HOW IMPORTANT ARE 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. Estoppel Letters are particularly important for Factors that factor construction receivables, as those receivables are routinely subject to back charges and offsets, with the Factor being completely in the dark with respect to the Client’s performance on the project.

We recently obtained a favorable settlement for our construction factoring client in a lawsuit against an Account Debtor, in no small part because the Factor had obtained valid Estoppel Letters from the Account Debtor prior to purchasing each invoice. These Estoppel Letters provided the Factor with the leverage it needed to resolve the lawsuit on favorable terms and quickly, before the Factor was forced to spend a lot of money. The Estoppel Letters allowed us to be aggressive in the litigation, knowing how much leverage we had because of the Estoppel Letters. This article will focus on why the Factor’s Estoppel Letters were so strong and were not susceptible to the usual pitfalls.?

The Estoppel Letters were not marked up and were executed by an authorized representative.

Estoppel Letters are meant to create contracts between the Factor and the Account Debtor. In exchange for the Factor continuing to provide funding to the Client, the Account Debtor agrees to pay the invoice to the Factor without recoupment, set-off, defense, or counterclaim. As with every contract, the Estoppel Letter must lay out the material terms of the agreement and be executed by authorized representatives of the parties.

This Factor made sure that: (i) there were no changes, big or small, made to the Estoppel Letters; and (ii) the Estoppel Letters were executed by someone they knew had authority to bind the Account Debtor. Courts often consider any handwritten changes on an Estoppel Letter to be a rejection/counter-offer on behalf of the Account Debtor, even if there is no further discussion regarding the handwritten notes. To be enforceable, Factors must either agree to these changes in writing or reject them and re-submit the clean Estoppel Letter. Additionally, the Factor conducted its own due diligence to determine who should sign the Estoppel Letter. This Factor did not rely upon its Client’s information as to whom the Estoppel Letters should be sent.

Because the Factor was able to receive clean Estoppel Letters signed by an authorized representative, the Account Debtor had only a few, weak defenses to challenge the enforceability of the Estoppel Letters, which did not carry the day.

The Factor did not purchase an invoice without receiving an executed Estoppel Letter.?

The consideration, or benefit, that supports the enforceability of the Estoppel Letter is the promise that the Factor will purchase a receivable and advance funds to the Client. The funds then allow the Client to perform its work for the Account Debtor. Because the Factor refused to purchase any receivable without an executed Estoppel Letter, it showed the Court how important the Estoppel Letter was to the Factor and that the Factor truly relied upon the Account Debtor’s representations contained in the Estoppel Letter.

An additional reason that Factors should only purchase invoices after receiving a signed Estoppel Letter (for situations that call for Estoppel Letters), is that it ensures that the Factor does not get “ahead of its skis.” The due dates for payments from general contractors can range from 30 days (very low end) to pay-when-paid by the owner of the project. As such, depending on its Client, the Factor could have a lot of money advanced while it waits for payment. That is why it is so important that the Factor protect itself and try to obtain a signed Estoppel Letter before purchasing those invoices. Especially in the construction factoring context, invoices are frequently reduced or changed by general contractors depending on the subcontractor’s performance. Without an executed Estoppel Letter, the Factor may receive a fraction of what it thought it was going to receive from the Account Debtor and will have a tough time trying to collect the full amount of the invoice.

The importance of Estoppel Letters in the construction factoring world cannot be understated and often makes the difference between getting paid or not. If you have any questions about what needs to be included in them, how they should be sent, who they should be sent to, or changes proposed by the Client or the Account Debtor, you should contact your attorney to ensure that you are putting yourself 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 25 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 [email protected] or [email protected] or 561-615-5701.