Debtor Creditor â Foster â Fall 2012
Debt Collection is the Main Theme
1. Basic
a. Process
i. Collection
ii. Threaten Suit
iii. Start Suit
iv. Discovery
v. Trial
vi. Judgment
vii. Execution, levy, garnishment, sup. Proceedings
b. Types of Creditors
i. Creditors with Liens Ă Most Powerful is creditor with a lien
1. Prevents property from going anywhere except to satisfy the lien
2. interest on specific property of the debtor obtained by creditor to secure performance on payment by debtor
3. Effect of a lien m
a. Prevents sale of property w/o creditors consent
b. RIGHT TO FORECLOSE to satisfy debt.
c. Judgment is good for 10yrs , & another 10 = 20 year span total. (unless bankruptcy)
4. If donât have lien with file (ex. car lien or mortgage lien) then its ur job as a creditor to get one.
5. Automatic Lien (Hospitals, etc)
ii. Creditors with Priority Only arise when COLLECTIVE CREDITOR ACTIONS, Ă mass of creditor
1. Collective Actions: receivership, bankruptcy and assignments for the benefit of the creditor;
2. Granted: whether they have a lien or not. Ă public policy reasons. given favored status: (among others):
a. Govt tax claims
b. Claims by laborers and wage earners of the bankrupty debtor
c. Administrative expenses for handling debtors property in bankruptcy (lawyers for bank trustee, etc)
d. Prevent in justice: state insolvent grain elevator: FARMERS w/ sale and storage Ks given priority
iii. General Creditors
1. creditors with neither liens nor priorirty
2. borrowed bucks Ă EX. Mastercard, visa, target card, the dentist, utility company, day care ctr,
3. No public policy exist to give special protection to these creditors
a. Imposing Liens – if creditor hires lawyer ct can create special protections by imposing liens on Dâs prop:
i. attachments, judgments, garnishments and executions.
ii. ALL GC can ultimately become lien creditors, need lawsuit Ă judgment.
c. Types of Liens
i. Consensual Ă By agreement of parties
1. Examples
a. UCC security interest ï like car loan
b. UCC security interest includes Cropsï crop mortgage.
c. Real Estate mortgage.
2. Purchase money agreement Ă purchase money security interest
a. Most powerful type
b. Survives bankruptcy
ii. Statutory
1. Arises by operation of law on a given set of circumstances. Aka implied by law.
a. mechanics lien (it called construction lien in ND; where I fix ur roof),
b. federal tax lien, state tax lien,
c. storage lien,
d. landlords lien,
e. agricultural supplier lien and processor lien,
f. repairmanâs lien(car)
2. construction worker needs to take u to ct to foreclose mechanics lien. Ă sell and get his $10k for roof repair
iii. Judicial
1. Judicial Liens Defined: By order of Court OR arising in context of judicial procedure.
a. Writ of Attachment â
i. Pre-judgment remedy
ii. Grabs debtorâs stuff before trial
iii. Emergency â if you expect debtor to leave the state
b. Either by
i. direct crt order creating the lien OR
ii. as long as the judge is involved in the procedure., Ă judicial lien
c. A judgment lien is a judicial lien.
2. Types: attachment line, garnishment lien on wages, lien of execution levy, judgment lien
3. Process: EX. â I hereby find in favor of the P in the sum of 250Kâ; and Council for P will u prepare a order for judgment and a judgment please.â
a. So u prepare a ORDER FOR JUDGMENT and a JDUGMENT.
b. Judge sign off on the order for judgment Ă now u can go docket it with district ct.
c. moment of docketing Ă becomes automatic lien on real estate of D in the country in which docketed.
d. Typical Debtor Creditor Scenario
i. Collection Letter:
1. U can say âmust pay within 10 daysâ Ă commercial debt (other restrictions)
2. Miranda Warning: Consumer debt u need to write certain Miranda Warning
ii. Threaten Suit
iii. Start Suit
1. Start suit: service of process Ă Send out sheriff to serve SOP.
2. If still not paid, u go through Discovery, Interrogatories, Request of production of documents, request to go onsite to insepct collateral.
3. You are then exercising your right to prejudgment remedies like
a. Attachments, replevin, receivership, ï these remedies allows u to grab/clamp onto property of the debtor b4 debtor has his day in crt.
4. Also u can do MOTIONS
a. Motion for summary judgments are useful when damages are liquidated meaning u know exactly how much the debtor owes u (such as a mortgage). Motions for SJ, u can dispose a case early w/o ever having a jury or factfinder to listen to live testimony.
iv. Trial
1. Trials are stressful and many cases settle b4 the crt house. But if it hasnât been settled then, ï
2. U can get a judgment. (very powerful device)
3. Judgment becomes an automatic lien on the real estate of the debtor in the county in which u docket the judgment, and u can transcribe it all around the state, wherever the debtor has real estate. âAuthenticate that judgment to other statesâ too.
4. Judgment is good for 10 years, and can be extended for another 10 years.
v. If u still havenât been able to pay at the point of the judgment, then u got all the POST JUDGMENT REMEDIES
1. Execution of levy or seize the debtor property, where u send out sheriff.
2. Garnishment
3. Supplementary proceedings ï where u bring debtor into crt in front of judge and grill him on cross examination about his assets.
a. If lie ï judge can hold in contempt of crt (jail time)
vi. YOUR STRATEGY is ratchet up pressure, let the system work for you.
1. Sometimes the fear of the judgment is more powerful then the judgment itself.
2. Non-judicial Debt Collection – Doing things w/o court., lawyers, or sheriff, etc. In other words, Creditors collecting their own debt.
a. Customary Self Help Devices
i. Dunning (or demand) Letter
1. Attorneyâs Fees – cannot collect attny fees from a debtor in ND.
2. Consumer debt – letters are imposed by Federal Law and discussed in FDCPA.
a. Must give 30 days breathing date . aka pay within 30 days., NOT 10 days like in commercial debt.
b. required to put in the letter (because of FDCPA)
i. Consumer has 30 days to dispute all or part of the debt in writing.
1. lawyer must provide verification of debt by mail. Ă no dispute assumption of valid.
2. Sold Loan – If creditor name is diff from the original creditor then must provide name and addy of the original creditor by mai within 30 days if request in writing.
ii. mini maranda warning. âthis is an attempt to collect a debt by collector and any information we obtained will be used for that purpose.â
3. Skipping Letter â can sue w/o sending letter. Ă Just go for the lawsuit first. Ă helps avoid FDCPA
ii. Telephone contact, personal confrontation, threats of suit, communications with debtorâs employer , or actually showing up to the debtors door.
iii. Self â Help repossession of secured collateral under Article 9 of the UCC.
1. Car Loan – at signingĂ granting UCC security interest lien on car.
a. Juris: Self Help Repo applied in all 50 states under the Article 9 of the UCC
b. Breach of Peace
i. Violence
ii. Threat of violence
iii. Condition that are conducive to violence
2. Trespass – CL can go on debtors land to reposes ur secured collateral.
3. âDefaultâ â Not defined in UCC, Ă whatever creditor and debtor agree upon what default is in the contract.
a. Ex of Default
i. Definition of Default; Failure to pay when due any part of the debt of secured by this agreement; Failure of Borrower to comply with the Agreement ; False statements; Defective collateralization; Insolvency; Other creditor actions ; Change in financial or other conditions of the Borrower
b. Then u talk about REMEDIES, in case there is default, u can list in ur k, the remedies to that default
i. Accelerate Debt secured by this Agreement and declare all of the same immediately due and payable (principle and interest); Require borrower to assemble collateral; Repossess the Collateral either by self help or judicial action; sell or otherwise dispose of the Collateral; Collect accounts and general intangible directly to have them pay bank directly; Other rights and remedies allowed by law.
4. COLOR OF STATE LAW, can be sued if take sheriff with exercising the Self Help Ă only ct order take sheriff with
iv. Set off
1. Consent â required to perform set-off
a. probably see setoff language in a promissory note or security agreement.
2. Law – Common Law. Ă ND its statutory, but every state allows setoff against the bank acct on month owed on a loan involved at the same bank.
a. owe 100k but u owe me 70k for different reason, Ă I just write a check for 30k. We do a setoff.
3. Notice:
a. Advanced: Banks donât need to give u advance notice â if u bounce check because set-off Ă tough luck
b. After the fact notice: required Ă Aka âwe have setoff ur account.
b. Common Law (Tort) Limitations on these type of Self Help Remedies – recovery is rare because jury awards maybe like $1.00, juries not sympathetic to debtors who donât pay.
i. Defamation (libel and slander)
1. Public or dissemination of FALSE statements/information orally or writing, that is damaging to reputation.
a. calling someone a crook , is calling someone a criminal, and u are not a criminal for failing to pay a debt, u are merely a breach of civil k,
b. Calling some critterĂ reasonable person cannot believe this person is a rodent.
c. Calling prostitute or burglar Ă can sue for defamation and can be actionable.
2. Creditors DEFENSES FOR DEFAMATION:
a. TRUTH
b. Privilege (under the CL creditor can call up ur law firm where u work)
i. That said, FDCPA pretty much queers that ability for creditor to call up an employer anymore. But under CL, privilege is a defense, so creditors do often contact the debtors employers.
c. Juryâs are lenient â ppl donât like people who donât pay their bills.
ii. Invasion of Privacy – 2 kinds that debtors have used to get back at creditors
1. Types
a. Public Disclosure of private facts, Ă Ex notice/list of debt in creditors place of busi or newspaper.
i. Itâs not a public matter until it goes to crt.
ii. So it u can show damages by that u can sue for it that u have been wrongfully intruded upon.
b. Wrongful Intrusion into debtors solitude
i. Repetitive Contact â w/ D is unreasonable when if u make repeated phone calls at 2 am at home, Ă that may be harassment.
ii. This is a gray area. Ă Very fact driven.
iii. FDCPA has put severe limits on contacting debtors, especially consumer debtors.
2. Creditor DEFENSES
a. defense of privilege – defeats action; if legitimate interest employer knowing facts of employees financial situation.
b. Neighbors: Dâs have received recovery where creditors have talked to neighbors
iii. Intentional Infliction of Emotional Distress – Creditors more successful here than invasion of privacy
1. conduct was extreme and outrageous conduct by the creditors
a. swearing at debtor thatâs beyond deceny.
b. Telling to become a prostitute
2. Burden – on the debtor – There are problems with BOP.
a. Severity, outrageousness, the impact rule, the cost of expert testimony, cost too much,
i. Proof problems gets really difficult for debtors to prove and it cost too much etc.
iv. Breach of Covenant of Good Faith â Debtorâs best bet (first 3 poor action for D) Ă AKA: Bad faith lawsuit.
1. Law: 1970âs breach of the covenant of Good Faith in UCC
a. imposed on parties to debtor/creditor CONTRACT under the UCC 1-102 and 1-201
b. Must have a K to claim Bad Faith
c. Punishment: must fit the crime
i. donât put car dealership out of business just because he screwed up alittle.
ii. So there is a mandate to try to wrk things out b4 u shut them down.
2. Alleging: Bad faith is often alleged by debtors along with a laundry list of other âlender liabilityâ theories of recovery, including breach of fiduciary duty, fraud, conversion of collateral due to breach of peace, defamation, invasion of privacy, infliction of emotional distress, etc.
c. Statutory Limitations – FDCPA – Federal Fair Debt Collection Practices Act – 1977, Ă gotta be careful
i. FDCPA Application
1. nonjudicial collection devices.
2. Commerce Clause justification â âdirectly affect interstate commerceâ
3. We as lawyers (so are collection agencies) are 3rd party debt collectors
4. Consumer Debt â Debt incurred for personal, family, or household use.
a. Business debt and agricultural debts are excluded , FDCPA does not apply.
ii. Reasons Congress enacted the FDCPA
1. Abusive, deceptive and unfair debt collection practices by many debt collectors.
a. practices contribute to # of personal bankruptcies, martial instability, loss of jobs , invasion of privacy,
i. Ex. Money problems is the number 1 cause of divorce.
2. Existing law and procedures for redressing these injuries are inadequate to protect consumers.
3. There are other effective ways to collect debt other than abusive/misrepresentation debt collection practices
iii. 3rd party debt collector
1. EXCEPTION: FDCPA does not apply to Creditors collecting their own debts.
a. Ex. Collection dept. of a bank , collecting their money. It only applies if bank takes their file over to a collection agency or gives it to a lawyer to collect the debt.
iv. Contact Limit – debtor, debtors employer and others
1. Location – ONLY allowed to contact someone other than debtor to find debtor
2. Representation – CANNOT say u are a debt collector/trying to collect (when contacting 3rd party)
a. Be very careful here lots of lawsuits here.
3. Attorney – If Debtor says represented by attorney Ă must stop conversation.
a. can only ask who ur attny is and how to get hold of attny.
4. Stop Calling – If debtor says STOP writing me, calling me, or donât contact me anymore Ă then u can no longer correspond or call him on the phone.
5. Education level – must treat every debtor as the LEAST SOPHISTICATED CONSUMER Ă u are not allowed to believe that the debtor has any more than 8th grade education.
a. Communication must be clear and simple. If complicated u can get nailed for violation of the act.
6. Debt Verification – debtor writes to u and says, u wrote and said I owe 20k, I want u to verify exactly what the debt is
a. must provide some proof like affidavit from original creditor, invoices, ledger sheet, et
v. Lawsuit – u have the option to sue right away
vi. Bad Acts (unethical) â 3 categories
1. Harassment or Abuse. Very fact driven . when does repetitive call turn into harassment>?
a. use or threat of the use of violence to harm the person
i. Ex. telling someone we will wreck ur reputation
b. use of obscene or profane language
i. Fâword. Record conversation to prove. Usually fâword is coming from the debtor.
c. publication of list of consumers that allegedly have not paid their debt expect to collection agency.
i. Hugoâs list only allowed if collecting own debt Ă because FDCPA doesnât apply Ă D still has old tort common law for recourse
d. Causing a telephone to ring or engaging in any person in telephone conversation repeatedly or continuously with intent to annoy, abuse or harass any person at a called number
i. 2am calls might not be appropriate, may be considered abuse and harassment
2. False or Misleading Representations
a. Saying that u are attny and u are not.
b. To say that if u donât pay u will be in prison or to say failure to pay is a criminal act.
i. Only way debtor goes to jail if held in contempt, Ă meaning lies or doesnât turn over property Ă contempt of crt order. Not debt.
c. Also false and misleading representation that documents are legal process when in fact they are not
i. Ex. Fake summons or complaints
ii. Misleading sending out process in pink Brittney spears envelope.
iii. Also when they donât serve u and let the 20 days roll by so they can get a default judgment against u for the amt in the complaint.
3. Unfair Practices
a. Fedâs philosophy Ă even if its effective is shld be illegal.
b. Accepting a post adted check if its more than 5 days b4 its due.
i. Ex.if due date is 13th Ă if he comes in the 10th its okay, u can take check
ii. If he comes in the 5th Ă and gives u a check to deposit for the 13th â u canât do it becau
ruments or credit cards
iii. Property is perishable
iv. property is in danger of destruction, concealment, removal or sale
c. Burden – â, not creditor has to show why property shouldnât be given to creditor
i. Trial on the merits appears to require a jury
d. Warrant to Seize Property – specialized form of replevin, a sister of replevin
i. Subject Matter â anything other than real property
1. Intangible or tangible personal property
2. Any lien – verified complaint and affidavit stating that seizure of property is necessary to prevent removal, destruction or concealment of the property.
ii. Emergency â required
iii. Possession â sheriff holds pending final judgment upon ctâs issuance of a warrant
iv. Bond â lower than replevin Ă what property is worth
v. When – Btwn commencement of action and anytime b4 judgment
vi. North Dakota Warrant to Seize property,
1. Requires verified complaint and permits a special answer by â to test propriety of warrant, upon which a hearing must be held.
2. Bond in the amount claimed in the complaint, but in no event less than $100
3. Final Judgment on the merits allows sale of seized property and also allows deficiency against personally liable obligors (the party bearing the legal obligation)
4. Other personal property recovery procedures are not exclude by Warrant to seize property. ⊠For example can still use UCC self help rep, and or claim and delivery still avail.
e. Receivership
i. Ct appointment: disinterested party to collect, administer, manage and preserve debtors property or business pending suit outcome
ii. Title: D holds title, receivership has possession
iii. Emergency: required Ă like the property or fund is in danger of being lost, removed or materially injured.
iv. Equitable remedy/Exhaustion â receivership unavailable if legal remedies not exhausted
v. Use: Used primarily against business debtors
1. Post judgment: Receivership is also used in post judgment to carry out judgment in special circum.
2. In the receivership form u fill out, u need to use this phrase â deems just and proper under the circumstances.â
3. can be for insolvent or dissolved Limited liability company or limited liability partnership. (in addition to the historical use of recivers for corporations, general partnerships and other entities)
4. Precednet: can get receiver in cases where there has been past cases that have appointed receiver. Look at Am Jur.
vi. Priority: No advantage to any specific creditor, but advantageous to all creditors by maintaining status quo.
vii. 3 TYPE OF RECIEVERS
1. Active Mgr â aka hands on. Ă takes over running busi. This is best way to preserve the business because ur kicking them out.
2. Overseer Ă (this one is the easiest to get.) Ex. CPA coming frequently in to look over the book and the records.
3. Static Ă receiver holds property in storage. This act almost like an attachment.
a. Ex. like the cryo genic in CA and have foreclosed, hire a receivership to look over the gages.
viii. Receivership ELEMENTS
1. You got a disinterested party
2. They Collect & manage & preserve & adminster
3. Use Receivership on Business Debtors (usually) because u want the business running. Otherwise u use a attachment
4. Maintain Status Quo
5. No advantage to petitioner Ă Ex. Wis Con bank got receivership, but other creditors can get liens, and others.
f. Foreclosure Trustee: specialized form of receivership
i. Juris: some states during foreclosures of commercial building morgages
1. Ex. apartment building, office building, factories, hotel
2. Anything commercial that is not homestead
3. Apartment budling 2 or more units. So duplex is considered a commercial.
ii. The Trustee is appointed to collect rents and manage property during foreclosure and during redemption period.
1. DURING THE REDEMPTION, the debtor gets the Rents, because u give a chance to debtor to redeem the property.
2. Report: report to crt is required at termination. (ND)
iii. Compensation: of trustee comes out of the debtorsâ property and property income.
1. By operation of law Ă Taxes get paid first, then mortgage get paid off
iv. Notice: give notice to your debtor. After 10 days of notice, Ă P will seek order from crt appointing a trustee to take possession.
1. Burden: only cause u have to show is the balance of the real estate mortgage and taxes
g. Lis Pendens
i. Generally – Aka suit pending. Avail in âpending actionsâ and action is âpendingâ
1. After â canât be after divorce, must be pending
2. Protection â fraudulent transfers, deal with at own risk, quiet title
a. Cause of Action â must deal with title – claim for relief “affects the title to real property.”
b. Tort Case â not directly affecting title so no lis pendens proper
c. Foreclosure â if you begin, file lis pendens to notify you are repossessing
ii. Public – publicly filed notice concerning specific property (usually realty), Ă prerequisite binding subsequent purchasers/encumbrances with litigation results
iii. Collection: Not a collection device in and of itself, but sometimes has that effect
1. Lien: does not create a lien, but puts a cloud as effective a lien on title
iv. Time: good for 10 yrs (can be renewed for another 10 yrs) ND
h. Constitutional Limitations on Prejudgment Remedies: Due process requires notice and opportunity to be heard, except in extraordinary situations
i. Due process=notice and hearing required for prejudgment garnishment except in âextraordinary situationsâ (Sniadach)
1. All prejudgment remedies require â North Georgia Finishing, Guzman
2. pre-seizure hearing required for replevin Ă so can show why stuff shouldnât be taken â (Fuentes)
a. Except in Extraordinary situations â immediate danger D will destroy or conceal goods (Garrison Memorial Hospital)
i. (1D is absent from the state or concealed in the state avoiding service;
ii. (2D disposed or concealed or about to dispose or conceal prop w/ intent to defraud creditors;
iii. (3) D has removed or is about to remove prop out of state with intent to defraud creditors; or
iv. (4) the â fraudulent incurred the obligation.
3. attachment, now require a hearing with notice to the defendant prior to issuance of the writ of attachment.
ii. Replevin (Mitchell upheld because:)
1. Because judge involved, not mere clerk of court (political person to try to collect fees for the county).
2. fact based affidavit of need. It canât be hearsay.
3. Post-seizure hearing okay if immediate. So allowed seizure first b4 hearing if immediate.