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Case Law Updates. A guest blog by Scot Pierce

Aug 10

Posted by admin in General Information | Comments off

The Texas Supreme Court recently issued Italian Cowboy Partners, Ltd. v. The Prudential Insurance Co. of America, 2011 WL 1445950 (Tex. 2011). Although this is not a factoring case, it deals with some of the same contract interpretation issues that many of you deal with in your intercreditor agreements.

The issue was whether to interpret certain contract clauses as eliminating a claim for fraudulent inducement. The facts are bad. The Plaintiff signed a lease with the Defendant to open a restaurant in Dallas. The Plaintiff signed a lease with the following clauses:

Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representation or promises with respect to the Site, the Shopping center or this Lease except as expressly set forth herein.

Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party…

After opening the restaurant, the Plaintiff became aware of a foul odor that turned out to be sewer gas. The odor greatly affected Plaintiff’s business. Plaintiff was unable to remedy the problem, and had to close. Plaintiff then sued Defendant for a number of causes of action including fraudulently inducing them into signing the lease.

Before signing the lease, Defendant had made statements to Plaintiff that it was not aware of any problems with the space and that the space was in perfect condition. Plaintiff presented extensive evidence showing that Defendant was aware of the odor problem, but had concealed it from Plaintiff.  After considering the evidence, the trial court concluded that Defendant had lied and rendered judgment for the Plaintiff. The appellate court, however, reversed and found that the above clauses negated any reliance for fraudulent inducement. Plaintiff appealed to the Texas Supreme Court. The issue was whether the contract clauses prevented Plaintiff from being able to rely on Defendant’s untrue statements as a basis for a fraudulent inducement claim.

The dissent pointed out that the clauses explicitly state that there were no representations other than in the contract. There can be no statements for Plaintiff to rely on if the parties agreed in the contract that there were no other representations. If Plaintiff, who was represented by counsel, did not like the clauses, then it should not have agreed to them. As a result, Plaintiff should lose on its fraudulent inducement claim.

The majority of the Court, however, disagreed. They reasoned that the clauses did not expressly disclaim reliance. They just state that no representations were made other than are in the contract. Since the clauses did not disclaim reliance, Plaintiff wins.

The Italian Cowboy Partners opinion is a classic example of where the facts were so bad, that the Court felt compelled to find a remedy. Now, unfortunately, the law is less clear. The lesson is to be careful what you put in contracts when you are relying on someone else’s statements or someone is relying on your statements. Many of you negotiate your own intercreditor agreements. Be especially careful of the clauses in these agreements.

This article is not intended to render legal advice for any specific matters or situations. It is merely intended for informational purposes. You should contact your attorney for advice about any specific matters.

About the author: Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues.  He can be reached at 817/339-2474 or spierce@belaw.com.

Wishing you continued success. The Factor Guru.

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Case Law Updates, a guest blog by Scot Pierce

May 17

Posted by admin in Underwriting | 2 Comments

In late 2010, a new Yale Factors’ opinion was published that I thought was worth discussing, as many may still not be familiar with the case or the opinion. Because this dispute has been around so long, we really need to start at the beginning to understand what happened.

Facts of the Case

In 2002, Jersey Tractor Trailer Training, Inc. entered into a loan agreement with Wawel Savings Bank for $315,000.  To secure the loan, Wawel took a blanket security agreement against all assets including inventory, equipment, accounts, instruments, documents, chattel paper and other rights to payment including general intangibles.  Wawel filed a UCC-1 on May 24, 2002.  Wawel put no restrictions on Jersey’s use of its accounts and the proceeds unless there was a default on the loan.

In 2003, Jersey entered into an agreement to factor its receivables with Yale Factors NJ, LLC.  According to the court, Yale never asked Jersey about any prior encumbrances and never reviewed Jersey’s books or records.  Dun and Bradstreet ran a lien search for Yale, but instead of using Jersey’s exact legal name, they left off “Inc.”  Because of this, Dun and Bradstreet did not find Wawel’s senior lien.  And, of course, the client concealed Wawel’s loan from Yale and concealed Yale’s factoring agreement from Wawel.  Yale filed their UCC-1 against all present and after acquired accounts in 2003.

Jersey continued having cash flow problems.  In December 2005, Wawel and Yale finally learned about each other and began litigation.  By April 2006, Jersey Tractor declared bankruptcy.  Yale and Wawel promptly filed an adversary proceeding in the bankruptcy court to determine who is entitled to the proceeds of all of Jersey’s accounts.  Yale argued that this case was an exception to first to file priority rule and that it should win over Wawel.

2007 Opinion

In 2007, after a two day trial, the bankruptcy court held that Wawel wins.  Yale argued that under New Jersey’s version of UCC 3-302, 9-330 and 9-331, it should have priority over Wawel to the proceeds because it was a holder in due course and purchaser for value of invoices.  For Yale to qualify for protection under either of these statutes, the court must find that the invoices are “instruments.”  The court must also find that Yale took the instruments in “good faith” which means that Yale observed “reasonable commercial standards of fair dealing.”  Although the court held that the invoices are instruments, the court denied Yale relief because Yale did not observe “reasonable commercial standards of fair dealing” when it entered into the factoring agreement because its due diligence was lacking and because it did not run the lien search using the exact corporate name of the debtor.

2008 Opinion

Yale appealed to the district court.  In 2008, the district court issued an opinion upholding the lower court’s ruling.  Wawel wins again.

2009 Opinion

Yale then appealed to the Third Circuit Court of Appeals.  In 2009, the Third Circuit affirmed most of the district court’s decision, but found that the bankruptcy court could not conclude that Yale’s lien search was commercially unreasonable as a matter of law just because it omitted “Inc.” from the name.  In fact, the Third Circuit Court seems to believe Yale’s search was commercially reasonable.  But instead of reversing the bankruptcy court, the Third Circuit sent the case back to the bankruptcy court to redetermine commercial reasonableness.  No one wins, but Yale gets another chance.

2010 Opinion

This year, the bankruptcy court issued a ruling in favor of Wawel . . . but for a different reason.  The bankruptcy court reconsidered the issue of whether an invoice is an “instrument” for purposes of 3-302, 9-330 and 9-331.  The court concluded that an invoice is merely a record of a transaction and not an instrument.  Yale Factors, therefore, cannot avail itself of any of the holder in due course or purchaser for value protections regardless of whether it acted with commercial reasonableness.  Yale attempts to argue that it was not just invoices, but also checks from account debtors that it purchased, therefore, the court should analyze whether these checks are instruments.  At trial, however, Yale never introduced any checks into evidence.  Without these checks, the bankruptcy court held that it cannot even begin to consider this issue.  Wawel wins again.

So what should we learn?  There are lots of lessons, but I want you to consider how much time and money these parties have spent litigating this issue.  Better due diligence and lien searches could have saved everyone a lot of time and money.  Or, to say it another way, an ounce of prevention is worth a pound of cure.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues and has been a speaker with the International Factoring Association.  He can be reached at 817/339-2474 or spierce@belaw.com.

Wishing you continued success. The Factor Guru.

 

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Big Sanctions in Bankruptcy Court a guest blog by Scot Pierce

Feb 10

Posted by Gen Merritt in Collections | 1 Comment

With the current state of today’s economy, dealing with account debtors and clients who are in bankruptcy has become a way of life for factors.  As a result, many factors have become very proficient dealing with bankruptcies and know the basic rules.  But even some of the most sophisticated financial institutions can still run dreadfully afoul of one of the most basic tenets of the bankruptcy code–the discharge injunction.  And if you are caught, you can be in a for a very expensive lesson.

Last November, a bankruptcy judge in the Northern District of Texas issued an opinion in Danny and Kimberly McClure v. Bank of America, Creditors Financial Group LLC and Peter Rebelo, 2009 WL 4263365, (N.D. Tex. 2009) that reminds us of the consequences of violating the discharge injunction.  Danny and Kimberly McClure filed for bankruptcy protection in July 18, 2007 and received a discharge on November 15, 2007.  Among the debts discharged were personal guaranties on two Bank of America credit cards in the names of their business.

After the couple’s debts had been discharged, Bank of America referred the credit card debts to a collection agency.  Bank of America testified that they knew the debtors had filed for bankruptcy when they referred the case to the collection agency.  As an aside, this is not the kind of testimony that you want to have.  Bank of America essentially admitted that they willfully and intentionally violated the discharge injunction.

When the collection agency received the placements, they performed an initial bankruptcy scrub, but used the tax identification number from the business that Mr. McClure owned instead of Mr. McClure’s social security number to run the scrub.  Because of this, they failed to learn of the bankruptcy discharge.

The collection agency then assigned each credit card to a different collector.  The first collector performed an Accurint search and found Mr. McClure’s social security number.  In spite of this, he did not perform another bankruptcy scrub.  That collector then contacted the McClures for payment.  Mr. McClure testified that the collector told him that someone was likely headed to his house and that the collection agency would be filing a lawsuit shortly if he did not pay.  The very fact that the court mentioned this testimony in the opinion indicates that the court was disturbed by the collector’s tactics.  At that time, Mr. McClure informed the collector that he had received a bankruptcy discharge.

The first collector then entered the bankruptcy information into the collection agency’s system and apparently ceased his collection efforts.  But the second collector, who was assigned to collect the debt owed on the other credit card, did not have access to this same information so he sent a collection letter and attempted to contact the McClures for payment.

That triggered the debtors filing a motion for contempt for willfully and intentionally violating the discharge injunction.  The debtor requested attorney fees, damages and sanctions against Bank of America, the collection agency and the second collector.

After hearing the evidence presented, the court denied recovery and sanctions against the second collector.  The court, however, did find that both Bank of America and the collection agency willfully and intentionally violated the discharge injunction.

The court awarded the debtor $79,839.14 in attorney fees and $2,500 in actual damages both jointly payable by Bank of America and the collection agency.  The court also awarded a separate $100,000 sanction against Bank of America and $50,000 sanction against the collection agency.  Each party’s sanction would be suspended and need not be paid if the president or  general counsel of each company submitted an affidavit within 90 days detailing how their procedures had been changed to prevent this from happening again in the future.

A number of lessons can be learned.  Among them is to ensure that you have adequate procedures in place to protect against violating the discharge injunction or automatic stay.   Also, be careful who you refer delinquent accounts to for collection.  I believe there is at least a possibility that Bank of America would never have been sanctioned if the collection agency had not had faulty procedures that triggered the debtor to complain to the bankruptcy court.  I also believe the strong arm tactics that the collection agency used made the situation worse.  The bottom line is you should check your procedures to ensure that once your company becomes aware that a debtor is in bankruptcy or has a received a discharge–stop collection efforts immediately.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues.  He can be reached at 817/339-2474 or spierce@belaw.com.

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