Equine Law Blog

Avoid Installment Sale Disputes

Banks do it.  Credit card issuers do it.  Horses can be expensive, and buyers often want to spread out their payments over time.  Should you, the horse seller, do it?

The business of extending credit is risky. The horse seller and the bank have much in common when they agree to extend financing.  Both take a risk that the buyer will make payments faithfully.  But that is where the similarities end.  Banks protect themselves by credit checks, financial disclosures, and detailed contracts.  Not so in the horse industry.  Horse sellers often part with a horse merely on a handshake and with only a tiny fraction of the purchase price paid up front -- just minutes after meeting a total stranger who wants to buy the horse.

This article discusses some pitfalls of installment sales transactions and offers some practical suggestions for avoiding them.

Problems in Installment Sales and Ways to Address Them

In an installment payment arrangement, the seller and buyer agree that the purchase price can be satisfied through a series of payments (often called installments) spread out over months and sometimes years. 

Problem: The Buyer Stops Paying

With installment payment arrangements, the most common risk is the most foreseeable – the buyer fails to pay.  To avoid this, here are two ideas for sellers:

• Hold the Registration Papers Until The Final Payment Clears.  Especially if the horse's value for racing, showing, or breeding purposes depends on the papers, sellers can retain them until the last installment payment clears the bank.
• Properly Document the Seller's Right to Repossess.  Banks repossess cars and equipment when loans are not paid.  When they do this, they typically follow -- to the letter -- rights available to them in their contracts and under the law.  Horse sellers, who often have no contract and no knowledge of the law, learn the hard way that repossession is not that easy.  Over the years, horse sellers have entered another's private property (a barn or pasture) attempting to repossess a horse -- only to face costly legal battles and sometimes criminal charges of trespass and theft.  To help avoid these and other problems, a carefully-written sales contract can give the seller a security interest in the horse, include a legally-proper UCC (Uniform Commercial Code) form, and specify from the start how and when the seller can repossess the horse.

Problem: The Horse Becomes Injured, Ill, or Dies Before the Final Payment

What if the horse becomes lame or sick while in the buyer's care?  Even worse, what if the horse dies before the seller has been fully paid?  When these unfortunate events occur, some buyers simply stop paying.  To protect the seller, a sales contract can specify that the buyer exclusively bears all risk of the horse's loss after the horse is delivered to the buyer or after the buyer signs the contract.  Also, the contract can require that the horse be insured with a full mortality insurance policy with proceeds, if any, payable to the seller representing the remaining installments.

Problem: Legal Fees

Installment sales arrangements can generate costly legal battles.  Banks are prepared with a staff of lawyers, but horse sellers often have limited funds.  A sales contract can specify that the buyer agrees to pay the seller's legal fees in the event of a legal dispute.  Sometimes, sales contracts state that the "loser pays" if a legal dispute arises out of the contract.  As this author has learned, there is never a guarantee that a court will enforce these provisions, but without them the seller has virtually no chance of recouping the cost of his or her legal bills.

If you have questions about installment sales, please give me a call or send me an email using the form below.

Categories: Sales/Disputes