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Uniform Debt-Management Services Act - Page 8

SECTION 13. BOND REQUIRED.

(a) Except as otherwise provided in Section 14, a provider that is required to be registered under this [act] shall file a surety bond with the administrator, which must:

(1) be in effect during the period of registration and for two years after the provider ceases providing debt-management services to individuals in this state; and

(2) run to this state for the benefit of this state and of individuals who reside in this state when they agree to receive debt-management services from the provider, as their interests may appear.

(b) Subject to adjustment of the dollar amount pursuant to Section 32(f), a surety bond filed pursuant to subsection (a) must:

(1) be in the amount of $50,000 or other larger or smaller amount that the administrator determines is warranted by the financial condition and business experience of the provider, the history of the provider in performing debt-management services, the risk to individuals, and any other factor the administrator considers appropriate;

(2) be issued by a bonding, surety, or insurance company authorized to do business in this state and rated at least A by a nationally recognized rating organization; and

(3) have payment conditioned upon noncompliance of the provider or its agent with this [act].

(c) If the principal amount of a surety bond is reduced by payment of a claim or a judgment, the provider shall immediately notify the administrator and, within 30 days after notice by the administrator, file a new or additional surety bond in an amount set by the administrator. The amount of the new or additional bond must be at least the amount of the bond immediately before payment of the claim or judgment. If for any reason a surety terminates a bond, the provider shall immediately file a new surety bond in the amount of $50,000 or other amount determined pursuant to subsection (b).

(d) The administrator or an individual may obtain satisfaction out of the surety bond procured pursuant to this section if:

(1) the administrator assesses expenses under Section 32(b)(1), issues a final order under Section 33(a)(2), or recovers a final judgment under Section 33(a)(4) or (5) or

(d); or

(2) an individual recovers a final judgment pursuant to Section 35(a), (b), or (c)(1), (2), or (4).

(e) If claims against a surety bond exceed or are reasonably expected to exceed the amount of the bond, the administrator, on the initiative of the administrator or on petition of the surety, shall, unless the proceeds are adequate to pay all costs, judgments, and claims, distribute the proceeds in the following order:

(1) to satisfaction of a final order or judgment under Section 33(a)(2), (4), or (5) or (d);

(2) to final judgments recovered by individuals pursuant to Section 35(a), (b), or (c) (1), (2) or (4), pro rata;

(3) to claims of individuals established to the satisfaction of the administrator, pro rata; and

(4) if a final order or judgment is issued under Section 33(a), to the expenses charged pursuant to Section 32(b)(1).

Comment

1. Subsection (a) imposes the bond requirement on all providers that section 4 requires to be registered, including those that are not required to establish trust accounts. A provider’s employee who serves as an intermediary between an individual and the individual’s creditors, and therefore is a “provider,” need not provide a bond, however, because section 4(b) exempts the employee from the registration requirement.

2. The bond is a source of payment of damages for a provider’s failure to comply with this Act. It is conceivable that the administrator or an individual would not commence litigation until after a provider ceases providing services in this state. Therefore, paragraph (1) seeks to preserve the availability of the bond for two years after the year in which the provider’s registration ends.

3. Paragraph (2) requires the bond to run in favor of the state for the benefit of the state and for the benefit of the customers of the provider. Thus, it is available to compensate the administrator for the administrator’s enforcement costs. The bond also runs directly in favor of customers who have a cause of action for a provider’s noncompliance with the Act.

4. Subsection (b)(1) sets the amount of the bond at $50,000, but gives the administrator the power to adjust the amount, either higher or lower than $50,000, for a particular provider. A provider operating on a national basis must comply with the bond requirement of each state in which it operates. This may be burdensome, but it does not by itself justify a reduction in the amount of the bond required under this Act. Rather, the primary criterion should be the level of risk of injury associated with the provider. If the provider’s history of operations leads the administrator to conclude that the risk of injury is sufficiently low, a reduction from $50,000 would be appropriate. By the same token, a provider’s history of operations may lead the administrator to conclude that an increase is appropriate.

5. Subsection (b)(3) requires that payment of the bond be conditioned upon noncompliance with the Act. Bonds often are written in the form of penal bonds: the surety agrees to pay unless the principal obligor performs its obligations, performs a contract, enters a contract, etc. A bond in this form satisfies the requirement of this section because, although the formal condition may be compliance with the Act, in fact the sum is paid only if the provider fails to comply.

Nothing is payable until the administrator or an individual obtains a judicial determination that the provider has failed to comply (or the administrator assesses costs under section 32(b)(1). In a typical case the surety would be joined as a party defendant.

6. Section 32(b)(1) empowers the administrator to charge a provider for the costs of an investigation of the provider. Section 33 empowers the administrator to seek restitution for injured individuals and recover its costs of an enforcement action. Under subsection (d) the bond or other security required by this section is a source for payment of this restitution. Section 35 authorizes private rights of action. The bond or other security is a source of payment of actual damages, damages for overcharges, the $5,000 minimum damages, and costs and attorney’s fees. It is not available to satisfy civil penalties under section 33 or punitive damages under section 35.

7. Section 35(g) requires the administrator to assist an individual in enforcing a judgment against the bond. Subsection (e) of this section sets out the priority of claims against the bond, but it does not necessarily set out a temporal order of payment. Hence, if it is clear that the bond is sufficient in amount to satisfy the claims in paragraphs (1) and (2), the administrator should distribute bond proceeds to individuals with final judgments even though the claim of the administrator under paragraph (1) is not yet final. To facilitate administration of this claims process, the administrator may set a deadline for individuals to submit the claims described in paragraph (3).

8. Subsection (e) creates an administrative procedure for the payment of claims, but it does not require use of that procedure. A surety may file an interpleader action for distribution of the proceeds. This subsection suggests the order in which a court should distribute the proceeds of the bond or other security.

SECTION 14. BOND REQUIRED: SUBSTITUTE.

(a) Instead of the surety bond required by Section 13, a provider may deliver to the administrator, in the amount required by Section 13(b), and, except as otherwise provided in paragraph (2)(A), payable or available to this state and to individuals who reside in this state when they agree to receive debt-management services from the provider, as their interests may appear, if the provider or its agent does not comply with this [act]:

(1) a certificate of insurance issued by an insurance company authorized to do business in this state and rated at least A by a nationally recognized rating organization, with no deductible; or

(2) with the approval of the administrator:

(A) an irrevocable letter of credit, issued or confirmed by a bank approved by the administrator, payable upon presentation of a certificate by the administrator stating that the provider or its agent has not complied with this [act]; or

(B) bonds or other obligations of the United States or guaranteed by the United States or bonds or other obligations of this state or a political subdivision of this state, to be deposited and maintained with a bank approved by the administrator for this purpose.

(b) If a provider furnishes a substitute pursuant to subsection (a), the provisions of Section 13(a), (c), (d), and (e) apply to the substitute.

Comment

1. This section provides three alternatives to posting a bond. It authorizes the provider to procure insurance or, with the administrator’s approval, a letter of credit or debt instruments. With respect to debt instruments, the requirement of approval by the administrator extends to both the instruments deposited and the terms of the account into which they are deposited, to ensure that they are available to pay claims of injured individuals. The administrator by rule can develop the mechanics for liquidating the instruments and paying the proceeds to injured individuals.

2. With respect to letters of credit, the requirement of approval by the administrator extends to the identity of the bank and to the form of the letter of credit. If a letter of credit requires personal presentation of a certificate, presentation to a distant bank may entail inconvenience or expense. When this is the case, the administrator may confine approval to banks located in a specified geographic area.

3. Subsection (a)(2)(A) requires that a letter of credit be payable upon presentation of a certificate by the administrator, and the administrator may determine the nature of that certificate. For example, the administrator may require that a letter of credit provide that the issuer will pay the amount stipulated in the certificate as costs assessed under section 32(b)(1) or the amount stipulated in the certificate as the amount of a judgment obtained by an individual. Similarly, the administrator may require that a letter of credit provide for presentation of the certificate by mail or other specified means.

4. Subsection (b) refers to several provisions of section 13, which applies to surety bonds.

In stating that those provisions apply to the substitute security furnished under this section, subsection (b) requires the substitute security to be available for two years after a provider ceases providing services, available for the benefit of the state and residents of the state at the time of an agreement, replenished if depleted, available for payment of the claims specified in section 13(d), and distributed in the order specified in section 13(e).

5. Section 35(g) requires the administrator to assist an individual enforce a judgment against the security posted by the provider.

SECTION 15. REQUIREMENT OF GOOD FAITH. A provider shall act in good faith in all matters under this [act].

Comment

The obligation to act in good faith relates to “all matters under this Act.” If a person fails to act in good faith, this means that the person has failed to act as required in connection with some matter under this Act. Consequently, the person has violated the section dealing with that matter, and, depending on the sections on remedies (sections 33, 35), may be liable for violation of the section dealing with the underlying matter. But there is no independent cause of action for failure to act in good faith. The failure to act in good faith also may make unavailable a right or power that otherwise would have been available to the provider. See Commentary No. 10, section 1-203, Permanent Editorial Board for the Uniform Commercial Code (Feb. 10, 1994). Good faith is defined in section 2(11).