I Want My Attorney Fees!

A number of my clients ask the same question regarding the enforcement of contracts, particularly the collection of debt. The question is, “Can I get my attorney fees and cost of collection.” A recent Eleventh Appellate district case, the court discussed this topic in a succinct manner.

The case Somerset Synfuel No. 1, L.L.C. v. Resource Recovery International Corp, 188 Ohio App.3d 368, involved a number of convoluted issues one of which was the defendant’s failure to pay the attorney fees to the successful party in a promissory note issue. In its opinion, the court stated:

As a general rule, the costs and expenses of litigation, other than the usual court costs, are not recoverable under Ohio law, Freeman v. Crown City Mining, Inc., 90 Ohio App.3d 546, 630 N.E.2d 19. Ohio has long adhered to the “American rule” with respect to recovery of attorney fees. A prevailing party in a civil action may not recover attorney fees as part of the costs of litigation, Wilborn v. Bank One Corp., 121 Ohio St.3d 546, 2009-Ohio-306. However there are exceptions to this rule. Attorney fees may be awarded when a statute or an enforceable contract specifically provides for the losing party to pay the prevailing party’s attorney fees, Nottingdale Homeowners’ Assoc., Inc. v. Darby, 33 Ohio St.3d 32, 514, N.E.2d 702.

O.R.C. 1301.21(B) authorizes the award of attorney fees regarding contracts of indebtedness if 1) the contract includes the commitment to pay attorneys’ fees and2) if the contract is enforced through judicial proceedings.

Therefore, in order to obtain attorney fees or other costs of litigation, you must:

1. Have a written agreement authorizing the payment of attorney fees, etc. in the event of default, and

2. Be successful in enforcing the contract.

Credit Card Liability - Dispelling Two Myths

A recent Medina County Court case provides dictum regarding two myths regarding credit cards. The case, Citibank v. Kovach, 157 Ohio Misc.2d 24 involved the use of a credit card issued by Citibank to the defendant. Three pertinent facts were established: 1) The defendant did not sign any agreement or contract with the bank, 2) he did use the credit card to the tune of $20,569.06 and 3) the bank attached to its complaint a complete itemization of charges, payments and credits. The two myths dispelled by the case are:

Myth No. 1: The plaintiff must establish that the defendant executed a contract or credit agreement with credit card company to establish liability. This is untrue. Under Ohio law, a cardholder becomes liable for charges made on a credit card by using the credit card itself, Chase Bank USA v. Lopes, 8th Appellate Dist No. 91480, 2008 Ohio 6000, 2008 WL 4950985. In fact, the use of the credit card subjects the card holder to the terms of the credit card agreement, Am. Express v. Silverman, 10th Dist. No. 06AP-338, 2006 Ohio 6374, WL 3491741.

Myth No. 2: The creditor need only produce a summary account attached to its complaint to establish a prima facie case of liability. This is also untrue. In order to establish a prima facie case for money owed on an account, “an account must show the name of the party charged and contain: (1) a beginning balance (zero, or a sum that can qualify as an account stated, or some other provable sum); (2) listed items, or an item, dated and identifiable by number or otherwise, representing charges, or debits, and credits; and (3) summarization by means of a running or developing balance, or an arrangement of beginning balance and items which permits the calculation of the amount claimed to be due." Gabriele v. Reagan (1988), 57 Ohio App.3d 84, 87, 566 N.E.2d 684

The Need for Unambiguity and an Underlying Agreement

A recent Ohio Court of Appeals case exemplifies the need to strive for contract terms with little ambiguity and the requirement to generate an underlying agreement in support of a promissory note.

The case, Cranberry Fin., LLC v. S&V P'ship, 186 Ohio App. 3d 275, involved a dispute regarding the terms of a promissory note. The debtor entered into a promissory note and subsequently argued that the terms of the underlying agreement were different from the note.

The court, in its opinion, stated, “A promissory note is a contract and rules of contract interpretation apply to the interpretation of promissory notes. If a contract is clear and unambiguous, then its interpretation is a matter of law and there is no issue of fact to be determined. If, however, an ambiguity is present such that parole evidence is necessary to resolve the ambiguity, a factual determination of intent or reasonableness may be necessary to supply the missing term. The fact-finder may also examine the surrounding circumstances of the transaction to determine the parties' intent. Further, it is axiomatic that contracts -- including promissory notes -- are construed against the drafter. The rule is well established that where there is doubt or ambiguity in the language of a contract it will be construed strictly against the party who prepared it. In other words, he who speaks must speak plainly or the other party may explain to his own advantage.”

But the court went further, “When a party voluntarily places his signature upon a note or other writing within the Ohio Statute of Frauds, and where that party's sole defense to an action brought upon the writing is that a different set of terms was orally agreed to at that time, such defense shall not be countenanced at law regardless of the theory under which such facts are pleaded. In such event, the writing alone shall be the sole repository of the terms of the agreement.”

In this case, the Sixth Appellate Court, merely restated what is known in the law as the “Parole Evidence” rule. Basically, the rule imparts that oral testimony may not be introduced into evidence to alter the terms of a written agreement. Only if the terms of the agreement have ambiguities, may the court entertain testimony to interpret the ambiguous portions of the agreement. Therefore, if the terms in an agreement are unambiguous, the court will not permit testimony that would alter those terms.

In this case, the court deemed the terms of the promissory to be unambiguous. Therefore, the party could not introduce evidence in derivation of those terms.

Most promissory notes are fairly simple and do not set forth underlying agreements relating to the note. Therefore, it is vitally important that the parties enter into an agreement setting forth the terms underlying the note and that agreement be referenced as part of the covenants set forth in the note.

Disclosure of Principal Vital in Avoiding Personal Liability

A recent Eight Appellate District case exemplifies the importance of definitively identifying an agency relationship to a third person with whom your are dealing. A failure to do so could result in personal liability.

The case, Independent Furniture Sales, Inc. vs. Dan Martin, dba, Martin's Appliance, 2009 Ohio 5697 involved the failure of the operating manager of a corporate buyer to disclose his agency relationship to the Plaintiff.

As stated by the court, “To avoid personal liability, an agent must demonstrate that he disclosed to a third party: (1) the agency relationship; and (2) the identity of the principal. If this disclosure is not made, then the agent may be personally liable for contracts entered in his own name...A corporate officer has a responsibility to clearly identify the capacity in which he is dealing in a specific transaction. The failure to comply with this rule will expose the corporate officer to individual liability on the resulting contract.”

In this instance, even the issuance of two checks on the corporate account was insufficient disclosure that Mr. Martin was the agent of the corporation. As occurred in this matter, the Defendant continually failed to disclose the principal-agency relationship over a ten year period. Although two checks were drawn over the decade from the corporate account, this was insufficient evidence to put the Plaintiff on notice that the Defendant was the agent for the corporation

Therefore, I advise clients as follows:

1. Any communications with third parties should be made on a document clearly citing the name and address of the principal.

2. When one signs any communication with the third party, that person’s title and relationship should be clearly set forth on the signature line or immediately underneath.

3. Never pay for a corporate debt using a personal credit card or personal check.

4. Never execute a personal guarantee or surety agreement unless required to do so to obtain credit for the corporation.

Contracts and Equitable Relief

How to you solve the issue of payment when you can’t prove you have an express contract? If you’ve read this blog, you know I stress to my clients the necessity to enter into WRITTEN contracts. But for those who still rely on the “handshake” take heart. The courts do permit relief.

A typical example of this issue was discussed in the recent case of Bldg. Industry Consultants v. 3M Parkway, 182 Ohio App.3d 39, arising from the Ninth Appellate District of Ohio (Lorain). In that case the parties never entered into a formal contract. There were communications, letters and memorandums exchanged, the plaintiff did perform some services, but the parties never formally agreed on a price or for that matter an agreement outlining the contractual obligations of each party. As the court stated, the elements of a formal express contract were not present - “...offer, acceptance, contractual capacity, consideration, a manifestation of mutual assent and legality of object and consideration.”

The court went on to say, “To constitute a valid contract, both parties to a contract must assent to its terms; there must be a meeting of the minds of the parties with respect to the essential terms of the contract, which terms are also definite and certain.”

Even though there is no express contract, a court does have the power to compensate an aggrieved party under the theories of “unjust enrichment” or “quantum meruit.” In other words, the court can impose an implied or constructive contract using these theories of equitable relief. As is obvious from the term, “equitable relief” is available if it is proven that a party obtains a unjust benefit through another’s actions.

To be success ful, the aggrieved party must prove that: “... (1) a benefit has been conferred by a plaintiff upon a defendant, (2) the defendant had knowledge of the benefit, and (3) the defendant retained the benefit under circumstances where it would be unjust to do so without payment,” Bldg. Industry Consultants, v. 3M Parkway, Supra.

So even though parties do not enter into a formal written contract, given the proper evidence, a court will award payment. In this case the court did award the plaintiff payment for work the plaintiff did perform in furtherance of the project notwithstanding the fact that the plaintiff was unable to prove a formal express contract.

Is a Spouse Liable for the Debts of the Other Spouse?

In “Contracts 101" all law students are taught that a spouse can be held liable for the “necessities” of the other spouse. This tenant has been promulgated in Ohio in O.R.C. 3103.03. The statute states in part:

“(A) Each married person must support the person's self and spouse out of the person's property or by the person's labor. If a married person is unable to do so, the spouse of the married person must assist in the support so far as the spouse is able...

"If a married person neglects to support the person's spouse in accordance with this section, any other person, in good faith, may supply the spouse with necessaries for the support of the spouse and recover the reasonable value of the necessaries supplied from the married person who neglected to support the spouse unless the spouse abandons that person without cause.”

Historically, “necessities” have included medical care, sustenance, and housing. In the event a spouse fails to provide these necessities, the spouse or a third party may take action against the non-supporting spouse to pay for these necessities.

But what happens when the spouse is able, but fails, to pay? A recent of Ohio case, Brown v. Williamson, 2009 Ohio 4579, took up this issue. In this case, the husband failed to pay rent and the landlord sued both spouses for the back rent even though the wife did not sign the lease. The lower court found in favor of the landlord stating, in fact, the wife is liable for necessitates, which includes housing.

The appellate court disagreed, in part. The court, citing Ohio State Univ. Med. Center v. Calovini, 2002 Ohio 5756,, in part, stated, “...we agree with the trial court that housing, like medical care, qualifies as a ‘necessary’ and is a component of a spouse's support obligation under R.C. § 3103.03. But even if the statute is applicable here, [the wife is not liable] for her husband's rent obligation unless he is unable to pay the debt and she is able to aid in his support by paying it herself...”

Therefore, the court set forth the following criteria before a spouse can held liable for the debt of their spouse:

1. The debt must be for a “necessity, i.e. medical, food or housing, etc.

2. The spouse must be unable to pay for the necessity themselves, and

3. The spouse has the ability to aid in that support obligation.

As a result, it appears any creditor must exhaust all efforts against one spouse before pursuing the other spouse. And, in pursuing the other spouse, the creditor must show the other spouse has the financial means to pay the obligation.

Collecting Your Money

In my many years of practice, I have encountered many clients who have trouble collecting debts owed to them. My first such encounter was a “simple” collection matter. I asked the client to forward his “file” and it consisted of a single invoice (Names are changed for ethical reasons):

ABC Company

1234 Main Street

City, State 11111

July 1, 20–

Mr. & Mrs. Smith

For services rendered $5000.00

Yes, this was the ENTIRE file presented by my client. No contract, no address, no required disclosures – merely the invoice shown above.

While businesses have matured and the obvious mistakes, both tangible and implied, characterized by this invoice are not longer made, this document is symbolic of errors of omission and commission present even in today’s business. Summarizing my experience in collecting debts, errors are categorized as follows: (1) Enforcement issues, and (2) Legal issues.

Enforcement Issues

Initially a company should be sure any contract entered into is enforceable. This means more than a “meeting of the minds.” It also requires that covenants contained in your agreement are enforceable.

Webster simply defines a contract as “A formal agreement between 2 or more persons.” In actuality, it is a bit more complicated. Black’s Law Dictionary is a bit more illustrative of the elements of an enforceable contract by stating a contract is “An agreement, upon sufficient consideration, to do or not to do a particular thing.” It goes on, “It is [an] agreement creating [an] obligation in which there must be competent parties, …legal consideration…, [and] mutuality of agreement…”.

Legal mumbo-jumbo, yes, but the enforcement of your agreement depends upon your ability to prove the defined elements of contract. To enforce your contract these elements must be present in any agreement.

So, what should be contained in my contract in order to enforce the agreement? Here is a short list:

1. Obtain the FULL and LEGAL NAME(S) of the other party.

2. Get the CORRECT ADDRESS. The location where you are performing your services or where you are delivering the goods may not be where the party resides or its main place of business..

3. Be sure you fully define what service or material you are providing.

4. Set forth the terms and amount of your compensation as well as when payment is due.

5. If the other party is preparing the contract make sure all terms, exhibits, and addendums are attached to the executed copy.

What additional information should I collect? Sometimes, in spite of your efforts issues arise regarding the terms of the contract. The following is a list of recommendations:

1. Retain summaries of telephone conversations you have with customers.

2. Maintain labor and material job costs.

3. If possible obtain the social security number or federal identification number of the other party.

Legal Issues

Beyond the ordinary terms of any contract are statutory and legal requirements that impact on the enforceability of any contract. Consumerism, politics and legal precedent have posed additional burdens upon any business.

Over the years, the courts have ruled upon many issues, particularly the enforceability of certain covenants of a contract. Among the covenants applicable are:

Liquidated Damage Clauses – Uniformly, most states have looked unfavorably upon these clauses. Typically, they call for the party to pay a given amount as “liquidated damages” for the party’s of certain terms of the contract. Generally, the courts have severely limited the enforceability of such clauses. The courts have ruled there must be some correlation between the stipulated damages and the actual damages incurred by the contractor. The burden is upon the creditor to prove these damages. The inability of the creditor to prove these damages renders the clause unenforceable.

Warranty Waivers – Most contracts have some limitation to the warranties given by a party. With the advent of the “Uniform Commercial Code,” which has a major impact the law relating to sales of goods, the waiver of warranties or other representations require definitive language to render them enforceable. Each state has promulgated its own rules. I strongly recommend you seek assistance of a professional to determine whether your limitation of warranties clause is statutorily correct.

Collection Clauses – Typically these clauses call for the owner to pay all costs of collection, including attorneys fees, in the event the contractor must sue to collect. The courts seldom enforce these clauses. The reasoning behind this is based upon “public policy,” i.e. that the clauses are fundamentally unfair.

The states have placed additional statutory burdens upon the creditor. Among laws having applicability are:

Consumer Protection Laws – These laws generally define what are unfair sales practices and run the gambit from “bait-and-switch” schemes to sales tactics. Among the more pertinent laws relate to home solicitation sales and estimate requirements. Both laws require statutory language be included in every contract. Home solicitation laws generally require specific language notifying the consumer of their right to cancel a contract within a specific period of time and a form containing additional language outlining their rights. Estimate laws require the contractor to notify the consumer of their right to obtain an estimate for services to be rendered. Both laws materially affect the enforceability of a contract as they provide leverage for the consumer in the event the contractor fails to comply with these statutory requirements.

I also suggest a detailed reading of the provisions of this act. This act has provisions that regulate more than “home solicitation sales.” Consumer protection laws are used to protect the personal consumer against private lenders, auto repair shops, small furniture stores, etc. The regulations enacted under the statutory law has broadened the provisions of the act enormously.

Debt Collection Laws – The Federal government has enacted the “Fair Debt Collection Act” which sets forth rules a collector must follow when collecting a debt on behalf of a client. A number of states have incorporated these rules indirectly by setting forth a violation of the act as an unconscionable act under their consumer laws.

Regulation “Z” – This Federal regulation is applicable to those regularly extending debt. The regulation defines who is a “creditor.” Those thinking such regulations only to banks or other such institutions are patently wrong. The definition includes many small businesses such as car dealers, rental companies, and even individuals allowing for payment over time.

As you can see there are a number of steps you can take to protect the collectibility of monies owed you. Additionally, there are steps you can take to prevent legal entanglements that could prevent the collection of monies owed you. A little accounts receivable management using some of the techniques and preventive measures outline above will go a long way in insuring the collection of money owed you.

Contract Drafting - What You Say, Or, More Importantly, What You Don’t Say, Can Lead to Disputes with Your Customer

You arrive at the home or office of a prospective customer, form contracts in hand, ready to redress the customer’s needs. After leaving the customer with an estimate (signed by you, but not by the customer), you begin work only to run into constant questions, changes, and consternation between you and your customer. Eventually, you are asked to leave or, worse, the customer refuses to pay. Is this an all-to-often scenario? Such an experience can be avoided by following some simple rules when drafting your estimate.

Put yourself in the place of the customer. Does your customer understand all the terms? As with any other profession, the industry has developed “terms of the trade” that may or may not be easily understood by laymen. While easily understood by members of the trade, they may have an entirely different meaning to the customer. In the event of a dispute, the definition of a term will be construed most favorably on the side of the customer. Therefore, it is vitally important you explain clearly the terms of the contract. Better yet, define your terms, in writing, in the contract. Does the customer understand exactly what you are doing? The “process” you use may be foreign to the customer. They may not understand the necessity to proceed as you recommend. They may even think the process you are using is merely an attempt to extract more money. Be sure to explain, thoroughly, the process you are using and the reason for doing so. Once again, put it in writing.

Have a “meeting of the minds.” Do all parties know and understand what they have agreed to do? Does the customer understand the structural problems the job entails? Are you being realistic regarding your ability to perform what is needed given the customer’s budget? Will the job be a permanent fix or just a temporary solution? If merely temporary, be sure the customer understands the temporary nature of the repairs and agrees.

Always be in a “collection” mode? I’ll never forget the client who gave me a file to collect. The only information in the file was the name “Mr. & Mrs. Smith” and the amount owed. Ask yourself these questions when preparing the contract:

1. What is the full and legal name of the customer?

2. Is the person signing the contract the owner of the property?

3. If not, do they have the authority to enter into a contract on behalf of the owner?

4. What is their home or office address? The address of the job may not be where the invoice should be sent.

Tell them what you will not do. Remember these two statements which should be part of any contract:

1. “There are no covenants or representations made other than those set forth in this contract.”

2. “There are no guarantee or warranties, either oral or written, for fitness for a particular purpose, or otherwise, other than those set forth in this contract.”

By using these two phrases, the customer cannot rely on any representations made outside the written contract nor imply any warranties or guarantees made other than those set forth therein. While these phrases are important restrictions and set forth limitations, they also protect you from the representations of over zealous sales persons.

Get it in writing. Oral agreements are problems waiting to happen. Customers have selective hearing. Your interpretation of what was agreed upon may be drastically different from that of the customer’s. Solution – put your agreement in writing, setting forth the information using the tips outlined above, and have the party is ultimately responsible for payment sign the agreement. Remember, an unsigned estimate is not a written contract. A written contract is defined as one signed by both parties.