The Day Of
The Handshake Deal Has Passed:
How to
Protect Your Future Receivables against an Ever Increasingly Pro-Debtor
Dateline:
December, 2002
Overview:
In decades past the
Does it have to be in writing?
Initially, it should be noted that with the exception of certain areas of commerce wherein the legislature has imposed the requirement of a writing (i.e. mortgages, home repair contracts), there is no overt necessity of a writing. In fact, the Legislature of New Jersey has repealed a large portion of the Statute of Frauds wherein a written agreement had previously been required. See, N.J.S.A. 25:1-5, et. seq. However, even in the most simple of transactions the absence of at least a basic writing shall result in the self-fulfilling prophecy of both non-payment and the unwillingness of the court to assist the creditor in what should be a simple quest to obtain payment for the work, services or money they may have loaned.
Example: As a point of reference, I was witness to a true life example of this ever growing trend. In a recent court appearance I had the opportunity to observe a young woman who had loaned money to a friend in her attempt to obtain a judgment from the court so she could obtain repayment of that loan. Even though the young woman had witnesses to the loan, and she and her witnesses appeared to be credible, the court refused to enter judgment even for the principal amount of the money lent despite the fact that the defendant debtor failed to file an Answer to the Complaint or testify in opposition to the woman’s assertions. In light of this real life example of the court’s unwillingness to enforce agreements orally entered into it should be clear that at least a basic contract will be necessary to protect a creditor’s right to obtain payment. Even a simple notation in the memo portion of a check that the money is being given as a loan can provide a creditor with an initial stepping stone to obtaining repayment.
What makes an agreement to pay a debt?
A basic contract or agreement
between the parties must identify the goods or services to be performed, the
cost or unit price to be charged for those goods and services, in many cases
the date upon which those goods or services are to be delivered or performed
and most importantly a signature of the person or persons responsible for
payment for those goods or services. See, Leitner v. Braen, 51 N.J.
Super. 31 (App. Div. 1958) and Friedman v. Tappan Development Corp., 22
N.J. 523 (1956). Of all of the above requirements,
the signature of the person to be charged is the most critical.
Example: Prior to current times many ongoing services such as the delivery of oil or perishable goods would be delivered with a weekly or monthly statement being rendered for payment. It was typical for the invoice or statement to set forth that if payment was not rendered that interest would accrue after a period of time and that if non-payment continued costs associated with collecting the bills would be assessed. These additional costs of doing business were previously enforced based on credible testimony, course of conduct, and the state of the law. See, Zuhlcke v. Zuhlcke , 136 N.J. Super. 266 (Ch. Div. 1975) and Kamens v. Fortugno, 108 N.J. Super. 544 (Ch. Div. 1970). Absent a signed credit application stating that these charges shall accrue, many of the more recent judicial appointees ascending to the bench are refusing to enforce payment on these book accounts beyond the principal amount due. As it may take creditors years to obtain payment for their services the courts unwillingness to enforce what were previously viewed as pro forma costs charged to a defaulting debtor could cost a creditor substantial sums of money.
What can you do to make a debt more collectable?
So what steps can a creditor or person providing services take to make sure that they remain entitled to be paid for the principal amount due for their goods and services as well as interest and costs associated with collecting their money?
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In a single transaction situation there should at least be a writing setting forth the description of goods or services provided, the agreed upon price for those services and a signature of the person receiving those services indicating that those goods and/or services were actually received. Acknowledgement of actual receipt by the party to be charged avoids the claim by a debtor that the goods or services were never received after they leave the creditor. This is especially critical in situations where the goods being provided are perishable, subject to being used up or are destined to be incorporated into a larger item (i.e. auto parts, flour, etc).
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If ongoing purchases are to be made, prior to starting delivery of the goods or services, the creditor should enter into a blanket purchase or credit agreement. This agreement should state when payment is expected after being invoiced, that interest of a certain percentage shall accrue if not paid within a specific period of time, that collection or attorney’s fees shall accrue if not paid within a certain period of time and in certain cases a period within which goods are to be returned or rejected if the recipient believes they are non-conforming.
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With regard to the issue of interest, the credit application should state the date from which interest shall accrue. As the courts in the absence of a specifically designated interest rate generally deny the award of any interest, even though the case law indicates that they should award interest in cases where the amount sought is a liquidated amount, it is important for the creditor to set forth a specific rate at which interest is to be charged. See, Kamens v. Fortugno, 108 N.J. Super. 544 (Ch. Div. 1970) and Busik v. Levine , 63 N.J 351 (1973).
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In regard to a creditors’ desire to cover the costs associated with collection or attorney’s fees, the creditor should provide in the contract that either “reasonable collection and/or attorney’s fees shall be assessed if the account is sent to collection” or that “attorney and/or collection fees in the amount of X % of the outstanding bill shall be added to the bill if the matter is sent for collection”. Case law suggests that the percentage of attorney’s fees chosen must be 30% or less of the outstanding amount due to pass judicial muster. See,
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In the event where goods and services could be rejected as non-confirming, the creditor should require that the request for the return of the items be made in writing and should be no more that thirty (30) days. By setting this forth in the credit application the creditor can avoid later claims that the recipient of the goods and services attempted or wanted to return the goods or that they now want to return the goods as non-conforming at the time you finally are forced to send them to collection to obtain payment.
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If you are providing medical services, there are the additional pitfalls related to debtor claims associated with the processing of their insurance claims. To avoid claims by debtor patients that you promised to write-off co-pays and deductible and/or that the medical provider promised to accept the insurance as full payment, the following additional language should be made part of the initial application or agreement to provide treatment. It should state that “We agree to submit any insurance that may provide coverage for your treatment. We make no guarantee that the insurance submitted shall pay for the services and do not agree that we shall accept whatever the insurance may pay as full payment for the services we have rendered. The patient is responsible for obtaining any required insurance pre-authorization. We cannot and do not waive any right to seek payment of the patient’s co-pay and deductible amounts and the patient remains fully responsible for any balance remaining after all insurance proceeds have been received unless our provider agreement with your insurance company requires us to waive any balance.” Although the above language may appear to cover issues that should be considered common sense, debtors on a regular basis make these claims in an attempt to avoid payment for the medical services rendered and many times find a judge with a willing ear.
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Be aware that there are numerous requirements placed upon home improvement contractors and builders. The extent of those requirements goes far beyond the breadth and intent of this Article, which is intended to provide a mere primer as to the pitfalls that can be avoided in a general contractual situation.
Summary:
In the past the courts followed a far less stringent standard for a judgment to be entered in a case where a merchant or professional was merely seeking to be paid for the goods and services that they had rendered. Today, even in cases that are not contested by the debtor entry of judgment will not necessarily follow from the prima facie or basic presentation of the facts alleging that a debt is due and owing from a debtor. At times, it seems like in the absence of aerial photos and Barry Scheck’s DNA services, a creditor will not be paid for the services. As such, we again emphasized that a writing bearing the signature of the person to be charged for those goods and services is critical to obtaining payment in this ever increasingly debtor friendly State.
This Article is a service of the Collections Practice Area of Fein, Such, Kahn & Shepard, P.C., 7 Century Drive, Suite 201, Parsippany, NJ 07960. Phone: 973-538-4700. Website: www.feinsuch.com. It does not constitute legal advice nor create an attorney-client relationship. For more information contact Brian P.S. McCabe, Esq. at bmccabe@feinsuch.com.
© 2002, Fein, Such, Kahn & Shepard, P.C., all rights reserved. Permission is granted to reproduce and redistribute this article so long as (i) the entire article, including all headings and the copyright notice are included in the reproduction, and (ii) no fee or other charge is imposed.