Collecting Accounts Receivable Part II: Commencing Legal Action Against Delinquent Customers
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This Blog is Part II in a series of Blogs designed to provide business owners with a high-level overview of the legal process for collecting on past-due accounts receivables. Specifically, Part II focuses on commencing legal action against delinquent customers once it’s become apparent that pre-suit collection efforts are futile.
Before getting into the various legal actions against delinquent customers, the necessity of having a written contract must first be discussed. The importance of a business entering into a contractual relationship with its customers prior to conducting business, i.e., prior to providing services and delivering goods, cannot be over-emphasized. In fact, let this be rule number one for all business owners—always memorialize the terms of an agreement in written contract form, which must then be signed and dated by the customer. Put that rule on a Post-it note and stick it to your computer. Not having written contracts in place makes litigation against delinquent customers tougher than it needs to be.
Every business should have a standard contract specifically tailored to its line of work and which includes the following provisions: (1) attorneys’ fees and legal costs to be paid by the delinquent customer should the business have to commence legal action to collect; (2) a set default interest rate for past-due accounts receivables (the highest rate allowable under Florida law is 18% per annum or 1.5% per month); (3) a set interest rate for post-judgment interest (see https://www.jimersonfirm.com/blog/2013/05/contractual-post-judgment-interest/); and (4) a personal guaranty for a customer to sign in his or her individual capacity (more on this below). This list of important contractual provisions isn’t exhaustive, but if these are included in your standard contract then legal action against delinquent customers becomes much easier.
Once it has become obvious that pre-suit collection efforts have no effect on a delinquent customer, the next step is to file suit against that customer by filing a Complaint with the court. Within that Complaint, your various causes of action against the delinquent customer are laid out and presented to the court. If you have a written contract with the customer, as outlined above, then your Complaint will include the strongest and easiest-to-litigate cause of action against a delinquent customer – Breach of Contract. If there is no written contract, however, not all is lost as Florida law allows for numerous other possible claims to be made against delinquent customers. The following are other causes of action that can be made in the absence of a written contract:
Breach of Oral Contract: This claim is obviously not as strong as a Breach of Written Contract claim because the business bringing the action must first prove the existence of an oral agreement.
Open Accounts: This cause of action exists when a debt is created by a series of credit transactions. See Hawkins v. Barnes, 661 So.2d 1271, 1273 (Fla. 5th DCA 1995). For example, your business provides services and/or sells goods on credit but the customer has failed to make adequate payments on that outstanding credit line. The business must provide proof of this open account by attaching an itemized invoice, or some other acceptable form of evidence, to the Complaint. See H & H Design Builders, Inc. v. Travelers’ Indemnity Co., 639 So.2d 697 (Fla. 5th DCA 1994).
Accounts Stated: This cause of action exists when the parties have entered an agreement (oral or written) for previous transactions, the business provided the services and/or goods the customer requested, it sent the customer a bill, and the customer failed to pay yet did not object to the bill within a reasonable amount of time. See Merrill-Stevens Dry Dock Co. v. Corniche Express, 400 So.2d 1286 (Fla. 3d DCA 1981); Robert C. Malt & Co. v. Kelly Tractor Co., 518 So.2d 991 (Fla. 4th DCA 1988).
Goods Sold and Delivered: This is another cause of action that exists when the business has delivered goods to a customer and the customer failed to pay. The business may bring this action to recover the purchase price of said goods.
This list of possible causes of action against delinquent customers is not exhaustive, and there are numerous other causes of action that a business can bring depending upon the unique circumstances of each dispute. This list is meant to impress upon the business owner the importance of not only having a written contract in place with all its customers, but also the importance of maintaining complete and accurate billing and accounting records. Proof of each cause of action must be attached to the Complaint or else the Complaint can be dismissed.
It was mentioned above that it is good practice for a contract to include a “personal guaranty” section. A personal guaranty is a binding promise to answer for the debt and/or default of another, and it is considered a separate and independent contract. Nicolaysen v. Flato, 204 So.2d 547 (Fla. 4th DCA 1967). If the contract includes a personal guaranty, the business can add another cause of action to its Complaint—Action on Guaranty—and now file suit against two defendants in order to collect on the outstanding accounts receivable.
Why is the personal guaranty so important even when there is a written contract with the commercial customer? Well, what if the commercial business failed to pay its bill because it is in financial difficulties? Moreover, what if it takes a year or more to obtain a final judgment against the business? During that time, the failing business may dissolve or file for bankruptcy. If there is no personal guaranty, then any judgment against the now-defunct commercial business is not even worth the paper it is printed on because the judgment would be uncollectable. However, if there is a personal guaranty in place, then there is still hope for the business to collect on its past-due accounts receivable.
Stay tuned for Part III of this Blog series, which focuses on what to do once legal action against a delinquent customer is concluded and a final judgment is obtained. Part III discusses receiving the final judgment, certifying it, and then recording it so that the business can then pursue it against the debtor.