Issue link: https://www.e-digitaleditions.com/i/80263
In extending credit and collecting receivables, a company's credit execu- tive needs to comply with applicable state and federal laws governing these activities.The good news is the lawdoes provide some rights and remedies to avoid a loss when selling on open account.Discussed below are a number of preventive measures that a company can take, with the assistance of legal counsel, to protect its bottom line. Proper care and attention to the exten- sion of credit to customers and the development of procedures to monitor customer credit performance is certain to improve a firm's profit potential. Recovery of Seller'sAttorney's Fees Oftentimes the only way to collect monies due for goods sold on open account is to file a lawsuit. Even where the amount due from the customer is recovered in full, the seller generally must bear its own attorney's fees. In most states, attorney's fees incurred in a collection action can only be recovered from the customer where specifically authorized by a contract between the seller and customer, or by state statute. Except in rare cases, state statutes do not permit the seller to recover its attor- ney's fees from the customer when suing on an open account. To remedy this, the sellermay seek an agreement on fees before credit is extended.This agreement is often part of awritten credit agreement signed by the customer, submitted to the seller and accepted after due investigation of the customer's financial condition, trade references and bank references. Language that could be used is similar to the following (specific language should be prepared for each seller's par- ticular needs): "Customer understands that seller's terms are net _____ days. It is understood and agreed by customer that in the event legal action shall become necessary in order to effect col- lection for goods purchased by cus- tomer from seller, customer agrees to pay all seller's costs of collection includ- ing reasonable attorney's fees." Additional language is often included, whereby the buyer agrees to allow the seller to file any collection action against the buyer in the seller's home state. Personal Guarantees Personal guarantees from the princi- pals or owners provide additional pro- tection to the seller from a loss on an open account sale.However, difficulty is usually encountered when attempting to obtain guarantees and there may be problems in collecting on a guarantee when there is a default by the customer. For example, some courts have released guarantors fromthe obligation when there is a further extension of credit or a change in credit terms to the customer without the written consent of the guarantors. In fact, guaranty agreements are strictly interpreted and may be voided by any substantial change in the obligation guaranteed.A well-drafted guaranty agreement will address this problemarea and others so that the agreement may not be voided by the courts in an enforcement action. The signator's social security number and residential address should appear on the guaranty agreement,so it is clear- ly signed by the individual. Subordination of Inside Debt As an alternative or supplement to personal guarantees, the seller may request a subordination agreement. Smaller firms often have a debt owing to the principals of the company due to a loan or advance made for working cap- ital. In this situation, the seller asks to be paid by the customer before payments are made on the indebtedness owing to the firm's principals. A subordination agreement would state that no repayment would be made on the debt until all debts to the seller are paid in full.This agreement may not prevent an unauthorized payment to the principals. However, a properly drafted subordination agreement would permit the seller to proceed against the principals for personal liability to the extent that unauthorized payments are Oftentimes the only way to collectmonies due for goods sold on open account is to file a lawsuit. Even where the amount due from the customer is recovered in full, the seller generallymust bear its own attorney's fees. received in violation of the agreement. Collecting on NSF Checks A number of states grant a seller a legal remedy where the customer ten- ders a check in payment for goods pur- chased and a check is dishonored due to nonsufficient funds or other reasons. For example, in many states, a person who issues a bad check is liable to the payee for all its costs and expenses (including reasonable attorney's fees) incurred in collecting the amount of the check, plus treble damages. Right to Recover Goods Delivered to Customer What can a seller do if goods are sold on unsecured credit, and the seller learns that the customer has become insolvent (i.e.,ceased to pay debts in the ordinary course of business, or cannot pay debts when due, or is insolvent within the meaning of federal bank- ruptcy law),or has made an assignment for the benefit of creditors, or entered into bankruptcy proceedings? Under the Uniform Commercial Code, the sell- er has a legal right to reclaim the goods if the seller delivers a written notice for reclamation upon the customer within 10 days after the customer receives the goods. Oral notice is acceptable, but it must be confirmed in writing and continued on page 18 September/October 201 2 1 7