BCJ SeptOct 2012

NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned from “ZOMBIE RESTAURANTS”: A Cause of Indigestion for a Creditor

In This Issue

by Scott Blakeley, Esq., and Virginia Soderman

Lessons Learned..................... 1

R

Chair’s Message...................... 2

estaurants have been one of the more popular sectors for private equity investors and hedge funds over the last two years. In 2010, buy-out firms purchased at least 24 restaurant holding companies with disclosed deal values added up to $5.66 billion, according to Thomson Reuters. The acquisitions continued into 2011, with Golden Gate Capital taking California Pizza Kitchen Inc., Roark Capital Group buying II Fornaio and Corner Bakery Café, and Bain Capital purchasing Japanese restaurant chain Skylark for $2.1 billion.

The food and drink business, particularly in this volatile economy however, can be cyclical and prone to a falloff of revenues and an erosion of profit margins.

Furthermore, restaurants are vulnerable to consumer confidence, dining trends, and commodity prices. The economic downturn, rising food prices, and the cost of advertising have had a significant affect on the number of Chapter 11 filings in the food industry.

A recent New York Times article refers to companies filing Chapter 11 in the food industry as “zombie restaurants.” Although these so-called “zombies” barely bring in enough revenue to cover base level expenses, many of them cling to life. These failing restaurants have continuously cut prices in order to attract customers, and healthy restaurants have been forced to do the same in order to remain competitive. Analysts state that this excess of producers is part of the economy in the food industry, which allows “zombie restaurants” to stay open as long as they can cover basic costs. Much of the financial trouble in the food industry stems from this oversaturation of suppliers, which has lead to an imbalance in supply and demand in the restaurant industry.

Friendly’s Ice Cream Corp. and Real Mex Restaurants Inc., filed for Chapter 11 within days of each other, citing a sluggish economy, high rent costs, slow consumer spending, and high costs for commodities. Real Mex Restaurants is the largest full-service Mexican restaurant chain with locations in 17 states.

Friendly’s operates a chain of about 500 family-style restaurants in 15 states.

Both Friendly’s and Real Mex are portfolio companies of the private equity firm Sun Capital Partners. Sbarro, Inc. filed for Chapter 11 in April of 2011. It is a leading Italian quick service restaurant concept and the largest shopping mall-focused restaurant concept in the world with locations in 42 countries. A food manufacturer, Orval Kent Food Company recently filed Chapter 11. Orval Kent is the leading provider of prepared foods to the retail and food service

President’s Message................ 2 Member Profile....................... 3 New Designee’s...................... 4 Meet the CSR’s....................... 6 California’s New Mechanic Lien ............................................. 7 NOF Scholarship Funds............ 9 Legislative Corner................... 10 Credit Manager’s Index........... 12 International Corner................ 13 BCLC Webinars....................... 14 Education Schedule................. 14 Contacts................................. 21

continued on page 15

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Message from the Chairman Well, I think we have all enjoyed

Message from the President In the October Business Credit

our forty days of summer in the Pacific Northwest (the rest of the country gets at least ninety days of summer) and we now look forward, or resign ourselves to fall. I being a native Texan, like summer the best, but fall is also full of new beginnings. For many of us fall brings the start of another year of school to enhance our careers with additional education or to educate our children and young adults. Fall means fun things like football, and the beginnings of hockey, and basketball. This year, fall also comes with a Presidential Election and all the fun TV commercials that will be part of that process. Fall also means rain, rain, and more rain. I have never understood why the return of the rainy season brings so much comfort to North Westerners.

Fall also brings with it educational opportunities at NACM Oregon. On September 6, we hosted “Fundamentals of Credit Risk.” On September 11, we presented, “Certification Roadmap Introduction.” We offer “Making Effective Credit Decisions” on September 13 and you can attend “Credit Enhancements: Tools to improve the Likelihood of Payment-in Full” on September 20.

Please don’t forget to register soon for the NACM Western Region Credit Conference in Las Vegas. This year’s conference “Unleash the Dragon,” is being held from October 17 to October 19 at the Golden Nugget Hotel. Please feel free to contact us for additional information regarding this important educational opportunity.

John Hardy Emerson Hardwood Co. jhardy@emersonhardwood.com

magazine, you will be given the slate for a Western Region Director position on the NACM National Board of Directors. Please read the four candidates statements carefully and vote!

Thank you for your support.

Rod Wheeland, CCE, CAE Direct: 971.230.1158 rwheeland@nacmoregon.org

© New Yorker Cartoon. Dean Vietor from cartoonbank.com. All Rights Reserved.

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Member Profile Graybar Electric

A

n electrical distributor with a branch located just off the Banfield in Northeast Portland, Graybar is a company whose history is woven into the fabric of our country and the technology we use in our daily lives.

The company that would become Graybar, Gray & Barton, was founded 143 years ago in Cleveland by Enos Barton and Elisha Gray.

In 1869, the Western Union Telegraph Company was looking for a reliable supplier. A partnership with Gray & Barton was struck, which took the fledgling company to Chicago.

Contracted by Western Union, Gray & Barton’s firm expanded quickly, bouncing around Chicago as they grew. In 1871, the Great Chicago Fire decimated the city—including Western Union’s Chicago headquarters—and came to within two blocks of Gray & Barton. Supplying fire alarms, now in high demand, and equipment to replace the destroyed became their first priority.

Electric). By the 1890s, Western Electric was an electrical manufacturer closely affiliated with American Bell Telephone Company. But Enos Barton, company president at the time, had visions of something bigger. He decided that not only would Western Electric distribute its own products, but those of other manufacturers as well.

Western Electric’s fledgling supply department was a vital part of a growing industry. At the turn of the century their catalog contained over 500 pages.

In 1925, Western Electric prepared the grown-up supply department for sale. “Graybar,” a combination of Gray & Barton (the parent company’s original name), was chosen after

seven days of deliberation. In December of 1925, Graybar Electric Company was born as a wholly owned subsidiary of Western Electric. It is the first example of a company reverting to a form of its original name.

However, a condition of the sale was that Graybar maintain its generous employee benefits didn’t bring many buyers. Graybar and Western Electric struck a deal allowing the employees to purchase the company from its parent. The initial down payment of three million dollars was made on December 31, 1928. The sale closed the next day.

On the first day of 1929, Graybar became the largest employee-owned company in the country. It is still continued on page 4

Additional investment came from Western Union the following year and Gray & Barton became its primary supplier. The company’s name changed to Western Electric Manufacturing Company and grew dynamically over the years, as technology advanced (the telephone, typewriter, and light bulb were some of the products offered by Western Rick Weisman, CCE, Financial Manager

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Member Profile, continued from page 3 owned by its employees to this day.

One of its current employees, Rick Weisman, CCE, works at the Portland branch as the Financial Manager responsible for branches in Tacoma, Eugene, Portland, and Honolulu. Weisman, after receiving a degree in Business Administration and a brief stint selling life insurance, found Graybar in 1979 through an employment agency.

Weisman and his fellow management trainees worked in the warehouse.

“We can’t [bring trainees into the warehouse] any more but it was interesting because we were able to learn the business from the ground up,” Weisman says. Watching his fellow trainees graduate from the warehouse to the customer service desk helped Weisman realize where he didn’t want to go. Customer service was a sink-or-swim environment. Weisman discovered that in Financial Debt he would be only one promotion away from manager and the work didn’t seem nearly as cut-throat.

It was in Seattle’s Financial Debt department that Rick Weisman graduated in 1980 as a Financial Student. He began attending the local NACM lunch meetings and describes the experience as “Great exposure for a newbie.” Weisman lost his newbie status quickly. In 1982, he was transferred to Spokane with a promotion.

Weisman began an ongoing relationship with NACM in Spokane. He was on, what is presently known as, NACM Inland Northwest’s Board of Directors, eventually serving as its chairman for a short time prior to his transfer to Graybar Portland in 1995.

As Weisman puts it, “We’re an employee-owned company, so we take our credit very seriously.” The wide variety of customers they serve is another factor.

Customers range from old (dating back to the Western Electric days) to new and include hospitals, power companies, contractors, and everyone in between. “[NACM] is a primo place for information,” Weisman continues. “If you prevent yourself from one loss from these lunch meetings, you’ve paid for a lifetime’s worth of membership.”

Like so many great credit managers, Weisman can see past the numbers.

“It really is a people business, and that’s the thing that’s great about this job,” he says. “A difficult challenge is an opportunity to develop a relationship. As a credit manager you’re eventually going to run into muddy water with customers.

You’re going to have to roll around in the mud with them. But if you can get through it you’re going to come out stronger on the other side.”



New Designee’s Congratulations to the following recipients who earned their Certified Business Associate (CBA) designation: Kathi Piper Pacific Seafood Connie Wright Sysco Portland Inc. Congratulations also are in order for Elizabeth (Lisa) Ann Stein, Olshens Bottle Supply Co., DBA: Richards Packaging, on her recent CCE recertification designation achievement.

NACM Oregon recognizes and applauds everyone’s success!

Roadmap Sessions Whether you’re just starting out or trying to earn a higher certification, learn how your past and present experience can affect your future.

NACM Oregon offers complimentary Roadmap sessions in January, May, and September.

Marilyn Rea, CCE, helps you navigate the path to career development. With the personal knowledge and experience of acquiring her certification, she’ll share with you what it takes to make your educational goals a reality.

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Stealing from the IRS: Tax returns from ID Thieves Experian/Moody’s Analytics Small Business Credit Index edged up 0.9 point in the second quarter of 2012, to 104.1 from 103.2. This is the index’s third consecutive quarterly improvement, after it fell over much of 2011. Findings from the report also show that credit quality will be slow to improve in coming months, and threats to consumer confidence and spending have become more prominent. Business confidence is in line with an economy growing below potential, and this could weigh on hiring through the rest of the year, postponing the emergence of a strong, consumer-led recovery.

“Small businesses continue to get their financial houses in order, but the progress is slow and they remain cautious in expanding their operations,” said Mark Zandi, chief economist at Moody’s Analytics. “Until small businesses step-up more aggressively, the economy will struggle to grow.”

Small-business credit conditions improve slightly as economy shows signs of stalling.

Highlights from the Q2 report show that small-business credit quality was essentially unchanged amid slower hiring and new worries about the European fiscal crisis.

Small-business financial strength continues to vary considerably across the country. In areas where hiring has picked up and earnings are growing, consumer spending has provided a much welcome boost to small companies. Where spending is still weak, small-business credit quality remains poor.

Additionally, the trend in business payment behavior continues to be a concern. On average, U.S. small businesses paid their bills 7.4 days beyond contracted terms (DBT) during the second quarter, compared with fewer than seven days this time last year.

Average DBT grew regardless of firm size, but large firms employing more than 1,000 people showed the greatest increase, along with firms with fewer than 19 workers.

“Paying bills on time is just as critical for a business as it is for a consumer,” said Allen Anderson, president of Experian’s Business Information Services. “Delinquent payments have a direct negative impact on risk scores, making it difficult to qualify for the best rates and terms. Having this access to additional credit when needed, can be a business’ life line in times of economic distress.”

To receive the full report click here.

The latest ID theft scheme is for thieves to file Internal Revenue Service tax returns. Of course these returns will not be for themselves admitting to their ill-gotten gains, but on the deceased children and others who would not normally file a tax return.

The IRS estimates that ID thieves filed for, and received, more than $5 million in 2011 tax refunds and could steal up to $21 billion over the next five years. The IRS reports it detected an estimated 940,000 fraudulent returns in 2011, which had claimed $6.5 billion in refunds. It estimates up to another 1.5 million cases of ID thieves filed tax returns and successfully received refunds.

Investigators found that thieves also are exploiting vulnerabilities in the way the IRS delivers refunds, preferring direct deposit and pre-loaded debit cards. Thieves often prefer those methods to a paper check, which require a physical address to receive the check and photo ID matching the taxpayer’s name to cash it.

In one example, investigators found a single address in Lansing, Michigan, that was used to file 2,137 separate tax returns. The IRS issued more than $3.3 million in refunds to that address. Three addresses in Florida filed more than 500 returns totaling more than $1 million in refunds for each address.

The IRS said it is already putting a number of new measures in place, including new ID theft screening filters that will hold on to refunds until the IRS can verify a taxpayer’s identity. That filter had thwarted about $1.3 billion in potentially fraudulent refunds through April, the audit said.

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Meet NACM Oregon

Customer Services Representatives

Shawna came to NACM Oregon in 2008 as a Research Specialist with bank experience, and became the Collections Intake Specialist in 2009. Recently, Shawna joined the Member Services team as a Customer Services Representative.

Family is most important to Shawna and, when not at work, she divides her time, “as Mom’s Taxi,” among her children’s activities. It helps that her husband is a professional chef and does most of the cooking!

Favorite Quote:

“Ability is what you’re capable of doing. Motivation determines what you do. Attitude determines how well you do it.”

Recommendation:

Document, document, document!

Dream Vacation:

Backpacking through Kenya

Favorite Ice Cream: Baskin Robbin’s Mint Chocolate Chip

Shawna Kelly

Kendall joined the NACM Oregon family in December 2010 as a Customer Services Representative and Receptionist. Her position requires a great deal of organization by responding to members needs quickly and professionally. Accurate and prompt service is our number one priority. “We want to keep our members happy,” she said echoing our customer service philosophy.

Outside of work, her siblings are what is most important to her as she is very close with her older brother and two younger sisters. In her free time, she enjoys running, staying active, cooking, and eating all kinds of food. Sushi is her favorite thing to eat.

Favorite Quote:

“I believe that everything happens for a reason. People change so that you can learn to let go; things go wrong so you appreciate when they go right; you believe lies so you eventually learn to trust no one but yourself; and sometimes good things fall apart so better things can fall together.”

Recommendation:

Pay attention to detail when signing documents!

Dream Vacation:

Anywhere tropical

Kendall Sun

Favorite Ice Cream: Tillamook Cookies and Cream

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

CALIFORNIA’S NEW

O

n July 1, California’s new mechanic’s lien statute came into effect, marking the culmination of a 13-year long project to improve the law. The law was passed in September 2010, but its implementation was delayed to allow the construction industry to digest the key changes, and prepare itself. You may have taken heed of the forthcoming changes months ago, and were able to seamlessly integrate the new provisions in to your business practices when the clock struck midnight on July 1, in which case you can stop reading now. But if you were unaware of the change, or are still coming to terms with the new law, here are a few of the key points.

Overview The attempt to modernize the mechanic’s lien law began in 1999, when the California Law Reform Commission was asked to study the existing framework, and recommend reforms. For a project so long in the making, its ambitions were relatively modest. The law makes no radical substantive changes; mostly just changes designed to make the law more user-friendly. The end-result could be described as a facelift. The old law, which contained language dating back to 1872, had not been drastically overhauled since 1969, and had been amended 70 times since in a piecemeal fashion. In the opinion of

STATUE: THE BASICS by Johnny White, ESQ. the California Law Reform Commission, it had “become increasingly difficult to use, generating litigation over confusing provisions, and often leaving unsophisticated participants unsure of their rights and obligations.” The new law seeks to put that right. In the words of the legislative digest accompanying the original bill, it recodifies, reorganizes, and clarifies the mechanics lien statute; modernizes terminology and eliminates inconsistencies in language; makes provisions more readable and easier to use.

Determining What Law to Apply With the law having only recently come into effect, you may be unsure of what law applies to projects that you worked on before July 1. What do you comply with if you are intending to file a mechanic’s lien for work performed in June? What procedure should apply if you are moving to expunge an old mechanic’s lien? The answer to both questions is that you should look to the new law.

However, “the effectiveness of a notice given or other action taken on a work of improvement before July 1, 2012, is

hypothetical, where you are moving to expunge an old lien, you would apply the new procedural rules for expunging liens; however, you would analyze whether the mechanic’s lien was proper in the first place under the old law.

Structure and Terminology The new law is found between Sections 8000 and 9566 of the California Civil Code, and is split into three “Titles.” The first of these relates to “Works of Improvement Generally.”

In here, you’ll find all the statutory definitions, all of the requirements for notices generally (be sure to check the specific section for the notice in question also), and all of the new waiver and release forms. The second relates to “Private Works of Improvement,” and the third to “Public Work of Improvement.” This is thought to be an improvement on the more scattershot organization of the prior law. Definitions have been simplified, and language made clearer. In some cases, the terminology of the statute has changed. A “Stop Notice” is now a “Stop Payment Notice” to avoid confusion with a “Stop Work Notice;” the archaic “Materialman” is now a ...continue on page 8

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Mechanic Lien Statue: The Basics, continued from page 7 “Material Supplier;” and the “20-Day Preliminary Notice” is now just the “Preliminary Notice.”

Important Changes Affecting Day-to-Day Business While the effort to make the statute more readable and accessible to the average person is a laudable goal, the more important question is: what changes does the law make that are of relevance from day-to-day as a matter of practice? And, there are certainly a couple of things. The first is that the law prescribes new conditional and unconditional waiver and release forms. Civil Code, §§ 8132-8138. A waiver and release of statutory lien rights in exchange for a progress payment or a final payment is “null, void, and unenforceable unless it is substantially [in the new] form.”

Accordingly, it is imperative to update your release forms. You should be able to locate the language of the new form online, but if you are having difficulty doing so, or are uncertain about whether you have it right, feel free to contact this office.

The second change relates to notices.

The new law makes an effort to standardize the form and manner of any notice given under the statute, setting forth minimum requirements for their contents, and standard methods of service. Fortunately, the new law also includes language to the effect that a notice is sufficient if it will “substantially inform the person given notice of the information required.”

This language will hopefully mitigate some of the harsh consequences of minor defects in notices that could have been fatal under the old law.

Nonetheless, it is important to ensure that your preliminary notice and other forms are current, contain all of the information required by Civil Code, § 8102, the form language set forth in Civil Code, § 8202(a)(3), and your practice for serving them is up to date. For example, first class mail is no longer a valid means of serving a preliminary notice.

Conclusion While the changes to the law are primarily cosmetic, and should not be overly disruptive to the industry, there are nonetheless significant amendments that require immediate attention. This article touches on a few, but in the immediate aftermath of the change, you should second guess yourself, and consult the new (and hopefully more readable) law for guidance before taking any actions.

Reprinted with permission from the Summer 2012 Blakeley & Blakeley Quarterly newsletter.

Miscellaneous Changes In no particular order, the new law also makes the following, noteworthy changes: (1) solving the problem for subcontractors of identifying the construction lender when serving a preliminary notice, the new law requires the general contractor and the owner to make that information available; (2) general contractors are now also required to serve preliminary notices on construction lenders prior to filing a lien; (3) the process of expunging a lien has been expedited, and the penalties for failing to remove an invalid lien are potentially greater; (4) the rules relating to when a project is deemed complete have changed, among them an owner is now entitled to record its notice of completion up to 15 days after the date of completion of work; and (5) the amount of a mechanic’s lien release bond has been reduced to 125% of the lien amount (formerly 150%).

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

NACM-Oregon Foundation Scholarships For the Remainder of 2012 The NACM-Oregon Foundation grants scholarships to credit professionals for continuing education, professional designations, and conference expenses.

The Foundation manages two scholarship funds: the NACM-Oregon Scholarship Fund and the Phylliss Clark Memorial Fund. The Foundation is offering scholarship to the following events: Western Regional Credit Congress for First-Time Attendee October 18-20, 2012 Las Vegas, Nevada NOF will award one, $500 scholarship to any NACM Oregon member first-time attendee to the Western Regional Credit Congress.

Deadline: September 28, 2012

Seminars and Classes for Certifications $1,000 total If taking a course or pursuing your certification seems like an expensive proposition, think again. These scholarship funds are a benefit to you as a member, so please take advantage by applying.

Western Regional Credit Congress October 18-20, 2012 Las Vegas, Nevada Four (4), $500 scholarships.

Deadline: September 28, 2012 Certification Fees $1,000 total

To apply— To apply for scholarship funds, or for more information, contact Lourdes (Lou) Rice, NOF Scholarship Committee Board Director, Pacific Metal Company at 503.454.1051 or lrice@pacificmetal.com.

Submit applications to: Lourdes (Lou) A. Rice, NOF Scholarship Committee Board Director Pacific Metal Co. 10700 SW Manhasset Dr. Tualatin, Oregon 97062 p: 503.454.1051 f: 503.454.1065 e: lrice@pacificmetal.com

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

LEGISLATIVE CORNER 2012 Oregon Ballot Measures Signatures have now been turned in, counted and certified by the Secretary of State. Below are the statewide issues that you will be voting on in November.

Seven initiative petitions (sent to ballot through citizen efforts)

Measure 79—Constitutional ban on real estate transfer fees.

Prohibits real estate transfer taxes, fees and other assessments not already operative as of December 2009. Current statutory law prohibits a city, county, district, or other political subdivision or municipal corporation from imposing taxes or fees on the transfer of real estate (with certain exceptions).

However, the state legislature has the authority, subject to Governor approval, to impose such taxes and fees or to change current statutory law. This measure prohibits all political bodies from imposing such fees based upon the transfer of any interest in real property or measured by the consideration paid or received upon the transfer of any interest in real property.

Measure 80—Statutory change legalizing marijuana.

Allows personal marijuana and hemp cultivation and use without a license.

Creates a Cannabis Commission to regulate commercial sales and establishes taxes. Currently, marijuana cultivation, possession, and delivery are prohibited; regulated medical marijuana use is permitted. The measure replaces state, local marijuana laws except medical marijuana and driving under the influence laws; distinguishes “hemp”

from “marijuana;” prohibits regulation of hemp. Creates commission to license marijuana cultivation by qualified persons and to purchase entire crop.

Commission sells marijuana at cost to pharmacies, medical research facilities and to qualified adults for profit through state-licensed stores. Ninety percent of net proceeds goes to state general fund, remainder to drug education, treatment, hemp promotion.

Bans sales to, possession by minors.

Bans public consumption except where signs permit and where minors are barred. Commission regulates use and sets prices. Attorney General to defend against federal challenges/ prosecutions. Effective January 1, 2013.

Measure 81—Statutory ban on gillnet fishing in Oregon.

Bans Columbia River commercial salmon fishing with gillnets by non-tribal persons, allows seine nets instead. Currently, non-tribal Oregon commercial fishers may catch salmon in Columbia River only with gillnets and only in areas below Bonneville Dam. Current law recognizes Washington gillnet licenses as valid in both Oregon/ Washington waters of Columbia River.

The measure prohibits commercial gillnet salmon fishing by Oregon non-tribal fishers except in specifically designated areas outside mainstream of lower Columbia River: Youngs Bay, Tongue Point/South Channel, Blind

Slough/Knappa Slough; Fish and Wildlife Commission may designate additional areas meeting specified criteria. Measure would not prohibit Washington-permitted gillnet fishers from continuing to commercially fish in Washington waters of Columbia River; allows commission to permit Washington gillnet fishers to “land” fish in designated Oregon areas.

Measure 82—Constitutional change removing ban on non-tribal commercial casinos.

Requires State Lottery to permit the operation of privately-owned casinos within the state, provided that the particular operation is approved through initiative law (see Measure 83). If the privately-owned casino is to be located within an incorporated city, city electors must also approve casino location. The privately-owned casino shall pay 25% of adjusted gross revenues each month to a fund created by law for the purposes of fostering job growth, educational achievement, vibrant local communities, protecting and improving natural environment, and supporting all federally recognized Indian tribes in Oregon.

Measure 83…Statutory permission for casino in Wood Village.

Under the measure, State Lottery shall issue renewable 15-year lease continue on page 11

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Oregon Ballot Measures, continued from page 10 permitting owner of former Multnomah Kennel Club in Multnomah County to operate gaming devices, table games, keno, other games of chance at that site. Measure would become operative only if constitution is amended to permit casinos within state (see Measure 82). Casino operator shall pay 25% of adjusted gross revenues into a Job Growth, Education and Communities Fund (separate from general fund), and 80% in the State Lottery Fund. Moneys in the Job Growth fund are apportioned to the incorporated cities adjoining casino, Indian tribes, law enforcement, and gambling treatment services.

Measure 84—Statutory phase-out of inheritance and estate taxes.

Current state law imposes one-time tax on estate of person dying on/after January 1, 2006, if estate’s gross value—determined by federal law as of December 31, 2000—is at least $1,000,000. Current law taxes income-producing property sales, regardless of parties’ relationship. This measure incrementally phases out estate/inheritance tax, tax on property transfers between “family members,” and tax on property transferred in connection with person’s death; prohibits imposition of such taxes on property of person dying on/after January 1, 2016. Allows state to cooperate with other states and federal government in administering those entities’ estate/inheritance taxes; permits fees on probate and other transactions that may occur following person’s death. Measure reduces state

revenues, and provides no replacement.

Measure 85—Constitutional change abolishing corporate kicker.

Before each biennium, the governor must prepare an estimate of revenues expected to be received by the General Fund for the next biennium. The General Fund is the primary funding source for schools, prisons, social services other state-funded programs/ services. Current law requires an automatic “kicker” refund of corporate income and excise tax revenue when that revenue exceeds estimated collections by two percent or more.

Measure 85 allocates the corporate income and excise tax “kicker” refund to the General Fund to provide additional funding for K through 12 public education—though the language actually does nothing to assure proper use and accounting (i.e. could just supplant other dollars and not be additional help for out schools).

Measure does not change the constitutional personal income tax “kicker.”

Two referrals (sent to ballot by a legislative vote) Measure 77—Constitutional Amendment allowing Governor to declare “catastrophic disaster.”

Proposes amendment of Oregon constitution to provide for government action in event of catastrophic disaster.

Grants governor temporary authority to redirect general fund and lottery monies for thirty days following

declaration of disaster, unless legislature extends or passes law specifying use of funds.

Permits extension of time limit with approval of three-fifths of each chamber able to attend and requires bill establishing termination date.

Permits legislative operation in location other than Capitol and with quorum of two-thirds of members able to attend, rather than two-thirds of total members. Permits legislator attendance via electronic means. Restricts governor to one-time invocation per catastrophic disaster.

Measure 78—Constitutional Amendments technical in nature.

Changes terminology in Oregon Constitution from Legislative “Department” to Legislative “Branch,” Executive “Department” to Executive “Branch,” and Judicial “Department” to Judicial “Branch,” Removes from Oregon Constitution gender specific references to office of Secretary of State. The proposed changes make Oregon Constitution terminology consistent with what is taught in most modern-day civics and American government classes. The “department” language of the Oregon Constitution pre-dates the American Civil War.

Cindy Robert has been lobbying the Oregon State Legislature for almost two decades, with clients ranging from local governments to fortune 500 businesses to non-profits. Cindy is an expert in all aspects of government relations, legislative strategy, campaign development and advising, organizational development and governance structure, corporate partnership and leveraged packaging.

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Advantages and Disadvantages of Purchasing Credit Insurance Purchasing business credit insurance can substantially reduce the risk of exposure to customer nonpayment, and an accompanying bad debt write off. Credit insurance can cover a company’s entire customer base, or it may be targeted to cover only certain customers or types of customers. A domestic credit insurance policy covers commercial risks. Commercial risks can be thought of as events within the control of buyers, and include: • The buyer’s insolvency or bankruptcy, • Protracted payment default, • Their unwillingness to pay for goods received, • Repudiation of a shipment of custom made goods, • Pre-shipment risk which is the risk related to losses caused by a buyer’s insolvency during the manufacturing period but before delivery.

Some of the disadvantages of commercial credit insurance include: • Certain accounts will have specific coverage limits assigned, and the limits may be far less than the amount requested by the creditor, • Policies include annual and per-loss deductibles meaning that credit insurance is not first dollar loss coverage so the creditor self-insures for a portion of the risk • Insurance policies often contain exclusions and limitations on coverage • Often, losses under a certain dollar amount are not covered at all • The insurer will likely require detailed periodic reports from the creditor about the status of customers covered by the policy and failure to comply with any of the terms of the insurance contract could invalidate the coverage • Credit insurance policies will usually not pay the creditor company if the debtor asserts that the balance due is in dispute...and customers in serious financial trouble often claim the balance due is disputed • The narrower the “spread” of risk being submitted to the insurer, the more difficult it will be to find coverage at an acceptable price.

• Credit insurance involves risk sharing, not risk transfer from the creditor to the insurance company and most insurers decline coverage on companies they consider high risk. The problem is that these are often the exact customers that the creditor wants coverage for.

Credit Manager’s Index The CMI is created from a monthly survey of U.S. credit and collections professionals. The survey asks participants to rate whether factors in their monthly business cycle— such as sales, new credit applications, accounts placed for collections, dollar amount beyond terms—are higher than, lower than, or same as the previous month. The results reflect the entire cycle of commercial business transactions, providing an accurate, predictive benchmarking tool.

The National Association of Credit Management’s (NACM) economic report for August 2012 effectively eliminated the threat of a summer slump with improvements in both manufacturing and service sectors.

To view the complete report click here.

All credit and collections professionals are invited to take the survey each month. NACM membership is not required.

Survey Dates— 2012 CMI Timeline

Survey Opens

Survey Closes

September

Mon, September 17

Fri, September 21

October

Mon, October 15

Fri, October 19

November

Mon, November 12

Fri, November 16

December

Mon, December 17

Fri, December 21 (noon)

One final thought—The more account exclusions, the more coverage limitations in the policy, the more restrictions, and the more terms and conditions in the policy the more difficult it will be for a creditor to determine the value of a credit insurance policy to a company.

© 2010 Michael C. Dennis. All Rights Reserved

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

International Corner,

T

by Alice Knight, RGCP

he Credit Research Foundation held its August Credit & Accounts Receivable Open Forum and Expo at the JW Marriott, Chicago, August 13-15.

Although CRF focuses primarily on domestic issues there were some areas that could easily apply to international practices.

Over the last few years it has become more and more evident that the same analysis used by credit professionals can add value when applied to purchasing and vendor analysis. In a slight twist on this one of the presentations emphasized the importance of vendor/purchasing analysis as a key factor in determining a customer’s credit worthiness. The premise was that by analyzing what, how much, and when a customer buys goods or services you can more accurately predict their output and revenue steam. This is certainly not a new concept on the international side since one of the many benefits from customer visits is to see what, how much, and from whom your customer is buying goods and services.

In conjunction with the Forum ICTF hosted a luncheon and afternoon session on international concerns. Walter Rebello, Ravago Sr. Credit Manager Latin America and an ICTF Board Member presented a fascinating review of Latin/ South America from the 70’s until now.

Were you aware that in 2011, six of the 100 busiest airports in the world were in Latin/South America with four of them in Brazil?

In the 70’s-80’s, Venezuela was the only country in the area doing well with a democratically elected government in contrast to the majority of the other countries under military rule. Brazil

started their ethanol program in this era due to lack of oil and hard currency.

In the 90’s, Chile emerged to the state of prominence it still enjoys today.

Columbia and Peru were mired in guerilla warfare and Argentina started a decade of growth and prosperity. Mexico and Chile were the only investment grade countries.

Things changed radically in the 00’s with Brazil, Peru, and Columbia showing stability and growth while Venezuela, Argentina, and the “friends of Chavez”— Ecuador, Bolivia, and Nicaragua—returned to economic and political turmoil.

Currently the only investment grade countries are: Chile, Brazil, Peru, Colombia, Panama, Mexico, Trinidad, and Tobago and a few carribean islands.

Walter emphasized how things change. Venezuela was the highest rated Latin American country in the 70’s. Argentina was one of the top economies in the world in the 50’-60’s. It is critical to keep current in all these markets where change often happens quickly.

He reiterated the fact that Latin/South America is only a geographic area that DOES NOT have a common commercial law, bankruptcy law, promissory note practices, common currency, or a common culture. Each country needs to be analyzed by its own criteria. The content of credit reports vary widely by country.

Financial statements can be obtained but must be reviewed within the context of that country’s inflation rate, access to capital, and business culture.

The presentation concluded with a current brief summary of seven major countries including Argentina, Peru, Colombia, Brazil, Chile, and Mexico.

The afternoon ended with an open forum discussion of areas of concern and the current status of credit insurance availability in some difficult markets. This kind of networking with other professionals and providers in the international arena is a unique benefit of belonging to well-informed credit groups.

Alice Knight is Vice President of Finance & Administration for Paper Products Marketing, Inc. Ms. Knight has more than 45 years' of experience in International Finance and is an active member of ICTF and NACM. She has served as Co-chair, Panel Member, and Presenter at Annual Global Conferences, as President of FCIB Forest Products Group.

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Business Credit Learning Center Webinar Schedule

On-site Education Class Schedule

Information Security, Credit Cards & document Retention September 13  9-10 a.m. (PT)

Building Blocks to Successful Credit Management Series

Resolving Conflicts & Maintaing Relationships September 19  9-10 a.m. (PT)

50% discount to new members as of January 1, 2012.

$45 each for members

.2 CEU each Decisioning September 13, 7:30-9:30 a.m.

Accepting Payment by Credit Card September 24  9-10 a.m. (PT) The New CA Construction Law Get Paid September 25  9-10 a.m. (PT) The Real Measure of Cash Flow October 9  9-10 a.m. (PT) Leading Guiding and Directing Others October 10  9-10 a.m. (PT) Unclaimed Property Compliance in the State of Oregon October 11  9-10 a.m. (PT) Letters of Credit November 15  9-10 a.m. (PT)

Disputes & Deductions September 20, 7:30-9:30 a.m.

Webinar fee: $79 each—member $109 each—nonmember For a complete list of webinars and descriptions, please visit www.businesscreditlearningcenter.com.

If you have any questions on any of the webinars, call Elizabeth Heintz at 971.230.1120, or eheintz@nacmoregon.org.

Schedules are subject to change.

Collections September 27, 7:30-9:30 a.m.

Preventing & Detecting How Do I Manage Risk and Maximize My Company’s Revenue Opportunities?

October 25  8:30-11:30 a.m.

Hyatt Place at Cascade Station $95/members CEU: .3, Course Level: Advanced Guest Speaker: Robert S. Shultz, Founding Partner, Quote to Cash Solutions (Q2C)

Building Blocks to Successful Credit Management— All Day Session $145/member; 50% discount to new members as of January 1, 2012.

November 7  8:30 a.m.-4 p.m.

NACM Oregon Classroom CEU: .65, Course Level: Core Doing Business in Canada November 9  8-11:30 a.m.

Hyatt Place at Cascade Station $95/members CEU: .35, Course Level: Intermediate Guest Speaker: Hubert Sibre, Partner, Davis LLP

Registration To register for on-site classes, please call Elizabeth Heintz at 971.230.1120 or email eheintz@nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned, continued from cover industries. Orval Kent was also held as a portfolio company by a private equity firm.

How do these recent Chapter 11 filings impact vendors’ credit decisions with national and regional restaurant chains and food distributors? How are vendors’ prepetition claims being treated in these Chapter 11’s? What of opportunities for the vendor to continue selling postpetition?

What red flags should the vendor look for to identify food distributor and restaurant chain insolvency risk?

The Corporate Debtor’s Favorite Chapter 11 Filing Location: Delaware Friendly’s, Real Mex and Orval Kent all filed Chapter 11 in the district of Delaware, although their principal places of business are elsewhere. Real Mex’s principal place of business is California, Friendly’s is Massachusetts, and Orval Kent’s is Illinois.

However, each of the companies is incorporated in Delaware, which provides venue to file Chapter 11 in Delaware. The U.S. Congress is considering legislation that amends the Bankruptcy Code and localizes Chapter 11’s by limiting a company’s ability to file outside of the state where they have their primary operations, such as Delaware and New York. For now, creditors must continue to take the “Delaware train” to deal with their prepetition and postpetition claims with customers filing in this venue.

The Chapter 11 Debtor’s Balance Sheet Whether the debtor is a public or privately held business, a customer that files Chapter 11 must disclose its assets

and liabilities at the time of the bankruptcy filing or, in the opening weeks of the filing. The schedules can assist a creditor in evaluating the prospects for a range of distribution, which may guide them should the creditor be approached by a claim’s buyer. The schedules may also assist the creditor with evaluating postpetition credit risk should it elect to sell on terms. The schedules and statement of financial affairs also discloses whether the customer is part of a family of companies that has filed Chapter 11.

Real Mex Real Mex listed debts of $3.2 billion, of which $2.8 billion is secured Assets are valued at $434 million. Real Mex filed with 16 related companies: Acapulco Mark Corp., Acapulco Restaurant of Downey, Acapulco Restaurant of Moreno Valley, Acapulco Restaurant of Ventura, Acapulco Restaurant of Westwood, Acapulco Restaurants, ALA Design, Chevys Restaurants, CKR Acquisition Corp., El Paso Cantina, El Torito Franchising Company, El Torito Restaurants, Murray Pacific, Real Mex Foods, RM Restaurant Holding Corp., and TARV. These cases are jointly administered under Real Mex Restaurants.

Friendly’s Friendly’s listed debts of $401 million, of which $341 million is secured. Assets are valued at $144 million. Friendly’s filed with four related companies: Friendly’s Restaurant Franchise, Friendly’s Realty I, Friendly’s Realty II, and Friendly’s Realty III. These cases are jointly administered under Friendly Ice Cream Corporation.

Sbarro Sbarro listed debts of Sbarro $461 million, of which $207 million is secured.

Assets are valued at $51 million. Sbarro filed with 27 related companies: Carmela’s of Kirkman Operating, Carmela’s of Kirkman, Carmela’s, Corest Management, Demefac Leasing Corp., Larkfield Equipment Corp., Las Vegas Convention Center, Sbarro American Properties, Sbarro America, Sbarro Blue Bell Express, Sbarro Commack, Sbarro Express, Sbarro Holdings, Sbarro New Hyde Park, Sbarro of Las Vegas, Sbarro of Longwood, Sbarro of Virginia, Sbarro Pennsylvania, Sbarro Properties, Sbarro Venture, Sbarro’s of Texas, Umberto at the Source, Umberto Deer Park, Umberto Hauppauge, Umberto Hicksville, Umberto Huntington and Umberto White Plains. These cases are jointly administered under Sbarro, Inc. Orval Kent Orval Kent listed debts of $740 million, of which $490 million is secured. Assets are valued at $261 million. Orval Kent filed with nine-related companies: Chef Solutions Holdings, CS Distribution Holdings, CS Distributors of Ohio, CS Prepared Food Holdings, Chef Solutions, Orval Kent Holdings, Orval Kent Intermediate Holdings, Orval Kent Parent, and Orval Kent Food Company of Linares.

These cases are jointly administered under Chef Solutions Holdings.

Keeping the Debtor’s Doors Open: Use of Cash and Debtor in Possession Financing In the opening days of the Chapter 11 filing, the customer must have access to cash to meet its operating expenses, whether through cash flow or financing. ...continue on page 16

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned, continued from page 15 The customer must obtain a bankruptcy court order authorizing use of cash or financing. To use the cash collateral, the debtor must adequately protect the secured creditor’s interest. If the customer needs financing to fund its postpetition operations, the customer may file a motion with the bankruptcy court requesting the DIP financing.

Real Mex Real Mex received DIP financing up to $49 million to fund ongoing operations.

Friendly’s Prior to their bankruptcy filing, Friendly’s negotiated a $71.3 million postpetition financing package with their existing secured creditors. The DIP facility was used to meet operating expenses so as to prepare the sale of the business. Just as Real Mex, the DIP facility would provide the funding necessary to allow the debtors to maintain the ordinary course of business, thereby preserving the value for the creditors.

Sbarro Sbarro was authorized to borrow money pursuant to the DIP Credit Agreement up to $35 million from Cantor Fitzgerald Securities.

Orval Kent Orval Kent arranged two DIP facilities, with one from Wells up to $28 million, and another with Reser’s, who provided financing of $10 million.

The Most Recent Prepetition Invoices (‘Freshest’) are Entitled to Payment Per Invoice Terms, Provided Post

Petition Trade Credit is Extended Prior to the Bankruptcy Reform Act of 2005, vendors selling goods on credit to an insolvent customer that files Chapter 11 would find the value of the unpaid invoices at risk, even those goods shipped just days before the Chapter 11. A vendor would have a multi-step prove up before the bankruptcy court to reclaim the goods recently shipped and the customer received prepetition. However, the evidentiary burden of the old reclamation code section imposed on creditors was so high that they seldom improved their prospect for payment.

The Bankruptcy Reform Act of 2005 provides that vendors are entitled a priority claim for those goods received by the debtor within 20 days of the Chapter 11 filing. The adoption of this provision, has created a new constituent at the bargaining table—the Section 503(b)(9) claimants. However, the Bankruptcy Code does not specify when payment must be made, other than confirmation of the plan.

Real Mex Real Mex and Friendly’s recognized the significance of 503(b)(9) claims as to their exit from Chapter 11, and each filed motions with the bankruptcy court in the first days of the Chapter 11 addressing unique treatment of vendors asserting 503(b)(9) claims.

The bankruptcy court authorized Real Mex to pay those vendors holding 503(b) (9) claims according to the prepetition invoice terms, provided the vendor commits to provide the debtor comparable

credit terms as provided prepetition. The good news is that vendors don’t have to wait for payment until a plan of reorganization or liquidation is confirmed, which could be a year or longer.

Real Mex Real Mex and Friendly’s recognized the significance of 503(b)(9) claims as to their exit from Chapter 11, and each filed motions with the bankruptcy court in the first days of the Chapter 11 addressing unique treatment of vendors asserting 503(b)(9) claims.

The bankruptcy court authorized Real Mex to pay those vendors holding 503(b) (9) claims according to the prepetition invoice terms, provided the vendor commits to provide the debtor comparable credit terms as provided prepetition. The good news is that vendors don’t have to wait for payment until a plan of reorganization or liquidation is confirmed, which could be a year or longer.

Real Mex’s motion is voluntary. If the vendor holding the 503(b)(9) claim does not want to sell on terms postpetition, the vendor is not required to participate in the motion. This means that the purpose of the 503(b)(9) motion is to ensure Real Mex inexpensive financing, which trade credit provides. For the vendor, the credit evaluation is determining the risk of nonpayment with any postpetition credit sale.

Friendly’s Friendly’s 503(b)(9) motion is comparable to Real Mex. Sbarro Sbarro established a deadline for vendors to file 503(b)(9) claims and also employed a notice and claims agent, Epiq ...continue on page 17

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned, continued from page 16 Bankruptcy Solution.

Orval Kent Orval Kent established a deadline for vendors to file 503(b)(9) claims, but no mechanism for early payment of these claims. Vendors may file motions for 503(b)(9) payment. The challenge for the vendor is that the bankruptcy courts generally do not permit immediate payment of the 503(b)(9) claim in the early stages of the Chapter 11. The legal standard the court generally employs in evaluating whether to order early payment of the 503(b)(9) claim is the financial hardship on the vendor if payment is not shortly forthcoming.

The vendor may consider the Real Mex and Friendly’s example where the debtor may agree to early pay of the 503(b)(9) claim in exchange for postpetition credit extensions. This means that the trade relationship moves from an invoice by invoice trade relationship to a postpetition supply contract on credit terms comparable to those provided prepetition. The duration of the postpetition supply contract is commonly marked by the confirmation of the plan of reorganization or liquidation.

The vendor’s evaluation of opting in for the early payment of the claim is measuring the postpetition credit risk that accompanies the supply contract, balanced with the profit from the forthcoming credit sales.

Both Old and New (Fresh) Invoices Paid Early in Exchange for Post Petition Trade Credit: Critical Vendor Considered

On occasion, a vendor may find that the product or service they provided to the customer prepetition is deemed essential to the Chapter 11 debtor and key to the debtor’s continued operations. The uniqueness of the product or service may give the indispensible vendor leverage in negotiating post-bankruptcy sales. In this situation the debtor may request that the bankruptcy court allow it to immediately pay the vendor’s prepetition claim in the opening days of the Chapter 11, in exchange for the vendor selling to the debtor post-bankruptcy on comparable credit terms for the duration of the Chapter 11.

Real Mex Real Mex obtained court authorization to treat its alcohol beverage vendors as critical to its operations and paid immediately on their prepetition debt. Real Mex stated that the alcohol vendors would be given special treatment because under state law these vendors must be paid within 30 days. No others vendors were given this special treatment. Given this, a vendor must look to third parties to get paid prior to confirmation of a plan.

Friendly’s Friendly’s did not file a critical vendor motion. This means that, like Real Mex, vendors holding older prepetition invoices do not have a source of early payment from the debtor on their pre-503(b)(9) invoices, other than to a claim’s buyer.

Sbarro Sbarro received authorization to pay the prepetition claims of Critical Vendors who agree to continue to supply goods or

services Postpetition on acceptable terms and conditions. The payments are not to exceed $5.2 million.

Orval Kent The bankruptcy court authorized the debtor to pay $1 million to vendors the debtor deems as essential to ongoing operations. In exchange, the vendors must provide post petition trade terms on terms comparable to that provided prepetition.

Suppliers of Fresh Fruits and Vegetables and Suppliers of Livestock and Poultry Entitled to Special Treatment: PACA and PSA Claims Suppliers of perishable fruits and vegetables are given extraordinary protections under the Perishable Agricultural Commodities Act (PACA). PACA impresses a floating trust in favor of the unpaid suppliers of perishable agricultural products. The trust is even senior to the customer’s lender that holds a blanket lien. Likewise, the Packers and Stockyard Act (PSA) provides protections to unpaid sellers of livestock and poultry and all products, receivables or proceeds related to livestock and poultry.

Real Mex The bankruptcy court authorizes the debtor to pay PACA and PSA claims in the ordinary course of business.

Friendly’s Same treatment for PACA claims as in Real Mex. Sbarro Sbarro authorized to pay all valid PACA claims in the ordinary course of business.

Orval Kent Orval Kent authorized to pay PACA claims, but may not exceed $3.7 million.

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned, continued from page 17 Exit Strategy: Selling All the Assets The exit strategy trend of Chapter 11 customers is to sell all of their assets, usually in the opening weeks of the Chapter 11, as opposed to proposing a plan that pays creditors a quarterly dividend based on operating cash flow.

The sale of assets strategy is a multistep process. First, the debtor hopes to lock in a stalking horse bidder that sets the floor for a minimum price for the debtor’s assets. The debtor commonly sets a bidding procedures motion to provide for overbids of the stalking horse offer, and the terms that an over-bidder must meet.

The sale motion provides for an auction process where the bidder that makes the highest and best bid is selected as buyer of the debtor’s assets. Such is the case with Real Mex, Friendly’s and Orval Kent.

The Bankruptcy Code allows for the sale of substantially all of the assets of the debtor, upon approval of the bankruptcy court.

Generally, a major asset sale eliminates the need for a plan that provides for the debtor’s reorganization; rather, a liquidation plan will be filed.

Distribution to Unsecured Creditors Through a Sale of Assets Under the asset purchase agreement, the stalking horse bid is often set at the amount of the debtor’s secured debt. If a stalking horse bid is below the amount of the secured debt, the secured creditor must consent to the sale at that price.

Assuming that the stalking horse bid is set at the amount of the secured debt, unless there is robust auction of the debtor’s assets that results in a significant overbid

of the stalking horse bid, there will not be a meaningful distribution to unsecured creditors through the sale process. The bankruptcy court may authorize a sale in which unsecured creditors will not receive a distribution through sale proceeds.

Real Mex The bankruptcy court approved a sale of all assets of the debtor, with an auction scheduled for January 26, 2012.

Friendly’s Friendly’s cancelled an auction for the sale of its assets when it did not receive offers to compete with the proposed purchase offer from its owner, Sun Capital.

Sun Capital paid $75 million for the assets, of which $50 million was from a credit bid of its secured debt. $2.75 million is to be carved out for unsecured creditors and to cover the costs of closing the Chapter 11.

Sbarro Sbarro chose not to auction off its assets, and instead offered a revised plan of organization. This plan gave the lenders partial ownership of the reorganized restaurant in exchange for a reduction in debt and an additional $35 million in capital. Unsecured creditors received no distribution in the revised plan.

Orval Kent Orval Kent sold its assets for $69.2 million to Reser’s Fine Foods and Mistral Capital Management LLC. The offer covers, in addition to debt assumption, $35.9 million cash to pay off secured debt plus a $25.3 million credit bid.

Plan of Liquidation After the sale of assets, the sale pro-

ceeds are usually distributed through a plan of liquidation. The plan of liquidation commonly provides for the creation of a liquidating trust. The trust comprises the sale proceeds and assignment of litigation claims, including preference claims. A liquidation trustee is employed to administer the assets, including pursuing preference claims against vendors.

Sale of Claims Claims’ buyers in many larger Chapter 11 cases offer to purchase a vendor’s claim at a discount. The upside for the vendor in selling their claim is getting paid immediately, and avoiding the risk that the value of the claim may decrease as the Chapter 11 proceeds. The downside for the vendor is that they may have discounted the value of the claim too much.

It may be possible for the vendor to sell to a claim’s buyer. The claims’ buyers are often deep-pocketed funds that seek out vendors to sell their claims (open invoices at the time of the Chapter 11 filing) at a discount. The claims’ buyers base their claim pricing on a number of factors, which the claims’ buyers usually don’t disclose to the vendor. The claims’ buyers buy the claims at a discount and hold the claim through distribution.

Opportunity for Continued Sales to the Buyer of Assets?

The buyer of the debtor’s assets often seeks to continue trade relationships with key vendors of the debtor. A vendor often welcomes the buyer as a new customer as the buyer has a stronger balance sheet than the debtor, as it purchased only the debtor’s assets not liabilities. If the vendor was selling under a supply contract to the debtor, the buyer of the assets may have

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Lessons Learned, continued from page 18 elected to assume the supply contract.

The buyer of the debtor’s assets becomes the customer for the vendor. Assumption of the contract provides that the vendor is paid on its prepetition claim and is released from preference liability.

Vendors selling on an invoice basis will not have their prepetition claim directly paid by the buyer, other than a prorated distribution of the sale proceeds. The vendors in this type of trade relationship do not have a contract with the buyer of the assets for continued sale of goods or services. The sale’s person’s responsibility is to close the sale with the buyer, subject to the credit professional’s credit evaluation.

The Preference Clawback: Vendors at Risk?

Vendors are wrestling with bankruptcy trustees and liquidating agents in record numbers over the bankruptcy preference.

The bankruptcy preference requires a vendor to return payments received within the 90 days prior to the bankruptcy filing, subject to defenses such as the subsequent advance and ordinary course of business. The liquidating trustee has two years from the Chapter 11 filing to file preference actions. Real Mex, Friendly’s, Sbarro, and Orval Kent have not made demands on vendors for any payments alleged to be preferential, although it is early in their Chapter 11’s and liquidating trusts have not yet been created and the avoidance actions assigned to these trusts.

In sale of asset cases, as we have here, preference actions will be brought against vendors to recover a part of the short-fall from the sale of assets.

Warning Signs of a Customer’s Insolvency: Are You Selling to an Insolvent Restaurant Chain or Distributor?

Given Real Mex’s, Friendly’s, Sbarro’s and Orval Kent’s Chapter 11 filings, and concerns regarding other restaurant chains’ insolvency risks, below are some red flags that may be key indicators of insolvency risk.

Warning signs come in many forms and some are more obvious than others. As we review the past, it is easy to be a “Monday Morning Quarterback,” but reviewing a matter after the bankruptcy can bring much insight that will prevent future losses. It is well worth the effort.

When considering the overall financial health of a customer, always start with a common sense macro point of view. As mentioned earlier, the restaurant industry has been hit hard by the economic downturn of the last three years. For most consumers, dining out is an optional expense, therefore, the restaurant industry is a likely casualty when the consumer’s discretionary income is in question. With this downturn, even consumers who are not experiencing financial difficulty are cutting back on optional expenses. The sense of fear has been communicated universally to consumers nationwide.

Areas for Review: Market, Personnel and Financial In general, warning signs can be inferred from market activities, such as the overall demand for the goods provided, stock and bond pricing, key customer losses and an increase in vendor activity, such as credit reference requests.

Personnel is another area that can provide clues as to negative changes in a business, such as the departure of select senior management, changes in communication patterns with vendors or even employee rumors and departures.

Granted these changes are not always warning signs of problems, but they warrant closer scrutiny to be sure.

Returned checks and slowness of trade payments are traditional credit benchmarks that indicate possible financial deterioration and should always be a component of a credit review.

Even if a company is privately held, there may be public debt outstanding that requires the company to make financial information publically available. Such was the situation for Real Mex. Where financial data is available, the list of review items becomes much longer.

Negative trends in areas such as reduced cash, increased inventories, reduced EBITDA, decline in Interest Coverage are all good indicators to monitor. A change in Days Payable Outstanding, is frequently an indication of a customer attempting to increase vendor financed inventories. Correspondingly, reductions in lending availability or covenant violations all warrant close review.

Where were the clues?

Looking back on the traditional checklist of warning signs, we can see that many were present before the filings of Friendly’s, Real Mex, Sbarro and Orval Kent.

For example: • Both Friendly’s and Real Mex (Acapulco, Chevy’s & El Torito) restaurants reported

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Lessons Learned, continued from page 19

a slowdown in guest traffic, as well as reduced check totals with trends continuing negatively long before they filed for Bankruptcy protection. As a supplier, a review of shipment records may have confirmed the reduced requirements being shipped into the debtor’s operations.

• For those that made financial information public, such as Real Mex, the lack of profit-ability was obvious.

The lack of cash was acknowledged and discussed as early as May of 2011, within the context of being able to fund debt payments.

• Real Mex disclosed in their March 2011 fiscal statements that they were in violation of loan covenants with senior debt holders and the bank. The disclosure indicated that the company was in discussions on the matter.

However, in the Real Mex situation, formal waivers were never officially executed.

• Within the context of officer changes, Orval Kent/Chef Solutions changed senior officers within the 18 months before the filing.

• Where financial information was not available, trade payments provided some interesting insights. For example, reporting agencies showed deviations in how these businesses paid vendors versus the industry at large; however there was no significant deterioration in the few months preceding the filings.

Although not every warning sign was exhibited for each of these debtors, there were enough signs to warrant a close

review and conversations with the debtor’s management.

What Next?

Once the warning signs have been identified, the challenging art of balancing your company’s desire for sales and aversion to losses becomes the most important task. Collaboration with the selling organization and a thorough understanding of the customer’s operation are critical to creating an approach that may allow you to save the sale for your company, without incurring a loss.

Consider the alternatives—Will the customer purchase on Wire in Advance terms? Is a Standby Letter of Credit a possibility to support the credit line? Is there any collateral available to secure the relationship? Might a program of limiting sales to a 20-day balance be a possibility, so that if the customer files, the balance is a claim that is handled as a priority? Your assessment of the company’s post-petition prospects are critical to this decision, as you may be required to extend post-petition credit in order to have the 503(b)(9) claim paid.

be insolvent and have the appearance to have the financial wherewithal to pay according to invoice. However, these chains may be the “walking dead” and may be unable to meet their obligations and default in the near term. The New York Times article is also a reminder that even profitable restaurant chains may find that their segment of market may be tough going with profits being siphoned from the Real Mex and Friendly’s type of competitors.

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Scott Blakeley is a principal of Blakeley & Blakeley LLP where he practices creditors’ rights and bankruptcy law. His email is seb@blakeleyllp.com.

Virginia Soderman is the Vice-President Credit for Ventura Foods, LLC., and is a Trustee of the Credit Research Foundation.

Real Mex, Friendly’s, Sbarro, and Orval Kent are not likely to be the last wave of national restaurant and food manufacturer Chapter 11’s. Although finding a way through the maze of warning signs and remedies is very challenging, the reward can be great. Making the sale without losing the money, when facing a customer’s insolvency, is the best possible outcome for the credit professional and your company.

The New York Times article reminds the vendor that certain restaurant chains may

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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NACM Oregon Business Credit Journal September/October 2012 A monthly newsletter published by NACM Oregon

Contacts Board of Directors

NACM Oregon

Chairman John Hardy Emerson Hardwood Co. jhardy@emersonhardwood.com

Directors Steve Amiel Tektronix, Inc. steven.amiel@tektronix.com

Customer Service/ Credit Reporting 971.230.1220 services@nacmoregon.org

Industry Groups Richard Browning, CGA 971.230.1188 rbrowning@nacmoregon.org

Vice Chair Marsha Johnson, CCE TEC Equipment, Inc. mjohnson@tectrucks.com

Linda Bishop, CCE, CICP Tektronix, Inc. linda.j.bishop@tek.com

Data Contribution Shannon Abnal, CGA 971.230.1166 sabnal@nacmoregon.org

Kristen McBride, CGA 971.230.1176 kmcbride@nacmoregon.org

Secretary/Treasurer Pat Swope, CCE, CICP Pacific Seafood Co., Inc. pswope@pacseafood.com Counselor Raeann Binau, CICP, RGCP Airgas - Norpac, Inc. raeann.binau@airgas.com

Will Campbell Standard Supply Co. willc@standardsupplyco.com Tony Ceniga Industrial Finishes & Systems t.ceniga@industrialfinishes.com Paula Cooley, CBA American Steel pcooley@american-steel.com Sue Hein Rapid Bind, Inc. sue@rapidbind.com Lori Jones, CCE ljdangermouse@gmail.com Kimi Shelton-Muller, CCE EKC Consulting, LLC kimimuller@comcast.net President Rod Wheeland, CCE, CAE NACM Oregon rwheeland@nacmoregon.org

Member Services Kathy Linscott, CGA 971.230.1164 klinscott@nacmoregon Member Services Account Executives Clara Nemeth, CGA 971.230.1144 cnemeth@nacmoregon.org Denise Redding, CGA 971.230.1178 dredding@nacmoregon.org National Account Executive Caroline Anderson, CGA 971.230.1168 canderson@nacmoregon.org

Collection Services Brenda Terreault, JD, CBA 971.230.1196 bterreault@nacmoregon.org Billing Marmie Carpenter 971.230.1146 mcarpenter@nacmoregon.org Meeting Room Rental Elizabeth Heintz 971.230.1120 eheintz@nacmoregon.org Newsletter Editor Barbara Salazar 971.230.1182 bsalazar@nacmoregon.org

Education Elizabeth Heintz 971.230.1120 eheintz@nacmoregon.org

7931 NE Halsey, Suite 200, Portland, Oregon 97213 Tel 503.257.0802 or 800.622.6985 • Fax 503.257.0247 • www.nacmoregon.org

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