Whether you are a lending institution or a horse seller, the business of extending credit can be risky. The horse seller, the bank, and the credit card company have much in common when they agree to extend financing to someone -- all of them are undertaking a risk that the buyer will make payments faithfully and honor all obligations.

But that is where the similarities end. Banks and credit card companies protect themselves by demanding credit checks, financial disclosures, and detailed contracts before extending credit. Not so in the horse industry. Horse sellers, in sharp comparison, sometimes 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 their horse.

Installment payment disputes are common in the horse industry. As this author, an experienced lawyer, has learned, many disputes can be avoided when those who act like a bank are willing to think more like one, too. This article discusses common pitfalls of installment sales transactions and offers some practical suggestions for avoiding them.

What is an Installment Payment Arrangement?

In an installment payment arrangement, the horse 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 even years. Where horses are involved, the arrangements differ. For example, some sellers will transfer registration papers before the final payment arrives; others will not. Some sellers demand most of the purchase price up front; others do not.

Problems in Installment Sales and Ways to Address Them

Problem: The Buyer Stops Making a Payment

With installment payment arrangements, the most common risk is also the most foreseeable - the buyer might fail or neglect to pay. How can the seller avoid this? For starters, here are two simple ideas:

    *    Retain the Registration Papers Until the Final Payment Has Cleared. Especially if the horse's value for racing, showing, or breeding purposes depends on the registration papers, sellers would be wise to retain the papers in his or her own name and to hold them until the last installment payment has cleared the bank. This alone can encourage the buyer to pay up.

    *    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, can learn the hard way that re-possession is not that easy. Over the years, horse sellers have entered another's private property (a barn or pasture) attempting to re-possess a horse -- only to face costly legal battles and sometimes even criminal charges of trespass and theft. In an effort to 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 Buyer Makes the Final Payment

What if the horse, while left in the buyer's care, becomes lame or sick? Even worse, what if the horse dies before the seller has been fully paid? When these unfortunate events occur, some buyers simply stop paying. Of the many ways to avoid the problem, here are two:

    *    Carefully Address the Issue of "Risk of Loss" in the Sale Contract. To protect the seller, a sales contract can specify that the buyer shall exclusively bear all risk of the horse's loss after the horse is delivered to the buyer or after the buyer signs the contract. This means that the buyer accepts the risk of injury to or loss of the horse.

    *    Alternatively, Plan Ahead With Insurance. Insurance cannot prevent a horse's illness or demise, but it can protect both parties if something happens to the horse. In this connection, the sales contract can require the buyer to secure and pay for a policy of full mortality insurance on the horse, which designates the seller to receive certain proceeds (often called naming the seller as a "loss of payee"). The contract can specify that the seller, in the event that insurance proceeds are paid out, can only accept an amount representing the remaining installments and not a penny more; the rest goes to the buyer.

Problem: The Seller Is Either Paid in Full or Has Repossessed the Horse -- But It Took a Fortune in Legal Fees to Get This Result

Installment sales arrangements can, and do generate costly legal battles. Banks are always prepared when the time comes for legal action and often keep a staff of lawyers. In the horse industry, sellers often have very limited funds to hire a lawyer. Here are two options to address the problem:

    * Address attorney's fees in the sales contract. A sales contract can specify that the buyer agrees to pay the seller's legal fees in the event of a legal dispute. Sometimes, other sales contracts state that the "loser pays" if a legal dispute arises out of the contract. As this author has learned in her 12 years of practicing law, 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.

    *    Include an interest rate clause in the contract. Banks and credit card companies charge interest. In the sales contract, the seller would be wise to include a legally-permissible rate of interest to be assessed, at a minimum, when the buyer falls behind on payments. Keep in mind that state laws vary on allowable interest rates. By law, financial institutions are typically permitted to charge interest rates much higher than individuals can.

Conclusion

Installment sales transactions have tremendous risks. Those who sell horses under this arrangement act like a bank - and would be wise to think more like one, too. All it takes is good advance planning and carefully-written contracts to make the transaction run smoothly for all persons involved.

This article does not constitute legal advice. When questions arise based on specific situations, direct them to a knowledgeable attorney.

About the Author

Julie I. Fershtman is an attorney serving the horse industry for several years. She is rated "AV" [highest rating] in the Martindale Hubbell Law Directory, and her biography is published in Who's Who in American Law. She can be reached at (248) 644-8645.

Ms. Fershtman is the author of Equine Law & Horse Sense, the nationally-acclaimed book, which sells for $17.95 +$3 shipping and handling (Michigan residents add 6% sales tax). Contact Horses & The Law Publishing at (800) 662-2210 or send check or money order to Horses & The Law Publishing, P. O. Box 250696 Franklin, MI 48025-0696.

You can also easily order Equine Law & Horse Sense on-line via the Equerry BookStore from Amazon.com.
Click here for pricing and ordering details.