June 2012 / Volume 10, No. 2


Your collection efforts have not been successful.  Calls are not being returned or are being avoided.  Repeated promises of payment remain unfulfilled.   Deadlines come and go and your receivable is now over 180 days old and you suspect that your customer is financially distressed.  You then contact our office and request that we file a lawsuit to collect the debt.  You also ask if there is any way to freeze the debtor’s assets before it goes out of business.  Unfortunately, despite our many successes, and as much as we try, we are neither magicians nor miracle workers.  We cannot change reality.  If your former customer is heavily in debt, its assets fully encumbered by its secured lender, and is about to close its business or file for bankruptcy, there may not be any viable recourse for you.  The time to take action to enhance the collectability of a receivable is before delivering your product or service to the customer, and even before you start to do business with it.  This article will review some of the measures to enhance your ability to get paid for what you sell. 

Financial Investigation.  First, try to determine your customer’s financial condition, whether the customer is new to your company or a long and valued account.  Get updated credit information and references.  Moreover, as a regular business procedure, have all customers submit updated credit applications on an annual basis, or more often if needed.  Not only will such information allow you to determine whether to extend credit to a customer, if you extend credit on the basis of false information you may also have additional remedies that can be utilized to collect monies due.  In addition, your credit application or sales agreement should include a provision that allows you to recover interest on the unpaid balance, as well as reasonable attorneys’ fees, if the underlying debt is not paid in a timely manner.  If such terms are found only on the reverse side of an invoice issued after the sale, they likely will be found to be unenforceable.

Transaction Documentation.  The next measure is to have the transaction subject to your terms and not those of your customer.  This means that your commercial documents (such as quotation and acknowledgment forms) have terms that protect your company, including clearly designating payment terms, disclaimers of warranties, limitations of liability, as well as remedies, such as designating where litigation will take place and which state’s laws may be applicable, if your customer is located in another state.  You should also scrutinize the commercial documents received from your customer (as well as from your own vendors) to assure that you do not unknowingly accept adverse terms by failing to object to them.  Businesses often do not read the “boilerplate” on the reverse side of a purchase order (or a quotation from the vendor) unless and until a problem arises.  However, these terms are often enforceable and can impact your claim.

Security Interests.  Even with the best commercial forms, you may still have the daunting task of trying to collect monies from a customer that does not have sufficient funds to pay all of its creditors.  It is in those circumstances that we often are asked if we can have a lien placed on the customer’s property while the collection suit is pending.  Our answer is a definite “maybe,” for it all depends upon whether there is a contractual or statutory right to seize the customer’s property.  If your company sells goods to its customers, as opposed to services, it should consider a “secured transaction” (under the Uniform Commercial Code), whereby the customer grants your company a security interest in the products being sold (a “purchase money security interest”).  If done properly, a purchase money security interest will allow your company to be a “secured creditor” of the customer and have the right to recover goods previously sold and delivered or the proceeds from their sale.

Statutory Liens.  If obtaining a security interest is not something that is readily available or practical under the circumstances, then Illinois law may provide a basis for asserting a statutory lien against a customer’s property.  For example, someone who provides labor or material in connection with a construction project can assert a lien against the subject real estate under the Illinois Mechanics Lien Act.  Similarly, amounts that may be due and owing to a plastic or metal processor or a toolmaker may be subject to the Illinois Tool and Die Lien Act.  Illinois law also provides liens for services rendered by clinical psychologists, commercial real estate brokers, healthcare service providers, labor and storage liens, self-service storage facilities, as well as for those who provide other services.  Illinois law also allows for the “attachment” of property belonging to a debtor under certain circumstances.  Finally, under both Illinois and Federal law, you may be able to recover goods sold to an account that shortly thereafter files for bankruptcy.  However, these statutory remedies are not always applicable and require strict compliance with each of the statutory prerequisites.

Conclusion.  When it comes to getting paid, “an ounce of prevention” truly is worth more than “a pound of cure.”  Taking the appropriate measures before a sale is made can greatly enhance the likelihood of getting paid for what you sell.

By Daniel E. Beederman

Businesses:  Beware of What Appears on Your Credit or Debit Card Receipts

In today’s world, most businesses -- from service providers to sellers of goods -- accept credit cards for payment.  The proliferation of credit card (and debit card) use, however, has led to an increase in identity theft.  In an attempt to reduce instances of identity theft, Congress enacted certain “truncation” provisions in the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”), which affect what can appear on credit and debit card receipts.  Businesses that accept credit cards must be aware of FACTA’s provisions and the dangers of failing to comply with its truncation requirements.

FACTA provides that no business that accepts credit or debit cards for the transaction of business “shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction.”  This requirement applies only to “electronically printed” receipts; if the “sole method” of recording a credit or debit card number is by handwriting or by imprinting a copy of the card, no truncation is necessary.  So, any business that accepts credit or debit cards and gives the customer a printed receipt cannot print on the receipt the expiration date of the card or more than the last 5 digits of the card number.

The penalty for failing to comply with FACTA can be harsh.  In the case of a negligent (mistaken) violation of the statute, a consumer can recover in a lawsuit any actual damages it suffered, plus its attorneys’ fees and court costs.  If a “willful” failure to comply is found, the offending business is liable to the consumer for either the actual damages it suffered or a statutory penalty of between $100 and $1,000 per violation, punitive damages, and the attorney’s fees and court costs incurred by the consumer in bringing a lawsuit.  A “willful” violation occurs when a business knows about, but ignores, FACTA’s requirements, or when it acts in reckless disregard of the mandates of FACTA.  Lawsuits for FACTA violations are often brought as “class actions,” where an individual attempts to represent a larger group of people who have experienced similar violations of the statute by the same business.  Although any actual damages stemming from a FACTA violation are infrequent, statutory damages and attorneys’ fees can be catastrophic when the interests of a large group are represented in a class action against one business.

What constitutes an “electronically printed receipt” given at the “point of sale or transaction” is the subject of some debate in the courts.  It is clear that a computer-generated receipt actually handed to a consumer in a face-to-face transaction falls within the coverage of FACTA and that its truncation provisions apply to such receipt.  Less clear, however, are receipts that are provided by e-mail to a consumer or that are automatically generated by a website when a credit or debit card is used, which can be printed by the consumer if it so chooses.  Although courts have generally found that these “receipts” do not fall within the purview of FACTA, the issue has not been finally settled.  In the event of uncertainty, a business should contact its attorney to address these requirements.

By David S. Makarski

Schoenberg Finkel Newman & Rosenberg, LLC (312) 648-2300

This newsletter is not intended to be legal or tax advice and is not a substitute for obtaining legal or tax advice. This Newsletter is deemed to be advertising material by the Illinois Supreme Court.