David

New Teaching Engagement: Liens and Security Interests in Tennessee

On Thursday, February 24, 2011, I’m teaching a webinar for the Tennessee Attorneys Memo called Liens and Security Interests in Tennessee: Brush Up on the Basics.

The webinar will provide an overview of liens against real property, and it’s designed to cover the basics but also emphasize the legal issues that you really need to know.

And by “really need to know,” I’m talking about the types of liens that will get your debts paid–judgment liens, mechanic’s liens, security interests–and I’ll also cover a variety of bankruptcy issues that you can try to avoid.

TAM does a great job with these, and I encourage you to tune in and check it out. Plus, they offer a money-back guarantee. (How much pressure is that on me?)

More Than Just Legal Expense: The Unexpected Hassles of Pursuing Collection of Unpaid Debt

A few months ago, I mentioned how I warn all first-time collections clients about the unexpected hassle of suing on their invoices. In addition to the legal expense, I’m referring to the hostile responses, the denials, and the potential court scrutiny of their services and billing practices.

For an example close to home, there’s a reason why lawyers wait a year to sue clients on unpaid invoices. (Hint: the statute of limitations for malpractice claims is one year long.) You see, in response to lawsuits for unpaid legal invoices, it’s common for the former client to allege malpractice and attack the quality of work.

I was reminded of this when I read this Tennessean article about lawsuits filed by Nashville private schools to collect on unpaid tuition. I was doubly reminded about the “hassle” part when I scanned the comments, with the schools’ dirty laundry getting aired for the world to see.

The school is perfectly within its rights to seek payment of past due amounts, but collections can bring out the worst in people, especially in this economy. Other than allowing no unpaid debt, there’s no avoiding these issues, so be sure to consider these issues when starting the collection process.

It isn’t always just writing letters and cashing checks.

Are Bankruptcy Courts Creating a Co-Debtor Stay in Chapter 11 Reorganization Cases?

When collecting against an entity that files a Chapter 11 bankruptcy, I usually file an immediate suit against any guarantors of the debt. In Chapter 11, there is no statutory “co-debtor” stay, so there’s nothing stopping me from applying pressure to the other liable parties, who are usually the principals/owners of the company. The goal is not only to collect the debt from those parties, but also pressure the bankrupt entity to improve my client’s payment position.

Steve Jakubowski of the Bankruptcy Litigation Blog tweeted a recent decision that may scale back a creditor’s use of this tactic.

In the opinion, the debtors filed an adversary proceeding seeking an injunction of a collection action against guarantors, arguing that the collection action would adversely impact the ability of the debtor to reorganize.

The Bankruptcy Court agreed, finding that it had jurisdiction over the matter involving non-debtor entities under 11 U.S.C. 1334(b), since the action was “related to” to the underlying Bankruptcy. The Court found that the guarantors were “vital to the success of the reorganization process and that that the [collection action] would place a significant burden on Guarantors to the extent that [they] would not be able to adequately assist in the reorganization process.” Ultimately, the Court found that the guarantors were so critical to the reorganization process that the collection action against them would significantly impair the bankruptcy process and, thus, using 11 U.S.C. 105(a), the Court was willing to issue the injunction.

The Bankruptcy Court made clear that special factual circumstances existed, such as the guarantors’ past involvement and commitment to remain involved. Further, the Court noted that the guaranty liability isn’t extinguished and is, instead, only stayed during the pendency of the bankruptcy.

But, even with those safe-guards, it’s easy to imagine that this decision–if adopted by other courts–could create a common law co-debtor stay in Chapter 11s. Here’s a link to the full opinion:

Harris N.A. v. Gander Partners, LLC, No. 10-C-5495, 2011 WL 249484 (N.D. Ill. Jan. 26, 2011)

Bankruptcy Court Denies Discharge for Damages to Property from “Foreclosure Rage”

“Foreclosure rage” describes the situation when an angry homeowner, faced with a foreclosure, destroys the house or strips it of anything valuable. While not all involve complete demolition of the house, it’s common for an owner to take valuable fixtures out of a house or, worse, cause intentional damage.

A Bankruptcy Court has recently provided a remedy to a lender whose collateral was intentionally damaged: the lender was awarded a non-dischargeable debt for the amount of the damages. (See In re Zahniser, 09-B-71797, 2010 WL 5140779 (Bankr. N.D. Ill. Dec. 13, 2010)).

Under 11 U .S.C. 523(a)(6), a Bankruptcy Court can deny a discharge for debt resulting from “willful or malicious injury by the debtor to another entity or to the property of another entity.” Here, the lender argued that the damage to the house fell within this section, and the Court agreed, awarding damages for the cost of restoring the house and attorney fees.

This is a fair result, and I suspect other jurisdictions will follow this Court’s lead. It will be interesting to see how far Courts will protect lenders in this situation? What if the debtor simply removes the appliances from the house?

In this case, the Court tried to give the Debtor the benefit of the doubt, wondering if the Debtor believed that the large appliances were his to take (and not the bank’s collateral). But, the Court refused to overlook holes in walls and the removal of other items that were inextricably affixed to the house (tiles, light fixtures, cabinets, and the fireplace).

As with most arguments, it comes down to the facts of each situation. But, given the frequency that borrowers are gutting their homes before leaving, this decision is an interesting argument for lenders, if not an antidote for foreclosure rage.

Sometimes the Postman Brings Bad News: The Notice of Chapter 7 Bankruptcy Case

If you’re doing your job as a creditor, some of your defendants will file bankruptcy. More than likely, the way you’ll find out is when the Clerk mails you a “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines.”

This is the first mailing in a bankruptcy case, and a copy goes to all of the creditors and parties listed in the debtor’s bankruptcy Schedules.

In addition to putting the creditor on notice of the filing (and the imposition of the automatic stay), this Notice contains important information about the case, including:

What chapter the debtor filed (i.e. Chapter 7)
The name and address of the debtor’s attorney and the Trustee
The bankruptcy case number
The address of the Bankruptcy Court Clerk (and where/how to file pleadings)
The date, time, and location of the Meeting of Creditors
Deadlines to file Proofs of Claim (if any)
Deadlines to object to discharge or dischargeability of your debt

All of this information is relevant as you decide what your next step is. Over the next few weeks, I’ll revisit the various events and deadlines mentioned in the Notice in more detail.

For now, I’ll point to the bottom of the Notice, where there’s a line that shows how optimistic the bankruptcy system is about the recovery of assets:

“Please Do Not File A Proof of Claim Unless You Receive a Notice To Do So”

You see, you have to file a Claim in order to share in the distribution of the money that the Trustee recovers. So, basically, that’s the Clerk’s way of nicely saying, “Don’t Hold Your Breath.”

Be Careful When Dealing with Debt Relief Services

If you’ve watched much late night TV, you’ve probably seen the commercials for debt relief services promising the path out of debt through settlement with creditors. These companies ask consumers to pay them their money, then they’ll attempt reach out to the creditors and, they say, settle all debts for a fraction of what is owed.

In these tough times, consumers are looking for any help they can get, but many commentators say that debt relief agencies are a rip-off. Many cite the fact that the services pay themselves first, and, only after they have paid themselves, do they try to settle the debts.

As a creditor’s attorney, I’ve worked with these agencies on a number of occasions. On one hand, it’s efficient to deal with a business-savvy party on the other end of a debt repayment transaction. On the other, I know how the system works, and I know that, for any dollar they are offering to my creditor client, they have already kept as much in their own pocket.

Long story short, be wary when dealing with one of these companies, on either side of the table.

When Collecting on Judgments in Tennessee, Wage Garnishments Might Not be the Best First Step

The goal in judgment collections is to get as much money as possible, as quickly as possible.

The reason behind the “as much as possible” part is easy: clients want full recovery of the amounts owed.

The reasons behind the “as quickly as possible” are numerous. Maybe you’re competing with other creditors for the same pot of money. Maybe your debtor is getting ready to leave town (or spend all his money). Maybe you think a bankruptcy is on the horizon.

As a result, when deciding what collection tool to use first, always consider which tool gets you the most money the fastest. Judgment liens that immediately attach to any and all properties are a great start. Bank levies that seize all the money in a bank account aren’t bad.

When in a hurry, however, wage garnishments aren’t always your best bet. Here’s why: under Tennessee exemptions law, a wage garnishment is only effective against about 25% of a debtor’s wages (Tenn. Code Ann. 26-2-106). Plus, wage garnishments are applied in the order they are filed, meaning you can get stuck behind other creditors. Finally, a wage garnishment might be the last straw that pushes someone into Bankruptcy…meaning you probably get paid nothing.

Don’t get me wrong–knowing your debtor is working and earning regular income is a great sign of collections to come. But, in the grand scheme, getting just 25% of the earnings spread out over 6 months might not be your best first move.

To Solve Foreclosure Issues, Some Courts May Require Attorneys to be the First Line of Defense

This article in the New York Times suggests that courts may no longer allow lawyers to blame paperwork issues and inaccuracies on their clients. Now, some New York state court judges are requiring lawyers representing lenders to vouch for the accuracy of the client’s representations.

This is a judicial reaction to the frequent reports mortgage lenders relying on incorrect, incomplete, and unverified documents to take action against borrowers. This is an attempt to place some responsibility on the creditor’s attorney to vet the accuracy of his or her client’s documents, instead of leaving it all up to the court system.

As you’d expect, the article quotes foreclosure attorneys who dislike this practice, especially in the face of potential fines in the event the documents are erroneous.

The Rules of Professional Conduct already require an attorney to do a due diligence review of any client’s claims, and this practice could restore some level of faith in the foreclosure process. As it stands now, most borrowers believe that the “robo-signing” issues are indicative of the entire industry, not just a few sloppy lenders.

Any system that introduces only a few basic safe-guards into the process should be welcomed by counsel for foreclosure lenders.

Bankruptcies Fall in 2010, but Expect Record Numbers in 2011

Welcome back after a long holiday break. Of course, it’s always great to have your blog go stagnant at the same time the blog gets featured in a great Nashville Business Journal article, “Standing out on the Web: Tips to help your clients find your business online.”

The big news in the new year is that Bankruptcy filings are down nationwide, particularly in Tennessee and the south. In the article, one attorney says the decrease is an indication that the economy has turned the corner (or that everybody who was going to file bankruptcy has already filed).

I’m not so sure. Throughout 2010, we learned that banks were reluctant to foreclose, either as a result of issues with their paperwork, being adverse to taking properties into REO, or being hopeful that the mortgage modification programs would help.

As we ended 2010, we learned that none of those factors were a long-term issue that would prevent foreclosure. I expect foreclosures to crank back up in the next few months. Plus, as more second and other junior lienholders come to the realization that their collateral lacks value, 2011 will bring more lawsuits on the underlying debt.

The rise in foreclosures, coupled with more deficiency lawsuits on unpaid debt, will likely make 2011 another strong year in Bankruptcy Filings.

Bah Humbug: Christmas is a Great Time of Year for Collections

Ok, I realize that this post drastically increases my chances for a visit from the Ghost of Christmas Past, but here goes: Christmas is a great time for collection of debt.

Here’s why: Debtors who run retail businesses probably are flush with cash, whose bank accounts can be levied against.

(Just in case Santa reads this blog, I’m not going to point out that individuals may have more cash this time of year than others.)

Under Tennessee law, you can garnish a judgment debtor’s bank accounts, and that levy will freeze and seize all of the funds in the account, which will be paid to the Clerk–and then to you. The difficult part is discovering where the debtor has bank accounts and, then, catching that account while it has money in it.

Before you call me a scrooge, keep in mind that if the debtor doesn’t pay the creditor from this money, it’ll probably go to other creditors. Make sure that you’re at the front of the line for payment. While smart research is the biggest step, effective collections sometimes depends on luck and good timing.

Ghost of Christmas Past, bring it on.