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 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 Shawn P. McClure 

Under Pennsylvania common law, “the primary difference between a surety and a guarantor is the time at which a creditor can collect from each.  With regard to suretyship, the creditor can look to the surety for immediate payment upon the occurrence of a default by the principal obligor or debtor … However, where an individual is a guarantor, the creditor must first attempt to collect the debt from the principal debtor/obligor before demanding performance from the guarantor.”  Reuter v. Citizens & Northern Bank, 410 Pa.Super 199, 208, 599 A.2d 673, 678 (Pa. Super. 1991). 

Sounds troubling for a creditor.  After reading that statement, there is probably one question that quickly comes to mind.  What constitutes an “attempt?”  This question could be argued a hundred times over.  Thankfully, the Pennsylvania legislature has brought some clarity to this question. 

Under 13 Pa.C.S. § 1201, which is Pennsylvania’s codified version of the Uniform Commercial Code’s general definitional section, “[s]urety. Includes a guarantor or other secondary obligor.” 13 Pa.C.S. § 1201.  Thus, no “timing” requirement exists as to when a creditor can look to a guarantor for payment of a debt.      

Moreover, Pennsylvania statute provides that:                                                  

“[e]very written agreement hereafter made by one person to answer for the default of another shall subject such person to the liabilities of a suretyship, and shall confer upon him the rights incident thereto, unless such agreement shall contain in substance the words: “This is not intended to be a contract of suretyship,” or unless each portion of such agreement intended to modify the rights and liabilities of suretyship shall contain in substance the words: “This portion of the agreement is not intended to impose the liability of a suretyship.”

      8 P.S. § 1. See, also, Keystone Bank v. Flooring Specialists, Inc., 513 Pa. 103, 113, 518 A.2d 1179, 1184 (1986) (“section 1201 of the UCC is not the sole authority for treating a guarantor, especially where he has ‘guaranteed payment,’ as a surety.”).

      Accordingly, where Pennsylvania law applies, a creditor with adequately drafted documents does not have to first look to the principal debtor/obligor for payment before pursuing a guarantor.    

by Shawn P. McClure, Esq.

In a perfect world, a creditor would never have to file a lawsuit to collect on balances due and owing from debtors.  In a great world, any judgment obtained as a result of a lawsuit would immediately be paid by the judgment debtor.  In reality, creditors are often forced to sit on a judgment and hope that their judgment debtor either comes into some money or tries to sell a piece of real estate encumbered by their judgment lien.  This can take years. 

    Does this judgment simply sit interest free?  If not, then what interest rate is applicable to the judgment?  The answer to the first question is easy.  Under Pennsylvania law, at a minimum, interest will acrue on the judgment at the rate of six percent per annum.  As a creditor you have the ability to determine whether that rate is higher or lower when contracting with your future debtor at the beginning of your relationship.  

    Pennsylvania law provides that a plaintiff is entitled to interest on a judgment for a specific sum of money from the date of the verdict.  42 Pa.C.S.A. § 8101, (“Except as otherwise provided by another statute, a judgment for a specific sum of money shall bear interest at the lawful rate from the date of the verdict or award, or from the date of the judgment, if the judgment is not entered upon a verdict or award.”).  “Thus the general rule is that a plaintiff is entitled to interest on a judgment from the date of the verdict, and for purposes of computing interest, judgment and verdict are synonymous.” Osial v. Cook, 2002 PA Super 214, 803 A.2d 209, 215 (Pa. Super. 1994).

    A plaintiff receives statutory post-judgment interest as a matter of right where the damages are ascertainable by computation. Pittsburgh Constr. Co. v. Griffith, 2003 PA Super 374 (Pa. Super. 2003).

    Currently, the statutory rate of interest in the Commonwealth of Pennsylvania is fixed at six percent (6%) per annum, “but parties to a contract may agree to a higher rate.” Id; See, 41 P.S. § 202; In re Estate of Braun, 437 Pa. Super. 372, 650 A.2d 73, 78 (Pa. Super. 1994) (“the courts of this Commonwealth have found that the parties may agree to a post-judgment interest rate in excess of that provided by statute”); see, e.g., Miller v. City of Reading, 369 Pa. $71, 473-474, 87 A.2d 223, 226 (1952) (party who illegally fails to pay a debt is liable to pay interest thereon at the statutory rate unless the parties expressly agree otherwise); Smith v. Mitchell, 420 Pa. Super. at 144, 616 A.2d at 21 (Pa. Super. 1992) (quoting Daset Mining Corp. v. Industrial Fuels Corp., 326 Pa. Super. 14, 36, 473 A.2d 584, 595 (1984) and recognizing that in contracts concerning the payment of the sum of money at a rate higher or lower than the legal rate, they can agree to have the agreed upon interest rate continue after the debt becomes due; in the absence of an agreement, the interest rate fixed by law attaches); Cumberland Valley Cooperative Association v. Martin, 11 D.& C. 4^th 10, 12 (C.C.P. Cumberland County 1991) (specific intent of the parties prevails over the statutory rate; parties’ agreement to pay post-judgment interest rate of 15% was upheld).

    Therefore, if the parties’ agreement is silent as to interest or refers to “legal” or “lawful” interest, the judgment creditor is limited to six percent (6%) per annum in post-judgment interest.  However, where the parties’ agreement expressly provides for a higher interest rate and the plaintiff has plead this higher rate, Pennsylvania law allows for the imposition of post-judgment interest at the higher, agreed upon rate.  Once again, another example of why it is better to plan for the worst and hope for the best when entering into a creditor/debtor relationship.   

by Shawn P. McClure

A couple of months ago, I attended a presentation by a well known trial attorney.  He opened the seminar by stating that he had never represented a Plaintiff/Creditor in a breach of contract action.  Given the fact that the audience consisted of creditors’ rights attorneys, collection agencies and credit managers, this statement raised some eyebrows. 

This gentleman was quick to qualify this statement by saying that he has tried thousands of “broken promise” cases, but never a breach of contract case.  His point was that it is important to remember that these breach of contract cases (i.e. broken promises) are being heard and decided by people just like you and me.  As such, it is important not only to keep things as simple as possible, but to make sure that we don’t exclude the human element to such cases.

I think that this lesson translates to all stages of any collection effort.  It is something that everyone in the credit industry needs to remember.  From the initial telephone call to your Debtor, through the closing argument your attorney makes during a jury trial, all that is at issue is a broken promise.  The key is conveying to those involved, the Debtor, Debtor’s Counsel, Judge, Jury, etc., the simplicity and humanity of the situation.

Webster’s Dictionary defines a “promise” as, “a declaration that one will do or refrain from doing something specified.”  It is as simple as that.  Once you learn to communicate this characterization of your claim to the Debtor or their attorney, your successful collections will undoubtedly increase.  Just remember, don’t break any promises of your own.  If settlement discussions break down and you have threatened legal action, be sure to act promptly by contacting your creditors’ rights attorney.”  

by Shawn McClure

As a potential creditor, you have heard this message time and time again.  Do your homework!  Prior to extending credit to a new customer make sure to obtain as much information as possible regarding this new customer’s credit history.  As a creditors’ rights attorney, I urge you to include within this initial investigation the task of finding out a little about the customer’s present operations.  More specifically, find out where this new customer currently banks. 

Customer banking information is extremely valuable in the event that the relationship sours down the road, and you are forced to take legal action to collect on an outstanding account.  Moreover, in the early stages of the creditor/debtor relationship obtaining such information should be effortless.  A new customer who refuses to provide a banking reference should at the very least raise a red flag.     

In my experience, a bank attachment is typically the fastest and most successful form of execution upon a judgment.  It gets the creditor what they want (cash), and it does so in a relatively quick manner (the bank will have twenty days from the date of service to inform a creditor of any funds that may be available).  Of course there are procedural steps that your attorney will need to take in order to receive payment, but those steps can be taken quickly.   

So if in your current practice you are not already asking new customers for banking information, begin doing so.  For existing customers, I would suggest taking the time to note where current payments are coming from.  By expending minimal effort now, you have taken steps that can drastically improve your chances of recovery in the event that the account defaults.

by Shawn McClure

When a collection claim results in litigation, a creditor must become familiar with certain legal concepts that will often determine whether or not the creditor sees any recovery as a result of the lawsuit.  One such legal concept is the “burden of proof.” 

In all civil litigation, the burden of proof requires the plaintiff, the creditor, to convince the trier of fact (either a judge or jury) of the plaintiff’s entitlement to the relief being sought.  The plaintiff must prove each element of its claim, or cause of action, in order to recover.  In other words, the initial burden of proof is on the plaintiff to show the court why the defendant/debtor owes the money. 

The underlying legal cause of action in a collection case is typically for breach of contract.  Generally, a plaintiff must show: 1) the existence of a contract and its essential terms; 2) a breach of a duty imposed by the contract; and 3) resultant damages.  This is why it is critical that a creditor keep meticulous and detailed business records, which can be used to meet the plaintiff’s initial burden of proof.  

Invoices between the parties can be offered as evidence of the existence of a contract between the parties.  The breach is the defendant/debtor’s failure to pay according to invoice terms.  Lastly, the plaintiff/creditor has been damaged because they have provided goods to the defendant/debtor and have not received payment.  Seems simply enough, but one would be surprised at the number of creditors who do not have or simply do not feel they should be burdened with having to produce such supporting documentation for the court. 

Keep in mind that when your attorney asks you to provide documentation of the claim against the debtor, he or she is not questioning the merits of your claim, but rather preparing to meet the burden that the law has placed on you as a plaintiff in a civil action.  Also, if you havent realized it by now, simply stating that the debtor knows they owe the money will not suffice.    

By Shawn P. McClure

“They stole from me!” “I am not taking a penny less than the full amount owed!” “I want to nail that son of a b#@^$!”  Often creditors engage an attorney to recover an amount owed from a debtor, and the creditor feels betrayed or wronged by the debtor.  It doesn’t matter whether the account debtor is a long time customer who has ignored demands for payment or a one time credit sale; these feelings of animosity toward that individual or entity are still present.  If not checked, these feelings can boil over and lead to unproductive or unnecessary litigation that only ends up costing the creditor more time and money.     

As with any service industry, one of the first duties of a creditors’ rights or bankruptcy attorney is to monitor, deal with and ultimately manage client expectations and emotions.  I would suggest that the first thing that needs to be done is to get your client in an “economical mindset.”  A creditor needs to realize that when a debtor files bankruptcy or the creditor is forced to place an account with a law firm for collection, then the account is already a loss.  For a creditor’s rights attorney the goal then becomes finding the best way to mitigate that loss and obtain the most favorable resolution for their client.

Therefore, every decision during the “recovery” process should be analyzed while taking full account of the economical consequences of that decision.  No where is that more prevalent then when deciding whether or not to initiate litigation.  Immediately filing a lawsuit without a preliminary asset search or investigation into the financial stability of your debtor can turn out to be the most counterproductive thing a creditor can do when trying to be made whole.  Likewise continuing to pursue litigation when it is obvious that there is no financial recovery to be had can only hurt a creditor’s bottom line.

Sounds simple enough.  Why do creditors continue to fall into these same pitfalls?  Emotion.  Creditors become too focused on “punishing” the debtor, and lose focus of the end goal.  Money. 

Luckily, the problems outlined above are easy to remedy.  Creditors, heed your attorney’s advice and try to avoid focusing on the emotions involved in the dispute at hand.  Attorneys, take control of the situation and make it clear to your client that pursuing certain avenues, while emotionally satisfying, will simply lead to the loss of more time and money. 

I understand that sometimes a message needs to be sent, but for those creditors who seek truth and justice in a failed creditor/debtor relationship, I would suggest visiting a house of worship.  It will be less expensive and they may have better luck.