Commercial Law World - Issue 4, 2017 - 25

How to Determine if
a Fraud Claim Exists
in Collection Cases

by Joseph A. Marino, Esq
Joseph A. Marino, Esq., a Board Certified
Creditors' Rights Specialist and contributing
author to various legal publications with over
33 years of experience, spearheads the firm's
practice for Marino, Mayers & Jarrach, LLC.
Board Certified Creditors' Rights Specialist,
1994; Juris Doctor, New England School of Law,
MA, 1976.
Joseph was admitted Washington, D.C. Bar,
1977; Commercial Law League of America,
1978; American Bar Association, 1978.
http://marinomayerslaw.com

V

ery often what appears to be a simple collection
claim is more of a Fraud Claim not visible to a
creditor, and/or collection agency. This article will
provide you with some fact patterns and options to
determine if your client's collection claim may actually
be a fraud claim enabling you to recover funds for your
client.
Example 1: Mr. John Jones president of XYZ, Inc.,
orders $250,000.00 in goods from ABC Creditor over
a four to six month period of time. After "acceptance"
XYZ, Inc. closes its doors. (goes out of business). ABC
places the claim with We B Good Agency, who learns
the phones are disconnected and the mail is returned.
ABC wants the claim placed by an attorney. You are
that attorney. What should you do?  If you merely
commence a suit against XYZ, Inc., on an account and
are able to effectuate service, you may obtain a default
judgment which can become a nice wall decoration.
Instead, consider drafting a complaint including a
"Constructive Fraud" Count against the principal(s) of
XYZ, Inc.
Audit
Committee
Compliance

Controller
Group

General
Counsel

Human
Resources

Executive
Management

Internal
Audit

Security

Information
Technology

Investigation

What is "Constructive Fraud"
and How Does it Work?
The elements of constructive fraud are the same
as those for actual fraud with the crucial exception
that the element of scienter (i.e., the knowledge and
intent to mislead upon the part of the defendant,
perpetrator and/or his knowledge of the falsity of his
representation) is dropped. In its place, the plaintiff
must prove: (a) the existence of a fiduciary duty
(including that which is imposed by law in cases
of insolvency); or (b) a confidential relationship
warranting the trusting party (victim) to repose his
confidence in the defendant.

Particular attention should
be given to the definition
of "insolvent". The Uniform
Commercial Code ("UCC") defines
"insolvent" in § 1-201 (general
definitions) to mean: "(A) having
generally ceased to pay debts in
the ordinary course of business
other than as a result of bona fide
dispute; (B) being unable to pay
debts as they become due; or (C)
being insolvent with the meaning
of federal bankruptcy law."
The Uniform Voidable Transaction Act ("UVTA")
states, in pertinent part "A debtor is insolvent if, at a
fair valuation, the sum of the debtor's debts is greater
than the sum of the debtor's assets. (d) A debtor that is
generally not paying the debtor's debts as they become

CLLA.ORG

25


http://www.marinomayerslaw.com http://www.CLLA.ORG

Table of Contents for the Digital Edition of Commercial Law World - Issue 4, 2017

Contents
Commercial Law World - Issue 4, 2017 - Cover1
Commercial Law World - Issue 4, 2017 - Cover2
Commercial Law World - Issue 4, 2017 - Contents
Commercial Law World - Issue 4, 2017 - 2
Commercial Law World - Issue 4, 2017 - 3
Commercial Law World - Issue 4, 2017 - 4
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Commercial Law World - Issue 4, 2017 - 25
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Commercial Law World - Issue 4, 2017 - 28
Commercial Law World - Issue 4, 2017 - Cover3
Commercial Law World - Issue 4, 2017 - Cover4
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