Reducing Unauthorized Deductions

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Information on how to use persuasion, intimidation, and legal talk to reduce unauthorized deductions.

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Reducing Unauthorized Deductions

  1. 1. CMKF Creim Macias Koenig & Frey LLP <ul><li>REDUCING UNAUTHORIZED DEDUCTIONS </li></ul><ul><li>*************************************** </li></ul><ul><li>A MEASURE OF PERSUASION, A BIT OF INTIMIDATION AND A PORTION OF LEGAL MUMBO-JUMBO </li></ul><ul><li>*************************************** </li></ul><ul><li>CMA Webinar </li></ul><ul><li>April 2009 </li></ul>
  2. 2. CMKF Creim Macias Koenig & Frey LLP <ul><ul><ul><ul><ul><li>Richard Macias is a partner with the law firm of Creim Macias Koenig & Frey LLP. The firm specializes in creditors’ rights. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Mr. Macias represents trade suppliers, manufacturers and financial institutions in litigation involving contract enforcement actions, bankruptcy, business transactions, bad faith claims, collections, antitrust and dealer terminations. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Mr. Macias graduated from Pomona College in Claremont, California and received his law degree from Harvard Law School . </li></ul></ul></ul></ul></ul><ul><li>Prior to entering private practice, he served for three years as a criminal prosecutor in the office of the Los Angeles City Attorney and later was appointed to be Special Counsel to the City Attorney. He also was an Associate Professor of Law at Loyola Law School in Los Angeles, where he taught courses in litigation procedure, trial practice and negotiation skills. </li></ul><ul><li>He has written numerous articles on topics of interest to secured and unsecured creditors. He also has served on the Executive Committee of the Intellectual Property, Internet and New Technology Section of the Beverly Hills Bar Association. </li></ul>
  3. 3. CMKF Creim Macias Koenig & Frey LLP <ul><li>I. </li></ul><ul><li>IDENTIFYING THE SOURCE OF THE PROBLEM </li></ul><ul><li>A. Unauthorized deductions arise from two basic problems: </li></ul>
  4. 4. CMKF Creim Macias Koenig & Frey LLP <ul><li>1. Customers who unilaterally act to get a lower price for the goods they purchase. </li></ul><ul><ul><li>They know your management and/or sales people won't allow you to &quot;put your foot down&quot; on their account. </li></ul></ul>
  5. 5. CMKF Creim Macias Koenig & Frey LLP <ul><li>If this is your situation, take two Lunesta and go to bed. Or, after this seminar go chat up the hottie in a bar who can take your mind off work. Otherwise, neither a bartender, a psychiatrist or your lawyer can do much for you. Your lawyer might make you feel even worse by pointing out that your company may be violating the Robinson-Patman Act and other antitrust laws by letting some of your customer get away with paying lower prices. </li></ul>
  6. 6. CMKF Creim Macias Koenig & Frey LLP <ul><li>The other source may be actual business disputes or misunderstandings concerning: </li></ul><ul><li>1. Delivery issues </li></ul><ul><li>2. Purchase and sale terms </li></ul><ul><li>3. Defective or non-conforming product </li></ul><ul><li>4. Product returns </li></ul><ul><li>5. Accounting issues </li></ul><ul><li>6. Advertising, volume bonuses or other special credits </li></ul>
  7. 7. CMKF Creim Macias Koenig & Frey LLP <ul><li>In most cases the resolution of THESE conflicts will depend on how your &quot;contract&quot; with the customer handles the issues . </li></ul><ul><ul><ul><ul><ul><li>Your choice to engage your customer with some combination of negotiation or INTIMIDATION depends in large measure on the degree to which you have included legal boiler plate in your sales and credit documents that will work to your advantage. </li></ul></ul></ul></ul></ul><ul><li>Therefore, you must ascertain the details of the terms and conditions you use with your customers. </li></ul>
  8. 8. CMKF Creim Macias Koenig & Frey LLP <ul><li>B. What are the terms of your contract with your customer? </li></ul>
  9. 9. CMKF Creim Macias Koenig & Frey LLP <ul><li>The four basic situations usually are: </li></ul><ul><li>No documents other than an invoice </li></ul><ul><li>Documents favoring the seller's position </li></ul><ul><li>Documents favoring the buyer’s position </li></ul><ul><li>Conflicting documents </li></ul>
  10. 10. CMKF Creim Macias Koenig & Frey LLP <ul><li>APPLICABLE LAW WHERE THERE IS NO “CONTRACT” DOCUMENTION OF THE TERMS OF THE DEAL. </li></ul><ul><li>Unless your documents or contracts limit the buyer's rights to deductions and charge backs, the buyer may be legally entitled to take deductions or charge backs under state common law dealing with setoffs and counterclaims, or based on custom in the industry or prior dealings between parties. </li></ul><ul><li>Under Section 2717 of the Uniform Commercial Code (&quot;UCC&quot;), the buyer may deduct all or any part of the damages resulting from any breach of the contract from the price under the same contract if the buyer has notified the seller of its intent to deduct. </li></ul>
  11. 11. CMKF Creim Macias Koenig & Frey LLP <ul><li>T.S. </li></ul>
  12. 12. CMKF Creim Macias Koenig & Frey LLP <ul><li>D. APPLICABLE LAW WHEN THERE ARE WRITTEN TERMS </li></ul><ul><li>DO YOU SEE WHAT I U.C.C.? </li></ul>
  13. 13. CMKF Creim Macias Koenig & Frey LLP <ul><li>Documents Favoring the Seller's or Buyer’s Position </li></ul><ul><li>A seller who wishes to establish its legal rights should attempt to have the other party sign an agreement or document (e.g. credit application, dealer agreement or other contract) limiting the buyers rights. </li></ul><ul><li>For example, a seller should include language to limit the buyer's rights to take chargebacks and deductions. Absent a document signed by the buyer, the seller's documents (e.g. policy manuals, as referenced in the signed document, invoices, confirmations, etc.) should expressly limit the buyer's ability to take chargebacks and deductions. </li></ul><ul><li>Section 2719 of the UCC allows a buyer and seller to contractually modify or limit their remedies. Additionally, Section 2719 permits a buyer and seller to limit or alter the measure of damages recoverable under Article 2 (e.g., limiting the buyer's remedies to return of the goods or to repair and replace non-conforming goods). </li></ul>
  14. 14. CMKF Creim Macias Koenig & Frey LLP <ul><li>TRANSLATION: </li></ul><ul><li>IF YOU HAVE WRITTEN TERMS AND CONDITIONS AND THEY DON’T, YOUR DOCUMENTS ARE LIKELY TO CONTROL. </li></ul><ul><li>CONVERSLY, IF THEY HAVE THE BOILERPLATE FAVORABLE TO THEM IN THEIR DOCUMENTS, AND YOU HAVE NONE, THEIR DOCUMENTS PROBABLY WILL CONTROL. </li></ul>
  15. 15. CMKF Creim Macias Koenig & Frey LLP <ul><li>Example of Contract Language Limiting Claims for Credits or Deductions . </li></ul><ul><li>Any and all claims by the Buyer for credits, deductions or adjustments of any kind (including Post Audit claims or deductions) (&quot;Claims&quot;) must be submitted in writing to Seller within 6 months of the date of the invoice for which any such Claim is made. At the time the Claim is made by Buyer, Buyer will provide Seller with any and all documentation supporting such Claims and as necessary for Seller to determine whether such Claim shall be accepted by Seller (“Documentation”), including without limitation: [Describe various types of adjustments and necessary supporting documentation, e.g. Defects, Warranty, Late Delivery, Bar Code Placements, etc.] </li></ul><ul><li>Claims shall be submitted to Seller at: [Address for Claims] </li></ul><ul><li>Claims taken or submitted after the 6 month limitation or without the Documentation required in Paragraph 1 above, will be denied and will be charged back to the Buyer by Seller without investigation. </li></ul><ul><li>Failure of Buyer to remit payment of any charged back Claim or to provide notice of reversal of any denied or rejected Claim, including Claims taken for Post Audit, will result in Seller’s refusal to release shipment of new goods. </li></ul>
  16. 16. CMKF Creim Macias Koenig & Frey LLP <ul><li>2. Conflicting Documents </li></ul><ul><li>In most circumstances, the limitations on a buyer's right to take deductions or chargebacks will be through terms in the seller's documents (invoice, order confirmations, CREDIT APPLICATION) which are contrary to, or supplemental to, terms in the buyer's documents (usually the purchase order). </li></ul><ul><li>Article 2 of the UCC establishes the basic standards for determining what the terms of the contract are when the buyer's and seller's documents differ. </li></ul><ul><li>Section 2207 deals with terms which are in one party's documents (e.g. the seller's confirmation of a purchase order) but are not in the other party's documents. </li></ul>
  17. 17. CMKF Creim Macias Koenig & Frey LLP <ul><li>§ 2207. Additional Terms in Acceptance or Confirmation </li></ul><ul><li>(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. </li></ul><ul><li>(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: </li></ul><ul><li>(a) the offer expressly limits acceptance to the terms of the offer; </li></ul><ul><li>(b) they materially alter it; or </li></ul><ul><li>(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received. </li></ul><ul><li>(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this code. </li></ul>
  18. 18. CMKF Creim Macias Koenig & Frey LLP <ul><li>Section 2207 allows one party to limit the form of an acceptance of an offer to make a contract and to specifically limit the other party's rights to impose additional terms in purchase orders, confirmations, etc. </li></ul><ul><li>When both the seller's documents and the buyer's documents attempt to impose additional terms or limitations a &quot;battle of the forms&quot; results </li></ul><ul><li>When the terms conflict, courts are forced to examine the specific facts of each case to determine which terms should be applied and made a part of the contract. </li></ul>
  19. 19. CMKF Creim Macias Koenig & Frey LLP <ul><li>TRANSLATION: </li></ul><ul><li>IF YOU BOTH HAVE WRITTEN TERMS AND CONDITIONS, THE COURT WILL READ BOTH INTO THE “CONTRACT” EXCEPT FOR THOSE TERMS THAT CONFLICT WITH EACH OTHER. </li></ul><ul><li>IF YOUR TERMS AND CONDITIONS CONFLICT, THE “FIRST TO SPEAK” WILL CONTROL UNLESS THE SUBSEQUENT DOCUMENTS STATE AN OBJECTION TO AND REJECTION OF THE INCONSISTANT TERMS. </li></ul>
  20. 20. CMKF Creim Macias Koenig & Frey LLP <ul><li>II. PRACTICAL TIPS FOR DEALING WITH CUSTOMERS' UNAUTHORIZED DEDUCTIONS                     </li></ul>
  21. 21. CMKF Creim Macias Koenig & Frey LLP <ul><li>New Customers </li></ul><ul><li>Whenever possible (SOMETHING THAT IS CONTROLLED BY THE COMMON PRACTICES OF YOUR INDUSTRY AND YOU COMPANY’S POSTION IN THE MARKET) you should have a new customer sign documents (e.g. dealer agreement, credit application, etc.) which contain provisions favorable to your company's position on unauthorized deductions as discussed above. </li></ul><ul><li>If you are unable to get a new customer to sign such a document, you should nevertheless give the new customer a written policy statement that includes your policies on deductions and keep a written record of the date the customer received the policy statement (e.g. these provisions can be incorporated by reference in your terms of sale). </li></ul><ul><li>Thereafter, you need to respond quickly to any unauthorized deductions taken by your customer to prevent your customer from establishing a course of dealing that condones unauthorized deductions. </li></ul>
  22. 22. CMKF Creim Macias Koenig & Frey LLP <ul><li>B. Existing Customers </li></ul><ul><li>Try to resolve any outstanding unauthorized deductions taken by your customers now . The longer you wait the harder it will be. </li></ul><ul><ul><ul><li>As each day goes by, you lose leverage. </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Loss of Records, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Loss of Witnesses </li></ul></ul></ul></ul></ul><ul><li>If your company has tolerated unauthorized deductions, you need to MAKE SURE your management understands the potential risks. Your course of dealing with the account may eventually constitute a waiver by your company of the disputed amounts. </li></ul>
  23. 23. CMKF Creim Macias Koenig & Frey LLP <ul><li>Arbitration or Mediation??? </li></ul><ul><li>Many creditors are reluctant to file a lawsuit against a major customer that buys in quantity, pays invoices on time, but takes unauthorized deductions. The credit manager is often faced with the contradictory instructions from management to: “Collect the unauthorized deductions, but don’t upset the customer.” </li></ul><ul><li>One approach to this problem is to include an arbitration or mediation clause in your documents that applies only to deductions, credits, etc. This allows the creditor to move the problem to a dispute resolution forum short of a full blown lawsuit. </li></ul>
  24. 24. CMKF Creim Macias Koenig & Frey LLP <ul><li>WITH UNAUTHORIZED DUDUCTIONS, ONCE YOU GET DEEP INTO THE MAZE, THERE IS NO EASY SOLUTION OR QUICK WAY OUT. </li></ul>
  25. 25. CMKF Creim Macias Koenig & Frey LLP <ul><li>Post Script </li></ul><ul><li>The Rite Aid Saga </li></ul><ul><li>MAYBE CREDIT MANAGERS HAVE A GUARDIAN ANGEL? </li></ul>
  26. 26. CMKF Creim Macias Koenig & Frey LLP <ul><li>Customers in Chapter 11 Bankruptcy </li></ul><ul><li>A customer who files a chapter 11 bankruptcy WILL encounter difficulty in obtaining new inventory from suppliers. </li></ul><ul><li>A supplier can often use this to advantage by insisting that any &quot;accounting&quot; or other unauthorized deduction issues be resolved before any new inventory is sold. </li></ul><ul><li>In most cases, the debtor will be less concerned with the deductions because they involve pre-petition debt and only impact the size of the creditors' claim in bankruptcy. </li></ul>
  27. 27. CMKF Creim Macias Koenig & Frey LLP <ul><li>RICHARD C. MACIAS </li></ul><ul><li>Creim Macias Koenig & Frey LLP </li></ul><ul><ul><li>633 West Fifth Street, 51st Floor </li></ul></ul><ul><ul><li>Los Angeles, California 90071 </li></ul></ul><ul><ul><li>Tel: 213-614-1944 </li></ul></ul><ul><ul><li>Email: [email_address] </li></ul></ul><ul><ul><li>Web: www.cmkllp.com </li></ul></ul><ul><ul><li>© Richard C. Macias/CMKF 2009 </li></ul></ul>

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