In Virginia, a business entity properly registered with the State Corporation Commission (“SCC”) is a legal entity, separate and independent of its owners. Accordingly, unless it is necessary to promote justice, a business owner cannot be held responsible for the obligations of his/her business.
Nevertheless, business owners can quickly lose this shield of protection if they fail to disclose to third parties with whom they do business that they are acting in the capacity of an agent for the business, and not in their individual capacity. If this agency relationship is not disclosed (i.e third parties do not know they are doing business with an entity as opposed to an individual), the business owner may be held personally responsible for the obligations of the entity.
The same situation applies for business entities that use tradenames. If the tradename is not properly registered with the SCC, and the actual legal name of the entity is not disclosed to third parties, the business owner can be held personally responsible for the obligations of the entity.
Accordingly, it is very important for a business owner to make sure that all business correspondence (including letters, e-mails, contracts, agreements, business cards, etc.) clearly states the full legal name of the business. The full legal name includes the acronym identifying the form of the business entity (i.e. “Inc.”, “LLC”, “PC”, “LP”, etc.). When signing for the business, owners should always designate their title next to their name (i.e. President, CEO, etc. ) or use the term “authorized agent”. If a tradename is being used by the business, then it must be properly registered with the SCC. If not, all business correspondence must clearly state the actual legal name of the business, and not just the tradename.
Gross & Romanck, P.C. is currently representing an individual business owner being sued by a vendor for a debt of his business. The business had placed a purchase order with the vendor for expensive industrial machinery. When the business failed to pay for the machinery in full, the vendor sued the owner in his personal capacity for the debt. The vendor is relying upon the fact that the purchase order does not disclose the legal name of the business to argue that the order was placed by the owner, and not his business.
The lawsuit could have been avoided if the purchase order clearly identified the full legal name of the business or if the tradename had been properly filed with the SCC.
Do not let this happen to you! Always make sure that the full legal name of your business entity is disclosed to the third parties with whom your entity does business; and make sure that you always sign as an agent of the business.
Showing posts with label business law va. Show all posts
Showing posts with label business law va. Show all posts
Wednesday, April 14, 2010
Monday, December 29, 2008
Prebankruptcy Provisions: Should you include them in your contracts?
Creditors and lending institutions have recently been including various provisions in their contracts and credit agreements, which contemplate what will happen in the event of a bankruptcy. The provisions can be divided into three basic categories: (1) Waivers; (2) Covenants; and, (3) Representations/Admissions.
Waivers limit a borrower's right to either file a bankruptcy petition or to oppose the creditor's lifting of the automatic stay. Covenants provide for immediate relief from the automatic stay or consent not to contest a lift stay motion. Representations/Admissions include provisions in the agreement which admit the elements necessary for the creditor to lift the automatic stay, admit that any future bankruptcy filing will be made in bad faith to hinder or delay the creditor and admissions that security interests are properly perfected.
The prebankruptcy waivers provide a comfort level to lenders and creditors in the hope that they will not be delayed or damaged in the event of bankruptcy and they also are put in agreements to provide assurances that they are avoiding deals with debtors heading toward bankruptcy.
The courts are split on the enforcement of the prebankruptcy provisions. Some courts have expressed concern as to whether or not the provisions violate public policy. In almost all cases however, the courts have found the agreements are not necessarily self-executing. Therefore, a creditor should be weary of taking any action, which may result in a violation of the automatic stay without first obtaining bankruptcy court approval.
On the positive side, prebankruptcy provisions have proven to speed up the process and assist creditors in obtaining quick relief from the automatic stay of bankruptcy. In addition, some courts have upheld the various admissions and representations as conclusive evidence of the elements needed to lift the stay. This has led to a decrease in litigation cost for some creditors.
It would be dangerous and unadvisable to take any action which may be determined to be a violation of the automatic stay in reliance on the prebankruptcy provisions, but including the provisions may save you litigation fees in the long run. Therefore, while prebankruptcy provisions are not guaranteed to work, you may want to include them in your agreements.
The above article is not meant to replace legal counsel. If you'd like to speak to an attorney, please contact Gross & Romanick directly by filling out their online form, e-mailing law@gross.com, or calling (703) 273-1400.
Waivers limit a borrower's right to either file a bankruptcy petition or to oppose the creditor's lifting of the automatic stay. Covenants provide for immediate relief from the automatic stay or consent not to contest a lift stay motion. Representations/Admissions include provisions in the agreement which admit the elements necessary for the creditor to lift the automatic stay, admit that any future bankruptcy filing will be made in bad faith to hinder or delay the creditor and admissions that security interests are properly perfected.
The prebankruptcy waivers provide a comfort level to lenders and creditors in the hope that they will not be delayed or damaged in the event of bankruptcy and they also are put in agreements to provide assurances that they are avoiding deals with debtors heading toward bankruptcy.
The courts are split on the enforcement of the prebankruptcy provisions. Some courts have expressed concern as to whether or not the provisions violate public policy. In almost all cases however, the courts have found the agreements are not necessarily self-executing. Therefore, a creditor should be weary of taking any action, which may result in a violation of the automatic stay without first obtaining bankruptcy court approval.
On the positive side, prebankruptcy provisions have proven to speed up the process and assist creditors in obtaining quick relief from the automatic stay of bankruptcy. In addition, some courts have upheld the various admissions and representations as conclusive evidence of the elements needed to lift the stay. This has led to a decrease in litigation cost for some creditors.
It would be dangerous and unadvisable to take any action which may be determined to be a violation of the automatic stay in reliance on the prebankruptcy provisions, but including the provisions may save you litigation fees in the long run. Therefore, while prebankruptcy provisions are not guaranteed to work, you may want to include them in your agreements.
The above article is not meant to replace legal counsel. If you'd like to speak to an attorney, please contact Gross & Romanick directly by filling out their online form, e-mailing law@gross.com, or calling (703) 273-1400.
Monday, November 17, 2008
The Statute of Frauds: It's Not What it Sounds Like (What you should put in writing)
Based on its name you might think that the Statute of Frauds has something to do with criminal or civil fraud, but it doesn't. The name "Statute of Frauds" actually refers to a law passed by the British Parliament in 1677, and the name has been retained through the centuries. It specifies which kinds of contracts must be in writing in order to be enforceable. Its purpose is to prevent the setting up of supposed agreements and then supporting them by perjury.
The most common applications of the Statute of Frauds are as follows:
* Holding a person responsible for the promise to pay the debt of another
* Contracts for the sale of real estate
* Leases for real estate over 1 year
* Agreements which cannot be performed within 1 year
* Sale of personal property over $5,000
* Sale of goods over $500, unless the buyer accepts the goods
* Agency agreements
While the Statute requires a written agreement, almost any writing sufficient to indicate some kind of agreement between the parties will suffice. However, the "writing" must be signed by the party who is being charged. Thus, the venerable Statute of Frauds is still an important and influential part of modern law.
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The above article is not meant to replace legal counsel. For legal representation or for questions regarding a specific case, please contact Gross & Romanick directly by filling out their online form, e-mailing law@gross.com or calling 703-273-1400.
The most common applications of the Statute of Frauds are as follows:
* Holding a person responsible for the promise to pay the debt of another
* Contracts for the sale of real estate
* Leases for real estate over 1 year
* Agreements which cannot be performed within 1 year
* Sale of personal property over $5,000
* Sale of goods over $500, unless the buyer accepts the goods
* Agency agreements
While the Statute requires a written agreement, almost any writing sufficient to indicate some kind of agreement between the parties will suffice. However, the "writing" must be signed by the party who is being charged. Thus, the venerable Statute of Frauds is still an important and influential part of modern law.
***
The above article is not meant to replace legal counsel. For legal representation or for questions regarding a specific case, please contact Gross & Romanick directly by filling out their online form, e-mailing law@gross.com or calling 703-273-1400.
Monday, October 20, 2008
Apparent Authority: Is It What It Seems?
Before your business ships materials to a construction site, you insist that the subcontractor execute an agreement that all payments from the general contractor to the subcontractor be in the form of a joint check with your company as joint payee. After the general contractor and the subcontractor execute this joint check agreement, you begin shipping materials. When the subcontractor disappears with an outstanding balance on the account, you notice for the first time that the few payments you received were from the subcontractor and not joint checks issued by the general contractor. A call to the general contractor reveals that they claim to have no knowledge of the joint check agreement; in addition, they insist that the person who signed the agreement had no authority to do so. Can you get past due money from the general contractor for its failure to comply with the joint check agreement?
Actual v. Apparent Authority
Our analysis of the validity of the joint check agreement begins with whether the employee of the general contractor had actual or apparent authority to sign the agreement.
Actual authority means that the general contractor has officially empowered the employee with the right to sign the agreement and bind the company.
Even if an employee does not have actual authority, an employer may be bound by the acts of its employee under the theory of apparent authority. According to the Virginia Supreme Court in the case Wright v. Shortridge, "An act is within the apparent scope of the employee's authority if, in the view of the character of his actual and known duties, an ordinarily prudent person, having a reasonable knowledge of the usage's of the business in which the agent is engaged, would be justified in believing that he is authorized to perform the act in question," In our case example, a common laborer does not have apparent authority while the job supervisor probably does.
Even when an employer has specifically limited the actual authority of an employee, the employer may still be bound under apparent authority if it has held out the employee as possessing authority or has permitted the employee to represent that the employee possesses such authority.
Estoppel Works Both Ways
The general contractor in our case may be estopped from denying that its employee lacked authority to sign the joint check agreement if it acted or allowed the employee to act as though the employee had ostensible authority. Thus, employers cannot claim that an employee lacks authority if it represented that the employee had such authority or if the employee is clothed with apparent authority to enter into the agreement.
On the other hand, if your company knew or should have known that the employee lacked authority, you will be estopped from arguing reliance upon the employee's apparent authority. Furthermore, if you accept checks without informing the employer of the breach of the joint check agreement, the employer may have a good argument that they were unfairly prejudiced by your failure to provide an opportunity for them to avoid breaching the agreement.
Avoid Problems
Employers who wish to limit and define the authority of their employees or other agents should place these limitations in writing and they should send potential contracting parties a copy of this document. To limit the appearance of authority, control and monitor activities of employees and avoid giving important titles to people with lesser duties. If you learn that an employee's act exceeds granted authority, immediately repudiate the act and disclose the lack of authority to third parties relying on the act. Otherwise, you may inadvertently ratify the act, or worse, unknowingly extend the authority to the employee to bind the company.
Parties who enter into agreements with companies should beware. You may think you are dealing with an employee with authority to bind the company; however, this may not be the case. Even the President of a corporation may not have actual authority to bind the company; the president's power as an agent comes only as delegation of authority from the bylaws or the board of directors. (See Annotation Note to Virginia Code §13.1-673)
Protect Yourselves!
Insist on documentation of the authority of the person who is signing the agreement, such as a corporate seal or a corporate resolution. When in doubt, send a copy of the agreement to the company's headquarters, this will assist your estoppel, reliance and ratification arguments if the company does not protest the agreement. Had the supplier, in our example, sent a copy of the agreement to the general contractor and immediately contacted them when the checks were not issued jointly, then they might have prevailed in court even without actual authority. As the facts stand in the example, they will lose and fail to recover any money from the general contractor.
***
The article republished above is not meant to replace legal counsel. To seek representation or to ask further questions about Construction Law, please contact Gross & Romanick's Business Law division today by calling (703) 273-1400, e-mailing law@gross.com or filling out our online form.
Actual v. Apparent Authority
Our analysis of the validity of the joint check agreement begins with whether the employee of the general contractor had actual or apparent authority to sign the agreement.
Actual authority means that the general contractor has officially empowered the employee with the right to sign the agreement and bind the company.
Even if an employee does not have actual authority, an employer may be bound by the acts of its employee under the theory of apparent authority. According to the Virginia Supreme Court in the case Wright v. Shortridge, "An act is within the apparent scope of the employee's authority if, in the view of the character of his actual and known duties, an ordinarily prudent person, having a reasonable knowledge of the usage's of the business in which the agent is engaged, would be justified in believing that he is authorized to perform the act in question," In our case example, a common laborer does not have apparent authority while the job supervisor probably does.
Even when an employer has specifically limited the actual authority of an employee, the employer may still be bound under apparent authority if it has held out the employee as possessing authority or has permitted the employee to represent that the employee possesses such authority.
Estoppel Works Both Ways
The general contractor in our case may be estopped from denying that its employee lacked authority to sign the joint check agreement if it acted or allowed the employee to act as though the employee had ostensible authority. Thus, employers cannot claim that an employee lacks authority if it represented that the employee had such authority or if the employee is clothed with apparent authority to enter into the agreement.
On the other hand, if your company knew or should have known that the employee lacked authority, you will be estopped from arguing reliance upon the employee's apparent authority. Furthermore, if you accept checks without informing the employer of the breach of the joint check agreement, the employer may have a good argument that they were unfairly prejudiced by your failure to provide an opportunity for them to avoid breaching the agreement.
Avoid Problems
Employers who wish to limit and define the authority of their employees or other agents should place these limitations in writing and they should send potential contracting parties a copy of this document. To limit the appearance of authority, control and monitor activities of employees and avoid giving important titles to people with lesser duties. If you learn that an employee's act exceeds granted authority, immediately repudiate the act and disclose the lack of authority to third parties relying on the act. Otherwise, you may inadvertently ratify the act, or worse, unknowingly extend the authority to the employee to bind the company.
Parties who enter into agreements with companies should beware. You may think you are dealing with an employee with authority to bind the company; however, this may not be the case. Even the President of a corporation may not have actual authority to bind the company; the president's power as an agent comes only as delegation of authority from the bylaws or the board of directors. (See Annotation Note to Virginia Code §13.1-673)
Protect Yourselves!
Insist on documentation of the authority of the person who is signing the agreement, such as a corporate seal or a corporate resolution. When in doubt, send a copy of the agreement to the company's headquarters, this will assist your estoppel, reliance and ratification arguments if the company does not protest the agreement. Had the supplier, in our example, sent a copy of the agreement to the general contractor and immediately contacted them when the checks were not issued jointly, then they might have prevailed in court even without actual authority. As the facts stand in the example, they will lose and fail to recover any money from the general contractor.
***
The article republished above is not meant to replace legal counsel. To seek representation or to ask further questions about Construction Law, please contact Gross & Romanick's Business Law division today by calling (703) 273-1400, e-mailing law@gross.com or filling out our online form.
Wednesday, October 1, 2008
Accounts Receivable: A Plan to Improve Your Collections
In today's stressful economic climate, managing accounts receivable becomes vitally important. Gross & Romanick offers the following suggestions for increasing in-house collections. The article is not meant to replace legal counsel, however: please contact Gross & Romanick with any further questions.
***
Effective management of accounts receivable requires a written procedures manual, so that the patients, the office staff and the doctors understand everyone's duties and responsibilities. This plan will increase in-house collections.
A comprehensive collection plan that informs your patients of their obligations and identifies bad debts early can go a long way toward putting you in control of your accounts-getting your money more quickly and minimizing the cases sent to an attorney or collection agency. Any such plan that you devise must strike a balance between a policy that is too harsh at the cost of strained relations, or a lost patient, and one that is too permissive at the cost of profitability. Even the best plan will prove futile in some cases, when it becomes apparent that any further effort to convince a patient to pay will fall on deaf ears. Identifying bad debts and quickly sending them out for collection will improve your success rate.
This sample outlines a mix of written and oral reminders. Perhaps one like it will work for you.
The Collection Plan: Taking Control of Your Accounts Receivable
You've completed your service for the client and sent out the bill. But the money is not yet in your hands. You could just sit and wait (and hope), but we suggest a better alternative: a collection plan. A comprehensive plan will make collections more successful by informing clients of their obligations and identifying bad debts early enough to take appropriate action.
Formulating an effective collection plan is the first and most important step in getting control of your accounts. By setting up a comprehensive scheme for dealing with accounts receivable collections, you can obtain your money faster and avoid the necessity of going to an outside collection agency or attorney.
In constructing a collection plan it is important to strike a balance between effective collections and not angering (and losing) clients. At the same time it is necessary to quickly identify those clients who will not pay, so that more drastic actions are initiated.
In order for a collection plan to be effective it must treat all accounts according to the same policy so that your staff and clients know their obligations. This consistency will can be best achieved through the creation of a "schedule", similar to the one show below, which sets out the various contacts that should be made with the debtor at appropriate intervals. When designing a schedule you need to keep diplomacy in mind as well as your financial needs. A bookkeeper can call a client to check on an account a certain amount of time after a bill has been sent. If this is done incorrectly it can be very rude and will be likely to antagonize your clients, but if it is done properly it can be both polite and effective.
The schedule show below is only an example; you will have to design your own plan to suit your particular business needs.
At some point it will become apparent that any further efforts to convince a client to disgorge the unpaid funds would be futile. The whole point of a collection plan is to determine who is not going to pay, and to determine it as quickly as possible. Our own feeling is that any account which is over 90 days past due should be considered a bad debt and sent to an attorney for collection.
***
Effective management of accounts receivable requires a written procedures manual, so that the patients, the office staff and the doctors understand everyone's duties and responsibilities. This plan will increase in-house collections.
A comprehensive collection plan that informs your patients of their obligations and identifies bad debts early can go a long way toward putting you in control of your accounts-getting your money more quickly and minimizing the cases sent to an attorney or collection agency. Any such plan that you devise must strike a balance between a policy that is too harsh at the cost of strained relations, or a lost patient, and one that is too permissive at the cost of profitability. Even the best plan will prove futile in some cases, when it becomes apparent that any further effort to convince a patient to pay will fall on deaf ears. Identifying bad debts and quickly sending them out for collection will improve your success rate.
This sample outlines a mix of written and oral reminders. Perhaps one like it will work for you.
The Collection Plan: Taking Control of Your Accounts Receivable
You've completed your service for the client and sent out the bill. But the money is not yet in your hands. You could just sit and wait (and hope), but we suggest a better alternative: a collection plan. A comprehensive plan will make collections more successful by informing clients of their obligations and identifying bad debts early enough to take appropriate action.
Formulating an effective collection plan is the first and most important step in getting control of your accounts. By setting up a comprehensive scheme for dealing with accounts receivable collections, you can obtain your money faster and avoid the necessity of going to an outside collection agency or attorney.
In constructing a collection plan it is important to strike a balance between effective collections and not angering (and losing) clients. At the same time it is necessary to quickly identify those clients who will not pay, so that more drastic actions are initiated.
In order for a collection plan to be effective it must treat all accounts according to the same policy so that your staff and clients know their obligations. This consistency will can be best achieved through the creation of a "schedule", similar to the one show below, which sets out the various contacts that should be made with the debtor at appropriate intervals. When designing a schedule you need to keep diplomacy in mind as well as your financial needs. A bookkeeper can call a client to check on an account a certain amount of time after a bill has been sent. If this is done incorrectly it can be very rude and will be likely to antagonize your clients, but if it is done properly it can be both polite and effective.
The schedule show below is only an example; you will have to design your own plan to suit your particular business needs.
At some point it will become apparent that any further efforts to convince a client to disgorge the unpaid funds would be futile. The whole point of a collection plan is to determine who is not going to pay, and to determine it as quickly as possible. Our own feeling is that any account which is over 90 days past due should be considered a bad debt and sent to an attorney for collection.
| Past Due | Contact Type |
| 15 days | Pleasant memo: "Do you need more information?" -- written |
| 30 days | Polite inquiry: "Just a reminder." -- oral |
| 45 days | Strong reminder: "Is there a problem?" -- written/oral |
| 60 days | Strong demand: "Please pay now!" -- written/oral |
| 75 days | Final demand: "Pay now or face legal action." -- written/oral/personal visit |
| 90 days | Place debt with collection agency or attorney |
Friday, June 27, 2008
Collecting A Corporate Debt From A Director/Officer
Many Virginia corporations fail to file their annual reports, pay the annual registration fee or maintain a registered office, causing the State Corporation Commission to terminate the corporation. After such termination directors, officers and agents, acting on behalf of the corporation may be held personally liable for the acts of the corporation. Unlike the Delaware statute, Virginia Code §13.1-754 provides for personal liability during the termination period, even if the corporation is later reinstated.
ADVICE: Do not assume that a corporation is valid! Check with the State Corporation Commission. Holding owners of a corporation liable for its debts can be difficult but not impossible. If you are an officer or director of a corporation, you may want to check the status of the corporation, so you are not exposed.
Contact Gross & Romanick's Business Law division for more information or to speak with legal counsel.
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