David

New Opinion Analyzes Common Defenses to Domestication of Foreign Judgments in Tennessee

A good rule of thumb in Tennessee is that a valid foreign judgment will be enforceable here, provided the plaintiffs comply with the procedural requirements of Tennessee Code Annotated § 26-6-101, et seq.

A new Tennessee Court of Appeals opinion, in Bancorpsouth Bank v. David J. Johnson, et. al. (July 16, 2013), examined both the general law, as well as the potential defenses to domestication. This is a good case to know, since it reviews all aspects of the foreign judgment enrollment process.

First, it presents the three “standard” defenses to domestication:

a forum state may decline to accord full faith and credit to the judgment or public act of another state if it is (1) void due to a lack of personal or subject matter jurisdiction, (2) based upon fraud, or (3) “where enforcement of the judgment would violate the public policy of the forum state.” … Tennessee courts have recognized and adopted all three of these exceptions. … (citations omitted)

These defenses aren’t easy to establish, and the Court notes “a party who seeks to show that a foreign judgment should not be enforced in Tennessee must meet a ‘stern and heavy‘ burden.”

Most attacks on a foreign judgment are under Defense No. 1 (that the judgment is void); this new case is interesting in that is that the Court provides a good analysis of Defense Nos. 2 and 3 (which no other case that I’ve seen has done).

Defense No. 2, Fraud: “[T]o deny full faith and credit on the basis of fraud, there must be allegations of extrinsic fraud, that is, fraud that is collateral to questions which were either determined or which could have been determined in the underlying action. Extrinsic fraud is contrasted with intrinsic fraud, which pertains to an issue involved in the underlying action or where the acts allegedly constituting fraud were or could have been litigated…”

“‘[E]xtrinsic fraud ‘consists of conduct that is extrinsic or collateral to the issues examined and determined in the action,’. . . while intrinsic fraud is fraud within the subject matter of the litigation, such as forged documents produced at trial or perjury by a witness.”

An example of extrinsic fraud is a party lying to the other party about the court date or committing some fraud regarding the litigation (something beyond the allegations of the lawsuit). Intrinsic fraud would be some fraud related to or contained in the allegations of the lawsuit, such as a fraudulent signature on the note at issue.

Defense No. 3, Public Policy: “Under the public-policy exception to full faith and credit, “Tennessee courts are not obligated to give full faith and credit to any judgment of a state which we hold to be violative of Tennessee’s public policy or the Federal Constitution.”

This is rare, however: “The principle of giving full faith and credit to the judgments of sister states will “almost invariably” outweigh the interest of an individual state; the public-policy exception to full faith and credit is applied only on ‘extremely rare occasions.'”

While the Court doesn’t provide examples, the Defendants’ argument is illustrative. Here, they argued that the foreclosure that resulted in the deficiency balance at issue in the lawsuit was improper, and it was an issue that Tennessee has a defense for, under Tenn. Code Ann. § 35-5-118.

The Court saw this as an improper attempt to re-litigate potential defenses under the underlying judgment, not some public policy that rendered the out-of-state judgment unenforceable.

Most cases cite the three major defenses, and this new opinion is significant because it provides helpful analysis of what constitutes those defenses.

Tennessee Secretary of State to launch new online UCC filing system on July 1, 2013

The ability to file documents online is one of the many ways technology has made the practice of law easier. Faced with a looming deadline, attorneys no longer need to rush to the Courthouse before closing time. Nowadays, they pdf their pleading and can upload it at 11:59 from home.

Starting on July 1, 2013, the Tennessee Secretary of State will allow parties to make Tennessee Uniform Commercial Code (UCC) filings online. Information about this program can be found in this release.

To prepare Tennessee UCC filers for this process, the Secretary of State has posted a number of links to a number of training videos, which cover topics such as:

Filing a Tennessee UCC1 Financing Statement
Filing a Tennessee UCC3 Amendment – Termination
Filing a Tennessee UCC3 Amendment – Continuation
Filing a Tennessee UCC3 Amendment – Party Update
Filing a Tennessee UCC3 Amendment – Assignment
Filing a Tennessee UCC3 Amendment – Collateral and Max Indebtedness Change
Filing a Tennessee UCC5 Information Statement
Filing a Tennessee UCC11 Information Request
Searching the Tennessee UCC Database

The electronic filing system also coincides with the implementation of the 2010 Amendments to UCC Article 9, which also become effective on July 1, 2013. I’ll discuss those in a later post.

For now, I’ll say that I’m really excited about the prospect of filing and searching UCC records online. This is a great development for Tennessee lawyers.

Post-It Note: Creditor’s Rights During Bankruptcy

As many of you know, I’ll occasionally use this blog as a place to post reminders or cites to cases for my own benefit. As you’ve seen in the past, I call those entries “Post-It Notes.”

I saw this CLE seminar and thought the content would be helpful (plus, it’s a good outline for any future Creditor’s Rights CLEs I might teach). It’s presented by NBI Seminars and is called “Creditor’s Rights in Bankruptcy.” It’s set for July 31, 2013.

Here’s the Agenda:

Case Evaluation
- 10 Questions to Ask Before Getting Started
- Important Timeline Considerations
- Determining the Priority of Claims
Miscellaneous Creditors’ Rights
- The Involuntary Bankruptcy as a Collection Remedy
- Examination of Debtor’s Affairs
- Rule 2004 Exams
- Creditors’ Committees in Chapter 11 Cases
- Dismissal or Conversion of a Bankruptcy Case
- Appointment of and Communication With a Trustee or Examiner
- Recovery of Property for the Benefit of Creditors
- Municipal Collection Issues
Ethical Representation During Bankruptcy
- Collection Letters and Communication With the Debtor
- Misrepresentation
- Intermingling Activities of Collection Agency and Attorney
- Harassment
- Attorneys’ Fees
- Avoiding Violations of the Injunction
Overview of Creditors’ Rights Under Each Chapter
- Chapter 7
- Chapter 13
- Chapter 12
- Chapter 11
- When the Debtor Converts From a Chapter 13 to a Chapter 7 Case
- Significance of Valuation of Collateral
Claims and Distributions
- Filing and Allowance of Claims
- Objections to Discharge
- Objections to Confirmation
- Dealing With Objections to Claim
- Distribution to Creditors
- UCC Filing
- What to do When the Debtor Defaults on the Repayment Plan
- Recovery of Fraudulent Transfers
- Reaffirmation Agreements
Automatic Stay
- Broad Scope of the Automatic Stay
- Obtaining Relief From the Automatic Stay
- Motion for Lift of Stay: How, Why You Can Request It
- Changes in the Automatic Stay in Consumer Cases Involving Repeat Filers
- Changes in the Automatic Stay in Certain Other Limited Situations Involving Liens on Real Estate
- Changes in the Automatic Stay Involving Consumer Landlord/Tenant Law
- Exceptions to the Automatic Stay and Related Changes
- Monetary Sanctions for Automatic Stay Violation Where Notice is Lacking
Representing Creditors in Adversary Proceedings
Special Rights in Particular Property
- Reclamation Rights
- Setoffs
- Landlords and Equipment Lessors

New Trial Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting “Materially Less”

A few months ago, I argued the first appellate case construing Tenn. Code Ann. § 35-5-118, which is the new Tennessee post-foreclosure deficiency judgment statute. As you may recall from my blog post about the new law, the statute provides a possible defense to a deficiency action, where the debtor can show “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…”

In layman’s terms, a foreclosed borrower may be able to avoid a judgment for the remaining debt if he can show that the foreclosure buyer drastically under-bid at the foreclosure.

All across the state, this statute has resulted in two fights:

What was the fair market value at the time of the foreclosure? and
Was the foreclosure sale price “materially less” than the fair market value?

A big problem under the statute has been that “materially less” isn’t defined in the statute or anywhere else in Tennessee law.

In the resulting GreenBank v. Sterling Ventures opinion, the Court of Appeals issued a bank-friendly interpretation, offering guidance as to what “materially less” means by saying that a sale price of 86% is not “materially less.”

I’ve heard from a number of bank lawyers since that opinion, complaining that 86% isn’t low enough. I’ve told them, just wait, the Sterling Ventures opinion didn’t set the “floor;” there is room in the statute for lower values, which will be established in future cases (in the Sterling Ventures case, the bid at issue was 88-91%, so it didn’t require the Court to define the lowest possible percentage).

This past week, my firm received another favorable opinion from the Williamson County Chancery Court. In this Opinion (click to review), the Court recognized this issue, and rightfully upheld lower percentage bid amounts. The Court, following the lead of the Court of Appeals, cites the Holt v. Citizens Central Bank case, which recognized that a 50% recovery at foreclosure is a customary result.

While this doesn’t suggest that 50% is the magic number/floor percentage, this analysis shows a judicial tendency in interpreting the statute at a lower range than most debtors have argued.

With any new law, it takes a few decisions to “battle test” how it works. So far, the parameters of Tenn. Code Ann. § 35-5-118 are being defined in a way that favors creditors.

Contingent Fees: The Good, The Bad, and The Reason Many Lawyers Don’t Handle Them

Generally, a client pays a lawyer for his services by the hour, which is exactly what it sounds like. If a lawyer with an hourly rate of $250 does an hour’s worth of work, then the client owes the lawyer $250.

In some instances, a lawyer will handle a matter on a contingency fee basis, which means that the fee is paid only if there is a favorable result (i.e. “I don’t get paid unless YOU win”). The exact fee is calculated as a percentage of the amount of money recovered in the case.

Because I do creditor’s rights law, I’m sometimes asked to handle matters on a contingent fee. With the economy being where it is, however, I’m far less likely to accept creditor cases on this agreement. With so many people broke, the possibility of payment is lower than ever and the fight to get that money is harder than ever.

Proponents of contingency fees argue that they provide access to lawyers and the justice system for people who, otherwise, couldn’t afford lawyers (and that expensive hourly rate). That’s true.

My experience with accepting clients on a contingency fee billing is that those clients–i.e. the ones who are not paying for every phone call, every email, every step of the litigation–are the ones who have the most unreasonable demands of my time. Paying good money for an hour long phone call has a good way of discouraging any unnecessary hour long phone calls. If a nasty fight on an inconsequential issue doesn’t cost them anything, well, of course, they want you to fight on that issue.

When a client asks me to take a collections case on a contingent fee basis, I’m generally pretty frank with them in response. I explain the factors I consider: (a) how much actual work will be required; (b) whether the defendant has lots of assets; and (c) whether payment of the claim will be very quick. In short, it’s only a good deal for the lawyer if it’s going to be a windfall involving not much work and a quick payment.

In this economy, it’s rare to find the collections referral that pays quickly and without much effort. In a contingency fee case, the risk of nonpayment rests entirely on the lawyer’s shoulders. From a client’s perspective, the risk is that a lawyer is going to lose motivation to work on a case over a long duration when it doesn’t produce results (i.e. money).

My advice to lawyers is to be careful on these types of cases; my advice to the clients would be the same.

Last Chance to Learn: Creditors’ Rights in Tennessee: 10 Collection Strategies

A quick reminder: Tomorrow, June 6, 2013, I’ll be teaching the CLE presented by M. Lee Smith Legal Publishers called Creditors’Rights in Tennessee: 10 Collection Strategies.

This is a one hour audio seminar, that will cover the usual Tennessee collections lawyer song and dance. Things like:

Things to consider prior to declaring a loan in default and filing a collections lawsuit
Issues in deciding between Chancery Court and General Sessions Court
Importance of knowing your Statute of Limitations
Making sure you Sue the Right Party
Judgment Liens and why they work
Fraudulent Transfers
Overview of bankruptcy issues, including preferences and Trustee avoidance actions
Common roadblocks to collecting money, including domestication of foreign judgments

It’s one hour of CLE credit, and, hopefully, what I teach you during seminar will put some money in your clients’ pockets.

New Tennessee Legislation Imposes Contempt Sanctions on Judgment Debtors Who Don’t Notify Creditors of New Employment

As a creditor rights attorney, I’m always looking for new developments in the law that gives me any advantage.

Recently, I saw that the Tennessee Legislature is considering a new law that gives creditors an unfair advantage.

I’m talking about Public Chapter 187, on wage garnishments, which would create the new Tenn. Code Ann. § 26-2-225. The statute provides, in part, that:

… A judgment debtor whose salaries, wages or other compensation are subject to a garnishment shall notify the judgment creditor who filed the writ of garnishment within ten (10) days, as computed in § 1-3-102, of obtaining any new employment. Notice to the judgment creditor shall be by certified mail and shall include the name, address and telephone number of the new employer. A judgment debtor who fails to provide notice of new employment in compliance with this section is in contempt of court and, upon the court making a determination of contempt, may be punished the same as contempt of court in a judicial proceeding. …

Under this proposed law, any debtor whose wages are being garnished must notify the creditor within 10 days, via certified mail, of any new employment.

As a creditor’s lawyer, sure, I understand why this law would be helpful: when a debtor switches jobs it can take months for me to figure out where they work. But, I’m surprised that the Legislature would waste this energy to get involved in this collections cat-and-mouse game.

Frankly, even noting my creditor-friendly bias, I think this law goes a little far. An affirmative requirement that the debtor send written notice, via certified mail, seems so onerous that I predict that a General Sessions Court would hesitate to impose h a contempt charge.

This is just a strange law, all around.

Adequate Protection Considerations in the Middle District of Tennessee Bankruptcy Courts

Despite using the same Bankruptcy Code, Bankruptcy Courts often have a broad range of practices on how the exact same statutes can apply.

While most creditors’ lawyers will call any Bankruptcy Court “debtor-friendly,” one way that the Bankruptcy Courts in the Middle District of Tennessee are markedly different than others is the threshold of proof required for creditors to receive “adequate protection” payments from the debtor.

Adequate Protection refers to payments made by the debtor to the creditor, generally, to compensate the creditor for the use of the creditor’s collateral. The statutory precedent is 11 U.S.C. § 361(1), which allows the debtor to make a “cash payment” to the extent that the automatic stay “results in in a decrease in the value of [the creditor’s] interest in the property.” In layman’s terms, if the bankruptcy stay hurts or impairs the value of your collateral, you may be entitled to a cash payment (or an alternate/replacement lien).

In some districts, like the Middle District of Georgia, the Bankruptcy Courts allow the resumption of contract payments to a secured creditor, without a deep analysis of depreciation.

The Middle District of Tennessee takes a different approach. Here, a secured creditor is only entitled to adequate protection in the amount that it can prove depreciation of its lien. So, with a car, the creditor would get compensation for the loss of value from the Debtor’s use of the collateral. (It’s substantially more difficult with real property, where depreciation is may be impossible to prove.)

In order to obtain Court approval and avoid an objection from the U.S. Trustee, the creditor will typically need to hire an appraiser to go look at the vehicle and assess the value and his estimate of how much wear and tear/depreciation is imposed on the car on a monthly basis. Then, the Court would order monthly adequate protection payments in that amount.

As an aside, this practice isn’t for the debtor’s benefit; it’s actually designed to protect unsecured creditors from arbitrary loss of cash/income from the Bankruptcy Estate.

As a creditors attorney operating in the Nashville Bankruptcy Courts, this a conversation I have a lot with outside counsel. It’s a hard lesson to teach, especially when the Courts in their backyard take the opposite approach.

What is a Scire Facias (Specifically, What Does it Mean When an Employer gets a Scire Facias on a Judgment against an Employee)?

“Scire Facias” means, on a very general level, “to show cause.” It’s a Writ (known as a “Writ of Scire Facias”) that a judgment creditor can file in various instances. Specifically, a judgment creditor will file a Scire Facias on conditional judgments where the employer has failed to answer wage garnishments.

This happens most often on wage garnishments and bank levies. The procedure is that, once the employer has failed to file an Answer or other response to a Wage Garnishment, the Plaintiff files a Conditional Judgment that grants a “conditional” judgment against the employer for the amount of the Judgment against the Defendant.

It is called “conditional” because the Judgment isn’t final until the Plaintiff prepares and serves on the employer a “Scire Facias” directing the employer to appear and “show cause” (i.e. explain) why they failed to file an answer to the wage garnishment.

There are three general outcomes:

The employer doesn’t appear and the Judgment goes final against the employer;
The employer appears and has no good explanation for the failure, and a judgment (or consensual payment) in some amount is reached (Note: The employee lying to the employer about the status of the debt is not a defense for the employer–the employer has to comply with the response obligations under the law); and
The employer appears and presents some good reason, such as the garnishment was defective, the Defendant was not employed during the relevant timeline, or there was another garnishment.

Regarding item number 3, that’s not always a good and sufficient response, since a garnishee should always answer legal process, but a Court will accept a late answer in that situation, unless there is a showing of collusion or a pattern of failure to respond.

Mark Your Calendars: Tennessee Bar Association to host Creditors Rights 101 Webcast on April 17, 2013

On April 17, 2013, the Tennessee Bar Association has asked me to present a webcast CLE called “Creditor Rights 101: 10 Collection Strategies Every Lawyer Should Know.”

This is part of the TennBarU series, designed to give Tennessee general practitioner attorneys an overview of issues in Tennessee creditor rights. Discussion will include:

• Pre-Lawsuit Considerations
• Statute of Limitations Issues
• Jurisdiction and Venue Selection
• Judgment Enforcement Options
• Basic Bankruptcy Issues
• Common Roadblocks to Collecting Money

And, don’t forget, your Tennessee Bar Association membership gets you 3 hours of free CLE.