Securing the Delinquent Account & Alternative Legal Theories to Collect on Delinquent Accounts David M. Mannion, Esq. DMannion@BlakeleyLLP.com Blakeley LLP 54 W. 40th Street New York, NY 10018 V. (917) 472-9587 F. (949) 260-0613 www.blakeleyllp.com New York Los Angeles Orange County
Before the Account is Delinquent Credit Applications vs. P.O./Invoice Sales Essential Credit Application Terms: Attorneys Fees Duty to inspect within fixed time period Forum selection clause No modification Service charges Confessions of Judgment: N.Y. C.P.L.R. s. 3218 2 Promissory Notes
Personal Guaranties Formal Requirements Statute of Frauds Signature Requirements Individual signature block Mencher v. Weiss, 306 N.Y. 1, 7, 114 N.E.2d 177 (1953). Strict Construction An instrument purporting to establish liability against a guarantor must be strictly construed, and is not to be expanded beyond the fair import of its terms. Carrier Brokers, Inc. v. Spanish Trail, 751 P.2d 258, 261 (Utah App. 1988) 3
Duration, Revocation, & Assignability Continuing guaranties Cover future extensions of credit. Revocation A continuing guaranty may be revoked at any time by the guarantor, in respect to future transactions, unless there is a continuing consideration as to such transactions which he does not renounce. Cal. Civ. Code 2815 Irrevocable by express terms. Revocable with written notice, except as to then-existing indebtedness. Assignability Changes in ownership of creditor or customer. 4
Suretyship & Personal Defenses Suretyship Defenses Defined The basic rule on the liability of sureties is that the surety is not liable to the creditor unless his principal is liable [;] thus he may plead the defenses which are available to his principal[.] Rhode Island Hosp. Trust Nat. Bank v. Ohio Cas. Ins. Co., 789 F.2d 74, 78 (1st Cir. 1986). Rationale [T]he purpose of a suretyship in commercial transactions is to protect the creditor against the possible unjustified nonpayment by the principal debtor. Once a court has held that the debtor has no debt resulting from a given transaction, when the reason for the extinction of the claim stems from behavior of the creditor, it would be unjust then to allow the creditor to collect from the debtor's surety. Rhode Island Hosp. Trust Nat. Bank v. Ohio Cas. Ins. Co., 789 F.2d 74, 80 (1st Cir. 1986) (emphasis in original). 5
Suretyship & Personal Defenses (cont.) Examples of Suretyship & Personal Defenses Notice (of default, future advances, etc.) Modification of primary obligation (e.g., suspension of rights) without consent of guarantor Accord & Satisfaction Bankruptcy Invalidity or unenforceability of primary obligation (e.g., forgery, immunity, etc.) Statute of Limitations Judgment in favor of principal Performance by principal 6
Suretyship & Personal Defenses (cont.) Examples of Suretyship & Personal Defenses (cont.) Collection v. Payment A guaranty to the effect that an obligation is good, or is collectible, imports that the debtor is solvent, and that the demand is collectible by the usual legal proceedings, if taken with reasonable diligence. Cal. Civ. Code 2800 Compelling creditor to sue principal/co-guarantor Release of co-guarantor Application of collateral of primary obligor (e.g., Letter of Credit) Impairment of collateral/subrogation rights of guarantors Sterling Factors Corp. v. Freeman, 271 N.Y.S.2d 343 (N.Y. Sup. Ct. 1966), aff'd, 279 N.Y.S.2d 577 (N.Y. App. Div. 2d Dept. 1967) 7
Suretyship & Personal Defenses (cont.) Waiver of Defenses It is well settled in Utah that a borrower or a guarantor may waive claims or defenses. Specifically relevant to this case, in Utah [a] guarantor may... expressly waive his or her right to raise the defense of impairment of collateral. *** Accordingly, summary judgment against Defendants is proper. F.D.I.C. v. WS Sleeping Indian Ranch, LLC, 2:12-CV-00818-DN, 2013 WL 5503183, at *3 (D. Utah Oct. 3, 2013) [I]n the Unconditional Suretyship Agreement, [the guarantor] explicitly waived all notices and defenses. Citizens Banking Co. v. McKittrick, 1991 WL 79153, at *2 (S.D.N.Y. May 6, 1991). Sections 2845 and 2849 have often been found to have been waived by language contained in documents. Pearl v. Gen. Motors Acceptance Corp., 16 Cal. Rptr. 2d 805, 808 (Cal. App. 4th Dist. 1993) 8
Guarantee Provisions that Maximize Leverage and Reduce Costs Agreement to vendor s specified interest finance charges Liability for costs of collection (attorneys fees, etc.) Forum Selection Clause Waiver of defenses 9
Sample short-form Guaranty waiving defenses [Guarantor] hereby irrevocably and unconditionally guaranties the full and complete payment and performance of all of [Customer s] obligations under the Credit Application, as and when due. It shall not be necessary for [the creditor] to exhaust any remedies against [Customer] prior to asserting its remedies against [Guarantor] under this Guaranty. This Guaranty is a continuing guaranty of performance and payment, and not of collection only. [Guarantor] waives all defenses with respect to this Guaranty including but not limited to any and all suretyship defenses, defenses based upon impairment of collateral, and any other statutory, legal, or equitable defenses. RCJV Holdings, Inc. v. Collado Ryerson, S.A. de C.V., 18 F. Supp. 3d 534, 540 (S.D.N.Y. 2014) 10
Creating & Perfecting Purchase Money Security Interests under Article 9 of the U.C.C. Attachment vs. Perfection of security interests Requirements for Attachment: Section 9-203 requires, in general: (1) the creditor must give value, (2) the debtor must have rights in the collateral, (3) there must be a security agreement, (4) the security agreement must describe the collateral, and (5) the security agreement must be in a record authenticated by the debtor (usually a writing signed by the debtor). 11
Perfection of Security Interests Cal. Com. Code 9310(a) Except as otherwise provided in subdivision (b) and in subdivision (b) of Section 9312, a financing statement must be filed to perfect all security interests and agricultural liens. Subject to subdivision (b), a financing statement is sufficient only if it satisfies all of the following conditions: (1) It provides the name of the debtor. (2) It provides the name of the secured party or a representative of the secured party. (3) It indicates the collateral covered by the financing statement. Where to file? Cal. Com. Code 9301 12
Purchase Money Security Interests & Priority Cal. Com. Code 9322 (a) Except as otherwise provided in this section, priority among conflicting security interests in the same collateral is determined according to the following rules: (1) Conflicting perfected security interests...rank according to priority in time of filing or perfection. Cal. Com. Code 9103(a) Defines Purchase money security interests. Cal. Com. Code 9324(a) Except as otherwise provided in subdivision (g), a perfected purchase money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9327, a perfected security interest in its identifiable proceeds also has priority, if the purchase money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter. 13
Purchase Money Security Interests The Snooze Over Slide The Sport s Authority lesson In re Whitehall Jewelers Holdings, Inc., 08-11261 (KG), 2008 WL 2951974, at *1 7 (Bankr. D. Del. July 28, 2008) NACM s Secured Transaction Services: www.nacmsts.com 14
The Importance of E-Mail & Documenting Credit Sales under Article 2 of the U.C.C. Summary Judgment What it is, and why it should be the goal in every collection case. U.C.C. 2607(1) The buyer must pay at the contract rate for any goods accepted. Documents needed PO s, Invoices & POD s Emails (& Litigation Holds) 15
E-Mail & Documenting Credit Sales under Article 2 of the U.C.C. (cont.) Cal Com. Code 2607(3): Where a tender has been accepted: (A) The buyer must, within a reasonable time after he or she discovers or should have discovered any breach, notify the seller of breach or be barred from any remedy[.] Cal. Com. Code 1202(d): A person notifies or gives a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it. 16
E-Mail & Documenting Credit Sales under Article 2 of the U.C.C. (cont.) The Account Stated cause of action. Rodkinson v. Haecker, 248 N.Y. 480, 485 (1928): If, instead of an express admission of the correctness of the account, the party receiving it keeps the same by him and makes no objection within a reasonable time, his silence will be construed into an acquiescence in its justness, and he will be bound by it[.] Sierra Food Group, Inc. v. SnacLite, LLC, 2:14-CV-02401- TMP, 2015 WL 1538787, at *1 (N.D. Ala. Apr. 7, 2015) (granting pre-discovery summary judgment to creditor on account stated claim) 17
Arbitration Considerations Speed of resolution Prejudgment remedies Industry experts Privacy No summary judgment Reduced Discovery Unreasoned arbitral awards [A]n arbitrator's manifest disregard of the law is not a ground for vacatur [of an arbitration award] under California law. Comerica Bank v. Howsam, 208 Cal. App. 4th 790, 830 (Cal. App. 2d Dist. 2012) 18
Pre-Judgment Remedies Asset-Freezing Injunctions Accelerated discovery Likelihood of Success on the Merits & Irreparable Harm State v s Federal asset-freezing injunctions Writs of Attachment Majority States, e.g., New York (1) the defendant is a foreign corporation not qualified to do business in the state; (2) the defendant resides or is domiciled in the state and cannot be personally served despite diligent efforts to do so; (3) the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts; (4) the claim is based on a judgment or order of a court of the United States or of any other court which is entitled to full faith and credit[.] Minority States, e.g., California, Pennsylvania 19
Alternative Legal Theories Alter Ego Limited liability & abuse of the corporate form Control or Fraud + Injury to Creditor Factors considered re: control/domination 1) The absence of corporate formalities 2) Inadequate capitalization 3) Commingling of personal and corporate funds New York State Elec. and Gas Corp. v. FirstEnergy Corp., 766 F.3d 212, 224 (2d Cir. 2014) 20
Alternative Legal Theories Fraudulent Transfer Intentionally Fraudulent Transfers Factors considered under the UFTA: 1) Whether the transfer was to an insider. 2) Whether the transfer or obligation was disclosed or concealed. 3) Whether before the transfer was made the debtor had been sued or threatened with suit. 4) Whether the transfer was of substantially all the debtor s assets. 5) Whether the debtor removed or concealed assets. 6) Whether the debtor got reasonably equivalent value. 7) Whether the debtor was insolvent or became insolvent shortly after the transfer. 8) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred. Lis Pendens re: transfers of real estate 21
Alternative Legal Theories Fraudulent Transfer Constructively Fraudulent Transfers Debtor did not get reasonably equivalent value for the transfer, and either: (A)Was engaged in/was about to engage in a transaction for which its remaining assets were unreasonably small; or (B) Intended to incur or should have known it would incur debts beyond its ability to pay. 22
Evaluating Collectability of Judgments Public records searches (e.g., Westlaw, Lexis.) Federal and state court docket searches U.C.C. searches SeizeAssets.com Real estate records, e.g., ACRIS in New York Credit Insurance events Request verified financial statements 23