Case Studies on Recent Factoring Litigation

Allen J. Heffner and Bruce E. Loren
Aug 1, 2022

Factoring clients always ask us what they could have done differently to avoid lawsuits with their Clients and/or Account Debtors. In some cases, the Factor does everything correctly and litigation is inevitable. However, over the past several months, we have had Factors engaged in lawsuits that were largely avoidable if the Factor had taken certain actions or had better practices in place. Here are a few scenarios that we have dealt with recently.

Scenario 1: The Factor delivered its Notice of Assignment to the Account Debtor by e-mail. Shortly after sending the Notice of Assignment, the Factor began to purchase receivables from the Client. However, after not receiving payment from the Account Debtor, the Factor learned that the Account Debtor made all payments directly to the Client, claiming it never received the Notice of Assignment and that the individual the Factor sent the Notice of Assignment to was no longer working with the Account Debtor.

What could the Factor have done differently: A Notice of Assignment is not effective unless it is received by the Account Debtor. As such, the Factor should always send the Notice of Assignment in a manner that is traceable, so that it can prove the Account Debtor’s receipt. Generally, we advise our clients to send them via FedEx or certified mail, which makes proving proof of delivery easy. A Notice of Assignment can be sent via e-mail so long as the Factor can prove the Account Debtor’s receipt, either by a read receipt or written reply confirmation from the person receiving the e-mail, however, this is one of the few cases where sending it the old- fashioned way is preferred. Additionally, we advise our clients not to address a Notice of Assignment to a single person. Rather, the Notice of Assignment should be addressed to the Account Debtor’s accounts payable department. This puts the onus on the Account Debtor to deliver the Notice of Assignment to the right person in the company, rather than placing that burden on the Factor.

Scenario 2: The Factor and Client entered into a Factoring Agreement. The Factoring Agreement, along with the personal guaranty, granted the Factor a first priority security interest in all assets of the Client and Guarantor, including certain machinery that was vital to the Client’s business. However, the Factor recorded its UCC-1 Financing Statement in the state where the Factor was located, not the location of the Client, Guarantor, and the assets. The Client ultimately defaulted and litigation ensued between the parties. In that action, a third-party lender joined the lawsuit claiming that it had a perfected security interest on the equipment that primed the Factor’s interest because the Factor never recorded the UCC-1 Financing Statement in the operative state.

What could the Factor have done differently: The Financing Statement must be filed in the state where the Client is organized. If the Client is organized in Oklahoma, has its main office in Texas, and has offices throughout the United States, the Factor must file the Financing Statement in Oklahoma to cover all the Client’s assets. Assuming the Factor has a blanket security interest in the Client’s assets, this Financing Statement will cover nearly all of the Client’s assets. If the Client’s main collateral involves equipment, like the above scenario, the Factor may also file the Financing Statement where that property is located. This additional filing may be overkill, but the filing may protect the Factor if other creditors are going to file Financing Statements specifically as to that property.

Scenario 3: Factor sent various Estoppel Letters via e-mail to an Account Debtor, attempting to confirm that the subject invoices were correct and would be paid to the Factor without recoupment, setoff, defense, or counterclaim. For each e-mail, a representative for the Account Debtor responded “confirmed, to the best of my knowledge”, “based upon what we know now, yes”, “yes, pending final review”, or something along those lines. After receiving these responses, the Factor would call the Account Debtor to again confirm the Account Debtor’s agreement to the Estoppel Letters. The individual confirmed the Account Debtor’s agreement on the phone, but never responded in writing. The Factor accepted these responses as confirmations to their Estoppel Letters and funded the Client accordingly. Ultimately, the Account Debtor refused to pay the invoices in question, alleging that the Client was subject to numerous back charges and delay damages.

What could the Factor have done differently: Factors should only accept responses such as “yes” or “confirmed” when relying on an Account Debtor’s response to an Estoppel Letter. Any other additional language should be treated as a denial. Proper Estoppel Letters are treated as binding contracts. As such, there needs to be a complete meeting of the minds between the parties on all material issues. Extraneous or conditional language from the Account Debtor should not be treated as acceptable. Moreover, verbal confirmations should never be relied upon. If the Factor does not receive this confirmation in writing, it should proceed as if it does not have a binding Estoppel Letter.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 30 years, Mr. Loren has focused his practice on construction law and factoring law.  Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at bloren@lorenkeanlaw.com or aheffner@lorenkeanlaw.com or 561-615-5701.