April 2011 – Creditors Rights 101

Proposed Tennessee Legislation Seeks to Alter Liability for Attorney’s Fees and Expenses in Litigation

An interesting bill, House Bill 1156, Senate Bill 651, is making its way through the Tennessee legislature, which will radically shift the risks of litigation by awarding litigation costs and “reasonable and necessary attorney fees” to the prevailing party, even where no agreement to pay such fees exists between the parties. Today, the legislation passed in the House Judiciary Subcommittee–unanimously.

This would be very different than the current law. As it is now, a party cannot recover attorney fees in Tennessee litigation unless they have a written agreement granting the right to recover those fees or unless they sue under a statute that expressly provides those rights. Absent either of those, a creditor can’t recover attorney fees.

This bill, which would be the new Tenn. Code Ann. 20-12-119, awards “reasonable and necessary attorneys fees” (as well as other litigation expenses) in civil cases to the “prevailing party” (as long as the party did not hire its counsel on a contingency fee basis). The text says that the “judge shall” grant this recovery–it’s not discretionary.

The ability to recover attorneys fees is a big deal in litigation, as the potential of paying for the other side’s lawyers is often a detriment to prolonged fights. On creditor actions, especially smaller claims, creditors often base their decision on whether to sue on whether they can recover their expenses. Without that, the cost of suing on debts and small claims doesn’t make sense.

This proposed legislation is certainly a drastic change to Tennessee practice and, as much as I think it would benefit creditors in general, I question the fairness of the law. Frankly, litigation isn’t always “Right Versus Wrong,” and matters sometimes get tried not because of stubbornness, but because there is no clear answer to an issue. To award fees in such disputes without any such agreement seems unduly punitive.

Five Mistakes Judgment Debtors Make in Response to a Collections Lawsuit

I had a court docket today in Davidson County (Nashville) General Sessions Court. In “small claims court,” collections are generally limited to $25,000.00 (with some exceptions). Many defendants don’t have a lawyer, and many make the same mistakes. Here are ones I see the most:

Mistake # 5: Not showing up. Dealing with legal issues is stressful, but, if you don’t show up, you allow the other side resolve it for you–and that’s not going to be in your favor. Come to court to meet and work something out. Or call…

Mistake # 4: But don’t wait until too late to call. Don’t wait until the night before or the morning of the court appearance to call, because, by that time, it’s harder to work things out. Call and be prepared to discuss specifics; know how much you can pay per month, know what kind of agreement you’d like to make to get it resolved.

Mistake # 3: Not hiring an attorney (where you have good defenses), or, conversely, hiring the wrong attorney (where you’re spending good money for no results).

Mistake # 2: Agreeing to a resolution you can’t afford. Don’t get me wrong, as a creditor’s rights attorney, I want as much of your money as you’ll agree to pay. But, at the same time, I want you to actually pay the money. Don’t agree to $500 a month if you can’t pay it.

Mistake # 1: Silence is the worst mode of communication. Something will go wrong–it always does. Illness, job loss, something. If I’m expecting a payment from you and you can’t make it, call me. If a payment deadline comes and passes without a call, I assume you’re paying somebody else, and it’s time for me to start judgment enforcement.

It stinks to be sued, and, from my clients’ perspective, it stinks to not be paid. The process can be easier, though, and the above are easy ways to reach a resolution.

No Surprise: Newspaper Opposes Proposed Tennessee Legislation to Reduce Newspaper Publication of Foreclosure Sale Notices

Today, Memphis’ Commercial Appeal–my favorite paper in the state–published an editorial titled “Nice Break for Banks” about proposed Tennessee legislation to reduce the number of newspaper notices that banks must publish prior to conducting foreclosure sales.

Instead of the current 3 consecutive publications required by Tennessee Code Annotated Section 35-5-101, Tennessee House Bill 1920 and Senate Bill 1299 would require only one notice and would cut out some of the legalese from the property description.

Opponents, including the editorial, complain that these proposals drastically expedite an already short and unsupervised process. The proposed changes “relieve lenders of practically all sense of responsibility in the foreclosure process adds insult to injury on Tennesseans,” the Commercial Appeal says.

From the bank’s perspective, running three publication notices in a newspaper drastically increases the cost of a foreclosure, and there’s good reason to believe that newspaper publication notices do not provide any greater assurance of actual notice to the defaulted borrowers.

Frankly, who reads those gigantic supplemental sections of the paper that are entirely devoted to pages and pages of small-print foreclosure notices? (And, frankly, who reads the newspaper anymore?)

It comes as no surprise that the newspaper industry thinks the current publication system should stay the same. I’ve seen numerous publication bills that exceed my legal fees for conducting the foreclosure. (And, yes, I’m looking right at you, Commercial Appeal.)

It’s disingenuous to suggest that borrowers will be victims of stealth foreclosures in Tennessee if publications are reduced, and the editorial entirely leaves out a discussion of Tenn. Code Ann. Sec. 35-5-117, which requires a Notice of Right to Foreclose be sent to defaulted borrowers at least 60 days in advance of foreclosure sale publication.

If you want to argue that Tennessee’s non-judicial foreclosure system favors lenders, that’s a different argument (but, let’s be sure to discuss the problems with the judicial-only process in Florida as part of that debate).

But, if your argument is that more newspaper notices are the last line of defense for the “devastation–financial and otherwise–that financially strapped families” face, well…I’d save that newspaper space for advertisements.

When Enforcing Judgments, Look Back Four Years for Potential Fraudulent Transfers in Tennessee

From time to time, the judgment enforcement process hits a brick wall because your debtor is “judgment proof,” which means that they don’t own anything: no car, no property, and no cash.

This can be a disconnect from reality, especially where the debtor lives in a big house with a fancy car parked in the driveway. How can this guy be broke?

That’s when I investigate fraudulent transfers, which are transfers out of the debtor’s name to a third party—a wife, parent, or child—to keep the assets out of the creditor’s reach. This is more common than you’d think.

Tennessee has adopted the Uniform Fraudulent Transfer Act, at Tenn. Code Ann. § 66-3-301 et seq. That Act provides for a number of “badges of fraud,” such as transfers to an “insider”, transfers that render the person insolvent, transfers where equal value is not given for an asset, or transfers with “actual intent” to hinder or defraud creditors.

“Actual intent” means what someone is “thinking,” which, you can guess, is hard to prove. As a result, the Act provides some common ways to prove intent, at Tenn. Code Ann. § 66-3-305(b). These include:

The debtor retained possession of the asset;
The transfer was kept a secret;
Prior to the transfer, the debtor had been sued or threatened with suit;
The transfer was to an insider;
No equivalent value was provided; and
The transfer was made prior to a substantial debt was incurred.

Under Tennessee law, a creditor can attack fraudulent transfers from up to four (4) years preceding your lawsuit.

Long story short, when enforcing a judgment in Tennessee, don’t just examine what your debtor owns, but look also to what he used to own. Then, look back at least 4 years, because, in Tennessee, fraudulent transfers can be attacked for a long time.

Transfers of the big assets (like real property) are all of public record, so your cause of action can easily be discovered, if you know to look for it.

Ebay For Lawyers and Other Alternative Fee Arrangements

Earlier this week, the Wall Street Journal ran an article about Sphoonkle, a new ebay-like website that lets clients post their legal issues and solicit bids from lawyers to perform those services. The client would, presumably, pick the bidder with relevant experience and, most likely, the lowest bid.

As you can guess, the white-starched legal world is up in arms about the site, saying that blind competitive bidding on legal work degrades the profession.

While I wouldn’t stake the future of my practice on something called “Sphoonkle,” I like the effort to connect clients with lawyers in an innovative way. That’s half the reason I have this blog, to break down some of the traditional barriers between “the Law” and “the Client.”

Alternative fee arrangements are something that any forward-thinking lawyer has to embrace, especially in this economy. Right now, my firm is experimenting with flat rate, contingency, and blended rates when reasonable.

That having been said, I think Sphoonkle and the process behind it is flawed. Competitive bidding creates the presumption that the lowest bid is the best choice, but, with professional services, so much more goes into the work (experience, location, staffing, etc.).

Plus, as with many things, you get what you pay for. Sure, some lawyer who you’ve never met may propose to do your Will for $100, but there’s always risk in going cheap. You don’t want to sacrifice quality for savings, and that’s a fine line to walk when comparing lawyer quotes, whether you’re on ebay or in downtown Nashville.

My advice? Be careful, but always focus on quality first. But, don’t be afraid to ask about cost, and have a frank conversation about estimated costs on the front end.