This is a follow up to my earlier article detailing key factoring cases from the first half of 2021. I have included short summaries of five significant factoring cases from the second half of 2021. I did not, however, revisit the Bailey Tool case which was obviously significant since I have already discussed that case at length in two separate updates. Keep in mind that these cases are from various states and may not be predictive of the results in the states where you are conducting business. Also, some of these cases may be reversed on appeal.

The cases I chose revolve around four topics:

(i) personal injury defendants’ attempts to cap the amount that medical receivable factors can collect on their purchased receivables;

(ii) a struggle between an account debtor and a factor over recovery of payment to a factor that was paid in error;

(iii) when a succeeding factor crosses the line in competing for a client of an existing factor; and

(iv) whether a factor’s secured creditor who knew about and facilitated a fraud by the factor can have payments that it received from the factor voided as fraudulent transfers.

For the first two cases involving medical receivables, a little background may be helpful. Some factors are in the business of purchasing medical receivables from medical providers that are treating patients with personal injury claims. This is a way for a patient, who could not otherwise afford treatment, to receive the care he or she needs while he or she litigates the underlying claim. The medical receivable factor is typically paid when the case settles, or a judgment is entered. A common issue is whether the amount that the factor actually paid for the claim is admissible at trial. Defendants argue for the amounts to be admissible in an attempt to argue to a jury that a Plaintiff’s recovery should be capped at the amount that the factor paid for the receivable, not the full amount of the bill. In other words, Defendants want to argue that any recovery should be capped at the purchase price not the full invoice amount.

The collateral source rule commonly arises as a rebuttal argument by plaintiffs and factors. The rule varies between states but generally means that an injured plaintiff’s tort recovery may not be reduced because of money received from sources separate from the tortfeasor. Under the rules of evidence, the collateral source rule prevents certain types of information from being admissible which would include the information regarding the purchase price. Naturally, there are exceptions to this rule. Interpreting and applying this rule and the exceptions is being widely litigated throughout the United States.

1. 1. Bowling v. Brown[1] (from the United States District Court for the Western District of Louisiana in Shreveport, Louisiana).

Question: Should a medical receivables factor be compelled in a personal injury case to produce documents related to its purchase of the accounts receivable of the plaintiff’s medical provider?

Answer: Yes. The Court held that the information is discoverable in order to determine if the collateral source rule applies even if it is not ultimately admissible. The court also held that the information was discoverable to show possible bias of treating medical providers, impeach their credibility, and question their causation opinions. The court was not persuaded by the factor’s arguments that (1) providing the information would violate the factor’s confidential business relationship with various medical providers, (2) the factor purchased the receivables so it bears the risk of nonpayment so it is not relevant, (3) the plaintiff remains legally responsible for the full amount of the bills so the information is not relevant, and (4) the defendants are really attempting to discover the factor’s confidential and proprietary information.

1. 2. Ronquillo v. EcoClean Home Services[2] (from the Colorado Supreme Court in Denver, Colorado).

Question: Can evidence of the terms of a medical factor’s purchase of a medical receivable be excluded from evidence under the collateral source rule by a plaintiff in a personal injury case?

Answer: No. The factor did not confer a benefit on the plaintiff for purposes of the collateral source rule in Colorado since the plaintiff remained individually liable for the full amount of the bill. As result, the collateral source rule does not apply, and the factoring contract and its terms are admissible at trial.

1. 3. HP Inc. v Amerisource Finding, Inc.[3] (from the United States District Court for Southern District of Texas in Houston, Texas).

Question: Does a factor have to repay money from an account debtor that was paid in error but the factor believed it was owed and claimed to have taken in good faith as a bona fide payee for value even after the factor already paid out the funds to another entity in detrimental reliance?

Answer: Yes. The court held that the overpayments amounted to unjust enrichment even though the factor may have originally accepted them in good faith. No bona fide payee defense or discharge for value defense exists when a valid debt does not exist and the defendant is unjustly enriched as a result of overpayment. The court noted that the factor never cited any cases where a defendant was unjustly enriched and still prevailed on a bona fide payee defense. The court also noted that requiring restitution even after the factor had already paid the money to one of the factor’s creditors does not disadvantage the factor since the factor owed the debt prior to the payment. Repayment to the account debtor just returns the factor to the status quo before the payment.

1. 4. CD Consortium Corp. v. St. John Capital[4] (from the Appellate Court of Illinois, First District in Chicago, Illinois).

Question: Was a defendant factor liable to a plaintiff factor for tortious interference with its business when the defendant factor contacted the plaintiff’s customers before the contract cancellation deadlines, offered the customers below market rates, and prepared termination notices for the customers to send to the plaintiff factor?

Answer: No. The court held the defendant factor was merely competing with the plaintiff factor, not tortiously interfering. The existence of a renewable contract does not guarantee that a business relationship would last indefinitely regardless of how long it has lasted. Also, the Plaintiff failed to plead facts establishing that defendant intentionally acted with the aim of injuring Plaintiff’s business expectancy. Lawful competition was apparent under the facts alleged so Plaintiff was required to show that the Defendant acted with actual malice and without justification which the Defendant did not do. Plaintiff did not show that Defendant did anything improper other than compete.

1. 5. Bash v. Textron[5] (from the United States Court of Appeals for the Sixth Circuit in Cincinnati, Ohio).

Question: Can a secured creditor’s later—arguably bad faith—actions undermine its earlier perfected security interest so that payments made in connection with that security interest are fraudulent transfers under Ohio law?

Answer:  No. Textron was a secured lender to a factor that was involved in a Ponzi Scheme. Textron discovered the scheme after lending the factor money, but helped the factor hide the scheme and stay in business until Textron was eventually paid off. The factor was forced into an involuntary bankruptcy when the scheme was discovered. The bankruptcy trustee argued that payments to Textron that occurred more than two years before the bankruptcy should be avoidable as fraudulent transfers since Textron acted in bad faith. The court found that this did not justify reversing the transfers to Textron because of how the fraudulent transfer act is drafted.

Scot Pierce, Esq. is a trial lawyer and transactional attorney.  Click on his picture for his profile page.

Disclaimer: This post contains general opinions and analysis, is solely for educational purposes, and should not be treated as advice for any specific case.

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[1] 2021 U.S. Dist. LEXIS 1456612 (W.D. La. 2021).

[2] 500 P.3d 1130 (Co. 2021).

[3] 2021 U.S. Dist. LEXIS 198017 (S.D. Tex. 2021).

[4] 2012 Ill. App. Lexis 1677 (1^st Dist. Ill., 2021).

[5] 13 F.4^th 547 (6th Cir. 2021).