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| The following information is intended for California residents only, applies California law, and is only intended
as a general discussion of an area of law. While other states may have similar laws or provisions, a local attorney should be consulted
with any situation involving persons or businesses outside of the state of California or the United States. This website is not intended as legal advice
for any individual's or business' specific situation. A layperson should not rely on the limited information provided on this website to make decisions concerning
specific cases or issues. No attorney-client relationship is established simply by reading this general information; no relationhsip with the Law
Office of Steven R. Lovett exists until a written retainer agreement is signed by all parties. |
COMMERCIAL LAW
It always amazes me that generally, clients
only seek out attorneys after a business or personal deal has gone
bad. Patients regularly see doctors for "check ups," yet resist
seeing lawyers for preventive advice that could save thousands of
dollars in litigation fees.
Accordingly, I am taking this
opportunity to give advice that most people only
learn the hard
way...after they have been through a bad experience in
court.
1. Get it in writing!
Yes, it is true that the
law generally does not require written contracts (except in specific
instances, such as contracts for sale of real estate or contracts
involving the sale of goods over $500.00). Despite the lack of a
formal requirement, it is almost always advisable to get an
agreement written down.
First, a writing shows that a meeting
of the minds occurred and demonstrates that a contract exists. (This
fact is often disputed, especially in partnership situations).
Second, a writing prevents an after-the-fact (sour grapes)
denial of value. For example, a party's claim that he or she does
not owe a full debt or that services were not satisfactory is highly
suspect when there is an express promissory note admitting that
funds are due.
Third, a written agreement extends the statute
of limitations. When the parties only
have an oral agreement, a
party has to file suit within two years from the date of breach
(i.e.,
nonpayment). However, when there is a written agreement,
the plaintiff has four years to sue
before his or her claim is
forever barred.
Fourth, a written agreement with appropriate
language can entitle the victorious party to recover his or her
attorney's fees. With certain minor exceptions, one can generally
only recover attorneys' fees when there is a contract provision
entitling the prevailing party in a lawsuit to recover their
collection or legal expenses.
2. Invoice regularly!
It
is good business practice to send out invoices or statements on a
regular basis. It shows your accounts receivable that you are not
going to forget about them. In addition, if the customer does not
object to this statement within a reasonable time, an "account
stated" may be created. The creation of an account stated will
greatly increase the ease and likelihood of prevailing in any
lawsuit.
3. Document your position!
It is critical to
document your position (or, as the vernacular goes, to cover your
rear). When a telephone order comes in from a new account, write
down who placed the order.
That person may not still be with the
company by the time the case goes to suit, and his or
her
replacement may not know the goods or services were even
ordered. Also, at the first sign of
trouble, create a telephone
log that lists the date, time and summary of the conversations. Such
a log is very impressive when memories become hazy and the other
party states, "I never said that."
Finally, when you come to
an important agreement with someone, write a
confirming letter.
You can even have the other party sign and return the original
letter if it
accurately reflects your agreement (there are no
magic words to create a binding contract). In this age of fax, there
is no excuse not to memorialize an agreement or a modification of an
agreement. As a rule of thumb, get in the habit of asking the name
of the individual with whom you are speaking. If someone claims that
there is no excuse for nonpayment other than cash-flow
problems,
a letter should be sent documenting that fact. This helps to
eliminate excuses which are often concocted on the steps of the
court house. Any writing should be met by a corresponding writing.
For example, if there is a contract with a written deadline, and the
parties agree to extend that deadline, the extension agreement
should be in writing. Similarly, if there is a written invoice and
somebody agrees to excuse or reduce that invoice, there should a
memorandum or credit memo evidencing that fact.
These simple
steps can prevent the swearing match which often occurs once
a
dispute goes to litigation.
THE BINDING EFFECT OF A
CONTRACT
In the case of Larsen v. Johannes, the California
Court of Appeal recognized the general
rule that when a person
with the capacity of reading a contract signs it, that person, in
the absence of fraud, is bound by the contents of the contract. The
signator of the contract cannot state that the contract's explicit
provisions are contrary to the signatory's intentions or
understanding. People often underestimate the legal effect of a
written contract. Nine times out of ten, the party will be bound by
the terms of a written agreement.
Often times, a party may
attempt to maintain that a salesperson make
contrary
representations at the time that the contract was
entered into. In addition, occasionally a party will maintain that
they orally resolved the matter with somebody after the contract was
executed. The typical contract has two provisions that prohibit the
use of such oral statements in evidence. A so-called "integration
clause" typically states that the writing supersedes any prior or
contemporaneous oral agreements, and the written agreement is the
final agreement of the parties. This prevents any prior or
contemporaneous oral deviations from the contract.
The
second mechanism to bind a party by the contract's terms is the
equal dignities rule. This provision is generally combined in the
same paragraph as the integration clause. Typical language will
state that the agreement can only be modified or amended by a
writing signed by both parties. The equal dignities provision will
generally be enforced absent a waiver or executed oral agreement
between the parties.
DETERMINING EXACTLY WITH WHOM YOU ARE
DOING BUSINESS
In many instances, I have found that the
individual handling a debtor's account had no idea with what type of
entity he or she was doing business. It is important to know who is
buttering one's bread so that, for example, personal guarantees can
be sought from corporations. It is not uncommon to invoice one
entity, and receive a check from another distinct entity. It is
prudent to secure credit applications or subscribe to a business
credit reporting entity. It is also prudent to keep copies of checks
which are received and to update credit information on a regular
basis.
While going through the process of determining with
whom one is doing business,
it should be kept in mind that in
some instances it may not matter. Thus, if a debtor gives
an
improper name, a partial name, or fails to disclose their
corporate status, they may still be liable as an agent for an
undisclosed or partially disclosed principal. For example, it is not
uncommon for the creditor to be thinking it is dealing with an
individual sole proprietor. When a demand for collection is made,
the debtor may assert that it is a corporation. The question is what
did the debtor tell the creditor, and what did the creditor
believe?
A debtor has a two-fold duty to disclose: 1. It must
disclose its representative
capacity (the fact of agency), and 2.
It must disclose its corporate capacity ( the identity of the
principal). If it does not disclose both of these elements, there
may be individual liability on behalf of the person obtaining
credit.
It is clear that the obligation is on the part of the
debtor/ agent to disclose its status, and not on the creditor to
diligently investigate with whom they are dealing. Courts have held
that creditors are not obligated to review checks which are sent to
lock boxes in order to determine that the name is a fictitious name
of a corporation. Similarly, courts have held that it is not
incumbent upon creditors to search out fictitious filings to
determine with whom they are dealing (although it is definitely
prudent to do so).
DETERMINING WHETHER TO SUE
The
following are some of the questions that should be asked before
the
determination to sue is made:
1. Is the debtor still
in business and is there is a legitimate dispute?
2. Where
should the case be handled?
3. On what fee terms should the
case be handled, contingent or hourly?
4. Who or what entity
is liable?
5. Can a judgment be obtained?
6. Is the
judgment ultimately collectible?
Starting with the first
factor, the simplest way to determine whether or not a debtor is
still in business is to simply pick up the telephone and dial the
number. Doing so will
determine two things:
First, that
the defendant is still in business; second, the form of business.
How the telephone is answered should be noted. For example, the
receptionist may respond with either a different name than your
debtor's name or in some variation on that name that should be noted
in order for the judgment to be enforceable.
Another way to
determine whether or not a defendant is still viable is to
simply
mail a letter. By sending a letter with the notation
"address correction requested," the creditor can obtain a new
address for the debtor. Similarly, when a telephone number has been
changed, the first question out of the creditor's representative's
mouth should be, "have you moved?" A new address should be instantly
noted. It is also vital to determine that the business is the same
one with which the creditor originally did business. For example, it
is common practice for a client to call and say the person they did
business with two years ago who owes them $10,000.00 has just opened
up a new business up the street. In reality, it may turn out that
the new debtor is a wholly distinct corporation. In the absence of a
clear act of fraud, the only way to hold the new entity or
individual responsible for the debt of the old corporation is to
attempt to pierce the corporate veil and determine that the new
corporation and individual involved is the alter ego of the old
corporation. This is not a simple procedure, it involves extensive
work, and should only be considered on larger dollar
amounts.
A SUMMARY OF THE LEGAL PROCESS IN
CALIFORNIA
The following is a very brief overview of the
California legal process. Please keep in mind that this is a short
summary, and much of the procedure and court costs change at least
once a year.
If the amount in controversy in the matter is
$25,000.00 or less, the superior court-limited jurisdiction
(formerly municipal court) has jurisdiction. At this writing, it
costs $180.00 to file a lawsuit under $10,000.00, $300.00 to file a
lawsuit over $10,000.00. Any amounts over $25,000.00 must be filed
in superior Court-general jurisdiction. At this writing, the filing
fee in Los Angeles superior court is $320.00. Unfortunately these
fees vary from county to county.
After the lawsuit is filed,
it must then be served. The sheriff charges roughly $30.00 for
personal service and an additional $20.00 for each document served.
The average cost of service of process is roughly $50.00 per
defendant. Needless to say, in a case where there are multiple
defendants, service of process can be quite costly. On the average,
it takes a process server or sheriff three weeks to effect service
of process. Generally, a defendant can be served the same day for a
nominal additional charge.
Once a defendant is served, the
next step is for the defendant to either answer the lawsuit or have
its default entered. Entry of Default is a separate step from
obtaining a default judgment. The entry of default merely cuts off
the defendant's right to answer. This is a relatively simple step
which occurs by following a one-page document. In a simple case
based upon a book account, the clerk can enter judgment with little
documentation. However, in a more complex case involving a bad
check, lease payment, etc., the attorney may need to obtain an
affidavit or declaration under penalty of perjury signed by the
client along with appropriate supporting information. It typically
takes two to four months to obtain a default judgment in most courts
in Los Angeles. Other branch courts in other counties require
significantly less time. This time frame may get worse with budget
cuts.
If the defendant files an answer to the lawsuit, the
next step is to initiate discovery in appropriate cases. Discovery
consists of interrogatories (written questions), demands for
production of documents, depositions and requests for admissions.
Discovery is not just a harassment tool. If the defendant does not
respond to the discovery, the defendant's answer can be stricken and
a default judgment entered.
After an answer is filed and any
required discovery has been answered, the case
must be evaluated
for the possibility of prejudgment attachment or a summary judgment.
Prejudgment attachment allows the creditor to levy on the
debtor's assets before trial or a
judgment is obtained by showing
a reasonable probability of prevailing at an eventual trial.
Summary judgment is an expedited procedure to obtain a final
judgment in a case by showing that
there is no triable issue of
material fact and that the plaintiff is entitled to judgment as a
matter of law. Essentially, the summary judgment asks the court to
rule that the defendant's case has no legal merit. Unlike most
motions, which only require a $23.00 filing fee, the filing fee for
a summary judgment is $100.00. For example, if there is an issue as
to apparent agency or the
reasonableness of a commercial sale
upon a lease deficiency, these are typically issues that
cannot
be resolved at summary judgment level.
Many courts
require a judicial arbitration prior to trial. This a
non-binding
arbitration, as opposed to the more familiar binding
arbitration under the rules of the American Arbitration Association.
The judicial arbitration is generally conducted before an attorney
or retired judge. The attorney can attempt to have the client's
declaration introduced as evidence and avoid the personal appearance
of a witness. However, the defendant has a right to request the
physical presence of the client upon at least 10 days' notice. In
such an event, the client may have to attend the arbitration
proceeding and then attend again at the time of trial. Typically,
the losing
defendant will request a new trial after a judicial
arbitration. Occasionally, the cases do settle after arbitration.
Many courts require mediation as an alternative to judicial
arbitration. Generally, the mediator is an attorney or experienced
layperson who offers services on the court's panel. In many
instances, if the case does not settle after arbitration or
mediation, the cases will settle at a mandatory settlement
conference which precedes the actual trial.
If all else
fails, the case must go to trial. Most courts are now initiating
periodic status conferences where the attorney must attend. Many
courts then have a mandatory settlement conference where the client
must either attend or be available by telephone if they are out of
state. If the case is not settled, the case will go to trial and
appropriate witnesses must be provided. Most southern California
courts are currently taking anywhere between six months and fifteen
months for a case to go to trial. This is a significant improvement
over the 4-5 years that it took to go to trial before the onset of
so-called "fast track" procedures. We attempt to give as much notice
as possible of a trial date, and we attempt to minimize the expense
to the client of travel and staying at hotels in the event of such a
trial. Most collection-type cases are bench trials before a judge
and typically take two days or less. In the event that the defendant
requests a jury trial, the length of trial is generally doubled.
After a judgment is obtained, either through trial or
default judgment, the attorney can obtain a lien on the defendant's
real estate (called an Abstract of Judgment) and in appropriate
cases, a lien on personal property. The personal property lien is
filed with the Secretary of State, in a form similar to the UCC-1
financing statement. In order for the sheriff to execute upon the
judgment, the attorney must designate specifically upon what the
sheriff is to levy. The attorney must also have the court issue a
Writ of Execution. The courts take between several days and several
weeks to issue these writs.
It costs additional money to
enforce a judgment after the judgment has been
obtained. The
least expensive mechanism is to levy on a bank account. This
procedure costs
roughly $30.00 at this writing. If the client
does not have a copy of the defendant's check and has no way of
knowing where the debtor banks, a private investigator can obtain
this information.
Another possible way to effect execution is to
install a sheriff (a so-called "keeper") in the
defendant's place
of business. This works especially well in restaurants and other
retail
establishments. A keeper runs roughly $250.00 for an
8-hour period at this writing. It costs
substantially more money
to install a keeper for several days. The sheriff can also levy upon
a
vehicle which is owned outright and can inventory the
defendant's business and sell it. Both of
these procedures are
quite costly and should be used as a last resort.
When no
asset information is available, the defendant can be required to go
to
court for a Judgment Debtor Examination. The examination is
also called an ORAP or OREX.
The difficulty with this procedure
in most courts is that, first the debtor must be personally served
with the process. It is not uncommon to schedule an examination date
and then be unable to serve the defendant. Secondly, even if the
defendant is served, if they fail to appear at the examination,
while most jurisdictions will issue a bench warrant, often times the
sheriff will just hold the warrant and just send a postcard to the
debtor. Finally, in order for the examination to be meaningful,
records should be subpoenaed, which increases the cost of the
Judgment Debtor Examination. The examination runs roughly $75.00,
including the cost of service of process. If a subpena is also
required, the cost is increased to roughly $75.00 per subpena.
We hope that this information proves helpful in
understanding the California
judicial process.
QUESTIONS
OF LAW IMPACTING COMMERCIAL COLLECTIONS
Attorneys' Fees On
Open Book Account
On all open book accounts entered into
after January 1, 1987, the court will award
attorneys' fees of
25% of the principal obligation or $660.00, whichever is less. This
law does not apply if there is a written contract between the
parties. This section, California Civil Code section 1717.5, was
enacted by the California legislature as a mechanism to subsidize
collection actions by commercial interests.
Legal Rates of
Interest
Section 3289 of the California Civil Code provides
that the legal rate of interest on a contract entered into after
January 1, 1986 is 10% per annum.
On certain contracts, such
as retail installment contracts, where the contract
requests
interest at the maximum rate allowable by law, one must be careful
not to run into
problems with usury. Pursuant to California
constitution, article 15, section 1, the maximum
allowable
interest is 5% over the Federal discount rate in effect at that
time.
The California Supreme Court held in Southwest
Concrete v. Gosh that charging a
service charge of 1.5% per month
on any amount not paid within a specific time period does
not
violate state usury laws. Also, to constitute usury there
must be a borrowing and lending or
forbearing and money. Hence,
in a bona fide sale, where a seller offers property at a certain
price for cash and a much greater price on credit, there is no
usury. For example, there is no restriction on interest for a bona
fide business equipment lease.
Bad Checks
In
California, one can receive damages of three times the face value of
a check, of at least $100.00 up to $500.00, if a non-sufficient
funds check is written. To recover these punitive damages, however,
it is required that a written demand for payment containing certain
prescribed language be sent to the maker by certified mail. A
similar letter and similar penalty exists in the event of a stop
payment check if a court determines that a good faith dispute could
not be found under the circumstances of the case. This law is
codified at section 1719 of the California Civil Code.
It is
critical to note that if the transaction involves a consumer debt,
the creditor must also comply with the federal Fair Debt Collection
Act (FDCPA), and provide the written warnings established by that
law.
Restrictive Endorsements
In 1988, Civil Code
section 1526 was enacted in order to provide that when a
check is
restrictively endorsed with "payment in full" or other words of a
similar meaning, the
creditor can strike out or delete that
notation and accept the check. Similarly, if the acceptance of the
check or draft was inadvertent or without knowledge of the notation,
the check does not operate to fully discharge the claim. This law
seems to address the so-called lock-box that many business
operations employ. The only way for a debtor to ensure that a
restrictively endorsed check will operate a complete accord and
satisfaction is for that individual to send written notice at least
15 and not more that 90 days prior, that a check or draft will be
tendered with a restrictive endorsement and that the acceptance and
cashing of that check will result in a complete settlement.
However, this statute may have been superseded on January 1,
1993 by the
enactment of California Commercial Code section 3311.
Under this new section, a debt is
discharged when:
(1) The
debtor tenders the check in good faith as full settlement of the
claim, (2) the
amount of the claim was unliquidated or subject to
a bona fide dispute, (3) the creditor obtained
payment of the
instrument, and (4) the instrument or accompanying written
statementconspicuously states that the check is tendered in full
satisfaction of the claim. The only exceptions to this rule arise in
two circumstances: (1) if the creditor had previously designated the
individual to whom communication should be directed, and the debtor
since the communication is someone else, (2) if the creditor tenders
repayment of the check within 90 days. In Directors Guild of America
v. Harmony Pictures, Inc. (CD Cal 1998) 32 F. Supp. 2d 1184, the
federal court held that section 3311 should prevail since it was
enacted later. Given the current uncertainty in the stated law, the
newer, more restrictive statute should be complied
with.
"Reasonable" Attorneys' Fees
In California,
courts will award "reasonable" attorneys' fees. In the event of a
default, these fees are based upon scheduled rates. In the event of
trial or summary judgment,
courts will award reasonable
attorneys' fees and not actual attorneys' fees. There is a
common
misconception that one can impose actual collection costs
in the full contingent fees set forth in a contract. The California
Supreme Court has held that such a charge was an invalid liquidated
damages provision and an unfair business practice under the state
Business Professions Code. Accordingly, even in the contingent fee
setting, the creditor will probably have to show the reasonable
amount of time expended in order to obtain an award of attorneys'
fees. Also, in many instances, the attorneys' fees will be less than
the contingent fee of 20% to 33 1/3%.
Ex-parte Pre-judgment
Attachment
Effective January 1, 1989, the state attachment
law was amended so that an
attachment can issue against a
defendant ex parte (technically "without notice of" but
effectively
most courts require 24 hours' notice) if the client
can prove that the defendant is insolvent in the sense that the
defendant is generally not paying his or her debts as debts become
due. This
law is found at the Court of Civil Procedure section
485.010, subsection (b)(2).
[ Law Office of Steven R. Lovett • • telephone: (818) 999-9397 • facsimile:(818) 999-5048 • ]
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