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Legal Collection Advisor

Executive Orders Impacting Collections

No, this is not a review of the 1996 thriller starring Kurt Russell, Halle Berry and Steven Seagal but it does focus on the prestige of the word “Executive.”   At hotels and sports arenas, you want the executive suite. In Illinois, at least a 1,000 corporations integrate “executive” into their name. (Including one named Executive Elite 007 Club! Where can I sign up?)   William Holden and Barbara Stanwyck starred in a movie about control of a furniture company! You think they would have done a furniture movie if it wasn’t named Executive Suite? However, in the past few weeks, we have become familiar with the word in a different context – executive orders.   In fact, as I was outlining this article, both my governor and the Washington State’s governor issued new orders addressing wage garnishments. Simultaneously, executive agencies dispensed additional directives on collections.   Thus, we recall the root word for executive is execute.

Thanks to COVID, we are learning a lot about the operation of government vis-à-vis private enterprise, particularly regarding collections.     In my home state, we have been fortunate that our agencies and governor have been very balanced.   The same cannot be said elsewhere.   For example, in one state, their financial regulator issued “guidance” on collection calls that was neither evenhanded nor professional: “Debt collectors aren’t going to be able to talk people into behaving irrationally…, to “repeatedly disturb” or “annoy.”   The agency “forewarned” that practices that “may have been typical… may be deemed harassment…”

Now, there is a significant body of federal case law setting out when and how often a collector can call.   Yet, the “guidance” indicated that typical practices may be harassment – does that mean compliance with the FDCPA is no defense against the regulator? Sadly, there is no answer to that question as guidance noted that it “cannot draw a precise boundary between permitted and prohibited communication.”   Thus shrouded in nebulosity, the document went on to darkly assert that collectors “should expect to be judged harshly” by jurors who lived through the pandemic.     Guidance is defined as “advice aimed at resolving a problem.”   Here the root word is used in a different context – not as guidance aimed at resolution, but more as a guided missile aimed at us.

                We have come to expect politically pejorative pronouncements about creditors and collections. One need only look at pending Senate Bill sponsored by Sherrod Brown, Elizabeth Warren and Corey Booker that would shut down collections through the national shelter-in-place order and for 120 days after the pandemic for that revelation. But shouldn’t we expect that executives and regulators be aware of what is actually happening in the arena they regulate?   For our firm and our clients, from the outset of the pandemic, decisions were made to limit filings, calls and freeze post-judgment execution.     Few restrictions or orders were in place at that time and, as information about the spread of the virus was known, our clients and our firms responded in kind.   No one told our clients to do this.   For our part, our firms are working with judges to rapidly turnaround releases on bank accounts and I know this just didn’t happen to my firm or my state.     The plaudits given to private companies assisting in the production of critical supplies are well-earned.   The efforts undertaken by our firms and clients are also worthy of respect.    

                Even before this pandemic, clients would notify us of call restrictions in regions impacted by natural disasters. All our clients have extensive and robust hardship policies.     Most importantly, at all times, but particularly now, we and our clients view our call teams as a lifeline between our clients and a consumer in need.     Imagine if the nation shut down law firms.     How is a consumer whose bank account is frozen going to navigate filing an emergency motion without a law firm to act as an efficient intermediary?   How well will the consumer fare when they have to call an 800 number of one our bank clients with a call center in a different state (or country), possessing no legal expertise?   It is clear that regulators are not aware of previous or current efforts to provide a balanced approach to consumer/creditor relations.   Nor are they cognizant of how court closures mean no consumer is going to be forced to court in the midst of the pandemic.  

                But the truth is, our representatives, regulators and governors do not know these facts because doing our jobs professionally is not something the media will cover.   The media will cover CFPB reports that a 100,000 complaints were received about collections.   From experience in legislative meetings, a single anecdote provides the basis for consumer regulation.   Knowing these facts, it is more important than ever for collection professionals to organize, engage advocates and coordinate with state and local banking associations to supply critical information to policymakers.   Having a full time, not per-crisis, advocate lays a long term foundation that is indispensable to good government and should be considered as important as an insurance policy.   We are not going to change the narrative but if you want to avoid Steven Seagal style legislation, please employ a Kurt Russell instead.

4 Critical Questions Commercial Collectors Should Be Asking

starzec michaelFrom a distance, commercial collections appear to be just another collection file, the way a Thoroughbred and a Clydesdale are both horses, just that one races and the other hauls Budweiser. However, that would be a mistake. Commercial and consumer debt are as different as a horse and a zebra.

Commercial files are attractive for a number of reasons. The balances are significantly higher promising larger returns. It is also a relief to know there are no FDCPA concerns. In addition, they can be a welcome change from template driven consumer litigation. That said, its unique nature requires an analysis to ensure it is the right fit for your firm. It is important to conduct an initial file review, just as you would for consumer debt. The difference is in the questions you need to ask.

What Kind of Business?

Your initial inquiry is to verify the corporate status of the potential defendant. Are they incorporated and in good standing with your secretary of state? Are they an LLC or a partnership? Or, are they using a business name but are really a sole proprietor? If the corporation is dissolved, that is not the end of your inquiry. They may continue to do business, only now without corporation protection. The date of dissolution and the date of your client’s contract will help dictate if you can sue and who to sue as well.

Any Disputes?

It is also crucial to require your potential client to disclose any disputes they received from the customer and how they were addressed. For example, in one case, we were asked to collect for breach of a sales contract for an electric forklift. Simple, right? Well, it turned out the buyer did not pay because our client sourced forklifts from overseas and the manufacturer used a charging cord incompatible with American outlets. As you can guess, we did not take that account.

Contingency Fee or No?

Before accepting the file, verify if a contingency fee arrangement is appropriate. This may seem strange, but a significant percentage of commercial work is pursuing unpaid insurance premiums. However, under insurance policies, the final amount owed is not determined until there is end-of-term audit. In many of these potential files, that audit never happened. As a result, there is no sum certain that is owed and the invoice is only an estimate. Hence, the proper litigation avenue is an action in equity for specific performance to force the audit, which is not properly recompensed by a contingency fee.

Finally, once you accept a file, send a demand letter. While not required as these are not consumer debts, this may result in settlements, returned mail that discloses new addresses, business closures or details about why the bill wasn’t paid – financial hardship or issues with your client’s performance that the seller might have forgotten to relate.

Does the Client Know?

Another aspect to consider in taking commercial work is legal sophistication. Your big bank clients know that at times they have to make business decisions to take less or nothing at all to avoid exposure or negative outcomes. In many commercial cases, even if you are receiving files from a forwarder, the actual plaintiff is a small business that has never engaged in litigation. They will be unaware of the processes, how much time a case may take and the risks associated with trial. They likely have an inflated idea of what litigation can do and often assume that because there is a contract, they are going to immediately prevail and/or that a judgment entry means they will receive immediate payment. Many take their cases personally, making them unable to make the business decisions often necessary in litigation. Therefore, take time to fully explain the limits of litigation, the risks involved and that a 50% settlement in hand is worth more than a 100% judgment on paper.

By the same token, ensure your retainers have provisions that address what happens in the event of counterclaims or other substantive litigation. A provision that allows you to opt out or have your client choose a different counsel in the event of substantial litigation is ideal. Moreover, even if there is no counterclaim, commercial litigation often involves demanding discovery, depositions and motion practice. As such, verify your staff has the legal bandwidth to handle these matters and the time to address them properly.

Commercial work can help diversify your client base and provide big hits if you recover settlements on these larger balances. However, understanding the internal logistics, client learning curves, the amount of litigation involved and the differing strategies that must be employed are critical to ensuring success.

Michael L. Starzec is a partner with Blitt and Gaines, P.C and is vicepresident of the Illinois Creditors Bar. He is a frequent speaker, writer and litigator on creditor’s rights.