"Passing the buck" - those who deal in stolen goods should pay

It's rare to have a collection case where the subject is stolen goods, but I just had a trial on the topic, and thought I would pass along the gems the trial judge included in her written opinion on the case.

Our debtor didn't regularly deal in stolen goods, in fact, was generally an honest used car dealer.  However, when he received a call from the local police that one of the cars on his lot was suspected of being stolen, he reacted badly....instead of turning the car over (which would have resulted in a financial loss of about $8,000), he rushed over to a car auction house and had the car sold at auction, providing the auction house with the car, good title (the original theif had managed to obtain good title before unloading the hot car on the used car dealership), and as far as the auction was concerned, everthing was in order.

What is important here is that 3 days before the used car dealer attempted to auction off the car, he was informed by the police the car was potenially stolen.

The used car dealer failed to tell the auction company about the call from the police.  However, the auction did learn of the theft and, upon learning the car may have been stolen, quickly reinbursed the party who innocently purchased the car at the auction, and then looked to the used car dealership for reimbursement of its loss (again, about $8,000).

Making a long story short: the court found that even though the used car dealership purchased the car from a theif in good faith, and did receive good title to it, all good faith was wiped out, and the dealer turned into a lawless criminal committing fraud on the auction house when, three days after being informed a car may have been stolen, sold the car off in a rush through an auction.

Bottom line: the court found fraud EVEN THOUGH, at the time the used car dealer took the car in, he didn't know the car may have been stolen.  So, even where the seller is a good faith dealer in goods, that good faith is wiped out the minute he learns the item is "hot."  From that point forward, he is obligated to protect innocent third parties from paying good money for the item, knowing they may suffer loss.

Collection Agencies (or ANY Third Party Collectors)--What You Need to Know

Lawsuits Against Agencies, Creditors Up Through January

Collections & Credit Risk | Thursday, February 17, 2011

An estimated 440 different collection agencies and creditors were sued between Jan. 16-31, a slight increase from 426 sued in the first half of the month, according to data from U.S. District Courts.

The statement above, from Collections & Credit Risk, is strong evidence as to why debt collectors need to follow rules and guidelines to avoid, or at least reduce the likelihood, of being sued under collection laws like the Fair Debt Collection Practices Act.  Having knowlege of the correct things to say and useful forms to use makes all the difference when it comes to training and motivating collectors.

That is why I wrote the two books linked at the very end of this string of blogs...Credit and Collections Kit for Dummies and, specific to my state: Handling the Collection Case in Michigan: A Creditor's Guide.  Both books contain specific check lists, scripts, forms and tons of other useful material derived from my 35 years in this business.

Do Nice Guys Really Finish Last?

Well, yes and no.  How's that for a typical lawyer-like answer!?  An effective call to a customer/debtor for a past due payment doesn't have to be, in fact, shouldn't be obnoxious or rude...not at all.  So, be a nice person.

However, once you have given the customer an opportunity to explain why the debt hasn't been paid, bring the conversation back under your control, firmly but still being polite, and indicate "I appreciate what you've been dealing with, but you know we must resolve this balance." Then give a very specific suggestion based on your instincts, knowlege of the debtor, balance owed, and the age of the balance....such as " We must receive $525.00 by Tuesday, March 1st, here at (provide address), will the payment be here?" (You aren't looking for thier further objections, you're looking for confirmation the check will BE THERE!).  

Then confirm in writing per my blog below.

Are you dealing with stalling tactics?? Well, here's how to respond!

How many times have you heard “I never received the shipment”  or “I didn’t order the product” or “The product was broken when I received it” and really didn’t know what the law says about these objections?  Well, it happens all the time in the commercial collection business and it is important for commercial collector and the collection manager to know exactly what the law says about these typical “debtor defenses”. 

This seminar is an effort to cover some of the common debtor defenses or objections to paying the account.

Interestingly enough, the debtor’s goal in the commercial collection process is just the opposite of your goal.  The debtor would like to make the whole matter very fuzzy and very confusing in addition to making it much more complicated than it really is.  If the debtor succeeds, then the collector gets confused and even the client can be confused as to how much money is owed and what the real issues are.  When that happens, collection is not successful.

Your goal is to make it very clear exactly what the issues are.  Your goal is also to make it clear how much of the account the issues apply to.  For example, if the total amount of the claim is $2,500.00, the first thing you want to find out when the debtor makes an objection to payment is how much of that account is actually disputed.  If $1,000.00 out of $2,500.00 is disputed, make a clear note of that and of course challenge the debtor to pay the undisputed portion.  The debtor generally won’t pay it but wants to hold the hold account as “hostage” until the matter is fully resolved.  However, at least you are keeping your issues down to a minimum and you know that the bottom line is only $1,000.00 out of the whole account is actually disputed. 

Your second goal then is to determine exactly what the dispute is relating to that $1,000.00.  Determine if it is a particular invoice number or a particular shipment or whatever.  Narrow it down to an identifiable quantity.

Third, find out exactly what the debtor is objecting to.  Is he claiming it was late delivery so that he couldn’t sell the goods?  Is he claiming the goods were defective?  How to handle these particular objections (and more) is really the subject of this teleseminar and will be dealt with. 

Finally, assuming that the debtor wants to hold the whole account as “hostage” until the disputed portion is resolved, you can go in one of two directions.  First, you can see if the client is willing to concede or give away the disputed portion.  If the client will credit the $1,000.00, then the debtor has to pay the other $1,500.00 which is undisputed, correct?  Now, you don’t want to take advantage of your client or “sell your client down the river” so you have to be careful as to when and where that strategy is used. 

The other strategy which is a problem solving strategy is to take the information from the debtor back to the client and find out exactly what the client’s reply is.  Once you have the client’s information, you can deal with the debtor again.  If the debtor keeps changing his story, you can assume that he is lying.  If the debtor, however, is consistent in the story as to what he believes happened, then make sure your client is also clear. 

Once you have both sides of the story, you are in the best position to try and resolve the account.  If the parties don’t agree at all as to what happened, then it is probably time to settle the disputed portion of the claim.  By that I mean, you might just have to recommend an arbitrary figure, like 50% of the amount owed (again, just of the disputed portion) to resolve it.  In my scenario, if the full claim is for $2,500.00, and the disputed portion of the claim is $1,000.00, then the $1,000.00 dispute perhaps should be resolved for $500.00 or thereabouts if the parties simply can’t come to terms.  Even if the client splits the difference on the disputed portion, the debtor should still pay a total of the $1,500.00 non disputed portion plus the $500.00 settlement for a total of $2,000.00 out of $2,500.00.  That’s not bad.  You’ve done a good days work if you pull that off in most instances.  Don’t expect a pat on the back from the client because they aren’t happy no matter what you do if you collect anything less than full payment but you know you’ve done a good job. 

You have to know something about the law in order to negotiate the settlements.  That’s the purpose of this teleseminar.  You are at a weak spot if you can’t make a strong statement to your debtor as to what the law is.  You are also unable to deal with your own client unless you can make a strong statement of what the law is.  As I point out in this teleseminar, sometimes the client is wrong and they just don’t want to face it.  Sometimes the client has the law against them and they just don’t want to face that.  You can salvage a good settlement and keep a good relationship with your client in most instances if you just point out, in a sympathetic fashion that while you would like to agree with your client’s position, the law isn’t always helpful and sometimes it’s not even always logical.  By doing this, your client has the “legal system” to blame and not you in the client’s effort to justify taking a settlement of less than the full amount.  This strategy will become clearer when we talk about the individual debtor objections.

Questions on credit or collections? Need help, forms, collection assistance?? I'll personally reply for free

When pursuing commercial (business) collections, is it important to know WHO is liable for your debt?

Yes, absolutely.  The collector is really operating in the dark unless he or she is aware of  who is ultimately responsible for the debt.

Therefore, in matters of commercial claims, it is important to know what legal entity the client did business with.

Question:  What is a “legal entity” and why is that concept important to me as a collector?

Answer:  Legal entity is the term, which describes the business formation of a company.  The most common legal entities are proprietorship, partnership, and corporation.  These entities are very significant for the collector as more fully described in the question which follows this one.

A proprietorship is a simple form of business involving a single owner who has the business in his own name.  An example is John Jones dba Jones Bike Shop.  This form of business may not even be registered.  Occasionally, you find the business is registered under the assumed name or fictitious name county filings in the county where the business is operated.

A partnership is a little bit more complicated but similar to a proprietorship with more people.  The general partners are the owners, and, like a proprietorship, they are personally responsible for all debts incurred by the business.  An example would be John Smith and Mary Smith dba Smith’s Bike Shop.  A fictitious or assumed name certificate may be filed in the county.  A certificate of a partnership may be filed in the county or even with the state in some states.  Some states have lookup documents where you can lookup to see if a business is registered as a partnership.

A partnership can get a little bit more technical if you get into the concept of  limited partnership.  In this instance, there are two different kinds of partners: a general partner and a limited partner.  The general partner is personally responsible for all debts and the limited partner is like a shareholder of a corporation; that person has invested money and is only liable to creditors for the amount of his investment.  For example, if the limited partner invests $10,000.00 and that $10,000.00 is fully paid in, then the limited partner is not exposed for any other liability.  Limited partners generally are not active in the business and are really prevented from being active in the business.  The general partners are generally active in the business, responsible for day to day activities, and, again, are liable for contracts the business enters into.  There must be at least one general partner and one limited partner.  Partnerships can even consist of corporations, which form partnerships.  Sometimes these are also formed as joint ventures.  A joint venture is different because it is formed for just one limited purpose such as to run an event for a weekend or something like that.

Corporations of course are very familiar to all of us.  There are formalities.  They must be filed and they must be maintained.  If they are not maintained, corporations are dissolved automatically by the state they are in generally after three years.

The whole point of a corporation is that there is no personal liability for their owners.  However, there can be personal liability if they sign personal guarantees or if there is a theory for piercing the corporate veil.

Corporations are on file with the state.  They can generally be confirmed through a telephone number or on line access.

Each state has its own corporation law, partnership law but most states have adopted the Uniform Partnership Act so partnership enforcement is consistent and also most states, or at least 75% of the states, have adopted the Model Business Corporation Law which is also uniform.

Like the Uniform Commercial Code, these are all laws adopted in individual states.  None of these are federal laws.  However, there is remarkable uniformity throughout the country.

Question:  Who is liable with regard to these legal entities and who can we cask to pay us when we make our demand?

Answer:  This is a very good question and probably should be broken down as follows:  those legal entities which we call and can remind the owners that they are personally obligated and those business debtors we call knowing that there is only business liability.

First, the entities with personal liability:

1.      Proprietorship.  If the business is John Jones dba Jones Bike Shop or anything similar, John Jones is personally liable.  The bike shop could have folded but Jones’ personal assets are still exposed to you, the creditor.  You can threaten to sue him personally.  You can threaten to sue him and take his personal assets as part of that process (this should all be done professionally as you know).  There is full personal liability and a sole proprietor cannot escape that.

2.      General Partners of a Partnership are personally liable the same way sold proprietors are.  You can remind them when you make your collection calls that they will be held personally liable for contracts and that their personal assets are “on he line”.  Of course, this is not true with regard to limited partners.

3.      Corporations involved no personal liability with a few exceptions: check your client’s documents carefully to see if there are any personal guarantees which would make those individuals (generally top officers) personally liable for business debts.  The guarantees may even contain some restrictive provisions such as a limitation in dollar amount or a limitation of time.

There are a few other ways that corporate officers or directors could be personally liable for debts but when making demand over the phone, I would not go into it.  In other words, you may be considering a theory of piercing the corporation veil because there was some fraud or concealment or whatever.  After checking with an attorney experienced in that area, you could probably make such a demand but otherwise, I would stay away from it.

A corporation, which has expired, and the debt was incurred after the expiration date is a potential basis for personal liability.  I use the word “potential” because the corporation can re-file itself and erase the personal liability.  That can happen any time up until the entry of judgment in most states.  Let'’ take an example so that this concept is clear; Fred Jones owns Jones Corporation.  He files the corporation but fails to file annual reports.  After three years, Jones Corporation is dissolved.  The disillusion (that is what it is called) occurs for purposes of this example on August 1, 2001.  On September 1, 2001, he buys $10,000.00 worth of product from your client.  At the time the produce is purchased, the corporation is technically defunct, dissolved, does not exist legally.  He can use some theory such as “de facto” or “de jure” if he knows the lingo but you can also remind him that your client is prepared to litigate on the basis of personal liability since the corporation was dissolved at the time the purchases were made.  There was no corporate entity at that time.

Likewise, some debt can be incurred prior to the corporation being formed.  This is called “promoter liability”.  If for example, John Jones owned a Jones Corporation but he incurred some debt from your client prior to the corporation actually being formed with the state (it is very easy to determine the incorporation date by calling the state) then he is personally liable to you as a promoter of the corporation.

Making deals with customers for payments? Put them in writing!

It pains me to say this, but I may be getting too mature for details.

                  -Jerry Seinfeld

I can’t even recall what I had for lunch—so how can I expect a debtor (a customer who is delinquent in making payments) to remember a deal we made together?  I really shouldn’t be amazed when a debtor not only fails to make a first payment—but fails to remember the amount of the first payment and the date it’s due as well.

                 

It’s really to the debtor’s advantage to have a short memory when it comes to payment schedules, which is particularly true if the debtor is struggling to maintain a cash flow and is making an effort to conserve—not spend—cash.

                 

 Promises are meant to be broken.  At least verbal ones. Once in writing, however,  the rules change a bit because the written word is more difficult to ignore (“forget”) than the spoken word.

In many offices, the mantra is that it just isn’t done if it isn’t in writing.

That’s a good mantra to adopt.

The fastest way to obtain a judgment against your debtor is to show the court an admission of the debt and promises to pay it in writing.  In other words, courts love to see clear cut writings.  Indeed, all of your contracts made with suppliers, customers and other third parties should be clear, concise and contain language that just can’t be misinterpreted.  The same reasoning applies: if these matters have to be litigated at some point in the future, you want a slam dunk case to be presented to the judge.  So, we put agreements in writing.