1. business and industrial
2. company
3. bankruptcy

THE COMMERCIAL FACTOR
SPR04
Newsletter for the Factoring Industry
• Volume 6
• Number 2
• Spring 2004
International
Factoring Association
IN THIS ISSUE
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Factoring: Key Issues Under
The UCC ...................page 1
Sales vs. Operations: Conflict
or Cooperation?.........page 5
Documentation Management
in Factoring and Financial
Services .....................page 6
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Corporate News ........page 7
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Upcoming IFA Events ... page 7
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Do You Know What You're
Getting Into? ............... page 8
Navigating The Public
Records Maze.......... page 10
Credit Groups. Because There is
Stength in Numbers..... page 11
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Caveat Emptor ......... page 11
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Stop The Bleeding ....... page 12
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A Rose By Any Other Name
A Guide to Searching Under
RA9 ........................ page 13
Factoring News
Flashes.................... page 15
Legal Factors............ page 16
Account Exec/Loan Officer
Training Course........ page 17
Hiring The Right
Person..................... page 17
A Publication of:
THE INTERNATIONAL
FACTORING ASSOCIATION
555 Chorro Street, Suite B
San Luis Obispo, CA 93405
805-544-5724 • 800-563-1895
www.factoring.org • [email protected]
FACTORING: KEY ISSUES UNDER THE UCC
O
One of the most important transactions
covered by Revised Article 9 of the UCC
is the factoring of receivables. Factoring
is big business in this country and around
the world. Under a typical factoring
arrangement, receivables (e.g., 30/60/90/120-day
open accounts) are sold outright from originators (e.g.,
manufacturers, distributors, or retail dealers) to the
factor for cash at a discount. Commercial factors come
in all shapes and sizes. The factor could be buying the
receivables of a single originator or many. It could be
buying a single type of receivable (e.g., healthcare,
textile or government contractor receivables), or have
a highly diversified portfolio. The receivables could
involve either goods or services. Factors sometimes
combine the outright purchase of some receivables
with more traditional asset-based lending against
others.
Factoring is almost always done on a “notification”
basis, with the account debtors instructed to make
payment directly to the factor. It is also normally
done “without recourse”, at least in the absence
of any dispute involving the underlying goods or
services. The factor maintains the ledgers, collects
the accounts, and bears the risk of the account
debtors’ insolvency. Factoring is first cousin to the
sale of chattel paper from a dealer to a financer,
and to more elaborate “securitization” transactions.
A typical factoring agreement includes the following
provisions:
• A clear designation of the receivables covered
• Language conveying the receivables for the
designated discount price
• The factor’s assumption of the credit risk
• Accountings to be rendered monthly from the
factor to the originator
• Warranties as to the genuineness of the
accounts sold to the factor
• A right of charge-back if the account debtor
fails to pay due to a dispute regarding the
underlying goods or services
• The factor’s right to maintain a reserve as
protection against returns, claims, or
defenses relating to the underlying
transaction, unrelated claims by the account
debtor, or other debt owing by the originator
to the factor
Factoring is covered by Article 9. Article 9 of the
By Barkley Clark, Esq.
UCC is the legal framework within which factoring
takes place. The term “security interest” includes
the interest of an outright buyer of “accounts” and
“payment intangibles.” UCC §1-201(37). The term
“account” is defined broadly in Revised Article 9 to
include a right to payment for property sold, leased
or licensed, or services rendered. UCC §9-102(a)(2).
A “payment intangible” is a monetary obligation that
doesn’t qualify as an account (UCC §9-102(a)(61)),
and would include the obligation of a borrower on a
bank loan; the buyer of an interest in a bank loan under
a participation arrangement is akin to a factor but is
not considered to be part of the industry.
The most important rule found in Article 9 is that an
outright buyer of accounts, just like a lender against
accounts, must file a UCC financing statement; the
originator is the “debtor” and the factor is the “secured
party”. Failure of the factor to file a financing statement
will leave its interest unperfected if the originator goes
bankrupt or double-finances. Some small companies
just entering the factoring business may not be aware
of this pitfall. By contrast, the buyer of a “payment
intangible” need not file; its security interest is
automatically perfected. UCC §9-309(3). Most
factoring arrangements involve the sale of “accounts”,
not “payment intangibles”. If a factor has perfected
by filing against the accounts it buys, and the sale is
“outright” in nature rather than a disguised secured
loan, the factored accounts should be considered
removed from the originator’s bankruptcy estate
under §541 of the Bankruptcy Code, even though
Article 9 governs the transaction. A famous Tenth
Circuit decision from 1993 suggested otherwise, but
Revised Article 9 clearly overrules it. Octagon Gas
Systems v. Rimmer, 995 F.2d 948 (10th Cir. 1993),
cert. denied, 510 U.S. 993 (1993)
Is the factoring arrangement a “true sale” or a secured
loan? Although UCC filing is required for both outright
sales of accounts and secured loans using accounts
as collateral, there are important distinctions between
the two. Perhaps most important, failure to show
that the transaction is a “true sale” means that the
receivables remain as assets in the bankruptcy estate
of the originator and continued collection by the factor
is subject to the automatic stay. Though the factor
has a secured claim, it is only entitled to “adequate
CONTINUED ON PAGE 2
protection” for its collateral. The
CONTINUED FROM PAGE 1
P2 THE COMMERCIAL FACTOR
case law shows that the key issue is the amount of recourse the factor retains - the greater the
recourse against the originator, the greater the risk that the transaction will not be considered as
a true sale. A good case on point is In re Den-Pen Line, Inc., 215 BR 947, 34 UCC Rep.2d 502
(Bankr. E.D. Pa. 1997), where the court found a “disguised loan” based on the following clause in
the factoring agreement: “If after a period of 60 days from date of invoices, payment has not been
received, DIL [the factor] will charge back to Den-Pen [the originator] the monies advanced on
that invoice plus the full factor fee, to be deducted from the following week’s advance payment.”
The court felt that this was not an outright sale because of the high level of recourse; the factor
had not assumed the credit risk that “true ownership” would entail.
NEWSLETTER FOR THE FACTORING INDUSTRY
Failure to qualify the factoring arrangement as an outright sale can cause other problems for the
factor. In Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 26 UCC Rep. 1319
(3d Cir. 1979), the high level of recourse meant that the factor was required to turn over to the
originator any surplus realized from direct collection of the receivables. If the transaction had
qualified as a “true sale”, the factor could have kept the surplus as its own. UCC §9-608(b). In a
similar vein, the duty under Article 9 to collect receivables in a “commercially reasonable” manner
applies only to secured loans; if the transaction is a true sale, the factor is not subject to that
requirement when it collects the receivables from the account debtors. UCC §9-607(c)(2)(factor
must collect accounts in commercially reasonable manner only if it has “full or limited recourse”
against the originator).
Bert Goldberg
In a recent case, Korrody v. Miller, No. 04-02-00914-CV, 2003 WL 22489644 (Tex. Ct. App. Nov. 5,
2003), a construction company and a factor entered into an oral factoring agreement under which
the construction company was obligated to repay the factor the amount that had been advanced
on sale of a large receivable, plus a designated fee. The account debtor made payments to the
originator rather than the factor after the originator had asked the factor not to notify the account
debtor of the assignment until it terminated a prior factoring arrangement. When the originator
failed to make payment, the factor sued. The originator counterclaimed on the ground that the
transaction was not a “true sale” of the receivable, but a secured loan subject to the Texas
usury laws. In looking at all the surrounding circumstances, including the long-term relationship
involving “true sales” of receivables from originator to factor and the absence of any recourse,
the court concluded that the arrangement was a true factoring relationship and not a disguised
secured loan. Therefore, the usury law didn’t apply and the factor could recover the full amount
due. One additional point that stands out in the case: The factor was dumb to rely on an oral
agreement. Under Article 9, a “true sale” factoring agreement, just like a security agreement, must
be “authenticated” in order to be enforceable against the originator. UCC §9-203. If no written
agreement is signed, “authentication” still requires some sort of “record” identifying the parties
and showing a meeting of their minds. UCC §9-102(a)(7). The court in the Texas case glossed
over that issue, but factors should beware the danger of not getting a written agreement.
Filing and perfection issues. For the most part, factors face the same filing and perfection issues
under Article 9 that traditional secured lenders face. Here are the issues of most concern:
Risks posed by the filing transition rules.
If the originator of the receivables is a “registered entity” such as a corporation, and the
factor had filed in State X (chief executive office) under old Article 9, an “initial financing
statement in lieu of a continuation statement” will have to be filed in the originator’s state
of incorporation if that is a different state. That is the teaching of the transition rules in
Revised Article 9. The “initial financing statement” must be filed in the new state within
five years of when the old financing statement was filed, though the new filing need not
be made within six months of the end of the five-year period, as would be the case with
a regular continuation statement. UCC §§9-705, 9-706. A tickler system should be set up
to make sure the new filings take place on a timely basis. On the flipside, a factor doing
a UCC search against an originator must be concerned about a “secret lien” based on a
competing lender’s filing under the old UCC. If the originator’s state of incorporation might
be different from the location of its chief executive office, the only safe practice is to do two
searches, at least until July 1, 2006.
Risks posed by the “brilliant searcher/dumb filer” rule.
Based on a recent judicial decision that has sent chills through the secured lending and
factoring industries, the factor doing a UCC search against the originator should consider
broadening the search somewhat. In In re Irwin, 50 UCC Rep.2d 933, 2003 WL 21513158
(Bankr. D. Kan. 2003), the court held that a secured lender’s financing statement was not
“seriously misleading” when it used the debtor’s nickname (Mike Erwin) instead of his
full legal name (Michael A. Erwin). Therefore, even though a search under the full legal
name would not reveal the filing under the search logic of the Kansas filing system, the
prior filer’s security interest was perfected. Although this decision seems to fly in the face
of the “standard search logic” rule of UCC §§9-503 and 9-506, the Kansas court felt that
Revised Article 9 allows some leeway in naming the debtor on the financing statement, at
least if the debtor is an individual rather than a corporation. Although the decision seems
wrong, it creates a risk for factors, whose originators are frequently businesses run as sole
proprietorships. The best practice is to do a search under several reasonable variations of
the name, including the last name only (e.g., “Irwin”). Don’t limit your search to what you
CONTINUED ON PAGE 3
consider the “full legal name”. For a detailed discussion of the Kansas
The International Factoring Association
555 Chorro Street, Suite B, San Luis Obispo, CA 93405
800.563.1895
PUBLISHER
EDITOR
Susan McBeth
ADVISORY BOARD
Allen Frederic
Gulf Coast Business Credit
Bert Goldberg
Distinctive Solutions
David Marrin
Capitol Resource Funding
Randy McCall
KRM Capital
Gail Schulte Coulthread
Abingdon Business Capital
Ken Walseben
The Hamilton Group
Carlos Weil
Capital Solutions
The International Factoring Association’s (IFA) goal is to assist
the Factoring community by providing information, training,
purchasing power and a resource for Factors. The IFA provides a
way for Commercial Factors to get together and discuss a variety
of issues and concerns to the industry. Membership is open to
all banks and finance companies that perform financing through
the purchase of invoices or other types of accounts receivable.
The Commercial Factor invites the submission of articles of interest
to the Factoring Industry. For more information on submitting
articles or advertisements, please e-mail [email protected], or
call 800-563-1895.
To receive this newsletter via e-mail, please send e-mail to
[email protected] and type the words “subscribe IFA” in the
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CONTINUED FROM PAGE 2
“nickname” case, see the September 2003 issue of this newsletter.
The risk of post-filing changes.
Even though the factor’s original filing is right on target, it must be on the
lookout for post-filing changes that could require a new filing. For example,
if the originator changes its name so that a filing under the old name would
be seriously misleading, the factor has a grace period of four months to file
an amendment in the new name. UCC §9-507(c). Otherwise, it will lose
its perfected status with respect to accounts factored after that time. The
factoring agreement should contain covenants that require prior notice before
the originator changes its name. A similar risk arises when the originator
operates as a non-registered proprietorship or general partnership and
changes its principal residence or chief executive office to another state.
In such a case, the factor must refile in the new state within four months of
the change in location of the debtor. UCC §§9-307 and 9-316(a). Covenants
are needed here too.
The risk of filing officer error.
If the factor does a UCC search against the originator of the receivables, it
will not pick up a prior financing statement that the filing officer inadvertently
failed to index or which doesn’t show up based on some other filing officer
error. The factor bears the risk of such filing officer errors. UCC §9-516. For
example, in In re Masters, 273 B.R. 773, 47 UCC Rep.2d 398 (Bankr. E.D. Ark.
2002), the earlier secured lender (A) filed a subordination agreement giving
priority to another lender (B), but the filing officer went wild and terminated A’s
financing statement. A later searcher, relying on the absence of a financing
statement filed by A, was misled. The court held that A’s financing statement
remained effective, to the horror of the searcher. Other variations of this risk
are erroneous reversal of debtor and creditor in the filing index; improper
refusal to file a financing statement; improper filing in the realty records; a
clerk’s failure to include an exhibit describing collateral; and, most important,
failure to notify the searcher of a prior filer’s valid financing statement. Of
course the shoe is on the other foot when the factor is the filer and the
competitor is the searcher.
Supergeneric descriptions.
Under UCC §9-504(2), a financing statement “sufficiently indicates the
collateral that it covers if the financing statement provides…an indication
that the financing statement covers all assets or all personal property.” Such
“supergeneric” collateral descriptions are allowed in the financing statement,
but not in the security agreement or factoring agreement. UCC §§9-108 and
9-203. Yet there may be some risk if a factor is only buying the originator’s
receivables and not also taking a security interest in other assets. Comment
2 to UCC §9-504 seems to proceed on the assumption that supergeneric
descriptions will only be used in financing statements where the underlying
deal is to create a security interest “in all, or substantially all” of the debtor’s
assets. In the case of the typical factor, only one type of the
originator’s assets - receivables - are involved.
Though there are no cases on point yet, we think that a trustee in
bankruptcy would have a tough time arguing that a supergeneric
description in a factor’s financing statement is invalid, in spite
of a big gap between the broad financing statement and the
assets actually covered by the factoring agreement. First, no
searcher could really be misled by an over-broad description
in the financing statement, in the same way it could be misled
if the categories of collateral were misdescribed. Second, the
factor could point to the following sentence in the Comment to
UCC §9-504: “Of course, regardless of its breadth, a financing
statement has no effect with respect to property indicated but
to which a security interest has not attached.” Still, factors who
want to avoid litigation on the point might prefer to describe the
collateral more narrowly, using the “accounts” category.
Supporting obligations.
Revised Article 9 provides for automatic attachment and
perfection of a security interest in a “supporting obligation” such
as a standby letter of credit or guaranty, if the secured party
has a perfected security interest in the primary obligation. UCC
§§9-203(f) and 9-308(d). In the case of a factor, perfection as
to the receivables it buys by filing a proper financing statement
carries with it a claim to a standby letter of credit or guaranty of
the receivables that will stand up in bankruptcy. On the other
hand, if there’s no connection between the factor’s interest in the “accounts”
it purchases and other receivables that might arise, it will have no claim. For
example, a security interest in “accounts” doesn’t encompass bankruptcy
avoidance proceeds that come back into the debtor’s bankruptcy estate unless
there is a direct connection between the two. See In re Systems Engineering
& Energy Management Associates, Inc., 284 B.R. 286, 49 UCC Rep.2d 608
(Bankr. E.D. Va. 2002).
Priority issues. We can identify several recurrent priority issues that apply to
factoring. Revised Article 9 has a pretty clear set of rules to govern priority among
the various parties to a factoring arrangement:
Originator’s secured lender vs. factor. Suppose First National Bank has
long had a “blanket” perfected security interest covering all assets of ABC
Corp., including inventory, equipment, accounts and general intangibles.
ABC, a retail dealer of electronic products, enters into an arrangement
with Factor, Inc. under which Factor buys 30-, 60- and 90-day receivables
on a “notification”, non-recourse basis. Factor properly files its financing
statement in the state where ABC is incorporated. Who has priority to
the receivables? First National Bank has priority, based on the first-to-file
rule of UCC §9-322(a). This would be the case even if FNB was primarily
secured by ABC’s inventory, with the accounts serving only as proceeds of
the inventory loan. Moreover, any future advances made by the bank would
relate back to its earlier filing, expanding its priority. Factor can’t trump FNB
by arguing that it was a “buyer in ordinary course of business” because that
superpriority rule only protects buyers of goods. UCC §§1-201(9) and 9320(a). By contrast, Revised Article 9 makes it clear that FNB’s perfected
security interest in ABC’s accounts follows the accounts upon sale to Factor
unless FNB authorized sale of the accounts free of its lien. UCC §9-315(a).
In light of this priority problem, it is critical for Factor to (1) obtain authorization
from FNB to buy the accounts free of the bank’s lien (in exchange for the
cash), (2) pay off FNB and terminate its financing statement, (3) pay off FNB
and take an assignment of its filing, or (4) get a subordination agreement
from FNB, as allowed by UCC §9-339. If the subordination agreement
route is chosen, remember that a mere “acknowledgement” of the factoring
arrangement by FNB may not be enough to qualify as an enforceable
subordination agreement; stronger language will be required.
If Factor fails to take any of the four actions described above, it still may be
able to get around the first-to-file rule, based on two special “superpriority”
rules found in Article 9. Under UCC §9-331(a), Factor could prevail if it
qualified as a holder in due course of negotiable instruments issued and
delivered to it by the account debtors in payment of the receivables; its HIDC
status would enable it to take the collections free of First National Bank’s
prior perfected security interest. The case law under old CONTINUED ON PAGE 4
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Article 9 shows that Factor’s status as a HIDC is fact-specific; it depends on
whether and when it got wind of FNB’s adverse claim to the collections. See,
e.g., In re Joe Morgan, Inc., 985 F.2d 1554, 20 UCC Rep.2d 401 (11th Cir.
1993) (factor wins over competing bank as to those receivables collected
before it learned of originator’s double financing at a meeting, but not later
collections). Revised Article 9 could have an impact here by its new definition
of “good faith” found in UCC §9-102(a)(43), which is “honesty in fact and
the observance of reasonable commercial standards of fair dealing.” This
somewhat “objective” definition of “good faith” could work against Factor.
Does a junior filer take the collections in good faith when it fails to undertake
a search to determine the existence of prior filers? Comment 5 to UCC §9331 strongly suggests that the senior filer might prevail, particularly if doing
a UCC search is an established practice (as it is in the factoring industry).
If Factor did a UCC search, saw FNB’s filing, and never got a subordination
agreement, it would have an uphill battle to prove its holder in due course
status with respect to the collections.
Another new priority rule might come into play in situations where Factor
does not collect the receivables directly, but lets the originator do so. Under
UCC §9-332(b), a transferee of funds from a deposit account takes the funds
free of a security interest in the deposit account unless the transferee acts
in collusion with the debtor in violating the rights of the secured party. If the
collections go into ABC’s deposit account, and ABC then wires the funds to
Factor, Factor would be in a strong priority position notwithstanding FNB’s
claim to the deposit account as proceeds. But this special rule would only
apply if Factor was not doing direct collections - the exception rather than
the rule.
The “double debtor” priority rule.
Suppose that ABC (the originator of the receivables) is financed by First
National Bank and Factor is financed by Second National Bank. Both
banks have perfected security interests in the factored receivables of their
respective debtors, though Second National was the first to file. Which bank
has priority? In Bank of the West v. Commercial Credit Financial Services,
Inc., 852 F.2d 1162, 6 UCC Rep.2d 602 (9th Cir. 1988), the court held that
the first-to-file rule didn’t apply because that rule contemplates only a single
debtor. Instead, the court concluded that First National had priority based
on the principle that you can only grant a security interest in what you own.
When the receivables were sold to Factor, they were already encumbered
by FNB’s perfected security interest, and Factor’s secured lender’s claim
was limited the same way. Revised Article 9 basically codifies the Bank of
the West rule, giving priority to the originator’s financer if its security interest
is perfected. UCC §9-325.
No “purchase money” priority in receivables.
Suppose that Factor buys receivables from ABC free from any security interest
claimed by ABC’s financer. Factor has an asset-based lender (First National
Bank) with a blanket lien against all Factor’s assets; FNB is first to file. Factor
decides to buy $250,000 worth of receivables and gets financing from Second
National Bank to enable it to buy the new receivables. Second National
is second to file. Which bank has priority? Second National argues that it
wins because it has a “purchase money security interest” in the $250,000 in
receivables that its loan proceeds enabled Factor to buy from the originator.
That argument won’t fly. First National wins under the first-to-file rule. The
“purchase money” exception to the rule doesn’t apply because you can’t have
a purchase money security interest in intangible property like receivables.
See First Bethany Bank & Trust, N.A. v. Arvest United Bank, 77 P.3d 595
(Okla. 2003); UCC §9-324(f).
Agricultural commodity receivables under federal “trust fund” laws.
When agricultural commodity receivables are factored from a wholesaler,
the factor must be concerned about special federal statutes such as the
Packers and Stockyards Act and the Perishable Agricultural Commodities
Act (PACA). Under these laws, an unpaid supplier of meat or produce to a
wholesaler is given a special “trust fund” lien that trumps a security interest
in the wholesaler’s inventory. But if the wholesaler’s financer is a factor rather
than a traditional secured lender, the factor takes the receivable free of the
supplier’s “trust fund” claim. As indicated by a recent burst of litigation in this
area, the key to priority is whether the factor bought the accounts under a
“true sale” or whether the arrangement was a secured loan. For example,
in Boulder Fruit Express & Heger Organic Farm Sales v. Transportation
Factoring, Inc., 251 F.3d 1268 (9th Cir. 2001), cert. denied, 534 U.S. 1133
(2002), the court found that a “true sale” was involved, so that the factor
had priority to the receivable without any “trust fund” setoff. By contrast, in
Reaves Brokerage Co., Inc. v. Sunbelt Fruit & Vegetable Co., Inc., 336 F.3d
410 (5th Cir. 2003), the unpaid seller of commodities prevailed over the buyer’s
factor because of the “recourse” nature of the factoring arrangement, with
nonpayment risks remaining on the originator of the receivables.
Account debtor issues. There are two recurrent issues that arise with respect
to account debtors on factored receivables: raising claims and defenses, and
free assignability.
Raising claims and defenses.
Unless the account debtor has made an enforceable agreement not to assert
claims and defenses, the rights of a factor which buys an originator’s accounts are
subject to (1) all terms of the agreement between account debtor and originator,
(2) any defense or claim in recoupment that the account debtor might have arising
from the transaction that gave rise to the account and (3) any other defense or
claim of the account debtor against the originator that accrued before the account
debtor got notice of the factoring arrangement. UCC §9-404(a). A good example
of (1) are cases holding that factors are subject to an arbitration clause governing
the factored receivable, even though they don’t fully step into the shoes of the
originator. See, e.g., Systran Financial Services Corp v. Giant Cement Holding,
Inc., 252 F.Supp.2d 500, 50 UCC Rep.2d 305 (N.D. Ohio 2003). A good example of
(2) is the account debtor’s right to refuse payment on an invoice sent by the factor
if the goods or services received from the originator were faulty. A good example
of (3) is the account debtor’s refusal to pay on the factored account because of
money owed to it by the originator arising out of other transactions, i.e. setoff.
Revised Article 9 makes it clear that the account debtor can only raise claims or
defenses as a shield against making further payments, and has no right to use
the rule as a sword to recover from the factor payments already made. Nor could
the factor be affirmatively liable to the account debtor for any counterclaim. This
shield/sword principle is codified in UCC §9-404(b).
Of great importance to factors is the rule that an account debtor on an account may
discharge its obligation by paying the originator (assignor) until, but not after, the
account debtor receives a notification, authenticated by either originator or factor,
that the amount due or to become due has been assigned and that payment is
to be made to the factor. UCC §9-406(a). After the notice to deflect payment is
given (usually on the face of the factored invoice), the account debtor pays the
originator at its risk. It would seem that any attempt by the originator to “revoke”
or otherwise unwind the assignment, so that the account debtor would no longer
be required to pay the factor, is invalid.
Free assignability.
One of the key principles embodied in Revised Article 9 is the free assignability
of receivables. To the great benefit of factors, the statute voids both contractual
and state-law attempts to limit assignability. UCC §§9-406(d) and (f). This flat
rule helps factors defend against attacks by the originator’s bankruptcy trustee.
Moreover, at least where “accounts” are factored, the account debtor cannot use
an anti-assignability clause or rule to avoid its obligation to pay the factor directly.
(By contrast, free assignability of “payment intangibles” does not carry with it the
right to force the account debtor to deflect payment. See UCC §9-408(d)).
Enforcement issues. In a true factoring arrangement, where the factor takes the
full credit risk and has no recourse to the originator, it may collect the receivables
without worrying about a duty of “commercial reasonableness.” UCC §9-607(c).
In a rule of great significance, UCC §9-607(d) allows the factor to deduct from
the collections “reasonable expenses of collection and enforcement, including
reasonable attorney’s fees and legal expenses incurred by the secured party.”
Comment 10 confirms that the right to recover attorney’s fees “arises automatically
under this section.” This means that, if collection of a $50,000 receivable costs
the factor $10,000 in attorney’s fees, it can deduct that amount from the face
amount of the receivable and sue for the deficiency. A contractual attorney’s fee
clause is not necessary.
Bottom line. Factoring is a specialized type of finance that is governed by Article
9 of the UCC. In many respects, the rules governing factors are the same as
those governing traditional lenders. But in some areas, a “true sale” factoring
arrangement yields very different results.
i
Barkley Clark, Esq. is an attorney with Shook, Hardy & Bacon. He can
be reached at (202) 783-8400 or email him at [email protected].
SALES vs. OPERATIONS: CONFLICT OR COOPERATION?
Y
You’ve undoubtedly witnessed the
scenario a hundred times. You’re in
the middle of factoring a deal, and
your Operations people have run into
a snag. Maybe there’s a problem with
verification, or maybe the client is claiming the
Salespeople failed to provide complete disclosure.
Operations is getting nervous...and they’re on the
verge of saying No.
Your salespeople, meanwhile, are working
frantically to push the deal through. They’re calling
the client. They’re desperately searching for a way
around whatever problem the folks in Operations
have identified. In short, Salespeople HATE the
word "no" and they’ll fight to the finish to do the
deal - even if it means going head to head with the
company’s Operations staff.
Sound familiar? You’re not alone. When it comes
to advancing money, Sales and Operations seem
to be fighting a constant battle. In fact, in the
factoring business, you could pretty safely say that
having Sales and Operations go head-to-head is
“Business as usual.”
That’s precisely why you might be shocked by what
I’m about to ask you to do. And that is to throw out
whatever you’ve ever heard, read, or thought about
the topic of Sales vs. Operations.
While most people see the relationship between
Sales and Operations as constant battle, I’ve
developed a different perspective. And that’s
mainly because I’m in a somewhat unique position.
My company, Quantum Corporate Funding, is a
family business. As a result, I’ve gotten involved in
just about every aspect of the factoring business
- including both Sales and Operations. True, I’m
in charge of new business, and my main focus
is sales. It’s my first love, and I’m one of those
individuals who lives and dies with every deal.
But I still feel very comfortable wearing hats for
both Sales and Operations. And that means I’ve
learned to look at the business from both sides’
perspectives.
experience. At the end of the day, what I want is to
be able to sleep at night. I want GOOD business.
But isn’t that what everyone in the company wants
- including your Sales and Operations staffs? In
other words, do Sales and Operations REALLY
have such different objectives?
The answer is a resounding NO. Both want a
successful company. Both want to think outside the
box. Both want to come together as a team, making
touchdown passes every single day.
A candid conversation with James Rubbinaccio,
Quantum’s Director of Operations, drives home
this point. “I’m always going around the office
reminding people that my goal is ‘ABC’ - ‘always
be closing,’” says Mr. Rubbinaccio. “That’s my main
objective. Sure, it’s my job to make sure there are
no liens and to get the verifications done. But my
objective is closing deals.”
Mr. Rubbinaccio cites cases of criminal activity
that justify his close scrutiny of every deal. One
potential client, who is currently in jail, submitted
two “receivables” for work he never did, having
stolen letterheads from his attorney’s office and
forging his signature. Another applicant turned
out to be part of an organized crime family who
routinely defrauded lenders.
Of course, clients who are criminals are the
exception. In most cases in which applicants are
turned down, Mr. Rubbinaccio explains, it’s because
their creditors aren’t credit-worthy enough. Even in
those instances, there may be a way of making
the deal work - for example, putting that particular
receivable with a stronger receivable, instead of
using it as a stand-alone.
“Preserving
capital
is
very
important,”
By Howard Chernin
P5
Rubbinaccio notes. “We’re not a lender. Once
we buy a receivable, we must collect on it.” He
adds, “Sometimes I get called a ‘deal-killer,’ but
if the account is bad, the salesperson doesn’t get
paid, either.” So maybe it’s time to cast both Sales
and Operations in a different light, one that more
accurately reflects their perspectives and goals:
OPERATIONS...
- Is committed to getting the GOOD deals done
- Is committed to killing the BAD deals
- Wants to find a way to say YES
SALES...
- Love to sell
- Focuses on opportunities
- Wants to build by focusing on GOOD deals
You’ve undoubtedly heard the saying “We can’t
spell success without ‘U.’” Nowhere is this more
true than in the relationship between Sales and
Operations. In the end, Sales must work with
Operations. We all want good deals, and we all
want success - and that means BOTH groups
working together in order to make a successful
factoring company.
i
Howard Chernin is Senior Vice President of
Quantum Corporate Funding. He can be reached
at 800-352-2535 or by email hchernin@quantumfu
nding.com or visit www.quantumfunding.com
Mr.
What exactly are those perspectives? Let’s think
about the different images that Salespeople and
Operations people project:
OPERATIONS...
- Doesn’t know when to say Yes
- Is always pessimistic
- Goes out of its way to detect problems
- Bumps heads with Sales over everything
SALES...
- Doesn’t know when to say No
- Must get the deal done NOW
- Never sees problems... only opportunities
-Fights to keep Operations from getting in the way
But how fair - and how accurate - are these
images?
My answer is, Not at all. Sales and Operations
actually have the same goal, as proven by my own
www.quantumfunding.com
P6
DOCUMENT MANAGEMENT IN FACTORING & FINANACIAL SERVICES
W
Why should you care about
document management? Let’s
begin with a look at what it is and
what it isn’t. Document management
is a collection of tasks involved with
receiving, processing and storing information; it isn’t
necessarily a computerized operation, although it can
often be automated to some degree. Information is
usually received on paper or fax. In some factoring
firms, the processing is relatively simple (reviewing
and filing the document); in others it can be much
more complex. Sometimes this involves data entry
(or even manipulation of data) and transposition of
information from one source to another format. This in
turn can involve taking information from one document
and transcribing it into several others, collecting
information from several sources and putting it into
a single collection or some other type of information
flow. In most cases, something else is done with the
information during the processing phase. Finally, the
information is then stored for some length of time
before it is discarded.
Sound familiar, doesn’t it? That’s because document
management forms a big part of the routine workload
in most factors’ offices. Indeed, this is a very large
part of the customer service function in the entire
financial services industry. For that reason, document
management is already a very important part of the
operations department in most factoring firms.
Factoring Work Flow
Typically, the work flow (with some variations) begins
with the client application. Depending on the size of
the factor, there can be a handful every year or
hundreds every week.The content is reviewed and
the application is joined by a credit file, then the
underwriting decision is made. At this point, a contract
is put in place and the client is ready to begin normal
operations with their new factor. This process alone
often involves well over a hundred pages of crucial
information for every client.
The daily work flow comprises the bulk of the
document volume. Invoices arrive for funding,
accompanied by back-up documentation. The factor
verifies these; some will verify every invoice while
some will almost never check the validity of client
invoices; most factors verify at some level between
these extremes. Once the invoices have been verified,
the factor funds the client. At this point, the invoice is
the responsibility of the collections department. The
funds are either collected, the invoice is re-sold to
the client or it is applied against the reserve as a bad
debt. Paid invoices are then rebated to the client,
less the factor’s agreed-upon fee. Documents are
heavily involved in each of these phases, and a key
to efficient operations (not to mention profitability) is
handling them with a minimum of time and disruption.
In offices with manual paper flow, we have observed
that operations personnel spend over 25% of their
working time (away from their desks) chasing
documents: at the file cabinet, at the copier, at the
fax machine or at some one else’s desk trying to
locate a particular document. This is time they can’t
answer their phone and address a client issue, or
resolve a customer question in order to get an invoice
paid more quickly.
Now the invoice has become little more than a
historical document. It has hardly any value to the
factor unless a problem arises, however, infrequent
though it may be, there is a risk of litigation, and it is
By Jay Pittard
prudent to protect one’s interests by retaining proof
of what role the factor did (and did not) play in the
actual purchase transaction between the client and
his customer. According to Terry Hutchens, CEO
of Triangle Capital Partners, “In today’s litigious
society, it is imperative to keep everything, and
electronic imaging is by far the most cost-effective
way to do that.”
Technology in Factoring
Hutchens also has some advice for those of
us considering whether or not to automate our
document-handling activities. “While the conversion
process may be briefly painful, the value of having
every document involved [with a transaction] at
one’s fingertips is immeasurable. Without it, staffing
for customer service can become a severe drain on
profits.” On the other hand, many factors have few
compelling reasons to automate their documenthandling. We’ll examine this question in greater
detail later; for now, let’s look at how factors have
taken advantage of previous advances in technology.
Historically factors (like most of the financial industry)
have used technology to reduce the cost of clerical
staff, to improve operations and security, or both.
For example, the copying machine enabled factors
to keep the entire invoice on hand, rather than an
extract; this ensured accuracy and protection against
shady clients. The fax accelerated communications,
and the computer dramatically reduced the time and
manpower involved with a variety of tasks. Today, all
these are in use, but only 30% of the surveyed factors
have any form of document management automation
in place.
The integrated document
management system
enables a factor to
view every piece of
correspondence on his
computer, regardless of
its origin. Their systems
bring copier, fax and
computer together with a
synergy lacking in earlier
technology solutions.
Their electronic files
can be processed and/
or attached to a client
schedule in a fraction of
the time required by more
manual processes. In the
underwriting process,
this means that credit
files can be assembled
in moments instead of in
hours, and decisions can
be made more quickly;
this means not only less
manpower (and lower
costs) - it also means
better customer service.
In the much more
paper-intensive funding
process, the same
concepts apply, but
the time savings and
customer
service
improvements can be far
more dramatic. Finally,
in the collections phase,
the factor can locate and
transmit any necessary information to any relevant
party. This lets them get information to the client’s
customers immediately, shortening the cash cycle to
their advantage, and doing so with less staff time.
The fully automated factor receives invoices and
supporting documents in a wide range of formats
(fax, hard copy or digital document). The document
management system enables the factor to quickly
prepare them to be handled. Amy Bailey of South
West Business Corporation finds that morale in the
Operations department has soared since they brought
in an automated document management solution.
Gregory Lawler, CIO of that company, says that the
system is a key selling feature when clients visit their
facility, and that “This system shows our clients a
21st-century support center.”
Without needing to leave their desks, members of the
operations staff will process the invoices, verify them
automatically (usually via fax from their desks), extract
details and record them in the factoring software
system. Funding flows smoothly, with the funded
invoice linked to the original documents, enabling
collections to get any data needed along with its
supporting detail. Allied Capital Partners finds that
they have realized an unexpected boon: As Robert
Merkle (Senior Vice President - Operations) said,
“The document management system enables us to
create more insightful reports that give us correlations
[patterns, etc.] we might have otherwise missed.”
Finally, rebating and archiving
CONTINUED ON PAGE 7
MAKING YOUR
COMPANY SUCCESSFUL
ONE PERSON AT A TIME
Our mission, as factoring industry
recruiting experts and consultants
is to provide your company with the
best human capital (the top talent)
and industry knowledge to ensure
you accomplish your goals.
GIVE US A CALL TODAY
972-203-6064
WWW.ABLFACTORING.COM
CONTINUED FROM PAGE 6
P7
becomes nothing more than a routine task when managed by automated document management software.
Documents can be kept on-line, off-line or destroyed, all according to the factor’s individual requirements.
The cost reduction results from not taking time to handle the documents as well as not spending money
on the space.
Who Needs to Automate Document Management?
Nearly any factor with more than 1 employee can benefit from automated document management, but
practically speaking, it’s better to consider the costs and benefits before investing. One way to look at it is
by considering the volume of paper you handle in a day. If you handle more than 1,000 pieces of paper
per day, chances are that you’ll be very happy with the decision to automate the document management
part of your business. Goodman Factors got started before their average volume reached 1,000 pages a
day, because they saw that on the peak-load days (when they handled more than 1,500 pieces of paper),
things got a little out of control. Contrast this with Metro Financial, one of the larger factors we interviewed;
their daily document volume was in the 2,500 range when they began looking into automation (but this was
in 1999, when the technology was newer and somewhat more expensive).
Finally, if there are any specific bottlenecks or pending issues related to the volume of paper you handle,
you may be long overdue for automating your document management process. Examples of such issues
include: the need to add more space for file cabinets, the need to hire another person in the operations
area, a backlog of incoming (or outgoing) faxes, a growing problem with misplaced information or some
other such point in your office at which repeated backlogs occur. At Metro Financial, collectors were having
trouble getting invoice copies (and supporting information) to their clients’ customers on a timely basis,
taking up to 48 hours to confirm the invoices before they could collect the funds. Allied Capital Partners
found that their fax volume was the straw that broke the camel’s back. According to Robert Merkle, “We
were dealing with a paper maelstrom.”
Conclusion
There are a variety of ways to reach the conclusion that you do (or do not) need an automated document
management system. Not everyone does. Our company (The Software Construction Company, Inc.) has
created a Document Flow Analysis (DFA) survey, which helps clients better understand their work flow; some
people rely on this to make their judgment. Some use one of the above criteria and decide that it’s time.
Some take a different approach and bring technology on board simply because they prefer to be ahead of
the curve. Others have opted to wait until they see compelling immediate reasons to change. Wherever
you fall in that spectrum, I hope this article has been informative and helpful for you and your firm.
An automated document management system can enable a factor to minimize the time spent on mundane
paper-handling. This in turn helps employees become more productive, leading to improved customer
service. While the hard-dollar savings are usually associated with file space, staffing and labor costs,
factors often determine that the most important result of an automated document management system are
better management information and client perceptions. These “soft” benefits are not easy to measure, but
they can be an important consideration in deciding whether to automate your document management and
work flow.
i Jay Pittard is Sales Director for The Software Construction Company, Inc. He can be reached at
(828) 678-9000 or [email protected]
U
g g g
P7
CORPORATE NEWS
Ken Earnhardt, President,
SubFactors.com National, Inc. is
pleased to announce that Ron Bycroft
has joined SubFactors.com National,
Inc. as business development officer.
SubFactors.com has developed a program
which includes a strategic alliance with
the general contractor and transaction
based factoring for the subcontractor.
Subfactors.com National, Inc. will begin
offering franchises for its program in May
2004.
Key Capital Factoring, Inc based in
Owings Mills, MD has changed it’s name to
K Capital Partners, Inc.
FactorHelp, Inc, the single best resource
for the factoring industry, is proud to announce
the appointment of Thomas G. Siska as
Managing Director.
i
ª
É
Corporate News is a new feature
in The Commercial Factor. To
have your corporate news printed,
please send it to [email protected].
g g g
UPCOMING IFA EVENTS
STEVE KURTZ, ESQ.
LEVINSON, KAPLAN, ARSHONSKY &
KURTZ, APC
"Article 9 vs. Other Areas of the
Law."
1pm PST, Thursday,
May 20, 2004
Cost: $40
($50 for Non-IFA Members)
É
ACCOUNT EXEC/ LOAN
OFFICER TRAINING
MONTE CARLO RESORT
AND CASINO, LAS VEGAS
9am - 5pm, Thurs. &
Fri, June 10-11, 2004
Cost: $659
($745 for Non-IFA Members)
REGISTER ON-LINE AT:
www.factoring.org
É TELECONFERENCE CALLS
DO YOU KNOW WHAT YOU'RE GETTING INTO?
M
My company, KRM Capital, launched its factoring business in
the winter of 2002. In the process, I have met a non-ending
stream of wonderful, helpful people. I have found seasoned
veterans as well as relative newcomers to the industry who are
willing to extend solid advice to a new competitor. I’m not sure
why this happens, but my guess is that it is a combination of several things.
The people that have taken time with me are mostly seasoned veterans that
are good at what they do and confident in their abilities, so they do not feel
threatened by someone new. They also realize that the market for factoring
services is very large and widely untapped, so, unlike a bank on every corner,
factoring services are not nearly saturated. Since I have chosen to focus on
the smaller end of businesses, some of the larger factoring companies have
embraced me as someone who can fill some of the lower end holes that they
do not want to fill.
Some of my contacts have been with factoring companies in geographically
different areas than me and while most factors consider themselves
continental in scope, I am not a part of their direct marketing area. It seems
that the vast majority of factors focus their ongoing marketing efforts to certain
geographies, while gaining clients in far reaching locations generally through
referrals instead of their direct marketing efforts.
My article “Do You Know What You Are Getting Into?” is mostly based upon
my own experiences. While my college training and degree is in accounting
and I am a CPA, I spent most of my career in the Oil & Gas exploration and
production field as both a CFO and CEO of two privately owned companies.
In these capacities, I experienced all aspects of running family owned
companies, which has given me great insight into the trials and perils of
closely held businesses. As I am sure all of you have experienced, I have
seen well run organizations, as well as companies that exist despite their
incompotencies. Having spent time early in my career with an international
By Randy McCall
P8
accounting firm, I had exposure to the same type of companies. How well
does that experience translate into a well run factoring organization? Let’s
see.
The first question I have been asked is why did you leave something you
have done for so long to pursue factoring? Very good question and one
that I have asked myself at times, but the answer is not too complicated.
While with my last employer, I was the President, but I was not an owner.
I just ran the closely held business for the family owners. When the family
got so big that many of the ideas for moving forward conflicted with each
other, the only answer that made everyone happy was to sell the business
to the highest bidder, which happened not to be me. So I was faced with
an opportunity. Having had the entrepreneurial spirit most of my career, I
felt that I was given the chance to start a business of my own. For quite a
number of reasons, I decided not to choose Oil & Gas. So in my search for
a business, factoring became very appealing, both for the potential to earn
a living and for my ability to understand the business. After several months
of due diligence, I set up shop, rounded up the money and got started.
Now comes the hard part, while I had no problem understanding the
business and the various ways to reduce my potential for losses, there
was still the area that I had not had to do ever in my career, and that was
the marketing. So the question still is “Do You Know What You Are Getting
Into?” I must confess that I have always considered myself of above average
intelligence, and my track record relating to my business career is positive
with no business failures or failings along the way, and while I have not
been surprised by any of the operational aspects of the factoring business,
I did not fully know what I was getting into in the marketing area. Well, I am
almost two years into this venture and I have had a great education in the
process. I have talked to several of you over the last two years and most
CONTINUED ON PAGE 9
of the stories revolved around losing money because
Being number one
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It means you are.
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is installed in more systems worldwide,
helping more companies like yours become
more successful.
Discover why we are the world‘s leader
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email: [email protected]
CONTINUED FROM PAGE 8
P9
you did not fully understand the risks, however, the accountant side of me
thoroughly analizes the risks before we book them and so far I have not had
any large unexpected losses, but, I assure you that I know they will come,
given time and quantity of deals. The real issues that have surprised me have
been the marketing issues. While I feel like I finally have an understanding of
that aspect also, it has been my greatest source of naïveté.
The moral of the story is this! If you are considering starting your own factoring
business, there are a multitude of things to consider. Where are you going to
get your own funding; are you competent to handle the operational aspects of
your business or can you afford to get someone competent to work for you;
how are you going to market your business and to whom; can you manage
all aspect of a business including the business and marketing ends; and do
you possess the integrity and desire to adhere to a high degree of ethical
standards to make your business a success and one others will want to do
business with? Make sure you know the answers to all of these questions
including the need for running an ethical business before you ever launch into
this or any business for that matter, even if your experience is in this field.
After examining all of your reasons for getting into this business and you
really CAN say that you know what you are getting into, then you will not find
a better community of businesses to be associated with.
i
Randy McCall is founder and president of KRM Capital in Fort
Worth, Texas. He can be reached at 817-763-8888 x 11 or email him at
[email protected]
T
D
Tyler Daniel, LLC
J. Dugan Smith - Principal
Specializing in Strategic Business
Solutions AND Execution
a
a
a
a
35+ yrs Financial Services Experience
15+ years of ABL & Factoring Experience
Black Belt Certified Team Members
Work - Flow Specialists
a Organizational and Functional Efficiency
a Work-Out and Troubled Client Assistance
a Procedural Efficiency to Increase Overall
Productivity Within Your Organization
a IFA Vendor Member
P.O. Box 6124 High Point, NC 27262
Tel: 336.688.1898 Fax: 336.889.8115
E-mail: [email protected]
NAVIGATING THE PUBLIC RECORDS MAZE
P
Public Records research is quickly becoming part of the daily routine
in the factoring community. Too many factoring professionals have
been hurt by initiating an agreement without having first completed
the proper due diligence on their prospect. The information needed
to protect your investment is available and accessible, however, it
sometimes feels like finding what you need to move forward with confidence
is like being stuck in a maze. Too much time can be spent at dead ends.
With over 26,000 government agencies that house public records, finding
accurate information can be like finding a needle in a haystack. While many of
these agencies offer free on-line search engines, most free government sites are
for informational use only and do not contain personal identifiers like DOB and
SSN. While a great resource, they should not be relied upon independently. A
local hands-on search or use of a commercial system is always recommended
for thorough and conclusive results.
Knowing where to search is the first and most vital step, knowing ‘how” to search
can take years of practical experience and continuing education. As with most
business (and life!) practices, what you put in is what you get out. Oftentimes,
it takes a trained professional to maximize the accuracy of search results.
The following information will help guide you through the maze, but it is
neither conclusive nor constant in the ever-changing world of Public Records
research:
Federal Level Searches:
National Information Center (NIC) - Provides comprehensive information on
banks and other institutions for which the Federal Reserve has a supervisory,
regulatory, or research interest. Historical information is available on the
structure of all the institutions. Financial information is available for selected
time periods.
Securities & Exchange Commission - The SEC Litigation Index lists
persons involved in litigation with the SEC and provides information about
all public companies. Each year the SEC brings between 400-500 civil
enforcement actions against individuals and companies that break the
securities laws.
Federal Courts - There are 93 Federal Judicial Districts, called “United States
District Courts.” All districts are located within a state’s boundaries and cover
several counties. These Federal government offices maintain records about
cases involving both civil and criminal litigation.
U.S. Bankruptcy Court - All individual and business bankruptcy filings
are recorded here. The U.S. Bankruptcy court is governed by the Federal
Bankruptcy Act.
Department of Justice, Federal Prison System - The Inmate Locate
Service has information about all inmates in the federal prison system
since 1982.
(Web Site: http://www.bop.gov/)
NASD – Takes disciplinary actions against firms and individuals for violations
of NASD rules; federal securities laws, rules, and regulations; and the rules
of the Municipal Securities Rulemaking Board.
OSHA – This arm of the U.S. Department of Labor establishes and enforces
protective standards for all U.S. businesses. Information on enforcement
inspections is available to the public.
(Web Site: http://www.osha.gov/cgi-bin/est/est1)
State Level Searches:
Secretary of State - All Corporations, Limited Liability Companies, sole
proprietorships and partnerships are registered with this office. Use the SOS
to determine if the business is in good standing with both the state and the tax
authorities or to find information on Officers/Directors, Members/Managers
(LLC) or Registered Agents.
Uniform Commercial Code (UCC) Filings - Debtor and secured party are
listed on UCC filings that concern business financing transactions when
personal property is involved. UCC filings will reveal exactly what property is
encumbered by liens and what property has been put up as collateral. UCC
By Jamie Williams - Meden
P10
filings are usually active for five years, unless specifically continued.
Federal Tax Liens - In 31 of the 50 states, Federal tax liens are filed at the
same state agency where UCC financing statements are filed. In the other
states, the general rule is that Federal tax liens are filed at the County level. All
Tax Liens filed against real property are county filings as well (see below).
Professional Regulation - Several departments and agencies regulate
various groups of business professionals. Any professional person required
to be licensed is regulated by one or more division of this department or
agency.
Department of Justice, State Supreme Court - The state supreme
court’s record repository receives all court records involving civil and
criminal litigation. Some states do not consider all court records to be
public information. The court docket, however, is available to anyone. The
docket lists names (and sometimes addresses) of both the plaintiff and the
defendant, as well as the attorneys involved.
County Level Searches
Courthouse Index - Most courthouses maintain an “Index to Records”
containing information about both the plaintiff and the defendant. This
Index will also reveal the outcome of each action. The Index to Records
will indicate where complete records are kept concerning civil, criminal, and
probate actions, IRS tax disputes, UCC filings, liens, assumed names, and
final judgments.
County Recorder - The county recorder’s office keeps records of births,
marriages, divorces, and deaths. These records may also be maintained by
the state Department of Vital Statistics or the state department of health.
County Assessor - Property tax information including assessed value of
real property assets. Also find geographical information about property,
including plots and maps.
Real Property Records - Housed at either the Recorder’s or the Assessor’s
office, these offices maintain all records directly related to a parcel or property.
Historical/Environmental chain of title goes back 40–60 years, find Deeds
of Trust, Mortgage/Assignee information, UCC’s, tax liens and judgments
which have been recorded as liens to real property are recorded and filed
by property address or name of vested owner(s).
Probate Estate Filings - These filings contain information about estates in
probate. This data can be valuable if the deceased owed you or your business
money. Generally, you must have permission in the form of a court order to
obtain any information.
Occupational Licenses - This department has records of all applications
for occupational and other business licenses.
Fictitious Business Names - All businesses within the county “Doing
Business As” (D.B.A.) must file documents with the FBN office. Most counties
require that the businesses owner publish the FBN filing in a local business
magazine or newspaper.
Court Records
Civil Index - This Index lists all civil actions by date, names of plaintiff and
defendant. The record will indicate judgments, liens, and a file number of
the actual case.
County Civil Records - These are court records involving actions under
$1,500. The records list names of plaintiff and defendant and contain all
information relating to the outcome of the litigation, including judgments
and liens.
District Court/Circuit Court - The records are of actions valued more than
$1,500.
Criminal Index - This index is a roster of all criminal convictions for a certain
time period. It discloses information about on-going cases. Each case is
assigned a file number - which is helpful when accessing county, district, or
circuit criminal records.
County Criminal Records - These records contain information about countylevel misdemeanor cases.
CONTINUED ON PAGE 11
P11
CONTINUED FROM PAGE 10
investors to achieve full confidence in the integrity of the entity and the people
you are forming an alliance with. We’ve all heard “horror” stories about
businesses and/or individuals who pass all the status-quo credit checks but
still turn out to be wolves in sheep’s clothing. Our government provides the
resources necessary to keep digging until all doubts have subsided, and there
are many professional Public Records research firms that can help maximize
the accuracy of your search results. I hope this information is useful to you and
I look forward to meeting you in Miami.
Municipal (City/Township) Level Searches:
City/town Courthouse - Most cities and many towns maintain records,
similar to county court records, about local residents: their birth, traffic
offenses, marriages, building permits they’ve applied for, criminal offenses,
divorces, civil suits, business licenses issued to them, property transfers,
involvement in legal actions, and their death.
Building Planning Departments - Building Permits and zoning information,
applications and permits granted for all building and construction are kept on
file. Health code, environmental code and building safety code violations on
commercial and residential properties will be recorded at the city level.
i
Jamie Williams-Meden directs business development for Parasec,
a Nationwide Public Records research firm headquartered in Sacramento,
California. Jamie can be reached at (800) 741-5355.
Before beginning any business relationship you owe it to yourself and your
CREDIT GROUPS. BECAUSE THERE IS STRENGTH IN NUMBERS
I
It’s an undisputed fact. The more you have backing you up; whether it’s
data, knowledge or people, the better your position will be. And it’s that
underlying fact that is the foundation of a credit group.
Everyday credit managers make decisions on the creditworthiness of
potential customers. And billions of dollars annually are risked on the wisdom
of their choices. It’s no wonder that credit managers can sometime feel like
they are on an island unto themselves. There is an arsenal of information at
each individual manager’s disposal to help facilitate educated and informed
decisions. But the most valuable tool a credit manager can utilize is other
credit managers.
Credit groups are industry specific conclaves, where like-minded professionals
can enjoy the benefits of shared knowledge. They can meet monthly, bi-monthly
or quarterly; it really depends on the turbulence of the industry you’re in. But
the benefits of such meetings are long-standing. Through open discussion
and information exchange problems such as fraud and financial loss can be
minimized and viable customers can be responded to with vigor.
Trust is inherent and fostered in industry credit groups. How can it not be?
These are people who walk through the same fire day after day. The free flow
CAVEAT
EMPTOR
LET THE BUYER BEWARE!
Presented by Dr. Ron
The Assignment
of Claims Act of 1940 comes
into play when financing invoices
emanating from a U.S. Government
contract. When complied with,
it provides for payment from
the government directly to a
lender or factor. But make no
mistake – it does not take the place of a UCC filing
– you must still perfect your security interests as
always. Also be aware that other U.S.Government
agencies may have offset rights against your invoice.
i Dr. Ron needs all the ideas he can get for the Caveat
Emptor series. Clue him in at [email protected]
and get your name mentioned in this publication!
By Kathy Anderson
of information and the sharing of expertise creates a database that is more
reliable than one built on numbers and facts.
There is a responsibility that all credit groups must adhere to. Although the free
flow of information is encouraged, industry credit groups are required to follow
the high standards set by federal antitrust laws designed to ensure that free
trade is not curtailed. Most credit group meetings are also attended by legal
representation to ensure that no activity that would lead to the blacklisting of a
potential customer, divide markets, or limit the free will of a group member.
In addition, guest speakers are brought in to educate members on the laws
pertaining to areas of concern to the specific industry, financial services,
technology, and other educational matters.
Is it time for your group to explore the benefits of such a service?
i
Authored by The CreditExchange - Business Credit Reports and
facilitator of credit group meetings. The CreditExchange may be found at
www.creditexchange.com. Contact Kathy Anderson at [email protected]
for more information.
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STOP THE BLEEDING
T
extent of $3,000 per employee. What are some solutions? As far as I
know there are only three possible solutions: create cash reserves as
necessary to completely mitigate the problem, obtain collateral you are
not advancing on, the liquidation value of which being large enough to
cover the problem or, at last resort, elect to take the risk, monitor your
client closely and keep your fingers crossed.
There has been a lot of chatter lately via the IFA Yahoo discussion
group about personal credit and its role in the client approval
process. The range of comments vary between “Show me a
principal with poor personal credit and I’ll show you a client for
life” to “I wouldn’t touch this person with Stretch Kowalski*.”
Not surprisingly, I am somewhere in the middle on this issue although I
tend to lean a lot to the left when personal credit is considered. I’ll quote
Tom Siska of Amerisource Funding in a recent issue of the abfjournal. Tom
says “… Today, finding a small factoring client with good personal credit
is like finding a needle in a haystack.” There are many lenders that issue
unsecured credit to small businesses based solely on the personal credit
of the owner – and they do it at costs considerably lower than most factors
charge and without the continuing paperwork factoring requires.
I agree with Tom; if we want to build or perhaps even maintain our
portfolios, we must loosen up on personal credit requirements. Clients
having officers and owners with good personal credit are not abundant,
in fact they are quite rare. So the question is, just how bad can we allow
personal credit to be without substantially increasing our risk?
For years, Gibraltar has maintained a personal credit philosophy that
works well. We will “Google” the client’s owners and officers, we will
obtain their credit bureau reports, and occasionally we will dig deeper and
do things like a principal name search through Dun and Bradstreet. (A
principal name search uncovers the names of other business the owners
and officers may have been associated with in the past.) Generally, we do
not allow poor personal credit to kill the deal. We expect to see slowness,
overextension, cancelled credit cards, charge offs and even personal
bankruptcies or tax liens. So exactly what issues concerning a client’s
owners or officers should stop us from doing a deal if poor personal credit
doesn’t? I’ll give you my short list:
1. A really bad and lengthy history of not repaying debts to
the point of indicating a total disregard for the system
2. A history of a particular type of unpaid bills indicating a
propensity towards litigation
3. One single instance of not repaying a factor or commercial
lender
4. Certain types of felonious activity
5. A history of folded companies leaving unpaid debt (alter
ego issues also come into play here)
I should mention that what I am referring to in this discussion
are corporations or LLC’s. If a partnership or a proprietorship
applies for factoring, it requires good personal credit with a
total absence of tax liens of any type.
Wisconsin Labor Lien Law –Updated
Some of you may recall a piece of legislation enacted
in Wisconsin that put non-Wisconsin-bank commercial
lenders and factors squarely behind the eight ball. The
issue is that any business having employees based in the
state of Wisconsin is subject to having a lien placed on its
assets if it were to cease business operations. The lien
would be in favor of employees to the extent they were
unpaid. That lien primed all other liens including secured
liens of lenders or factors UNLESS that lender or factor
was a Wisconsin Bank. The law has been revised slightly.
Now the lien extends to all lenders and is limited to $3,000
per employee.
So if you factor or lend to a company with a Wisconsin
presence, even if it is only a one person sales office located
somewhere in that state, your lien may be primed to the
P12
By Dr. Ron
Factoring 102 at The Upcoming IFA Factoring Conference
For those of you contemplating attending the Factoring 102 session,
these are some of the topics we will be discussing…
• Underwriting new clients:
due diligence, concentrations, credit losses, verifications,
supporting documents, shipping evidence, purchase orders,
agreements to pay, vendor contracts, legal documentation
• LLC’s: universal resolutions, operating agreements,
• Non-registered entities
• Cross collateralization and cross defaults between 2 clients
• Subordinations vs. Inter-creditor agreements
• Progress billings: construction, information technology deals
• Medical provider factoring- the danger
• Debtor-In-Possession (DIP) factoring
• Exit strategies and strict foreclosure rules
• Expansion of product lines: inventory lending, purchase
order financing, equipment lending, real estate lending,
doing larger transactions, re-factoring, participations, private
label factoring
I hope to see you there!
* For those of you that have not yet guessed, my friend Stretch is a ten
foot basketball player from Poland
i
To contact Ron Winicour, a.k.a Dr. Ron, or to request copies
of documentation, past articles, etc., please send an e-mail to:
[email protected]. In the alternative, mail your request
to Dr. Ron at Gibraltar Financial Corporation, 60 Revere Drive, Suite
840, Northbrook, IL 60062.
GILBRALTAR FINANCIAL CORPRATION
No Hoops Financial Services Since 1951
NEED HELP with a new or existing...
• Chapter 11 situation
• Equipment loan
• Real Estate loan
• Difficult factoring situation
• Portfolio sale
Contact Dr. Ron at 888-GIBRALT (442-7258) or
[email protected]
GIBRALTAR FINANCIAL CORPORATION
Serving the business community since 1951
Toll Free: 888-442-7258
www.gibraltarfinancial.com
A ROSE BY ANY OTHER NAME... A GUIDE TO SEARCHING UNDER RA9
By Michael Ullman
U
Under Revised Article 9, secured parties must recognize that
different tests apply to whether one is searching for UCC
financing statement liens or federal tax liens. When it comes to
federal tax liens - a word to the wise - expand your searches,
especially at the inception of the factoring or asset-based lending
relationship.
It may seem as though when it comes to identifying the debtor’s name in a
financing statement, RA9 made the UCC waters free of any real concern.
For most states, after July 1, 2001, Revised Article 9 (“RA9”) became law.
Although some formatting changes were made to the form, RA9 retained the
use of a financing statement.
Section 9-502(a) of RA9 addresses the sufficiency of financing statements
and provides that:
Subject to subsection (b), a financing statement is sufficient only if it:
(1) provides the name of the debtor and Section 9-503 of RA9 at
subsection (a)(1) entitled, “Name of Debtor and Secured Party” reads
as follows:
(a) Sufficiency of debtor’s name. A financing statement sufficiently
provides the name of the debtor:
(1) if the debtor is a registered organization, only if the financing
statement provides the name of the debtor indicated on the public
record of the debtor’s jurisdiction of organization which shows the
debtor to have been organized.1
RA9 envisions the possibility for mistakes and, therefore, created a statutory
rule addressing when a mistake in the use of the debtor’s name makes a
financing statement ineffective. Section 9-506 of RA9, entitled, “Effect of
Errors or Omissions,” at subsections (b) and (c) reads:
(b) Financing statement seriously misleading. Except as otherwise
provided in subsection (c), a financing statement that fails sufficiently
to provide the name of the debtor in accordance with Section 9-503(a)
is seriously misleading.
(c) Financing statement not seriously misleading. If a search of the
records of the filing office under the debtor’s correct name, using
the filing office’s standard search logic, if any, would disclose a
financing statement that fails sufficiently to provide the name of
the debtor in accordance with Section 9-503(a), the name provided
does not make the financing statement seriously misleading.
According to the official comments, subsection (b) contains the general rule:
a financing statement that fails sufficiently to provide the debtor’s name in
accordance with Section 9-503(a) is seriously misleading as a matter of law.
Subsection (c), however, provides an exception: If by using the filing office’s
standard search logic the financing statement nevertheless would be
discovered in a search under the debtor’s correct name, then the incorrect
name does not make the financing statement seriously misleading. Simply
put, the financing statement is
effective if a computer search run under the debtor’s correct name turns
up the financing statement even though an incorrect name was used;
otherwise, as a matter of law, the financing statement is ineffective.
Are you now persuaded that no secured creditor need feel obligated to
perform a lien search using creative variations of a registered organization’s
correct name? For example, if a debtor’s name is ABC Co., Inc., should you
have to search for A.B.C. Co., Inc., ABC Company, Inc., ABC Corp., Inc.,
ABC
Co., Incorporated (you get the picture)? Is searching the registered
organization’s correct name adequate in every instance? If you answer
P13
yes, no and yes, you are wrong - insofar as a competing Internal Revenue
Service lien. Why? Is there some rule that says that federal agencies are not
governed by the precepts of the illustrious UCC? Easy answer: Yes. More
extensive answer: Yes, but not entirely. Read on.
It may seem as though when it comes to identifying the debtor’s name in a
financing statement, RA9 made the UCC waters free of any real concern,
and certainly free from the type battled by Police Chief Martin Brody in the
1975 adventure/horror movie, Jaws. Two federal decisions, however, a
United States Bankruptcy Court and a United States District Court (sitting
in its appellate capacity), should have you concerned and are significant to
this issue.
In May 2003, the United States Bankruptcy Court for the Eastern District of
Michigan rendered a decision entitled, In re Spearing Tool and Manufacturing
Co., and Crestmark Financial Corp., as Plaintiff, and the United States of
America, as Defendant.2
The facts of In re: Spearing were that in April of 1998, the debtor and
Crestmark Bank (“Crestmark”) entered into a lending relationship, and
Crestmark was given a security interest in the debtor’s accounts. Crestmark
duly perfected its secured interest by filing a UCC financing statement. In
addition, in April 2001 Crestmark Financial Corp. (“CFC”) entered into a
factoring agreement with the debtor to purchase accounts, and CFC duly
perfected its interests in that month by filing a UCC financing statement.
It may seem as though when it comes to identifying
the debtor’s name in a financing statement, RA9
made the UCC waters free of any real concern.
CONTINUED ON PAGE 14
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CONTINUED FROM PAGE 13
On October 15, 2001, the Internal Revenue Service (“IRS”) filed two
notices of federal tax lien with the Michigan Secretary of State and used the
taxpayer name of “Spearing Tool & MFG Company, Inc.,” not the debtor’s
exact registered name of “Spearing Tool and Manufacturing Co.” CFC
had periodic lien searches performed using the debtor’s exact registered
name, and through October 15, 2001 discovered no lien filings. Accordingly,
between October 15, 2001, and April 6, 2002, CFC made future advances
to the debtor.
On April 16, 2002, the debtor filed for chapter 11 relief. Pending a resolution
of the priority dispute between Crestmark and the IRS, the Bankruptcy Court
refused to give Crestmark access to a reserve account holding in excess of
$150,000.
In the Bankruptcy Court, Crestmark claimed that the IRS liens were
improperly filed and invalid for having recited an improper name for the
debtor. The IRS, however, claimed that state law only controlled the place
for filing a federal tax lien (because federal law says so) and that federal
law controls the form and content of filing. The IRS further argued that its
lien filing satisfied federal law and that Crestmark had a duty to conduct
searches under all variations of the debtor’s name, and if it had, Crestmark
would have discovered the IRS lien.3
The Bankruptcy Court initially addressed those portions of the Internal
Revenue Code (“IRC”) that enable the IRS to attain a perfected lien by
noting the following:
26 U.S.C. § 6323(f) provides, in relevant part, that the notice referred to
in subsection (a) shall be filed (ii) Personal property - In the case of personal property, whether
tangible or intangible, in one office within the State (or the county, or
other governmental subdivision), as designated by the laws of such
State, in which the property subject to the lien is situated, except that
State law merely conforming to or reenacting Federal law establishing
a national
filing system does not constitute a second office for filing as designated
by the laws of such State[.]
26 U.S.C. § 6323(f)(1)(A)(ii).
The statute further provides:
(3) Form —The form and content of the notice referred to in subsection
(a) shall be prescribed by the Secretary. Such notice shall be valid
notwithstanding any other provision of law regarding the form or
content of a notice of lien. 26 U.S.C. § 6323(f)(3).
The regulations on Procedure and Administration provide that the notice
shall be filed on Form 668, entitled “Notice of Federal Tax Lien Under
Internal Revenue Laws.” Treas. Reg. § 301.6323(f)-1(d)(1). Further, a
Notice of Federal Tax Lien “must identify the taxpayer, the tax liability
giving rise to the lien, and the date the assessment arose.” Treas. Reg. §
301.6323(f)-1(d)(2). These regulations
have the force and effect of law.
Crestmark, on the other hand, relied on the State of Michigan’s version of
Sections 9-503(1) and 9-506(1)-(3) of the Uniform Commercial Code, which
read as follows:
M.C.L.A. § 440-9503. Name of debtor and secured party Sec. 9503 (1)
A financing statement sufficiently provides the name of the debtor if it
meets all of the following that apply to the debtor:
(a) If the debtor is a registered organization, only if the financing
statement provides the name of the debtor indicated on the public
record of the debtor’s jurisdiction of organization which shows the
debtor to have been organized.
M.C.L.A. § 440-9503(1)(a).
M.C.L.A. § 440-9506. Effect of errors or omissions Sec. 9506.
(1) A financing statement substantially satisfying the requirements of
P14
this part is effective, even if it has minor errors or omissions, unless
the errors or omissions make the financing statement seriously
misleading.
(2) Except as otherwise provided in subsection (3), a financing
statement that fails sufficiently to provide the name of the debtor in
accordance with section 9503(1) is seriously misleading.
(3) If a search of the records of the filing office under the debtor’s
correct name, using the filing office’s standard search logic, if any,
would disclose a financing statement that fails sufficiently to provide
the name of the debtor in accordance with section 9503(1), the name
provided does not make the financing statement seriously misleading.
M.C.L.A. § 440-9506(1).
The Bankruptcy Court noted that it was federal, not state, law that determines
the priority of federal tax liens. As a result, the Bankruptcy Court rejected
Crestmark’s argument and wrote that federal law requires that the notice
of tax lien “identify the taxpayer.” Treas. Reg. § 301.6323(f)-1(d)(2). The
Court concluded that the notices filed by the IRS did identify the taxpayer
and that there was no error in identifying the taxpayer by using an accepted
abbreviation for the word “Manufacturing.” The Bankruptcy Court also noted
that the debtor frequently used the “Mfg.” and “MFG.” abbreviations in
identifying itself and that Crestmark itself referred to the debtor as “Spearing
Tool and Mfg.” in credit narratives prepared by a Crestmark employee.
Crestmark appealed the Bankruptcy Court’s decision to the United States
District Court.4 Sitting in an appellate court capacity, the United States
District Court was required to accept the Bankruptcy Court’s findings of fact
unless they were clearly erroneous but was not obligated to accept any of
the Bankruptcy Court’s conclusions of law.
The United States District Court, unlike the Bankruptcy Court, more fully
addressed the exact federal standard applicable to the contents of a notice
of tax lien and wrote:
The issue thus becomes whether the lien in this case complied with
federal law. The government concedes that the most applicable test
is that of reasonableness. In cases where the government has made
errors in the debtor’s name on the lien, courts inquire whether a
reasonable search of the index would have disclosed the errorladen federal tax lien. If such a search would have disclosed
the existence of the lien then the notice of federal lien meets the
statutory requirements of 26 U.S.C. § 6323.
In addressing the standard applicable to determining a “reasonable search”
the Court wrote:
Sitting in an appellate court capacity, the United States District
Court was required to accept the Bankruptcy Court’s findings of
fact unless they were clearly erroneous but was not obligated to
accept any of the Bankruptcy Court’s conclusions of law.
Crestmark responds that because of the state lien recording system’s search
logic, and the revised UCC which requires strict compliance regarding the
correct naming of debtors, it would not have been reasonable for the banks
to search under variations of the debtor’s name nor would any reasonable
search have produced evidence of the tax lien. If the Court agrees with the
government, the burden will be on future searchers to conduct separate
searches under every version of a potential debtor’s name of which it is
aware or should be aware. While the new version of the UCC, i.e., state law,
does not control the content of federal tax liens, it does shed light on what is
reasonable behavior for searchers in today’s environment. Crestmark points
out that the search of the Michigan Secretary of State’s record for liens on
personal property only disclose records that match exactly with the name
designated in the request. The Secretary of State will not search variants of
the name (as it did under the former version of Article 9 of the UCC), and the
public has no independent access to search the index. It is not reasonable
for searchers to conduct one search for liens that might
CONTINUED ON PAGE 15
CONTINUED FROM PAGE 14
include federal tax liens, and require them to conduct separate, multiple
searches under the debtor’s multiple possible names for a possible federal
tax lien. The burden on the government to include corporate taxpayers’
registered names seems slight by comparison. The United States District
Court concluded by writing:5
The issue is essentially who should bear the burden of recording systems
which use rigid computerized search logic. Gone are the days of large
alphabetical books, where a reasonable searcher would likely find a
misspelled (or mistakenly abbreviated) name because it would appear in
the close proximity to where a lien with a correctly spelled name would have
appeared. Fairness to third parties dictates that in cases like this, where a
reasonable searcher would not have notice of the federal tax lien, the IRS’s
liens should not have priority over other lenders.
Recommendation6
Every secured party must recognize that different tests apply to whether one
is searching for UCC financing statement liens or federal tax liens. Feeling
as confident, if not as arrogant, as Quint (actor Robert Shaw) in Jaws, that
creativity is no longer required in performing lien searches may result in
your priming the United States Department of Treasury due to the existence
of a superior (albeit seriously misleading under UCC standards) federal tax
lien. When it comes to federal tax liens, you, yourself must be creative and
you must require your lien search companies to, likewise, follow that rule.
Expand your searches - especially at the inception of the factoring or assetbased lending relationship.
i
Michael Ullman is a principal shareholder in the Boca Raton, Florida
law firm Ullman Ullman & Vazquez, P.A. He can be reached at (561) 3383535 or email him at [email protected].
The author would like to acknowledge and thank a member of his firm,
William Vazquez, for his English literary assistance.
ENDNOTES:
1 Registered organization is defined by Section 9-102(70) and means an organization
organized under the law of a single state…and as to which the state… must maintain a
public record showing the organization to have been organized.
2 Citation at 291 B.R. 579
3 The IRS uses Form 668, “Notice of Federal Tax Lien Under Internal Revenue Laws,” as its
notice of a federal tax lien. The form and content of the notice are governed by federal law
alone pursuant to Treas. Reg. Section 301.6323(f) - 1(d). Pursuant to the Internal Revenue
Code (“I.R.C.”) Section 6323(f), Form 668 is effective when it is filed in the proper place and
under the correct name of the liable person. To determine the proper place for filing in the
case of a corporation or partnership, the residence of a corporation or partnership is the
“place at which the principal executive office is located.” I.R.C. § 6323(f)(2)(B).
4 In the matter of Spearing Tool and Manufacturing Co., and Crestmark Financial Corp.,
appellants, and the United States of America, appellee, 302 B.R. 351 (U.S.D.Ct. E.D.
Michigan).
5 Not willing to accept the reversal by the District Court, the United States of America filed a
Notice of Appeal with the United States Court of Appeals for the Sixth Circuit on January 29,
2004. All of us who represent factoring companies and asset-based lenders, I am sure, wish
Crestmark Bank success in its defense of this appeal.
6 Since this article involves both the IRS and the movie Jaws, this author thought that you
might find a piece of movie trivia of interest: According to Amazon.com, Mr. Steven Spielberg
wanted Mr. Sterling Hayden for the role of Quint, however, Mr. Hayden was in trouble with
the Internal Revenue Service for unpaid taxes. All of Mr. Hayden’s income from acting was
subject to levy by the IRS. In an attempt to circumvent the tax lien, it was considered that Mr.
Hayden, who was also a writer, would receive union scale for his acting, and his story would
be purchased (his literary income wasn’t subject to levy) for a large sum. It was concluded
that the IRS would see through this scheme and Mr. Robert Shaw was cast instead.
P15
FACTORING NEWS FLASHES
The former head of the federal Superfund environmental
cleanup program was indicted on charges she concocted a scheme to
defraud a client who had hired her company to clean up a contaminated
site. Rita Marie Lavelle, who served as an assistant administrator in the
U.S. Environmental Protection Agency during the Reagan administration,
faces one count of wire fraud and two counts of making false statements to
federal agents. Robert Cole, 67, of Ventura, also was indicted on one count
of wire fraud. Lavelle, of Temecula, forged documents to make it appear that
the owner of a company ordered by the EPA to clean up a contaminated
site owed Cole’s hazardous waste storage company more than $52,000,
prosecutors said. Lavelle and Cole allegedly used the forged documents
to obtain $36,441 from Capital Partners USA Inc.
The Associated Press State & Local Wire, April 8, 2004,
Court-appointed receiver Robb Evans & Associates estimates that MX
Factors and its investment arms took in $ 55.6 million starting in March
2000. Investors were told their money would be used to purchase accounts
receivable, called factoring. But the Securities and Exchange Commission,
which sued the companies and their principals in February, says most
of the money from new investors was used to pay original ones, which
constitutes a Ponzi, or pyramid, scheme. Harkless has previously said
that MX Factors was a legitimate business. Investors are due upwards of
$ 20 million, according to a March report by Robb Evans. The receiver said
about $ 11.25 million in assets, including offshore accounts, homes and a
42-foot boat, have been located so far.
The Press Enterprise Co., April 3, 2004
Banco Santander Central Hispano SA said its Santander Consumer Finance
unit plans to sell Elcon Finans AS’s equipment leasing and factoring
business for 160 mln eur. In a statement, SCH said Societe Generale
could be a possible buyer. Earlier, DnB NOR ASA said it had sold Elcon to
Santander Consumer Finance for about 3.6 bln nkr. SCH said the total net
cost of the operation for the bank will be 240 mln eur, adding it will generate
goodwill of 102 mln. Elcon has 3.2 bln eur of assets under management,
the bank said, noting that its automobile financing business, with a 29.8
pct market share in Norway, accounts for 51 pct.
AFX News Limited, March 31, 2004
Appeal of a December 30, 2002 judgment of the United States District Court
for the Southern District of New York holding defendant-appellee Korea
Commercial Bank liable for damages under the Perishable Agricultural
Commodities for receipt of funds in breach of a PACA trust. Was reversed
and remanded.
The principal question presented by this appeal is whether, under the
Perishable Agricultural Commodities., a bank is liable to the beneficiaries
of a PACA trust for receipt of funds in breach of the trust where, having
extended revolving overdraft privileges to a produce dealer covered
by PACA, the bank routinely applied deposited PACA funds to reduce
the negative balance in the produce dealer’s overdrawn account.
New York Law Journal, March 30, 2004
The Board of Directors of First M&F Corp., at its meeting March 12, 2003,
replaced a stock repurchase program begun in August, 2002 with a 12month program targeted to acquire up to 240,000 shares. The Company
owns a 51% stake in an accounts receivable factoring business that has
experienced a loan loss of approximately $2.0 million.
PR Newswire Association, Inc., March 29, 2004
After Siam General Factoring (SGF) takes over Global Thai Finance, a
manager from Global will head the company. SGF is acquiring 100 per cent
of the shares in Global Thai Finance through a share swap. Later, SGF
plans to take over one or two more finance companies before applying for
a bank license.
Financial Times Information, March 26, 2004
DIcentral, has created a financing network for small U.S. and Canadian
businesses. The service - called ediFN - offers businesses access to
accounts receivable financing from $5,000 to $3-plus million, and is
available to any small business that wishes to take advantage of the
program.
Business Wire, Inc., March 17, 2004
LEGAL FACTORS
M
By John A. Beckstead, Esq.
I BLEW THE IRS 45 DAY RULE!
WHAT HAPPENS TO ME NOW?
Most factors are familiar with the so called IRS 45 Day Rule. It is
a frequent topic at seminars and presentations. Unfortunately, it
is not uncommon for factors to miss the deadline and purchase
accounts after the 45 day period. What happens then? How can
you minimize your exposure? While the factor will likely have to
turn over some collections to the IRS, the amount is usually less than the IRS
will demand.
Basics of the IRS 45 Day Rule
The Internal Revenue Code grants the IRS a lien on all assets of a taxpayer
upon the filing of a Notice of Lien. Because it is a federal statute, the Internal
Revenue Code preempts the Uniform Commercial Code. The federal tax lien
generally does not get priority over an existing perfected security interest but
there are exceptions for inventory and accounts receivable which cut to the heart
of a factor’s collateral. The federal tax lien gets priority over a perfected security
interest (including a purchase by a factor) in inventory and accounts which are
created after the earlier of (1) the date the secured party obtains actual notice
of the federal tax lien or (2) 45 days after filing of the federal tax lien (known
as the “effective date”). This rule is why it is imperative for factors to constantly
monitor for federal tax liens against the factor’s clients and immediately cease
funding if a tax lien is filed.
Will the IRS come after me?
For a variety of reasons, the IRS may never come knocking on the factor’s door
to assert its lien. The taxpayer may workout a payment agreement, the IRS
may choose to look to other assets of the taxpayer, and sometimes the IRS is
simply not as diligent as it could be. Therefore, the first response for the factor
is to keep a low profile and hope the IRS doesn’t come around. Don’t contact
the IRS and hope they don’t contact you.
This doesn’t mean your first step is to do nothing. Anticipate a worst case
scenario and begin reserving for it. Do all you can to recover from the client,
other collateral and guarantors. Your client is likely to close its doors or file
bankruptcy. When that happens, it is difficult to obtain records and information.
Get everything you need from your client while the client is still around.
The IRS Enforcement Process
If the IRS does come after you, you will likely receive a phone call or letter
from the IRS advising you of the IRS claim against the accounts. This is merely
informational and has no legal effect. You will next receive a Notice of Levy. This
is similar to a garnishment. It instructs you to pay over to the IRS all collections
received on the accounts dated after the effective date. You will also likely
receive an IRS Summons. This requires you to produce records concerning
the accounts so that the IRS can verify the amount you should be turning over.
If you do not comply with the Notice of Levy and send a check, you will receive
a Final Demand for Payment from the IRS. If you still do not send payment,
the IRS will then file suit against you in federal court.
Failure to pay in response to the Notice of Levy imposes additional liability on
the factor for costs and interest at the IRS underpayment rate from the date of
the levy. If the refusal to pay is “without reasonable cause”, the IRS may also
impose a penalty of 50% of the amount owing. Personal liability attaches to
the officers and employees who refused to tender funds that were owing.
Defenses to the IRS Levy
The first defense to an IRS levy is to scrutinize the process and be sure the
IRS dotted all the i’s and crossed all the t’s. Strict compliance is required and
any defect can void the levy.
Are there disputes as to the effective date of the levy? These often arise in
actual notice situations.
The IRS will usually assert a claim to collections on all invoices dated on and
after the effective date of the lien. This overstates the IRS position, sometimes
by a very significant amount.
The IRS levy extends only to property in existence and to obligations owing
P16
by the factor as of the effective date of the levy. At what point in time does
an account receivable come into existence? The courts have held that in the
context of a federal tax lien, this is a question of federal law and the majority
of the federal courts have held that an account is created when the client is
entitled to payment. This is generally when the goods are delivered or the
services performed. Depending on the length of the client’s cycle from delivery
to billing this could be several weeks. As a result, invoices dated weeks after
the effective date may not be subject to the IRS levy.
The factor may be able to exclude even more accounts receivable from the levy
if the client is selling goods or performing services pursuant to a contract and the
factor has a security interest in general intangibles. The Internal Revenue Code
includes the right to payment under a contract not yet earned by performance as
qualified property subject to the 45 Day Rule. It also provides that the taxpayer
acquires contract rights when the contract is made. Those contract rights are
a general intangible under the Uniform Commercial Code. Several cases have
held that accounts receivable are proceeds of these contract rights and when
the contracts rights were created and the factor’s security interest in general
intangibles perfected prior to the effective date of the tax lien, those proceeds
are not subject to the IRS tax lien, even though the right to payment was earned
after the effective date of the tax lien. In other words, if the client enters into
a contract or accepts a purchase order prior to the effective date of the tax
lien, and the factor has a perfected security interest in general intangibles, the
accounts generated by performance of that contract or purchase order will
not be subject to the IRS lien, even if performance is after the effective date.
Contracts are often signed and purchase orders received weeks or months
before they are fulfilled, allowing the factor to exclude a large number of
accounts from the IRS lien.
The IRS almost always asserts that more is owing in a levy than it is actually
entitled to receive. Scrutinizing the accounts which are subject to the IRS lien
is usually a fruitful effort.
Procedure for Contesting an IRS Levy
The are three procedures for a factor to contest an IRS Levy:
• First, the Internal Revenue Code authorizes payment of the levied amounts
and the factor may then file a lawsuit in federal court seeking recovery of the
amounts paid on the ground the levy was improper. The disadvantages to this
approach are obvious but it eliminates the accruing of interest and potential
penalties against the factor.
• Second, the factor may file an administrative proceeding with the IRS for
release of the levy. Choose this option and your case will be determined by
the fox who is guarding the hen house.
• Third, the factor may take no action and wait for the IRS to file suit.
Challenges as to the amount subject to the levy can then be asserted as a
defense. This allows the factor to hold on to the funds while the dispute is
pending but if the factor loses the factor will be required to pay interest and
possibly a 50% penalty. If this approach is taken, the undisputed amount
should be tendered upon receipt of the levy and only the portion upon which
the factor believes it will prevail contested in the lawsuit.
Conclusion
Blowing the IRS 45 Day Rule is never a good thing and the factor will almost
always incur some liability. But the good news is that the liability will usually be
less than what is claimed by the IRS. The other encouraging news is that today’s
IRS is kinder and gentler than past years which means they are more reasonable
and willing to talk. But the best policy is to not violate the 45 Day Rule!
John A. Beckstead, Esq. is a partner in the Salt Lake City Office
of Snell & Wilmer L.L.P. He can be reached at 801-257-1927 or email him at
[email protected].
ACCOUNT EXEC / LOAN OFFICER TRAINING COURSE
T
The IFA will be conducting a training course for Account Executives
and Loan Officers. This is a first of its kind course designed specifically
for the factoring industry. The course will be held June 10th & 11th at
the Monte Carlo Hotel in Las Vegas, Nevada.
This course is designed as a comprehensive training course covering a
variety of issues related to the factoring industry. The sessions are designed
to train Account Executives and Loan Officers on the intricacies of monitoring
a factoring portfolio. We will be doing in-depth training on the factoring industry
emphasizing many of the details involved with running a factoring operation.
After completion of this course, the attendees will be better informed regarding
factoring and more capable at making prudent decisions regarding their clients
and the portfolio. Some of the topics that will be covered are:
• Invoice Verification Procedures
• Checking the Paper Trail
• Reviewing and Approving
Debtor Credit Limits
• Management of the Accounts
Receivable Aging
• Collection Calls
• Dealing with Credit Memos
• Reserve Management
• Monitoring Tax Payments
• Collection Procedures
• Specific Industry Concerns and
Pitfalls
• Client Service Techniques
• Early Warning Signs
• Working with Government
Contracts
• Management Policies and
Strategies
• Documentation and
Compliance Procedures
• Assignment Procedures
and Issues
HIRING THE RIGHT PERSON
P17
We have selected two industry experts to conduct this training course. The
instructors were selected because of their experience, in depth knowledge and
commitment to factoring. Teaching this course will be:
Darla Hill, COO, Biz Capital USA, LLC and Jay Atkins, Vice President of Bibby
Financial Services, Inc. Darla has been involved with Factoring Operations for
the past 12 years. She also spends time training Factors in their back office
operations. Prior to joining Biz Capital, Darla consulted with many factoring
companies in her position as training coordinator for Distinctive Solutions.
Darla also served as Operations Manager for Access Business Finance in
Seattle, American Factors of Texas in Dallas and as Operations Coordinator for
First Capital Corporation in Oklahoma City. Mr. Atkin’s financial career began
over 16 years ago where he worked as a credit analyst. Since that time. Jay
currently serves as Vice President of Bibby Financial Services, Inc., the largest
independent factor in the United Kingdom.
The registration fee is $695 for members of the IFA and $745 for non-members.
The registration fee includes tuition, course materials, coffee breaks and
lunch.
The Monte Carlo is a deluxe resort and casino featuring the elegance of Monaco
combined with the excitement of Las Vegas. A special fee of $79 per night has
been negotiated for the meeting. A discounted rate is available for who are
planning on staying in Las Vegas over the weekend. Hotel reservations can
be made by contacting the Monte Carlo at 888-529-4828 and requesting the
XFACTOR rate.
You may register for the seminar by contacting the IFA at 800-563-1895. You
may also register on-line via the IFA web site at www.factoring.org
By David A. Rains
H
Hiring is never risk free and in fact it can be one of the most costly
mistakes you can make, next to actually funding that fraudulent invoice.
So, how can you ensure the person you are hiring is exactly everything
you need; that “perfect” employee. What process and steps can you
take to make 100% sure that you are not making a mistake that will
cost you a lot of time and money, damage the culture of your office, or cause you
to end up having to settle for someone who you really do not like or would rather
not have to deal with everyday. In the next few paragraphs, you will not find a
magic bullet, because the truth is that there is no proven method or process that
will guarantee 100% results. In factoring, we spend thousands of dollars every
month, underwriting, completing UCC searches, background investigations,
notifications, and verifications; completing a defined process that ensures we are
protected as well as possible and yet, when we hire; the process is usually done
on a totally conceptual basis of “gut feeling”, “first impressions” and “personal likes
and dislikes”. . How many times have you heard the various buzz statements “A
company is only as good as the people” “Our people make the difference in our
company and the competition”, blah, blah, blah….. However, the reality is much
different from the hype. The keys to successful hiring are tossed to the side and you
end up hiring the most successful interviewee, not the top employee for the job.
and how they will be evaluated. Additionally, ensure they understand the hiring
process and the timeline for the process to be completed.
• Develop behavioral type interview questions to determine the differences
between a good candidate and good employee. Too many times, the best
candidate is hired. Lou Adler in his white paper “How to Make Hiring Top Talent
a Business Process” defined the differences as well as anyone I have seen and
they are listed below.
One of the most important steps on the road to hiring better people is to “Define
the Process”. The steps to a well defined process are:
• Define the position accurately. This does not mean just a job description but
what challenges will the position hold? What characteristics and personality
does the successful employee need to have in order to be successful? What
are the day to day activities and tasks that will need to be accomplished?
• Establish a baseline for that position and have the people currently doing
that position successfully profiled to determine what characteristics are needed.
Think of it like this; have you ever thought “If I could just clone “Employee A”,
then we could experience rapid growth or what a great office we could have.”
Psychological profiling is a tool utilized to seek out someone who is similar in
characteristics and personality.
• Determine how you will evaluate the success and/or failure of someone in that
position. Ensure that the people you are interviewing know what that process is
TOP CANDIDATE
• Good resume
• Good skills
• On time/ prepared for interview
• Enthusiastic
• Great first impression
• Motivated to get a job
• Short-term focus
TOP EMPLOYEE
• Highly motivated to do the work
• Extremely competent
• Strong team player
• More discriminating
• Takes longer to decide
• Requires more information
• Decides with others in a circle
of influence or opportunity
• Aggressively looking
• Values opportunity over
compensation
• Will apply to multiple jobs
• Won’t apply to average positions
• Looks infrequently (the passive
job seeker)
After your processes are well defined, you must then source and interview the best
people for the position. Do not settle for a warm body but actively seek and find
the good employee (not the best candidate) who is a fit for your organization, your
goals and the culture of the company. Don’t forget in the process that you must also
sell your company as the best employees are the ones that interviewed you while
you were interviewing them. The cost of having slow and undefined processes is
that you will not lose every potential employee, only the best ones.
i
David Rains is the managing director of MRI/Commercial Finance Consultant.
He can be reached at (972) 203-6064 or by email at [email protected].
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