Collection Litigation FAQs
Can we put a lien on their assets and seize them?
Unless you have already filed a mechanics lien (typically for construction related projects) according to state law and followed all filing deadlines, it is too late to file a lien. Instead, we have to file a lawsuit, win, and get a judgment. Then we file a judgment lien which applies against all unsecured assets of the debtor. At that point we can begin the judgment collection process and seize assets as allowed by the court.
Can we sue for damages and/or lost profits?
No. The contingency attorneys we work with specialize in debt collection litigation for unpaid invoices, amounts due under contract, or return of advanced funds for services or products never delivered by the defendant. We understand that the debtor’s actions may have resulted in additional damages to our clients such as delays resulting in lost revenue and profit, lost business deals, etc. However, determining the amount of these damages is not an easy task and requires expert analysis and testimony. This is far more complicated than just suing for an unpaid invoice. While many of the attorneys we use are capable of handling this more complicated matter, their contingency fee quote does not apply. There would be a much larger non-contingency fee and advanced cost requirement in cases like this or the attorney may want an hourly fee. As a result, if a client wants to pursue damages, we recommend that we not be involved in the litigation and they find their own attorney to take the case.
Can we sue for attorney fees?
This question is answered completely in the “Typical Amounts Included in Collection Litigation“ section regarding collection litigation. Most of the time we can’t sue for attorney fees, when we can the amount awarded may be less than $1,000, and often the attorney’s fee quote says the attorney keeps 100% of attorney fees collected if they first collect 100% of principal, interest and court costs. The bottom line is clients should not expect any recovery for collecting attorney fees in most cases.
Can we collect from the business owner personally?
In over 90% of the litigation cases we file we are only able to collect from the company itself and not from the owners or officers. One of the main reasons to form a corporation, LLC (Limited Liability Company), PC (Professional Corporation) or LP (Limited Partnership) is to shield the owners from personal liability for the company’s debts. If you do not have a personal guaranty then it is extremely difficult to make the owner personally liable. You have to either pierce the corporate veil or prove fraud like in an Alter-Ego situation which is difficult, expensive and highly uncertain.
If your customer’s business is/was a sole proprietorship (i.e. an entity like a corporation or LLC was never formed and registered with the state), then technically there is no company and the owner is personally liable.
Many clients draft documents or emails with the intention of getting a personal guaranty. But often these are poorly worded or improperly executed and therefore not valid or enforceable. We cover this topic extensively in our free ebook: Credit Application handbook. The mistake we see most frequently is the signature block includes the person’s title at the company, or when they sign, they add their title. When the title is present, it is not clear if the person signing understood they were providing a personal guaranty instead of signing something as an officer or authorized party on behalf of the company making it a company agreement and obligation.
Can we go after the owner’s new company?
It depends. A new company, even if in the same business and at the same location, is technically a separate entity. Therefore, it is not liable for the debts of any other company, including a prior company in the same business owned by the same person. However, we can go after Alter-Ego companies when a business owner uses the assets of the old company without paying a fair price to the old company for those assets. So, if the new company uses the same phone number, same website, same location including the furniture, computers, etc., there is a chance that the Alter-Ego argument can be made.
If the new company paid a fair price to the old company for the assets (say $10,000) and then the money paid to the old company was paid out to creditors in order of priority, the new company probably is not an Alter-Ego. So, if they do it right according to the law, there is nothing to prevent someone from starting a new business and not having to pay all the debts of the old company. They just have to pay fair market value for the assets they got which may not be that much. But if they don’t do it right, then the new company can be considered an Alter-Ego and be held responsible for the original company’s debts including the money owed to our client. In this case, the judge can issue a judgment against the new company and then we can proceed with the judgment collection process.
The process for proving a new company is an alter ego is not easy and the attorney will usually want from $1,000 to $5,000 as a non-contingent fee or an hourly fee. We often have to file a lawsuit only against the old company, win, and then conduct a debtor exam to learn if the assets were properly paid for or not. If we learn the law was violated, then we can file additional motions to make the new, Alter-Ego company liable for the judgment granted against the old company. Sometimes this process can be combined in the original lawsuit, but either way, it is extra effort with a very uncertain result and therefore the attorney requires to be paid more up front.
Can we pierce the corporate veil?
Piercing the corporate veil is a technique for making the owner of the business liable for the company’s debts. It is difficult to do, expensive to try, and typically highly uncertain. We have to be able to show that the owner used company funds to pay personal debts or took money or assets out of the company to the detriment of creditors. In most situations, our clients do not have any proof of this up front, just suspicion. As a result, our clients rarely are willing to invest a few thousand dollars up front and potentially ten thousand dollars or more to pursue this as explained more fully in this article on piercing the corporate veil.
Can we collect from a debtor’s subsidiary company or parent company?
Generally we cannot collect from either the parent, subsidiary, or sister company of the specific debtor company. Each of these are separate entities, and one of the key reasons these entities are set up separately is to shield each entity from the debts of other entities. We can collect from these related entities if there are written cross guarantees or if there is fraud like in the Alter-Ego situation. A “division” is not a separate legal entity, just a name given to part of a business. Therefore we can collect from a division, although divisions usually do not have separate bank accounts or other assets.
Is arbitration, mediation or litigation better?
While some courts require mediation prior to having a trial (which costs our client money to pay for the mediation), it is not binding. During our role as a collection agency, we attempt to mediate. If the debtor never engages, then formal mediation as a step during the litigation process may be productive. In our experience, it rarely is.
Collection litigation costs our clients less than arbitration. In arbitration, our client may have to advance all the costs for the time for the arbitrator to study the documentation, hold a trial, and issue a binding decision. This can cost several thousand dollars or much more whereas the cost to file and serve a lawsuit may only be a few hundred dollars.
Unless our clients have an agreement with the debtor that says all disputes will be handled in arbitration, we recommend litigation. Even if there is a binding arbitration provision in the agreement with the debtor, if they do not actively fight the matter during the collection process, we give clients the choice of filing litigation first. If the debtor insists on arbitration, then we will have to dismiss the litigation case and go the arbitration route. This means the time and money spent on litigation is lost. But 95% of the time the debtor does not bring up this defense and we proceed to get a judgment at a much lower cost than arbitration would have been. Our clients have to weigh the risk and reward in this situation to decide how to initially proceed.
What if the debtor files bankruptcy?
When a debtor files bankruptcy all lawsuits are “stayed” (put on pause) and the bankruptcy Trustee and Judge will eventually decide who gets paid and how much. While debtors threaten to file bankruptcy all the time, this very rarely happens (under 5% of the time). Except when the debtor is a very large company (revenue of $50 million or more), once bankruptcy is filed it means our client has only a 10% chance of collecting any money and the amount of money is usually only 5% to 20% of what they are owed. So at that point the attorney stops doing any work except to possibly monitor court filings. Often they will immediately close the claim if the filings indicate there is almost no chance of collecting anything because they can’t justify their continued effort on the claim. If the attorney keeps the claim open, the contingency rate quoted for litigation applies to any recovery.
The most common reason we do not collect after getting a judgment is that the debtor company just goes out of business. They don’t bother to file bankruptcy. We can’t collect from a defunct company that does not have assets.
What is a defunct company?
Most companies that fail and close don’t bother to file bankruptcy. They just simply disappear and eventually cease to exist.
In this situation, it may be one or two years before the Secretary of State shows that the corporation is inactive or dissolved and in the interim show it as active or delinquent. So just because the Secretary of State says the business is active that doesn’t mean it really is.
When a corporation, LLC (limited liability company), professional corporation or limited partnership goes out of business, we call it a defunct company. When the company closes, it has an obligation to liquidate any remaining assets and use the money from that process to pay off creditors in order of priority. Typically the priority is the same as used in the bankruptcy process. Employees get paid first, then taxing authorities, then secured creditors (first secured lenders e then judgment holders) and finally unsecured creditors which is what our clients typically are. Unless our client had their customer sign a security agreement and then filed a UCC-1 to record the security agreement, our client is an unsecured creditor.
The reality is that our clients recover money from a defunct corporation less than 5% of the time, whether or not litigation is filed. It’s a dead end and once we know a company is out of business and there is no evidence of any remaining assets, the attorney and our firm will close the claim.
There are rare exceptions, such as when there is a personal guarantor (who has assets and has not filed bankruptcy), the company owner used company assets to pay personal obligations (requires piercing the corporate veil), or the company fraudulently transferred the company’s assets to another entity (often a successor company owned by the same people who owned the debtor company and referred to as an Alter-Ego). We can pursue your money in each of these cases, but it is more expensive and very difficult to prove the case and then to collect.
Does the client need to have a witness appear in court?
Probably not. Witnesses end up having to appear in less than 2% of the litigation cases we handle. Even in many of these cases where a witness is required, the debtor had made a settlement offer that our client declined, which means our client decided they would prefer to provide a witness and get a judgment for the full amount instead of accepting the settlement. So while there is a small chance our client will have to provide a witness we generally recommend to not have this possibility impact our client’s decision to sue or not sue.
In over 80% of the lawsuits we file, the client’s involvement will take less than an hour. This time is typically spent providing documentation, signing or reviewing affidavits or other legal documents, and providing feedback regarding settlement offers. The Kaplan Group typically handles all communication between our clients and the attorneys we hire, as we manage the attorneys and their efforts and ‘translate’ litigation communication into plain English for our clients. We also provide recommendations on negotiation strategy and potential settlement offers or payment plans.
Can’t your agency put more pressure on the debtor to pay instead of filing a law suit?
At the end of the day, the only way to force a debtor to pay is through the courts. And even then, if they don’t have any money we don’t collect.
We have all sorts of tactics to try to get ‘voluntary’ payments (as opposed to court ordered collection actions) and this works on 29 out of 30 of our successful collection efforts. Our success rate is much higher than the average agency and our success rate without litigation is even higher compared to industry standards because we put so much custom, extra effort into every case. But in the end, if the debtor ignores everything we try, the only remaining option is litigation.
Should we pay more for an Attachment Hearing?
In California, we can file for an attachment hearing which will usually be held about 90 days after the lawsuit is filed. At this hearing, if the judge believes there is a 99% chance the plaintiff (our client) will win when the trial occurs, the judge will issue an Attachment order. The Attachment order allows us to begin court ordered judgment collection activities immediately, including bank levies. This puts immediate pressure on
the debtor and they often are now motivated to discuss settlement or voluntary payment plans. If not, then we will attempt the bank levies and if successful, any funds recovered go in to escrow awaiting the trial date and the judge’s final ruling. When the judgment is issued the funds are released from escrow and then the client receives their portion.
Whenever a debtor has had their funds attached they immediately contact our attorney to resolve the matter. At this point there is no upside for the debtor to wait for trial a year from now when they owe the money. So, by seeking and if necessary enforcing an attachment order, if the debtor has any money or assets it accelerates the California litigation process by a year.
In order to prepare for the attachment hearing, the attorney puts together a very extensive lawsuit, with all the documentation to prove the money is owed and a declaration signed by the client. This is why they require a non-contingent fee, to partially offset the large investment of time they are going to make in preparing all this paperwork.
When more money is at stake, we usually recommend the writ of attachment approach. We also recommend this approach when we think the debtor will otherwise just try to delay matters by spending $1,500 to fight the lawsuit and get a trial date next year. When less money is involved and it is harder to justify spending so much up front, or if we think there is a good chance the debtor won’t fight the lawsuit (we get default judgments in about 50% of all cases), not spending extra money up front on an attachment hearing and paying a larger contingency fee may make more sense.
For more information, please see the appropriate section below: