Judgment Collections – Creditors Rights 101

Court of Appeals: If attorney discounts their fees, prevailing party may not be entitled to recover full amount

Much to my former law partners and book-keepers’ chagrin, I often apply courtesy discounts to my clients’ legal invoices.

It’s counter-productive to my business model. But, as a kid raised by a mom who worked at the local Piggly Wiggly and a dad who worked on an assembly line, sometimes I look at a bill, am reminded of how expensive lawyers are, and apply a small discount.

Don’t get me wrong: All my billable entries are wonderful and worth every penny. In fact, I tend to win many of my cases, including an award of attorney fees, and, when I do, I sometimes wonder whether the defendant have to pay the full amount (and not the discounted amount)?

A recent Tennessee Court of Appeals says that a court can only award what the prevailing party actually pays (or is obligated to pay). It’s at St. Paul Cmty. Ltd. P’ship v. St. Paul Cmty. Church, No. M202101548COAR3CV, 2023 WL 1860692(Tenn. Ct. App. Feb. 9, 2023).

In the case, the trial court originally awarded the Church $343,535.07 in attorney fees and expenses, which were computed at the rate of $295.00 per hour. In later proceedings (after an earlier remand), the Church attorneys asked for $515,655 in attorney fees, which appeared to retroactively calculate all entries at $450 per hour.

Why? The attorney and client had a unique “side” agreement to the engagement letter, that, even though the hourly rate was $295, if they won, the attorney would ask the Court to reimburse the fees “at a higher rate than the $295/hour I’m billing the church.” There was no agreement that the Church would ever actually have to pay that higher rate.

In light of the Tennessee’s application of the “American Rule” on attorney fees, the Court of Appeals focused on the text of the underlying agreement, which required the reimbursement of attorneys fees “incurred” by the Church. “Incur,” the Court noted, means “to become liable for” or “to be legally obligated to pay.”

Here, the lawyer’s engagement letter clearly said that the Church would never be expected to actually pay that higher rate. The trial court, then, was correct in awarding the attorney fees at the $295 rate, “which were charged and paid at the $295 rate pursuant to the written engagement letter” and denying any requests that the higher rate. Id. *6.

It’s an interesting opinion, with some fairly unique facts that would never come up in most cases.

But, in the context of long-standing litigation, a few $300 or $500 “courtesy discounts” here and there over the course of a case could add up to a few thousand (or more) dollars. After a long fought legal battle, it’d be natural to have your billing software show your cumulative legal fees for your Affidavit (which would naturally output only logged time entries and not paid bills) and forget to give your adversary the benefit of those discounts.

Under this new opinion, you may be legally obliged to. So, maybe my book-keeper is right.

Tennessee Courts will not consider substantive challenges to foreign judgments

Where a foreign judgment is based on substantive law that is inconsistent with Tennessee law, will a Tennessee court deny domestication of that judgment in Tennessee? The short answer is “no.” A Tennessee court will only look at whether the judgment is valid in the foreign state and will not consider substantive defenses based on Tennessee law.

The Tennessee Court of Appeals considered this exact issue a few years ago. In that case, the Court was faced with a foreign judgment based on a “confession of judgment” which, under Tennessee law, aren’t valid and are unenforceable. But, because confessions of judgment are valid in the other state, the Court found that a foreign judgment based on a “confession of judgment” was enforceable in Tennessee under the Uniform Enforcement of Foreign Judgements Act.

Last week, the Tennessee Court of Appeals that reaffirmed that outcome, in Mantis Funding LLC v. Buy Wholesale Inc., No. M202200204COAR3CV, 2022 WL 17986892, at *1 (Tenn. Ct. App. Dec. 29, 2022).

In Mantis, the judgment creditor sought to enforce a New York judgment in Davidson County Circuit Court. The judgment debtor objected, but Judge Brothers looked only to whether the New York court was willing to set aside or entertain a challenge to the validity of the underlying judgment. When the New York court denied the debtor’s motion to vacate the judgment, the Tennessee decision was easy: “the New York judgment is entitled to full faith and credit in Tennessee pursuant to the Constitution of the United States of America.” Id. at *1.

The Court of Appeals agreed. Sure, confessions of judgment are void under Tennessee law pursuant to Tenn. Code Ann. § 25-2-101, but “full faith and credit” doesn’t require that the sister state’s judgment be consistent with Tennessee law. Instead, assuming that there are no service or procedural issues, the Tennessee Court will consider only whether the judgment debtor has challenged the foreign judgment and/or the substantive legal issues in the foreign jurisdiction. If not, “the decision is res judicata… [and o]nce decided, these issues cannot be raised in another, later case seeking to enroll the foreign judgment.” Id. at *2.

This is a fairly settled issue in judgment enforcement, but, because a judgment debtor has such limited bases to challenge a foreign judgment, the debtor will nevertheless “throw the kitchen sink” at the creditor. This new opinion reaffirms that such challenges should be denied.

Recent Bankruptcy Case Offers Creditor-Friendly Holding When Calculating Preference Period

My creditor clients are always in a hurry to get their money.

When a bank levy hits a big account, most judgment creditors go nuts during that 20 day period when the Court Clerk holds garnished funds (per Tenn. Code Ann. § 26-2-407) before disbursement.

Once the funds are paid out, though, I tell my clients to keep their fingers crossed for a bit more time–at least until the end of the Bankruptcy Code’s “preference period.” Until then, a Bankruptcy Trustee can “recover” payments received by creditors in the 90 days before a bankruptcy case is filed.

“One of the most unfair creations of the Bankruptcy Code,” I’ve written on this very creditor-friendly blog.

The question I often get is this: Does the 90 day period start when the Clerk receives the funds or when the Clerk disburses the funds?

An August 19, 2022 Minnesota Bankruptcy Court opinion (In re Holbert, 643 B.R. 332 (Bankr. D. Minn. 2022))(from the Eight Circuit) presents pretty compelling reasoning that the clock starts ticking upon the Clerk’s receipt of the funds.

Specifically, this Court held that the “transfer” (per 11 U.S.C. § 547(b)) for property held in custodia legis occurs when the property is placed in escrow / deposited with the court.

The American Bankruptcy Institute has a more analysis of the case here (and a link to the opinion).

It will always be frustrating for a creditor to see the money just sitting there, in the court coffers, for 20 days. The silver lining, of course, is that the preference clock also appears to be burning off during that period.

New Tennessee Court of Appeals Resolves Ten-Year Old Question about Post-Judgment Interest Rate

For nearly a decade, I’ve been writing about the Tennessee post-judgment interest statute, Tenn. Code Ann. § 47-14-121, which was amended in 2012 to change from the long-standing fixed rate of 10% to a variable rate that changes every 6 months.

I say “writing,” but others may say “complaining.” They’d probably cite this post: What I Don’t Like About the New Post-Judgment Interest Rate Statute In Tennessee (Everything).

My initial concern was one that many Tennessee lawyers shared: Because the interest rate is subject to change every six months, will the applicable rate on an existing judgment also change every six months?

Nobody knew. Not attorneys. Not court clerks. Not even the trial court judges.

In a very helpful comment to this 2020 post about the issue, Tennessee attorney Michelle Reynolds provided the best answer I’d seen (and one that I’ve since argued):

From the TNCourts.gov website: “Beginning July 1, 2012, any judgment entered will have the interest set at two percent below the formula rate published by the Tennessee Department of Financial Institutions as set in Public Chapter 1043. The rate does not fluctuate and remains in effect when judgment is entered.”

Of course, that’s not a case or a statute. It’s an “introductory paragraph on the Administrative Office of the Courts website.”

In an opinion issued last night, however, we have our answer!

In the case (Laura Coffey v. David L. Coffey, No. E2021-00433-COA-R3-CV (Tenn. Ct. App. Apr. 11, 2022), the Tennessee Court of Appeals notes this long-standing confusion and then immediately dispels it.

In its analysis, the Court notes that the rate to be applied under Tenn. Code Ann. § 47-14-121(a) is clear and unambiguous (it’s math), and it’s the entirely separate provision at Tenn. Code Ann. § 47-14-121(b) that introduces fluctuations in the general rate. Noting the clarity in (a), the Court finds that (b) does not create ambiguity as to existing judgments.

Under Tenn. Code Ann. § 47-14-121(a), the Court writes, the “applicable post-judgment interest rate does not fluctuate when applied to a particular judgment; instead, it remains the same for the entire period of time following entry of the judgment…until the judgment is paid.”

It’s always a great day when an unresolved issue gets clarity. Sometimes I make a joke that only “law nerds” will appreciate a legal development like this; for this one, though, I think all Tennessee lawyers will benefit from this opinion.

Tennessee Judgments Always Incur Post-Judgment Interest

A good rule of thumb for prevailing parties in litigation is this: If you want something, be sure to include that in the court order.

Well, duh. The Judge can’t give it to you if it’s not expressly written in the order.

A recent opinion from the Tennessee Court of Appeals (Hartigan v. Brush, No. E202001442COAR3CV, 2021 WL 4983075 (Tenn. Ct. App. Oct. 27, 2021)), however, makes clear that post-judgment interest applies on all monetary judgments in Tennessee, no matter if the order expressly says so.

There, the Court noted that, under Tenn. Code Ann. § 47-14-122, “Interest shall be computed on every judgment…,” and, as a result, post-judgment interest is “mandatory.”

It’s an issue that’s unlikely to come up often, partially because every prevailing party generally includes an express grant in their judgment. But, when the order doesn’t expressly say it, have this recent case ready to go.

Bankers: Tennessee Court of Appeals issues opinion on safe practices on handling bank levies.

A few weeks ago, I went to Chancery Court on a conditional judgment motion and part of my presentation to the Judge was to acknowledge how rare it is to be in court on conditional judgment proceedings.

Under Tennessee law, a creditor can get a “conditional judgment” against a non-debtor garnishee (usually an employer or a bank) when the creditor issues a garnishment and the garnishee fails to respond. This conditional judgment is then made a final judgment if the garnishee never responds.

As you can imagine, asking that a bank or an employer be made 100% liable for a debtor’s judgment (regardless of whether the debtor actually works or banks there) tends to get the garnishee’s attention, thus eliminating the need for a hearing. In practice, most banks instantly respond to a conditional judgment.

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A few weeks ago, the Tennessee Court of Appeals issued an opinion detailing a conditional judgment fight between a judgment creditor and a garnishee bank over an allegedly inaccurate response, at Tullahoma Industries, LLC v. Navajo Air, LLC (No. M2019-02036-COA-R3-CV)(Tenn. Crt. Apps., June 29, 2021).

In that case, US Bank was served with a garnishment and immediately froze all accounts that might be relevant, including accounts in the name of a non-debtor entity, but that was clearly related (same principals, same address) to the debtor and with a very similar name. While the accounts were frozen, the third party’s lawyer sent a demand that the funds be released, pointing out the different entities’ names and different EINs.

After verifying that the debtor and the account holder entity had different tax identification numbers, US Bank released the funds back into the account and answered “no accounts.” In response, the judgment creditor challenged US Bank’s response by filing a Motion to Show Cause (i.e. asking for a conditional judgment for failure to provide an accurate/correct response). The trial court agreed with US Bank, and the Court of Appeals upheld the ruling.

A recap of the analysis:

A judgment creditor’s remedy in response to an inaccurate garnishment response will be to examine the garnishee under Tenn. Code Ann. § 26-2-204.
There is some suggestion that moving directly into a “Show Cause” / conditional judgment proceeding is procedurally improper.
Instead, the creditor starts with an examination (i.e. discovery) to vet the garnishee’s answer, with the purpose to determine whether the garnishee actually holds (or held) money or property of the judgment debtor.
The judgment creditor has the burden of proof that the garnishee holds the debtor’s property.
As to bank accounts, a court will not go beyond an analysis of account ownership (i.e. the account name, the tax identification number of the owner). The Bank does not need to inquire into the source of the funds or equitable ownership claims.
Even though the Court questioned the procedural path, it appears that the conditional judgment process is appropriate, but only after the examination takes place.

I note that this opinion was authored by Judge Neal McBrayer, a former debtor/creditor lawyer, who does a great job on commercial and real property cases.

This case provides important guidance to all parties. To creditors, it shows the value in naming the correct party-defendant, as well as any related entities, in your original proceeding.

To banks, it provides a great outline in how to process bank levies, including what to do when it’s not entirely clear that the judgment debtor is your account customer. That’s why I get all those calls asking for social security or tax id numbers, dates of birth, and other information like that. Smart banks avoid conditional judgments.

Don’t Forget This Blog Post (I did): A local court can order an out of county Sheriff to conduct a sheriff’s sale of real property.

I need to pay more attention to this blog. (And not just posting to it.)

A few weeks ago, I had a pretty deep legal discussion with a lawyer for a nearby county on a complex creditor rights question. And, after a few days of comparing research, she sent me a link to my own blog post on the exact same topic.

The bad news is that I spent many hours re-researching the issue. The good news is that I came to the same conclusion.

The issue was whether a Chancery Court in County A can issue an order and a levy to the Sheriff in County B to sell real property located in County B. And this wasn’t just a theoretical discussion–this was my own levy seeking to collect on a judgment.

The issue doesn’t come up much, and my concern was a lingering recollection that, in fact, some actions related to real property *are* limited to the county where the real property is located. That’s the “local action rule,” which requires those actions with a direct and undeniable connection to the land to be brought in that county (examples: title dispute / quiet title actions; detainer actions affecting possession of land; actions seeking money damages for trespass or injury to land). The way that Tennessee cases apply it, however, the local action rule speaks more to a “cause of action” that relates to the specific land at issue, not a general execution against the land.

In the end, here’s why Sheriff B can do it:

(1) Execution Sales of Realty are governed by Rule 69.07 and Tenn. Code Ann. § 26-5-101, and neither contains any county limitations. My review of Tenn. Code Ann. § 26-1-101 (and all around those statutes) did not reveal any limitation of the Sheriff’s ability to sell real property. We know that a local sheriff can enforce an out-of-county judgment on all other assets (wages/personal property like cars/bank accounts)—if there were a distinction as to real property, wouldn’t it be in those same statutes?

In fact, not only does Rule 69 not contain any exclusions, but it lumps real property in there with the other categories. For instance, in setting what can be levied against, Rule 69.05(1) says that “Property includes a judgment debtor’s realty, personalty, money, wages, corporate stock, choses in action (whether due or not), and court judgments.” (Note that there’s no distinction between the different types of assets.)

For personal property (which we know an out of county Sheriff can do), Rule 69.06 makes no distinction or exception as to the sheriff’s powers (or identification of which county’s sheriff can act).

For real property, Rule 69.07 (the separate rule for “Execution on Realty”) makes no distinction or exception related to which sheriff can take action. Instead, that Rule creates a system by which the creditor “may move” for an order of sale and then, “the sheriff” conducts the sale.

(2) The Jones v. Helms I wrote about last year remains valid.

In Jones, the creditor held a judgment from Gibson County and filed a Rule 69.07 motion in Gibson County for a sale order, and the Gibson County Court granted the request and ordered the Weakley County Sheriff to sell the land to pay the Sessions judgment. Rather than recite all the opinion, I’ll just direct you to last year’s post. (And, also, check out: Jones v. Helms, 2020 Tenn. App. LEXIS 517, *8-12, 2020 WL 6806372.)

One of the reasons that I maintain this blog to curate a list of useful opinions for my own practice. Next time, I’ll be sure to check in here first.

Does Post-Judgment Interest change every six months? (Probably not)

I had an “in-person” court appearance yesterday morning, renewing and extending a judgment from 2011. As a creditor, old judgments can be a gold-mine, as home values have soared in Middle Tennessee, and a well placed judgment lien might have some equity.

Plus, it’s sort of nice to take a trip down memory lane, back to when creditors automatically got 10% interest on their judgments.

As long time readers know, in 2013, they revised the post-judgment interest rate statute, Tenn. Code Ann. § 47-14-121, and switched to a variable (and lower) rate, subject to change every six months.

Yesterday, in my proposed Order Renewing Judgment that I handed up to the Judge, I included language that the renewed judgment would accrue interest “as provided in the original judgment, at the then applicable rate of interest under state law.”

The Judge asked me if that meant that interest was 10% over all of this time (and into the future) or, instead, was it a variable rate, changing each time the rate changes.

Well, Judge, that’s a legal question that drives hundreds of visitors to my creditor rights law blog every year.

The Judge asked me if I had a case or other authority to show whether or not the rate fluctuates. I hadn’t researched it (because it wasn’t really an issue on this unopposed Motion), so the Judge simply crossed out “then existing rate” and wrote in “applicable rate,” which punted the issue down the road.

But, we sort of have an answer, thanks to a local lawyer’s comment on this blog post from early last year:

From the TNCourts.gov website: “Beginning July 1, 2012, any judgment entered will have the interest set at two percent below the formula rate published by the Tennessee Department of Financial Institutions as set in Public Chapter 1043. The rate does not fluctuate and remains in effect when judgment is entered.”

And, no, that’s not a case or a statutory cite. It’s just an introductory paragraph on the Administrative Office of the Courts website. But, it’s something. And, it’s as good as we’ve got for right now. “The rate does not fluctuate and remains in effect when judgment is entered.”

As a practical matter, the best practice would be to always use a specific interest rate in any judgments. Instead of saying post-judgment interest “as provided under Tennessee law” or at the “applicable post-judgment interest rate,” always just say the a specific rate, whether it’s 5.25% or 7.45%. This text would create a presumption of a specific, certain rate of interest going forward.

As more of these Great Recession era judgments come up for renewal and lenders are dusting off these pre-2013 judgments for execution against houses and defendants with drastically changed circumstances, I’m betting that, very soon, this is going to be an issue that a creditor is going to need briefed.

Tennessee is set to increase homestead exemption in 2021

The Tennessee Legislature is, again, considering debtor-friendly changes to the homestead exemption statute.

The one most likely to pass is House Bill 1185, which seeks to increase Tennessee’s homestead exemption from the existing $5,000 to $35,000 for single homeowners and from $7,500 to $52,500 for jointly owned property.

Before you complain too much about that proposal, consider Senate Bill 566, which provides an unlimited exemption for a judgment debtor’s residential real property (and, after the debtor’s death, it passes to the heirs).

Similar proposals were made in 2019, in 2020, and also in 2012 (and a number of times in between). So far, all such efforts have failed, but I believe this is the year that the Tennessee homestead exemption is increased.

Back in 2019, I talked about the importance of exemptions for debtors, since exemptions can preserve and protect a basic necessity level of assets for debtors (picture the clothes on their back, a few thousand dollars in the bank, a car, tools).

As I wrote in 2019, though, “if this new law passes, the downfallen debtor can keep 100% of the equity in his $750,000 house entirely out of the reach of creditors.” I then said:

Wait a second. Is this law designed to protect downtrodden debtors seeking a fresh start in life (who very probably do not have high value real property at all) or, maybe, is it designed to protect high income individuals whose businesses fail?
Because that’s all this proposed law does. It grants fairly absolute protection to the high value real property owned by judgment debtors in Tennessee, and all the garnishments, levies, liens, and bankruptcies will never touch a penny of that equity.

I feel the same way about these new proposals. If we’re talking about protecting the working poor and preserving the necessities of life from garnishment, let’s start somewhere other than $750k of equity in a mansion. Let’s talk about debt relief measures, eviction support, access to justice, etc.

But, these new laws aren’t about basic necessities of life for poor people. Most poor people don’t live in lien-free mansions. Instead, these new measures are being lobbied for by the construction industry.

These are bad proposals. Unless you’re a debtors with big, lien-free McMansion. Then, sure, it’s a great new law.

Bankers: Are your Judgments expiring?

Tennessee judgments expire after ten years.

All those judgments you took during the Great Recession are coming up for renewal. If you don’t affirmatively ask the court for an extension, they just go away.

And, all those builders, contractors, investors, and so many others who were broke in 2010/2011 but who turned things around when Nashville real estate, business, and construction boomed in 2015 (and beyond)?

They’ve been waiting. Hoping that you’d forget about them. Hoping that you’d do nothing to renew your judgment.

Part of what makes this Creditors Rights blog so popular is that I keep it an objective discussion of the law. You don’t see me use it to solicit business. (Well, overtly.)

But, for today, I’ll say this: If you have a box of judgments that you haven’t touched for years…Call or e-mail me immediately. There may still be time.

I’m seeing it happen every day. Big judgments are expiring, and debtors are ridding themselves of millions dollars’ worth of judgment liens.

Once upon a time, the creditor probably got frustrated by the dead-ends (or maybe the expensive lawyers spinning their wheels while billing by the hour). Those old files got put in a file cabinet. Maybe the banker switched banks. Maybe the bank got sold.

But, if you don’t dust off those old files, you are probably leaving money on the table. If you haven’t looked at those old files lately, it may be too late.