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Cases of Interest

Company President Found Individually Liable for Corporate Account

The Debtor in this Chapter 11 case, filed in the Middle District of Alabama, objected to Becket & Lee's client's $20,000 claim for the Debtor's business credit card, citing merely that he either did not owe the debt or did not agree with the amount of the debt listed on the claim. The lack of specificity in the objection caused Becket & Lee Associate Attorney Natalie McGhee to contact the Debtor's Counsel, who admitted that the objection was filed in order to coerce the Creditor to reduce the amount of the claim. The Debtor (incorrectly) assumed that the Creditor would rather lower the claim amount than litigate the validity of the claim, a tactic that apparently had worked with some of the Debtor's other creditors.

Becket & Lee responded to the objection, arguing that it was so lacking in detail that the Creditor was unable to formulate a response to it. Discovery requests and responses were exchanged by both parties, during which the Debtor was provided with account statements and the contract governing the account. In the Debtor's discovery responses, he finally settled on the position that the debt was not his personal liability, but rather the liability of his company. Although the account agreement clearly specified the liability of both the company and the responsible company officer for the charges on the account, the Debtor alleged that the lack of a signature on the agreement precluded the Creditor from holding him liable for the debt.

In response to the new allegations, Becket & Lee filed a brief and affidavit from the Creditor, arguing that, in accordance with the terms of the account agreement, the Debtor's use of the card constituted acceptance of the account agreement, and, therefore, no signature was necessary to bind the Debtor to the terms of the agreement.

Shortly after the Creditor's brief was filed, the Debtor's Counsel made an offer to resolve the objection if the Creditor reduced its claim by $10,000. The creditor declined but counter-offered to reduce the claim by a nominal amount, accounting for a few months of finance charges and late fees incurred after the Debtor's last payment. The Debtor rejected this offer. With no chance of settlement, Becket & Lee and the Creditor prepared for the evidentiary hearing. A witness from the Creditor was prepared to testify via telephone.

Shortly before the evidentiary hearing, the Judge reversed his earlier decision and refused to allow the Creditors' witness to appear by telephone. After some persuading, the Judge returned to his previous decision to allow the telephonic witness, only to change his mind again at the hearing two days later. At that hearing, the Debtor admitted he used the card but testified that he did not remember who opened the account for the company and claimed that he never made any payments. The Debtor further testified that he did not remember ever seeing a copy of the account agreement. The Creditor's records, however, indicated that the Creditor's representative had spoken with the Debtor approximately one month prior to the bankruptcy.

The matter was set for a second hearing at which time the Creditor's witness was required to appear in person.

In preparation for the second hearing, a supplemental brief was filed to address the contingency that the court might find that the Debtor was not contractually liable for the account because he did not sign the account agreement. Although this position is not necessarily valid, Becket & Lee's experience is that in certain areas of the country, courts have required evidence of the debtor's signature on "something" in order to find liability for an individual on a corporate debt. Therefore, the supplemental brief focused on the theory of "unjust enrichment," which is the legal principle holding that a party should not be permitted, unjustly, to enrich himself at the expense of another, but should be required to make restitution for property or benefits received where it is just and equitable that such restitution to be made. Becket & Lee argued that the Debtor would be unjustly enriched if he were allowed to use the credit card to obtain assets to keep his business going, keep the profits from the business for himself, and then successfully object to paying the claim in his bankruptcy case.

At the hearing, the Creditor's witness testified that not all accounts are opened by a written application in the first instance; in fact many accounts are opened over the phone or internet, with no signature whatsoever. The witness further testified that upon approval of an application, a credit card is mailed to the responsible corporate officer, along with the account agreement. The account agreement specifies the terms of the account and the liability of both the company, and its representative, for the debt. The agreement directs the user not to use the account unless the user agrees to the terms of the agreement.

The Judge reserved a ruling at the hearing but later issued a decision overruling the Debtor's objection and allowing the claim. In its written ruling, the Court elaborated on the question of whether the Debtor was primarily liable or a guarantor on the account. This issue is significant because in Alabama, a claim against a guarantor must be evinced by the guarantor's signature, showing assent to be secondarily liable for the debt of another. Here, the court found that the provisions of the contract were unambiguous on their face, and by its terms, the Debtor was not a guarantor, but rather was primarily liable for the account. Thus, a signature was not required.

The court agreed with Becket & Lee's argument that use of the card signified assent to the account agreement and that the Debtor was personally liable with the company on the account, notwithstanding the fact that he did not sign a contract. The Court noted that the account statements included the Debtor's name, that the Debtor was President of the company, and that the charges on the account were for expenses for the Debtor's business. Having determined that the Debtor was, in fact, responsible, the Court allowed the claim in full.
In re Adams, Bankruptcy No. 03-30172-WRS-11 (Bankr. M.D. of Al. 2003)

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