asset-based loan

A type of loan agreement where the borrower pledges certain business assets—for example equipment or inventory—as collateral for a loan.

arrears

No matter how it sounds, this isn’t Scottish slang for derriere. Instead, it refers to being “behind” in payments. For example, an account that’s past due is “in arrears”. The term appears in contracts referencing a failure to pay on a sales, loan, or mortgage agreement.

APR

Americans owe a staggering $900 billion to credit card companies. That’s why most card-carrying members of the credit-card class aren’t surprised when the credit card company adds some sticker shock each month (for failing to pay their credit card off in full). These additional monthly interest payments are calculated using an annual percentage rate (APR) established by the federal government The APR is divided by twelve to arrive at a periodic interest rate, then multiplied against your monthly balance to come up with your monthly interest payment. References to APRs are often found in loan agreements and mortgages, or may be used in a contract as the standard for determining interest on late payments.

amortization

During the 1930s, homeowners purchased homes with much shorter mortgages (three to five years) than today’s 20-30 year loans. Down payments for these short mortgages ranged from 50% to 80% of the purchase price and ended with a large balloon payment. That may explain why more than half of the population rented and most of the rest were in danger of losing their homes during the Great Depression. In 1934, the Federal Housing Authority stepped in with a new system of government-backed mortgages, which required a much lower down payment, and spread repayment of the loan amount (the principle) and the cost of the loan (the interest) over a longer period, using a system called amortization. Using an amortized payment plan, the borrower—for example, in a mortgage or car loan—gradually pays less interest (and more principal) as the payment plan progresses.

EXAMPLE: Jake borrows $100,000 to purchase a condo at 8% interest and plans to pay it back over ten years. Although each of his120 monthly payments will be for the same amount ($1213), less than half of his first payment will go toward paying off the principal; the rest will pay the interest on the loan. As the principal is paid off, the interest owed decreases and the amount of each payment that goes toward the principal increases over the life of the loan, until only $8 of his final payment goes toward interest.

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[i] Service Employees International Union Local 503 v. State of Oregon (Ct. App. 2002).

[ii] Ibid.

accord and satisfaction

It may sound like an archaic maneuver from The Three Musketeers, but accord and satisfaction is actually a relatively simple contract principle: The parties can always agree to modify the terms of the contract. When one party agrees to accept something other than what‘s promised in the contract—for example, the seller of a car agrees to accept less money because the brakes need to be replaced—then the parties have reached an “accord.” When the buyer pays the lesser amount and the seller accepts it, that’s “satisfaction.” So, an accord and satisfaction is when the parties agree to an alternative way to perform the deal. An accord and satisfaction often involves the payment of a debt. For example, a creditor who loaned money to a failing business and wants to cuts his losses might agree to accept less than the full amount due.

How is it done? In an accord and satisfaction, one agreement (the new arrangement) is substituted for another (the original contract). The new agreement (sometimes referred to as a “Discharge of Debt,” or a “Mutual Settlement and Release of Debt”) spells out the accord and satisfaction and terminates the old agreement.

What about accepting checks that say ‘payment in full?’ Let’s say you borrow money from a friend and then have a dispute as to how much is owed—you say $500; she says $1,000. What happens if you send a check for $750 that states “payment in full”? Your friend says she is going to cash it but she thinks you still owe her $250, so she crosses out “payment in full” on the check. Can she go after you for the rest of the money if she cashes the check? Not according to most court rulings. As one judge put it, “What is said is overridden by what is done.” This rule applies only if there is a dispute over how much is owed, however. If you and the other party agree on what you owe, you can’t try to scratch out a better deal by writing “paid in full” on your check for half the amount. Finally, if there is a dispute but the check is cashed inadvertently, the rule may not apply (courts are split on that issue.)

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[i] Hudson v. Yonkers Fruit, Co. 258 N.Y. 168 (1932).

acceleration clause

It’s true of cars, and it’s true of contracts: An accelerator speeds things up. Acceleration clauses (also known as “demand clauses”), commonly found in loans, leases, mortgages, or other payment agreements, require the party who borrowed money to speed up the payments. If you’re required to make monthly payments on a loan and you miss a payment, an acceleration clause makes the entire amount you borrowed due. In other words, you must immediately pay back the entire loan.

Unenforceable clauses. Courts won’t enforce an acceleration clause that is so grossly unfair as to be unscrupulous (or “unconscionable”). This issue is more likely to arise in a lease, because the acceleration clause forces the tenant to pay for something he has not yet received (time spent in the rented space or using the rented equipment), while in other loan agreements, the debtor has already gotten the money, home, car, or other purpose of the loan.

Minimizing the damages. In general, courts don’t like it when acceleration clauses are used as penalties. A court is more likely to enforce a clause that approximates, at least to some degree, the damages cause by the missed payment(s), as estimated when the contract was signed.

EXAMPLE:A company leased ATM machines. When one of its customers missed a payment, the company tried to enforce an acceleration clause that made all future payments immediately due. An Ohio Court of Appeal ruled that the acceleration clause was unenforceable because it did not impose any obligation on the leasing company to minimize (or “mitigate”) its damages. For example, if the leasing company repossessed the ATM machine and then immediately leased it to someone else, the amount it earned from the new rental should have been offset from the amount owed by the first customer. Otherwise, the ATM company is getting paid twice for use of the same machine.

A court will also decline to enforce an acceleration clause if the parties have an honest dispute about the amount owed.

Mortgages. Most mortgages provide a grace period before the acceleration clause kicks in. During the grace (or “cure”) period, the borrower has the chance to make up missed payments. If the borrower is unable to bring the payments current, then the lender can demand full payment and start foreclosure proceedings or work with the borrower to avoid foreclosure. An acceleration clause in a mortgage may be triggered by other events besides a failure to make timely payment—for example, the sale of the property (sometimes referred to as a due-on-sale clause) or refinancing