Estoppel Letters for Payroll Funding Higher Risk Situations
Steve Capper Principal/CEO Flexible Funding - July 17, 2017
Payroll funding companies or payroll factors often perform verification of invoices with the customer accounts before funding them. Verification is done to confirm that invoices were received and that all of the information on the invoices is correct. Although it is comforting to funding companies, simple verification does not guarantee that the invoice(s) will be paid in full. Nevertheless, without absolute assurance of full payment in the future, many funding companies will advance funds
against the invoices. There are circumstances though, where a funding company will perceive higher risk and will need to get a higher level of verification–an assurance that the invoice(s) will be paid in full and on time without deductions, offsets, disputes, or credits. This higher level of verification is called an ‘estoppel’ letter or ‘no offset’ letter.
The primary basis upon which any customer debtor is obligated to pay you is a contract (or contract claim) for services or goods– which spells out what is expected and what is owed. If the customer doesn’t pay, the supplier (and it’s financing or factoring company) typically has claims against the account for breach of contract or collection related claims. Unfortunately, in some cases disputes arise. For instance, in technology and consulting businesses, projects may be done in phases, and completion is predicated upon another stage of work.
A funding company estoppel letter actually creates a separate recovery right in a claim against the customer account debtor–which is over and above a ‘contract’ claim. The letter is sent by the funding company on it’s letterhead to the account debtor. It explains or reiterates that a funding company is in the picture and funding against the accounts receivables. It lists the invoice(s), and the customer acknowledges or signs off that the amount is correct and there will be no credits or offsets when paid. Estoppel is a form of ‘reliance’; the customer knows, is informed, or should know that the funding company is relying on the sign off and will be advancing funds for the invoices. When an account debtor signs the letter, they are waiving the right to bring up any disputes and defenses relating to the invoices listed in the letter. In other words, once the customer account debtor signs off, they will be preluded from taking a different position and must pay the payroll funding company/factor.
Estoppel letters can be useful but one must understand their limitations. The letter is invoice specific and must be written for each invoice, or group of invoices, that the funding company will verify and fund. Some funding companies attach copies of the invoices to the letters. (A blanket letter covering all invoices sent to the customer account debtor could be done, but it is difficult to get them signed by the debtor and there are sometimes issues as to interpretation and enforceability.)
The person binding the company to an estoppel letter may not have authority to make that kind of deal. There is no surefire way to know if they do have authority but if the signer meets any of the following criteria, there will be a better chance of succeeding with the letter: a) If the signer has authority to issue checks for payment of the invoice. b)The signer has the authority to approve the invoice for payment. c)The signer is a Vice President or Treasurer, or other fiscal officer of the account debtor.
The letters are somewhat formal and an account debtor may feel the need to bring in their attorney. Some companies don’t like the idea of legal expense on top of a promise to pay. And one will have to take time for a complete review of the invoices and services or goods they are acknowledging.
Understand that when the customer signs, the estoppel letter waives the debtor account’s defenses against the funding company– which allows the funding company to advance funds. It does not waive any claims against the vendor supplier.
Estoppel letters are generally written so that the customer account debtor agrees there will be no discounts, offsets, setoffs, recoupment, counterclaims, disputes, defenses, credits or deductions for the invoices listed. One excellent factoring attorney (Bob Zadek), however, has created a clause which specifies that an agreed-on amount may be deducted when payment is made.
Another Southern California factoring attorney (Steven Kurtz) has discussed the usage of a lighter form of estoppel called ‘quasi estoppel’. First, a phone call (or simple e mail) is made to the customer account debtor as an ordinary-course-of business verification of the invoice(s); the customer is contacted to determine if the invoice has been received, is real, and that the information on the invoice is correct. Then, there would be a subsequent simple e mail that follows up after the first initial verification e mail. The second e mail is the key to quasi estoppel. The e mail is precise and in plain language, and does not contain legalese. For example:
This will confirm that the consulting work for Project #342 was performed and completed by Eyot Technical Staffing at your firm on April 21, 2015, that everything is in good order, and that the payment for Invoice #419 will be processed by May 20, 2015. Based upon our discussion, we will fund our client for the amount of the billing and look forward to receipt of the payment.
The most important element to be conveyed is that the funding company is relying on what the customer account debtor is telling them/confirming, and on that basis the funding company will be funding the supplier (in this case Eyot Technical Staffing.)
As explained earlier in this writing, one of the obstacles to getting full-on or full-fledged estoppel letters signed is that they are pretty formal and may seem more legally threatening to the customer–who may feel burdened with the need to bring in a lawyer before signing. The less-formal quasi estoppel might fly under the radar.
The aim of a quasi estoppel is to set it up so that if, or when, the collection matter ever gets to court, the funding company is not fighting over the quality of goods or services, or the services contract between the supplier and its customer account debtor. The focus in court moves to a completely separate matter–how and why the funding company relied on the account debtor customer’s assurance that they would pay. The customer debtor may not even give much assurance at all….the customer in their busy day may have ignored the follow up email and did not respond, or may have given a simple response that did not refute the follow up email.
In trial, a quasi estoppel may not always be as effective as a full estoppel, however, the quasi still has value: When the follow-up quasi communication is delivered, the customer may let the funding company know that there is a problem with paying the full amount…which needs to be known anyway.
Generally, estoppel or reliance claims are not the type of claims that can be thrown out by the court before a trial. Adding another fighting element– an estoppel claim– on top of a contract claim or collection claim may get the funding company a higher settlement, a lower loss, or possibly even a win in court.