MoneyMatters Report

(as seen in the Commercial Factor, Summer 2011, Vol. 13, No. 3)

As financiers in the factoring and commercial lending market, our work is a daily dance of thrust and parry vis-à-vis clients that are altogether too often, compelled by malice or circumstance, attempting to defraud us. While the workings of the everyday-home-variety fraud is the stuff of oft recited lender lore and the accompanying defensive measures de rigueur in all manner of Risk Management 101 training, as technology and business processes evolve so do the artifices employed by perpetrators. In this article we cover a sprinkling of anecdotes that highlight some of the more subtle, insidious, and instructive instances of fraud that have come our way, and the circumstances surrounding their incidence, unearthing and prevention.

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The SEC, on January 25, 2011, proposed changes to the Accredited Investor Standards under the Securities Act of 1933 Rule 501 of Regulation D to reflect the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The current standard calls for an Accredited Investor to surpass a net worth threshold of $1,000,000 in order to qualify and participate in private placements under Rule 501. Under the proposed standard, the threshold will be $1,000,000 excluding the value of the person’s primary residence. The SEC estimates that based on the change some 6.55% of U.S. households would qualify for accredited investor status (vs. 9.04% under the current  standard), a reduction of about 28%.

Given as such placements are generally employed by small businesses in their capital raises, these companies will have a substantially smaller investor pool to appeal to for their funding needs.

Accounting Standards Update 2011-01 issued by FASB this month defferred the effective date of disclosure requirements under ASU 2010-20 to apply to periods ending June 15, 2011 (from December 15, 2010) and after for public entities. The effective date for nonpublic entities remains December 15, 2011. ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, calls for increased disclosure for the following:

Senior secured financiers looking to enforce their rights after a default often find themselves at loggerheads with junior secured parties while attempting to take possession of and liquidate their collateral.

A senior secured party is entitled to possession of the collateral as against all junior secured parties.  Moreover, a junior secured party who refuses to relinquish possession of collateral upon demand of a secured party having a superior possession right to the collateral would be liable in conversion.”  Thus, a junior secured creditor, which refuses to relinquish possession of the collateral to a senior secured creditor is liable in trespass to the senior secured creditor (UCC § 9-609 Official Comment 5.)

Similarly, a senior secured creditor is entitled to replevin of assets seized by a sheriff on behalf of a judgment creditor and can sue the judgment creditor for conversion of the collateral.  McFarland v. Brier, 850 A.2d 965 (R.I. 2004); Chrysler Credit Corp. v. Simchuk, 685 N.Y.S.2d 236 (N.Y. App. 1999); Grocers Supply Co. v. Intercity Inv. Properties, Inc., 795 S.W.2d 225 (Tex. App. 1990); Brescher v. Associates Fin. Services Co., 460 So.2d 464 (Fla. App. 1984); Davidson v. Smith Canadian Peat, Inc., 294 S.E.2d 582 (Ga. App. 1982): Murdock v. Blake, 484 P.2d 164 (Utah 1971).  Therefore, the fact that a junior secured party obtained a judgment against the debtor, docketed the judgment in the relevant jurisdiction, and is seeking a Writ of Execution so as to enable the United States Marshal for such jurisdiction to execute and levy on the collateral provide no basis for the junior secured party attempts to interfere with the senior secured party exercise of its superior right to take possession of the collateral and to conduct a public foreclosure sale thereof.

The Times reported today on the rise of finance firms specializing in investments into pre-settlement divorce cases. The funds can be used for paying attorneys’ fees, searching for hidden assets, and maintaining lifestyle until the divorce is resolved. The report follows closely on the heels of an article in the Wall Street Journal earlier this week another emerging breed of niche financier providing funding against a future royalty stream.

Though both types of financing are in their infancy, the rise of such firms makes one wonder whether this represents true innovation in our industry or if the prolonged period of low rates has driven down the yield on conventional assets to such depths as to prompt the bold amongst us to take ever increasing risks in the search for yield.