Apparel Firms Closely Watching GMAC Factoring Suit
By ANTHONY PALAZZO
Staff Reporter
A lawsuit filed recently against GMAC Commercial Credit LLC, one of the nation’s largest specialized lenders to the apparel industry, is being closely watched for its potential to alter the industry’s financing relationships.
In the case, filed last month in Los Angeles Superior Court, GMAC Commercial Credit has been accused of taking too long to credit payments made to the accounts of apparel manufacturers who are its clients in the area of specialty finance called factoring.
The slow credits, allegedly a result of internal GMAC procedures, can cost clients hundreds of thousands of dollars, said Marina N. Vitek, a lawyer representing plaintiff Mountain High Hosiery Ltd. of San Diego.
“It’s a day here, a week there,” Vitek said. “That sounds very small, but for one of these companies with a very high volume of invoices, just a few days can add up.”
No discovery has taken place to determine whether Mountain High’s claims are valid. But its lawyers are seeking class action status and those involved in the factoring industry are paying close attention.
“It could be a landmark situation,” said Bruce Berton, officer director of international business consulting at Stonefield Josephson Inc., a Santa Monica accounting firm with a large apparel industry presence, but no role in the lawsuit. “(Factors) all will watch it very closely because it will affect them.”
Assuming risk
Most apparel manufacturers use factoring companies to finance production of an order during the months it can take for goods to be made, shipped and paid for by the buyer, usually a retailer. In a factoring arrangement, the factor often pre-qualifies the buyer anyone from a small boutique to a Wal-Mart Stores Inc. and assumes the credit risk. It is a business that traces its history to the days of the Roman Empire.
Typically, the factor will advance the manufacturer up to 80 percent of the order amount, leaving a 20 percent cushion for interest, fees, non-payment and disputes that may come up. The apparel firm uses the advance to pay for supplies, while the factor takes possession of the account receivable the right to collect the bill.
When the payments from the buyer come in, the factor is obligated to credit the client’s account after a contractually defined period, deducting interest for the money previously advanced.
In the end, the factor usually owes the manufacturer some money after each order is paid for. If the buyer files a claim over quality or some other performance issue, the factor deducts it from the account and it is the manufacturer’s responsibility to resolve. If the factor has assumed the credit risk on the account, and the buyer doesn’t pay, it credits the manufacturer with payment, typically after 120 days.
“Generally speaking, factors are on your side,” said Moshe Tsabag, chief executive of L.A.-based teen clothing line Hot Kiss, who uses a factor other than GMAC. “They need us as much as we need them. They can’t make money without us being in business.”
Buying share
Mountain High became a customer of GMAC by virtue of GMAC’s January 2001 purchase of the $9 billion factoring business of Bank of America Corp. In about May of that year, GMAC took over accounting for Mountain High’s account, according to the lawsuit. After that, the suit alleges, Mountain High’s outstanding receivables increased, application of payments were delayed and fees and costs associated with its factoring increased substantially.
The lawsuit alleges that GMAC instituted policies which will have to be detailed through the discovery process “designed to increase interest and fees charged to GMAC’s economic advantage and in direct conflict with its fiduciary duty.”
As a result, the suit alleges, GMAC isn’t crediting payments promptly, and thereby increasing the interest charged its clients. Among other particulars, Mountain High accuses GMAC of attempting to “hide, delay and avoid” its obligation to “deem paid” accounts receivable when a buyer fails to pay after the typical 120 days, and GMAC has assumed the credit risk.
Anne Marie Sylvester, a spokeswoman for GMAC Financial Services North America, declined to comment on specifics of the case.
Sources said GMAC has settled some similar cases, but didn’t identify them. Sylvester couldn’t confirm or deny any specific lawsuits, but said it’s the “normal course of business to have litigation at some point.”
GMAC won’t disclose the current size of its factoring business. According to its Web site, GMAC Commercial Credit has $3.6 billion in loans outstanding, including factoring and asset-based lending.
More than one industry source said GMAC’s entry into the factoring business, which requires a much closer and more active relationship with the client than many other areas of finance, has had some bumps.
“They’ve had some huge losses,” said one source, citing the collapse of GMAC customer Chorus Line Corp. of Los Angeles in 2001, and GMAC’s relationship with another struggling clothing company, BCBG Max Azria in Vernon.
Any issues with those companies have been resolved, said Sylvester. She said GMAC Commercial Finance, which includes GMAC Commercial Credit, underwent a restructuring earlier this year.
Disputes between apparel manufacturers and their lenders are usually worked out behind closed doors. However, because the amounts are relatively small, for all but the largest factoring clients it doesn’t pay to mount an investigation into its factoring account. The Mountain High case, if it receives class standing, might result in legal requirements for factors “to put in certain systems to verify receipt of moneys and the crediting of the client,” Berton said. “Most of them have it but it’s not monitored.”
