Articles

CAVEAT VENDITOR = "Let The Seller Beware"

RULES OF SALES

1. Know your buyer.

Before you make your first sale, obtain the correct legal composition of your customer. The best source is a copy of a check.

2. Advance Sales Protection.

Have the buyer sign a credit application with adequate terms of sales and have the principal of the debtor sign a personal guaranty.

You need two separate signatures: one for the corporation and one for the guarantor.

"In modern times most commercial business is done between corporations, everyone in business knows that an individual stockholder or officer is not liable for his corporation's engagements unless he signs individually, and where individual responsibility is demanded the nearly universal practice is that the officer signs twice--once as an officer and again as an individual." (Salzman Sign Co., Inc. v. Beck, 10 N.Y.2d 63, 67, 217 N.Y.S.2d 55.)

When a guarantor signs a guaranty and adds his corporate office following his signature, he can raise a defense in a lawsuit on brought to enforce the guaranty that he signed the guaranty in a corporate capacity and should not be held personally liable. Two recent decisions in the Appellate Division, First Department, have said that the addition of the guarantor's corporate office following his signature on the guaranty is merely descriptive and does not affect the guarantor's liability on the guaranty, Chemical Bank v. Kaufman, 142 A.D.2d 526. 530 Appellate Division, First Department, have said that the addition of the guarantor's corporate office following his signature on the guaranty is merely descriptive and does not affect the guarantor's liability on the guaranty, Chemical Bank v. Kaufman, 142 A.D.2d 526. 530 N.Y.S.2d 583 (1988), and Chemical Bank v. Masters, 176 A.D.2d 591, 874 N.Y.S.2d 754 (1991). Nevertheless, to avoid that defense, we urge our client-vendors to have the guaranty signed by the guarantor only in his individual name without the addition of a corporate title.

Members of the Bar only are invited to copy the firm's form Application for Credit with Subjoined Personal Guaranty that can be found on the firm's website by clicking on the FAQs button and scrolling down to the Clients' Corner, clicking, and proceeding to Forms. The password necessary to enter Forms can be obtained by faxing your firm's letterhead to our office and then by telephoning Attorney Joel Cohen.

3. Preserve your rights.

When a payment is received by check with a notation on the front or the reverse side that the check is given in full payment, you can deposit the check, if--and only if--you preserve your right to pursue payment for the balance due. On the reverse side of the check below the customer's notation, you MUST stamp, write or type in the following language: This check is deposited under protest, without prejudice, and with preservation of all rights of the payee against the drawer of this check pursuant to UCC � 1-207. Place your bank endorsement below this notation. You should then photocopy both sides of the check before you deposit it.

Endorsement of the suggested notation on the reverse side of the check will avoid the defense of accord and satisfaction in New York state and, as of 1985, most likely in the states of Missouri, Alabama, Florida, Oregon, and North Carolina. The New York rule is the minority rule. Vendors outside of New York State should consult their local attorneys before depositing a check for an amount that is less than the full amount due. The rule of law that permits the reservation of rights under the Uniform Commercial Code (UCC) was established in New York in Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321, 497 N.Y.S.2d 310 (1985).

The Horn case, at p. 326-327 of 66 N.Y.2d, describes a creditor's difficult decision:

"Offering a check for less than the contract amount, but 'in full settlement' inflicts an exquisite form of commercial torture on the payee. If the offer is reasonable it creates a marvelous anxiety in some recipients: 'Shall I risk the loss of $9,000 for the additional $1,000 that the bloke really owes me?' In general the law has authorized such drawer behavior by regarding such a check as an offer of accord and satisfaction which the payee accepts if he cashes the check. Traditionally the payee could write all manner of disclaimers over his indorsement without avail; by cashing the check he was held to have accepted the offer on the drawer's terms. Even if he scratched out the drawer's notation or indorsed it under protest he was deemed to have accepted subject to the conditions under which the drawer offered it.*** "Indeed, the common-law doctrine of accord and satisfaction creates a cruel dilemma for the good-faith creditor in possession of a full payment check. Under that rule, the creditor would have no other choice but to surrender the partial payment or forfeit his right to the remainder."

So the Horn case changed the doctrine of accord and satisfaction by permitting a creditor to reserve its right to pursue payment of the remainder of the monies due and still accept a customer's check for a lesser sum. The Horn case did say that "[s]uch words as 'without prejudice', 'under protest' or the like are sufficient" to preserve the vendor's rights. But this law firm prefers use of more expansive language. The Horn rule applies both to performance of services and the sale of goods.

4. Monitor sales activity.

Photocopy all checks received from your buyer. This will reflect a change in the buyer's legal status. For example, if the words "D.I.P." appear on a check, your debtor is in Chapter 11 and credit sales should be avoided.

5. Prepare for suit.

When a customer has failed to pay invoices timely, suit should be anticipated. Suit delayed is collection denied, when you seek recovery from a business customer.

Our law firm can bring lawsuits to collect from your customers located in the five boroughs of New York City--Manhattan, Bronx, Queens, Brooklyn, and Staten Island, known as New York, Bronx, Queens, Kings and Richmond Counties, respectively--and in the Counties of Nassau and Suffolk to the west of New York City and in the county of Westchester to the north of New York City.

Our firm has on-line computer access to corporate names, corporate trade styles, and trade styles of partnerships and of sole proprietorships, Uniform Commercial Code filings, judgment filings, records of pending lawsuits, property records, and bankruptcy records, for the entire State of New York. But, if you follow rule 1, initiation of the lawsuit will be expedited. The fastest way to collect a judgment is to restrain the debtor's bank account.

Safeguard your invoices and your signed delivery receipts. Creditors who deliver goods using common carriers should be warned that these carriers (including UPS) do not retain signed proofs of delivery for more than one year. When you are ready to authorize suit, you should immediately request a signed proof of delivery from your common carrier(s) for each and every invoice that remains unpaid. In your lawsuit to recover the balance due for goods sold and accepted, you must be able to prove receipt of the goods by your customer.

DETAILED SALES PROTECTION

AVOID PITFALLS

Under the Uniform Commercial Code's Statute of Frauds, every sale of goods of $500.00 or more must be in a writing signed by the buyer or its authorized agent or broker, UCC � 2-201[1]. The writing must, of course, describe the goods and the prices and the terms of sale. The section says, however, that, if a written confirmation of the order is sent to the buyer and retained for tens days without objection, a signature is not required. A signature is not required either (a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller's business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; (b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted or (c) with respect to goods for which payment has been made and accepted or which have been received and accepted.

In a commercial lawsuit for goods sold and accepted, the aim is to reduce the claim to judgment while the buyer remains in business and is able to pay the judgment. To accomplish this objective, a vendor must avoid pitfalls that will delay entry of a judgment in its favor.

In the normal sales situation, a buyer calls his vendor, orders goods and receives delivery at the buyer's POB within a few business days of the order. There is no signed confirmation of the order. But the UCC � 2-201 exception for goods received and accepted obviates a Statute of Frauds defense.

Under the Uniform Commercial Code, every sale of goods is made comes with whatever express warranties are made by the vendor, UCC � 2-313 and with the UCC � 2-314 Implied Warranty of Merchantability and the UCC � 2-315 Implied Warranty of Fitness for Particular Purpose. If there is a breach of warranty by the vendor, then the vendor is liable to the buyer under UCC � 2-715 for the buyer's Incidental and Consequential Damages. UCC � 2-316 permits the. Exclusion of these two warranties and all implied warranties and UCC � 2-719 provides for a Contractual Modification by permitting the vendor to limit the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts, so long as the vendor honors this limited remedy and the limitation is not unconscionable. Of course, if the vendor does not honor the limited remedy, the contractual limitation is forfeited and the UCC damages are restored.

This problem is well-illustrated in Empire Municipal Supply Corp. v. T.I.J. Materials Corp., 205 A.D.2d 1030, 613 N.Y.S.2d 786, (3rd Dept. 1994). The operative facts are that in July 1985 Iberia Road Marking Corporation (IBERIA) placed an order with defendant T.I.J. Materials Corporation (TIJ), a distributor of highway safety products, for 100,000 feet of lane marking tape to be used for a job on the Staten Island Expressway in New York City. TIJ attempted to order the tape from plaintiff, a wholesaler of paint and marking supplies, but was informed by the plaintiff that it would not sell the tape to TIJ on credit until payment was received for a prior order, shipped earlier that month. The plaintiff agreed to fill the order if it could bill IBERIA. IBERIA agreed that it could be billed directly for the order. Plaintiff ordered the tape from its manufacturer to be delivered directly to IBERIA, and after receiving a bill of lading, billed IBERIA for $105,600, the agreed-upon amount. IBERIA received the tape in August 1985. When plaintiff sought payment from IBERIA, on November 4, 1985, plaintiff received a letter from IBERIA stating that the tape was defective in that it did not meet the required standards of adhesion, that IBERIA was not plaintiff's customer but TIJ's, and that plaintiff should therefore look to TIJ for payment. After a jury trial, in December 1991 IBERIA was found to have agreed to assume primary responsibility for payment of the invoice issued to it. The Appellate Court held that the record supported the finding that IBERIA's promise to pay, which was clearly made to induce plaintiff to ship the goods for IBERIA's use, was supported by new consideration flowing primarily to IBERIA and constituted a new, independent contract between plaintiff and IBERIA. The Appellate Court also confirmed the finding that rejected IBERIA's claim that the tape did not adhere properly to the road surface and was therefore worthless.

So the vendor-plaintiff prevailed in the lawsuit without a purchase order or other memorandum containing terms and conditions of sale signed by the buyer. But at what cost? It took the vendor over three years from the sale to get a judgment after a jury trial and a full nine years from the sale to receive payment after an appeal by the buyer.

If the vendor had obtained a signed Application for Credit with terms and conditions of sale prior to shipping to its customer, these defenses of breach of warranties and counterclaims arising therefrom could still have been raised as a defense and counterclaim by the vendor in the lawsuit, but then they would have been dealt with by a motion for summary judgment. An excellent example of the summary disposition of the defenses and counterclaim by a summary judgment motion can be found in Belden-Stark Brick Corp. v. Morris Rosen & Sons., 39 A.D.2d 534, 331 N.Y.S.2d 59, (1st Dept. 1972), aff'd 31 N.Y.2d 884, 340 N.Y.S.2d 186 (1972)), where the Appellate Court reversed the Supreme Court, New York County, and granted summary judgment to the plaintiff-vendor on its cause of action for goods sold and dismissed the defense and counterclaim arising from a claimed breach of warranty.