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Publication Category: Creditors' Rights

The Benefits of Obtaining a Judgment: Post Judgment Collection

Robert S. Bernstein, Esq.
Managing Partner, Bernstein-Burkley, P.C.

Often times, when we as attorneys suggest the possibility of suit in a collection case, clients are conflicted as to whether they should file suit. It is often stressful to think of spending upwards of $300.00 on suit costs; some clients have compared this to “throwing good money after bad.” While spending the extra costs on suit may not seem worthwhile, obtaining a judgment against a Debtor can certainly provide the client with leverage, ultimately resulting in post judgment collection.

Anytime a new case comes into our office, we make an attempt to learn if the business is no longer operating and if there is not a personal guarantor.  In that case, we generally do not suggest suit, as a judgment will not likely lead to collection. If we are able to confirm that we have a viable address for the Debtor, and that the business continues to operate (or there is a guarantor or other asset to go after), suit is most likely the best option for the client.

Once a complaint is filed, a Debtor cannot ignore our demands without the risk of default judgment. After service of a Complaint by the Sheriff or otherwise, depending upon the applicable Rules of Civil Procedure, a Defendant has 30 days to respond to the Complaint, typically by filing an Answer or in certain instances, Preliminary Objections. After 20 days, we provide the Defendant with a Ten Day Notice. Once 30 days pass with no response, we are free to enter a Default Judgment.

Often times, we hear that it is the client’s goal to place a lien on the Defendant’s property. What clients sometimes don’t realize is that a judgment automatically places a lien on all real property owned by the Defendant in the county in which the judgment is filed. There are of course some exceptions, for example, if the property is owned jointly between a husband and a wife and the judgment is entered against only one spouse, no lien rights are created.  This lien lasts for five years, but can be renewed for additional five year periods.

Aside from automatically serving as a lien on residential property in the county where judgment was filed, there are several other advantages to obtaining a judgment against a Debtor. Demands coming from an attorney are far more forceful at this stage of the game. This is a useful tool regardless of whether the client chooses to pursue any of the additional remedies listed below. At this stage of the process, making demands is different than it was before suit was filed, as there is now a judgment in place. The leverage in forcing the Defendant to pay is the judgment, which has now affected the Defendant’s credit and real property in the county where the judgment was filed.

Our most popular method of pressing for payment on a judgment is garnishing the Defendant’s bank account. This option is only available if the client has banking information on hand. The costs associated with garnishment are typically $150.00 and include filing fees and Sheriff’s service upon the Bank. After service, the Bank has 30 days to respond to our interrogatories. If no response after 30 days following service, we are free to move for a judgment against the garnishee. As soon as the Bank is served with our interrogatories, the Defendant’s bank account is “frozen.” Often, this will result in us being contacted by the Defendant. Regardless of whether contact is made, when we are in receipt of answers to our interrogatories, we are free to enter a judgment against the Bank for the amount the Bank admits to owing our Defendant in the answers. Note that individuals are entitled to a $300.00 exemption, which is ordinarily automatically deducted from the Garnishee’s answers.

Another method of execution available to the client after filing judgment is a writ of execution directed toward the Defendant’s personal property. The cost of filing and serving a writ of execution is approximately $350.00. Because of the cost associated with an execution, executions should be used only when there is money or property owned by the Defendant (individually, not as a tenant by the entirety) that can be seized to satisfy a judgment. After the writ is filed, the Sheriff has 90 days to service and levy upon the writ.

There are two types of executions, real estate and personal property levies. Personal property is considered non-real estate property such as automobiles or household furnishings in the case of individuals. In the case of a business, personal property may include equipment, office furniture, computers, and inventory. When an execution is issued to the sheriff for personal property, there need not be a description of the specific property to be seized. Personal property is tagged for purposes of identification when an execution on personal property is issued. The sheriff must post and publish a Notice of Sale advertising when the property will be sold. A representative from the Plaintiff must be present at the sale.

Personal property may be subject to exemptions. If a property claim is filed, the sale will not proceed before a determination is made on the claims. However, in most instances, the client isn’t scheduling the sale to obtain the goods; rather the client is hopeful that the sale will lead to payment of the Judgment. Property claims do not solely apply to individuals. Even in this instance of a sale of business property, a secured creditor, such as a bank or other lending institution, might have a security interest in the assets of the business, which may take precedent over an execution. Therefore, it is important that a UCC filing check be made on any business before executing on any of their assets to determine if there is a security interest in the name of a secured creditor.

Although suit can be a little costly, depending on the amount of a client’s claim, suit is usually worthwhile, as the benefits normally outweigh the risks. Obtaining a judgment provides us with leverage that is far more likely to result in collection. Patience, along with a little time and money can go a long way in the collection world.

For additional information on perfection of security interests and the usage of other credit enhancements, please see the other articles in this Publications section.

The Unsettled Law of Distraint Procedures in Pennsylvania

Bernstein-Burkley, P.C.

The ambiguity of the legality of remedies available to a landlord when presented with a defaulting tenant has put the landlord in a difficult situation in Pennsylvania. The Landlord and Tenant Act of 1951, 68 Pa.Stat.Ann. § 250.302 et seq (hereinafter “the Act”) was thought to be envisioned by the legislature to afford a complete and exclusive remedy for a landlord seeking to vindicate his rights against a defaulting tenant. The Act provides for a statutory lien on tenant’s goods for rents due up to one year and authorizes a distraint action, in which the landlord may lawfully take possession of, and sell for arrearages of rent, a tenant’s personalty found on the leased premises. Under the Law of Distraint, no enforceable landlord’s lien arises unless and until the statutory distraint procedures have been followed, which includes an appraisal and sale of the property within a reasonable period of time. The issue of legality arises as to the procedure permitting the attachment by state officials of the tenant’s personalty based on the landlord’s ex parte petition authorizing the Sheriff to hold a public sale of the tenant’s property.

The federal courts of Pennsylvania began raising questions about the unconstitutionality of the distraint procedures based on due process concerns for the tenant: primarily the lack of notice and opportunity to be heard. In 1986, the Pennsylvania Superior Court held that the distraint process was inoperative. Later, the Superior Court confirmed it had previously decided distraint was unconstitutional. The Pennsylvania Supreme Court has since explicitly recognized the Superior Court’s ruling. Even where distraint has not been explicitly recognized as unconstitutional, the courts have emphasized that strict notice requirements must be adhered to prior to lawful possession and disposition of the goods.

The problem becomes then for the Landlord attempting to assert his rights, what is a lawful action. For example, a landlord was held liable for conversion where he unilaterally took possession of a tenant’s equipment by physically barring the tenant from entering the premises and then selling the goods to a new tenant. Thus, the question becomes raised whether a landlord proceeding in a similar manner as the distraint process authorizes will be held liable in a tort action against the tenant for an unlawful act. Commentators have suggested that the Pennsylvania Supreme Court would recognize a cause of action for trespass under the Act for a landlord who uses self-help instead of the legal process to evict a tenant.

Further confusion exists because any self-help repossession remedy (remedy utilized prior to the Act) has been effectively rendered inoperable. Self-help eviction constitutes any acts undertaken to prevent a tenant from using the leased premises, other than by judicial process, including, but not limited to removing the tenant’s personal property, using or threatening to use force or violence, reducing or disconnecting utility services, or removing parts of the structure, such as doors and windows. Self-help repossession has been specifically enjoined in a commercial setting by the Pennsylvania Court. However, on the same basis the distraint procedures are unconstitutional; the Pennsylvania courts have treated self-help repossession as unconstitutional in that it involves the taking of property without affording a tenant notice and an opportunity to be heard.

Although many commercial leases commonly provide for landlord liens and may also include distress provisions permitting the landlord to sell the tenant’s personalty as a remedy for delinquent rent, it does not appear simply including the provision in the lease would give a landlord an actual lien without a court proceeding that includes notice and an opportunity to be heard. The Western Pennsylvania Bankruptcy Court has recognized the conflicting authority on landlord liens, distress and distraint in Pennsylvania stating that the relevant issue does not become whether the lease contains a distraint clause but whether the Debtor acted legally under Pennsylvania law. Thus, most commentators believe either the landlord’s lien pursuant to the distraint process is unenforceable and/or that the only form of distress or distraint available to the landlord is to post the premises and hope the tenant voluntarily surrenders the goods.

Thus, due to the current conflicting state of the law, it is suggested a landlord should not attempt self-help or seizure of a tenant’s property but rather should commence an eviction action. Moreover, this is so assuming a landlord who is owed money would rather be the plaintiff in a collection action against the tenant rather than a defendant in a conversion action brought by the tenant.

Tenancy by the Entireties: Why a Personal Guaranty May Not Be Enough

Pennsylvania recognizes several forms of property ownership. The main form of property ownership that creditors need to be concerned with in Pennsylvania, however, is Tenancy by the Entireties.

Tenancy by the Entireties: What is it?

Tenancy by the entireties is a form of concurrent ownership of property in which each owner holds an indivisible interest with a right of survivorship. Although that may sound complicated, the method by which it is formed is quite simple: marriage. When a husband and wife acquire real property together (ie. the property is in both of their names) the property is automatically deemed an entireties property and both husband and wife are tenants by the entirety. This means that each spouse technically owns the whole property, such that neither husband nor wife, acting alone, can convey an interest in the property to a third party. In the simplest of terms, the creditor of only one spouse cannot execute upon property held as tenants by the entireties.

To make matters worse for creditors, the tenancy by the entireties doctrine also applies to joint bank accounts, making both a levy on real estate and a garnishment of bank accounts extremely difficult, if not impossible, when a debtor is married. Pennsylvania Courts have held that even language in the title of a bank account stating that the husband and wife intended to hold the account as Joint Tenants With Right of Survivorship was not enough to show clear and convincing evidence that they intended to create an estate other than a tenancy by the entirety.i Pennsylvania Courts have also held that even when an account is held by a married couple and a third party, as long as the intention existed to hold the account as tenants by the entireties, the account is entireties property.ii

The point is that Pennsylvania Courts are loathe to find that a husband and wife hold property in any other form than as tenants by the entireties, no matter what evidence exists to the contrary. Creditors of only one spouse, therefore, have virtually no ability to access entirety property for the purposes of execution.

How can Tenancy by the Entireties be Destroyed?

For all intents and purposes, tenancy by the entireties is terminated only by the death of one spouse, divorce or by the joint action of both husband and wife to intentionally dissolve the property ownership. Additionally, if the debtor spouse dies the non-debtor spouse takes the property as the sole owner, due to the right of survivorship, thereby eliminating the interest that any creditors may have had in the property to begin with. If, however, the non-debtor spouse dies, the tenancy by the entirety is again destroyed, this time allowing the creditors to attach the property now owned solely by the debtor spouse. Since such an event is both unlikely and morbid, it is not in a creditor’s best interest to sit around hoping that the non-debtor spouse dies for purposes of execution. So how can we avoid this mess, you ask?

Becoming a Joint Creditor

By becoming a joint creditor you are able to essentially ignore all of the above. Only a joint creditor (a creditor of both husband and wife) is able to attach or levy entireties property. Both spouses can act jointly to alienate their entirety property by, for example, both signing a personal guaranty. By requiring the spouse of an individual signing a personal guaranty to co-sign the guaranty, you avoid the impenetrable barrier of entireties property should that individual default. Co-guarantors waive the tremendous protection afforded by tenancy by the entireties. (Requiring the spouse of an individual signing a personal guarantee to co-sign is not permitted in some states, therefore, it is best to consult an attorney before engaging in such a practice).

Will Tenancy by the Entireties Ever Cease to be an Issue for Creditors?

Ever since the United States Supreme Court held in 2002 that Federal tax liens could attach to entireties propertyiii there has been a myriad of scholarly speculations as to how much longer tenancy by the entireties would survive as a form of property ownership. If the IRS can levy on entireties property, how long before a non-governmental creditor successfully makes the same argument?

So Our Options Are…

  1. Wait for the non-debtor spouse to pass away.
  2. Hope that the debtor and his spouse hit a rough patch and divorce
  3. Hope that the Pennsylvania Supreme Court affords all creditors the same rights as the IRS for debt collecting purposes
    OR…
  4. Protect your rights as a creditor by getting spouses to co-sign guarantees.

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i – Constitution Bank v. Olsen, 423 Pa. Super. 134 (1993)

ii – Plastipak Packaging, Inc. v. Depasquale, 2007 Pa. Super 348 (2007)

iii – United States v. Craft, 535 U.S. 274 (2002).

BAPCPA Amendments to Bankruptcy Code Provide Extra “Teeth” for Unsecured Credit Sellers

Augments expanded Reclamation Rights

Robert S. Bernstein, Esq.
Bernstein-Burkley, P.C.

Creditors are discovering new ways to help collect debts from bankrupt customers since the passage of the 2005 amendments to the The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

The amendments offered unsecured creditors powerful new collection rights, including Section 503(b)(9) of the Code, which grants the seller of goods an “administrative expense claim” for any goods delivered to the debtor during the 20 days preceding the bankruptcy filing.

Generally speaking, administrative expense claims are high priority – above unsecured claims, but below secured (lien) claims – and it is expected they will be paid in full by the case. As a result, 503(b)(9) should allow an otherwise unsecured creditor to receive a greater percentage of its claim than would other unsecured creditors. While there is no absolute guarantee of payment, these administrative expense claims must be paid in full in order to confirm a Plan of Reorganization in a Chapter 11. This provides some additional leverage.

The Purpose of Section 503(b)(9):

Under most state laws, a credit seller has the right to “reclaim” goods (get them back or get a lien for the value), from a defaulting buyer. Most state laws require a reclamation notice be given within 20 days of the delivery. Some require as few as 10 days. Recognizing the difficulty with these short timeframes, earlier changes to the Bankruptcy Code enabled creditors to give notice within 20 days after the bankruptcy filing. The right still only covered deliveries in the 10 days before the bankruptcy.

The 2005 amendments expanded the notice rights to provide that, when goods are sold to a debtor within 45 days of a bankruptcy filing, the seller has a right to reclaim those goods, so long as the seller gives notice within the first 20 days of the bankruptcy. Failure to provide this notice results in a waiver of the reclamation right. Sellers often miss this “notice deadline” and lose their right to reclaim their goods. Further, because the rights of a reclaiming seller are subject to the rights of a prior, properly perfected lienholder on the type of goods sold, this reclamation right is often illusory.

Section 503(b)(9) was inserted into the Bankruptcy Code as a way of offering relief to sellers of goods whose reclamation right is rendered meaningless – either by failing to give the required notice or because of a prior lienholder’s rights.

Asserting a Claim

The process of asserting a 503(b)(9) claim is relatively simple. Sometimes, the debtor will simply agree to grant the seller an administrative expense claim in the full amount of the goods received by the debtor. If the debtor refuses to cooperate, the seller can file a motion with the court, seeking to have the claim allowed.

Creditors that intend to file a 503(b)(9) claim in a bankruptcy case should be aware that courts are often inclined to grant “503(b)(9) procedures orders” proposed by the debtor. These orders usually set deadlines for filing 503(b)(9) claims and are often used by debtors to avoid many of their 503(b)(9) obligations. These Orders should, but may not, provide a streamlined procedure, short of filing a Motion for Administrative Claim with the Court.

Creditors’ Experiences with Section 503(b)(9):

Creditors have had mixed results in the first two years following the addition of section 503(b)(9) to the Code. For starters, obtaining an allowed administrative claim requires an upfront investment. The creditor must do one of two things: 1) get the debtor to agree to allow the 503(b)(9) claim; or, 2) if the debtor refuses to agree, file a motion with the court. This means that the creditor often has to hire an attorney and expend resources upfront.

More importantly, debtors will often challenge the 503(b)(9) claim in an attempt to get the creditor to negotiate the amount. Debtors will often claim that they received the goods outside of the required 20-day window. This forces the creditor to show evidence, though supporting documentation and testimony. Debtors sometimes take this position solely as a negotiation tactic. Debtors know that it will cost the creditor valuable time and money to litigate the case and that the creditor may be willing to settle for less in order to avoid litigation.

Unfortunately, the Code does not require that the administrative claim be paid in full immediately after the Court allows the claim. Instead, the Code only sets the relative priority of the claim. In Chapter 11, a requirement for the confirmation of a Plan is that administrative expense claims be paid “in full and in cash.” If the case is ultimately declared “administratively insolvent” – i.e. the debtor does not generate sufficient cash to pay its administrative claims – then 503(b)(9) creditors will probably not receive the full amount of their claims.

While the court can order immediate payment of these claims, they often decline to do so. The courts have tended to be very debtor friendly on this issue. In two recent cases, In Re Bookbinders and In Re Global Home Products, LLC, creditors attempted to force immediate payment of 503(b)(9) claims. In both cases, creditors urged the court to order immediate payment of the claims, arguing that there may not be enough assets left at the end of the bankruptcy to pay the 503(b)(9) claims in full. In both cases, the courts’ reasoned that the Code did not explicitly provide for immediate payment. The courts in both cases denied the creditors’ request for immediate payment of their 503(b)(9) claims. Unfortunately, in the Global Home Products case, 503(b)(9) creditors ultimately received less than 50 percent of their claims under the debtor’s Plan.

While a 503(b)(9) creditor appears to face an uphill battle, it is not all bad news. In fact, section 503(b)(9) has greatly increased the potential for recovery for large numbers of unsecured creditors nationwide. Notwithstanding the difficulties of allowance and payment that 503(b)(9) creditors face, they stand in a better position than a general unsecured creditor. Section 503(b)(9) claims are given the same priority status as the debtors’ attorneys’ and other professionals’ fees. In the grand scheme of the bankruptcy system, this is about the best position in which a trade creditor can sit..

Since many 503(b)(9) motions are lightly contested, they can be handled by experienced creditors’ rights counsel at a modest price. In fact, a valid 503(b)(9) claim is often stipulated to by the debtor early in the case. Often the debtor will agree to allow the claim in full, if the creditor agrees to forego payment until a plan can be confirmed. This system benefits all parties because if all 503(b)(9) creditors demanded immediate payment in full, many debtors would not have sufficient cash flow to meet those demands, and would terminate operations shortly after entering bankruptcy. Since debtors rarely enter bankruptcy with significant cash reserves, such an outcome would likely result in 503(b)(9) creditors receiving far less than 100 percent of their claims.

If a creditor is willing to accept a reduced amount on its 503(b)(9) claim, then it should consider “claim traders” – companies that purchase bankruptcy claims from creditors. Claim traders are often very interested in 503(b)(9) claims and, depending on the circumstances of the particular debtor and its prospects for reorganizing, are often willing to pay a very large percentage of the claim.

How Creditors Should Plan On Using Section 503(b)(9):

When a creditor receives notice that one of its customers filed bankruptcy, the creditor should immediately check its records to determine whether it delivered goods to the debtor within 20 days of the bankruptcy filing. If so, the creditor should consider its reclamation notice options and consider whether to pursue the 503(b)(9) claim. There is time to consider the latter. The former has strict notice deadlines. Obviously, the 503(b)(9) considerations are determined by the size of the claim. Amount a particular creditor is willing to spend to protect the claim depends on the size and nature of the creditors’ business.

As a general rule, the creditor should always attempt to obtain the debtor’s consent to allowance of the 503(b)(9) claim. Should the debtor refuse to agree to allow the claim, then the creditor again must decide whether the claim is worth a further investment in time and money.

Conclusion:

Section 503(b)(9) is not a guaranteed path to full recovery on an unsecured claim. The process can lengthy and result in a reduced payment several months or years after the bankruptcy was filed. However, the right to payment granted by section 503(b)(9) is substantially better than the rights afforded to a general unsecured creditor. In practice, section 503(b)(9) has proven to be a valuable tool to unsecured creditors seeking to recover a portion of the debt. In fact, in the right circumstances, section 503(b)(9) can be used to obtain a full recovery on an otherwise uncollectable debt. Accordingly, when a customer enters bankruptcy, before writing off the debt as uncollectable, creditors should always analyze the prospect of a 503(b)(9) claim. It just might prove to be invaluable.

Bob Bernstein practices at Bernstein-Burkley, P.C. in Pennsylvania.
www.bernsteinlaw.com Bernstein, board-certified in Creditors’ Rights and in Business Bankruptcy, is Managing Partner of the Firm. Bernstein recently published Get P.A.I.D., A Guide to Getting Paid Faster (2007 Business Credit Publications LLC), which is available at getpaidsystem.com and amazon.com (search keyword: get p.a.i.d.) and could be ordered from major retail outlets.

Collateral Assignment of an Entity Interest: Economic v. Governance Rights

Bernstein-Burkley, P.C.

In these difficult economic times, debtors have become more creative in proposing additional or substitute sources of collateral to secure a debt or obtain a forbearance or loan modification. As real estate values have plummeted, alternatives have become more attractive, including an assignment of the debtor’s interest in an operating entity with good cash flow.

However, the recent decision of the Pennsylvania Superior Court in Zokaites v. Pittsburgh Irish Pubs, LLC, 962 A.2d 1220 (Pa. Super. 2008), appeal denied 972 A.2d 523 (Pa. 2009), provides food for thought in terms of structuring and drafting a collateral assignment of an interest in a limited liability company or partnership. In Zokaites, a creditor was attempting to enforce its judgment lien by executing upon the debtor’s interest in two limited liability companies (“LLC”) that owned and operated several Pittsburgh area restaurants. The creditor sought a court order to compel the debtor to transfer its ownership interest in the LLCs so those interests could be sold at sheriff’s sale. After much procedural wrangling in both state and bankruptcy court, the case ended up in the Superior Court, which looked to Pennsylvania’s Limited Liability Company Law, 15 Pa.C.S. §8901 et seq. (“LLC Law”), for guidance.

The Superior Court focused on a provision in the LLC Law that prohibits a transferee of an LLC interest from becoming a member or participating in the company’s management without the approval of all other LLC members. The same provision, however, allows a transferee to receive the LLC member’s distributions or other return of capital contributions. Because of this protection of an LLC’s “close-knit structure,” the Superior Court decided that a judgment creditor can secure a debtor’s economic rights to distributions and return of contributions from the LLC, but cannot obtain the debtor’s governance rights to vote and participate in managing the LLC. The Superior Court equated this remedy of obtaining the economic rights in an LLC interest to the “charging order” that is permitted against a partnership interest under Pennsylvania’s Uniform Partnership and Limited Partnership Acts (“Partnership Acts”).

In light of the decision in Zokaites, lenders considering accepting a collateral assignment of an entity interest should keep a few things in mind for due diligence and drafting purposes. First, where a debtor has interests in multiple related entities, have the debtor provide an organizational chart. It is often easier to understand a complex organizational structure from a chart or “tree” than from a description. The chart should show the relationship among the entities and include the names of each entity and the percentage interest the debtor owns. For example, in a recent transaction where several guarantors were proposing to pledge their interests in a variety of LLCs and partnerships that in turn were the general and limited partners of other entities, an organizational chart prepared by the debtor was a crucial tool in pinpointing who owned what and in targeting the collateral.

Second, once you understand what entity interest(s) the debtor owns, it is essential to carefully review a copy of the organizational agreement and any amendments (the LLC Operating Agreement or the Partnership Agreement) for each entity. Key provisions include transfer or assignment rights or restrictions and default and dissolution provisions. If the organizational agreement expressly permits assignment, then the limitations under the LLC Law and the Partnership Acts do not apply1. Most likely, however, the LLC or partnership interest will not be assignable without the other members’ or partners’ consent. It is also important to understand whether an assignment will trigger an unwanted result such as a dissolution or default.

Third, once you know what is owned and can be pledged, draft the assignment to specifically identify the entity interest being pledged. Taking into account the ruling in Zokaites, where not all of the LLC members or partners are involved, a pledge of economic rights only is more likely to be enforceable than a collateral assignment that appears to transfer governance and other rights as well. In most instances, the cash flow from the right to receive distributions, profits, and return of capital is the true collateral anyway.

In describing complex or multiple entity interests or owners, consider attaching as exhibits the organizational chart and a table identifying each debtor, the entity, and the percentage interest owned. Include in the body of the assignment representations and warranties by the debtor confirming all of the information on the chart and table as true, complete and correct and that the debtor’s interest has not already been pledged or assigned.

Fourth, since the creditor will not have governance rights, the pledge agreement should also contain covenants to protect the creditor’s right to receive distributions. Such covenants would include prohibiting the debtor from voting to amend the Operating or Partnership Agreement or to dissolve the entity. Another useful provision would be the debtor’s authorization for the LLC or partnership and its officers to recognize and give effect to the collateral assignment by paying distributions directly to the creditor or lender upon demand. Finally, when the assignment is being made by a married individual, if possible have the spouse join in to waive any marital or spousal interest.

Assignment of a debtor’s interest in an LLC or partnership can be a valuable and useful form of collateral. But the creditor should follow the money and remain mindful of the Zokaites decision by taking a pledge of the economic rights and leaving the governance rights alone, unless all of the entity owners consent.

1. Similar to the LLC Law, the Partnership Acts contain provisions that, unless otherwise agreed, the assignee of a partner’s interest does not become a partner or share in partnership liability and cannot exercise a partner’s management, inspection of records, or accounting rights, but has the right to profits. 15 Pa.C.S. §8344(a) and 15 Pa.C.S. §8562(a)(2)and (c).

What Credit Grantors Should Do Just Before Sunrise

By Robert S. Bernstein, Esq.

The sun always rises, stocks always go up, and the economy will always turn around. If you don’t believe that these are true statements, there is no need to read on. If, on the other hand, you admit the probable truth of these maxims, then you always need to be thinking about the future. You can decide whether it is a short- or long-term view, but whatever the time horizon, there are things that you, as a credit grantor, need to be thinking about before the sun rises next.

We didn’t have much warning about the latest downturn. It came pretty quickly and, most would say, without warning. In prior articles, we’ve talked about what to do to prepare for a downturn (if you can). Here, we’ll discuss how to prepare for the upturn, the “good times.”

Are you a credit grantor? Well, do you lend customers money either by outright loans or by selling goods or services on credit? If so, you are a credit grantor.

As to credits already in place (and, presumably not being paid according to terms), one can assume that a general improvement in the economy should improve customers’ general ability (or willingness) to pay. Of course, any particular customer’s financial situation may not be changed by the general upturn. A creditor should consider the customer’s change of circumstances and put a collection strategy in place that deals with those circumstances. A periodic review should be appropriate. If efforts were suspended because the customer’s finances were poor enough to conclude that payment could not be obtained and if the customer’s situation appears to be improving, renewed and revised collection efforts may be in order.

The other side of the coin is the preparation to lend again. Many businesses responded to the economic and credit conditions by raising credit standards and reducing the customers who qualified for credit. That was a business strategy that many followed. Those who did that may be starting to think about relaxing those standards and opening the credit faucet again.

As outlined in the Preparation phase of our Get P.A.I.D.® Credit System (www.getpaidsystems.com), we often recommend that lenders prepare to lend by examining their credit policies, procedures and documents before they even get to evaluating a particular credit. Our theories are based upon a concept that we call the Payment Gap. That is the distance between the sale (or extension of credit) and the time payment is received. Except in cash-in-advance or cash-on-delivery situations, that Payment Gap always exists. How you plan for it, manage it and get compensated for it are the keys.

The Payment Gap concept is based on the idea that all credit costs the lender something. Many lenders do not consider all of the costs. Considering all of the costs (cost of funds, opportunity costs, collection costs, marketing costs, client replacement costs) allows a lender to properly price the credit or the sale.

Once it is priced in accordance with actual costs and company profit margins and expectations, you should look at the policies and procedures that should be in effect to manage the lending and collection process.

Do you have a written policy (even a sheet of paper hung up over the desk of the person responsible for approving credit)? If not, you should. Everyone in the organization should know what steps to follow and under what circumstances credit is approved for new and existing customers. Once those steps are agreed on by the management (so it will be followed and enforced), then start to look at your documents.

Are your standard forms up to date? Do they include all of the protections that you can get (tempered by what the market will bear)? Have you considered the interest, service charges, attorney’s fees, guarantees, liens and other possible protections? Obviously each market and industry will be able to stand different levels of protection, but these “credit enhancements” should be considered.

In Get P.A.I.D.® A Guide to Getting Paid Faster (and What to do if You Don’t), we discuss in more detail why “preparation” is such a large part of the lending process. Every tool in a credit manager’s toolbox is designed to protect the organization. Among the tools that should be considered in preparing to lend are:

  • Advance deposits – It ensures customer buy-in, protects the bottom line and gives proof internally and externally that the company is serious about collecting its debts.
  • Final payment upon receipt – The interval allows a debtor to obtain the funds and complete the transaction.
  • Payment due in 30 days – This gives the customer time to examine the merchandise before payment comes due.
  • Late fees – This sensible policy helps the credit department recoup some of the company’s credit costs. Late fees also rescue profit from the clutches of slow payers and send a clear message to employees that this is a credit conscious culture.
  • Credit agreement – This document provides the terms and conditions of a credit relationship and sets the ground rules for any future conflicts. It is one of the credit manager’s sharpest tools. It is especially useful for new, large or risk-prone accounts.
  • Credit enhancements – This document provides leverage and protection, especially for new, untested accounts. Types of credit enhancements include, personal guarantee, merchandise liens, purchase money security interests, letters of credit and confirmation.

Another thing to remember is to make sure you have your credit application and credit checking process tuned up. Often the most important “boilerplate” and terms and conditions can be included in the credit application.

Once you are through this Preparation phase or review, then you can look at individual credits. That review should be in accord with the processes, policies and procedures adopted to meet the plans and expectations of the company.

Before things turn around, and you become busy with sales and new credit applications and the like, now is a great time to get these things in order. When business starts to flow again few companies take the time to check their processes and systems. Everyone is pre-occupied with booking business and following through on orders. So, during the calm before the storm, just before dawn, is the perfect time to tidy up the store to get ready for the customers.

Robert Bernstein is the author of Get P.A.I.D.®: A Guide to Getting Paid Faster (and What to do if You Don’t). The book lays out an innovative strategy for businesses to successfully manage their credit policies and collect for their sales. Get P.A.I.D. ® is Bernstein’s comprehensive system for businesses and credit managers to increase profits, reduce costs and delays, while developing better relationships with customers. For more information, please visit www.getpaidsystem.com

Forum Selection Clauses Under Pennsylvania Law

A forum selection clause is a contractual provision, whereby the parties to the contract agree that all future legal disputes between the parties will be litigated in a particular forum.

The Pennsylvania Supreme Court has long recognized the validity of forum selection clauses, holding that, “while private parties may not by contract prevent a court from asserting its jurisdiction or change the rules of venue, nevertheless, a court in which venue is proper and which has jurisdiction should decline to proceed with the cause when the parties have freely agreed that litigation shall be conducted in another forum and where such agreement is not unreasonable at the time of litigation.” Central Contracting Co. v. C. E. Youngdahl & Co., 418 Pa. 122, 133, 209 A.2d 810, 816 (Pa. 1965). The Supreme Court went on to further hold that such agreements are only unreasonable when, in light of all circumstances existing at the time of litigation, the plaintiff’s ability to pursue a cause of action would be seriously impaired by enforcement of the clause. Id. However, the Court was clear to point out that mere inconvenience or additional expense is not the test of unreasonableness, since it is assumed that the plaintiff received consideration for these things under the contract. Id. The Court then concluded that, “[i]f the agreed upon forum is available to a party and said forum can do substantial justice to the cause of action then that party should be bound by his agreement.” Id. at 133-34, 209 A.2d at 816. In other words, if both jurisdiction and venue are proper in the chosen forum then the forum selection clause should govern.

The Superior Court of Pennsylvania has recently cited the Supreme Court’s holding in Central Contracting as the established rule of law in this Commonwealth with regard to forum selection clauses. See, Patriot Commercial Leasing Co., Inc. v. Kremer Restaurant, 2006 PA Super 371, 915 A.2d 647 (Pa. Super. 2006) (enforcing lessor’s forum selection clause1 in breach of contract actions initiated by lessor against out-of-state lessees); see also, Susquehanna Patriot Commercial Leasing Co. v. Holper Industries, 2007 PA Super 173, (Pa. Super. 2007) (enforcing a “floating” forum selection clause2 in equipment leases, which conferred venue over an action in the home jurisdiction of an assignee of the lessor). In both cases, the Superior Court relied on the Supreme Court’s holding in Central Contracting to decide the issues before it.

In the aforementioned cases, the Superior Court recognized that forum selection clauses in a commercial contract between business entities are presumptively valid and will only be unenforceable based on unreasonableness when: 1) the clause itself was induced by fraud or overreaching; 2) the forum selected in the clause is so unfair or inconvenient that a party, for all practical purposes, will be deprived of an opportunity to be heard; or 3) the clause violates a public policy of the jurisdiction. Patriot Commercial Leasing Co., Inc. v. Kremer Restaurant, 2006 PA Super 371, 915 A.2d 647, 651 (Pa. Super. 2006); Susquehanna Patriot Commercial Leasing Co. v. Holper Industries, 2007 PA Super 173, P9 (Pa. Super. 2007).

With respect to fraud, a forum selection clause is avoided for fraud only when the fraud relates to the procurement of the forum selection clause itself, standing independent from the remainder of the agreement. Patriot Commercial Leasing Co., Inc. v. Kremer Restaurant, 2006 PA Super 371, 915 A.2d 647, 653 (Pa. Super. 2006).

Whether or not the forum selected in the clause is so unfair or inconvenient as to deprive a party of its opportunity to be heard is a fact-based inquiry determined by the circumstance of each individual case. While the Supreme Court pointed out that mere inconvenience and additional expense do not control when determining whether a forum selection clause is unreasonable, this does not mean that financial matters do not come into play. Where the amounts in question are so minimal that the plaintiff would choose to default rather than litigate, the forum selection clause will not be upheld. Cf. Churchill Corp. v. Third Century, Inc., 396 Pa. Super. 314, 578 A.2d 532 (Pa. Super. 1990) (finding a forum selection clause in a lease agreement unenforceable where the Pennsylvania company leased a single office machine from Missouri company and the clause designated Missouri as the forum for all disputes); Morgan Trailer Manufacturing Co. v. Hydraroll, Ltd., 2000 Pa. Super. 228, 759 A.2d 926 (Pa. Super. 2000) (forum selection clause found unenforceable where jurisdiction was vested in England when all of the witnesses and evidence were in this Commonwealth and when the English company had an office in Pennsylvania). In Churchill, the court reasoned that when it is more expensive to defend a cause of action than to pay a default judgment solely because of the location in which the matter is being adjudicated, litigation in the foreign forum is no longer a matter of mere inconvenience or additional expense, but rather rises to the level of serious impairment on the parties’ ability to defend against the action. Cf. Churchill Corp. v. Third Century, Inc., 396 Pa. Super. 314, 322 578 A.2d 532, 536 (Pa. Super. 1990).

There is a public policy concern that springs to mind with regard to enforcement of a valid forum selection clause. Because a forum selection clause is a contractual provision, as long as it is clear and unambiguous3 the law is required to bind the parties to it. See, Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 305 469 A.2d 563, 566 (Pa. 1983) (“Where . the language of the contract is clear and unambiguous, a court is required to give effect to that language”). In other words, the non-enforcement of a valid forum selection clause that is clearly and unambiguously written is itself a violation of not only public policy but also the law.

Therefore, a forum selection clause will be upheld under Pennsylvania law as long as it is clear and unambiguous, and is not unreasonable4 at the time of litigation. Obviously, the chosen forum must meet the minimal jurisdiction requirements of the state and must not attempt to change the venue rules of the state, but contractual forum selection clauses are certainly available for creditors in the Commonwealth of Pennsylvania.

1 “Any legal action concerning this lease shall be brought in federal or state court located within or for Montgomery Count, Pennsylvania. You consent to the jurisdiction and venue of federal and state courts in Pennsylvania.” This language was located on the front of the equipment lease agreement, just to the left of the signature lines for the lessees.

2 “This agreement shall be governed by, construed and enforced in accordance with the laws of the State in which the Rentor’s principal offices are located or, if this Lease is assigned by Rentor, the State in which the assignee’s principal offices are located, without regard to such State’s choice of law consideration and all legal actions relating to this lease shall be venued exclusively in a state or federal court located within that State, such court to be chosen at the Rentor or Rentor’s assignee’s sole option.” The opinion does not state where this clause was located within the contract.

3 A valid forum selection clause need not name Pennsylvania or another specific forum in order to establish that the clause is unambiguous. Susquehanna Patriot Commercial Leasing Co. v. Holper Industries, 2007 PA Super 173, P13 (Pa. Super. 2007) (holding that the “floating” forum selection clause at issue was not ambiguous as it could be readily understood by anyone reading it to mean that the party to the contract has consented to have a breach of contract action pertaining to the lease brought in any state).

4 With “unreasonable” in a commercial context being defined by the Superior Court as a clause that is: 1) induced by fraud or overreaching; 2) so unfair or inconvenient that a party, for all practical purposes, will be deprived of an opportunity to be heard; or 3) a violation of a public policy. Patriot Commercial Leasing Co., Inc. v. Kremer Restaurant, 2006 PA Super 371, 915 A.2d 647, 651 (Pa. Super. 2006).

Lawyer Up!

Everyone knows the benefits of hiring an attorney to fight for you regardless of what side of the courtroom you’re on. However, not everyone knows the detriments of not hiring an attorney. Sure, the law can be complicated and fraught with nuances and technicalities, but can’t one just ask around to a few lawyer-friends or relatives and seek their way through?

Problem #1 – The Office of the Prothonotary (the office in which all pleadings for civil court are filed and recorded) will often accept any writing by the Defendant whatsoever and time-stamp it as an “Answer” to the Plaintiff’s Complaint. The main problem with this practice is the fact that there are very specific rules under the Pennsylvania Rules of Civil Procedure that govern the wording and structure of a proper Answer. Although it may seem counterintuitive, simply writing language to the effect of “I, the named Defendant, deny the allegations set forth in Plaintiff’s Complaint and intend to defend myself in Court” will spell certain death for your case. A quick Motion for Judgment on the Pleadings will magically twist those words of denial into a complete admission of every allegation in the Complaint. Trust me. I’ve done it. In the best case scenario and with a sympathetic judge, you may be given a period of time, 20 days typically, in which to retain an attorney and file a proper response.

And the rules governing the proper format and wording of pleadings doesn’t end with Answers to Complaints. These rules apply to every one of the myriad of pleadings filed in Pennsylvania Courts.

Problem #2 – Are you incorporated? Pursuant to Pennsylvania case law, an entity that is incorporated must be represented by an attorney licensed to practice law in the Commonwealth of Pennsylvania. This means that even if you’re the President, Vice President and CEO of your corporation, you may not appear in court on behalf of your corporation. In addition, if you would like to file suit against another entity or individual, you must hire an attorney to enter his/her appearance and sign your pleading. Likewise, if suit is filed against your corporation you may not personally file a response on behalf of your corporation. Again, you must hire an attorney to enter his/her appearance on your behalf and file your response. If you do not, the Court will grant the opposition’s preliminary objections and give you 20 days in which to retain counsel and file an amended pleading. Trust me. I’ve done it.

Problem #3 – Timing. In the law, timing really is everything. Different areas of the law have different statutes of limitations (timelines for how long a Plaintiff is able to wait before filing suit). For example, a Plaintiff in Pennsylvania has 4 years in which to file an action for breach of contract after the date on which the contract was allegedly breached by the Defendant. If you try to file an action for breach of contract 4 years and 1 day after the Defendant breached the contract, your action will be thrown out.

In addition to issues surrounding the statute of limitations, each pleading that is filed is associated with a period of time during which the opposing party must respond. In some instances, if this deadline is missed, the case may be dismissed without the merits ever having been heard by a judge.

What it comes down to is that while some people have successfully represented themselves in court, many more people have unsuccessfully done so. The first step that should be taken in any legal situation, whether you’re the plaintiff or defendant, is to hire an attorney who specializes in the area with which you’re dealing. This way, win or lose, you will do so on the merits of the case and not due to a miniscule error that could have been prevented.

Maintaining Lien Priority After Obtaining a Judgment is Incredibly Easy but Should not be Overlooked

By Raymond P. Wendolowski Jr.

After a judgment is entered a judgment creditor typically begins execution efforts in order to collect on the judgment, but sometimes a debtor genuinely has nothing for a judgment creditor to collect. In these cases our firm typically recommends that the judgment creditor should cease execution efforts and come back to the judgment at a later date. When the economy is suffering, like it has been for the last few years, this situation arises with much more frequency. Judgment creditors who obtained judgments at the very beginning of the current economic downturn are now approaching a deadline that must be addressed in order to maintain lien priority on their judgments. If you are a judgment creditor and you would like to ensure that you can execute on your judgment lien at a later date, then you must follow the procedures outlined below.

The entry of judgment in Pennsylvania acts as a lien on all real property of the judgment debtor in the county in which the judgment has been entered. In Pennsylvania, a judgment lien is fully effective for five years, and is governed by the five year statute of limitations. 42 Pa.C.S.A. § 5526. The term “fully effective” is more appropriate here than the term “valid” in describing the effect of the statute of limitations on a judgment lien, because a judgment lien will still be a lien on real property after the five year period has expired but it will not maintain its original priority. See, Home Consumer Discount Company of Wilkes-Barre v. Hashagen, 35 Pa D & C 668 (Common Pleas 1985), Mercer County State Bank v. Troy, 27 Pa D & C 3rd 751 (Common Pleas 1983), Popatak v. Evans, 1995 WL 864523, 26 Pa. D & C 4th 244, (Common Pleas 1995).

To maintain the priority of a judgment lien a judgment creditor must revive the judgment itself within the five year period after judgment has been entered. In order to revive the judgment lien a judgment creditor must file a Praecipe for Writ of Revival. See, Pa.R.C.P. 3025. The Writ of Revival (“Writ”) is the “equivalent of a complaint in civil action,” however there are a few subtle differences. Pa.R.C.P. 3029. The judgment creditor must file the Praecipe for Writ of Revival and then the Writ will be issued and indexed against each judgment debtor. See, Pa.R.C.P. 3027. At this point the Writ must be served within ninety days, instead of the thirty day period permitted for a complaint. Pa.R.C.P. 3028. The judgment debtor will then have time to respond and dispute the validity of the judgment or the amount currently owed, and a default judgment may be entered against the judgment debtor for failure to do so which will prevent the judgment debtor from objecting to the revival at a later date. Pa.R.C.P. 3031. This does not create another judgment, but merely governs the rights of the judgment debtor to object to the revival. Entering the default judgment is a very important step that can be easily overlooked, and failure to do so can create unnecessary headaches during later attempts to execute on the revived judgment lien.

This does not mean that a judgment lien will be effective forever without revival, as some courts have held that a judgment lien cannot be revived more than ten years after the date of entry. For instance, in US v. Shadle,1992 WL 551290, 16 Pa D & C 4th 297 (Common Pleas 1992) the court, in interpreting § 5526, held that a judgment lien is fully valid for five years from the date of entry and § 5526 begins running after that period for another term of five years. Id. at 302. If the judgment lien is then not revived before ten years have passed from the original date of entry “’the lien created by the judgment is forever lost.’” Id. quoting Dauphin Deposit Bank & Trust Co. v. Verhovshek, 18 Pa. D. & C.3d 108 (1980). This case appears to be an outlier, but its existence should make judgment creditors very wary of not reviving within ten years of the date of entry of a judgment, or else a judgment creditor may end up having to appeal a decision on a judgment which has been fully litigated once already or forever losing the judgment lien.

Reviving a judgment lien is a relatively simple procedure that will ensure that a judgment creditor still has the same judgment lien priority against a judgment debtor’s real property when the economic climate eventually changes for them. You should be certain to follow the guidelines listed above as well as the remaining rules governing revival of judgments. See, Pa.R.C.P. 3025-32. This paper has been focused on the general process for reviving a judgment and maintaining judgment lien priority, but there are other nuances for which the Rules of Civil Procedure, particularly the comments, can provide much more detailed guidance. Failure to do so may result in a judgment lien that has lost all priority at best, or a judgment lien that has been completely lost at worst.