Planning, Information Gathering, and Assessment
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Chapter 3: Planning, Information Gathering, and Assessment
Charity A. Olson, Olson Law Group

Credit Applications
Presuit Considerations
Information Gathering
Skip Tracing
Collecting Over the Phone
Advising Clients About Small Claims Court
Miscellaneous Planning Considerations

I.   Overview

§3.1   Filing a lawsuit against a worthless defendant when there is no chance of recovery is a substantial waste of time, money, and energy. To save headaches and client disappointment, check out the defendant before instituting a suit. Besides reviewing a corporation’s annual reports and conducting a Uniform Commercial Code (UCC) search for secured creditors and tax liens, do an online search via services such as LexisNexis Accurint and TransUnion TLOxp. This is a convenient and reasonably priced way to collect a considerable amount of useful information about debtors. See exhibit 3.1 and §§3.30–3.38 for more on information gathering.

To plan for a collection suit, consider the statute of limitations, the legal composition of the debtor, what court to file suit in, what parties to sue, and potential fraudulent transfers. Take full advantage of information in credit applications. Finally, train your staff to make full and effective use of the telephone to collect debts.

II.   Contract Basics

A. Fundamental Principles and Documents

§3.2   A working knowledge of fundamental contract law principles is essential in collecting debts, and collection lawyers should be able to explain the basics to their clients. A contract generally consists of an offer, acceptance, and consideration. In business, the offer typically consists of a purchase order, and the acceptance is the shipping of the goods or the providing of services named in the purchase order. The consideration is the purchase price. Offer, acceptance, and consideration can be implied depending on the circumstances.

With some important exceptions (such as sales of real property), contracts do not have to be in writing. Although the UCC provides that all contracts over $1,000 should be in writing, UCC 2-201(1), MCL 440.2201(1), there is a notable exception to this rule. Where a seller of goods ships to a buyer and the buyer receives and retains those goods, there is an implication that a contract exists. If the buyer fails to timely return the goods, no writing is needed to imply that the buyer intended to contract for the purchase price of the goods. UCC 2-201(3)(c), MCL 440.2201(3)(c). The UCC also provides for substitutes for a writing or exceptions to the writing requirement where there is a written confirmation between merchants, UCC 2-201(2), MCL 440.2201(2); specially manufactured goods, UCC 2-201(3)(a), MCL 440.2201(3)(a); an agreement admitted in court, UCC 2-201(3)(b), MCL 440.2201(3)(b); and partially performed agreements, UCC 2-201(3)(c), MCL 440.2201(3)(c).

The UCC does not require price terms, delivery terms, or other details for the sale of goods. Past experience of the parties and other statutory default provisions will help to determine most of the terms of a contract, including a purchase price. Therefore, it is fairly easy under the UCC to establish the existence of a contract without having to prove specifically the elements of offer, acceptance, and consideration.

The contract must be entered into before the goods are delivered or services are provided. For that reason, the purchase order and the documentation before the sale, including the credit application, become the contract between the parties. The credit application is an often overlooked but important document. Credit applications often set forth extremely important terms such as interest rates to be paid should the account become delinquent, personal guaranties to be invoked if the account becomes delinquent, and the parties’ agreement concerning full settlement checks. See form 3.1 for a sample credit application.

A common misconception is that an invoice is a contract. An invoice may contain a description of the goods, shipping dates, and price terms, but it is not a contract. The invoice is prepared and mailed out after the goods are shipped and after the contract is entered into. For this reason, the terms printed on the back of invoices (most companies insist on filling up the back of their invoices with various terms in small print, including immediate inspection, immediate return of any defective goods, and a return authorization number on any defective goods) are generally not enforceable. See Power Press Sales Co v MSI Battle Creek Stamping, 238 Mich App 173, 183, 604 NW2d 772 (1999). Thus, for example, if a customer voluntarily agrees to pay interest on a delinquent account based on the terms set forth in the invoice, that is all well and good, but if the customer later decides not to pay the interest, it is likely that a court will not enforce the interest terms if they are only in the invoice.

The courts will generally enforce contracts that are within the parties’ expectations. If there is a one-sided (unilateral) mistake, the contract is enforceable. However, if there is a mutual mistake, the court will generally not enforce it. For example, if both parties thought that the steel was Grade A worth $57.00 per pound and it turned out, by mistake of both parties, that the steel was Grade B, then the court will not enforce the contract.

Sometimes contracts are purely unilateral. In other words, acceptance of the contract occurs through performance. For example, if someone offers to pay $500 if the contracting party drives a car to California, acceptance occurs when the car is driven to California.

Consideration is difficult to measure, and courts often will not bother to measure it at all. If any legal consideration exists, the contract will most likely be enforced. Thus, if the buyer overpays for a product, a court will not question the overpayment unless there was actual fraud or a mutual mistake.

For more on contract law, see Michigan Contract Law (John R. Trentacosta ed, ICLE 2d ed).

B. Ratification

§3.3   Ratification is an overlooked principle in the enforcement of contracts. Sometimes the parties have dealings with each other, but no valid contract exists. This might occur when one of the parties was represented by an agent who had no authority to act on the principal’s behalf (see §3.17). If a seller ships to a buyer who did not authorize the shipment, the buyer is still obligated to pay for the goods if the goods are received and accepted. The acceptance of goods under the UCC creates an absolute obligation to pay for them. UCC 2-607, MCL 440.2607. This is the concept of ratification.

For an example of how this might occur, consider a printing company that receives an order for 5,000 sheets of letterhead. It is more efficient for the printer to run 10,000 sheets at a time. Therefore, the printer prepares an order of 10,000 sheets and ships the entire 10,000 to the buyer. If the buyer receives the 10,000 sheets at the delivery dock, signs for them, and then fails to timely reject them, the buyer is now obligated to pay for 10,000 sheets of letterhead even though 5,000 was the original order quantity. Thus, ratification can create a contract (or different terms) where none originally existed.


1 ICLE thanks Jeff Kirkpatrick, of Court Services Agency, for contributing exhibit 3.1, Investigative Tools for Executions.

Forms and Exhibits

Form 3.01 Credit Application
Form 3.02 Letter Regarding Check Returned for Nonsufficient Funds (Prima Facie Evidence of Fraud)
Form 3.03 Letter Regarding Check Returned for Nonsufficient Funds (Triple Payment)
Form 3.04 Information or Copy Request (UCC 11)
Form 3.05 Michigan Department of State Record Lookup Request (BDVR-154)
Form 3.06 Promissory Note (Basic)
Form 3.07 Confession of Judgment
Form 3.08 Resolution of the Board of Directors
Exhibit 3.01 Investigative Tools for Executions
Exhibit 3.02 Collecting Your Money from a Small Claims Judgment