York, California, Texas and Louisiana are also stepping up enforcement activities. The survey found that approximately one-third of companies have been or are currently under audit, but that number could be expected to increase over the next several years. Companies that are in compliance or that take an active stance with state regulatory authorities will find themselves in a much better position to deal with an audit.

Unlike a tax, there is no "statute of limitations" and nexus rules do not apply. Unclaimed property must revert to the state of the owner's last known address or state of incorporation if the address is unknown. Failure to properly comply with these statutes may subject the company to both state and federal implications. Unclaimed property specific to energy companies can include, but is not limited to:

  • Payroll/wages/commissions
  • Accounts payable
  • Accounts receivable credit balances
  • Utility deposits
  • Customer credit refunds
  • Rebates
  • Mineral proceeds/suspense accounts
  • Gift cards
  • Equity-related property (stocks, dividends, etc.)
  • Debt-related property (bonds, debentures, etc.)
  • Worker's compensation
  • Employee benefits
  • M&A related property

In addition to facing stiff fines and penalties for non-compliance at the state level, there could also be federal implications for failure to properly address this important compliance requirement as outlined in Sections 404 and 302 of Sarbanes-Oxley.

Source: The Tax & Accounting Business of Thomson Reuters


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