delinquent account handout.doc1

BLAKELEY & BLAKELEY LLP

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GETTING PAID ON YOUR DELINQUENT ACCOUNT: FROM EVALUATING YOUR

CUSTOMER’S ABILITY TO PAY, TO REPAYMENT AGREEMENTS TO ARBITRATION AND LITIGATION

SCOTT E. BLAKELEY, ESQ. BLAKELEY & BLAKELEY LLP 4685 MacArthur Court, Suite 421

Newport Beach, CA 92660 VOICE: 949/260-0612

FAX: 949/260-0613

Los Angeles Office 515 S. Flower Street, 36th Floor Los Angeles, California 90071

Tel: (213) 382-0675

[email protected] INTERNET: www.bandblaw.com


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Scott Blakeley is a partner in the California law firm of Blakeley & Blakeley LLP, where he advises companies around the country regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He was selected as one of the 50 most influential people in commercial credit by Credit Today. He is contributing editor of NACM’s Credit Manual of Commercial Law, contributing editor to the American Bankruptcy Institute’s Manual of Reclamation Laws, and author of A History of Bankruptcy Preference Law, published by ABI. Credit Research Foundation has published his manuals entitled The Credit Professional’s Guide to Bankruptcy, Serving On A Creditors’ Committee and Commencing An Involuntary Bankruptcy Petition. Scott holds an B.S. from Pepperdine University, an M.B.A. from Loyola University and a law degree from Southwestern University. He served as law clerk to Bankruptcy Judge John J. Wilson.


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NOTES


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GETTING PAID ON YOUR DELINQUENT ACCOUNT: FROM EVALUATING YOUR CUSTOMER’S ABILITY TO PAY, TO REPAYMENT AGREEMENTS TO

ARBITRATION AND LITIGATION

I. The Delinquent Account A. What is a Delinquent Account? 1. Why past due: cash flow vs. disputed items 2. Contract controls a. From the vendor’s view i. Credit application/supply contract ii. Credit policy: Tolerance limit

(a) Percentage of the bill that is acceptable to keep the account current

(b) Minimum amount that must be paid to avoid credit

hold (c) Unauthorized deductions (d) Dispute resolution practice

iii. Sarbanes Oxley internal control and procedures iv. Pre-default action

b. From the debtor’s view i. Battle of the forms ii. Course of dealing iii. Stop payment/NSF check

iv. Counterclaim

3. Avoiding a delinquent account through effective credit management


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a. Pay close attention to the creation of new accounts

i. The best defense against a delinquent account is to avoid extending credit to those may become delinquent

ii. Steps to take

1. Ownership records 2. Locations of projects 3. Require a personal guarantee

b. Maintain continuous communication

i. Assign credit analysts to a person rather than an account ii. Build a relationship iii. Understand the ins and outs of their system

c. Respond quickly to disputes, problems, and delinquencies

i. Immediately find all supporting documentation regarding

the issue ii. Respond to delinquencies immediately

1. Send a letter 2. Call the sales person

C. The Type of Customer 1. The trustworthy vs. untrustworthy customer 2. Ability to pay vs. willingness to pay 3. Ways to determine type of customer

a. Request for financial information and confidentiality agreement b. Third party comment


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i. Salesperson visits the account ii. Contact customer’s bank iii. Talk to industry group members and other vendors iv. Landlord

D. Analyze Chances of Successful Collection 1. Collectability

a. Internet as a search tool b. Banking information c. Availability and sufficiency of security d. Asset and UCC search, including real estate search e. Bank account search f. Review of debtor’s current status g. Effect of other creditors’ actions h. Analyze possible defenses to creditor’s claim (credits, guaranty,

antitrust, tort claims, harassment, threats of criminal prosecution)

2. Likelihood and Effect of Bankruptcy

a. Automatic stay b. Preferences

E. Identifying Potential Sources of Collection

1. Corporations

a. Promoters

i. Promoter cannot be an agent of corporation not yet in


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existence. Promoter personally liable on pre-incorporation contract unless creditor agrees to look solely to corporation when formed for performance

b. Shareholders – individual or corporate (alter ego)

i. Allows creditor to sue where no contractual relationship ii. Domination or control (unity of interest) iii. Wholly inadequate capitalization iv. Fraud or injustice unless corporate form disregarded

c. Successor corporations

i. Same shareholders and directors ii. Transfer of assets iii. Nonpayment of prior corporation’s debts iv. Same business

d. Partnerships

i. Must name individual partners to reach all assets ii. Partner by estoppel

e. Related Parties

i. Guarantors ii. Means test under Bankruptcy Code iii. Co-borrowers iv. Joint ventures v. Successor business (bulk sales) vi. Other creditors who exercise control


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F. Document Retention

1. E-Credit department 2. Document preservation: requires preservation of any document that may

be relevant to any current or future litigation

a. Once vendor anticipates litigation with the customer, the vendor must place a hold on its document destruction policy, including electronic information such as e-mails

b. Vendor faces risk of sanctions for failing to place litigation hold

3. Document retention policy

G. Review Workout Possibility

1. Hardship letter and request for financial information 2. Final demand by creditor with attorney 3. Workout to improve creditor’s legal position

a. Secured (cure any defects in documents, UCC filings, or recordation, increase the amount of security, add additional guarantees, self-help)

b. Unsecured (obtain security and guarantees, judgment pursuant to

stipulation, confession of judgment [beware state law procedures and due process problems], self-help)

c. Secured and unsecured debt (reduce indebtedness to written

agreement to minimize offsets, defenses, but beware of loss of purchase money priority due to the transformation rule when open account obligations are transferred to a promissory note)

d. Settlement agreement e. Collect for the debtor f. Find financing for the debtor


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H. Repayment agreements

1. Agreement to take payment over time for past due account 2. Fix the indebtedness 3. Waiver of counter claims and disputes 4. Ordinary course preference defense 5. Most favored creditor treatment clause 6. Stipulated judgment- discount coupled with judgment if default 7. Confession of judgment

a. With debtor’s counsel b. Without debtor’s counsel

I. Arbitration and Mediation 1. What is Arbitration?

a. Binding arbitration is a formal collection process most like a vendor filing a collection suit in a state or federal court

b. A vendor may invoke arbitration where the customer has agreed

through the terms of a vendor’s credit application to use an arbitrator to hear their dispute and resolve it through a binding judgment

c. A customer’s claims cannot be heard by a jury, nor the risk of a

sympathetic award to the customer, especially where the vendor has the economic power in the trade relationship

2. Agreement to Arbitrate

a. “Any controversy or claim arising out of this credit application, or sales thereto, or breach thereof, may be resolved by arbitration, at the election of [vendor], in accordance with the rules of the American Arbitration Association, and judgment rendered may be entered in the highest state or federal court”


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3. Mediation

a. Arbitration and mediation are similar in that they attempt to resolve disputes with customers without the vendor filing a lawsuit

b. Mediation is an informal process where the vendor and the

customer select a mediator who attempts to bring the parties to a resolution through negotiation

c. If one party is not happy with the negotiations, they can terminate

the mediation and pursue their claim in court

J. Beginning Litigation

1. Appropriate lawsuit

a. Common counts/breach of contract b. Conversion, fraud, fraudulent conveyance

2. Name all parties, list all trade names, bank accounts business license in

trade name) 3. Proper court

a. State b. Federal c. Jurisdiction d. Venue

4. Pre-judgment remedies

a. Theory - secure the ultimate judgment today b. Preserve collateral c. Obtain a lien not voidable after 90 days d. Practical uses


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i. Settlement ii. Prevents protracted litigation and additional expense

e. Replevin (claim and delivery)

i. Elements

(a) Fight to immediate possession (b) List of specific personal property

ii. need to know specific location of the collateral iii. Proof of affidavits or declarations iv. Documentary evidence necessary v. Necessity of demand vi. Bond required by creditor vii. Defendant can post redelivery bond viii. Turnover orders (directed to defendant)

(a) Used for property that cannot be located (b) Can reach property in other states (c) Avoids expense of levy (d) Enforced by contempt

5. Timing

a. Noticed hearing (5-30 days) b. Ex parte applications c. Collateral in immediate danger of being transferred, concealed, or

impaired in value


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d. Temporary restraining order pending noticed hearing issue as an

alternative binds only debtor after personal service e. May be issued without notice in extreme circumstances

6. Levy (expense)

K. Collection on Judgments

1. Elements – commercial debt states

a. Contract – written and oral b. readily ascertainable amount c. Probably validity of claim d. Unsecured e. Trade or business

2. Elements – fraud states

a. Fraud b. Conversion c. Secreted assets d. Fleeing debtor e. Debtor avoiding service f. Non-resident debtor

3. Location/types of assets a. Deposit accounts b. Inventory c. Equipment and motor vehicles


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d. Accounts receivable e. Real property f. Other tangible personal property g. Negotiable instruments, documents and money h. Securities

4. Proof of affidavits or declarations; role of documents 5. Turnover orders (directed to defendant)

a. Used for property that cannot be located b. Can reach property in other states c. Avoids expense of levy d. Enforced by contempt

6. Levy a. Possession

i. Keeper – expense ii. Resulting storage by authorities pending judgment iii. Service of writ

(a) Financial institutions (b) Third parties and filing with proper authorities

(Secretary of State, Country Recorder)

7. Timing

a. Noticed hearing (5-30 days) b. Ex parte application


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i. Great or irreparable bulk sales notice recorded assets being

concealed, impaired in value, or otherwise made unavailable to levy

ii. Temporary protective order pending noticed hearing issue

as an alternative – binds only debtor after personal service iii. May be issued without notice in extreme circumstances

8. Other provisional remedies

a. Receiver b. Injunction c. Accounting

L. Collecting on Judgments

1. Judgment liens on real property

a. Effect of judgment lien. A judgment lien on real property establishes and preserves the judgment creditors priority over later claimants

b. Creation of judgment lien. A judgment creditor obtains a

judgment lien on a judgment debtors real property by recording an Abstract of the Judgment in the office of the county recorder in which the property is located

c. All real property interests affected. d. Property in more than one county. The judgment lien attaches only

to the real property interests in the county where recorded. 2. Judgment liens on personal property

a. Personal property subject to judgment lien. A judgment lien on personal property attaches to accounts receivable, chattel paper, equipment, farm products, inventory, and negotiable documents of title


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b. Personal property not subject to judgment liens. Personal property in which security interests cannot be perfected are not within the reach of a judgment lien.

c. Creation of judgment lien. A judgment creditor obtains a

judgment lien on personal property by filing a notice of Judgment, along with a certified copy of the judgment, with the Secretary of State

d. Reach of judgment lien. The Notice of Judgment gives the

judgment creditor a lien on the equipment and inventory of the judgment debtor, anywhere in the state in which the filing occurs.

e. Duration of judgment lien on personal property. A judgment lien

on personal property is enforceable for five years from the date it is filed with the Secretary of State, unless it is satisfied, terminated, or released

3. Enforcement of judgment by writ of execution

a. Writ of execution defined. A writ of execution is a court process requiring a levying officer (i.e. sheriff, marshall or constable) of the county where the levy is to be made, to then enforce a judgment creditor’s money judgment

b. Limited to Money Judgments. Only a money judgment entered or

registered in the state is enforceable by writ of execution c. Issuance of writ. The clerk of the court where the judgment was

entered issues a writ of execution upon the judgment creditor’s request and payment of the appropriate fee.

d. Levy of writ of execution. After issuance of a writ of execution, it

must be delivered to the levying officer with instructions and the required fee.

e. Obstacles to collection. There are obstacles to collection where

senior liens exist on the property.

4. Wage Garnishment

a. Wage garnishment is the process by which an individual judgment debtor’s employer is forced to withhold the debtor’s nonexempt,


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disposable earnings for payment directly to the levying officer to satisfy the judgment

b. Withholding orders. In order for a judgment creditor to garnish

wages, the creditor must serve the judgment debtor’s employer with an earnings withholding order.

c. Earnings exempt from garnishment. The maximum amount of the

judgment debtors disposable income

5. Writ of Possession and Writ of Sale

a. Nonmoney judgments. b. Issuance of writ of possession or sale. c. Time for levy. The levying officer has 180 days after the issuance

of the writ to take the specified property into possession d. Writ of possession of personal property

e. Writ of possession of real property

f. Writ of sale

M. Keep Litigation Cost-Effective

1. Discovery

a. Purpose

i. Preparation for trial ii. Settlement

b. Types and timing i. Depositions ii. Interrogatories iii. Request for admission


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iv. Production of documents

c. Effect of discovery of creditor’s files

2. Settlement before trial

a. Settlement agreements

i. Novation is contingent upon settlement being paid in full ii. Security, attorney’s fees, and interest

b. Benefits and dangers of accepting a promissory note or notes

i. Requires future litigation to collect on

(a) A promissory note (b) May reduce defenses to debtor (c) Security, attorney’s fees, and interest

c. Settlement conferences pursuant to court order

i. Timing (eve of trial) ii. Role of creditor

3. Judgments

a. Default judgment

i. Timing (may apply to court after time to answer has elapsed)

ii. Relief only as prayed in complaint

b. Summary judgment i. Timing (hold at beginning and end of case) ii. Limitations


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(a) Relief only as prayed in complaint (generally) (b) No issue as to a “material” fact

c. Trial

i. Preparation ii. Court calendars iii. Witnesses iv. Original documents

d. Execution on judgment

i. Relationship to provisional remedies ii. Judgment liens (a) Real property (b) Business personal property (c) Time limitations on duration iii. Levy and execution liens iv. Exemptions (Personal property and homesteads) v. Supplemental proceedings (a) Judgment debtor examination (b) Third party examination

N. All Out Litigation: When To Do It

1. Make a statement to your dealer or customer network 2. Large dollars to collect 3. Solvent parties


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O. Pre-Litigation Checklist for Getting The Most Bank For Your Buck – What To

Do Before You Call Your Attorney

1. Internal Review

a. Review your company’s credit files, sales files, correspondence and reports

b. Review other facts; if appropriate, interview the sales people

responsible for the account c. Identify unusual problems, e.g., disputes, accounting or credit

issues, counterclaims d. Make a broad analysis of the likelihood of collection

2. Assemble the Facts and Documents a. Names of all debtors and guarantors b. Addresses of all debtors and guarantors c. Identify any collateral in which your company has a security

interest, deed of trust, etc. d. All locations of collateral e. Identify debtor's and guarantor's other assets. Are any of these assets free and clear of other liens, security interests, etc? f. Approximate value of collateral and other assets g. How much is owed? h. What is the form of the debt? (Open account, promissory note, etc.) i. Collect all relevant original documents


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j. Run a statement of account k. Review all payments made by the debtor to your company and to

other companies within the preference period if debtor were to file or be placed immediately in an involuntary bankruptcy.

l. Are any goods in shipment, or were any goods shipped within the

last ten days; the last three months? 3. Prepare a brief summary of the situation

a. List the relevant facts and documents

b. Be sure to mention any possible counterclaims, set-offs, defenses, etc.

c. Your analysis of the account and any suggestions (e.g.,

prejudgment attachment or replevin) 4. Call the attorney and send him/her the above materials

a. Identify your short and long term goals and problems (e.g., is a

replevin action appropriate, should a UCC Section 2702 reclamation letter be sent?)

b. Ask for an estimate of time, costs and fees c. Discuss who else should be kept apprised of the status and resolve

copies of correspondence, pleadings, etc. d. State whether you require monthly status reports or other progress

reports 5. Follow-up

a. The squeaky wheel gets the grease

b. Keep your attorney informed of any business

P. Defenses and Counterclaims

1. Basic rules


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a. You can choose your customers b. Don’t let your lawyer get ambushed

2. Antitrust/unfair competition a. Pricing and credit issues b. Restraint of trade claims

3. Fraud, misrepresentation 4. Contract interference 5. Discovery designed to inhibit the creditor 6. Documents and keeping tidy files