Having A Clear Understanding of Your Customers’ Organizational Structure Is Vital To Successful Debt Collection

David J. Gengler
dgengler@kmksc.com
(414) 962-5110

Consider a common scenario. As a supplier of goods, materials, or services, you are contacted by a potential customer who wants to place an order. The goods are delivered or the materials are provided, but payment is not received. The customer does not respond to calls or emails, and you have exhausted efforts to resolve the dispute amicably. How do you proceed? The first question that needs to be addressed is: “Who is actually responsible for this debt?”

With a one-off transaction, you may be given little identifying information from an individual or business. The information you have might be the name of the person who placed the order, or it might be what you think is the name of the business. For example, you might have received an order from John Smith. He submits a purchase order from “Smith Painting.” You get a partial payment drawn upon an account from “Smith Painting Inc.,” but the rest of the balance is not paid. Without more information, you cannot be sure with whom you were doing business and the party against whom you can file suit.

Your potential debtor could be one of several entities. The simplest debtor is an individual, acting either in a personal capacity or as a sole proprietorship. Using the example above, this could be either John Smith personally, or John Smith doing business as (“d/b/a”) Smith Painting. Your debtor in either case is John Smith. A more complicated entity is a general partnership among two or more individuals operating together. Perhaps John Smith and his brother, Jack Smith, are operating Smith Brothers Painting together. In this case, generally speaking, both brothers are likely to be personally responsible for the debt.

More sophisticated debtors will take simple steps to avoid personal liability for business debts by creating a company as permitted under their state’s business organization statutes. In Wisconsin and most states, the most common entities are corporations and limited liability companies, though other entities such as limited partnerships are also permitted. In the above example, Smith Painting Inc. or Smith Painting LLC would be your debtor.

Unfortunately, debtors do not always provide perfect information when placing orders, filling out credit applications, and completing other contracts. If you only receive the information in our example above, it is not clear if your debtor is John Smith, d/b/a Smith Painting, or Smith Painting Inc. While governing law in Wisconsin generally provides that the corporate entity needs to be disclosed to obtain the protections of a corporate structure, there are exceptions and sometimes debtors are given the benefit of the doubt. This is particularly true when partial information is provided and the “correct” name of the debtor could be located with reasonable diligence. Best practices would have you conduct additional due diligence to ascertain the correct identity of your potential debtor.

So where can this type of information be found to conduct your search? Every state has a readily available database that allows you to search for business entities registered to do business in that state. In Wisconsin, this is available through the Department of Financial Institutions (wdfi.org). In most states, this information is available through the Secretary of State’s office. Entities that wish to obtain the protections of a corporation or limited liability company, for example, need to follow each state’s regulations to create and maintain their corporate status. At a minimum, this involves payment of a fee and filing reports identifying the name of the entity, a registered agent, and a registered address. Certain states require additional information, such as identifying the principals and officers. Importantly, the registered agent is the person (or company) that is authorized to accept service of legal process on behalf of that business. This information needs to be kept current with regularly filed reports that update any name and address changes.

So why is it so important to know with whom you are dealing? At the outset of a business relationship, if you are conducting business with a corporation or limited liability company, there may be limitations on which employees are authorized to act on behalf of that entity and bind the company. In Wisconsin, a 2022 law (effective January 1, 2023) made numerous changes affecting business organizations. (A KMK article discussing this law in more detail can be found here.) One important change is that LLCs are no longer required to disclose whether they are member-managed or manager-managed in their organizational documents filed with the DFI. This can make it difficult to know precisely who is authorized to bind the LLC to a contract with your organization, but LLCs do need to identify at least one member or manager in their public filings. LLCs in Wisconsin also have the option to file a Statement of Authority with the DFI specifying who can bind the LLC to certain transactions (or limit an individual’s authority), but this is not required. While reviewing DFI records may not provide the full picture of a company’s internal management structure, it can provide critical information that can help avoid a situation in which you inadvertently do business with the person you thought had the authority to bind the company but in fact did not.

In the event a debtor fails to make payments that are due and a lawsuit is required, identifying the proper debtor is crucial in every step of the legal process. For instance, a creditor must ensure that the correct debtor is sued and served with the summons and complaint. Bringing suit against the wrong entity, even if the name of the entity that is sued matches the information written on a contract or credit application, can subject the creditor to penalties for suing an improper party. Moreover, suing the wrong entity slows down the collection process, may allow the statute of limitations to lapse, and may give the debtor time to dissipate assets.

Having a clear understanding of the party responsible for debt (including any trade names or d/b/a’s) is also critical to collection. For example, a creditor may have copies of prior checks the debtor provided or other banking information (ACH forms, etc.). If the name on the check and the bank account matches the name of the defendant on the judgment, the account can often be garnished as a form of efficient collection. However, if the debtor is identified by a trade name on its business checks or accounts, and that trade name was not included in the judgment, it may be difficult to obtain a garnishment. The same principles hold for vehicles, land, and other assets. It is crucial that the defendant is clearly and fully named in the complaint (including trade names), and all filings up through and including any resulting judgment, to eliminate doubt as to whether assets are subject to garnishment or attachment.

Simple steps can be taken early in a business relationship to ensure that the party with whom you are dealing is clearly and unambiguously identified. No matter the size of the sale, taking some additional time to verify information provided, or to request clarifying information from the customer when they are eager to do business and more likely to provide that information voluntarily will not only help your organization be more comfortable in dealing with an individual or business, but it will increase the likelihood that, in the event of a dispute the parties cannot resolve themselves, a lawsuit is successful in obtaining a judgment that maximizes the chance of collection.

It is essential to know the party with whom you are dealing at the outset of a relationship so that you are properly prepared to pursue collection when problems arise. Properly constructed contracts and credit applications, coupled with sound procedures for verifying information and conducting appropriate due diligence, ensure that you have key information. If you have any questions about business organizations, or are looking for assistance in drafting or conducting a review of existing contracts and credit applications, please contact KMK Attorneys Darrell R. Zall at dzall@kmksc.com or David J. Gengler at dgengler@kmksc.com. Both can be reached at (414) 962-5110.