You and your partner have a deal and they break that deal. You have a contract with your customer and they break the contract. You sue, and the judge or jury awards you money. In legal terms, you have reduced the debt you were owed to a judgment. That judgment legally entitles you to collect what is owed you, but it is just the first step. Collection doesn’t have to be a fight, however. It can be done with an agreement between the person who owes money (the debtor) and the person who is owed (the creditor). A debtor can sign over collateral such as property to a creditor in exchange for dismissing the debt, or to extend the time to pay. Similarly, a debtor may sign a promissory note (an agreement to pay) to the creditor that includes specific terms. This article discusses the various ways that creditors can collect what is owed them in Colorado, legally.
An open account is a legal term to describe a lawsuit, usually brought by a retail or wholesale business, to collect money owed on an account. On any suit to collect a debt the statute of limitation (time allowed to bring a lawsuit) is six years, and an open account is no different. An “acknowledgment” of the account by partial payment of the debt during this six-year period can extend the time allowed to pay.
The creditor in a suit on an open account must prove that goods were sold and delivered to the debtor, and to show what money, if any, has been paid toward the debt. The law does not require the creditor to prove the exact amount owed. Rather, from the evidence about money received, the jury or judge is tasked with finding the amount due.
In an open account suit, certain items from the business operations may be used as evidence, such as a copy of the itemized account statement and a ledger (log book or web record of sales). When you introduce an account statement or ledger as evidence, then both debits and credits count as evidence. The court can award interest in addition to the amount owed on an open account.
An account stated is an account which is no longer open, that is, which has been checked and accepted by both the debtor and the creditor. An acknowledgment of the debt after receipt of an account statement converts an open account into an account stated.
For an account stated to exist, there must be:
- an accounting between the parties,
- a deal struck as to how much needs to be paid and by when, and
- an express or implied promise to pay the balance.
The essence of an account stated is a contract or agreement about the validity of the bill and a promise to pay the balance. There must be a meeting of the minds of the two parties. If either party did not understand that there was a final settlement of their respective demands, there can be no account stated.
A promissory note is a written promise by one or more parties (makers) to pay a specified sum of money to another (payee). To be valid under Colorado law, a note must be signed by the maker, contain an unconditional promise or order to pay a sum certain in money and no other promise, be payable on demand or at a definite time, and be payable to the person owed the money.
A “demand draft” is a kind of promissory note created to charge a payee’s bank account in order to pay a debt. A demand draft must contain the account number and any or all of the following:
- The payee’s printed or typewritten name
- A notation that the payee authorized the draft; or
- The statement “No signature required” or words to that effect.
By signing the note, the maker enters a contract in which he promises to pay the note. The payee can bring a lawsuit against the maker on the day after the note has expired. The statute of limitation, as on any debt collection, is six years.
Debtors who are getting desperate about their financial situation sometimes try to hold on to treasured items for their own benefit, or at least to prevent certain creditors from gaining access to them. One way that people do this is by changing ownership of the property in one way or another. Similarly, rather than sign over property, a desperate debtor may take on debt or mortgage property with the intention of making it harder for creditors to collect their claims.
Generally speaking, if such actions are taken to hinder, delay, or defraud creditors, they may be voided by the creditors harmed. Colorado law provides several options for relief to creditors who claim a debtor has defrauded them, which your attorney can talk through with you. Although Colorado law provides that actions taken with the intent to hinder, delay, or defraud creditors “shall be void,” it has been interpreted to mean that the court can void such actions.
The term “liquidated damages” refers to the sum of money which contracting parties agree will be paid in the event of a breach of contract. The parties to the contract will use this method when it looks like the actual damages would be hard to measure or prove. The amount is often derived by estimating the actual damage likely to happen if a breach were to take place and must be reasonable, not disproportionate to the probable loss or injury which would result from a breach of the contract.
A liquidated damages provision which intends to force a party to fulfill the contract or seeks to punish the breaching party is not valid in Colorado, but there are other penalties that are legal. For instance, a prepayment penalty paid by a borrower to pay off a commercial loan is enforceable under the law of liquidated damages. The law of liquidated damages doesn’t apply where there is no breach of contract because a borrower exercises an alternative form of fulfilling the contract (by invoking a prepayment privilege). The borrower voluntarily exercised its contractual right to prepay the loan principal, thereby triggering lender’s contractual right to invoke the prepayment penalty.
An alter ego is a corporation, organization or other entity set up to provide a legal shield for the person actually controlling the operation. Proving that such an organization is a cover or alter ego for the real defendant breaks down that protection, but it can be difficult to prove complete control by an individual.
In all civil lawsuits where a person or property are wronged under circumstances of “fraud, malice, or willful and wanton conduct”, the jury may award punitive damages. These punitive, or punishing, damages are also called exemplary damages, because they are intended to make an example of the person or persons who has acted wrongly. Exemplary damages are awarded only when the person suing proves his entitlement beyond a reasonable doubt.
The judge may award exemplary damages of up to three times the actual damages under certain conditions. The judge may also reduce or disallow a jury’s award of exemplary damages under certain conditions. One third of exemplary damages collected in the State of Colorado are paid into the state’s general fund.
Breach of Fiduciary Duties to Corporations
Under normal circumstances, directors of a corporation think of themselves as owing fiduciary duties to the corporation itself, and to its shareholders. In certain circumstances, however, especially when the corporation is insolvent, the law imposes on them fiduciary duties to the creditors of the corporation. The officers and directors of an insolvent corporation owe creditors a duty to avoid favoring their own interests over creditors’ claims.
For instance, because a director is treated by the law as a trustee for the corporation which he represents, a director will not be allowed to purchase corporate assets if that benefits himself and harms creditors of the corporation. That is, knowing that a corporation is insolvent, a director has a duty to its creditors not to divest corporate property for his own benefit. The Colorado Supreme Court has held that creditors may sue on behalf of the corporation for the directors’ breach of this duty. The suit must be brought for the benefit of all creditors so that one creditor does not recover funds that rightfully belong to all.
Whether you are owed a debt or you owe money, the laws around collection are complex and numerous. The attorneys at Robinson & Henry can help you sort through each party’s rights and obligations, so that you come out whole on the other end. If you have additional questions or would like an assessment with an attorney, call 303-688-0944.