Attorney Liens: Because Every Lawyer Should Get Paid

I talk a lot about liens as a good way for a creditor to get paid. In state courts and bankruptcy courts, there often are two lines formed: one for those with liens; and the other for those without liens. And you can guess which one leads to the money.

Under Tennessee statutes, there are liens for all kinds of people: mechanics, artisans; dentists; jewelers; shoe repairers; cotton ginners; lithographers; baggage claim folks…just to name a few.

But let’s talk about attorney liens today.

Under Tenn. Code Ann. § 23-2-102, an attorney who files a lawsuit “shall have a lien upon the plaintiff’s or complainant’s right of action from the date of the filing of the suit.” (Or, per Tenn. Code Ann.  § 23-2-103, the attorney has a lien from the date that the attorney starts work on the case.)

This lien extends to two types of property. The first is a “retaining lien,” which gives the attorney the right to retain a client’s books, papers, or money coming into his possession during the matter until the client pays. The second is a “charging lien,” which is a lien for payment of fees against the judgment or recovery obtained in a case. For a good review of this, see Starks v. Browning, 20 S.W.3d 645, 650 (Tenn. Ct. App. 1999).

There’s some old caselaw out there that suggests that the attorney must have the lien noted in the Judgment to be valid. The Starks case above (involving the venerable Nashville lawyer, Bart Durham) says that requirement is not in the statute and is just an odd creation from old caselaw.

 

But, I say that it’s a good practice to note the attorney lien any– and every-where (in judgments, in notices filed with the Court, notices recorded in the Register’s Office), but it’s not legally required.

The statutes above don’t cover all situations where an attorney might have a lien; in fact, other specific statutes, like worker’s compensation matters, may have their own special rules. Additionally, nothing would stop a collection minded lawyer from obtaining a consensual lien as part of his or her client engagement documents, particularly where client resources may eventually be scarce.

 

Long story short, the attorney lien statutes are probably narrower than you thought they were, granting a lien generally only the lawsuit filed by the attorney. Any other, broader liens to secure repayment must be granted or taken under other statutes (judgment liens, consensual liens).

A Reminder About Collection on Unpaid Legal Invoices: Wait a Year

This is an issue I’ve written about before, in Collection on Unpaid Invoices: One Really Good Reason to Wait a Year.  

But, I mention it again because the Tennessee Court of Appeals revisited the issue recently, in Scott Ostendorf, et. al. v. R. Stephen Fox, et. al. (Tenn. Ct. Apps.,  No. E2013-01978-COA-R3-CV, July 16, 2014).

In that case, the law firm committed possible malpractice regarding the perfection of a client’s lien security interest rights. The issue came to light in November 2008, and the client sued for malpractice in March 2012. Clearly, the lawsuit was filed more than one year after the facts alleged to be malpractice. 

This was a pretty easy one for the Court, which cited the Tennessee Supreme Court’s opinion at Kohl & Co., P.C. v. Dearborn & Ewing, 977 S.W.2d 528, 532 (Tenn. 1998):

“The statute of limitations for legal malpractice is one year from the time the cause of action accrues. Tenn. Code Ann. § 28-3-104(a)(2). When the cause of action accrues is determined by applying the discovery rule. Under this rule, a cause of action accrues when the plaintiff knows or in the exercise of reasonable care and diligence should know that an injury has been sustained as a result of wrongful or tortious conduct by the defendant. Shadrick v. Coker, 963 S.W.2d 726, 733 (Tenn. 1998).” 

As I said in my prior post, I’m not condoning legal malpractice, nor suggesting that you should play hard-ball in collection of unpaid invoices for services that involved malpractice. But, as I said in my last post, if you sue a client for unpaid bills, it’s more than likely going to result in that client claiming malpractice, whether it’s merited or not. 

If you think that such a claim will be raised from vindictiveness or tactic planning, then any lawyer should sit on the unpaid bills for services for at least a year. It’s an easy summary judgment / failure to state a claim upon which relief can be granted issue. 

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Tennessee Courts will not find a ‘Paid in Full’ Check to be Conclusive Release of Debt

Every once in a while, one of my clients will receive a random check with a note in the Memo line that says “Paid In Full.”

If the creditor accepts that check, the borrower’s argument goes, the creditor also accepts the payment as a settlement…that the account was paid in full. This overlooks (or counts on) the fact that most big creditors process payments by machine or without watching for sneaky notes in the Memo section.

Fortunately, however, the general rule in Tennessee is that a note on a check may be an indication that the account was settled, but it isn’t the only and final proof of settlement.  On this exact issue, the Tennessee Supreme Court has said “Something more is required.” Quality Care Nursing Servs., Inc. v. Coleman, 728 S.W.2d 1, 4 (Tenn. 1987).

Generally, Tennessee courts will look at whether there was any other evidence of a payment dispute and “meeting of the minds” that this payment was tendered as a settlement and a proposal to resolve the disputed account. Was there a cover letter explaining a dispute and that acceptance of the payment was truly a settlement of the debt?

The Supreme Court noted: “It would be unrealistic in the modern business world for a debtor to send an installment payment to a creditor, which may be receiving hundreds or thousands of such checks, and to have the balance of his debt deemed discharged as a matter of law simply because of a legend the debtor placed thereon, absent any other proof of a compromise or settlement.”

So, what do you do if you are faced with a “Paid in Full” check? Well, as a initial matter, be careful.

If you receive one and you notice it, you may well be opening yourself up to an “accord and satisfaction” defense under Tennessee law. The best practice would be to refuse any such payment and return it to the borrower, with a demand that the check be replaced.
The risk in accepting the payment is clear. One court has noted ” a creditor’s action of cashing the check speaks louder than its words, have held that by accepting and cashing a check marked ‘paid in full,’ a creditor has agreed to accept the amount of the check as full payment of a disputed amount.” Ideal Stencil Mach. Co. v. Can-Do, Inc., 85-81-II, 1985 WL 4041 (Tenn. Ct. App. Dec. 4, 1985).

 

Confessions of Judgment aren’t Valid in Tennessee: Here’s Why

All kinds of search terms that lead visitors to this site. I routinely look at them, because it’s a great insight into what creditor rights issues people want to learn about. (And, sometimes, it’s pretty funny.)

A common query is whether confessions of judgments are valid in Tennessee. Frankly, after nearly 15 years of practice in Tennessee, I’ve never dealt with a confession of judgment, so, as a practical matter, I don’t think they are valid in Tennessee. But, recently, I actually came across the answer.

As background, a confession of judgment is a contract provision (or a stand-alone contract) in which one party agrees on the front-end of a transaction to let the other party enter a judgment against him if the deal goes bad.  You agree, in advance and before any default or dispute arises, that the other party can get a judgment, even without a lawsuit pending and despite any legitimate defenses that may ultimately exist.

You can imagine why a creditor would include such a provision in their contracts.

Tennessee doesn’t allow such provisions. Tenn. Code Ann. § 25-2-101(a) says:

Any power of attorney or authority to confess judgment which is given before an action is instituted and before the service of process in such action, is declared void; and any judgment based on such power of attorney or authority is likewise declared void.

But, an agreement to allow a judgment may be allowed after a lawsuit is filed and after the party is served (when, it would be assumed, the party has received due process of the law and the issues are defined).  § 25-2-101(b) says:

This section shall not affect any power of attorney or authority given after an action is instituted and after the service of process in such action.

So, even though Confessions of Judgment are not valid in Tennessee at the time of the contract, such provisions will be enforceable after the filing of the lawsuit, such as in a forbearance or settlement agreement.

Is it Bankruptcy Fraud to Dismiss a Case Where Your Plan is to Incur More Debt and then Refile?

I’ve done collections law too long to think of it in moral terms. I don’t think a person who doesn’t pay his bills is necessarily “bad” (though some are). Sometimes, I think the creditor is equally at fault for lending money or providing services to these poor folks.

But, I recently saw a Bankruptcy pleading  that stopped me dead in my tracks.

It was a Motion to Voluntarily Dismiss Chapter 7 Bankruptcy Case, which is a filing a debtor makes to stop his bankruptcy case. People want out of bankruptcy for a number of reasons, but this one took the cake.

In it, the Debtor asked the United States Bankruptcy Court  to dismiss his Chapter 7 because he wanted to, basically, wait a few more months to run up some more medical bills. Then, after that, he’d re-file his case and discharge those new debts.

The exact text from the Motion is this:

1. The Debtor filed a Chapter 7 bankruptcy on November 6, 2012.

2. The Debtor’s meeting of creditors is set for December 12, 2012.

3. Since the filing of this case, the Debtor has incurred extensive medical care and expects to have a surgery and additional medical care in the coming months.

4. The Debtor, therefore, desires this chapter 7 proceeding be voluntarily dismissed.

Without a doubt, that’s a tough situation for the Debtor, facing medical bills that he can’t pay.

But, what about that doctor or hospital who will be asked to provide those services? This is as close as “pre-meditated” default and bankruptcy as it gets.

The Bankruptcy Code allows a creditor to oppose discharge for some debts that are incurred immediately before Bankruptcy, including those incurred via fraud or bad intent. But, to do that, the creditor has to file a lawsuit to claim that the debt shouldn’t be discharged and that’s a burdensome, costly process.

In case you’re wondering, the Motion was granted.

Long story short, some doctor is going to provide goods and services in the near future that certainly will never be paid.  Yikes.

 

My Thoughts on “What To Do When a Creditor Knocks” from the Wall Street Journal

This weekend’s Wall Street Journal ran a article on how to respond to bill collection efforts, called “When Bill Collectors Knock.”  The article mixes good advice with a little bad advice. Here’s my bounce.

Good advice:

Take the call. It is virtually impossible to resolve a problem without addressing it head on. The best way for borrowers to handle a debt they can’t pay is to talk with the lender as soon as possible. Then they should work out a plan to keep the debt current with a smaller payment or to seek a temporary delay until they can pay something.

This is good advice. I talked about the importance of communicating with creditors in an earlier post. The worst thing a debtor can do is be silent, as that invites collection.

Unrealistic advice:

Keep detailed records. Staying on top of debt can be tough. But keeping records and careful notes can pay benefits if borrowers are sued.

I agree that it helps to keep payment records and copies of old invoices, but how realistic is that, particularly with debts that are years old?

But this is better:

Know the rules. Every state puts a limit on how long a creditor is able to pursue borrowers in court.

Your best focus, however, could be records showing your past payment. In Tennessee, the statute of limitations on debt collections is six years from the date of default. If you can provide that it’s been more than 6 years since your default, you may be able to obtain a dismissal of any action.

Bad advice:

Negotiate. Because debt is bought at a discount, collectors should be willing to bargain, perhaps accepting just a fraction of what is owed. If borrowers can come up with the money, they should be able to negotiate a settlement of 50 cents to 65 cents for each dollar owed…

Earlier, the article suggests that most unpaid debt collectors are collecting debts that they paid a mere four cents on the dollar for. So, the article suggests, you should haggle for payments in the range of 50 cents on the dollar.

While this may be true for some debts, in my experience, it’s not as common as the anecdotal stories suggest. The creditors I represent don’t buy debt and so any talk of ten cents on the dollar is a waste of time. Plus, even if a creditor has paid a small amount for a debt, that doesn’t mean that they will accept a small amount to settle, especially if the creditor perceives the debt can be collected in full.

Don’t get me wrong. I always say “Money Talks,” but if you’re making a low ball offer, you have to back it up with proof that your offer is the best you can do, and that requires proof of a debtor’s finances, other debts, etc.

My take-away this this: Over-communicate; Confirm that the debt isn’t over 6 years old (in Tennessee); and Money Talks (or, at least, proof of that the money you’re offering is the most the creditor will otherwise get).