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COMMON MISTAKES WITH ESTOPPEL LETTERS Allen Heffner and Bruce Loren | Sep 24 2019

COMMON MISTAKES WITH ESTOPPEL LETTERS

Estoppel Letters (also called Acknowledgement or No Set-off Letters), if done properly, create binding contracts between the Factor and its Account Debtors that greatly increase the likelihood of collecting money from Account Debtors, should the need for litigation arise. However, we have recently encountered situations in which Factors made seemingly trivial mistakes that have led to disastrous results in which the Factors were essentially relying upon an ineffective Estoppel Letters. This article highlights some of those mistakes and provides lessons that can be learned from those experiences.

Independently verify who to send the Estoppel Letter to and the authority of the individual who signs it.

Because Factors have limited or no communications with their Client’s Account Debtors, Factors often have to rely upon their Clients to identify the person to whom the Estoppel Letter should be sent. However, Factors should never take their Clients’ word on this and must always confirm with the Account Debtor that the individual signing the Estoppel Letter is authorized to sign it on behalf of the Account Debtor.

If the Factor independently verifies the individual’s authority, the Factor’s reliance upon the Account Debtor’s representations would be deemed reasonable and could result in the Account Debtor providing the individual with apparent authority to sign on behalf of the Account Debtor, even if the individual did not have actual authority to sign. However, a Factor’s reliance upon the Client’s representations about the individual working with the Account Debtor’s authority is likely to be held to be unreasonable. Factors can accomplish this due diligence by performing background searches on the Account Debtor/individual as well as contacting the Account Debtor’s accounting department directly.

Do not ignore the Account Debtor’s handwritten notes on the Estoppel Letter.

In some situations, Factors receive Estoppel Letters executed by the Account Debtor with handwritten notes, such as “subject to payment by the owner” or “will be paid in accordance with subcontract agreement.” Unfortunately, some Factors mistakenly believe that these notes are irrelevant because the Account Debtor signed the Estoppel Letter, confirming the invoice in question would be paid “without setoff, defense, recoupment, or counterclaim.” This is a mistake.

Estoppel Letters are contracts, and therefore, there needs to be a “meeting of the minds” between the Account Debtor and Factor as to all material terms. Courts often consider these handwritten changes to be a rejection/counter-offer on behalf of the Account Debtor, even if there is no further discussion regarding the handwritten notes. Factors must address these changes – either by agreeing to them in writing or by rejecting them and submitting the clean Estoppel Letter again.

Refer to the Client’s invoice numbers in the Estoppel Letter or attach the actual invoices.

Though not legally required, it is best practice for Factors to attach the actual purchased invoices to the Estoppel Letters. This avoids any argument by the Account Debtor that it was unsure which invoices are at issue.

However, if the Factor is not going to attach the invoices to the Estoppel Letter, the Factor must refer to the invoice numbers and references used between the Client and the Account Debtors. We had a case in which the Factor used a simple “1, 2, 3” system to identify the invoices on its Estoppel Letter and included the total amount of the invoice. Even though the Account Debtor executed the Estoppel Letters, the court held that there was ambiguity as to which invoices were subject to the Estoppel Letters and held the Estoppel Letters to be unenforceable. Factors should use internal references for invoice numbers as it creates unnecessary uncertainty.

Factors, not their Clients, should send and receive the Estoppel Letters.

Often, a Client will tell a Factor that the Account Debtor prefers to have all communications, including Estoppel Letters, go through the Client rather than the Factor. Do not do this.

The Estoppel Letter is an agreement between the Factor and the Account Debtor. As such, the Factor should be the one sending the Estoppel Letter to the Account Debtor and receiving the executed copy. It is not unheard of to have situations where Clients alter the terms of an Estoppel Letter or worse, falsify the Account Debtor’s signature on the Estoppel Letter. Allowing the Client to handle this problem invites needless issues to arise.

Avoiding common mistakes can be the difference between getting paid and not. A Factor that takes the time to ensure that the Estoppel Letters it receives from Account Debtors are enforceable greatly increases its likelihood of collecting money from the Account Debtor. If the Factor has any concerns about whether or not it has an enforceable Estoppel Letter, it should consult with an attorney before funding to ensure that the Factor is in the best possible position.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 30 years, Mr. Loren has focused his practice on construction law and factoring law. Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at bloren@lorenkeanlaw.com or aheffner@lorenkeanlaw.com or 561-615-5701.