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Being Taken Out by Another Factor:

What you say
(misrepresent in legal jargon)
and even more important what you
fail to say (omission in legal jargon)
can cost you
-and-
Can you afford to hold up that UCC
Release when you have been paid?

Distinctive Solutions' Teleconference

June 6, 2002

Publication Authored By:

Michael W. Ullman, Esq.
Ullman & Ullman, P.A.
150 East Palmetto Park Road, Suite 650
Boca Raton, Florida 33432
Telephone: (561) 338-3535
Facsimile: (561) 338-3581
E-MAIL: mullman@uuvlaw.com
Website: http://ullmanlaw.lawoffice.com

TOPIC I

I. A Scenario (there are many more)

You get an unexpected call from someone (it's a competitor who has the gall to have spoken with your factoring client, and worse yet, offered better terms than you). You don't feel like speaking to them - but - you do, especially since this client's portfolio has been under-performing and account dilution has been increasing. In fact, you have reason to believe that a material portion of the accounts are questionable, since during your verification process you get responses from account debtors that cause you to seriously question the validity of the accounts. You begin to think, "Hey, this may be my lucky day!" The new factor's representative asks you, "How are the client's accounts performing?" and "Are you aware of any problems?" You say "Fine" and "No." After you get taken out, you get a call from the take-out-factor who tells you that sixty(60%) percent of the accounts won't pay and wants you to repay all of the monies they paid to get the client and, worse yet, that he holds you liable for its losses because of your FRAUD! Are you liable?

II. Types of Fraud

  1. FRAUDULENT MISREPRESESNTATION
    1. Intentional Fraud.
    2. Negligent Fraud.
    3. Innocent Fraud.
  2. FRAUD BY CONCEALMENT/NONDISCLOSURE
    1. Unequal Opportunity to Discover Information and Artifice or Trickery is Employed to Prevent a Person From Making an Independent Inquiry
    2. Partial Disclosure
    3. Words or Acts that Disguise the Truth or Distract the Other Person's Attention
    4. Confidential/Fiduciary Relationship

1. INTENTIONAL FRAUD

Intentional fraud requires all of the following:

  1. You must have made a false statement of material fact to the take-out-factor.
  2. You must have known the statement to be false at the time you made it to the take-out factor.
  3. You must have made the statement for the purpose of inducing the take-out-factor to act in reliance thereon.
  4. The take-out-factor must have reasonably relied on the correctness of your representation.
  5. The take-out-factor must suffer damage as a result of your erroneous statement.

Questions for our teleconference discussion:

  1. What type of statements are of fact?
    1. What about "opinion" or "belief" statements?
  2. When is a statement of fact material?
    1. When the take-out-factor would not have entered into an agreement but for the concealed fact.
    2. The take-out-factor must be pecuniarily prejudiced by the false concealed fact.
  3. What happens if the take-out-factor could have ascertained the truth if it had made some investigation? Can the person deceived still claim reliance on the truth of a representation?
  4. Can the take-out-factor rely on a false statement if the falsity should be obvious?

ELEMENTS:

2. NEGLIGENT FRAUD

In order to be liable for Negligent Fraud, the following must all exist:
  1. You made a false statement to the take-out-factor material fact that you believed to be true but which was in fact false.
  2. That in the exercise of reasonable care under the circumstances, you were negligent in making the statement because you should have known the statement was false.
  3. That in making the false statement you intended or expected the take-out-factor would rely on the false statement.
  4. The take-out-factor justifiably relied on your false statement.
  5. The take-out-factor was damaged as a result of what you stated.
    1. When is a fact material?
  6. If the misrepresentation is negligent and not intentionally fraudulent, the take-out-factor's comparative negligence must be considered. At least 12 states have agreed with this approach, and they include:

    Utah

    Colorado

    Ohio

    Connecticut

    Kansas

    Georgia

    Louisiana

    Minnesota

    Montana

    New Jersey

    Vermont

    Wisconsin

What comparative duty to investigate exists?
Why does that even play a role?

For comparative negligence the question is whether, under the circumstances, the take-out-factor was negligent (i.e., failure to use reasonable care - the degree of care a reasonably careful person would use under like circumstances) in relying on your statement and whether the take-out-factor negligence was a contributing legal cause of damage.

3. INNOCENT FRAUD

In order to be liable for Innocent Fraud, the following must all exist:

  1. You innocently made a false statement of material fact to the take-out-factor.
  2. The take-out-factor believes your false statement of material fact to be true and was misled by it in entering into an agreement.
  3. The take-out-factor was damaged as a result of what you stated.

Questions for our teleconference discussion:

1. Can the take-out-factor seek money damages under this fraud theory?

B. FRAUD BY CONCEALMENT OR NON-DISCLOSURE:

General Rule: Intentional non-disclosure of known material facts between parties to a regular commercial transaction is not actionable.

The following are exceptions to General Rule:

1. UNEQUAL OPPORTUNITY TO DISCOVER INFORMATION

In order to be liable for Fraud by Concealment or Non-Disclosure under this exception, the following must all exist:

  1. You do not disclose to the take-out-factor material facts you have based on your superior knowledge.
  2. The take-out-factor does not have an equal opportunity to investigate the veracity or lack thereof the facts because of some trickery or artifice you commit.

2. PARTIAL DISCLOSURE

In order to be liable for Fraud by Concealment or Non-Disclosure under this exception, the following must all exist:

  1. Where a party undertakes to disclose facts and fails to disclose the whole truth.

3. WORDS OR ACTS THAT DISQUISE THE TRUTH OR DISTRACT THE OTHER PERSON'S ATTENTION

  1. A concealment is fraudulent when it is accompanied by words or acts that suppress or disguise the truth or distract the person's attention from the real facts.

4. CONFIDENTIAL/FIDUCIARY RELATIONSHIP

In order to be liable for Fraud by Concealment or Non-Disclosure under this exception, the following must all exist:

  1. One party is duty bound to disclose information to the other party all material facts because a fiduciary relationship exists between the parties.
  2. The party possessing the duty fails to make the requisite disclosure.
  3. The fiduciary's breach results in harm to the other party.

TOPIC II - Issuing a UCC Termination Statement1

When will your failure to send of file a termination statement cost you?

1. 9-625 entitled "Remedies for Secured Party's Failure to Comply with Article" at subsection (2) states the general rule and basic remedy:

…a person is liable for damages in the amount of any loss caused by a failure to comply with this chapter, including damages suffered by the debtor resulting from the debtor's inability to obtain, or increased costs of, alterative financing, but not including consequential, special, or penal damages, unless the conduct giving rise to the failure constitutes an independent claim under the laws of this state other than this chapter and then only to the extent otherwise recoverable under law.

2. 9-625(3) tells us who has standing to bring a claim under subsection 2:

(a) A person who, at the time of the failure, was a debtor, was an obligor, or held a security interest in or other lien on the collateral may recover damages under subsection (2) for the person's loss…

Does this statute give the take-out-factor standing to sue the prior factor for damages due to a failure to file or send a termination statement?

What should be your strategy?

3. What's one way to protect yourself against possible exposure? Let's look at 9-625(1).

If it is established that a secured party is not proceeding in accordance with this chapter, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions. This subsection shall not preclude a debtor other than a consumer an a secured party, or two or more secured parties in other than a consumer transaction, from agreeing in an authenticated record that the debtor or secured party must first provide to the alleged offending secured party notice of a violation of this chapter and opportunity to cure before commencing any legal proceeding under this section.

1. So what should ever factoring agreement contain?

If you want to take over an account and the old factor in uncooperative, what strategy might you use?

9-625(7) provides that:

(7) If a second party fails to comply with a request regarding a list of collateral or a statement of account under s. 679.210, the secured party may claim a security interest only as shown in the list or statement included in the request as against a person who is reasonably misled by the failure.

Have the proposed factoring client send a 9-210 list of collateral and statement of account request and recite that he believes that no collateral serves to secure the current factor and that no obligations are due. In the current factor fails to comply and you are reasonably misled - the current factor's security interest may be limited.

What is the downside to send statement? None. However, be aware that the old factor may ignore your request by assuming that subsection (2) exempts compliance. That reads in relevant part:

(2)…a secured party, other than a buyer of accounts…shall comply with a request within 14 days after receipt: (a) In the case of a request for an accounting, by authenticating and sending to the debtor an accounting; and (b) In the case of a request regarding a list of collateral or a request regarding a statement of account, by authenticating and sending to the debtor an approval or correction.

9-513 entitled, "Termination statement" at subsections (3)(a) and (b) reads:

(3)…within 20 days after a secured party receives an authenticated demand from a debtor, the secured party shall cause the secured party of record for a financing statement to send to the debtor a termination statement for the financing statement in the filing office if:

(a) Except in the case of a financing statement covering accounts…that has been sold…there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation or otherwise give value;

(b) The financing statement covers accounts…that has been sold but as to which the account debtor or other person obligated has discharged its obligation;

9-509 entitled "Persons entitled to file a record" at subsection (3)(b) reads as follows:

(3) A person may file an amendment other than an amendment that adds collateral covered by a financing statement or an amendment that adds a debtor to a financing statement only if:

…(b) The amendment is a termination statement for a financing statement as to which the secured party of record has failed to file or send a termination statement as required.

Suggest to your new factoring client that if the provisions of 9-513 exist, it should file a termination statement.

-The secured party is required to send to the debtor a termination statement or file it if:

  1. The secured party receives
  2. an authenticated demand
  3. from the debtor

and as to a financing statement not covering accounts that have been sold…there is no obligation secured by the collateral covered by the financing statement.

and as to a financing statement covering accounts that were sold, all account debtors have discharged their obligations.

1 The statutes referenced in this section are Florida law and differ somewhat from the uniform legislation and other states' versions.

 

 

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