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Glossary of Legal Terms in Business Credit
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. Acceptance - The act of voluntarily agreeing, directly or by implication, to the terms of an offer, thereby creating a contract. If the act modifies or adds to the terms of the offer, it is not an acceptance, but a counteroffer. For more on this concept, please refer to our case study: "Meeting of the Minds": What Constitutes a Legally Binding Offer? 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. Anticipatory repudiation - This occurs when a party to a valid contract unequivocally declares, before the time for performance has arisen, his intention not to fulfill the contract. For more on this concept, please refer to our case study: Credit & the Law: Is This Threat to Stop Service Anticipatory Repudiation or Simply Aggressive Collection Activity? Article 2 of UCC - Article Two of the Uniform Commercial Code provides rules for determining risk of loss in goods sales. Automatic stay - An automatic stay is an injunction filed immediately after a bankruptcy petition is filed which prohibits lawsuits, foreclosures, and all other collection activities against the debtor/filer. Avoid or Avoiding the transfer - When a bankruptcy trustee is successful in proving that a payment in the 90 days prior to a bankruptcy filing is a preferential payment and thus, succeeds in getting the money back from the creditor for the bankruptcy estate, that is known as "avoiding the transfer" For more information on this concept, see: Debt Payments as Voidable Preferential Transfers Avoidance - Undoing or setting aside. 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 Bankruptcy Abuse Prevention & Consumer Protection Act - Aka "BAPCPA," is the latest revision of the U.S. Bankruptcy Code. Among other changes most relevant to trade creditors, it included changes to the preferential payment rules. Bar date - is the date by which a bankruptcy claim must be filed with the bankruptcy clerk. In Chapter 11 cases, the court sets the bar date for filing proofs of claim and notice of such deadline must be given to all creditors and interested parties. Breach of the peace - Courts have defined it as follows: It is disturbance of public order by an act of violence, or by any act likely to produce violence, or which, by causing consternation and alarm, disturbs the peace and quiet of the community. 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? CFR - The acronym for Cost and Freight. CFR terms mean the seller is only responsible for paying the costs and freight to bring the goods to the port of destination, and is not responsible for maritime insurance. Chapter 9 - Chapter 9 of the Bankruptcy Code provides for municipalities to obtain bankruptcy protection, with the primary purpose to permit debt adjustment. Debtor eligible for Chapter 9 include any state-sponsored or state-controlled entity that raises revenues through taxes or user fees to fund public projects, including cities, counties, school districts, hospitals, sanitary districts, and port or highway authorities. It is the public sector's equivalent to Chapter 11. A municipality may not be a Chapter 7 or Chapter 11 debtor, nor may an involuntary bankruptcy be commenced against a municipality. For more on this concept, see ) CIF - The acronym for Cost, Insurance, and Freight. CIF terms mean that the seller has the same responsibility as under CFR but the seller also must contract for and pay for maritime insurance against loss or damage to the goods while in transit to the named port of destination. Condition concurrent: Is a particular type of condition precedent (see below). It exists where the parties to the contract are to exchange their agreed performances at the same time. Concurrent conditions generally occur in contracts for the sale of goods and contracts for the sale of land. See also: Credit & the Law: Contractual Conditions in Sales 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? See also: Credit & the Law: Contractual Conditions in Sales Conditions subsequent: Is any fact, the existence or occurrence of which, by agreement of the parties, operates to discharge a party from future performance after the performance has begun or become absolute. For a case study of this concept in action, see our article: Credit & the Law: Contractual Conditions in Sales Cram-down - A cram-down plan provides is the involuntary imposition by a court of a reorganization plan over the objection of one or more classes of creditors. 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 Destination Contract - a contract in which the seller bears the consequences of any loss or damage sustained up until the goods are delivered at the destination. (For more on this concept, see our legal case study, 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 Document Requests - One of the five methods of discovery, document requests seek to elicit each party's documents relating to the case. 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 Fee-Shifting Provision - A way for contracting parties to protect themselves from the cost of attorney's fees in the event of a future contract dispute. This typically must be written into a sales contract and/or credit agreement. For more information on this concept, please see our case study: The Price of a Dispute: Recovering Costs and Attorney's Fees FOB - The acronym for Free on Board. A shipment for which the seller is responsible for transportation and shipping costs to the point where the goods are delivered to and loaded onto a carrier. 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? Implied Warranty - An implied warranty is a warranty that is considered to be included in a sales contract even though it is not specifically agreed to by the parties. For a case study of this concept, see: Credit and the Law: Implied Warranties of Fitness Under the UCC 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. Invitation to an offer - Requesting a price quote or a price list are examples of what is referred to as an invitation to an offer; neither of which meets the test of a full-fledged offer to purchase. For more on this concept, please refer to our case study: "Meeting of the Minds": What Constitutes a Legally Binding Offer? Meeting of the Minds - The point at which two parties create a contractual obligation; both parties will have indicated their mutual assent. This usually takes the form of an offer by one party, the offeror, followed by an acceptance by the other party, known as the offeree. For more on this concept, please refer to our case study: "Meeting of the Minds": What Constitutes a Legally Binding Offer? Motion to compel - This is a motion where the court is asked to issue an order requiring one party to produce what the other has asked for. 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? New value defense - An exception to the preferential payment rules that allow you to not be required to return payments received in the 90 days prior to a bankruptcy filing. Generally, if you give new value in return for payment received, the payment is not a preferential payment. The details are covered in §547(c)(1) of the new bankruptcy code. For a case study covering this concept, see our article: Legal Case Study: If It Looks Like a Preference Payment and It Sounds Like a Preference Payment, It's . . .. Offer - A proposal to enter into a certain arrangement, usually accompanied by an expected acceptance. Offers in general must be sufficiently definite to evidence the offeror's intent to enter into a binding agreement. For example, asking for a price quote is not an offer. For more on this concept, please refer to our case study: "Meeting of the Minds": What Constitutes a Legally Binding Offer? One-way street provision - A contract provision that attempts to shift the cost of attorneys' fees and litigation costs to one contracting party but not the other no matter what. These are routinely rejected by courts. For more information on this concept, please see our case study: The Price of a Dispute: Recovering Costs and Attorney's Fees Oral Depositions - One of the five methods of discovery, a deposition is a witness examination in advance of trial. The witness takes an oath, and a court reporter will make a record of the testimony. Ordinary course of business defense - One of two primary defenses against preferential payment claims. To qualify for this, creditors must demonstrate that payments received in the 90-days prior to bankruptcy filing were: (a) made in payment of a debt that was incurred by the debtor in the ordinary course of business of both the debtor and creditor; and either in the ordinary course of business of the debtor and creditor; or (c) according to ordinary business terms. This is covered in §547(c)(2) of the new bankruptcy code. For a case study covering this concept, see our article: Legal Case Study: If It Looks Like a Preference Payment and It Sounds Like a Preference Payment, It's . . .. Parol evidence rule - This is a rule of substantive contract interpretation, stating that when the parties have expressed their agreement in a final and complete -- or integrated -- writing, evidence of prior communications is inadmissible to alter or vary the parties' written contract. In other words, if your written agreement is a complete and final expression of your contract, all terms should be in it. For more information on this concept, please refer to our case study: Plan of Adjustment - A plan of adjustment is the method under Chapter 9 of the Bankruptcy code by which a municipality or other state entity discharges its pre-petition obligations and provides the method for repayment of its obligations. Chapter 9 imposes several conditions on a municipality for its plan to be confirmed, including that the amounts paid by the municipality under the plan are "reasonable"; that all post-petition administrative claims be paid in full; and, perhaps most importantly, that the plan is in the best interest of creditors. For more on this concept, see ) Prevailing Party - The party in whose favor a judgment is rendered, regardless of the amount. For more information on this concept, please see our case study: The Price of a Dispute: Recovering Costs and Attorney's Fees 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: Other resources: A Primer on Purchase Money Security Interests (PMSIs) Under the Uniform Commercial Code Requests for Admissions - One of the five methods of discovery, a request for admission is like an interrogatory, but it involves questions designed to narrow issues, in particular, to have the other side admit or deny a particular fact (Did you ship $1,000 of product to Company X?) Replevin - A legal action, typically used by creditors, to reclaim property that his unlawfully held by a debtor. 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: 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 Section 362 of the United States Bankruptcy Code - This section of the code imposes an automatic stay the moment a company files bankruptcy. Section 503(b)(9) Claim - The section of the Bankruptcy Code which specifies that vendors that deliver goods to a debtor in the ordinary course of the debtor's business within the twenty (20) days prior to the petition date are entitled to an administrative expense priority claim for the value of those goods. This administrative expense priority claim enjoys a priority for payment above general unsecured non-priority claims. For more on this concept, see: "Vendors Beware: Courts May Require More From Vendors Than the Filing of a Proof of Claim" Section 523 of the U.S. Bankruptcy Code - This section of the code governs non-dischargeability of a single claim. Section 727 of the U.S. Bankruptcy Code - Under section 727, creditors, or the Chapter 7 trustee or United States Trustee, may object to a debtor receiving a discharge of all debts in bankruptcy where the debtor has engaged in acts resulting in harm to creditors. Security interest - The right of a creditor to take possession of collateral offered to secure a debt For more on this, see our case study: "Perfection of Security Interests--Properly Identifying the Partnership Debtor"" 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 Shipment Contract - a contract in which the seller bears the risk of loss or damage only until the goods are brought to the place of shipment. The buyer bears the consequences of any loss or damage sustained while in transit. (For more on this concept, see our legal case study, 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? Subpoenas - One of the five methods of discovery, a subpoena is a discovery method used to obtain evidence from third parties, who are not involved in the action. Non-parties can be asked to produce documents, or attend depositions when they are served with a subpoena. 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-1 - is the document filed with the Secretary of State and/or the County Clerk's office(s) to perfect a lien on a customer's assets. A UCC-1 is also called UCC Financing Statement. 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. UCC Section 9-503 is the statute in the Uniform Commercial Code (UCC) which embodies the rights of a secured party to use self-help in the event of a "default" by the debtor-purchaser. It provides in relevant part: "Unless otherwise agreed a secured party has on default the right to take possession of the collateral. In taking possession a secured party may proceed without judicial process if this can be done without breach of the peace or may proceed by action." Waiver-The intentional relinquishment of a known legal right. For more information, see: < http://www.credittoday.net/members/3067.cfm >
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