Publications

HOW TO GET BLOOD FROM A STONE
A PRIMER ON UNCONVENTIONAL COLLECTION METHODS

Conventional collection techniques work well when applied to honest accounts that acknowledge the debt, have some ability to pay and have a forthright desire to satisfy their rightful obligations. Unfortunately, however, such techniques fail miserably and are easily circumvented when applied to accounts that are less than completely honest and/or bordering on insolvency. In those instances, a more creative and unconventional approach is warranted. The linchpin of any such approach is always leverage: you must be able to maneuver your customer into a position where it is more in your customer's self interest to pay you than ignore you.

Whether the effort will be worth the time, money and trouble is, of course, a judgment call that depends on such factors as how much money is at stake and your management philosophy respecting such issues. The key is to pick your spots intelligently, weighing the costs and benefits..

THE "I'D LIKE TO PAY YOU BUT I DON'T HAVE THE MONEY" GAMBIT

THE SITUATION: Your customer admits that he owes you the money (or makes up a transparent defense that even he doesn't take seriously) but claims he's insolvent and can't pay you. At the same time, he's got a Florida tan and is driving a new car. You know he's got assets buried somewhere, but are reluctant to throw good money after bad in collection efforts. Still, it really galls you to just walk away. What do you do?

• The ultimate lie detector test: Ask for a judgment
  • What's a "judgment"? What's a "judgment note"?
    • Its a bundle of rights
    • Its a lien on real estate in the counties where it is recorded
• The response will speak volumes
  • If they really don't have the money, they'll probably agree.
  • If they don't agree, it usually means that they either have assets they are trying to protect (like equipment they need to stay in business); or they expect to have assets in the future; or they have something else they are trying to protect (such as a possible refinancing, or they are being acquired, etc.)
  • If they don't agree, this opens the door for you to ask for something else in exchange for forestalling a law suit -- collateral, a letter of credit, a personal guaranty, etc. The responses will usually let you know if you are dealing with an honest or a dishonest debtor.
• One of the primary advantages of a judgment is the ability to take discovery in aid of execution
  • You can find out what happened to the assets they used to have, you can get financial statements, you can get their checkbook and trace the "hanky panky", etc.
  • You can execute and garnish on what you find.
• They might permit the judgment, so long as you agree not to record it or execute on it for a stated period. That may be acceptable, but consider such things as:
  • Will they give you an authorization to get financial information and tax returns? (Get the financial statements they gave to their bank where they disclose, as opposed to hide their assets)
  • Will they give you collateral?
  • Will they set aside money for you out of current receipts?
  • Will they let you take discovery in aid of execution?
  • Will the individuals promise you that nothing is being sold and the company is staying in business?
  • Will they commit to some money now, and a payment schedule?

THE "I'D LIKE THE BUSINESS BUT DON'T REALLY TRUST HIM" DILEMMA

THE SITUATION: Your sales people keep submitting orders, and you keep turning down the credit. Business is tough, and your sales people are giving you heat. You don't want to be the source of complaints but, at the same time, if the customer does not pay its your neck on the chopping block. Is there some middle ground or other solution?

• Ask for security in the form of collateral or a third party guaranty; you probably won't get it; and even if you do it probably won't help you too much. Securing a debt can be extremely hypertechnical.
  • A proper lien search needs to be made.
  • UCC-1's don't attach to everything -- will the collateral be resold or incorporated into other goods?
  • A guaranty that's good today may be worthless tomorrow.
  • The husband-wife rule
  • A bankruptcy can throw it all out the window.
  • Second mortgages are a possibility.
• Letters of credit or performance bonds, properly drafted, are usually the way to go. But if your customer is solvent enough to obtain them, you probably don't need them.
• "Skunk Factors": Getting to the top of the pile by making yourself more trouble than you're worth.
  • Instant leverage -- but it only works if the customer has assets and plans to stay in business
  • Attorney's fees
  • Interest above market rate
  • Home court advantage
  • Quick arbitration

GETTING THE UPPER HAND, UNDERHANDEDLY

• Using credit applications to impose individual liability

  "The signatory hereto represents that all of the information set forth above is verified, true and correct, and further represents that the company has sufficient assets to satisfy all liabilities incurred and to be incurred to seller. Said signatory further promises and represents that he will forthwith advise the seller of any change in the company's condition or ability to satisfy its liabilities to seller before such liabilities are incurred."

  "The signatory hereto hereby agrees to serve as surety and guarantor of all liabilities incurred to seller, now or in the future, in said signatory's individual capacity."

• Use confirming letters to impose individual liability
  • Get assurances, then send a confirming letter, such as: "This confirms our conversation in which you promised and represented that the company has sufficient assets and receipts to pay for these goods. We are relying upon your assurances in moving forward with this transaction"
• The battle of the forms

USING "PRESSURE POINT" TECHNIQUES AFTER THE DEAL GOES SOUR

• Can you go after the individuals and their related companies? Can you turn a contract into a tort?
  • The individual liability theory: usually depends on your ability to prove they lied to you to induce you to make the sale
• The "piercing the corporate veil" theory
  • Follow the money
• The "alter ego" theory
  • Is another company with the same people doing basically the same thing?
• When fraud turns into RICO
• Can you take back the goods you sold?
  • The Uniform Commercial Code allows you to reclaim goods in limited circumstances, which will often require the commencement of a lawsuit
  • Must make a demand; do it in writing
  • You can only get those goods delivered within ten days of the date of your demand (3 months if misrepresentations were made to you respecting the buyer's solvency)
  • You can only get the goods that were there when you made your demand; might want to take photos
  • You must be able to identify which goods are yours
• What should you do if you hear that your customer is selling off assets and not paying you?
  • Fraudulent conveyances
  • Involuntary bankruptcy

THE "OVER THE BARREL" TECHNIQUES — RECOGNIZING WHEN THEY NEED YOU

• Bulk Sales Act notice
• Request to compromise sent to all creditors, or a meeting of creditors notice
• In either event, this generally means that the debtor has plans that you can foul up by pushing the right buttons

©2009 Powell, Trachtman, Logan, Carrle & Lombardo, P.C. The foregoing is intended for general information purposes only and does not constitute legal advice. All business and legal decisions should be made in conjunction with competent legal advice as applied to specific situations. Portions of this article may be quoted for non-commercial purposes with proper attribution.