Part 9: Can I Just Give Up?

The ability to just walk away after turning a debt over to attorneys for legal collection depends on a few things. Legally, it depends whether the debtor has responded to the lawsuit by raising a counterclaim. If so, one can’t just fold the tent and go home, at least not without negotiating a “washout” or other settlement with the debtor. If the defenses are merely defenses, there is generally no difficulty in filing a voluntary dismissal and ending the case.

Contractually, the creditor may have a financial obligation to the agency or the lawyer if the creditor has engaged them and used their time to get to this point while letting them think the creditor was going to proceed in good faith. Typically, creditors only turn tail and run in reasonable circumstances where there costs are just outrageous. Even then, most will allow their counsel the opportunity to settle out the claim for some amount, thereby allowing the agency and the lawyer to recoup some of the investment they’ve made in the creditor’s claim.

Part 7: Lawsuit Time – Supporting Debt Litigation

Once the contacts have been made, defenses (or excuses) examined, and collectability assessed, if the amount involved warrants, the lawyer will offer suit as an option to turn up the heat. The lawyer may recommend the suit option or it might just be offered as another tactic. That difference might make a difference in the lawyer’s willingness to proceed on a wholly contingent fee basis. Remember, the lawyer is also assessing whether she is going to get paid for her services. If the case looks like a loser and doesn’t carry a good prediction of success, the lawyer may not want to take all the risk. When that happens, the lawyer may want to discuss a partial fee advance against the final fee. Usually those advances are in the hundreds of dollars (rather than the thousands), but it depends on a number of things, including the lawyer’s relationship with the agency that placed the claim.

One serious consideration for the client is whether to authorize suit in a disputed matter if an eventual trial will require the attendance of a witness from the creditor at the trial. Many times (most times) a witness isn’t necessary. However, with certain defenses and certain courts, a witness will be required in person in the local courthouse. Whether a witness will be provided is a piece of information that should be discussed with the chosen lawyer when suit is discussed. If the creditor will not send a witness to California from New York, that is a fact that the agency and the lawyer should know when deciding whether to take on a lawsuit on a contingent fee. After all, if the claim would be collectible after judgment, but the creditor holds the key to recovery (by sending a witness and will not), the lawyer and agency need to evaluate whether to take the risk the debtor will force the case to trial, in which case, there may be no recovery because the client won’t provide a witness.

If the lawyer recommends suit, the lawyer should be more willing to roll the dice and become a “partner” in the debt litigation, at least in terms of contingent fee. In almost every case, the client should expect to advance an amount for the actual court filing and service fees. These vary from state to state and county to county within states. It is not unusual for the court costs to be more than $250 for a $10,000 suit.

The lawyer will also request copies of all the contracts, invoices, delivery receipts and correspondence, if they haven’t already been provided.

Once all of the documents, funds and authorizations are received, the papers are filed and sent out for service. Some states allow process servers or certified mail service. Others require service by the Sheriff or Marshal. In any event, that takes some time and may have some difficulty. Address changes, “Mom & Pop” businesses where the operators are out working during the day and no one is present to receive service, may delay service.

After service is made there is another delay to allow the debtor to enter a defense. Often that period is 20-30 days. If no defense is entered after the appropriate time, many courts will permit entry of judgment by default (without a trial). Once any appeal time expires, that judgment is a judicial determination that the money is owed. Virtually every jurisdiction then has some process for the creditor (usually through a court officer) to seize assets of the defendant to pay the judgment. How that works (what it costs and how long it takes) varies state by state.

If a defense is entered, there are many ways the case can go. The lawyer should work with the creditor to review the defense and determine whether there is any truth or validity, whether some adjustment to the claim amount should be made and whether an overture at settlement would be appropriate. The response to a defense depends in great part on the pre-suit discussions. If the pre-suit discussion was only about the debtor’s ability to pay, then a list of disputes is raised when the suit is filed; creditors and lawyers are less likely to believe them. On the other hand, a debtor’s consistent reference to a dispute takes on additional significance when the debtor is willing to pay a lawyer to assert it rather than spending that money to settle the claim.

The tactics used in disputed litigation can include going right to trial, engaging in formal Discovery (perhaps to support a Motion for Summary Judgment – that there are no facts in dispute – or a Motion for Judgment on the Pleadings – that the pleadings themselves call for a decision for the creditor), mediation, arbitration or other settlement discussions. Whether one or another is appropriate depends on many circumstances and should be discussed among the team of the creditor, the agency and the lawyer.

Part 6: There are Disputes and There are Disputes.

Most credit people have heard all the stories. The customer who doesn’t want to pay because they didn’t get the shipment. Or it wasn’t the right product. Or it was the wrong size. Or it wasn’t delivered in time. Or it didn’t sell. Or it was broken. There are some stories about customers who assert all of these defenses, and more! Then there are disputes about the equipment that didn’t perform like it was supposed to. Or broke and the manufacturer could never get it right. Or the damage it caused when it leaked.

Some disputes are more suspect than others. On the other hand, some seemingly lame disputes might just get a Court’s attention. “The product was delivered a week late” might not seem so important, but if the delivery was drinking water for a two-week cruise, it might, especially if the debtor had to purchase replacement product, on an emergency basis, at a higher price. That could lead to a set-off or counterclaim.

The analysis of the disputes needs to be a cooperative effort among the client, the agency and the lawyer. The client knows the customer, the product and the client’s own processes. The agency has experience in the industry and, probably, with the client. The lawyer most likely has a greater understanding of the law and how it will treat the dispute. The lawyer will also have the best appreciation for the local flavor of the judges and juries and how they might deal with the debtor and its defense.

All of this information together will form a backdrop for decisions about payment arrangements, settlement terms, and lawsuits.

Sometimes the debtor files a counterclaim or countersuit as a means of raising defenses. Counterclaims are generally claims that could stand on their own and which could have been filed by the debtor against the creditor if the creditor hadn’t filed first. These must be carefully considered and dealt with. Such a claim could result in an affirmative recovery against the creditor. That means the debtor might win the suit and end up collecting money from the creditor. Often defenses (the product didn’t work) are filed as counterclaims, when they are defenses against the claim, rather than separate recovery actions.

Part 4: What Communication Should the Client Expect?

The short answer is that once you turn a debt over for legal collection, as the client, you should expect to be kept adequately informed of steps and progress, as well as risks. The longer answer depends on the agreement with the agency as to frequency and method of reporting.

Generally speaking, the client wants the agency to be the agent or the buffer for information from the lawyers. Agencies prefer that lawyers communicate with the agency so they can make sure the information is appropriate and meaningful for the client.

One of the many benefits collection agencies can provide is help in the management of account portfolios. If the agency has a large number of accounts for the client, there may be economies that can be achieved by setting up reporting and authorization systems in advance. As to reporting, perhaps the client wants an extensive report each month on all accounts. Otherwise, the client may want an individual report on each account monthly. It may be better to have individual reports when important activity occurs, trusting the agency to move the maters along. Some clients may provide settlement and suit authority in advance, allowing the agency to really manage the accounts. Some agencies will provide clients with real time access the agency’s database to allow the client to monitor accounts without the need for the agency to generate any reports. Technology has created complete flexibility to fit any organizational needs.

On the other hand, the agency and the lawyers should have an understanding as to what communication is expected (and necessary) to meet the needs of the client. Reports from lawyers may need to be more detailed so the agency can manage that information into its communication system with the client. Whether the agency prefers that report to come by mail, fax, email or on-line is a matter of preference and agreement. Most creditors’ rights firm these days can provide whatever method and form is needed by the agency.

At certain times, the telephone trumps all other methods of communication. While email may reach the account manager at the beach, live discussions may be better when there are trial preparations or detailed settlement issues that need to be reviewed.

Unless the account has been legally sold (assigned) to the agency, the creditor is the client of the lawyer and the lawyer is always free to communicate with the client (rather than its agency). However, this direct communication often short-circuits the established communication patterns and care should be taken (by the client or the lawyer) to bring the agency up to date.

Part 2: How is the collection lawyer chosen?

Choosing the lawyer is an art and a science. Most experienced agency personnel have relationships (or at least familiarity) with creditors’ rights lawyers in most major metropolitan areas. If they’ve been in the business any length of time, the agency person has had to find (and evaluate) lawyers for clients in the past. Agencies choose lawyers (and give them repeat business), because the lawyers are “good.” But how do they find the lawyers in the first place and what defines them as “good”?

A recent survey of those choosing lawyers to enforce commercial obligations found that most clients look for lawyers who know the industry and who are known in the industry. That stands to reason. Agencies, on behalf of clients, want lawyers who know what they are doing and who are players in the field.

In the first instance, an agency will look to recommendations from people they trust. Clients, other agencies, other lawyers and commercial Law Lists, are all regular sources of referrals for agencies. These recommendations will generally cover important issues that affect the recovery rates and the cost, such as:

• Is the lawyer effective at collecting?
• Does she have experience?
• Is he cost-effective and does he provide good value?
• Does she cover a wide geographic area, but still effective as a “local” lawyer?
• Is he board-certified in creditors’ rights?
• Is she listed on recognized Law Lists?
• Does he act (and report) promptly?

Agencies will then overlay their own particular philosophies on the process:

• Some want competition among multiple lawyers in the same geography.
• Some look for the best service, not just the best price.
• Others want new lawyers who are “hungry.”
• Others want lawyers who are active in the Commercial Law League of America (CLLA) and International Assn. of Commercial Collectors (IACC).

Lawyers who concentrate in collections make their availability known to agencies in many ways. They purchase listings in Law Lists, attend industry trade group meetings, and obtain (and advertise) their board-certification and specialization in creditors’ rights. Lawyers will advertise directly to the agencies and often visit the agencies to get better acquainted with the personnel. Since agencies will typically place claims for many clients with the same lawyers, the lawyers recognize strong agency relationships as a steady source of business and they market for that. Lawyers recognize that agencies and lawyers are part of the collections team that serves the credit needs of businesses.

Some clients remember their good (or not so good) experiences with creditors’ rights lawyers on other accounts and make specific requests of the agency when the time comes for legal placement. As the client, the creditor should always have the right to choose (or approve) the agencies’ choice.

Part 1: What Causes it to “go legal?”

When an account is placed with a collection agency, the client usually gives the agency authority to place it with a lawyer if the agency believes this move would assist in the collection. As a result this step often requires the agency to pay the lawyer a percentage of the collection, which reduced the fee the agency will earn. The incentive, therefore, exists for the agency to do what it can to collect without legal placement. The better agencies understand that the legal service is part of the “full service package” that agencies provide and realize it goes with the territory. The agency may not make as much money on the legal accounts and, in fact, may lose money. But they understand the idea that the client wants to have its needs serviced and that the agency can be the team leader that gets it done.

Many things can cause the client or the agency to place the claim with a lawyer. First, it could be an account that has a security interest or a lien right that needs to be enforced by a lawyer. There may be a particular contract issue or defense that needs legal help to resolve. The agency’s collection efforts may not raise the “threshold of pain” high enough to get the debtor to pay and they may need to call in reinforcements. Perhaps the client has done everything reasonable (or the customer has done something unreasonable) and the client wants immediate suit. These are all reasons that might get the agency to place the account with a lawyer.

Clients also must recognize that not every uncollected account justifies placement with a lawyer. Yes, placement with a lawyer does not necessarily mean a lawsuit, but if the claim is of a certain size and the debtor is of a certain frame of mind, the agency (and probably the client) can tell it will not be collected without a suit. And the agency and client know that claims of certain size will never justify a lawsuit on a typical contingent fee basis. In many of those cases, even the court costs will be too much to risk on the claim. Those claims should never “go legal,” at least not without a clear understanding what is expected, and what the fee and cost expenses will be.

A short series for Creditors

Many collection or credit managers spend a great deal of time preventing collection problems, whether in the granting process or the in-house collection phase. More experienced personnel understand what happens when an account can’t be collected or adjusted in-house and has to be placed with an outside agency. Most managers have had experience with collection agencies and have some sense how that process works. The more experienced managers have systems and relationship set up so their team knows exactly when an account gets placed and how that happens.

Fewer know the ins and outs of what happens after the agency makes its efforts, but can’t collect or settle the account. This short series will cover the legal placement and litigation process for a typical collection claim for goods sold and delivered.

Click here to place a claim

A mechanic’s lien can be filed against property and structures by contractors, subcontractors, material suppliers, and other construction professionals involved in new construction improvements to real property, or the alteration and/or repair of existing structures. When a mechanic’s lien claim is filed, it clouds the property owners’ title to the affected property, and normally would be released or satisfied after the parties’ filing of the mechanic’s lien claim have been paid for their labor or material. In Pennsylvania, contractors, subcontractors and suppliers often file mechanic’s lien claims against construction site property to secure prompt payment for labor and material. Since amendments were made to Pennsylvania’s mechanic’s lien law in 2006, lending institutions, as well as property owners, contractors and subcontractors, are updating their procedures to protect their rights under the new amendments.

When a mechanic’s lien claim is filed, it clouds the property owners’ title to the affected property, and normally would be released or satisfied after the parties’ filing of the mechanic’s lien claim have been paid for their labor or material.

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