3 Planning, Information Gathering, And Assessment

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3Planning, Information Gathering, and AssessmentCharity A. OlsonI. Overview §3.1II. Contract BasicsA. Fundamental Principles and Documents §3.2B. Ratification §3.3III. Credit ApplicationsA. In General §3.4B. Information Requests and Policy Statements §3.5C. Equal Credit Opportunity Act (ECOA) Considerations §3.6D. Guaranty §3.7IV. Presuit ConsiderationsA. Statutes of Limitations §3.8B. Legal Composition of the Debtor §3.9C. What Court to Use §3.10D. What Parties to Include in the Collection Process1. Overview §3.112. Corporationsa. In General §3.12b. Piercing the Corporate Veil §3.13c. Subscription Agreements §3.14d. Successor Liability §3.153. Partnerships §3.164. Principals and Agents §3.17E. Possible Fraudulent Transfers §3.18F. Self-Help Repossession by Secured Creditors §3.19G. Problems with Debtors’ Checks1. In General §3.202. Uncollected Funds Checks §3.213. Insufficient Funds Checks §3.224. Personal Liability for a Bad Check §3.235. Account-Closed Checks §3.246. Stop-Payment Checks §3.257. Postdated Checks §3.26ICLE thanks Jeff Kirkpatrick, of Court Services Agency, for contributing exhibit 3.1, Investigative Tools for Executions.41 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

Handling the Collection Case in Michigan8. Checks Containing Special or Qualified Endorsements §3.27H. Bailments and Consignments §3.28I. Statutory and Common-Law Liens §3.29V. Information GatheringA. In General §3.30B. Annual Reports §3.31C. Uniform Commercial Code Searches §3.32D. Real Estate Searches §3.33E. Legal Newspapers, Court Websites, and Other Online Resources§3.34F. Motor Vehicles Searches §3.35VI. Skip TracingA. In General §3.36B. Preliminary Investigation §3.37C. Techniques and Resources §3.38VII. Collecting Over the PhoneA. In General §3.39B. Specific Telephone Techniques §3.40C. Particular Personality Types §3.41D. Admission of the Debt1. Promissory Notes §3.422. Confessions of Judgment §3.43E. Goals of Collection Calls §3.44VIII. Advising Clients About Small Claims Court §3.45IX. Miscellaneous Planning ConsiderationsA. Federal Student Loans1. In General §3.462. Dischargeability in Bankruptcy §3.473. Amount Owed by Debtor §3.484. Litigation of Student Loans §3.495. Loan Cancellation §3.506. Deferments §3.51B. International Business Dealings1. In General §3.522. Letters of Credit §3.533. Cultural Differences §3.544. Sovereignty and Act of State Implications §3.555. Force Majeure §3.566. Forum Selection §3.57X. Conclusion §3.58Forms3.1 Credit Application3.2 Letter Regarding Check Returned for Nonsufficient Funds (PrimaFacie Evidence of Fraud)42 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

Planning, Information Gathering, and Assessment3.3§3.2Letter Regarding Check Returned for Nonsufficient Funds (TriplePayment)Information or Copy Request (UCC 11)Michigan Department of State Record Lookup Request (BDVR-154)Promissory Note (Basic)Confession of JudgmentResolution of the Board of Directors3.43.53.63.73.8Exhibits3.1 Investigative Tools for Executions3.2 Collecting Money from a Small Claims JudgmentI. Overview§3.1Filing a lawsuit against a worthless defendant when there is nochance of recovery is a substantial waste of time, money, and energy. To save headaches and client disappointment, check out the defendant before instituting a suit.Besides reviewing a corporation’s annual reports and conducting a Uniform Commercial Code (UCC) search for secured creditors and tax liens, do an onlinesearch via services such as LexisNexis Accurint and TransUnion TLOxp. This is aconvenient and reasonably priced way to collect a considerable amount of usefulinformation about debtors. See exhibit 3.1 and §§3.30–3.38 for more on information gathering.To plan for a collection suit, consider the statute of limitations, the legal composition of the debtor, what court to file suit in, what parties to sue, and potentialfraudulent transfers. Take full advantage of information in credit applications.Finally, train your staff to make full and effective use of the telephone to collectdebts.II. Contract BasicsA. Fundamental Principles and Documents§3.2A working knowledge of fundamental contract law principlesis essential in collecting debts, and collection lawyers should be able to explain thebasics to their clients. A contract generally consists of an offer, acceptance, andconsideration. In business, the offer typically consists of a purchase order, and theacceptance is the shipping of the goods or the providing of services named in thepurchase order. The consideration is the purchase price. Offer, acceptance, andconsideration can be implied depending on the circumstances.With some important exceptions (such as sales of real property), contracts donot have to be in writing. Although the UCC provides that all contracts over 1,000 should be in writing, UCC 2-201(1), MCL 440.2201(1), there is a notableexception to this rule. Where a seller of goods ships to a buyer and the buyerreceives and retains those goods, there is an implication that a contract exists. Ifthe buyer fails to timely return the goods, no writing is needed to imply that thebuyer intended to contract for the purchase price of the goods. UCC 2-201(3)(c),MCL 440.2201(3)(c). The UCC also provides for substitutes for a writing orexceptions to the writing requirement where there is a written confirmation43 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

§3.2Handling the Collection Case in Michiganbetween merchants, UCC 2-201(2), MCL 440.2201(2); specially manufacturedgoods, UCC 2-201(3)(a), MCL 440.2201(3)(a); an agreement admitted in court,UCC 2-201(3)(b), MCL 440.2201(3)(b); and partially performed agreements,UCC 2-201(3)(c), MCL 440.2201(3)(c).The UCC does not require price terms, delivery terms, or other details for thesale of goods. Past experience of the parties and other statutory default provisionswill help to determine most of the terms of a contract, including a purchase price.Therefore, it is fairly easy under the UCC to establish the existence of a contractwithout having to prove specifically the elements of offer, acceptance, and consideration.The contract has to be entered into before the goods are delivered or servicesare provided. For that reason, the purchase order and the documentation beforethe sale, including the credit application, become the contract between the parties.The credit application is an often overlooked but important document. Creditapplications often set forth extremely important terms such as interest rates to bepaid should the account become delinquent, personal guaranties to be invoked ifthe account becomes delinquent, and the parties’ agreement concerning full settlement checks. See form 3.1 for a sample credit application.A common misconception among business people is that an invoice is a contract. An invoice may contain a description of the goods, shipping dates, and priceterms, but it is not a contract. The invoice is prepared and mailed out after thegoods are shipped and after the contract is entered into. For this reason, the termsprinted on the back of invoices (most companies insist on filling up the back oftheir invoices with various terms in small print, including immediate inspection,immediate return of any defective goods, and a return authorization number onany defective goods) are generally not enforceable. See Power Press Sales Co v MSIBattle Creek Stamping, 238 Mich App 173, 183, 604 NW2d 772 (1999). Thus, forexample, if a customer voluntarily agrees to pay interest on a delinquent accountbased on the terms set forth in the invoice, that is all well and good, but if the customer later decides not to pay the interest, it is likely that a court will not enforcethe interest terms if they are only in the invoice.The courts will generally enforce contracts that are within the parties’ expectations. If there is a one-sided (unilateral) mistake, the contract is enforceable.However, if there is a mutual mistake, the court will generally not enforce it. Forexample, if both parties thought that the steel was Grade A worth 57.00 perpound and it turned out, by mistake of both parties, that the steel was Grade B,then the court will not enforce the contract.Sometimes contracts are purely unilateral. In other words, acceptance of thecontract occurs through performance. For example, if someone offers to pay 500if the contracting party drives a car to California, acceptance occurs when the caris driven to California.Consideration is difficult to measure, and courts often will not bother to measure it at all. If any legal consideration exists, the contract will most likely beenforced. Thus, if the buyer overpays for a product, a court will not question theoverpayment unless there was actual fraud or a mutual mistake.44 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

Planning, Information Gathering, and Assessment§3.4For more on contract law, see Michigan Contract Law ( John R. Trentacostaed, ICLE 2d ed).B. Ratification§3.3Ratification is an overlooked principle in the enforcement ofcontracts. Sometimes the parties have dealings with each other, but no valid contract exists. This might occur when one of the parties was represented by an agentwho had no authority to act on the principal’s behalf (see §3.17). If a seller shipsto a buyer who did not authorize the shipment, the buyer is still obligated to payfor the goods if the goods are received and accepted. The acceptance of goodsunder the UCC creates an absolute obligation to pay for them. UCC 2-607, MCL440.2607. This is the concept of ratification.For an example of how this might occur, consider a printing company thatreceives an order for 5,000 sheets of letterhead. It is more efficient for the printerto run 10,000 sheets at a time. Therefore, the printer prepares an order of 10,000sheets and ships the entire 10,000 to the buyer. If the buyer receives the 10,000sheets at the delivery dock, signs for them, and then fails to timely reject them, thebuyer is now obligated to pay for 10,000 sheets of letterhead even though 5,000was the original order quantity. Thus, ratification can create a contract (or different terms) where none originally existed.III. Credit ApplicationsA. In General§3.4The credit application is one of the more powerful documentsin a credit manager’s file. It may even be the only contract between the parties thatincludes conditions beyond those specified in purchase orders. Shipments ofgoods on open accounts often are devoid of any contractual terms, and credit people look to their own invoices to establish the contractual basis for their dealingswith their customer. But as noted previously, the invoice is not a contract. Eventhe interest provisions that often appear on invoices are generally not enforceableif a debtor chooses to ignore them.Although the courts have not definitively ruled on jurisdiction and venue forbusinesses with websites, many courts are allowing cases to be heard in venueswhere a website is accessible, particularly if the site is more than just informational(passive). See also §3.10. A website’s posting of a credit application that wouldform the basis of doing business with a customer could easily be considered active.Furthermore, it is good practice to set forth a forum for dispute resolution, and itis becoming increasingly common to insert some specific means of dispute resolution, such as binding arbitration clauses, in a contract. Keep in mind that theseclauses should be regularly reviewed by an attorney, because the law in this entirearea is unsettled and constantly changing. Finally, electronic signatures areenforceable as original signatures, although as of yet no cases have decided thatthis also applies to personal guaranties. See 15 USC 7001 et seq. (Electronic Signatures in Global and National Commerce (E-SIGN) Act); MCL 450.831 et seq.(Uniform Electronic Transaction Act (UETA)).45 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

§3.5Handling the Collection Case in MichiganThus, at the beginning of the open account, a credit application is the keydocument. A well-written credit application can head off a number of problemsbetween the parties that may arise as their business relationship develops. See alsothe discussion of UCC searches in §3.32.B. Information Requests and Policy Statements§3.5An effective credit application contains provisions asking forthe following information or stating the following:1. The correct and full legal name of the applicant, the physical address (notmerely a post office box), and the position of the individual who is applying(e.g., treasurer, president). To make sure that the customer clearly specifiesthe type of business entity, provide check-off boxes for proprietorship, corporation, limited liability company (LLC), and partnership. Requiring a taxidentification number (TIN) for a corporation and Social Security number(SSN) for a proprietorship is also a good idea.2. Any trade names the company operates under. For example, if the BrakeShop is a division of Win Management Corporation, the application shouldrequire that both names be listed along with the relationship between thetwo.3. Names, addresses, and telephone numbers of any authorized purchasers atany branches.4. Names, addresses, telephone numbers, and SSNs of partners and officers.5. Name, address, and telephone number of the bank where the companymaintains its accounts.6. Names, addresses, and telephone numbers of several trade references.7. Type of product(s) sold.8. Year the business was formed.9. A statement similar to the following: “A signature on this document provides permission to pull a credit bureau report on any individual who may beliable under this agreement (such as a personal guarantor, proprietor, generalpartner, or similar person).”10. Financial statements.11. Amount of credit requested.12. Anticipated monthly purchases.13. A statement that the customer agrees to pay interest at a specific percentagerate or the maximum legal rate of interest from the date of the last invoice.The interest charges are to be construed as a time-price differential and,therefore, are not to be considered interest.14. A personal guaranty, which should be obtained on all credit applications.The signing of a personal guaranty is optional and requires a separate signature from the signature on the credit application itself. The language of thepersonal guaranty should be similar to the following:46 2016 The Institute of Continuing Legal Education 1020 Greene Street, Ann Arbor, MI 48109-1444 [email protected] Phone 877-229-4350 or 734-764-0533 Fax 877-229-4351 or 734-763-2412 M-F 8:00am-5:00pm

H. Bailments and Consignments §3.28 I. Statutory and Common-Law Liens §3.29 V. Information Gathering A. In General §3.30 B. Annual Reports §3.31 C. Uniform Commercial Code Searches §3.32 D. Real Estate Searches §3.33 E. Legal Newspapers, Court Websites, and Other Online Resources §