International Law

Mess with the Bull, Get the Horns, Son!

Found on the net yesterday, this little gem from a certain self-satisfied ersatz foreign “Professor of Constitutional Law” at some Korean university who’s been sniffing his own farts too long:

A developer recently contacted me concerning a dispute with a supplier of building materials. The developer purchased building materials from a supplier with payment to be forwarded 30-days after receipt of the materials. This is a common practice when a supplier has a long-term relationship with a developer, provides a consistent flow of supplies to a developer, and the developer is solvent.

Here comes the problem. The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.

The developer paid the old owner at the business office of the supply business without noticing any difference in ownership and without being informed by the old owner of the change of circumstances.

As expected, the new owner charged the client for the supplies, since the new owner claims that the old owner, through the sales contracts, transferred all rights including the credits for the shipped supplies to the new owner.

The old owner is nowhere to be found and likely collected from multiple creditors leaving the new owner with credits that were reflected in the sale price of the supply business.

Article 25 of the Korean Commercial Code states that:

(1) A trade name may be transferred on in cases where business is discontinued or it is transferred together with the business.

(2) Transfer of a trade name shall not be effective as to third persons unless it has been registered.

The business trade name was properly transferred and registered by the new owner under Article 25.

However, Article 43 states that:

...a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.

Therefore, since the old owner did not inform the manufacturer of the transfer, the payment was made at the companies business address and no facts are evident that otherwise show ?gross negligence? the manufacturer is not liable to the new owner.

A letter from a law firm explaining the law on the matter would usually settle these types of disputes and often the business relationship can still continue.

Um, a letter from a law firm explaining the law on the matter in this way might not be all that helpful. The conclusion might be correct (it is, by the way) but the reasoning is so soup-sandwich sloppy it misses the point almost completely.

Let’s go back over this fact pattern again. An acquiror (the “New Owner") purchased from a seller (the “Former Owner") a business that provided goods on credit terms (the “Business"). Pursuant to their agreement concerning the sale, the New Owner paid a purchase price reflecting the value of the Business’ uncollected accounts receivable (the “Accounts Receivable").

For purposes of explanation, it seems pretty clear that the business is being transferred in the form of an asset transfer rather than a share deal, because implicit in the discussion of any distinction between New Owner and Former Owner is the assumption the Business is a sole proprietorship. Otherwise, even if the shares in a corporation were to have changed hands, there’s no change in legal personality.

After the transaction’s closing, the Former Owner collected from innocent customers (the “Customers") their payments on the Accounts Receivable at the Business’ customary place of business. One of the Customers wants to know, If a Customer has in good faith paid the Former Owner of the Business when the Customer should have paid the New Owner, does the Customer still have to pay the New Owner?

A good question. And the answer is still No. But not for the reasons stated by the author of the explanation we’re discussing. Here’s why:

Art. 43 of the Commercial Code doesn’t stand for the proposition for which the author is using it. And that’s plain as day even just looking at the English-language translation of the statute this guy cites. Let look at it again:

...a performance made to the transferee in respect of any obligation that has arisen from the business of the transferor shall be valid, in cases where the obligor effecting the performance has acted in good faith and without gross negligence.

Now I’ll annotate the above-quoted clause according to the terms I’ve defined in this entry:

...a performance made to the transferee (the New Owner) in respect of any obligation that has arisen from the business of the transferor (the Former Owner) shall be valid, in cases where the obligor effecting the performance (the Customer) has acted in good faith and without gross negligence.

In other words, if a Customer mistakenly paid the New Owner in the good-faith belief the Customer was still dealing with the same enterprise, the Customer shall be protected from additional claims from the Former Owner in respect of the same obligation.

That’s ass-backwards from what the “Professor” is propounding.

I’m at a loss to understand how anyone who has completed even the first year of law school could have read the foregoing statutory language and thought this provision could be applicable to cases where Customers made payments to the Former Owner as stated in the fact pattern above. Hell, I don’t think this is beyond anyone who doesn’t have some kind of learning disability.

Even assuming no access to a Korean-admitted colleague, or ability to read the Korean language himself, here we have a foreign lawyer (and “Professor of Constitutional Law") opining using some provisions he looked up in the English translation and getting it wrong. It’s his native language, and he still can’t read the plain language staring him in the face…

Okay, Brendon, Mr. Meanie-Pants, if this other guy’s reasoning is faulty, what is the applicable rule?

The relevant provision is not in the Commercial Code at all. The correct provision of Korean law is found at Art. 450 of the Civil Code, which concerns assignments of rights.

In a nutshell, this provision of the Civil Code requires that in order for the assignment of obligations (i.e., transfer of the Accounts Receivable, which are an obligation to pay money, from the Former Owner to the New Owner) to be effective in respect of third party obligors (i.e., for the New Owner to be able to lawfully demand payment from the Customers) then either notice of or consent to the assignment shall be necessary.

Where the performance of the obligation is purely monetary, and there is no contractual provision otherwise restricting assignment, then only notice of assignment is required. Where the performance is not purely monetary but involves other, personal elements of performance, the third-party obligor must have consented to the assignment in order for the assignment to have been perfected.

Therefore, because the Former Owner did not inform the Customers of the assignment of claims, the New Owner has no right to demand payments from Customers. The New Owner does, however, have possible claims against the Former Owner for breach of warranties and representations about the state of the Accounts Receivable or for breach of covenant to assist in perfecting the assignment of the Accounts Receivable by dispatch of notices to the Customers.

Correct result, wrong reason. In law school, this gets you an “F”.

This is Contracts 101 stuff, by the way. And if you didn’t get it in law school or your bar review course, a partner or senior associate should school you. Assignment of rights is a standard “boilerplate” clause of any commercial agreement, and a basic issue of any business-transfer analysis.

Also, I’m fairly convinced the author of this blurb is not responding to an actual inquiry from a client, but has massaged something he’s cut-and-pasted from elsewhere. (Which he is known to do from time to time...) Take a look at this sentence again:

The supplier was sold and the business and trade name was transferred to a new owner. The problem arose when the developer paid the old owner, who the manufacturer believed was still the owner of the supplier, for the building materials.

Where does “the manufacturer” come from? I thought we were talking about a developer who originated this inquiry. Unless I’m right, and the make-believe “Professor’s” legal questions-and-answers columns in the newspaper have the same verisimilitude as the letters to Penthouse. I’ll tell you what I think—more sloppiness from an inveterate cut-and-paste artiste.

Another quibble: I’m pretty sure the Former Owner didn’t go around collecting from multiple creditors, as the “Professor” has written above. Creditors get paid, they generally don’t pay. This guy means “debtors” or “obligors” but is too stupid to recognize his sloppy writing. Normally I don’t pick on the disabled, but the “Professor” has made a habit of antagonizing me. Sadly, that’s a mistake.

To the fake “Professor of Constitutional Law”: Caveat emptor, indeed! Stop biting my ankles, and I won’t need to kick you in the teeth again.

To the law students and young lawyers reading this, and worrying that vindictive ol’ Uncle B may turn on them one day—bear in mind I’ve been holding my tongue on this clown for five years now, watching him churn out all manner of dreck in the newspaper and merely shaking my head. It took him twisting my words trying to make his bones at my expense (in two meanings: plagiarizing from things I’ve given him as references, and then quoting me out of context in order to tut-tut about colorful language and his “superior ethics") to get me to confront him with his words. I’m not saying he’s tugged on Superman’s cape or anything, but he’s surely messed around with Jim.

This isn’t the only piece on the “Professor’s” site that is erroneous in some way. Nearly everything he writes is wrong in some detail, whether it’s Konglish he failed to catch when he presents some Korean person’s work as his own, profound naïveté in recommendations for action, or errors in his quotations and analysis of statutory provisions (for example, he missed the April 2007 amendment of the LSA when he wrote about wrongful termination in May 2007). I could go on all day, but frankly I’ve probably prattled on too long about this as it is already. Young lawyers, don’t be arrogant gits and you’ll do fine.

And to the rest of you, I’m sorry for the outburst. This drunken little turd has really gotten under my skin lately.

Full post as published by Korea Law Blog on March 01, 2008 (boomark / email).