Here is a glossary of terms and definitions from the legal side of business credit management.

Absolute Priority: A provision of the bankruptcy code that senior creditors must be paid in full before junior creditors receive anything. In turn, junior creditors must be paid in full before stockholders receive any money from the bankrupt estate.

Agent: One who performs services for another under an agreement that makes the agent subject to the control of the other person or company.

Agreement: An understanding reached between two or more parties regarding their rights and obligations relating to a specific subject matter.

Bailee - Someone who holds goods for transport or storage or other purpose who is either transferring the goods as a common carrier (railroad or trucker) or holding the goods in a public warehouse for storage.
See: Is the Warehouse Responsible For Payment in this SNAFU? Exploring Documents of Title

Bulk Sale - Is usually a sale made not in the ordinary course of business. It must be a major part of the material, supplies, or merchandise or other inventory of a debtor.

Bulk Sale Law - This is the law governing bulk sales (see above). It was designed to prevent business owners (debtors) from defrauding their suppliers by selling goods below cost and skipping. Among many possible abuses, it is designed to keep merchants from going through the motions of selling a business to a close friend or relative at less than fair price and then buying back the merchandise from the relative and organizing a new business. It is also designed to prevent a merchant from dumping inventory on a knowing transferee for less than half the value."
For a case & analysis of this concept in action, see our article: Bulk Sales Laws: Can Ed Recover His Goods?

Condition Precedent: - In a contract, a situation where one party must perform its part of the agreement before the other party is required to perform their part of the contract.
For a case study of this concept in action, see our article: Credit & the Law: Do Sloppy Delivery Procedures Endanger Payment?

Defamation - Defamation involves an act of communication that causes someone to be ridiculed or shamed, to be held in contempt, or lowered in esteem, or to lose economic or employment status, or to otherwise suffer a damaged reputation. Defamation can occur orally, or in writing. Libel involves written defamation of character, while slander involves verbal defamation.
Thanks to Credit Today's Credit and Collection Handbook

Discovery proceedings -- Part of the pre-trial litigation process in which each party requests relevant information and documents from the opposing side to attempt to "discover" pertinent facts. One method of "discovery" is an interogatory (see below). Others include depositions, document production requests and a request for inspection.

Generally discovery devices include depositions, interogatories, requests for admissions, document production requests and requests for inspection.

Document of title - Includes bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which in the regular course of business or financing is treated as evidence that the person in possession of it is entitled to receive, hold and dispose of the document and the goods it covers. To be a document of title a document must purport to be issued by or addressed to a bailee and purport to cover goods in the bailee's possession which are either identified or are fungible portions of an identified mass.
For a case study which explores this concept, see: Is the Warehouse Responsible For Payment in this SNAFU? Exploring Documents of Title

A related concept to waiver, a fairness doctrine based on the other party's reliance. Unlike waiver, estoppel would not focus on the other party's intent, but rather on the effect of their actions. Estoppel arises when one party's conduct "misleads" another to believe that a right will not be enforced and so causes the other to act to his detriment in reliance on this belief. For more information, see: < http://www.credittoday.net/members/3067.cfm >

Executory: According to Wikipedia, an executory contract is a contract in which a party has material unperformed obligations. Although material, an obligation to pay money does not usually make a contract executory. An obligation is material if a breach of contract would result from the failure to satisfy the obligation. A contract that has been fully performed by one party but not by the other party is classified as an executory contract.

For more info, see: Documenting Your Credit Sale to the Financially Distressed Customer: Can A Supply Contract Get You Paid And Avoid Preference Risk If Your Customer Files Chapter 11?

Exemption Laws - These are the laws that define what cannot be touched by creditors.

The Federal Trade Commission Act - The Federal Trade Commission Act [the FTC Act] was passed in 1914. It is the most far reaching of the federal antitrust laws. The FTC Act states that all unfair methods of competition, and all deceptive acts and practices affecting commerce are unlawful. The FTC Act does not define the term "unfair." The kinds of activities that are "unfair" are left to the discretion of the FTC and the Courts.

Thanks to Credit Today's Credit and Collection Handbook

force majeure - The term force majeure means "superior force." Another common label for this type of contractural condition is an "Act of God" clause, although under modern contract law it has been significantly expanded to include many other contingencies. A force majeure-clause in a contract acts as an exculpatory clause. It excuses a party from failing to perform on the occurence of an event specified in the clause itself - a force majeure.

Other Resources: Credit & the Law: Force Majeure Clause - What Is It and What Are Your Rights?

Homestead exemption - This is the part of the exemption laws that defines what, exactly, a 'homestead' comprises. The homestead exemption is designed to protect the head of a household or a surviving spouse from losing their home to creditors.

The laws were originally enacted in America in the mid-19th century, in part to prevent insolvent debtors from becoming useless members of society.

In Florida, for example, the most liberal of all states, the exemption includes any person keeping a household of one-half acre within a municipality or 160 acres outside of a municipality.
For a case study of this concept in action, see our article: Credit and the Law: Do Florida's Exemption Laws Throw a Wrench in This Credit manager's Personal Guarantee?

Interrogatories -- A formal or written question asked by one party of an opposing party in court of law. They must be answered in writing under oath.

Negligence - In layman's terms, is carelessness that gives rise to an injury to another. Legally, negligence is defined as the failure to exercise reasonable care under the circumstances, or failure to avoid an unreasonable risk of harm to others.
For a case study where this concept is mentioned, see our article: When Is a Lawsuit Too Late?

Purchase Money Security Interest (PMSI) - A purchase money security interest (PMSI) under the Uniform Commercial Code (UCC) is a security interest taken by 1) a supplier of collateral for the purchase price or 2) a third-party lender who gives value so the debtor can purchase the collateral.

A PMSI can only be taken in goods and software - it cannot exist in intangible products. In order for a PMSI to be created at all there must be a close nexus between the acquisition of the collateral and the secured obligation. A security interest will not qualify as a PMSI if you sell goods on an open, unsecured account, then subsequently attempt to create the security interest in the goods.

A PMSI:

1. Is automatically perfected in consumer goods.

2. In goods other than inventory, it is perfected when the creditor:
   • Has the debtor execute a security agreement authorizing the PMSI, and

   • Files a UCC-1 financing statement in the appropriate jurisdiction, within the time frame established by that jurisdiction, after the debtor takes possession of the goods.
3. In inventory, it is perfected when the creditor:
   • Has the debtor execute a security agreement authorizing the PMSI,

   • Files a UCC-1 financing statement in the appropriate jurisdiction before the debtor takes possession of the goods, and

   • Notifies existing secured creditors of record holding a security interest in the same type of inventory in which the creditor intends to take a PMSI. This must be done before the debtor takes possession of the goods.

Other resources: A Primer on Purchase Money Security Interests (PMSIs) Under the Uniform Commercial Code

The Robinson-Patman Act - The Robinson-Patman Act is intended to prevent discriminatory pricing arrangements. Specifically, the Robinson-Patman Act makes it illegal:

"To discriminate in price between different purchasers of commodities of like grade and quality, where the effect of such discrimination may be to substantially lessen competition ... "

Under the Robinson-Patman Act, price discrimination has been identified as including any of the following business practices:

• Offering different prices to purchasers of like grade and quality and quantity of products
• Offering "like" customers different credit terms [terms of sale].
• Offering "like" customers different allowances or programs when those programs or allowances result in price discrimination. Examples of such programs would include cash discounts, volume rebates, marketing allowance programs, slotting allowance programs, Spiffs, and co-op advertising programs.
• Any agreement among competitors to set or fix the terms of sale to a particular customer or group of customers constitutes illegal price fixing.

Specific provisions of the Robinson-Patman Act are applicable to the actions of the credit department. Here is a simple example:

Two "like" companies are offered Net 30-day term of sale. One is offered no cash discount. The other is offered a 5% cash discount. The company offered the 5% discount has in effect a 5% price advantage over the other company. This may be a violation of the Robinson-Patman Act [the Act]. Credit managers should be aware that violation of federal antitrust laws carry both civil and criminal penalties are intended to dissuade companies from engaging in illegal activities. Many companies are either unaware of their duties under the Act, or choose to ignore the law.

One of the most common excuses heard is that they are not treating "like" customers differently because no two customers are exactly alike. That particular argument is not reasonable or rational. In point of fact, no two companies can or will ever be exactly alike.

There are a number of ways the seller can justify price variances between customers. For example, if the seller can prove that it was attempting to meet a competitor's price, then there is no violation of the Act. Similarly, if the price variances can be justified by documenting different costs of dealing with different customers then there is no violation of the law.

It is not illegal to offer different customers different terms of sale or different credit limits based on their creditworthiness. However, the decision about what terms of sale each customer will be offered must be based on the creditworthiness of the applicant, and credit terms cannot be used deliberately to give a competitive advantage to a favored customer.

Thanks to Credit Today's Credit and Collection Handbook

The Sherman Act and the Clayton Act - The Sherman Act was the first antitrust law passed by the federal government. It was written to prevent the establishment of monopolies and combinations that result in unfair restraints on trade. The Sherman Act outlaws "every contract, combination or conspiracy in restraint of trade." The Sherman Act makes it illegal for a company to monopolize, or attempt to monopolize trade or commerce.

Sellers should be aware that an express or implied agreement that limits or restrains trade, such as price fixing, is a per se violation of the Sherman Act. An agreement among two competitors that each will limit a delinquent customer to a $10,000 credit limit would almost certainly be a violation of the provisions of the Sherman Act. The Clayton Act prohibits mergers and acquisitions when the effect may be to substantially lesser competition, or tend to create a monopoly.

Thanks to Credit Today's Credit and Collection Handbook

Statutes of limitations - are laws passed by each state establishing the time limit for suing or prosecuting a claim. The purpose of these statutory limitations periods is to encourage diligence in the bringing of claims, providing finality and certainty for the parties affected, and ensuring that disputes will be resolved when the necessary evidence is not only available but reasonably fresh.
For a case study examining this concept from a credit manager's perspective, see our article: When Is a Lawsuit Too Late?

Summary Judgment - A summary judgment is a request to the court (judge) that the creditor be entitled to judgment based upon an affidavit and documentation supporting the affidavit. It asserts that the debtor has raised no genuine issue to be tried and asks the judge to rule in favor of the creditor.
For a case study and analysis of this concept in action see our article: Credit & the Law: Summary Judgements

UCC Article 2 - The section of the Uniform Commercial Code that deals with the sale of goods. A fundamental provision of Article 2 is that a buyer who accepts goods from a seller is bound to pay for them.

Waiver-The intentional relinquishment of a known legal right. For more information, see: < http://www.credittoday.net/members/3067.cfm >

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