1. BLAKELEY & BLAKELEY LLP
GETTING PAID ON YOUR DELINQUENT
ACCOUNT: FROM EVALUATING YOUR
CUSTOMER’S ABILITY TO PAY, TO
REPAYMENT AGREEMENTS TO
ARBITRATION AND LITIGATION
SCOTT E. BLAKELEY, ESQ.
BLAKELEY & BLAKELEY LLP
4685 MacArthur Court, Suite 421
Newport Beach, CA 92660
VOICE: 949/260-0612
FAX: 949/260-0613
Los Angeles Office
515 S. Flower Street, 36th Floor
Los Angeles, California 90071
Tel: (213) 382-0675
SEB@BANDBLAW.COM
INTERNET: www.bandblaw.com
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2. BLAKELEY & BLAKELEY LLP
Scott Blakeley is a partner in the California law firm of Blakeley & Blakeley LLP, where he
advises companies around the country regarding creditors’ rights, commercial law, e-commerce
and bankruptcy law. He was selected as one of the 50 most influential people in commercial
credit by Credit Today. He is contributing editor of NACM’s Credit Manual of Commercial
Law, contributing editor to the American Bankruptcy Institute’s Manual of Reclamation Laws,
and author of A History of Bankruptcy Preference Law, published by ABI. Credit Research
Foundation has published his manuals entitled The Credit Professional’s Guide to Bankruptcy,
Serving On A Creditors’ Committee and Commencing An Involuntary Bankruptcy Petition. Scott
holds an B.S. from Pepperdine University, an M.B.A. from Loyola University and a law degree
from Southwestern University. He served as law clerk to Bankruptcy Judge John J. Wilson.
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NOTES
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GETTING PAID ON YOUR DELINQUENT ACCOUNT: FROM EVALUATING YOUR
CUSTOMER’S ABILITY TO PAY, TO REPAYMENT AGREEMENTS TO
ARBITRATION AND LITIGATION
I. The Delinquent Account
A. What is a Delinquent Account?
1. Why past due: cash flow vs. disputed items
2. Contract controls
a. From the vendor’s view
i. Credit application/supply contract
ii. Credit policy: Tolerance limit
(a) Percentage of the bill that is acceptable to keep the
account current
(b) Minimum amount that must be paid to avoid credit
hold
(c) Unauthorized deductions
(d) Dispute resolution practice
iii. Sarbanes Oxley internal control and procedures
iv. Pre-default action
b. From the debtor’s view
i. Battle of the forms
ii. Course of dealing
iii. Stop payment/NSF check
iv. Counterclaim
3. Avoiding a delinquent account through effective credit management
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a. Pay close attention to the creation of new accounts
i. The best defense against a delinquent account is to avoid
extending credit to those may become delinquent
ii. Steps to take
1. Ownership records
2. Locations of projects
3. Require a personal guarantee
b. Maintain continuous communication
i. Assign credit analysts to a person rather than an account
ii. Build a relationship
iii. Understand the ins and outs of their system
c. Respond quickly to disputes, problems, and delinquencies
i. Immediately find all supporting documentation regarding
the issue
ii. Respond to delinquencies immediately
1. Send a letter
2. Call the sales person
C. The Type of Customer
1. The trustworthy vs. untrustworthy customer
2. Ability to pay vs. willingness to pay
3. Ways to determine type of customer
a. Request for financial information and confidentiality agreement
b. Third party comment
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i. Salesperson visits the account
ii. Contact customer’s bank
iii. Talk to industry group members and other vendors
iv. Landlord
D. Analyze Chances of Successful Collection
1. Collectability
a. Internet as a search tool
b. Banking information
c. Availability and sufficiency of security
d. Asset and UCC search, including real estate search
e. Bank account search
f. Review of debtor’s current status
g. Effect of other creditors’ actions
h. Analyze possible defenses to creditor’s claim (credits, guaranty,
antitrust, tort claims, harassment, threats of criminal prosecution)
2. Likelihood and Effect of Bankruptcy
a. Automatic stay
b. Preferences
E. Identifying Potential Sources of Collection
1. Corporations
a. Promoters
i. Promoter cannot be an agent of corporation not yet in
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existence. Promoter personally liable on pre-incorporation
contract unless creditor agrees to look solely to corporation
when formed for performance
b. Shareholders – individual or corporate (alter ego)
i. Allows creditor to sue where no contractual relationship
ii. Domination or control (unity of interest)
iii. Wholly inadequate capitalization
iv. Fraud or injustice unless corporate form disregarded
c. Successor corporations
i. Same shareholders and directors
ii. Transfer of assets
iii. Nonpayment of prior corporation’s debts
iv. Same business
d. Partnerships
i. Must name individual partners to reach all assets
ii. Partner by estoppel
e. Related Parties
i. Guarantors
ii. Means test under Bankruptcy Code
iii. Co-borrowers
iv. Joint ventures
v. Successor business (bulk sales)
vi. Other creditors who exercise control
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F. Document Retention
1. E-Credit department
2. Document preservation: requires preservation of any document that may
be relevant to any current or future litigation
a. Once vendor anticipates litigation with the customer, the vendor
must place a hold on its document destruction policy, including
electronic information such as e-mails
b. Vendor faces risk of sanctions for failing to place litigation hold
3. Document retention policy
G. Review Workout Possibility
1. Hardship letter and request for financial information
2. Final demand by creditor with attorney
3. Workout to improve creditor’s legal position
a. Secured (cure any defects in documents, UCC filings, or
recordation, increase the amount of security, add additional
guarantees, self-help)
b. Unsecured (obtain security and guarantees, judgment pursuant to
stipulation, confession of judgment [beware state law procedures
and due process problems], self-help)
c. Secured and unsecured debt (reduce indebtedness to written
agreement to minimize offsets, defenses, but beware of loss of
purchase money priority due to the transformation rule when open
account obligations are transferred to a promissory note)
d. Settlement agreement
e. Collect for the debtor
f. Find financing for the debtor
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H. Repayment agreements
1. Agreement to take payment over time for past due account
2. Fix the indebtedness
3. Waiver of counter claims and disputes
4. Ordinary course preference defense
5. Most favored creditor treatment clause
6. Stipulated judgment- discount coupled with judgment if default
7. Confession of judgment
a. With debtor’s counsel
b. Without debtor’s counsel
I. Arbitration and Mediation
1. What is Arbitration?
a. Binding arbitration is a formal collection process most like a
vendor filing a collection suit in a state or federal court
b. A vendor may invoke arbitration where the customer has agreed
through the terms of a vendor’s credit application to use an
arbitrator to hear their dispute and resolve it through a binding
judgment
c. A customer’s claims cannot be heard by a jury, nor the risk of a
sympathetic award to the customer, especially where the vendor
has the economic power in the trade relationship
2. Agreement to Arbitrate
a. “Any controversy or claim arising out of this credit application, or
sales thereto, or breach thereof, may be resolved by arbitration, at
the election of [vendor], in accordance with the rules of the
American Arbitration Association, and judgment rendered may be
entered in the highest state or federal court”
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3. Mediation
a. Arbitration and mediation are similar in that they attempt to
resolve disputes with customers without the vendor filing a lawsuit
b. Mediation is an informal process where the vendor and the
customer select a mediator who attempts to bring the parties to a
resolution through negotiation
c. If one party is not happy with the negotiations, they can terminate
the mediation and pursue their claim in court
J. Beginning Litigation
1. Appropriate lawsuit
a. Common counts/breach of contract
b. Conversion, fraud, fraudulent conveyance
2. Name all parties, list all trade names, bank accounts business license in
trade name)
3. Proper court
a. State
b. Federal
c. Jurisdiction
d. Venue
4. Pre-judgment remedies
a. Theory - secure the ultimate judgment today
b. Preserve collateral
c. Obtain a lien not voidable after 90 days
d. Practical uses
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i. Settlement
ii. Prevents protracted litigation and additional expense
e. Replevin (claim and delivery)
i. Elements
(a) Fight to immediate possession
(b) List of specific personal property
ii. need to know specific location of the collateral
iii. Proof of affidavits or declarations
iv. Documentary evidence necessary
v. Necessity of demand
vi. Bond required by creditor
vii. Defendant can post redelivery bond
viii. Turnover orders (directed to defendant)
(a) Used for property that cannot be located
(b) Can reach property in other states
(c) Avoids expense of levy
(d) Enforced by contempt
5. Timing
a. Noticed hearing (5-30 days)
b. Ex parte applications
c. Collateral in immediate danger of being transferred, concealed, or
impaired in value
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d. Temporary restraining order pending noticed hearing issue as an
alternative binds only debtor after personal service
e. May be issued without notice in extreme circumstances
6. Levy (expense)
K. Collection on Judgments
1. Elements – commercial debt states
a. Contract – written and oral
b. readily ascertainable amount
c. Probably validity of claim
d. Unsecured
e. Trade or business
2. Elements – fraud states
a. Fraud
b. Conversion
c. Secreted assets
d. Fleeing debtor
e. Debtor avoiding service
f. Non-resident debtor
3. Location/types of assets
a. Deposit accounts
b. Inventory
c. Equipment and motor vehicles
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d. Accounts receivable
e. Real property
f. Other tangible personal property
g. Negotiable instruments, documents and money
h. Securities
4. Proof of affidavits or declarations; role of documents
5. Turnover orders (directed to defendant)
a. Used for property that cannot be located
b. Can reach property in other states
c. Avoids expense of levy
d. Enforced by contempt
6. Levy
a. Possession
i. Keeper – expense
ii. Resulting storage by authorities pending judgment
iii. Service of writ
(a) Financial institutions
(b) Third parties and filing with proper authorities
(Secretary of State, Country Recorder)
7. Timing
a. Noticed hearing (5-30 days)
b. Ex parte application
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i. Great or irreparable bulk sales notice recorded assets being
concealed, impaired in value, or otherwise made
unavailable to levy
ii. Temporary protective order pending noticed hearing issue
as an alternative – binds only debtor after personal service
iii. May be issued without notice in extreme circumstances
8. Other provisional remedies
a. Receiver
b. Injunction
c. Accounting
L. Collecting on Judgments
1. Judgment liens on real property
a. Effect of judgment lien. A judgment lien on real property
establishes and preserves the judgment creditors priority over later
claimants
b. Creation of judgment lien. A judgment creditor obtains a
judgment lien on a judgment debtors real property by recording an
Abstract of the Judgment in the office of the county recorder in
which the property is located
c. All real property interests affected.
d. Property in more than one county. The judgment lien attaches only
to the real property interests in the county where recorded.
2. Judgment liens on personal property
a. Personal property subject to judgment lien. A judgment lien on
personal property attaches to accounts receivable, chattel paper,
equipment, farm products, inventory, and negotiable documents of
title
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b. Personal property not subject to judgment liens. Personal property
in which security interests cannot be perfected are not within the
reach of a judgment lien.
c. Creation of judgment lien. A judgment creditor obtains a
judgment lien on personal property by filing a notice of Judgment,
along with a certified copy of the judgment, with the Secretary of
State
d. Reach of judgment lien. The Notice of Judgment gives the
judgment creditor a lien on the equipment and inventory of the
judgment debtor, anywhere in the state in which the filing occurs.
e. Duration of judgment lien on personal property. A judgment lien
on personal property is enforceable for five years from the date it is
filed with the Secretary of State, unless it is satisfied, terminated,
or released
3. Enforcement of judgment by writ of execution
a. Writ of execution defined. A writ of execution is a court process
requiring a levying officer (i.e. sheriff, marshall or constable) of
the county where the levy is to be made, to then enforce a
judgment creditor’s money judgment
b. Limited to Money Judgments. Only a money judgment entered or
registered in the state is enforceable by writ of execution
c. Issuance of writ. The clerk of the court where the judgment was
entered issues a writ of execution upon the judgment creditor’s
request and payment of the appropriate fee.
d. Levy of writ of execution. After issuance of a writ of execution, it
must be delivered to the levying officer with instructions and the
required fee.
e. Obstacles to collection. There are obstacles to collection where
senior liens exist on the property.
4. Wage Garnishment
a. Wage garnishment is the process by which an individual judgment
debtor’s employer is forced to withhold the debtor’s nonexempt,
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disposable earnings for payment directly to the levying officer to
satisfy the judgment
b. Withholding orders. In order for a judgment creditor to garnish
wages, the creditor must serve the judgment debtor’s employer
with an earnings withholding order.
c. Earnings exempt from garnishment. The maximum amount of the
judgment debtors disposable income
5. Writ of Possession and Writ of Sale
a. Nonmoney judgments.
b. Issuance of writ of possession or sale.
c. Time for levy. The levying officer has 180 days after the issuance
of the writ to take the specified property into possession
d. Writ of possession of personal property
e. Writ of possession of real property
f. Writ of sale
M. Keep Litigation Cost-Effective
1. Discovery
a. Purpose
i. Preparation for trial
ii. Settlement
b. Types and timing
i. Depositions
ii. Interrogatories
iii. Request for admission
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iv. Production of documents
c. Effect of discovery of creditor’s files
2. Settlement before trial
a. Settlement agreements
i. Novation is contingent upon settlement being paid in full
ii. Security, attorney’s fees, and interest
b. Benefits and dangers of accepting a promissory note or notes
i. Requires future litigation to collect on
(a) A promissory note
(b) May reduce defenses to debtor
(c) Security, attorney’s fees, and interest
c. Settlement conferences pursuant to court order
i. Timing (eve of trial)
ii. Role of creditor
3. Judgments
a. Default judgment
i. Timing (may apply to court after time to answer has
elapsed)
ii. Relief only as prayed in complaint
b. Summary judgment
i. Timing (hold at beginning and end of case)
ii. Limitations
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(a) Relief only as prayed in complaint (generally)
(b) No issue as to a “material” fact
c. Trial
i. Preparation
ii. Court calendars
iii. Witnesses
iv. Original documents
d. Execution on judgment
i. Relationship to provisional remedies
ii. Judgment liens
(a) Real property
(b) Business personal property
(c) Time limitations on duration
iii. Levy and execution liens
iv. Exemptions (Personal property and homesteads)
v. Supplemental proceedings
(a) Judgment debtor examination
(b) Third party examination
N. All Out Litigation: When To Do It
1. Make a statement to your dealer or customer network
2. Large dollars to collect
3. Solvent parties
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O. Pre-Litigation Checklist for Getting The Most Bank For Your Buck – What To
Do Before You Call Your Attorney
1. Internal Review
a. Review your company’s credit files, sales files, correspondence
and reports
b. Review other facts; if appropriate, interview the sales people
responsible for the account
c. Identify unusual problems, e.g., disputes, accounting or credit
issues, counterclaims
d. Make a broad analysis of the likelihood of collection
2. Assemble the Facts and Documents
a. Names of all debtors and guarantors
b. Addresses of all debtors and guarantors
c. Identify any collateral in which your company has a security
interest, deed of trust, etc.
d. All locations of collateral
e. Identify debtor's and guarantor's other
assets. Are any of these assets free and
clear of other liens, security interests,
etc?
f. Approximate value of collateral and other
assets
g. How much is owed?
h. What is the form of the debt? (Open account,
promissory note, etc.)
i. Collect all relevant original documents
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j. Run a statement of account
k. Review all payments made by the debtor to your company and to
other companies within the preference period if debtor were to file
or be placed immediately in an involuntary bankruptcy.
l. Are any goods in shipment, or were any goods shipped within the
last ten days; the last three months?
3. Prepare a brief summary of the situation
a. List the relevant facts and documents
b. Be sure to mention any possible counterclaims, set-offs, defenses,
etc.
c. Your analysis of the account and any suggestions (e.g.,
prejudgment attachment or replevin)
4. Call the attorney and send him/her the above materials
a. Identify your short and long term goals and problems (e.g., is a
replevin action appropriate, should a UCC Section 2702
reclamation letter be sent?)
b. Ask for an estimate of time, costs and fees
c. Discuss who else should be kept apprised of the status and resolve
copies of correspondence, pleadings, etc.
d. State whether you require monthly status reports or other progress
reports
5. Follow-up
a. The squeaky wheel gets the grease
b. Keep your attorney informed of any business
P. Defenses and Counterclaims
1. Basic rules
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a. You can choose your customers
b. Don’t let your lawyer get ambushed
2. Antitrust/unfair competition
a. Pricing and credit issues
b. Restraint of trade claims
3. Fraud, misrepresentation
4. Contract interference
5. Discovery designed to inhibit the creditor
6. Documents and keeping tidy files
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