David

Borrower Beware: Co-Signed and Guaranteed Loans Can Haunt You for Years

In the spirit of Halloween, the scariest article in this weekend’s Wall Street Journal wasn’t about the story about new ways that haunted houses are terrorizing people.

Nope, the one that gave me nightmares was about the perils of co-signed debt, lurking in the shadows, waiting to attack a parent (or grandparent) for co-signing a student loan.

And this is a monster that can’t be out-run: In addition to being 100% responsible for the debt, the student loan debt could be deemed non-dischargeable in a Bankruptcy by the guarantor.

Long story short, the debt could follow you for years, until it’s paid in full. The Wall Street Journal did a follow-up blog post, providing more advice for those considering co-signing student loan debt.

According to that blog post, “90% of private loans had co-signers last year.” The reason is obvious: if there is any level of risk of non-payment, a lender wants to get more obligors to collect against.

This should be a cause of concern for any person asked to co-sign a loan, whether it be a consumer loan or a commercial loan. Think carefully before signing it. If it goes bad, you could be liable for the entire amount.

Also, read the terms carefully. On many personal guaranty agreements, especially ones involving long term credit advances, the guarantor’s obligation to guarantee advances may out-last their involvement with the business that borrowed the money.

Sometimes, the only way to beat this monster is to never sign up for the fight in the first place.

What Tim McGraw Can Teach You About Injunctions in Tennessee

During the first week of law school, law students learn how to read caselaw.

The way it works is this: Judges decide legal issues by writing legal opinions that summarize existing law and apply the existing law to the facts before them in that case (or by departing from existing law to create new law). Over time, the line of published legal opinions creates “The Law.”

Long story short, a good way to learn the law on a topic is to look for a recent case dealing with the topic.

That’s why I am citing the Curb Records, Inc. v. Samuel T. McGraw case from last week. (That’s “Tim McGraw” a.k.a. Mr. Faith Hill.) I don’t delve into entertainment law very often (although I’ve sued a few country singers in my time for unpaid debts), but this case has a very good review of Tennessee injunctions and the standards to obtain injunctive relief.

This legal opinion discusses the primary law (Tenn. R. Civ. P. 65.04), along with the most recent cases discussing the standards. Plus, because it’s a case from last week, you can cite it with confidence that it remains good law and hasn’t been overruled. It’s worth a read.

Tim McGraw will undoubtedly be flattered to hear that the Tennessee Court of Appeals finds, as a matter of fact, that “McGraw is undisputedly an entertainer offering unique and
extraordinary services.”

Digital Footprints: The Best Credit Applications Include E-Mail Addresses

I’ve got a client who does a great job on their collection referrals. Their referral packet includes the usual: addresses for the borrower; whether the borrower owns the property; employment information; banking information; and copies of the relevant loan documents.

But, tucked away in their Credit Application, there’s an extra line that includes a unique request: provide an e-mail address.

You may wonder how an e-mail address could help in collections. If the borrower isn’t answering your calls and is dodging your process server, you may think, how quickly would they delete an e-mail from you?

The e-mail address isn’t merely a way to make contact with the borrower. Instead, it provides a unique way to identify and locate them online. In collecting on an unpaid debt, I’ve found that an e-mail address is as close as a digital footprint as there is online.

As an illustration, imagine running a Facebook or LinkedIn search for “Mike Jones.” You’ll get hundreds of false hits, because there are probably a lot of Mike Jones in this world. But, with an e-mail address, you would run a search for “mikejones1974@gmail.com.” There’s only one of that person.

So, that internet search results in finding the person you’re looking for, because Facebook and other social networking services allow you to search both by name or e-mail address. Plus, you’ll potentially find a long list of online activity, whether it be comments on blogs (be careful in the comments section below) or other postings online.

People tend to keep active e-mail addresses, especially ones they’ve used for years. It’s a great resource, and an easy, discrete piece of information to ask for.

Big New Case in Nashville Bankruptcy Court

For Nashville Bankruptcy lawyers, most weeks look the same: Chapter 7 and Chapter 11 hearings are on Tuesday mornings, and Chapter 13 matters are heard on Wednesdays (this is new: Monday used to be Chapter 13 docket day).

Today, however, there was a flurry of activity over in Bankruptcy Court, with a “Who’s Who” of local bankruptcy lawyers in court. Typically, June dockets aren’t very busy, with summer vacation season in high gear.

Today was the hearing setting for “first day” Motions in the Amnon Shreibman Chapter 11 Bankruptcy Case (12-05272). There were about nine matters set for hearing, with most being the Debtor’s various Motions for Use of Cash Collateral. Where a secured lender either holds a claim secured by cash or the proceeds of other collateral, the Debtor has to ask for and obtain Bankruptcy Court authority to spend that cash (and must provide adequate protection to the secured lender for the use of the cash).

After seeing the commotion, I’ll say this: nothing gets the local Bankruptcy lawyers as excited as a debtor who says they have assets in the $50,000,000 to $100,000,000 range. This is going to be a big case.

All this reminds me of this weekend’s New York Times article, The Trouble With Bankruptcy Lawyers, which discussed proposed legislation to limit legal fees in big bankruptcy cases. Sometimes, those fees can exceed $1,000 an hour.

New Tennessee Court of Appeals Case: To Set Aside a Default Judgment, Movant Must Comply with Rule 60.02 and Show a Meritorious Defense

When a Defendant doesn’t file an Answer to a Complaint in the required 30 days (and never files even a late Answer), the Plaintiff can ask for a Judgment “by default,” i.e. as a result only of the Defendant’s failure to respond.

This happens a lot in Chancery Court collections cases. Conventional wisdom says that, if the Defendant doesn’t have the money to pay the debt, then he probably doesn’t have the money to pay a lawyer to fight the lawsuit.

About once or twice a year, after complete silence from a defendant (and after I get a judgment), I’ll receive a “Motion to Set Aside a Default Judgment,” asking the Court to undo the Judgment and allow him to litigate the matter.

I’ve seen all kinds of excuses. One Debtor had a heart condition and didn’t want to deal with the stress. Another says his lawyer forgot to tell him about the Motion. Or the postman didn’t deliver it. Or all of the above.

A rule of thumb is that Tennessee courts dislike defaults, and the courts would rather matters be decided on the merits. That’s what all the Motions to Set Aside always say.

Last week, the Tennessee Court of Appeals issued a new opinion in Monroe v. Monroe (a divorce case) that contains a good, precise statement of the standards for setting a default judgment aside.

The Court confirmed that default judgments aren’t favored and a Court will err on the side of the moving party, but the moving party must show that relief is appropriate under Tenn. R. Civ. P. 60.02 and that it has a “meritorious defense” to the lawsuit.

Rule 60.02 requires a showing of mistake, inadvertence, surprise, or excusable neglect. That’s not enough, however: the moving party must also show some sort of defense to the action.

The second prong is designed to prevent a party setting aside a judgment, only to suffer an inevitable summary judgment a month later because they didn’t have any defenses.

I’d add that a Motion under Rule 60.02 must be made within a “reasonable time” and, generally, no later than a year after the Judgment.

As a creditor’s lawyer, I hate these. Leave my judgments alone.

Davidson County Chancery Court Case and Pleading Access Online

Last year, I noted that the Davidson County Chancery Court had started a service that showed case dockets online. This Chancery Court Public Records Access site provided the names and dates of filings, but not copies of the actual pleadings. Last year, I predicted that electronic copies of pleadings can’t be far behind.

I was right. Now, the Chancery Court has a second site, called Chancery Information Access, on which you can actually view copies of pleadings. It is a subscription service. Here is information on how to register.

It costs $15 a month. If you think that’s expensive, well, wait until you need a copy of pleading and have to walk to the Courthouse to get it.

Now, I’m hoping that the next step will be for Chancery Court to accept remote electronic filing of pleadings.

The Wisdom of the Six D’s of Debt Collection

I learned today about the passing of Art Willard, a well known and well liked banker and special assets officer in the Nashville area with whom I worked on many deals in Bankruptcy Court, in Chancery Court, and at the auction yard.

As a banker, Art was the kind of guy you’d want collecting your debts, because he was smart, tenacious, and could smell money a mile away. As a borrower, Art was the kind of guy you wanted coming after you, because he was smart and knew when a proposal was the best deal he’d get.

In Bankruptcy Court a few years ago, Art and I sat and sat, waiting for a big case to get called. I heard stories of him accepting monthly payments of fifty cents on a Judgment and repossessing airplanes. I also learned the 6 D’s of Debt Collection.

2012 Tennessee Legislature is Considering an Absolute Homestead that Would Eliminate a Creditor’s Ability to Collect Against Residential Real Property

Recording a judgment in the county’s Register of Deed’s Office creates a lien on any real property owned in that county by the Debtor pursuant to Tenn. Code Ann. § 25-5-101.

A judgment lien is the single most effective tool in the collection process. Plus, it’s cheap: for less than $20, a creditor can get a lien on any property owned (or owned in the future) by the Debtor, and that property cannot be sold, refinanced, or transferred without dealing with the creditor.

As a creditor rights lawyer, you can guess my concern over two Bills being considered by the Tennessee Legislature in 2012, House Bill 2887 by Glen Casada and HB 2930 by Mike Bell.

These Bills seek increase the “homestead” exemption in Tennessee. “Exemptions” allow a debtor to protect certain property from the reach of creditors. Exemptions are designed so that a judgment creditor can’t take everything, so household goods, retirement accounts, and other necessities can be exempted.

H.B. 2887 proposes an absolute exemption that would exempt a debtor’s residence from any execution or judicial sale. Essentially, no matter how much equity a debtor has in his or her house, that equity would be completely untouchable by creditors. A debtor could live in a $1,000,000 lien-free house without paying a penny to creditors. This legislation would completely abolish the concept of a judgment lien.

Currently, Tenn. Code Ann. § 26-2-301 allows a single individual to exempt $5,000 of equity, a married couple $7,500, and a married couple with minor children living in the house up to $50,000.

The other proposed legislation, HB 2930 by Mike Bell, seeks to simply increase the homestead exemption amount to $50,000 across the board.

From a creditor’s perspective, the proposed legislation is both too broad and unfair. I understand the importance of protecting peoples’ homes, but, at the same time, the law should operate fairly as to creditors and debtors.

Frankly, I think it’s unfair that the law would shield $50,000 of equity from the reach of creditors. Think about it from a creditor’s perspective: if you loaned somebody $200,000 and weren’t getting paid any of it, wouldn’t you be mad to see them keep $50,000 of equity?

Your Next Landlord Could be A Hedgefund: Are Rental Properties Making a Comeback as a Good Investment?

I’ve said for years that the contractors and investors who got burned by the economic downturn will eventually hit rock bottom, dust themselves off, and end up making as much money on the backside of the recession as they lost on the front end. This is because the same market inefficiencies that were exploited in the past are being replaced by equally exploitable new ones.

The builders who once built speculative homes on inflated market appraisals are going to be the contractors who do the work for the investors who buy the properties from the banks at 40 cents on the dollar.

The Las Vegas Sun did a story last week on how hedge funds are buying Las Vegas real properties at bargain rates, making minimal investments/improvements, and renting the properties for an 8% to 12% annual return. Then, once the economy rebounds, the investors could expect appreciation to add more value to the investment.

As far as investments go, being a landlord is fairly labor-intensive. And, if the past 4 years has shown us anything, it’s hardly a fool-proof move.

Potential landlords would be smart to read this excellent article in the Wall Street Journal, Do You Really Want to be Landlord? The article has both horror stories and advice, as well as a forecast that rents are likely to increase over the next few years.

I got out of the landlord business two years ago, when my tenant couldn’t unclog her drains and called me every other day. The 30 minute drive, coupled with time spent waiting on plumbers, gave me all the time to reconsider the pros and cons.

Two Signatures Not Required: New Tennessee Supreme Court Decision Finds Personal Guarantees will be Enforced by Their Clear Text

Lately (i.e. in this economy), I’m constantly fighting over the enforceability of personal guarantees.

A personal guarantee is an agreement by which a third party agrees to personally repay another person’s/corporation’s debt. When a corporate entity doesn’t have a credit history or sufficient assets, a lender will generally ask for an individual to personally guarantee the debt. Creditors, obviously, want guarantees, because more parties obligated to repay your debt increases your chances for repayment. If a creditor files a lawsuit, it can obtain a judgment for the debt against all of the guarantors.

With the rise in defaults, guarantors are getting sued more than ever before. Their only defense is to attack the guarantee, and, as a result, the text of these agreements is constantly being tested. A common issue relates to the signature line(s): if a corporation’s president signs a contract that contains guarantee language, does the president need to sign twice, both as “Bob Smith, President” and then a second time as “Bob Smith?”

In the past, the overwhelming outcome was that there needed to be two signatures–one from the President and one from the Individual.

So, in that context, you’ll understand why I liked the recent Tennessee Supreme Court case of 84 Lumber Company v. Bryan Smith (Dec. 12, 2011). There, the Supreme Court looked only at the text of the contract. That text clearly said that the person signing the contract for the corporation was also personally obligating himself to serve as the guarantor. When the text is crystal clear, it doesn’t matter that there is only one signature.

So, even though the only signature on the contract was by ““R. Bryan Smith, President,” the Court said “[t]he explicit and unambiguous language of the contract points to only one conclusion: Mr. Smith agreed to be personally responsible for the amounts due on the account.”

A good practice would still be to get two signatures, but, in light of this case, it’s certainly not fatal to only have one signature.