NEW YORK — Mountain High Hosiery thinks its factor gave it a raw deal.
This story first appeared in the August 12, 2002 issue of WWD. Subscribe Today.
Mountain High filed a lawsuit against GMAC Commercial Credit, charging the factoring firm with breaches of contract and fiduciary duty and fraud.
The lawsuit was filed on Aug. 2 in a California state court in Los Angeles. It seeks class-action status, as well as unspecified general and punitive damages. Also sued were 50 “John Does.” Wasserman, Comden, Casselman & Pearson is the law firm representing the sock manufacturer, with Cliff Pearson, lead attorney in the case.
GMAC officials could not be reached for comment.
According to court papers, Mountain signed a factoring agreement with C&S Sovran Commercial Corp., later known as NationsBanc Commercial Corp. GMAC subsequently acquired the NationsBanc factoring arm, and took over the Mountain Hosiery account around May 2001.
The lawsuit against GMAC alleged that once the factor took over the Mountain Hosiery account, the manufacturer’s “outstanding receivables increased, application of payments were delayed and fees and costs associated with plaintiff’s factoring increased substantially.”
Firms sell their receivables to factors, giving the finance companies the headache of collections, but also the right to charge a commission on the amounts. Manufacturers benefit from the arrangement because they get to borrow against the receivables from the factors, a common source of funding for many apparel firms. Factors also make money by charging interest on the sums advanced.
According to the lawsuit, the amount of the advance that Mountain Hosiery is entitled to receive is subject to a percentage of its receivables, with that sum fluctuating depending on when payments are credited to its account. Also affected is the amount of interest charged on the loan. The formula, Mountain Hosiery alleged, can be “manipulated in numerous ways including, without limitation, the timing of chargebacks and credit backs [and] the failure to timely apply payments of receivables.”
The lawsuit further charged that “GMAC has taken advantage of small undercapitalized businesses such as plaintiff and the class who rely on this financing for their lifeblood and are at the mercy of GMAC to collect their receivables and keep their businesses viable. GMAC has instituted policies and procedures designed to increase interest and fees charged to plaintiff and the class all to GMAC’s economic advantage and in direct conflict with its fiduciary duty to plaintiff and the class.”