Articles Posted in Debtor Defenses

When starting an action against a debtor, the creditor’s attorney wants to make sure good service is made upon the debtor if it is a corporation, limited liability company or limited partnership. Good practice skills teaches that the easiest and best way to serve an entity that must register with New York’s Secretary of State is to serve the Secretary of State because under New York’s Business Corporation Law §§ 306 and 402, when such an entity registers with the Secretary of State, the organization document designates the Secretary of State as the authorized agent to receive service of process. In connection with that registration, the organization document requires that an address be set forth so that the Secretary of State can then mail by certified mail directly to the entity whatever document has been served on it. BCL §402. Indeed, New York courts have specifically held that an entity who registers with the Secretary of State has a duty to keep that mailing address current. FGB Realty Advisors, Inc. v. Norm-Rick Realty Corp., 227 A.D.2d 439 (2nd Dep’t. 1996) (“FGB Realty”). And see FedEx TechConnect, Inc. v. OTI, Inc., WL 5405699 (S.D.N.Y. 2013).

The alternative to serving the Secretary of State is to serve the entity directly, which depending on the entity is going to involve serving some person connected to the entity clothed with sufficient authority so as to meet minimum due process requirements. So, for example, if the entity to be served is a corporation, then New York’s Civil Practice Law and Rules (“CPLR”) §311, states the individual to be served must be an officer, director, managing or general agent, or cashier or assistant cashier. Unless there is sufficient advance information on exactly who is an officer, manager, cashier, etc., the seasoned practitioner knows that serving such an individual is a probable invitation to a challenge from the debtor that service was not made properly because, of course, Joe Smith is not a manager of the debtor, and moreover, there is no such person named Joe Smith who works for the debtor. The challenge works in the debtor’s favor because it slows down the litigation process, usually requiring a hearing on the service.

The savvy creditor’s attorney therefore foregoes the chance that she will not find an appropriate employee of the entity to serve, and, instead, pursuant BCL §306, effects service of the summons and complaint on the Secretary of State. Service on the Secretary of State is good service, so the creditor’s attorney diaries the date an answer is due and prepares for a possible default application and pursuant to CPLR 3215, serves an additional copy of the Summons on the debtor. Lo and behold, no answer is filed or received in the required time period, and the creditor’s attorney enters a default judgment and serves notice of entry of the judgment on the debtor at the address known to the creditor, which, for argument’s sake, is the same address listed by the debtor in its filing with the Secretary of State. Continue reading

Consider the following facts. For many years a company provides services to a corporation. The corporation is a small business, owned and controlled by one individual. A substantial balance is incurred by the corporation which the corporation refuses to pay. A familiar scenario is then played out. The owner opens a new corporation in a similar business and dissolves the first corporation. The service provider creditor commences an action against the first corporation. The law suit is ignored by the first corporation. Thereafter, the creditor obtains a default judgment against the first corporation, but is unsuccessful in finding any assets.

The creditor then deposes the owner and requests bank and financial records. These records reveal that after the commencement of the action against the first corporation, the owner caused the first corporation to transfer a significant amount of cash to the new corporation. The owner cannot establish a credible explanation for the transfers. Thereafter, further discovery reveals that the owner has been using funds in the new corporation to pay directly for personal expenses.

Unbeknownst to the creditor, shortly prior to the deposition of the owner, the owner was granted a discharge in bankruptcy. The creditor was not aware of the owner’s bankruptcy filing and the bankruptcy petition reveals that the owner did not list the creditor as having a claim against either the first corporation or against the owner. Continue reading

Next to the purchase of a home, the purchase of an automobile is the most expensive transaction most consumers in this country make. And like the purchase of a home, most car buyers finance this purchase with a bank loan, where the lender as security for the loan gets a lien on the car so as to allow the bank to repossess the car in the event the car buyer defaults on the loan.

When there is a default on a car loan, most lenders do not immediately repossess the vehicle. Instead, there is a long process of notices, demand letters, calls, and attempts to work out a payment plan. If none of these efforts work, in all likelihood, the lender takes steps to repossess the car and sell it in a commercially reasonable manner in order to recoup as much of the default loan amount as possible from the sale proceeds. After that, collection efforts may continue until it is clear that the borrower will not pay anymore. Upon reaching that point, the lender may send the claim to its attorneys for collection, assign the claim to a collection agency or perhaps sell the claim to a debt buyer. Thereafter, these subsequent entities in the chain of collection may pursue further collection efforts and then ultimately sue the borrower.

The prudent lender, collection agency or debt buyer keeps close watch of the time which transpires from default until suit is commenced to prevent the claim from being time barred, but sometimes years can go by before a suit is commenced and the holder of the claim may well be presented with a defense that the claim is time barred by the applicable Statute of Limitations. The question then becomes what is the applicable Statute of Limitations, which, in turn, is a function of what kind of transaction is at issue. Continue reading

If you are a vendor or supplier of services outside of New York you may want your transaction with your New York customer to be controlled by the law of your state and not that of New York. There may be some good reasons to want your state’s law to control, particularly if it provides certain advantages to you as a seller if you end up having to sue your customer in New York. So, you ask your company’s attorneys to draft up language in your standard contract which provides that in the event of a dispute the law of your state will govern. You think you are protected until the day you end up suing that New York customer you knew was going to be trouble and your customer’s attorneys argue that despite what the contract says, applying your state’s law is unfair. How do New York courts handle choice of law clauses?

In Welsbach Electic Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006) (“Welsbach”), New York’s highest court set forth a two-pronged approach in determining whether a choice of law clause in a written contract would be enforced. First, the Court stated that as a general matter, a choice of law clause would be enforced if the chosen law bears a reasonable relationship to the parties or the transaction. If the agreement is clear and unambiguous, a court will not interfere with the contract and the intent of the parties in choosing a particular law. However, New York’s highest court goes on to state that a contract, which is clearly illegal or contravenes some fundamental principle that is deeply rooted in New York State’s history, or as the high court put it — those foreign laws that are “truly obnoxious” — will not be enforced. If this type of moral repugnancy is not present, New York will enforce the intent of the parties in choosing to be governed by a sister state’s law.

Welsbach is a good example of how New York analyzes choice of law clauses. In Welsbach, the issue concerned whether a Delaware sub-contractor’s agreement with a Florida general contractor which contained a “pay if paid” provision (legal under Florida law) and which agreement provided that Florida law applied would be enforced even though the provision was illegal under Section 34 of New York’s lien law. In order to determine the issue, the Court needed to decide whether a fundamental concept was in question. Finding that prior precedent has found fundamental concepts to be present in cases involving human rights and civil rights discrimination, the Court held that the issue of risk allocation present in the lien law context did not arise to the level of a fundamental concept, particularly where the parties are commercial entities and voluntarily entered into the contract. In short, the Court held that the given all of the circumstances, the “pay if paid” clause was not “truly obnoxious” so as to void the parties’ choice of law. Continue reading

Creditors do not want to hear it, but the answer to the question of when a debtor can defeat a claim for collection of monies due based upon a defense of no written agreement is – “it depends”, the dreaded, sometimes unhelpful response that attorneys give. So what are the parameters of “depends”? On a general level the answer to the question is a function of what kind of transaction is at issue. Sales of goods are governed by a special set of rules, whereas brokerage claims, employment contracts and real estate agreements are covered by other rules.

In New York, like most other states in the Union, sales of goods transactions are governed by the Uniform Commercial Code (“UCC”), which has its own specific section on when and under what conditions a writing is necessary to enforce a collection claim. The rule on when a writing is required, generally referred to as the Statute of Frauds (dating from the early days of English law) can be found in UCC Section 2-201 (1) which states that “Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.” This does not necessarily mean that a buyer and seller need to have signed a written agreement in order to satisfy the UCC’s Statute of Frauds requirement. Whenever possible, the drafters of the UCC wanted the statute to reflect practical business reality. Therefore, UCC Section 2-201 (2) provides that as between merchants, if within a reasonable time the seller sends a written confirmation of the order or the contract which is sufficient against the seller (i.e. that it is signed by the seller or clearly attributable to the seller) and the buyer has reason to know of the contents, then unless within ten (10) days after it is received, the Buyer objects, there is an enforceable agreement under UCC section 2-201. Section 2-201 (2) covers the typical situation where a buyer and seller reach an oral agreement on an order for goods and the seller thereafter sends a confirmatory memo or even an invoice. There are, however, other practical circumstances which create exceptions to the writing requirements. Suppose a seller sends goods which were ordered by a buyer and the buyer accepts the goods or even pays for the goods prior to acceptance? Then, no writing is required. UCC section 2-201 (3) (c) specifically covers that situation. Another situation is where goods are specially manufactured and it is clear that the goods are designated for the particular buyer and the seller has commenced manufacture – again, no specific writing required here. See UCC section 2-201 (3) (a). Continue reading

Creditors, often times, those in the equipment leasing business, will enter into an equipment lease agreement with a business lessee where the agreement is signed perhaps by a manager or some other employee whose job it is to furnish and equip the debtor’s business. When the debtor’s business gets in trouble, employees are let go and the lease payments stop. The equipment lessor sends notices reminding the lessee to pay or that the lease is in default, demanding payment. Much to the surprise of the lessor, the lessee now says that while the person who signed the lease was an employee of the debtor, that person had no authority to sign the lease or bind the debtor, and therefore, the lease is not an obligation of the debtor.

Leaving aside that the debtor had the benefit of using the equipment for some period of time, can the debtor effectively disown a signed agreement by denying the authority of the debtor’s employee to sign the agreement? Clearly, the employee is an agent of the debtor, and probably represented to the lessor that he has authority to sign the lease. When is the debtor bound by the act of its agent who signs the agreement?

Under New York law an agent’s authority may be actual or apparent. Actual authority exists when an agent has the power to do an act or to conduct a transaction on behalf of the principal based upon the principal’s clear direction that the agent perform the act.  Minskoff v. American Exp. Travel Related Servs. Co., 98 F.3d 703, 708 (2d Cir.1996). Actual authority may be express or implied, and in the case of express authority is the kind of authority distinctly and plainly articulated, either orally or in writing. On the other hand, implied authority exists when verbal or other acts of the principal reasonably give the appearance of authority to the agent. Implied authority has also been defined as a kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. The general rule in New York with regard to implied authority is that an agent employed to do an act is deemed authorized to do it in the manner in which business entrusted to him is usually done. Songbird Jet Ltd., Inc. v. Amax, Inc., 581 F.Supp. 912, 919 (S.D.N.Y.1984). Continue reading

For the many small and medium sized businesses in our country, particularly those involved in retail sales, access to working capital from banks and other traditional asset lenders can be hard to access.  There are, however, companies that provide working capital to small and medium sized retail merchants by providing these merchants with a way to access working capital through the sale of anticipated future revenues.  These future revenues are most often provided through future credit card sale transactions which merchants and their customers engage in on a daily basis.  Merchants who need working capital will provide purchasers of these future credit card receivables with their history of credit card transactions.  The purchasers will then determine how much of the future credit card receivables they are willing to buy and fix a percentage of future transactions that will be allocated to the purchaser as payment for the purchase, with the balance turned over to the merchant.  Written merchant agreements are entered into which typically provide that the merchant will, in good faith, continue in the same business, continue taking customer credit cards and will use an agreed upon processor for the credit card transactions.

But as in any financial arrangement, sometimes things go wrong and sometimes a merchant stops using the designated processor or stops using credit cards altogether.  If the merchant, after notice, does not go back to the agreed upon method of doing business so as to allow the purchaser to get the purchase price paid, the purchaser has to sue.

Once in court, the merchant determined to beat the purchaser looks to raise any and all defenses, including sometimes that the merchant agreement was not really a purchase and sale, but rather, a loan.  And if the transaction was a loan, says the merchant, by comparing the amount of money going back to the purchaser to the amount of money advanced to the merchant over a specified period of time, the “loan” is usurious.  Criminal usury in New York is a loan which exceeds 25.00%.  New York Penal – Article 190 – § 190.42 Criminal Usury in the First Degree. Continue reading