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• Distinguish between secured and unsecured debt.
• Understand the process of collecting on a debt.
• Explain an Article 9 transaction, how it is created, and its relationship to collecting money from a debtor.
• Understand the three major chapters in bankruptcy, including their similarities and differences.
• Understand the purpose and components of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
• Identify the difference between real and personal property and how each is transferred.
• Distinguish between the forms of protection for intellectual property: patents, copy- rights, trademarks, and service marks.
• Identify international issues related to intellectual property.
Creditors and Debtors 16 As discussed in Chapter 15, one of the most significant relationships in business is that of creditor and debtor. All of us enter into debtor–creditor relationships in our daily lives, whether using a credit card to purchase goods or dropping off clothing at the dry cleaners. As a student, you may have borrowed money to attend college and will have an obligation to pay back the loan over a period of time. In short, buying items on credit is such a common, everyday occur- rence that most people who transact business this way think nothing of it. At least, that is true until the debtor defaults. It is then that the creditor becomes painfully aware that the money he or she thought was forthcoming is now in doubt; also, the debtor feels the weight of a debt that is being called in immediately.
The cost of recovering bad debts is very expensive and time consuming. The purpose of this chap- ter is to discuss some of the different forms of debtor–creditor relationships; how to recoup money loaned; the rights and obligations of each of the parties; and the major federal and state legislation governing the relationship.
The law draws an important distinction between two types of debts: unsecured debts and secured debts. An unsecured debt simply means that when the creditor loaned the debtor money, the creditor did not receive any property (collateral) to secure or guarantee repay- ment. Although the two parties have an underlying contract to enforce payment, the creditor would have to resort to suing in court to recover the money loaned. The practice of making small, unse- cured loans may justify such a risk, but larger loans that take place in a business do not. Not only is the lawsuit to recover the debt expensive and time consuming, but there is no guarantee at the end of a trial that there will be any money to collect. Therefore, to decrease the risk incurred when a debtor defaults, many creditors, especially business creditors, enter into secured loans, also called secured debts or secured transactions.
For the purposes of debtor–creditor law, a secured transaction is one in which the debtor gives col- lateral as a pledge to the creditor. If the debtor defaults on the loan, the creditor can sell the collateral to recover the money lost. If the collateral used to secure the loan is personal property, we say that the debtor has given the creditor a security interest in personal property; if the property that secures the loan is real property, that security is called a mortgage. Although a secured loan does not pre- vent the debtor from defaulting, it does help the creditor recover the money.
In a default situation with an unsecured loan, the debtor has little recourse but to end up in court to try to recover the debt. In a secured situation, by contrast, the creditor can sell the collateral and use the proceeds to cover at least part of the debt. (For the basics of setting up a secured transaction, see Chapter 17.) Consider the following example.
Carla Consumer owns a boat worth $5,000 and wants to buy a car for $6,500 with a loan from Convenient Credit Union (CCU). She could use the boat as collateral for the loan of $6,500 to purchase the car. Then, if Carla the buyer (now the debtor) defaulted, CCU could sell the boat to defray the loss of the $6,500. Now suppose CCU sold the boat for $4,000. On a loan of $6,500, the creditor has lost only $2,500 as opposed to the full $6,500 that would have been lost had the loan been unsecured.
If the creditor did not enter into a secured transaction before making the loan, there are still options available, but all of these involve going to court. Before proceeding down that road, the creditor should first make absolutely sure that the debtor has assets to pursue, such as a home, money, savings, stock, or wages from employment. Many liti- gants fail to consider that winning a lawsuit is of absolutely no value if the defendant has no assets.
How can a creditor determine whether a debtor has any assets prior to suing? One way is to use online databases such as Dun & Bradstreet (http://www.dandb.com). Such ser- vices charge a fee to investigate and prepare a report showing the defendant’s assets and where they are located. However, the cost of obtaining such information may be well worth it if it saves needless litigation expenses.
When real estate is bought and sold, such a transaction is recorded in a local office, usu- ally of the county clerk. Access to these records is open to the public and can be searched by using the seller’s or the buyer’s name. Many counties have now placed real estate records online. This is a good place to look for a potential defendant’s assets. And, since the information is readily available, the search costs nothing. At the same location, there may be corollary resources or books that list mortgages and other liens against property. Using them, one could determine if there is any equity in the debtor’s real property. If a judgment has been entered by the court against the debtor, such books also list creditors and debtors.
Examples of counties that provide such services online are Broward County, Florida, whose website can be viewed at http://205.166.161.12/oncoreV2/Search.aspx, and Denver County, Colorado, at http://www.denvergov.org/assessor/TheRealProperty Section/RealPropertySearch/tabid/442284/Default.aspx.
If the creditor determines that the debtor has assets available, and the loan initially made was unsecured, there are a number of ways to proceed. The collection of a debt can be organized into three phases: prejudgment, judgment, and postjudgment (see Table 16.1). Each phase represents a unique opportunity to recover assets.
The creditor files suit (a summons and complaint) in court (e.g., trial, small claims) against the debtor, who has defaulted on a loan.
After the lawsuit is filed but before the actual trial takes place. No judgment has been awarded yet.
The lawsuit has been heard in court by a judge or jury, which has awarded money to the plaintiff/ creditor.
The plaintiff/creditor has won the lawsuit and is seeking to collect the money from the debtor.
You will recall from Chapters 2 and 3 on litigation that to begin a civil lawsuit, the plaintiff first serves the defendant with the summons and complaint stating the cause of action. In a debt collection case, the papers would indicate that the plaintiff is suing for breach of contract on a debt. Once the papers are served, however, many years may go by before the case is actually heard in court. We refer to this phase as the prejudgment period because it occurs after the summons and complaint are filed but before the case has actually gone to trial. Once the debtor receives the papers, his or her first reaction might be to hide, sell, or dispose of all his assets to keep them away from the creditor. Years later, when the creditor “wins” the lawsuit and turns around to collect money from the debtor, he or she might discover that all the debtor’s money and assets have magically disappeared. The follow- ing prejudgment remedies are intended to protect the creditor from such an outcome.
The Writ of Attachment One way to avoid the Case of the Missing Assets is through the use of a prejudgment tool called a writ of attachment. This is a statutory device to seize personal property or freeze financial assets before going to trial. Every state has its own rules for how to obtain a writ of attachment, but in general, these may involve giving the debtor notice of the lawsuit; going to court for a hearing; or the creditor posting a significant bond and, if granted, having the sheriff seize specific property. Some states allow a prejudgment writ of attach- ment without a hearing or notice to the debtor if the creditor can show that the debtor is likely to hide, destroy, or convert assets to another purpose. If the court grants the writ, the sheriff physically seizes the property and holds it, or has it held in a secure facility, so that in the event the plaintiff/creditor prevails in the lawsuit, there are some assets to sell to make the creditor whole.
dant needs to operate a business), the defendant may be eager to settle the lawsuit without going to court, encouraging resolution of the dispute much more quickly than waiting for a trial.
might be willing to arrange to pay the debt quickly in order to resume his or her liveli- hood. On the other hand, every situation has to be considered individually. If the debtor owns nothing but a radio and a broken-down car, the debtor will probably not care too much about getting them back, and retrieving these paltry assets certainly won’t pro- pel that person to seek a settlement. Note again the importance of gathering information about the value and type of assets in the defendant’s name, because it indicates the value of pursuing this writ.
Writ of Garnishment/Levy on Earnings Another remedy (also subject to state law) is a prejudgment writ of garnishment. The difference between garnishment and attachment is that in an attachment, the creditor goes after property of the defendant/debtor, whereas in a garnishment, the creditor goes after the property of a third party. For example, the creditor might seek money from the debtor’s employer by having money deducted from the debtor’s paycheck (called a levy on earnings). Some states make this remedy available only if there is no personal property to attach. For garnishment to be available as a remedy, states also require that the debtor/ defendant must be employed and receive a regular paycheck.
THE STATE OF NEVADA TO: BENNY’S BOWLING LANE, THE EMPLOYER OF DOUGLAS DEBTOR, Garnishee.
under your custody and control belonging to said defendant(s), described as a biweekly payment of $1543.25.
subject to the exemptions indicated above, to the Henderson Constable at the address below.
retain as a fee for compliance. The $3.00 fee does not apply to the first pay period covered by this Writ.
if any, whose address appears below.
Garnishment, like attachment, has limitations. These may include a court requirement for the creditor to post a significant bond, and in some cases, the debtor may be given notice and the opportunity to show up at a hearing to defend against the procedure. On the positive side, the writ ensures that the creditor gets paid, but unfortunately, the payment occurs over a very long period of time. In addition, all the defendant has to do is quit his or her job, and garnishment will no longer be in force.
If obtaining a writ of attachment or garnishment is too expensive or fails to recover any property, a creditor may have no alternative but to proceed to court to try to collect the debt. This will involve filing a civil suit in which the creditor will have to convince the judge or jury (depending on whom the plaintiff decides to hear the case) by a prepon- derance of the evidence that the debtor does indeed owe the creditor the money. While litigants who are bringing a suit often think they have a guaranteed case, many are often surprised when a jury does not agree with them. Thus, to collect a debt by way of a judg- ment, not only must the debtor have assets, but the creditor must be willing to go to the expense of suing for those assets and actually win in court. If all these factors pan out in the creditor’s favor, then the court will issue a judgment to the plaintiff/creditor. The judgment is filed with the local court and, in some states, places an automatic lien on the defendant’s real estate. Note that the judgment by itself is not a guarantee that the plaintiff will ever receive any money, however. Instead, the judgment is just the first step toward acquiring assets from the defendant in the postjudgment phase.
Once a judgment has been acquired, the creditor can place a lien against the defendant’s property. A lien is a legal interest in property that is granted to the creditor until the debtor pays off the debt. A lien is “placed on property” by filing paperwork with the clerk of the court where the property is located. The clerk will enter the information about the lien in a book (or online) so that anyone searching the defendant’s name will see the lien. Thus, one will know that there is a problem with the defendant and his or her property in that a lien exists, the defendant has not paid on a debt, and the creditor has gone to the time and expense of pursuing the lien against the defendant in court.
By this phase, statistically speaking, the creditor has gone to extraordinary steps to try to collect on the debt. So for anyone seeing this information in the clerk’s records, the lien by a creditor (other than the mortgagee) should act like a siren accompanied by a flash- ing red light. If the debtor has a simple mortgage, by contrast (the most common type of lien against real property), this does not indicate credit problems unless the debtor has defaulted on the loan. At that time, the creditor (mortgagee) has the right under the mortgage to sell the house to pay off the debt owed, so there may be nothing left for the creditor seeking a judgment against the same debtor.
Judgment Liens When a creditor takes a debtor to court and obtains a judgment, the creditor’s next option is to file liens against the defendant’s property. A lien does not pay the creditor any money. Instead, a lien gives the creditor rights in the property or the proceeds if the property is sold.
Writs of Execution It is also possible to place a lien on personal property, although this remedy is not as common as for real estate. To place a lien on personal property, commonly called a writ of execution, the creditor must first identify the property to the court. Depending on the state and the court, one common procedure is for the sheriff to seize the property for sale, with the proceeds going to pay off the debt owed to the creditor. The writ can cover prop- erty such as bank accounts, artwork, or, if a business is involved, a “till tap,” which is the money in the cash register.
A business involved in debt collection (or that outsources its debt collection functions to another firm) has to be very careful not to violate the Fair Debt Collection Practices Act (FDCPA). If a business is attempting to collect a debt from a consumer or another busi- ness, this law mandates what actions are allowable and imposes strict liability on col- lectors. The purpose of the FDCPA, enacted in 1978 as Title VIII of the Consumer Credit Protection Act and amended in 2006, is to lessen abusive debt collection practices. For example, debt collectors are not allowed to threaten, intimidate, or harass debtors. Viola- tions of the law may result in substantial fines, and businesses engaged in debt collection should obtain legal advice about permissible behavior under the statute. For a sample video demonstrating illegal tactics used in debt collection, watch the ABC News coverage of “Outrageous Calls from Debt Collectors” at http://www.youtube.com/watch?v=KJS9 c0jgosQ&feature=related.
The following case excerpts are an excellent example of what happens when employ- ers fail to properly monitor their employees in how to carry out otherwise legal debt collections.
On August 13, 2009, Greystone mailed Smith a collection letter concerning a credit card debt belong- ing to her that had been placed with Greystone for collection. That letter identified Greystone as a “debt collector” and informed Smith that the letter was an attempt to collect a debt and that any information she provided would be used for that purpose.
Shortly after leaving a message on Smith’s home answering machine, Garner attempted to contact Smith at a telephone number ending in 2882. Garner was unable to reach Smith at the number and changed its status from unknown to bad. Garner then attempted to contact Smith at a telephone number ending in 7876. Garner left a message at the 7876–number. A few minutes later, Oneta Sampson, who was Smith’s business partner, returned Garner’s call. According to Sampson, she asked Garner why he had called. Garner informed Sampson that his call related to a personal matter. After learning the nature of his call, Sampson told Garner that he could not reach Smith, her business partner, at that number. According to Sampson, Garner retorted that Sampson should “know who [she is] doing business with.” Moreover, Garner did not update Greystone’s files to indicate that the 7876–number was not a number at which he could contact Smith. Instead, Garner added the 7876– number to Greystone’s records.
Later that evening, Smith returned Garner’s call. Garner discussed with Smith the debt Greystone was attempting to collect. According to Smith, Garner also informed her that he had spoken with Sampson about the debt and that she was not pleased. After Smith told Garner that she was not able to pay the debt at that time, Garner informed Smith that her account was being documented as a refusal to pay. On August 17, Smith twice called Greystone to speak with Garner. During the first call, Smith requested information so that she could send payments. After making the first call, Smith called back ten minutes later to request Garner’s name and terminated the conversation after yelling at him.
Cases to Consider: Smith v. Greystone Alliance LLC (continued) Greystone trains its employees regarding compliance with the FDCPA and its internal policies and procedures. Among other things, Greystone employees must pass a written examination regard- ing FDCPA requirements. To ensure compliance with the FDCPA and its internal policies, Greystone employs a Call Monitoring Program and Remedial Response Process. Pursuant to that policy, Greystone monitors a minimum of six calls per month made by each of its collectors and nine calls per month made during a collector’s first month of employment. Greystone utilizes several scripts that its employees follow when leaving voice messages for debtors. From March 2009 to September 2009, Greystone required its employees to use the “Greystone Alliance Foti Message” when making a first attempt to contact a debtor and on any additional attempt to contact the debtor until a “right party contact” had been established. . . . The Foti Message Policy thus clearly directs employees to mention neither that the caller is calling on behalf of Greystone nor that Greystone is a debt collector once a right party contact has been established.
It is clear that none of the Greystone employees followed any of the scripts when contacting Smith. Moreover, it is also clear that although each of the employees identified himself or herself as a Greystone employee, contrary to the direction in Greystone’s Foti Message Policy for calls made after a “right party contact,” none of the collectors ever explained to Smith that Greystone is a debt collector. Finally, it is clear that Greystone’s Foti Message Policy does not require callers to identify Greystone as a debt collector after a “right party contact” is made.
Congress passed the FDCPA to curtail abusive debt-collection practices. The Act imposes strict liabil- ity on collectors, and a consumer need not show intentional or even negligent conduct by the debt collector to be entitled to damages. Section 1692e prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” Among other things, §1692e requires a debt collector to disclose in all communications other than formal pleadings made in connection with a legal action that the communication is from a debt col- lector. Smith claims that Greystone violated Section 1692e(11) of the FDCPA by leaving voice mes- sages that do not disclose that the call is from a debt collector.
The test for whether a communication violates a provision of the FDCPA is an objective one. Id. For purposes of determining whether a communication from a debt collector violates § 1692e, prohibiting false, deceptive, or misleading representations, courts ask whether the communication would deceive or mislead an unsophisticated, but reasonable consumer. The state of mind of a reasonable debtor, therefore, is relevant. . . . In order to deceive or confuse the unsophisticated consumer, the false, misleading or deceptive statement must be material. The Seventh Circuit has held that FDCPA claims alleging deceptive or misleading statements fall into three categories: (1) statements that plainly on their face are not deceptive or misleading or where the false statement is immaterial; (2) statements that are not plainly misleading but extrinsic evidence, such as consumer surveys, might demonstrate that an unsophisticated consumer would be misled; (3) statements that are plainly misleading where extrinsic evidence is not necessary to prove what is already clear. This dispute, however, presents a wrinkle. Here, the alleged misleading statement is not a statement at all, but an omission.
Congress has always been wary of debt collectors preying on unsuspecting debtors who may not be particularly savvy about protecting themselves. Thus, legislation like the Fair Debt Collections Practices Act exemplifies a federal statute meant to protect consumers. Congress introduces the legislation by saying, “There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy” (15 U.S.C. § 1692).
Cases to Consider: Smith v. Greystone Alliance LLC (continued) its subsequent communication. In short, Greystone suggests that its omission falls into the first category of statements identified in Ruth [a previous case serving as precedent in this case], sug- gesting that the communication is on its face not deceptive because it previously disclosed it is a debt collector.
Greystone’s omission, however, is not like that made by the debt collector in Epps [another case serv- ing as precedent in this case]. Unlike the communication in Epps, the context of Greystone’s subse- quent calls to Smith provided no clue as to its identity as a debt collector—none of the messages left by its employees referenced Smith’s debt and Greystone’s name did not imply that it was a collection agency. Instead, Greystone informed the consumer that it was a debt collector only in its initial dun- ning letter and asks the Court to conclude that the omission in its subsequent communications would not confuse or mislead the unsophisticated consumer.
. . . Section 1692e(11) requires certain disclosures in an initial communication to a consumer. It also requires similar, but less substantial, disclosures in subsequent communications, notwithstanding the fact that these disclosures were made previously in a collector’s initial communication. 15 U.S.C. § 1692e(11). Under Greystone’s theory, all a debt collector would ever have to do to comply with the “subsequent communications” prong of § 1692e(11) is to make the initial disclosures. That would effectively read the language requiring disclosures in subsequent communications out of the stat- ute, which of course violates the most basic canons of statutory interpretation. The Court holds that making the disclosures required by § 1692e(11) in an initial communication does not relieve a debt collector from making the disclosures required by § 1692e(11) in subsequent communications.
Read the full text of the case here: http://docs.justia.com/cases/federal/district-courts/illinois/ilndce/ 1:2009cv05585/235280/104/.
1. What was the problem with how some of Greystone’s employees went about contacting Smith? What should they have done? What did they do incorrectly?
2. As a manager training employees to call delinquent debtors, what did this case teach you about what your employees should be saying to debtors? What did it teach you about the behavior of some employees?
3. Under the FDCPA, what is the standard imposed to show on debt collectors? What is the test for determining if debt collectors violated this act?
attachment Seizure of personal property by a court-appointed official, usually the sheriff.
bad debt Debt that is not collectible by the creditor.
choses in action The right to bring a law- suit to recover chattels, money, or a debt.
collateral Personal property that can be sold if the debtor defaults to make the creditor whole. Also known as security.
default When a debtor fails to make pay- ments on a loan.
Fair Debt Collection Practices Act A fed- eral law enacted in 1978 (15 U.S.C. § 1692) that regulates how businesses must act when collecting debts from consumers, to curb abusive debt collection practices.
garnishment Obtaining an interest from a third party (e.g., an employer) in the debtor’s property or wages.
judgment lien An interest acquired by the creditor in the debtor’s real or personal property as the result of a judgment.
levy on earnings An interest acquired by the creditor in the debtor’s wages as the result of a judgment; results in the garnish- ment of the debtor’s pay.
lien An interest in the debtor’s property.
litigants Parties to a lawsuit; the plaintiff and defendant.
mortgage An interest that the credi- tor (mortgagee) has in the debtor’s real property.
personal property All tangible, movable property other than land and fixtures.
postjudgment The phase of a lawsuit after a judgment has been entered in court.
prejudgment The phase of a lawsuit before a judgment has been entered in court.
secured debt A debt that gives the credi- tor certain rights in property such that if the debtor defaults, the creditor can sell the property to recover all or part of the loan amount.
secured loan A loan that has collateral (security) in its terms in order to secure payment in case of a default by the debtor.
secured transaction A loan governed by Article 9 of the UCC.
unsecured debt A debt without any collat- eral guaranteeing its payment.
unsecured loan A loan without any col- lateral guaranteeing its payment.
writ of attachment An order by the court to seize some of the debtor’s property.
writ of execution An order by the court to place a lien on a debtor’s personal property.
writ of garnishment An order by the court to seize some of the debtor’s prop- erty from a third party, e.g., an employer.
1. What is the difference between a secured debt and an unsecured debt? What law covers secured debts?
2. What do the terms prejudgment, judgment, and postjudgment mean? What is the significance of each?
the end of the trial, if the creditor was successful, what would the creditor receive from the court? Would the creditor then have money from the debtor? Why or why not?
5. As a businessperson, what would be your concerns if you received a writ of garnishment from the court? Why? What steps could you take to ensure that the writ was authentic?
6. Review the Writ of Garnishment in Figure 16.1. Who is the garnishee on the writ? What is the garnishee ordered to do by the writ? What happens if the garnishee does not follow the instructions on the writ?
7. Alexander Home Supply Company entered into a contract with the Fabulous Marble Company in which Fabulous was supposed to ship marble to Alexander on March 1, 2012. However, Fabulous breached the contract and never shipped the goods. As a result, Alexander suffered a loss of more than $150,000 and now wishes to sue Fabulous.
a. Assume that Fabulous has filed for bankruptcy in the past and is still finan- cially unstable. How could Alexander determine whether it was worth pur- suing a civil lawsuit against Fabulous?
b. Assume that Alexander has investigated the financial status of Fabulous and has decided that the latter has enough assets to make it worth pursuing a case in court. What steps could Alexander take before filing the lawsuit to ensure that if it won a judgment, the money would be available for collection?
c. Assume that Alexander did not take any steps before litigation but did even- tually win a $150,000 judgment in court. Fabulous refuses to pay the money. What steps can Alexander take to collect the judgment from Fabulous?

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