David

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.

Speaking at Landlord-Tenant Law Seminar on April 28, 2011

On April 28, 2011, I’ll be speaking at the 8th Annual Landlord-Tenant Law-With a View from the Bench on Litigation Seminar in Nashville, presented by Sterling Education Services.

I’ll be teaching the afternoon session, on topics covering Collections, Enforcement of Judgment, Dealing with Tenant Bankruptcy, and Legal Ethics in Landlord-Tenant law.

Here’s the full agenda. This seminar gets lawyers continuing legal education credits, but it’s also designed for rental agents, landlords, and other non-lawyers who want to learn the legal process.

Lawyers Don’t Get Paid by the Word, but They Sometimes Act Like They Do

This falls more into the category of “effective lawyering” than it does collections, but this article is a good lesson about the importance of reading your court’s rules of procedure and persuasive writing.

In the article, the Seventh Circuit Court of Appeals comes close to dismissing a party’s appeal based only on the blatant non-compliance with the Court’s 14,000 word limit in briefs, but then notes that the appeal has no merit (so side-steps that issue). The brief apparently used 18,000 words in unpersuasively making its point.

But, the decision has a lesson: know your court’s rules of procedure, and follow those rules.

And, aside from that, lawyers need to understand that less is often more. There’s a tendency to cite every case, refute every argument, and rehash every point. In our 30 second soundbite world, that’s not how we–and I include Judges here–process information. We look for summary statements, bullet points, and clear, concise statements.

And don’t get me started on those lawyers who just stand up and start reading from their briefs.

Invoice Hint: Do your Homework Before Extending Credit

As a collections attorney, bad invoices drive me crazy. A collection lawsuit is only as good as the paper it’s enforcing, so when invoices have serious defects, it’s hard to do a good job, because the other side has easy defenses.

A common issue is an invoice (or credit application) that doesn’t get the borrower’s name right. For instance, the document doesn’t clearly identify and completely name the party buying goods. As easy as it sounds, this happens all the time, particularly when dealing with corporate entities.

As an example, let’s say your invoice is simply addressed to “Smith Contractors.” Is that an “Inc.,” a “LLC,” or “John Smith d/b/a Smith Contractors”? This is critical in determining who you sue. Even if the borrower writes down “Smith Contractors, Inc.,” there might not actually be a valid company set up under that name.

Here’s an easy fix: check out your prospective borrower’s corporate status on the Tennessee Secretary of State website, by using the “Business Information Search.” You should be able to locate any valid corporate entity, and, if you can’t find it, then you should ask more questions about the legal status or name of your borrower.

Trust me, it’s better to ask those questions on the front end, before you extend the credit. If you wait to do this after the account is in default, it is probably too late.

Borrower’s Attack on Foreclosure Process May be Barred by Detainer/Eviction Proceedings

Across the country, lenders are fighting claims from borrowers that the lender’s foreclosure on real property was defective. In response, courts will sometimes entertain an examination of the specifics of the foreclosure. Regardless of the outcome, the lender is invariably faced with delay in obtaining a deficiency judgment or the costs of litigating these issues.

On January 31, 2011, the Tennessee Court of Appeals issued a decision finding that such claims by a borrower will not be considered, where the lender has filed a post-foreclosure unlawful detainer warrant in General Sessions Court and obtained an eviction judgment. If the homeowner does not raise the defective foreclosure in the General Sessions Court, then the decision is “res judicata” on any subsequent action.

It’s a a quick and cheap way to clear title on property. Also, you serve the detainer warrant by nailing it to the door of the property — no chasing the elusive occupants around the world trying to get service.

Cite: Robert E. Davis, et. al, v. Crawford L. Williams, et. al, No. E2010-01139-COA-R3-CV (Tenn. Ct. Apps. Jan. 31, 2011).

Sommet Group LLC Proof of Claim Deadline Set for May 18, 2011

When I write about creditors in bankruptcy, one of the mantras I repeat over and over again is: don’t forget to file your Proof of Claim.

In many instances, the only way a creditor gets a distribution of money recovered by the Trustee is if the creditor has filed a claim. In fact, as a creditor, you’re hoping that other creditors miss the bar date/deadline for filing claims, because, if they don’t file a claim, they don’t get any money. Which, in turn, means the creditors with filed claims get a tiny bit larger share of the money.

All that having been said, the Chapter 7 Trustee in the Sommet Group LLC Bankruptcy filed a Trustee’s Notice of Assets & Request for Notice to Creditors to File Claims. The deadline to file the Claims has been set for May 18, 2011.

The Trustee is chasing this company hard, but, even so, he’ll probably only collect a fraction of the monies owed to creditors. The only way to guarantee that you don’t receive any money is to forget to file a Claim.

Sabre Defence Industries LLC files Chapter 11 Bankruptcy in Tennessee

You never want to be a creditor of a company that “manufactures high-quality XR15 rifles in the US and Europe.” But, many creditors find themselves in that position, as Sabre Defence Industries LLC has filed for Chapter 11 Bankruptcy in the Middle District of Tennessee.

This filing follows a variety of recent articles about criminal charges against the principals of Sabre Defence.

This case was apparently timed to stay a sale of the Sabre Defence assets by a creditor, Cadence Bank, that had been scheduled for February 14, 2011. So far, however, the bankruptcy contains only a skeletal filing–the company has filed a Petition, but not the required Bankruptcy Schedules and Statements.

Creditors of Sabre Defence need to be on the look-out for the various filings that are sure to follow, as I predict this case will go through a number of twists and turns long before the Meeting of Creditors. I’d bet on a 11 USC 363 Sale of the assets.

I realize that I missed an opportunity to make a joke about the “bullets flying” or a “shoot out.”

Update: Here’s the Nashville Business Journal’s story.

Wall Street Journal Reviews Weapons for Creditors in “The Battle Against Slow Payers”

The Wall Street Journal has an article that is right up my alley, “The Battle Against Slow Payers.”

The article reviews a variety of new online applications and services, such as: automated invoice dunning software; pay-in-advance invoice escrow services; and affordable business information and credit bureau searches.

While I don’t have first-hand experience with any of the vendors mentioned in the article, the collection issues that these services try to prevent are very real, and, even without using these services, small businesses should keep the underlying issues in mind at all times:

Clear, Well-Documented Invoices: Always have invoices that are clear and simple where they need to be (due date, amount owed), but have sufficient detail where necessary (project description, services provided).

Keep Track of Your Unpaid Invoices: Don’t wait until the 90 or 120 day mark to send reminders. By that time, it may be too late: either the customer no longer needs your credit/services, or you’ve fully performed your end of the deal. In collections, the squeaky wheel really does get the grease.

Get Advance Payment Where Possible: If it’s a new relationship, ask for a retainer for all or part of your services. Don’t worry about offending the new business; if it’s a legit company, they’ll understand.

Do Your Homework Before Lending Time or Money: If this economy has taught us anything, it’s that there is no obligation to lend money or sell products to unfamiliar customers. If the customer doesn’t have a track record with you, check out their business history, ask for referrals, or, if no such information exists, sell on a cash basis only. Otherwise, you’re assuming all the risk.

Doing all of the above is time-consuming and sometimes expensive, and, in the end, nothing can guarantee that all your accounts will get paid. But, if a little advance research vets just one or two of the bad apples, then it will all be worth it.

An unpaid invoice plus a collection lawyer costs far more than the services described in the article.

Nukote International Bankruptcy Case in Middle District of Tennessee Starts the Preference Recovery Process

Yesterday in the Middle District of Tennessee Bankruptcy Court, the Trust created in the Nukote International, Inc. bankruptcy began the process of filing adversary proceedings to recover preferences. So far, about 40 cases have been filed.

This is a process that generally happens after a Chapter 11 Plan is confirmed, in which the post-confirmation entity takes action on the various lawsuits it held as of the bankruptcy filing.

Here, the lawsuits make claims under 11 U.S.C. 547, which is a provision of the Bankruptcy Code that, under certain circumstances, allows a trustee to recover payments made to creditors within 90 days of the bankruptcy filing.

The basic theory is that, the debtor is presumed to be insolvent during those 90 days, and any payments made during that period were selective disbursements (a.k.a. preferential payments) to certain preferred creditors. By these actions, the trustee recovers these preference payments, puts the money into a big pot, and then distributes it evenly to all creditors.

Sounds pretty fair in theory, right? Well, in practice, these actions drive creditors crazy. “Not only did this company bankrupt on the debt, now, two years later, they’re suing me to take back some of the last money they paid me?” My response? “Yes.”

There are a number of defenses to these actions (see 11 USC 547(c)), and I’ll touch on those in a later post. Right now, I’m going to go look at the dockets to see who all is getting sued.