Legal Expenses in Payroll Funding and Financing Contracts
Steve Capper , Flexible Funding - July 19, 2017
In payroll funding financing agreements, a minefield of costs can be embedded in contract clauses relating to legal fees and expenses.
A payroll factoring or funding contract presented to a staffing firm may specifically list just a few of the legal costs that you will be responsible for. The words “including but not limited to” are
often inserted just prior to the listing of costs to make the scope of what you might pay more broad. Even more common, funding contracts simply state that you will be responsible for ALL legal fees and expenses in any way related to the agreement. Most staffing agency owners fail to recognize the extent to which a broad, open-ended and monetarily-uncapped arrangement can cost. The following are examples of what legal fees and costs payroll funding companies might include (even though they may not be explicitly stated):
- Costs of any litigation, arbitration or proceeding as a result of the lending relationship.
- Any contest, dispute, proceeding or action of any type no matter who institutes it whether it be the borrower, the lender, or any other person.
- Legal costs whether or not litigation is commenced.
- Legal costs whether or not a judgment is issued.
- Costs at any court appellate/appeals level or probate court.
- Costs in any bankruptcy case or insolvency proceeding involving the borrower.
- Costs in any bankruptcy case or insolvency proceeding involving the collateral, any account debtor or an account.
- Costs connected with the negotiation, due diligence, or preparation of the loan agreement and any modifications, amendments, waivers, consents.
- Preparation or negotiation of any other documents in connection with the transaction.
- Cost of any administration or execution of the agreement.
- Cost of providing notices of default, sale, assignment, etc.
- Creating, protecting or enforcing the lenders ownership or assignment interest in the accounts.
- Protecting the lenders interest in collateral other than accounts receivables if applicable (any attempt to inspect, verify, preserve, perfect, or continue the perfection of the lender’s liens upon the collateral, or restore, collect, sell, liquidate or otherwise dispose of the collateral).
- The lender’s costs in collecting the accounts.
- Enforcing any rights of the lender against any guarantor.
- All legal fees of the funding company’s in-house counsel.
- Cost of additional field exams.
- Accounting fees.
- Photocopying, travel and attorneys fees and expenses incurred in complying with any subpoena or other legal process attendant to any litigation.
- Attorney time spent waiting in court, attorney time spent on all phone calls.
- Fees for third party experts, appraisers, trustees, receivers, keepers, masters, arbitrators, investigators, service of process and filing fees, court and court reporter costs, the cost of any bonds.
- Paralegal fees, process server fees, court reporter fees, messenger and courier fees, extraordinary word processing charges, computer research and outside assisted legal research and clerical staff overtime charges. (It is possible that some of the tasks referred to in a broad costs and expenses clause could be performed by a clerical person rather than a $250-$500 per hour attorney, but you may have no control over the process.)
- Any records search or Private Investigator investigative fees and expenses.
- Any time spent communicating with the IRS or other state and local taxing authorities.
- Any legal expenses related to an insurance claim in which staffing agency is named or involved relating to the services provided by the staffing agency under the agreement, or any material insurance claims against the client.
- Interest. Legal amounts charged to the borrower may become obligations covered or secured by all of the collateral (security for the loan) and payable on demand bearing “interest” from the date such demand is made until paid.
- Costs and expenses can be added to the outstanding principal amount due, becoming additional indebtedness (rather than billed or paid separately.)
- Any anticipated post-judgment collection services or any costs to enforce any judgment may be included as your obligation.
In many contracts of payroll funding companies, legal costs and fees are lumped together in one large “Costs and Expenses” contract clause covering not only legal costs but also many general non-legal out of pocket costs that you are to be held responsible for. It may be initially blurry as to whether or when an item is actually a “legal” cost or whether it may become legal at a later time. For example, a few contracts state that you are responsible for legal fees ONLY when you are in default of the contract. Most commonly, contracts of payroll funding companies or factoring organizations specify or imply that you are responsible for all costs whether or not you are in default of the contract provisions.
If the Costs and Expenses contract clause refers to “default” then you should examine the range of scenarios that trigger default. These may include not only a wide range of conditions that affect your staffing company, but also events that affect the guarantor (nearly every funding contract requires a person to guarantee payment of the loan for the staffing firm). An “event” that triggers a default may be very broad such as any “material change in borrower’s financial condition”. If a breach of any contract “warranty” triggers a default ….then you must also study and understand all “warranties” in the contract.
Legal fees may not only be covered in clauses about legal fees, or costs and expenses. A “hold harmless” or “indemnification clause” may also list attorneys fees to be responsible for by reason of the staffing agency’s breach of or failure to perform any of the warranties, guarantees, commitments or covenants in the agreement. Lastly, be sure to examine the personal guaranty for additional clauses about responsibility for costs.
Regardless of what payroll funding services contracts say about legal fees, responsibility for certain items may ultimately end up at a judge’s discretion.