Creditors Rights 101

New Trial Opinion on Tennessee Post-Foreclosure Deficiency Statute Shows a Creditor-Friendly Trend in Interpreting “Materially Less”

A few months ago, I argued the first appellate case construing Tenn. Code Ann. § 35-5-118, which is the new Tennessee post-foreclosure deficiency judgment statute. As you may recall from my blog post about the new law, the statute provides a possible defense to a deficiency action, where the debtor can show “by a preponderance of the evidence that the property sold for an amount materially less than the fair market value…”

In layman’s terms, a foreclosed borrower may be able to avoid a judgment for the remaining debt if he can show that the foreclosure buyer drastically under-bid at the foreclosure.

All across the state, this statute has resulted in two fights:

What was the fair market value at the time of the foreclosure? and
Was the foreclosure sale price “materially less” than the fair market value?

A big problem under the statute has been that “materially less” isn’t defined in the statute or anywhere else in Tennessee law.

In the resulting GreenBank v. Sterling Ventures opinion, the Court of Appeals issued a bank-friendly interpretation, offering guidance as to what “materially less” means by saying that a sale price of 86% is not “materially less.”

I’ve heard from a number of bank lawyers since that opinion, complaining that 86% isn’t low enough. I’ve told them, just wait, the Sterling Ventures opinion didn’t set the “floor;” there is room in the statute for lower values, which will be established in future cases (in the Sterling Ventures case, the bid at issue was 88-91%, so it didn’t require the Court to define the lowest possible percentage).

This past week, my firm received another favorable opinion from the Williamson County Chancery Court. In this Opinion (click to review), the Court recognized this issue, and rightfully upheld lower percentage bid amounts. The Court, following the lead of the Court of Appeals, cites the Holt v. Citizens Central Bank case, which recognized that a 50% recovery at foreclosure is a customary result.

While this doesn’t suggest that 50% is the magic number/floor percentage, this analysis shows a judicial tendency in interpreting the statute at a lower range than most debtors have argued.

With any new law, it takes a few decisions to “battle test” how it works. So far, the parameters of Tenn. Code Ann. § 35-5-118 are being defined in a way that favors creditors.

Contingent Fees: The Good, The Bad, and The Reason Many Lawyers Don’t Handle Them

Generally, a client pays a lawyer for his services by the hour, which is exactly what it sounds like. If a lawyer with an hourly rate of $250 does an hour’s worth of work, then the client owes the lawyer $250.

In some instances, a lawyer will handle a matter on a contingency fee basis, which means that the fee is paid only if there is a favorable result (i.e. “I don’t get paid unless YOU win”). The exact fee is calculated as a percentage of the amount of money recovered in the case.

Because I do creditor’s rights law, I’m sometimes asked to handle matters on a contingent fee. With the economy being where it is, however, I’m far less likely to accept creditor cases on this agreement. With so many people broke, the possibility of payment is lower than ever and the fight to get that money is harder than ever.

Proponents of contingency fees argue that they provide access to lawyers and the justice system for people who, otherwise, couldn’t afford lawyers (and that expensive hourly rate). That’s true.

My experience with accepting clients on a contingency fee billing is that those clients–i.e. the ones who are not paying for every phone call, every email, every step of the litigation–are the ones who have the most unreasonable demands of my time. Paying good money for an hour long phone call has a good way of discouraging any unnecessary hour long phone calls. If a nasty fight on an inconsequential issue doesn’t cost them anything, well, of course, they want you to fight on that issue.

When a client asks me to take a collections case on a contingent fee basis, I’m generally pretty frank with them in response. I explain the factors I consider: (a) how much actual work will be required; (b) whether the defendant has lots of assets; and (c) whether payment of the claim will be very quick. In short, it’s only a good deal for the lawyer if it’s going to be a windfall involving not much work and a quick payment.

In this economy, it’s rare to find the collections referral that pays quickly and without much effort. In a contingency fee case, the risk of nonpayment rests entirely on the lawyer’s shoulders. From a client’s perspective, the risk is that a lawyer is going to lose motivation to work on a case over a long duration when it doesn’t produce results (i.e. money).

My advice to lawyers is to be careful on these types of cases; my advice to the clients would be the same.

Last Chance to Learn: Creditors’ Rights in Tennessee: 10 Collection Strategies

A quick reminder: Tomorrow, June 6, 2013, I’ll be teaching the CLE presented by M. Lee Smith Legal Publishers called Creditors’Rights in Tennessee: 10 Collection Strategies.

This is a one hour audio seminar, that will cover the usual Tennessee collections lawyer song and dance. Things like:

Things to consider prior to declaring a loan in default and filing a collections lawsuit
Issues in deciding between Chancery Court and General Sessions Court
Importance of knowing your Statute of Limitations
Making sure you Sue the Right Party
Judgment Liens and why they work
Fraudulent Transfers
Overview of bankruptcy issues, including preferences and Trustee avoidance actions
Common roadblocks to collecting money, including domestication of foreign judgments

It’s one hour of CLE credit, and, hopefully, what I teach you during seminar will put some money in your clients’ pockets.

New Tennessee Legislation Imposes Contempt Sanctions on Judgment Debtors Who Don’t Notify Creditors of New Employment

As a creditor rights attorney, I’m always looking for new developments in the law that gives me any advantage.

Recently, I saw that the Tennessee Legislature is considering a new law that gives creditors an unfair advantage.

I’m talking about Public Chapter 187, on wage garnishments, which would create the new Tenn. Code Ann. § 26-2-225. The statute provides, in part, that:

… A judgment debtor whose salaries, wages or other compensation are subject to a garnishment shall notify the judgment creditor who filed the writ of garnishment within ten (10) days, as computed in § 1-3-102, of obtaining any new employment. Notice to the judgment creditor shall be by certified mail and shall include the name, address and telephone number of the new employer. A judgment debtor who fails to provide notice of new employment in compliance with this section is in contempt of court and, upon the court making a determination of contempt, may be punished the same as contempt of court in a judicial proceeding. …

Under this proposed law, any debtor whose wages are being garnished must notify the creditor within 10 days, via certified mail, of any new employment.

As a creditor’s lawyer, sure, I understand why this law would be helpful: when a debtor switches jobs it can take months for me to figure out where they work. But, I’m surprised that the Legislature would waste this energy to get involved in this collections cat-and-mouse game.

Frankly, even noting my creditor-friendly bias, I think this law goes a little far. An affirmative requirement that the debtor send written notice, via certified mail, seems so onerous that I predict that a General Sessions Court would hesitate to impose h a contempt charge.

This is just a strange law, all around.

Adequate Protection Considerations in the Middle District of Tennessee Bankruptcy Courts

Despite using the same Bankruptcy Code, Bankruptcy Courts often have a broad range of practices on how the exact same statutes can apply.

While most creditors’ lawyers will call any Bankruptcy Court “debtor-friendly,” one way that the Bankruptcy Courts in the Middle District of Tennessee are markedly different than others is the threshold of proof required for creditors to receive “adequate protection” payments from the debtor.

Adequate Protection refers to payments made by the debtor to the creditor, generally, to compensate the creditor for the use of the creditor’s collateral. The statutory precedent is 11 U.S.C. § 361(1), which allows the debtor to make a “cash payment” to the extent that the automatic stay “results in in a decrease in the value of [the creditor’s] interest in the property.” In layman’s terms, if the bankruptcy stay hurts or impairs the value of your collateral, you may be entitled to a cash payment (or an alternate/replacement lien).

In some districts, like the Middle District of Georgia, the Bankruptcy Courts allow the resumption of contract payments to a secured creditor, without a deep analysis of depreciation.

The Middle District of Tennessee takes a different approach. Here, a secured creditor is only entitled to adequate protection in the amount that it can prove depreciation of its lien. So, with a car, the creditor would get compensation for the loss of value from the Debtor’s use of the collateral. (It’s substantially more difficult with real property, where depreciation is may be impossible to prove.)

In order to obtain Court approval and avoid an objection from the U.S. Trustee, the creditor will typically need to hire an appraiser to go look at the vehicle and assess the value and his estimate of how much wear and tear/depreciation is imposed on the car on a monthly basis. Then, the Court would order monthly adequate protection payments in that amount.

As an aside, this practice isn’t for the debtor’s benefit; it’s actually designed to protect unsecured creditors from arbitrary loss of cash/income from the Bankruptcy Estate.

As a creditors attorney operating in the Nashville Bankruptcy Courts, this a conversation I have a lot with outside counsel. It’s a hard lesson to teach, especially when the Courts in their backyard take the opposite approach.

What is a Scire Facias (Specifically, What Does it Mean When an Employer gets a Scire Facias on a Judgment against an Employee)?

“Scire Facias” means, on a very general level, “to show cause.” It’s a Writ (known as a “Writ of Scire Facias”) that a judgment creditor can file in various instances. Specifically, a judgment creditor will file a Scire Facias on conditional judgments where the employer has failed to answer wage garnishments.

This happens most often on wage garnishments and bank levies. The procedure is that, once the employer has failed to file an Answer or other response to a Wage Garnishment, the Plaintiff files a Conditional Judgment that grants a “conditional” judgment against the employer for the amount of the Judgment against the Defendant.

It is called “conditional” because the Judgment isn’t final until the Plaintiff prepares and serves on the employer a “Scire Facias” directing the employer to appear and “show cause” (i.e. explain) why they failed to file an answer to the wage garnishment.

There are three general outcomes:

The employer doesn’t appear and the Judgment goes final against the employer;
The employer appears and has no good explanation for the failure, and a judgment (or consensual payment) in some amount is reached (Note: The employee lying to the employer about the status of the debt is not a defense for the employer–the employer has to comply with the response obligations under the law); and
The employer appears and presents some good reason, such as the garnishment was defective, the Defendant was not employed during the relevant timeline, or there was another garnishment.

Regarding item number 3, that’s not always a good and sufficient response, since a garnishee should always answer legal process, but a Court will accept a late answer in that situation, unless there is a showing of collusion or a pattern of failure to respond.

Mark Your Calendars: Tennessee Bar Association to host Creditors Rights 101 Webcast on April 17, 2013

On April 17, 2013, the Tennessee Bar Association has asked me to present a webcast CLE called “Creditor Rights 101: 10 Collection Strategies Every Lawyer Should Know.”

This is part of the TennBarU series, designed to give Tennessee general practitioner attorneys an overview of issues in Tennessee creditor rights. Discussion will include:

• Pre-Lawsuit Considerations
• Statute of Limitations Issues
• Jurisdiction and Venue Selection
• Judgment Enforcement Options
• Basic Bankruptcy Issues
• Common Roadblocks to Collecting Money

And, don’t forget, your Tennessee Bar Association membership gets you 3 hours of free CLE.

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.

Do-It-Yourself Creditors: Beware of the Claim Redaction Requirements in Bankruptcy Court

After many years of Tennessee Bankruptcy Court practice, I notice trends in litigation. Years ago, there was a flurry of attacks on Deeds of Trust for invalid notaries. Then came the debtors objecting to the documentation filed on “big mortgage lender” mortgage claims.

Right now, the hot issue is adversary proceedings (i.e. bankruptcy lawsuits) against creditors for failure to redact personal information when they file Proofs of Claim.

When you file a Proof of Claim in Bankruptcy Court, you are obliged to comply with Federal Rule of Bankruptcy Procedure 9037, which provides in part

…in an electronic or paper filing made with the court that contains an individual’s social-security number, taxpayer-identification number, or birth date, the name of an individual, other than the debtor, known to be and identified as a minor, or a financial-account number, a party or nonparty making the filing may include only:

(1) the last four digits of the social-security number and taxpayer-identification number;

(2) the year of the individual’s birth;

(3) the minor’s initials; and

(4) the last four digits of the financial-account numb

To clarify, “redaction” means that you must cross-out or otherwise remove the information, other than the information expressly allowed above. To keep it simple, I keep a Sharpie pen at my desk and mark up any loan/account documents I file as exhibits to my claims.

Now, debtors are watching all claims filed and, where a claim contains prohibited information, the debtor files a Motion to Redact and that motion seeks also sanctions against the offending creditor. Recovery can include damages, costs of future credit monitoring, and attorney fees.

I know what you’re thinking: your borrower filed bankruptcy on your debt; you’re never going to get paid; you went to the trouble of filing a claim on a debt you’re never going to get paid on; and, now, they can sue you if you do it wrong?

Yes, they can.

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).