HOW FACTORING FAIRED IN COURTS

HOW FACTORING FAIRED IN COURTS International Factoring Association 13th Annual Conference Sheraton New Orleans New Orleans, LA April 27, 2007 Robert A. Zadek Of Counsel

Anglo-Dutch Petroleum International, Inc., et al v. John Haskell, et al Court of Appeals of Texas, First District, Houston 193 S.W. 3d 87; 2006 Tex. App. LEXIS 1779 Facts Anglo Dutch needed money to fund a major lawsuit against Halliburton, and raised funds by selling investments in the suit, with the return based on a percentage of recovery. When it won it sought to have the investments set aside as void as against public policy and usurious. Court found for the investors. Significant Holdings and Legal Goodies 1. Contingency factor in usury analysis - A factor that courts consider when determining usury is whether repayment was based on a contingency. Catalina, 881 S.W.2d at 297. This factor is important because it helps a court in determining whether a transaction was a loan or a business investment. Id.; If the agreements did not constitute a loan, if the agreements did not create an absolute obligation to repay, or if the agreements did not charge usurious interest, If Anglo-Dutch recovered nothing or an insufficient amount of damages, then according to the plain terms of the agreements, Anglo-Dutch had no obligation to reimburse appellees for the principal amounts invested, much less pay appellees any return on their investments. Thus, as a matter of law, the agreements cannot be usurious. 2. Van Dyke s testimony that he explained to appellees that there was no risk and that he was confident that Anglo-Dutch would collect enough money to repay appellees because Anglo- Dutch s interest in the oil and gas field lost as a result of Halliburton s and Ramco s actions was valued in the hundreds of millions of dollars, is also insufficient to create a fact issue concerning Anglo- Dutch s usury defense. These statements merely constituted Van Dyke s personal expectations on the success of the Halliburton lawsuit, and the fact that he communicated his personal expectations to appellees is of no consequence; Van Dyke s confidence in the outcome of the lawsuit did not dissolve the very real contingency that existed in the agreements themselves. Similarly, Van Dyke s testimony that appellees communicated to him that they did not consider their investments to be speculative, that some appellees stated that they believed that success in the Halliburton lawsuit was certain, that one appellee told Van Dyke that he could not afford to lose his money, and that multiple appellees stated that there must be no risk whatsoever because of Anglo-Dutch s trial counsel also constitute nothing more than appellees personal expectations on the success of the Halliburton lawsuit. As such, it does not erase the contingency in the agreements. Significantly, despite Van Dyke s testimony concerning his and appellees confidence in the outcome of the lawsuit, the very real contingency contained in the agreements is illustrated by the fact that the amount of the judgment that Anglo- Dutch ultimately received in the Halliburton lawsuit was significantly lower than what it had anticipated and, importantly, what it had represented to appellees that it would receive at the end of the case. Anglo-Dutch argues that an illusory contingency will not remove a transaction from the scope of the usury laws-at least not as a matter of law. Anglo-Dutch cites the following illustration offered by the Restatement (First) of Contracts:

Important Issues and Lessons 1) Usury is sometimes raised in factoring transactions. 2) If it is raised in non-recourse transactions, one of the defenses offered by a factor is the contingency nature of the purchase (i.e. the factor may not be paid back) making this not a loan. 3) The contingency must be real, and cannot be illusory. Litigation Funding Issues 1) In Echeverria, the New York Superior Court held that a litigation funding agreement that provided for a lender s right of recovery only in the event the plaintiff received a judgment in his favor charged usurious interest. However, the court noted that because the underlying case was a strict liability labor law case there was a very low probability that judgment would not be in favor of the plaintiff and, in fact, later characterized the probable success of the lawsuit a sure thing.

Wells Fargo Century Inc. v. Peter Brown, et al 2007 US Dist LEXIS 12766 Facts 1) On March 13, 2003, Wells Fargo entered into Factoring Agreement with RBS Holdings, Inc. ( RBS ). On the Same day, guarantors signed an Unlimited Personal Guaranty (the Guaranty, The guaranty provided THE UNDERSIGNED EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK, IN THE COUNTY OF NEW YORK, WITH RESPECT TO ANY CLAIM OR DEMAND UPON THE UNDERSIGNED BASED UPON THIS INSTRUMENT OF GUARANTY OR ANY AMENDMENT OR SUPPLEMENT THERETO 2) The guarantor attacked the forum selection clause. Significant Holdings and Legal Goodies 1) There exists a strong presumption favoring enforcement of freely negotiated choice of forum provisions. A party seeking to prevent the enforcement of a forum selection clause bear[s] the heavy burden of making a strong showing in order to overcome the presumption of validity. Such clauses should be enforced unless it is clearly shown that enforcement would be unreasonable and unjust or that the clause was obtained through fraud or overreaching. 2) The unreasonable exception is interpreted narrowly. It renders forum selection clause unenforceable in the following circumstances: (1) if its incorporation into the agreement was the result of fraud or overreaching; (2) if the complaining party will for all practical purposes be deprived of his day in court due to the grave inconvenience or unfairness of the selected forum; (3) if the fundamental unfairness of the chosen law may deprive the plaintiff of a remedy; or (4) if the clauses contravene a strong public policy of the forum state. 3) Identification of the jurisdiction more narrowly drawn to refer to a specific court pursuant to a restrictive contractual agreement dictates where the matter may be settled. Important Issues and Lessons 1. Although factors rarely find it necessary to sue guarantors, sometimes they do. 2. It is often important to be able to sue in the jurisdiction of your choice. 3. A forum selection clause is one where both sides agree on the forum (i.e. the place where litigation will take place). 4. A specific court should be named as the forum to be used.

Facts GREENFIELD COMMERCIAL CREDIT, L.L.C. VERSUS CATLETTSBURG REFINING, L.L.C., ET AL. CIVIL ACTION NO. 03-3391 SECTION K (2) UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF LOUISIANA 2007 U.S. Dist. LEXIS 1936 January 9, 2007, Decided 1) On May 15, 2003, Pipeworks entered into a factoring agreement with Greenfield Commercial Credit, L.L.C. ( Greenfield ) by which Pipeworks Inc. assigned its accounts receivable to Greenfield. 2) The notification sent by the factor identified the assignor as Pipeworks Reserve, Inc., not Pipeworks, Inc. 3) The client asked that the account debtor paid it directly (i.e. not pay the factor) and the account debtor complied. 4) The factor sued the account debtor for payment after notification. 5) Catlettsburg and Jacobs sole challenge to the validity of the assignment is that Greenfield s notice of assignment failed to reasonable identify the rights assigned by identifying the assignor as Pipeworks Reserve, Inc., with which defendants had no contractual relationship, rather than Pipeworks, Inc. and by failing to identify the invoices assigned to Greenfield. 6) Catlettsburg and Jacobs contend that the notice was deficient because it failed to indicate what project account (Catlettsburg or Valero) the notice applied to, and if it applied to a Catlettsburg project, which of several Catlettsburg projects was involved. Significant Holdings and Legal Goodies 1) The assignee bears the burden of proving that the account debtor received proper notice of the assignment. 2) A notice of assignment must reasonable identify the rights assigned. If an account debtor had doubt as to the adequacy of a notification, it may not be safe in disregarding the notification unless it notifies the assignee with reasonable promptness as to the respects in which the account debtor considers the notification defective.

3) Uniform Commercial Code Comment 3, Comment 3 makes it clear that when an account debtor, such as Jacobs, doubts the adequacy of the notice of assignment, the onus is on it to contact the assignee not the assignor concerning the alleged insufficiency of the notice. Additionally, Greenfield s notice letter specifically invited Jacobs to contact it [i]f you have any questions concerning this account 4) The notice provided by Greenfield states that the assignment applies to our accounts. Important Issues and Lessons 1) Although the notice of assignment must be carefully drawn, the UCC is quite protective of factors, and states that the account debtor has a duty of inquiry if it is not sure what the notice is all about. 2) Be sure that the notice states that the factor is the assignee of all present and future accounts. 3) Note, under the UCC, if the account debtor asks for proof of assignment, the factor must promptly provide it or else lose the benefits of the notification.

DESSERT BEAUTY, INC., Plaintiff, - against PLATINUM FUNDING CORP., Defendant. PLATINUM FUNDING CORP., Third Party Plaintiff, - against NEIL SHINDER; RANDI SHINDER, and DESSERT BEAUTY HOLDINGS, INC., Third Party Defendants. Facts 06 Civ. 2279 (SAS) UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK 2006 U.S. Dist. LEXIS 93023 December 26, 2006, Decided December 26, 2006, Filed 1) Dessert Beauty, Inc. a Barbados corporation, is a manufacturer of cosmetics. Platinum Funding Corp. ( Platinum ), is a New Jersey financing company. 2) Platinum has a very complex minimum monthly fee clause, which is cleverly drawn and quite onerous. 3) When the client discovered how expensive the minimum fee clause was, they tried to get out of the contract, claiming that they were induced into signing the contract based on misrepresentations. 4) Platinum sought to dismiss the complaint. 5) Specifically, DBI claims that at the time the parties entered into the agreement, Platinum knew that the representation contained in paragraph 9... was false because, as a practical matter, Platinum knows what it does and does not require of its customers and that in fact the Fee and Reimbursement Schedule that was made part of the Factoring Agreement is the same fee schedule Platinum incorporates into all of its contacts. 6) The clause: Seller expressly acknowledges that Platinum has agreed thereto in reliance upon Seller s agreement during each Term Semi-Annual to deliver at least the Semi-Annual to deliver at least the Semi-Annual Base Sales Amount and that Platinum requires an increased fee in the event that [*10] a lesser volume of approved Accounts Receivable is agreed upon in any Term Semi-Annual. Consequently, if the aggregate amount of approved Accounts Receivable delivered by the Seller to Platinum during any Term Semi-Annual, whether by reason of Seller s premature termination, reduced level of salves, or otherwise, shall

be less than the Semi-Annual Base Sales Amount, then Seller shall pay to Platinum an adjustment fee on account of such Term Semi-Annual. The adjustment fee is arrived at by dividing the amount of fees earned by Platinum on the accounts receivable sold by DBI in the Term Semi-Annual, by the aggregate amount of accounts receivable delivered by DBI during the term. This quotient is multiplied by the Semi-Annual Base Sales Amount, and the amount of fees earned by Platinum on the accounts receivable purchased is subtracted from that total. Thus, the adjustment fee is roughly equivalent to a weighted average discount rate for the term, applied to the Semi-Annual Base Sales Amount, less the aggregate fees already collected during that term by Platinum. Significant Holdings and Legal Goodies 1) Under New Jersey law, there are five elements to a claim of fraudulent inducement: (1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon; and (5) resulting damages. Fraud in the inducement occurs when the victim[ s] consent to [a] bargain is obtained by lies or half-truths. n81 It is a misrepresentation as to the terms, [*22] quality or other aspects of a contractual relation... that leads a person to agree to enter into the transaction with a false impression or understanding of the risks, duties or obligations she has undertaken. 2) Only matters of act can be misrepresented. Furthermore, statements as to future or contingent events, to expectations or to probabilities, or as to what will or will not be done in the future, do not constitute misrepresentations, even though they may turn out to be wrong. 3) Client asserted enough to survive motion to dismiss. 4) The client s request for a jury trial was made too late. Important Issues and Lessons 1) Monthly minimums and early termination clauses are quite contentious. 2) This was only a motion to dismiss, so it is impossible to determine how this will turn out.

Facts SBN-DVI, LLC vs. WALTER F. CROWDER, ET AL. CIVIL ACTION NO. G-02-114 UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS, GALVESTON DIVISION 2006 U.S. Dist. LEXIS 79693 November 1, 2006, Decided November 1, 2006, Filed 1) Crowder was mistreated by DVI, which did all sorts of bad things and violated Medicare rules. 2) DVI went into a bankruptcy proceeding, and sold assets to SBN free and clear of claims. 3) SBN asserted claims against Crowder Significant Holdings and Legal Goodies 1) This case presents a sad example of a legally directed result which appears, under any notion of fair play, to be simply unjust. For almost four years the lecherous predecessors of Plaintiff s interests sucked increasingly larger amounts of unearned monies from the Defendants Medicare receivables pursuant to contracts establishing what has not been shown to be illegal and unenforceable factoring arrangements. Important Issues and Lessons This case is presented just to show how angry a court could get at a factor.

Facts Re: Securities and Exchange Commission v. U.S. Funding Corp., et al. Civ. No. 02-2089 (WJM) UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY 2006 U.S. Dist. LEXIS 24789 April 11, 2006, Decided 1) Gwinnett, a New Jersey resident, was the president, founder and sole owner of defendants U.S. Funding Company and U.S. Funding Corporation (collectively, Gwinnett formed U.S. Funding Company in New Jersey in October 2001. (Id. at P3). She formed U.S. Funding Corporation, a New Jersey based corporation in December 2001. (Id. at P4). 2) Gwinnett s capital contribution of $39,526.00 constituted most of U.S. Funding s startup capital. 3) When Gwinnett started U.S. Funding, she had no prior experience in the factoring business other than performing bookkeeping for two companies that used factoring services and personally funding a one-time factoring transaction for a friend. 4) She hired a telemarketer to help her raise funds from investors. 5) The Investment Materials misrepresented and committed many key facts about U.S. Funding. For instance, the Investment Materials misrepresented: (1) that as of September 30, 2001, U.S. Funding had over $2.2 million in assets; (2) that U.S. Funding serviced thirteen industries, such as food, telemarketing, and transportation, even though it had not engaged in any such business prior to this date; (3) that U.S. Funding was a privately-funded business that had operated since 1998; (4) that U.S. Funding owned a substantial portfolio of accounts receivable; [*7] (5) that investments in U.S. Funding would be used solely to acquire new accounts receivable; and (6) that U.S. Funding would secure UCC-1 filings to protect the interests of investors. 6) The SEC contents that Gwinnett, individually and as the principal of U.S. Funding, [*21] received at least $636,222.52 in profits through violating the securities laws. According to the SEC, this amount consists of; (1) $435,526.00 in net salary and distributions, $25,000.00 from investors deposited directly into her personal bank account, $26,421.00 in cash withdrawals for Gwinnett s benefit from U.S. Funding s account by her personal assistant, and $50,417.00 in payments by U.S. Funding for Gwinnett s gambling bills and her purchases at various department stores, minus her initial capital contributions by her of $39,526.00; plus (2) payment by U.S. Funding of $138,374.52 in total salaries for the benefit of Gwinnett and related persons.

Important Issues and Lessons 1) This case shows you what you are up against from a public relations standpoint as factors.

ORIX FINANCIAL SERVICES, INC., Plaintiff v. INTERSTATE CAPITAL CORP., Defendant Case No. 3:05-0538 UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE, NASHVILLE DIVISION 2006 U.S. Dist. LEXIS 5685 January 27, 2006, Filed Facts 1) Rich Transport Inc., a Waynesboro, Tennessee trucking company, became indebted to Orix pursuant to leases and notes made and entered into between Orix and Rich Transport relating to the lease of tractors and trailers. To secure the indebtedness, Rich Transport granted to Orix security interests in Rich Transport s accounts receivable. 2) After Orix had perfected its security interests in Rich Transport s accounts receivable, Rich Transport entered into a factoring agreement with Interstate Capital Corp. 3) Interstate collected accounts. 4) Orix contends that the agreement between Rich Transport and Interstate is junior to the interest it has in Rich Transport s accounts receivable and consequently sues Interstate in this Court for conversion. 5) The statute of limitations had run in Tennessee and Oriz asked for a voluntary dismissal so it could sue in New Mexico which had a longer statute. Important Issues and Lessons This case was included to remind factors that equipment lessors often take a blanket lien to secure rental obligations or installment sales contracts on equipment. Care must be taken in doing a search and reading the fine print of attached leases.

DONALD M. LAUGHLIN Debtor(s). RMJ LEASING INC., Plaintiff(s) vs. DONALD M. LAUGHLIN, Defendant(s) Bankruptcy No. 05-05417, Chapter 7, Adversary No. 05-30186 Facts 1) RMJ Leasing is an invoice factoring company. 2) Debtor operated a business known as ATA, Inc. ( ATA ). Debtor was the President of ATA. ATA employed drivers to haul automobiles by truck from a point of origin, [*3] such as a manufacturing plant, to their final destination, such as a sales lot. Debtor s business was growing and many of his clients were slow in paying their invoices. Thus he sought an agreement with RMJ Leasing to factor the invoices so he would have sufficient cash to cover payroll, gas, and the other costs of operating his business. 3) RMJ Leasing would receive an initial invoice for a specific amount due. It would pay ATA the discounted rate on that invoice. Subsequently, an amended invoice would be received for the same transaction which was reduced by various amounts. 4) Other times, after having purchased invoices and submitting them for payment, RMJ Leasing was informed that ATA owed more money to the payor than the invoice reflected. In other words, the company owing money on the invoice would use the amount of the invoice to setoff an indebtedness already owed to them by ATA. Additionally, several of the invoices were reduced upon presentation because the contracted number of automobiles were not actually hauled. 5) During Miller s (the owner of RJM)vacation week, Mr. Miller wires money to the various clients based upon this communication. However, he does not physically see the invoices until he gets back from vacation. 6) The revised invoices, which were at Mr. Miller s business when he returned from vacation, were all less than the amount discussed on the telephone while Mr. Miller was on vacation. 7) RMJ Leasing is not seeking denial of discharge on all of the deficiency but only on the 33 invoices which the company asserts are the product of fraud. 8) Mr. Miller testified that the company bases its fraud allegations on the fact that initial invoices should have been accurate and collectable when received. None of these invoices was final. All were inaccurate or subject to later modification in some respect. Mr. Miller testified that every invoice was submitted with a dollar figure which was subsequently modified downward. He felt that it was suspicious that not one of these invoices ever generated more money than the face value of the initial invoice. 9) Debtor explained that initially, Mr. Miller only agreed to factor invoices for completed jobs. This arrangement is reflected in the factoring contract between the parties.

However Debtor stated that over time, this arrangement became unfeasible due to his cash flow problems. Debtor testified that he discussed his problem with Mr. Miller. He stated that Mr. Miller agreed to begin factoring invoices ahead of time, but only if the invoiced load was actually on the truck, ready to be hauled. Debtor added that over time, with Mr. Miller s knowledge, he would prepare and submit invoices for contracted jobs that were a day or more away from being completed. Debtor used the term prefactoring for this business arrangement. Mr. Miller stated that while he has never heard the term prefactoring, it was the parties eventual understanding that invoices were submitted for work to be completed within a reasonable length of time. 10) Debtor testified that the fact that certain misstated invoices came in during RMJ s vacation period was merely coincidental. 11) In order to comply with RMJ s method of factoring, Debtor divided the total contract price into fixed invoice amounts. In actuality, sometimes the manufacturer would state that it had a load ready for delivery and have fewer cars ready for transport than Debtor s invoice had indicated. Manufacturers would often demand that the load leave immediately and, therefore, the revised invoice would reflect a lesser amount. Significant Holdings and Legal Goodies 1) Discharge opposed based on Bankruptcy Code 523(a)(2) (fraud or false pretenses). Through its denial of discharge claim, RMJ Leasing essentially asks the Court to disregard the corporate form and find that the debt is owed by Mr. Laughlin, the individual debtor in this case, rather than ATA. 2) As the primary goal of the Bankruptcy Code is to provide honest debtors with a fresh start, exceptions to discharge are generally construed narrowly against the creditor and liberally for the debtor. These considerations, however, are applicable only to honest debtors. 3) The Court finds RMJ Leasing has established by a preponderance of the evidence that the invoices purport to represent the existence of debt owed to ATA by its customers. 4) Additionally, the Court finds that the representations made by the Debtor were not true. 5) Debtor provided purchase summaries to RMJ Leasing that asserted that ATA agrees these invoices are true and correct as defined in the Factoring Contract with RMJ Leasing, Inc. 6) The factoring contract required each invoice to be unconditionally owed and... due without defenses, disputes, offsets, counterclaims or rights of return or cancellation. 7) Debtor s own testimony establishes that at the time he submitted the invoices, he knew they were untrue for various reasons,

8) The Court finds that Debtor knew his representations were false when made. 9) RMJ Leasing has failed to establish that Debtor presented inaccurate invoices with an intent to deceive the company. 10) While Debtor s representations were clearly inaccurate, testimony presented by the parties establishes that Debtor and his employee Delores Johnson took measures to ensure that RMJ Leasing was aware of the prefactoring practice. Significantly, Johnson testified that she was in contact almost daily with Mr. Miller. 11) Mr. Miller substantiated the testimony of Debtor and Johnson, stating that he knew invoices were submitted for uncompleted work that was to be finished within a reasonable length of time. 12) It has failed to establish justifiable reliance on Debtor s misrepresentations. 13) The evidence is overwhelming that RMJ Leasing was intimately familiar with Debtor s business. 14) Mr. Miller was in almost constant contact with Debtor s employees and even made phone calls directly to Debtor s customers when he felt it was necessary to confirm the existence of a job. 15) The Court finds that RMJ Leasing purchased each of the invoices in dispute after it had become aware of Debtor s prefactoring practice. Important Issues and Lessons 1) This case is a reminder that the seeking to have a debt declared non-dischargeable is difficult. Also, it is sometimes hard to find a benefit to support the effort, and expense. Benefits might include (i) debtor s often settle non-dischargeability litigations, (ii) enforce non-discharged judgment against post-bankruptcy assets or earnings.

In re Jessee, Carolyn K. Factoring of Oklahoma, LLC v. Carolyn K. Jessee United States Bankruptcy Court for the Northern District of Oklahoma 2006 Bankr. LEXIS 2685 October 5, 2006, Decided Facts 1) Debtor and her son worked for her company, Pounds & Francs, Inc. which factored its accounts with Factoring of Oklahoma, LLC 2) The factor claims that it was defrauded by the client, through the actions of Jessee and her son Means. 3) Jessee and her son were persuaded to sign a consent judgment wherein they admitted to the fraud. 4) Neither Jessee nor Means consulted an attorney prior to executing the documents and they did not answer the state court action. Significant Holdings and Legal Goodies 1) The doctrine of issue preclusion applies in bankruptcy dischargeability proceedings. While a bankruptcy court ultimately determines whether a debt is nondischargeable under 523, a state court judgment may preclude the relitigation of settled facts under the collateral estoppel doctrine. 2) When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim. 3) Thus, under Oklahoma law, the party relying on the doctrine of issue preclusion must establish: (1) a final judgment on the merits in prior litigation; (2) the issue sought to be precluded is identical to one previously litigated; (3) the issue was actually litigated and necessarily determined in the prior proceeding; and (4) the party against whom estoppel is asserted had a full and fair opportunity to litigate the issue in the previous forum. 4) When a judgment is entered by consent, none of the issues is actually litigated. However, issue preclusion may still be applicable if it is clear that the parties intended that the issues addressed in the consent judgment could not be relitigated in a subsequent action between the parties. 5) Generally, consent judgments should not be given preclusive effect unless it is clear that the parties intended the judgment to have such preclusive effect.

6) Neither the Agreed Judgment nor the Stand Still Agreement contain express language that Jessee would be precluded form relitigating such issues in a subsequent proceeding or that Jessee s debt to Factoring would not be dischargeable in a bankruptcy proceeding. Important Issues and Lessons 1) The court did not address the issue of the breaching of the corporate veil to get to the individuals. 2) This case teaches us the use of consent judgments and their value (except not here) in a subsequent bankruptcy case.

LeChase Data/Telecom Services, LLC, on Behalf of Itself and All Others Similarly Situated, Appellant, v. Daniel Goebert et al., Defendants, and Business Funding Group, Inc., Respondent. (Action No. 1.) COURT OF APPEALS OF NEW YORK 6 N.Y.3d 281; 844 N.E.2d 771; 811 N.Y.S.2d 317; 2006 N.Y. LEXIS 198; 2006 NY Slip Op 1247 January 10, 2006, Argued February 21, 2006, Decided Facts 1) Plaintiff LeChase Data/Telecom Services, LLC is a specialty contractor that furnishes and installs telecommunications and data transmission facilities in new and existing buildings. 2) Defendant Business Funding Group, Inc. is a factor, a company that lends money to others on the security of their accounts receivable. 3) Light House entered into an Outside Plant Engineering and Project Management Agreement with WorldCom for the design, engineering, project management, procurement, construction, operation, maintenance, relocation and replacement of various telecommunications network projects within the United States. 4) Light House also entered into an Accounts Receivable Purchase Agreement with Business Funding on January 31, 2000. 5) On February 4, 2000, Light House instructed WorldCom to pay all invoices directly to Business Funding. 6) Business Funding did not, however, file a notice of assignment (Lien Law 15) or a notice of lending (Lien Law 73). 7) Light House testified that, on occasion, it would request an advance for less than the face value of an invoice. Business Funding would advance funds in the amount requested, and would divide that amount by 0.8 to create a fictitious face value to be used for purposes of calculating the rebate and factor s fee. 8) Light House subcontracted out to LeChase part of two projects for the design. 9) Le Chase sued Light House and its principals and controller for breach of contract, and also asserted claims against these parties and WorldCom and Business Funding for diversion of statutory trust funds in violation of article 3-A of the Lien Law. 10) LeChase filed mechanic s liens for the sums remaining due from Light House on the Monroe County projects. 11) After learning that Light House had entered into the factoring agreement prior to Business Funding s incorporation, LeChase commenced a second action in May 2002

against Mark Burgholzer, doing business as Business Funding Group, again alleging diversion of statutory trust funds. Significant Holdings and Legal Goodies 1) Business Funding has the means to protect its interests by filing a notice of assignment [*288] complying with Lien Law 15, or a notice of lending complying with Lien Law 73 (see also Lien Law 73 [3] [d] [deeming a properly filed notice of assignment which meets the requirements of Lien Law 15 to be a notice of lending]), but neglected to do so. 2) Article 3-A of the Lien Law impresses with a trust any funds paid or payable to a contractor under or in connection with a contract for an improvement of real property (Lien Law 70 [1]). 3) Section 77 authorizes a trust beneficiary to recover trust assets from anyone to whom they have been diverted with notice of their trust status. 4) The only contested issues are what type of notice would disqualify Business Funding from the benefit of the exception to liability under article 3-A for a good-faith purchaser; and whether there are triable issues of fact regarding the requisite notice. 5) UCC 1-201 (25) supplies the proper standard of notice in this case, and that actual knowledge is not prerequisite to depriving Business Funding of the protection of the exception in Lien Law 72 (1) for a good-faith purchaser. 6) Factors may readily avoid the risk of loss, however, by filing proper Lien Law notices and screening accounts receivable. 7) LeChase maintains that Business Funding has failed to raise a triable issue of fact regarding its notice of the trust and the diversion, and we agree. 8) The master agreement n4 included construction among these services, and the work orders detailed the construction work. 9) According to Burgholzer, Business Funding did not receive a copy of the master agreement. Under the factoring agreement, however, Business Funding had the right to the original and one copy of each invoice submitted for its possible purchase as well as a copy of the bill of lading, proof of delivery, contract or purchase order, and other documents satisfactory to Factor. 10) Business Funding s files contain a list of WorldCom s construction managers and their telephone numbers, and there are various e-mails and notes that refer to approval of Light House s invoices by WorldCom s construction managers.

Important Issues and Lessons Statutes NY Lien Law 1) Not that the factor had to dummy up invoices in order to work around the accounting software. This is never a good idea. Courts and juries pick up on and never understand things like dummy invoices and they make a factor look slippery. 2) The NY Lien Law allows a factor to avoid the adverse effects of mechanics liens. Here it appears that the factor was unaware of this provision. Note that mechanics lien laws are decidedly not uniform, and someone factoring construction receivables would be well advised to learn the law in the appropriate jurisdiction. 3) The court was not sympathetic to the factor s claim that they did not know these were construction invoices. 15. Assignments of contracts and orders to be filed 1. No assignment of one or more contracts for the performance of labor or the furnishing of materials for the improvement of real property shall operate to reduce the lien of a subcontractor, laborer or materialman,... nor shall any such assignment or order be valid for any purpose, unless a "Notice of Assignment" meeting the requirements of subdivision two of this section....or a statement containing the substance thereof and such assignment... be filed within ten days after the date of such assignment... in the office of the county clerk... and such assignment or order shall have effect and be enforceable from the time of such filing, and no such assignment or order shall have any validity until the same shall have been so filed, and every such assignment or order, not filed shall be absolutely void as against a subsequent assignee in good faith and for valuable consideration, whose assignment or order is first duly filed. 72. Diversion of trust funds 1. Any transaction by which any trust asset is paid, transferred or applied for any purpose other than a purpose of the trust as stated in subdivision one or subdivision two of section seventy-one, before payment or discharge of all trust claims with respect to the trust, is a diversion of trust assets, whether or not there are trust claims in existence at the time of the transaction, and if the diversion occurs by the voluntary act of the trustee or by his consent such act or consent is a breach of trust. Nothing in this article affects the rights of a holder in due course of a negotiable instrument or of a purchaser in good faith for value and without notice that a transfer to him is a diversion of trust assets. 77. Action to enforce trust 1. A trust arising under this article may be enforced by the holder of any trust claim, including any person subrogated to the right of a beneficiary of the trust holding a trust claim, in a representative action brought for the benefit of all beneficiaries of the trust. An action to enforce the trust may also be maintained by the trustee. In any such action, except as otherwise provided in this article, the practice,

pleadings, forms and procedure shall conform as nearly as may be to the practice, pleadings, forms and procedure in a class action as provided in article nine of the civil practice law and rules; provided, however, that in determining whether the prerequisites of a class action have been satisfied, the provisions of paragraph one of subdivision (a) of section nine hundred one of such law and rules may be waived at the discretion of the court.

Facts RETENBACH CONSTRUCTORS, INC., Plaintiff, v. CM PARTNERSHIP and LEXINGTON STATE BANK, Defendants. COURT OF APPEALS OF NORTH CAROLINA 639 S.E.2d 16; 2007 N.C. App. LEXIS 79 August 24, 2006, Heard in the Court of Appeals January 2, 2007, Filed 1) In 1999 LSB loaned money to Forsyth Drywall, secured by Forsyth Drywall s inventory, accounts, equipment, and other collateral. LSB filed [*2] a UCC financing statement on 12 February 1999. 2) In 2001 United Capital Funding Corp. ( UC ) was interested in factoring some of Forsyth Drywall s accounts receivable. UC requested a first lien position before it would factor Forsyth Drywall s accounts. On 24 September 2001 LSB filed an amendment to its financing statement, purporting to make a partial assignment to UC of its security interest in a certain of Forsyth Drywall s accounts receivable. 3) On 20 June 2002 Forsyth Drywall entered into a separate factoring agreement with CM Partnership. However, CM did not file a UCC financing statement until January 2003. 4) In February 2003 UC executed a reassignment of the first lien position to LSB. 5) Forsyth Drywall later defaulted on its obligations to both LSB and CM, and filed a Chapter 7 bankruptcy petition in March 2003. 6) Defendants each claimed a first priority, perfected security interest in approximately $72,500 that plaintiff Rentenbach Constructors, Inc., an account debtor, owes to Forsyth Drywall. Significant Holdings and Legal Goodies 1) Thus, a security interest in collateral cannot be transferred unless the underlying debt is also assigned. In re Leisure Time Sports, 194 B.R. 859, 861 (9th Cir. B.A.P. 1996).. Important Issues and Lessons 1) Despite the best efforts of instructors and attorneys, parties still try to effect subordinations in strange ways, such as (i) terminations and re-filings, (ii) amendments to filings, and weird stuff such as this assignment. All such methods lead to trouble. Just use an Intercreditor Agreement, a/k/a Lien Subordination Agreement.

Facts HOLLOWAY-HOUSTON, INC., Appellant v. GULF COAST BANK & TRUST COMPANY, Appellee COURT OF APPEALS OF TEXAS, FIRST DISTRICT, HOUSTON 2006 Tex. App. LEXIS 7497 August 24, 2006, Opinion Issued 1) Gulf Coast is involved in the business of factoring. 2) On September 19, 2001, Gulf Coast entered into a Receivables Purchase Agreement with Star Steel & Trading, Inc. (Star Steel). 3) Among the accounts assigned to Gulf Coast were accounts in which Holloway owed money to Star Steel. Gulf Coast sent notice to Holloway stating that future payments should be remitted to Gulf Coast. 4) In April 2003, Charles Elliott, the President of Star Steel, telephoned Holloway s office manager, Cindy Dutton, and asked her to deliver Holloway s checks to Star Steel rather than to Gulf Coast. After checking with her supervisor, Dutton paid four of the assigned invoices directly to Elliott. Instead of paying the funds to Gulf Coast. 5) Despite repeated notice of the assignment of the Holloway Accounts to Gulf Coast Bank, and although Holloway acknowledged each assignment and agreed to pay the invoices directly to Gulf Coast Bank, no payment of these accounts was made to the bank.. 6) Holloway contends that no evidence, such as bank records or other documentary evidence, was offered to show that the invoices at issue were actually purchased by Gulf Coast. Significant Holdings and Legal Goodies 1) Although Holloway contends that Gulf Coast was required to show that the accounts had been purchased by Gulf Coast, section 9.406 does not contain that requirement. Rather, [*13] Gulf Coast must only notify Holloway that the accounts have been assigned. 2) We conclude, therefore, that the invoice verification letters stating that Star Steel has sold their invoices to [Gulf Coast] and the October 28 letter stating Star Steel will be assigning their accounts receivable to Gulf Coast constitute legally sufficient evidence to satisfy the trial court s fifth finding of fact. 3) Whether Gulf Coast purchased the accounts is not relevant because section 9.406(a) provides that, once Gulf Coast provided notice to Holloway that the accounts had been assigned and that payment was to be made to a lockbox under Gulf Coast s control,

Holloway could discharge its debt only by paying Gulf Coast, the assignee at the lockbox address, and not by paying Star Steel, the assignor. 4) Section 9.406 does not require a separate or additional agreement between the account debtor and the assignee, and Holloway cites no authority for such a proposition. Important Issues and Lessons 1) Solid case for several reasons. First of all, the court dismissed the issue of purchase of accounts versus taking a security interest. Secondly, it is clear that a standard notice would work.

DECISION POINT, INC., Appellant, v. REECE & NICHOLS REALTORS, INC., Appellee. SUPREME COURT OF KANSAS 282 Kan. 381; 144 P.3d 706; 2006 Kan. LEXIS 665 October 27, 2006, Opinion Filed Facts 1) Commission Express purchased real estate commissions and notified Reece & Nichols (the broker). 2) The broker nevertheless paid the salesmen. Significant Holdings and Legal Goodies 1) Advancing cash to a real estate agent for personal, family, or household purposes in return for the assignment of an anticipated commission and a percentage of the anticipated commission is a consumer loan subject to the UCCC. 2) The UCCC defines earnings as compensation paid or payable to an individual or for such individual s account for personal services rendered or to be rendered by such individual, whether denominated as wages, salary, commission, bonus, or otherwise. 3) The Kansas Comment for K.S.A.; 2005 Supp. 16a-1-301(21) demonstrates the legislature s intent that the definition of earnings be applied broadly enough to include sums owed to independent contractors. 4) Commissions paid to real estate agents who work as independent contractors are earnings under the UCCC. 5) The UCCC precludes the assignment of earnings. 6) Reece & Nichols paid the real estate agents rather than paying Commission Express directly. When the real estate agents defaulted on the agreement with Commission Express by failing to tender payment, Commission Express sued Reece & Nichols for payment of the commissions. 7) The real estate agent must acknowledge that the transaction is not a loan or a consumer transaction, but the sale of a business account receivable at a discount for commercial purposes. If the assigned commission is insufficient to satisfy the obligation, the real estate agent must immediately pay the deficiency and any penalties assessed by the Agreement. If the commission is not paid because the real estate transaction fails to close, the agent is required to repurchase the accounts receivable for the full amount of the assigned commission. In addition, the Agreement grants Commission Express a security interest in all of the real estate agent s current and future commissions, accounts, general intangibles, contract rights, leases, chattel paper,

other rights to receive money, and all cash and noncash proceeds from the foregoing items. 8) Ashby used the money to pay for her son s medical expenses. Beeman used the money for household expenses and gambling. 9) The key to resolving Commission Express appeal is determining which code applies, the UCCC or the UCC. 10) A consumer credit transaction is a consumer credit sale, consumer lease, or consumer loan or modification thereof including a refinancing consolidation, or deferral. 11) A consumer loan is a loan made by a person regularly engaged in the business of making loans in which: (i) The debtor is a person other than an organization; (ii) the debt is incurred primarily for a personal, family or household purpose; 12) Commission Express argues that the real estate agents were not consumers under the UCCC. Commission Express argues that the money received by the real estate agents was not used for personal, family, or household purposes. 13) Although Commission Express asserts that it purchases accounts for a discount rather than making loans, it does not dispute that it is in the business of providing money to real estate agents in return for the real estate agents agreement to repay the money either through the assignment of the commission or the repurchase of the account. Essentially, Commission Express creates debt by paying money to the real estate agents before their commissions become available. This type of transaction qualifies as a loan under the UCCC 14) Commission Express argues that the agents may have used the money for business expenses like advertising, telephone bills, vehicle expenses, membership dues, or licensing fees because they commingled their personal and business accounts. However, there is no evidence in the record to dispute the agents testimony that they used the money for medical expenses, household expenses, and gambling. The record also indicates Reece & Nichols pays for the vast majority of their sale agents business expenses. Other than automobile and cell phone expenses and other incidental, minor expenses, real estate agents use their commissions primarily for personal living expenses. 15) The district court noted several factors in determining whether these real estate commissions are considered earnings: i. These real estate agents are not paid any regular wages. Their commissions are their only earnings for their work. ii. These real estate agents pay very few of their business expenses out of their share of the commission. Reece and Nichols pays nearly all of their business expenses.

iii. The realtors commission are their sole source of income from their labor; 16) Both Ashby and Beeman contracted with Reece & Nichols to provide their personal services as independent contractors to sell houses for Reece & Nichols. Important Issues and Lessons 1) This type case is a threat to the factoring of real estate commissions. 2) Other states have statutes affecting payments to non-licensees. 3) Can this apply to other industries, such as trucking? Read the rationale of the court carefully before you respond.

IIG Capital LLC, Plaintiff-Appellant-Respondent, v Archipelago, L.L.C., et al., Defendants-Respondents-Appellants. 7949, Index 603959/03 SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT 2007 NY Slip Op 40; 36 A.D.3d 401; 829 N.Y.S.2d 10; 2007 N.Y. App. Div. LEXIS 45 January 4, 2007, Decided January 4, 2007, Entered Facts 1) The factor brought the instant action seeking to collect on an account receivable. 2) The factor alleged that it notified the debtors by letter that the accounts had been assigned to the factor and that subsequent payments should be made to the factor. 3) The appellate court held that the debtors denial that they received the letter and accompanying invoices did not afford a basis for dismissal. The debtors assertions that the complaint failed to allege an outright purchase or assignment of the accounts were without merit. Significant Holdings and Legal Goodies 1) The notice was not rendered inadequate as a matter of law because the August 2002 letter was not dated and was addressed to Ladies and Gentlemen. The Federal Express receipts submitted in opposition to the motion, while not conclusively demonstrating delivery, suffice to support plaintiff s allegation that notice of the assignment was provided to defendants on the specified dates. 2) That defendants reached a $ 3.1 million settlement in 2003 with MarketXT regarding these same accounts does not warrant a different result. If, as alleged, defendants accounts with MarketXT were assigned to plaintiff pursuant to the factoring agreement, and proper notice was given, defendants payment in settlement to MarketXT would not be a defense to an action by plaintiff to collect on the accounts. 3) We reject, however, plaintiff s alternative claim that it is authorized to collect on defendants accounts by virtue of the security interest granted to it under the factoring agreement. Paragraph 8.1 (b) of the agreement pro-vides that plaintiff s right to collect on the collateral is expressly conditioned on an event of default, and no such default is alleged in the complaint. Important Issues and Lessons 1) This is a troubling case in that the court did not accept that a secured party has the right to notify account debtors on accounts assigned as collateral, as opposed to accounts which were purchased.

NOVARTIS ANIMAL HEALTH US, INC., Plaintiff v. EARLE PALMER BROWN, LLC, et al., Defendants UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION 424 F. Supp. 2d 1358; 2006 U.S. Dist. LEXIS 19607; 59 U.C.C. Rep. Serv. 2d (Callaghan) 270 Facts 1) Novartis, a provider of pharmaceutical products and services to the animal health industry, and EPD, an advertising agency, entered into an Advertising Agreement for the provision of general advertising services. Pursuant to the Advertising Agreement, in December 2001, Novartis and EPB agreed to a television [*1361] advertising plan for 2002 (the 2002 Advertising Campaign ). A total of $9.4 million was budgeted to pay various media outlets throughout the country to air the planned advertisements (the Media Placement Money ). 2) Novartis and EPB agreed to an advance billing schedule. 3) Pursuant to this agreed-upon schedule, EPB issued three invoices to Novartis totaling $ 9.4 million. 4) From late January through March 2002, Novartis issued several checks in payment of the Media Placement Invoices. 5) EPB s parent, defendant Panoramic Communications, LLC (Panoramic), had entered into a Factoring Agreement with defendant UPS Capital Corporation (UPSC), under which Panoramic assigned all of its accounts receivable to UPSC. Pursuant to the Factoring Agreement, Panoramic assigned the Media Placement Invoices to UPSC. In return, UPSC advanced a percentage of the invoice amounts (65%-85%) to Panoramic. When Novartis paid the invoices, the payments went to UPSC. 6) Some media companies sued EPB and Novartis for failure to pay for the Novartis advertisements 7) Novartis claims that Panoramic and UPSC conspired with EPB to misappropriate the Media Placement Money. 8) Novartis asserts claims against UPSC for fraud, violation of both state and federal Racketeer Influenced and Corrupt Organizations (RICO) Acts, conversion, tortuous interference with contractual relations, unjust enrichment, breach of contract, breach of implied contractual duty of good faith and fair dealing, breach of fiduciary duty, and negligence.

Significant Holdings and Legal Goodies 1) Article 9 of the UCC provides that the rights of an assignee such as UPSC are subject only to an account debtor s claims in recoupment. Thus, under the UCC, an account debtor such as Novartis may assert a claim against an assignee such as UPSC only to reduce the amount the account debtor owes. 2) The evidence does not support Novartis s claim that UPSC acted in bad faith when it accepted the assignment of the Media Placement Invoices. Novartis s bad faith argument relies on the contention that it was improper for UPSC to factor the Media Placement Invoices because the funds were intended to be used to pay the various media providers in the 2002 Advertising Campaign. Neither the facts nor the law supports this contention. 3) First, the evidence does not support Novartis s contention that payment of the Media Placement Invoices was made in trust 4) Second, the evidence does not support Novartis s contention that the Media Placement Invoices could not be factored because they were advance billings for media placements that had not yet occurred. It is undisputed that the Advertising Agreement expressly contemplated advance billing, and that Novartis and EPB regularly agreed to advance billing during the course of their relationship prior to the 2002 Advertising Campaign. 5) Under these circumstances, at the time Novartis paid the Media Placement Invoices, there was a valid, subsisting, matured obligation for payment which could properly be assigned to UPSC. 6) Because Novartis had agreed to the advance payments, the assignment gave rise to no right of action by Novartis against UPSC. 7) To permit such an action would amount to the grant of a windfall recovery to [Novartis], because Novartis did not bargain for the financial strength and reputation of [UPSC]; it bargained only for the financial strength and reputation of [EPB]. 8) The evidence does not support Novartis s contention that it was entitled to notice of the assignment of the Media Placement Invoices but did not receive such notice. 9) Novartis contends that UPSC agreed to leave the [assignment] stickers off the Novartis media placement invoices so as to hide the fact that they were being factored. At most, however, the evidence shows only that Panoramic failed to put assignment stickers on some invoices, including the Media Placement Invoices, and that UPSC elected not to treat such invoices as ineligible for factoring. That is unremarkable given that, as discussed above, insisting on notice is a factor s right, not an obligation, and the only party put at risk by that decision was UPSC.

10) Novartis contends that UPSC conspired with EPB and Panoramic to hide their deteriorating financial condition. However, UPSC was under no obligation to provide Novartis information about EPB s and Panoramic s financial status. Important Issues and Lessons 1) This is a great case for factors, although it should never have been brought. The plaintiff had no case from the outset, although the legal fees suffered by both sides was about $4 million. 2) Good discussion of the factoring of prebillings which is fine, so long as the account debtor has an absolute duty to pay.

Kenneth C. Henry and Frank Aiello v. Lehman Commercial Paper, Inc. No 04-55396 United States Court of Appeals for the Ninth Circuit Facts 1) First Alliance Mortgage (a sub prime lender) went bankrupt due to allegations of fraudulent lending practices. 2) Lehman Brothers provided financing for them. 3) It is alleged that Lehman knew of their bad practices. 4) Claims were made against Lehman for aiding and abetting fraud, which a jury trial sustained. Significant Holdings and Legal Goodies 5) Lehman had actual knowledge of the fraud. Based on that, the court holds that ordinary business transactions a bank performs for a customer can satisfy the substantial assistance element of an aiding and abetting claim if the bank actually knew those transactions were assisting the customer in committing a specific tort. Knowledge is the crucial element. Important Issues and Lessons 1) This theory has been recently used by a church in asserting a claim against an asset based lender where the church was defrauded. Seems like the beginning of a trend.

Hoyt Properties, Inc., et al., Appellants, vs. Production Resource Group, L.L.C., et al., Respondents. A05-1293 COURT OF APPEALS OF MINNESOTA 716 N.W.2d 366; 2006 Minn. App. LEXIS 91 June 20, 2006, Filed Facts 1) This appeal from summary judgment involves three claims that are grounded on allegations of fraudulent inducement in the settlement of commercial-lease litigation. The lessor, Hoyt Properties, Inc., sued the lessee and its parent company, Production Resource Group, L.L.C. (PRG), for breach of contract, piercing the corporate [**2] veil, and rescission of the settlement agreement. 2) During the negotiations, PRG's attorneys told Hoyt that PRG wanted a release. In response to Hoyt's inquiry about the reason for the release, PRG's attorney indicated that PRG did not want to get sued after the fact. Steve Hoyt replied, "Well, that would be piercing the veil... I don't know of any reason why [PRG] could be liable, do you?" One of PRG's attorneys allegedly responded, "There isn't anything. PRG and Entolo are totally separate." Steve Hoyt then walked over to his attorney and authorized him to insert a "global" release into the settlement agreement. 3) Steve Hoyt testified in his deposition that he agreed to the release based on the representations of PRG's attorney. 4) A few months after Hoyt signed the release, Steve Hoyt learned that Bruce Knight, who was employed by Entolo after the entity acquired Knight's trade-show-design business, had brought a breach-of-contract action against Entolo and a piercing-the-corporate-veil claim against PRG. Steve Hoyt confirmed [**5] that the complaint had been served before Hoyt's settlement agreement with PRG. The complaint contained detailed allegations of PRG's control of Entolo's daily business and financial affairs and further alleged that Entolo had been operated as a mere instrument of PRG. 5) Based on the information about PRG's conduct of Entolo's operations and the litigation that was pending before the settlement agreement, Hoyt concluded that PRG's attorney falsely represented that "there isn't anything [about a veil-piercing claim]" and that PRG and Entolo were "totally separate." Hoyt brought this action against PRG and Entolo, seeking to rescind the settlement agreement. 6) The district court granted the motion, concluding that, because the representations by PRG's counsel to Steve Hoyt constituted a legal opinion rather than a factual representation, Hoyt's rescission claim was not viable. The district court also concluded that Hoyt did not reasonably rely on counsel's representation. 7) Having dismissed Hoyt's rescission claim, the district court then dismissed Hoyt's veil-

piercing claim, reasoning that the claim was barred by the provision in the settlement agreement releasing PRG from liability. Significant Holdings and Legal Goodies 1) Although abstract statements of law or pure legal opinions are not actionable, statements of law that imply knowledge of facts are actionable. 2) Whether Hoyt had a viable veil-piercing claim depended not on legal abstractions but on whether PRG and Entolo functioned as a single business entity as a matter of fact. The attorney's response therefore implied that the factual elements necessary to establish the claim did not exist, and Steve Hoyt justifiably interpreted the response as a factual negation of a claim that PRG and Entolo functioned as a single business entity. 3) Our determination that the attorney's representation implied knowledge of facts is also supported by the district court's finding that the statements amounted to an assertion that "PRG and Entolo are separate corporations that have maintained separate boundaries and formalities and, therefore, are not vulnerable to piercing claims." The representation that PRG and Entolo were separate corporations that functioned with separate structures and with separate boundaries is a direct factual assertion. 4) Finally, the district court's conclusion that PRG's attorney had no legal or ethical duty to concede that his client's adversaries might have a winning claim does not make the attorney's representation nonactionable. The attorney, indeed, had no duty to concede that his client's adversaries had a winning claim; but once he chose to respond to Steve Hoyt, he had a duty to be truthful. 5) But an "attorney who makes affirmative misrepresentations to an adversary... may be liable for fraud." A party may reasonably rely on representations made by an adverse party, unless the falsity of the representation is obvious. 6) But an experienced businessperson is entitled to rely on statements by an opposing party to a transaction, unless his or her experience makes the truth or falsity of the representation apparent. Important Issues and Lessons 1) There have been cases involving the tort of intentional misrepresentation brought against counsel who bluffed in negotiations.

Robert Zadek San Francisco, California Of Counsel P (415) 227-3585 F (415) 227-3527 rzadek@buchalter.com Robert Zadek focuses his practice on matters involving factoring, asset-based lending, purchase order financing, commercial loan documentation, trade finance and letters of credit, loan workouts and bankruptcy. Mr. Zadek is a past Chair of the Commercial Financial Services Committee of the Section on Business Law of the American Bar Association. He served on the Executive Committee of the Business Law Section of the State Bar of California and Chaired its Uniform Commercial Code Committee. He has served as an attorney advisor on the American Law Institute committee to revise the Restatement of the Law of Suretyship, and was an advisor to the Drafting Committee on Revision of Article 9 of the Uniform Commercial Code. Mr. Zadek s column, You Be The Judge, is a regular feature in The Secured Lender, the journal of the Commercial Finance Association. He co-authored Insurance Considerations in Asset-Based Financing A Transactional Guide, published by Matthew Bender & Company. He was a faculty member at Rutgers University School of Law, teaching a course on secured transactions. He also is a former faculty member at both Hofstra and Adelphi Universities. In addition, he teaches workshops across the country on loan documentation issues and was named Educator of the Year by the Commercial Finance Association for his course, Negotiating, Documenting and Administrating Asset-Based Loans. Mr. Zadek is a former Vice President and Senior Counsel at Wells Fargo Bank, San Francisco, and is a certified public accountant. Areas of Practice: Bank and Finance Insolvency Bar Admissions: California New York