by Shawn P. McClure, Esq.

At the end of June 2011, the Third Circuit Court of Appeals, in the case of Leshner v. The Law Offices of Mitchell N. Fay, F.3d, 2011 WL 2450964 (3d Cir. 2011), found that settlement letters sent on a law firm’s letterhead implied that there was forthcoming legal action, and therefore were “false and misleading” under section 1692e of the FDCPA, because the firm was not acting in a “legal capacity” when the letters were sent.  This ruling was made despite the existence of a disclaimer on the letters concerning the attorney involvement in the case.  

Section 1692e of the FDCP prevents, “false, deceptive or misleading representation or means in connection with the collection of any debt.”  The use of attorney letterhead and an attorney signature on a letter is enough to find that letter “false and misleading” if the attorney is not sufficiently involved in the sending of the letter so that the court finds that the letter is not actually “from” an attorney.

The leading case on debt-collection letters from attorneys is Clomon v. Jackson, 988 F.2d 1314 (2d Cir. 1993).  In Clomon, the court found that collection letters on attorney letterhead with mechanically reproduced signatures were “false and misleading” under the FDCPA.  Even though the attorney approved the form of the letters and the procedures by which the letters were sent, the court still found that the attorney had no direct personal involvement in the mailing of the letters.  The court in Clomon expressly stated that several factors were taken into account when determining whether the letters violated the FDCPA, including: the attorney did not review each debtor file; the attorney did not determine when particular letters should be sent; the attorney did not approve the sending of particular letters based on the recommendation of others; the attorney did not see particular letters before they were sent; and the attorney did not know the identities of the persons to whom the letters were issued.   

That being said, debt-collection letters from law firms do not necessarily require attorney review. If the letter has a clear disclaimer explaining the limited extent of the law firm’s involvement in the collection action, then the letter does not “mislead” the debt with respect to the attorney involvement and will not be in violation of 1692e of the FDCPA.  For example, a debt-collection letter with the following disclaimer, “[a]t this time, no attorney with this firm has personally reviewed the particular circumstances of your account,” was found not to be in violation of the FDCPA because the court found there to be no false representation or implication that the letter was from an attorney or that an attorney had meaningful involvement in the case at that point. 

The fact that the letters in the Leshner case contained a disclaimer, but were nonetheless found to be in violation of the FDCPA is why this ruling is so impactful on creditors.  The disclaimer language in the present case stated, “[a]t this point in time, no attorney with this firm has personally reviewed the particular circumstances of your account.”  The disclaimer was also located on the backside of the letter.  The Third Circuit found that the language and location of this disclaimer insufficient to ensure that the “least sophisticated debtor” (the applicable standard when viewing potential FDCPA violations) wouldn’t have reasonably believed that an attorney had reviewed the file and determined that the debtor was a candidate for legal action.

This ruling by the Third Circuit emphasizes how important it is for creditors to be knowledgeable of the FDCPA and be aware of what seems to be its ever expanding landscape.    

I also believe that a couple of years ago, the Third Circuit handed down a decision involving “safe harbor” language on consumer debt collection letters (i.e., saying “may take legal action” instead of “will take legal action.”)  I believe the case caption was Brown v. Credit Card Services, but I do not recall the citation.  In any event, I believe the decision supported the proposition that even the use of such “safe harbor” language in consumer debt collection letters, MAY be deceptive or misleading if the record shows that the debt collector has a history of NOT taking legal action despite regularly saying only that legal action “may be taken.”  Here again, however, I think we actually have sued on enough retail claims that we would not be vulnerable under this standard either.  But still something to keep in mind.

by Arthur W. Zamosky, Esq.

In the United States, the concept of replevin dates back to the late Nineteenth Century and has been available in most jurisdictions to the present day. 

A replevin action is used to regain possession of chattels that are being wrongfully detained by another party.  The action allows a Court the ability to order that the property be returned to the party asserting rightful ownership prior to a final judgment on the merits. 

Historically, a replevin action could only be sustained by a party that had full ownership of the property sought.  However, Pennsylvania Courts have held that a security interest coupled with a right of immediate possession is sufficient to maintain an action.  Since the Pennsylvania UCC allows a secured party to take immediate possession of the collateral, an action for replevin is appropriate even if the moving party does not have full ownership.

As a prerequisite to bringing a claim for replevin, the moving party must make a demand for return of the property.  Assuming the moving party has either 1) full ownership or 2) a security interest and an immediate right to possession, if the party with possession at the time of the demand refuses to return the property, he or she will have satisfied the “wrongful detention” requirement for replevin.

Actions for replevin must be brought in the County in which the property is located or in any County that the wrongful possessor can be sued under the Rules of Civil Procedure.  An action for replevin is brought by filing a Complaint in the appropriate County. 

After the filing of the Complaint in replevin, in order to take immediate possession of the property, the party seeking the property can seek a writ of seizure from the Court.  The writ must be prepared and served in accordance with the Pennsylvania Rules of Civil Procedure.  The moving party must also post a bond with the Court of double the value of the property at issue.  A hearing on the writ of seizure is then held and a judgment on the disposition of the chattel is made.

The case then goes to trial in a fashion similar to most matters before the Court of Common Pleas.  The parties can opt to have the trial before a Judge only (instead of before a jury) if they like.  The issues in a replevin trial are typically limited to the plaintiff’s ownership or security interest in the chattel and the plaintiff’s right to immediate possession of the chattel.  Those matters need to be proven by a preponderance of the evidence to be successful.  A successful plaintiff in a replevin action also has the right to recover costs and damages, however, exemplary damages are awarded very rarely.   

As with all areas of law, the specific facts of any scenario could change the manner in which to proceed.  The preceding was intended to give a basic outline of a replevin action in Pennsylvania.  For a more specific analysis of a specific claim or dispute, you should consult an attorney.

by Kit F. Pettit, Esq.

With all of the types of business entities available to choose from when starting a new business, how do you know which business entity is best? There are LLC’s, LP’s, S-Corps and C-Corps, and each type of entity has its own advantages and disadvantages depending on a number of considerations. Some of the advantages and disadvantages are tax matters, asset protection, liability protection and transferability. Some of the considerations include the entity’s size, the type of business activity, desired governance structure and other business investment matters.

Typically, tax treatment is one of the most important factors in choosing the form of business entity. Among other things, one of the basics tax matters an entrepreneur should know when deciding which entity may best suit his or her business plan is that C-corporations are subject to double-taxation while S-corporations are generally not subject to the two layers of taxation. A new business owners should also be aware that limited liability companies and partnerships are flow through entities and the earnings of these types of entities are not subject to federal income tax, however, Pennsylvania treats all limited liability companies as corporations for capital stock taxes. There are numerous tax advantages and disadvantages for each type of entity and a skilled legal practitioner along with advice from an accountant can help an entrepreneur through this maze.

Once the entrepreneur is aware of the tax considerations, personal liability protection is often the next most important factor to consider. The various entities can have different liability shields. Careful planning and consideration should be given and knowledge of the statutory liability limitations is most important. For example, 15 Pa.C.S.A. § 1526 sets forth the statutory rules with respect to the personal liability of shareholders of a business corporation while 15 Pa.C.S.A. § 8922 provides the rules for personal liability of members and managers in partnerships and limited liability companies. Business trusts are governed by a different statute. 15 Pa.C.S.A. § 9506.

The governance structure and standards of conduct of the shareholders, partners or members is also a very important consideration when organizing and forming a new entity. The governance structure of each type of entity differs and there are business, legal and other reasons why an individual or group of individuals may prefer one management structure over another. In Pennsylvania, corporations have established governance principles and structural formalities that are for the most part defined by statute and case law. 15 Pa.C.S.A. § 1701 et al. Partnerships are primarily governed by contract between the partners, i.e., a partnership agreement, however, there are certain rights and duties of partners governed by statute. 15 Pa.C.S.A. §8331 et al. As for limited liability companies, they have significant flexibility with respect to governance of the company. For example, a Pennsylvania limited liability company can be “member-managed” which follows the general partnership rules, or it can be “manager-managed” which governance mechanism is most similar to that of a corporation. 15 Pa.C.S.A. § 8941.

The above matters highlight some basic and important considerations when starting a new business. Corporate formation and organization is more than an online “check-the-box” process. It takes knowledge and careful planning based on information provided by the client. For example, does a majority-member of a limited liability company really want unanimous consent provisions in the company’s operating agreement that would require the consent of a 5% member for certain company actions? Would you incorporate as an S-corporation if you anticipate distributions to some shareholders and not others? After all of the considerations have been discussed and the form of entity selection is made, an entrepreneur should also know that each type of entity has its own formation and organization requirements and respective formalities that should be properly observed and followed once incorporated or organized. Observation and practice of these important formalities such as annual meetings of members and shareholders is a part of the liability protection mechanism and should not be ignored or forgotten once your business is up and operating.

by Jennifer L. Tis, Esq.

One thing that I’ve noticed time and time again in my practice is that clients are not always aware that they may need to appear in court at some point if they choose to take legal action against a debtor. In Pennsylvania, if the matter is not settled or if judgment is not obtained prior, it will go to either arbitration or trial. The factor that determines which type of hearing you will have is the amount for which you are suing. If that amount is over a certain limit (usually $25,000.00 or $50,000.00 depending upon the county) your case will go to trial and if it is below a certain amount it will go to arbitration. The arbitration that I refer to, however, is through the Court of Common Pleas and is not affiliated with the American Arbitration Association. It operates much like a trial except for the fact that your case is presented to a panel of three attorneys as opposed to a Judge. What many creditors do not realize is that regardless of whether the matter will first be scheduled for arbitration or trial, a witness must physically appear at the hearing to testify on behalf of the Plaintiff. I have been asked many times whether the witness may ‘appear’ by telephone. This has never been allowed in Pennsylvania Courts and it is expected that if you file suit in Pennsylvania you, or a credible individual with first-hand knowledge of the matter, are able and willing to appear in Pennsylvania Courts in regards to that suit. Although many cases come to an end through either settlement or judgment, by default or otherwise, long before trial or arbitration is scheduled , one must always prepare for a potentially lengthy litigation. Therefore, I would urge anyone considering filing suit in Pennsylvania to first ask themselves whether they will be able to travel to the county in which the suit is filed for one or more hearings. If the answer is ‘no,’ such action should be reconsidered so as not to spend even more money chasing a debtor who has already caused you a loss.

by Shawn P. McClure, Esq.

It is a very common situation for a creditor to be owed a large sum of money from a debtor who continues to operate by paying other creditors or parties. Naturally, this is very frustrating. It can also be very disturbing because at the same time there are rumblings of the debtor’s financial instability. At this point, the creditor must decide on a course of action.

Certainly, the creditor has the option of filing a state court breach of contract action and working toward obtaining a judgment. However, litigating a lawsuit takes time and even more time is spent to execute on the judgment. The passage of time affords the debtor the opportunity to continue paying others and ultimately wind down the business.

There is another option, which is often overlooked. Force the debtor into bankruptcy. This is done by filing an involuntary bankruptcy petition. The reason for an involuntary bankruptcy is to prevent and protect creditors from unfair activities and treatment by debtors. The greatest advantage to an involuntary bankruptcy is that it forces bankruptcy upon the debtor rather than allowing the debtor to ultimately file on its own terms. This is extremely important because of the ability to recover payments or wrongful transfers by the debtor within certain time frames leading up to the filing of the bankruptcy petition. These payments and transfers can be brought back into the bankruptcy estate to be properly distributed by the bankruptcy court.

In sum, bankruptcy is not always a bad thing for unsecured creditors. It just simply depends upon whose terms the bankruptcy is filed.

If you are interested in reading more about involuntary bankruptcy click here

by Shawn P. McClure, Esq.

Often, when foreclosing on a piece of real property, a secured creditor’s focus and objective is limited to the recovery of the property. However, in this economic climate, more and more secured creditors are electing to pursue a deficiency balance against the debtor because the underlying debt owed exceeds the value of any real property that is recovered.

Deficiency Judgments in Pennsylvania are governed by statute. 42 Pa.C.S. § 8103. In order to establish a deficiency balance, a judgment creditor must first file a Petition to Fix the Fair Market Value of Real Property Sold. This Petition must be filed within six (6) months, “following execution and delivery of the sheriff’s deed for the property sold in connection with the execution proceedings.” 42 Pa.C.S. § 5522(b)(2). Therefore, it is important that a creditor make the decision to pursue a deficiency balance as soon as possible.

The purpose of the petition is to establish a fair market value of the real property sold, so that figure can be offset against the total amount of the debt owed. This process recognizes that the secured creditor who purchases the real property at foreclosure sale for Sheriff’s costs, usually a couple thousand dollars, cannot then pursue the debtor for the full remaining balance of the debt. Establishing the fair market value and crediting it against the debt owed prevents the secured creditor from receiving a windfall.

The Petition is filed as a supplementary proceeding on the same docket in which the judgment was entered. If an answer is filed to the Petition alleging that the fair market value of the property is more than the value stated in the petition, then the court shall hear evidence and fix the fair market value of the property sold. This is usually a battle of appraisals that turns on what parties’ appraiser appears more qualified and credible to the court.

While the deficiency judgment process in Pennsylvania seems quite simple, there are two important factors that cannot be overlooked: 1) Timing; and 2) Hiring a qualified appraiser. These are both issues that can easily be address by your creditors’ rights attorney.

by Shawn P. McClure, Esq.

While I subscribe to the belief that a secured lien holder should always know the location of its collateral, I understand that is essentially impossible to practice. Which is why a secured lien holder may some day find themselves in a position where they find their collateral in the possession of a third party. Often that third party is a garage looking to be paid for repairs, towing or storage with respect to the collateral.

Under Pennsylvania law, the secured lien holder is generally on the hook for repairs and towing charges. The theory being that the secured lien holder receives any benefit bestowed upon the collateral. However, a dispute often arises over storage fees. Particularly, where a garage stores the collateral and then makes no effort to inform the secured lien holder of the collateral’s location.

With typical charges of $25.00-$35.00 per day, these storage fees can quickly accumulate. A garage is entitled to any storage fees incurred after the secured lien holder gave “consent” to storing the collateral. Obviously, if the secured lien holder gave express consent to store the collateral, there is no issue. The problem arises in instances of implied consent. Implied consent will be found when the garage has sent notice to the secured lien holder that they have the collateral and the secured lien holder does not pick up the collateral.

However, most problems arise when express consent is not given and notice is not sent. The secured lien holder after months of contacting the Debtor about delinquent payments finally hears from the Debtor that the collateral has been at the local garage for months. So what does a secured lien holder do?

1. Immediately contact the garage and find out exactly what amount of money they are demanding. Obtain a break down of the charges identifying what is for repairs, towing, storage, etc. Also, find out what they are charging per day to store the collateral.

2. Immediately make a reasonable offer, in writing, to the garage to resolve the matter. Pennsylvania case law provides that if a garage declines a reasonable offer to a secured lien holder, then the garage cannot seek any storage fees if it is later found consent to storage did not exist.

3. It is usually best to settle. However, if the garage is unreasonable, then immediate legal action should be taken by contacting your creditors’ rights attorney.

by Jennifer L. Tis, Esq.

As a creditor’s rights attorney, I often receive Answers to our Complaints filed Pro Se by  Defendants. Sometimes these Answers are in the proper format and I assume that an attorney prepared the response but declined to enter his appearance. Sometimes, however, they simply consist of a paragraph denying liability for the debt or expressing an interest in entering into a payment plan. Whether or not they are in the proper format is irrelevant, however, if the Defendant is a corporation. Thanks to the Pennsylvania case of Walacavage v. Excell 2000, Inc., 331 Pa.Super. 137, 480 A.2d 281 (Pa.Super., 1984) a corporate entity may only appear in court through an attorney licensed to practice law in the Commonwealth of Pennsylvania. This means that if an individual who owns a corporation files a Pro Se response to a Complaint that names only the corporation as the defendant he is in violation of Pennsylvania law.

The Court in Walacavage also addressed the concern that the requirement of a corporate entity to hire counsel puts corporations at a disadvantage. The Court stated that such a requirement does not deny corporations due process or equal protection under the law. It seems that there are several rationales behind this requirement one of which is the fact that a corporation is technically fictitious so that even if the individual filing the Pro Se response is the President of the corporation, the corporation itself is a fabrication and, therefore, cannot represent itself. Another suggested rationale is that incorporating a business brings many benefits including protection from personal liability. By the same token, however, there are responsibilities that come with such protection including the responsibility to hire an attorney for representation. Finally, it is suggested that the legal issues before the court can become confused when an attorney is not representing a corporation, however, I don’t see how it can be any more confusing for the court than when an individual represents himself…it can be bewildering for everyone involved.  I, personally, believe that the rationale accounting for equal benefits and responsibilities makes the most sense. If an individual wants to remain shielded from personal liability he is going to have sacrifice some benefits that he would otherwise have if not incorporated such as the ability to represent himself in court. You can’t have your cake and represent it in court, too.

                It is always surprising to me how many individuals who have incorporated a business are unaware of the necessity of retaining counsel for a legal matter. In my opinion, the best way to go about dealing with a Pro Se response from a corporate defendant is to file Preliminary Objections to the response. Filing Preliminary Objections to a Pro Se response from a corporate Defendant can save a great deal of time for you and a great deal of money for your client. I find that it often leads to settlement or, better yet, has the effect of getting the response stricken followed by Judgment by Default. From both a financial and expeditious perspective either of these two scenarios is preferable to having to prepare for and attend arbitration or trial as well as requiring your client to send a witness to court.

by Scott Schuster, Esq.

Many of you are familiar with preferences actions and the defenses to those actions. You may not be aware of fraudulent transfer actions. With the increasing rise in bankruptcy cases in which the main secured creditor is “under water,” bankrupt debtors and trustees are using preference actions as a primary means for collecting funds to distribute to unsecured creditors. However, since unsecured creditors are increasingly aware of preference defenses and how to properly deal with questionable debtors, preference actions are becoming less profitable for the bankruptcy estate. As a result, we’re seeing an increase in the use of fraudulent transfer actions to recover funds for the estate.

There are two types of fraudulent transfer actions: actual fraud (the Debtor deliberately defrauds creditors) an constructive fraud (discussed below). Since actual fraud is somewhat rare, this article is focused on constructively fraudulent transfers.

A transfer is constructively fraudulent if: (1) the debtor received less than reasonably equivalent value in exchange for the transfer and (2) the debtor was (a) insolvent on the date of the transfer or became insolvent as a result of the transfer, (b) the debtor was engaged or was about to engage in a business or transaction for which any property remaining with the debtor was an unreasonably small capital, or (c) the debtor intended to incur or believed that it would incur debts beyond the debtor’s ability to pay as such debts matured.

Most of the cases relating to fraudulent transfers focus on the “reasonably equivalent value” language of the statute. Generally speaking, the courts look to (1) whether the value transferred by the Debtor is approximately equal to the value of what was received by the Debtor in exchange for the transfer and (2) whether the transaction took place at an arm’s length.

In a typical scenario, a vendor provides goods or services having a certain value and the Debtor makes payment sometime thereafter. In this situation, no fraudulent transfer has occurred because the Debtor received “reasonably equivalent value” for its payment.

However, imagine the following scenario: A construction company is composed of three affiliates. Company A cuts timber and delivers it to Company B. Company B processes the timber and makes plywood and delivers it to Company C. Company C uses the plywood to make kitchen cabinets. While these three companies share some common owners, they conduct business at arms-length, do not have any parent-subsidiary relationships and are, for all intents and purposes, separate and distinct legal entities.

Now imagine the creditor that provides $100,000 worth of monthly shipping services for Company A. This creditor is “bankruptcy savvy” and, therefore, insists on 30 day payment terms and strict adherence to payments made in the “ordinary course of business.” All three companies file for chapter 11 bankruptcy protection. When the creditor receives notice of Company A’s bankruptcy, the creditor is secure in knowing that any potential preference action would top out at $300,000 (three months worth of payments) and knows that it has strong defenses to such an action.

Months later, the creditor receives a complaint from the Trustee in Company C’s Bankruptcy demanding the return of $2.4 million worth of “fraudulent transfers.” The complaint indicates that for many years all three companies were insolvent and had problems balancing cash flow. Due to these problems, Company C would pay some of Company A’s Accounts Payable. Pursuant to this arrangement, Company C paid all of the creditors invoices that were directed to Company A. The trustee claims that when Company C paid the monthly invoices for Company A, Company C received no value whatsoever, since the services were delivered to Company A. The trustee therefore demands the return of 2 years worth of monthly payments paid by Company C. Upon review of its file, the creditor is shocked to notice that the checks it received on its invoices were from Company C and not Company A.

Sounds ridiculous, right? Well, while there are certain fact intensive exceptions, such transactions are generally considered “fraudulent transfers” that are recoverable by a bankruptcy trustee.

A creditor that unknowingly receives such a fraudulent transfer is in a very unfortunate situation. While preferences only occur during the 90 days preceding the preference action, the bankruptcy code’s “look back” period for fraudulent transfers is 2 years (which can actually increase depending on which state’s laws apply). Consequently, creditors are at risk of much larger lawsuits being filed to recover fraudulent transfers than the typical preference actions, making it very hard to limit a creditors’ exposure.

More importantly, preference defenses – i.e. ordinary course of business, new value, contemporaneous exchange – do not apply to fraudulent transfers. The fraudulent transfer defenses – typically that the payor received reasonably equivalent value and/or that the payor was insolvent at the time it made the payment – are heavily fact intensive. In other words, the litigation is time consuming and expensive.

For legal and tax purposes, most large companies are split into multiple affiliates, meaning the risks posted by fraudulent transfer actions to unknowing creditors are quite large. For those “bankruptcy savvy” creditors that I mentioned, the best way to protect against such an action is to demand payment from the debtor to which you supplied services. While accepting payment from an affiliate is often the easiest way to get paid timely, it may ultimately end up costing you substantially down the road.

by Shawn P. McClure

Once a claim goes legal, there are many factors that come into play and directly impact a creditor’s ability to get paid.  As a credit professional, you must be aware of these factors to determine their impact on settlement negotiations and how far you decide to push the debtor.  As a creditors’ rights attorney, we must be available to quickly identify how these factors impact litigation and provide our clients with intelligent insight as to how litigation is likely to play out in light of these factors.

The rules of evidence are such a factor.  All of a sudden the forwarded email from a cousin’s mother’s friend who used to work for the debtor may not make it to the trier-of-fact, let alone have the impact the creditor thought it would.   

In the typical creditor-debtor dispute, evidence usually translates to written documents (contracts, invoices, statements, correspondence etc.) setting forth the basis for the parties’ relationship.  As a result of being a simple man, I like to keep in mind three simple concepts when determining whether I can get documents into evidence.  Those concepts are:

1.       Relevance – Why does this matter?

2.       Authentication – Is this real?

3.       Hearsay – Is this reliable?

The first concept is pretty self explanatory and is often easily understood because it involves logic that makes sense to a layperson.  For example, my client’s contract with the debtor is relevant to the issue of whether or not money is owed to my client.  Whereas, my client’s lease with their landlord has no bearing on the issue. 

It is with issues of authentication and hearsay, that clients and attorneys spend an inordinate amount of time explaining to each other and arguing with debtor’s counsel.  I could write pages upon pages trying to explain these concepts, so I will leave you with three helpful tips.  The last being the most useful.  Pay attention to rules on self-authenticating documents to hopefully ease the burden on yourself.  Hearsay is an out of court statement offered for its truth, it remains hearsay even if the declarant is now on the stand during trial.  Lastly, evidence law is determined by the trial judge that you are currently practicing before.  

I would like to wrap up by sharing a recent experience that illustrates why it is important to keep evidence concepts in mind throughout the legal process. 

I recently had a case where debtor’s counsel filed preliminary objections in response to my client’s complaint.  Simultaneously, debtor’s counsel served discovery requests.  More specifically, debtor’s counsel served a request for production of documents seeking the original credit application that was alleged in the complaint.  Debtor’s counsel filed preliminary objections asking the court to dismiss the complaint because we failed to attach the original credit application to our complaint.  The basis for these objections being that the failure to attach the original credit application was a violation of the Best Evidence Doctrine.  Well, we didn’t have the original credit application.  We told debtor’s counsel we didn’t have it in our responses to discovery.  However, in deciding the preliminary objections, the judge correctly overruled the debtor.  As simple as it sounds, debtor’s counsel forgot one importance aspect of the Best Evidence Doctrine.  It doesn’t come into play until a party is trying to put evidence into the record at trial.   

As for how that case turned out at trial … it will probably settle soon.