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When it was enacted, most publicity regarding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) focused on consumer bankruptcy reforms. However, commercial creditors faced with the vexing problem of a preference action in bankruptcy also received some relief. The three most significant changes were touted at the time to offer the following benefits: (1) ease the creditor’s burden to establish the ordinary course of business defense; (2) preclude a commercial debtor from suing to recover transfers under $5,000.00; and (3) require lawsuits seeking less than $10,000.00 total to be brought in the creditor’s home court, rather than the sometimes-remote bankruptcy court where the original petition was filed. In practice, since these reforms were put in place, the changes have offered some relief, but not all that creditors had hoped for at the time.

 

Preference Claims and the Ordinary Course of Business Defense

Creditors that have suffered through a customer’s bankruptcy filing know that a double whammy can be involved: First, the customer files its bankruptcy petition leaving a large unpaid balance, resulting in an unsecured claim worth pennies on the dollar. Second, often years after the original bankruptcy filing, the debtor or the trustee sues the creditor to recover all payments that the debtor made in the 90 days before the bankruptcy filing—the dreaded preference claim.

 

The threshold to assert the preference claim is very low. Debtors tend to sue every company that received a payment within the 90 day preference period. The burden then falls to the creditor to establish some defense. Two more common defenses were not altered by BAPCPA; the subsequent new value defense and the contemporaneous exchange defense were unchanged by the law, and remain powerful tools for defending preference claims. Unfortunately, these defenses rarely provide a complete shield for all payments—usually the creditor must resort to the ordinary course of business defense to protect a portion of the payments received in the preference period. One change in BAPCPA expanded this defense.

 

Specifically, prior to BAPCPA, the ordinary course of business defense had three parts, all of which the creditor had to establish: (1) The payment must have been for a debt incurred in the ordinary course of business; and (2) The payment must have been made in the ordinary course of business of the debtor and the creditor; and (3) The payment must have been made according to ordinary business terms. The first requirement (fortunately) is rarely disputed. The second element involves comparing the debtor’s payment history for the 90-day preference period with the period of time prior to the preference period—if the payment histories for the two periods are generally alike, this is a good indication that this test will be satisfied (although other factors can also come into play, such as held orders, a switch from checks to wire transfers or other collection efforts). The third element—ordinary business terms—required evidence that the payments fell within a “range of ordinariness” within the relevant industry.

 

Most courts required proof of “ordinariness” in the relevant industry to be established by expert testimony – a time consuming and expensive proposition. Debtors often exploited this requirement by resisting the ordinary course of business defense, even in the face of a consistent payment history between the parties, and Court decisions regularly ruled against creditors that failed to establish this required third element.

 

A Simple Change: “and” Became “or,” Resulting in a Broader Ordinary Course Defense

BAPCPA changed the wording of the defense: the word “and” in the statute between elements two and three was changed to “or,” so that the creditor can protect a payment with the ordinary course of business defense by establishing the first element and then either the second element or the third element. In other words, the ordinary course of business defense now succeeds if a payment was either (a) consistent with the pre-preference period payment history; or (b) made according to ordinary business terms, i.e., ordinary within industry standards.

 

Over the last 12 years, this change has significantly improved the hand of the preference defendant and has also reduced somewhat the cost of defending a preference claim. Where the preference period payment history does not vary significantly from the prior payment history, debtors cannot insist on expert testimony to establish the third element. On the other hand, if the preference period payment history varies significantly from the prior payment history (which would have been a defense-killer under the old law) the creditor can still come forward with expert testimony to set forth industry standards and still protect the payments.

 

The $5,000 Minimum for Preference Claims—Now $6,825

BAPCPA also added a new, seemingly bright-line defense to the recovery of individual transfers of less than $5,000.00, which has now increased to a minimum of $6,825 under CPI adjustments built into the law every three years. Unfortunately, this change has not worked out as creditors might have hoped. Even though as written, the language seems to protect individual payments (now) of less than $6,825.00 from preference attack, courts have generally allowed recovery of smaller payments, as long as the total of all payments during the 90 day period exceeded the minimum. There is still the occasional case where the total a creditor received in the 90 day period is less than $6,825.00, in which case the defense does knock out these claims, but the original hope back in 2005 when the minimum claim was established has not panned out in practice.

 

The Venue Provision – Where a Debtor can Sue

Under the old, pre-BAPCPA bankruptcy law, debtors or trustees filed all preference lawsuits in the bankruptcy court where the bankruptcy petition was filed. That practice subjected creditors to the prospect of defending even small preference actions in far distant states such as New York, Delaware, or any other, debtor-friendly bankruptcy court around the country.

 

BAPCPA, however, included a change that appeared to require a debtor or trustee files a preference suit for less than $10,000.00 (now up to $13,650.00 under every-three-year CPI adjustments), to sue the creditor in the creditor’s home-town federal bankruptcy court. In other words, even if the debtor or trustee files its bankruptcy case in debtor-friendly Delaware, BAPCPA seems to require a preference suit against a Wisconsin creditor for less than $13,650.00, to be filed in one of the federal courts in Wisconsin.

 

Again, however, this has not worked out as creditors would have hoped. Many courts (including those in debtor-friendly Delaware) have held that BAPCPA’s change to the venue statute did not go far enough to expressly apply to preference claims, whatever Congress’s intent might have been. Therefore debtors and trustees continue to bring small preference cases in the local court where the bankruptcy was filed, where it is convenient for the debtor, but not the creditor. And, unfortunately, because this issue only comes up in cases where the amounts at issue are relatively small, it usually behooves a creditor to negotiate a resolution based on the standard preference defenses (e.g., new value, ordinary course), rather than spending more hard-earned creditor money on procedural arguments that might, or might not, succeed.

 

Conclusion

Even though all the anticipated benefits of the preference changes in BAPCPA have not played out as hoped, the change in the ordinary course of business defense has still provided a material benefit to preference defendants. Expert witness reports and testimony are no longer a required part of all preference defenses, but they remain a valuable tool in the event the specific debtor-creditor course of business strays out of the ordinary. The other two defenses have not helped as much, but the three-year CPI adjustments keep the minimums creeping up, and in the right case, they still are another point of leverage in the ongoing battle between the forces of Good (Creditors, of course) and the Evil preference claim.

 

If you have any questions regarding this article or other bankruptcy-related matters, please contact attorney Matthew P. Gerdisch (mgerdisch@kmksc.com), attorney Samuel C. Wisotzkey (swisotzkey@kmksc.com) or attorney Devon E. Daughety (ddaughtey@kmksc.com) at (414) 962-5110.

 
 

NOTE: This article was originally posted on April 4, 2017. It has been updated to reflect the three year CPI adjustments that took effect April 1, 2019 (See Doc. 2019-01903 Published 2-12-19).

 
 

About KMK

Kohner, Mann & Kailas, S.C. (KMK) is a value-driven law firm with a global reputation for success and a rich tradition of results. When you need unsurpassed legal expertise in business and financial services, business litigation, or commercial collections, let our seasoned attorneys help you achieve your most important objectives. Founded in Milwaukee in 1937, KMK enjoys a local, national, and international reputation, recognized by U.S. News & World Report as one of the nation’s Best Law Firms. For more information, visit www.kmksc.com

The Wisconsin Supreme Court recently issued a decision that clarifies an important part of foreclosure law. The decision is advantageous for lenders that seek not only to foreclose on real estate collateral, but also preserve their right to collect from guarantors.

 

Wisconsin law allows a lender to shorten the redemption period on a foreclosure of commercial real estate1 from six (6) months to three (3) months if the borrower agreed in writing (usually by way of a clause in the mortgage) to the provisions of Section 846.103(2) of the Wisconsin Statutes. In order to utilize the shortened redemption period, however, the statute requires the mortgagee (the lender) to elect in the lender’s foreclosure Complaint to waive judgment for any deficiency against “every party who is personally liable for the debt secured by the mortgage.” The borrower on the business note is a “party who is personally liable for the debt secured by the mortgage” and, by application of the statute, the borrower would be free of a deficiency judgment if the mortgagee (the lender) made the Section 846.103(2) election. But what about the guarantor of the business note? Is the guarantor “personally liable for the debts secured by the mortgage” and therefore free of the debt too? This was a question without a clear answer until very recently. Previously, the “safe” course of action to preserve the claim against the guarantor was to proceed under the longer six month redemption period and not waive the deficiency claim in the foreclosure action. However, the Wisconsin Supreme Court in a very recent decision, in Bank Mutual v. S.J. Boyer Construction, Inc. 2010 WI 74 (July 9, 2010), ruled that the lender can elect the three month redemption period, waive the judgment for deficiency against the borrower, and still retain the right to obtain judgment against the guarantor for the full amount of the guaranteed debt.

 

Mutual sued the borrower (S.J. Boyer Construction, Inc.) for foreclosure on five business notes secured by mortgages on five properties. The Complaint also included a separate claim for relief against two guarantors (Steven Boyer and Marcy Boyer) on an unlimited Continuing Guaranty of all debts and obligations of the borrower to the bank. The foreclosure Complaint stated that the bank waived any deficiency claims against the borrower. The amount due the bank exceeded $1.4 million. The bank obtained summary judgment and after the three month shortened redemption period expired, the properties were sold at Sheriff’s Sale. The bank was the only bidder and purchased the properties for $1,180,000.00. The borrower and the guarantors objected to confirmation of the sales and sought relief from the judgment because the bank elected the shortened redemption period but the judgment did not waive deficiency judgment against the guarantors. The trial court overruled the objections and denied the request for relief from the judgment finding, in part, that the guaranty was a contract separate from the business notes and provided an independent basis for the guarantors to be liable to the bank, in spite of the language of Section 846.103(2) requiring waiver of deficiency against parties “personally liable” for the debts. The borrower and the guarantors appealed the trial court’s decision to the appellate court.

 

The appellate court, in a unanimous decision, overruled the trial court. The appellate court found that the guaranty was a guaranty of payment and that the guarantors were personally liable for the debts secured by the mortgage. As a result, the appellate court ruled that Bank Mutual could not reap the benefit of the shorter redemption period and obtain judgment for deficiency against the guarantors. Bank Mutual appealed the appellate court decision to the Wisconsin Supreme Court.

 

The Wisconsin Supreme Court, in a majority decision (two justices dissented and one did not participate in the decision) reviewed, among other things, the statutory lineage of the present foreclosure statute and found that the phrase “personally liable for the debt secured by the mortgage” is a legal term of art that does not include a guarantor. The Court explained that the borrower was “personally liable for the debt secured by the mortgages” because it signed the business notes that evidenced the debt secured by the mortgages. By contrast, the guarantors did not sign the notes secured by the mortgages; instead, the guarantors were “personally liable” on their contract of guaranty. The Court explained that when “a guarantor’s liability arises from a completely separate contract of guaranty, the guarantor is not personally liable for the debt secured by the mortgage, and, in such a case, neither a guaranty of payment nor a guaranty of collection comes within the scope of the redemption statute.” The Court concluded “that a mortgagee who forecloses under the shortened redemption period of Section 846.103(2) does not forfeit the right to obtain a judgment against the guarantor of payment even though [the mortgagee] must waive its right to collect any deficiency from the [borrower]”. The question is now answered and under Wisconsin law a lender can elect the shortened redemption period (and waive judgment for any deficiency against the borrower or co-signer of the note) but the lender does not waive the lender’s right to seek full payment from the guarantor of all guarantied obligations.

 

RESULT: The Supreme Court’s decision will allow lenders to accelerate the foreclosure process making the three month redemption period election a readily available option even when the lender holds guaranties. Nevertheless the Boyer decision brings to mind a few “practice points.”

 

In the first instance, a lender cannot make the Section 846.103(2) election to shorten the redemption period unless the mortgagor agreed in writing at the time of the execution of the mortgage to the provisions of Section 846.103(2). Likewise, Section 846.101 is a corresponding statute that allows for shortening the redemption period from 12 months to 6 months for other types of properties.2 The best practice is for the lender to include within the terms of the mortgage the lender’s right to make the election under both of the Wisconsin Statutes.

 

Second, lenders should keep in mind that if the lender makes the Section 846.103(2) shortened redemption period election, the statute states that the mortgagee (the lender) “consent[s] that the mortgagor, unless he or she abandons the property, may remain in possession of the mortgaged property and be entitled to all rents, issues and profits therefrom to the date of confirmation of the sale by the court.” If the mortgaged property is generating rental income from tenant leases, and the lender makes the shortened redemption period election, the lender may be giving up the opportunity to collect rents during the shorten redemption period. There are unpublished court decisions, not binding on other courts, which have allowed a lender to elect the shortened redemption period but nonetheless assert a claim to the rents and profits where the lender also held, separate from the mortgage, an assignment of rents and leases agreement. However, such a claim to the rents and profits in such circumstances remains uncertain in Wisconsin foreclosure law and consequently a lender must keep in mind that by making the shortened redemption period election, the opportunity to collect the rents and profits during the redemption period may be lost.

 

Third, the Boyer case does not address a situation where a mortgage secures the guaranty. For example, suppose the owner of the borrower-business provides a personal guaranty of the business note and the owner also provides the lender a mortgage on the owner’s home to secure the guaranty (instead of the business note). In that scenario it appears the guarantor is personally liable for the debt (the guaranty obligation) secured by the mortgage and an election by the lender of the shortened redemption period in the foreclosure of the owner’s home might result in a court ruling that the lender must also waive judgment for deficiency against the guarantor.

 

Lastly, the Boyer decision also does not address the situation where a borrower waives by contract the right to be free from a deficiency judgment in the event of a shortened redemption period. For example, in a loan “work-out” situation, a forbearance agreement might include a provision whereby the borrower agrees that, in the event of a later foreclosure action, the redemption period will be shortened but that the lender shall have the right to obtain a deficiency judgment against the borrower. Do the provisions of Section 846.103(2) “trump” such an agreement and free the borrower of a judgment for deficiency despite the borrower’s consent to deficiency liability? Or, is the forbearance agreement an enforceable waiver of the borrower’s opportunity to be free of a deficiency judgment under the statute? These will be questions to be answered by other cases.

 

Lenders should give a cheer for the S.J. Boyer Construction decision. The decision clarifies lender’s rights against guarantors and enhances alternatives in enforcing their foreclosure and guaranty rights. If you would like a copy of the S.J. Boyer Construction decision (but be warned it is 66 pages) or would like to discuss the impact of the decision on foreclosure strategies, please contact Matthew Gerdisch of our office.

 

If you have any questions relating to this article please contact the author, Attorney Matthew Gerdisch, at mgerdisch@kmksc.com or on (414) 962-5110. Mr. Gerdisch is the head of KMK’s Banking and Bankruptcy department and is Board Certified—Business Bankruptcy Law and Creditors’ Rights Law by the American Board of Certification.

The credit application is arguably the single most important factor in the control, collection and limitation of losses relating to the management of accounts receivable and collection of delinquent accounts.

 

Yet, both large and small business creditors constantly enter the game with only half a “play book”. Consequently, they lose more games (uncollected accounts) than they should because they are playing with both a weak offense and weak defense. They are using an incomplete and ineffective credit application.

 

The comprehensive credit application serves to satisfy two primary purposes:

 

First Purpose: The Offense
The first purpose is to collect and store that available background scenario, facts and information that will allow the credit professional to evaluate and determine the creditworthiness of the applicant. It helps the credit professional to decide whether the credit risk should be taken in the first instance. By taking the initiative with a “state-of-the-art” credit application, the creditor is insisting upon that pertinent information necessary and available to insure a sound credit decision. The credit professional can intelligently reject all those accounts that would tend to be future problem accounts and “losers” that are best left to the competition. In essence, the credit professional is playing to “win” from the first play of the game.

 

Second Purpose: The Defense
Use of the “state-of-art” credit application will insure that the customer (debtor) agrees to pay the full account plus the greatest reasonable interest available, collection costs, attorneys’ fees, and all other legally collectible incidental costs. In essence, the creditor is protecting against any loss whatsoever, even if the accounts should become delinquent, by including the proper provisions in the credit application to be signed by the debtor. This defensive measure provides the legal basis for the creditor to recover completely (without any loss) in the event the creditor has placed the account for collection early enough, and while the debtor is still a fully viable and collectible entity.

 

Be Aggressive
The truly aggressive “superstar” creditor will exercise those additional defensive and offensive devices not generally utilized by the meek creditor. Industry competition and other considerations are often blamed for the creditor’s election to not insist that the debtor provide creditor a reasonably current financial statement at the time the signed creditor application is provided. The meek creditor will also opt not to have the customer provide one or more personal guarantors in the event the debtor is a relatively undercapitalized corporation, LLC, or other like entity not generally carrying personal liability of its principals.

 

The financial statement is a valuable offensive “play” which will help the creditor to determine whether to take the credit risk in the first instance, or to what extent to limit the line of credit to be extended. The personal guaranty(s) are an excellent defensive “play” to provide possible additional collection potential in the event of a weak debtor entity. Our office has regular and substantial success in collecting in full upon otherwise uncollectible claims, only because of the availability of one or more personal guarantors. It can be the difference between collecting an account in full or having to write an account off as completely uncollectible and a total loss.

 

The Need for Financials

The practice of our firm, with respect to the credit applications we draft for our clients, is to provide a provision in the credit application requiring that the customer affix a current financial statement to the credit application. Our clients advise us that most customers do provide some type of financial statement as requested. If no financial statement is attached, the creditor will have to exercise a value judgment as to whether it wants to accept the risk without the financial statement before providing the credit, or limit the credit line as it deems appropriate.

 

As a matter of course, our law firm provides for personal guarantees in the credit applications that we draft for our clients. Our clients tell us that when presented properly, most customers will sign the credit application without objection irrespective of the personal guaranty included at the time the customer opens up a credit line. That is the time to request the guaranty and not when the creditor has a large delinquent account balance against the customer (debtor) that appears of questionable collectibility, and creditor must “beg” for the officer of the debtor entity to put personal assets on the “line”, by signing the personal guaranty at that subsequent time. Time after time, our office collects otherwise uncollectible accounts receivable only because of the availability of the personal assets of the principals of the debtor entity, as provided by the personal guarantees signed by them.

 

As one would expect, there are rudimentary and basic informational considerations which should be addressed in the credit application, to collect that data required to identify and evaluate the prospective customer. The complete name, address, phone number, fax number and identification number (tax number for a corporation and social security number for an individual) are essential.

 

Additionally, if the creditor is to fully evaluate its risks, the credit application must very clearly evidence the legal entity or “makeup” of the customer. Is the customer a sole proprietor? A partnership? If so, the names and addresses of all partners are invaluable. Is the customer a corporation or LLC? If so, the state of charter, and names and addresses of all principals and officers are of value. With this specific data, the creditor can open the new account with the correct, verified entity, which will be readily available to help evaluate the credit risk or ascertain the legal entity to be sued in the event of any subsequent delinquency in the account. Getting this “right” at the beginning can save a lot of time and trouble later, when the specific information is an absolute necessity. Trade names or style names should be collected and noted for any future use. The names and addresses of the principals and officers will be useful if service of process is required in the event of suit on a defaulted account or if any of these individuals must be sued on their personal guarantees.

 

The applicant’s bank references are important (full name and address of bank, name and address of loan officer, etc.) in the event that a future garnishment is desired to effect collection of any delinquent account that has been reduced to judgment.

 

The proposed customer should be required to pay all expenses and reasonable interest and/or service charges to the extent legally enforceable and to the extent the customer is able to pay same. Maximum collection can only be effected in such fashion, if the terms to recover same are clearly set forth in the written language of the credit application. Interest, service or finance charges, or whatever can be fully recovered if reasonable and clearly provided for in the contract created by the written language of the credit application.

 

A rate of 1.5% to 2.0% interest per month on the defaulted balance is generally considered reasonable, or the application can provide for “the greatest amount allowed by law” within a subject jurisdiction. Attorneys’ fees and collection costs of 25% of the amount outstanding (which is within the usual costs of collection on a commercial account) may be recovered if the written language is clear and definite. Without such planning and specific language, the creditor’s recovery is generally limited to statutory interest and attorneys’ fees which are generally of a very nominal amount and much less than can be recovered by the specific terms of the credit application contract.

 

Many creditors include in their credit application specific language setting forth terms of payment and credit terms. Our law firm does not include these in the credit application as such, as a credit application should limit its content to only that pure data and information that will aid in the credit risk evaluation and that language which will ensure maximum recovery in collection upon possible delinquency. Our recommendation is that terms of payment and credit terms are best provided to the proposed customer on a separate document submitted for the informational purposes to the customer, and which information can be easily amended each time there is a change required. A change of terms will not then be a problem because the credit application included terms which were effective at the time of execution, but not effective at the subsequent date of any such changes.

 

Any other general information deemed desirable by the creditor, such as amounts to be ordered, places of delivery, persons responsible for payment or to accept delivery, etc., is best accomplished in a separate “fact-gathering” sheet, and possibly on the same sheet setting forth applicable payment and credit terms.

 

In the credit applications our firm drafts for clients, we use language on the credit application that the debtor agrees to creditor’s usual terms and conditions as promulgated and amended from time to time. As previously mentioned, those specific credit and payment terms in force at the time of the execution of the credit application can be best communicated by a separate document. This ensures the individual credit application will be free of collateral considerations not specifically addressed to the evaluation of the credit risk and recovery of maximum collection on any delinquent account.

 

Names and addresses of business references and a listing of major secured creditors and their collateral will be extremely valuable in the creditor’s tracking of the applicant’s creditworthiness.

 

If properly designed, all of the above information can be fit on the front and back of one sheet of 8.5×11 paper, and when written in simple English, can be easily understood by the judge who may be called upon and from whom you are seeking a judgment against the applicant customer “now” turned debtor.

 

Reprinted as published in Creditor’s Edge.

 

The language of the credit applications drafted by KMK provides the legal contractual language to bind the purchasing customer to the payment of interest, collection costs and all other damages as the result of defaulted payment. KMK can historically document clients that have delinquent accounts receivable that nevertheless maintain a strong and positive recovery rate. Call Attorney Steve Kailas at 414-962-5110 to discuss and confirm this phenomenon.

A letter of credit (“LC”) can be a valuable tool in a trade creditor’s arsenal to secure payment of an account and at the same time avoid a future bankruptcy preference claim. However, creditors should beware. They can on occasion find themselves in the middle of what we call the “payment from the debtor bankruptcy paradox.”

 

With a properly drafted stand-by LC in hand, a trade creditor can recover payment on an account balance from the debtor’s bank (or other entity that issued the LC), in the event the debtor does not timely pay the creditor (or, if the creditor is utilizing a commercial or documentary LC, the creditor can receive payment from the bank on the LC upon presentation of required documents even before the account comes due). It is uniformly recognized by bankruptcy courts that a payment to a creditor by the bank on the LC is not subject to preference attack in the debtor’s later bankruptcy case because the payment did not come from the debtor. The payment came from the bank under the bank’s independent obligation to pay the creditor under the terms of the letter of credit.

 

Now comes the paradox.

Suppose the following: The creditor is the beneficiary of a stand-by LC that expires in six months. The bank issued the LC under the debtor’s unsecured line of credit with the bank. The debtor’s $100,000 account balance is delinquent and the creditor is about to draw on the LC. However, instead of payment under the LC, the debtor wires to the creditor $100,000 as full payment of the delinquent account. Eighty-nine days later (within the 90-day bankruptcy preference period), the debtor files a Chapter 7 bankruptcy petition.

 

One year and 11 months later, the Chapter 7 bankruptcy trustee commences an adversary action against the creditor seeking the return of the $100,000 payment as a preference claim. (For the purposes of this discussion, we will assume that the creditor does not have an ordinary course of business defense or a traditional “new-value” defense to the preference claim.) If the creditor is required to return the $100,000 payment to the bankruptcy estate as a preference, the invoices paid with the $100,000 payment are once again unpaid and very delinquent. Unfortunately, the creditor can no longer draw on the letter of credit because the LC expired a few months after the bankruptcy case was filed.

 

Therein lies the paradox

Having the LC is not an unconditional guarantee of payment on unpaid invoices IF the debtor pays the invoices and then goes into bankruptcy. There are, however, terms that can be added to an LC to help alleviate this trap, but generally must be addressed on a case-by-case basis when negotiating the terms of the LC. Be sure to obtain counsel from your bankruptcy lawyers to help develop your protections.

 

Nevertheless, with a slight change to the facts of our hypothetical, the creditor may have the opportunity to defend against the preference claim by asserting a type of “release of lien” new-value defense. Assume the same hypothetical as above except that the LC is issued by the bank under a line of credit that is secured by all of the debtor’s assets (and the value of those assets equals or exceeds the amount owed to the bank, plus the amount of the LC).

 

Summary

In this hypothetical, if the debtor had not paid the creditor, the creditor would have drawn on the LC, and then the bank’s line of credit claim would have increased along with the bank’s secured claim to the debtor’s assets. But, because the debtor paid the creditor, the bank did not have to pay on the LC, and the bank’s potentially larger secured claim did not increase. So, the payment by the debtor “saved” the debtor’s estate from the increase in the bank’s secured claim and that savings, arguably, was “new value” to the estate which should cancel out the preference claim. The same analysis could be applied where the bank is undersecured, but only to the extent that the bank is secured for the LC draw. This concept has been recognized by bankruptcy courts, but different bankruptcy courts can come to different conclusions, and so this “defense” cannot be guaranteed. Nevertheless, it should not be overlooked if a creditor is confronted with this scenario.

 

Of course, at the outset, had the creditor drawn on the LC instead of taking payment from the debtor, the creditor would not have faced the paradox and could have avoided the preference claim altogether. A letter of credit is an important tool of a creditor manager’s arsenal, but as noted above, it has its limits. If faced with a troubled account, a credit manager should give consideration to other tools, such as a requiring the debtor to make payments on a cash-in-advance basis via confirmed wire transfer. Although cash-in-advance payments come from the debtor, if properly managed, the creditor should have complete defenses to any future preference claim and can avoid the bankruptcy paradox and the intricacies and pitfalls of an LC.

 

Disclaimer

This can be a very technical area of the law and consultation with sophisticated bankruptcy attorneys before going into a letter of credit arrangement or liquidation is a wise investment. THE INFORMATION CONTAINED IN THIS ARTICLE IS NOT PROVIDED AS LEGAL ADVICE. LEGAL ADVICE SHOULD BE SOUGHT AS TO ANY FACTUAL AND LEGAL ISSUE.

 

If you have any questions relating to this article please contact the author, Attorney Matthew Gerdisch, at mgerdisch@kmksc.com or on (414) 962-5110. Mr. Gerdisch is the head of KMK’s Banking and Bankruptcy department and is Board Certified—Business Bankruptcy Law and Creditors’ Rights Law by the American Board of Certification.

Introduction

 

With many creditors their first contact with the Wisconsin Fair Dealership Law (Chapter 135, Wisconsin Statutes) arises when they attempt to collect monies owed to it by a Wisconsin based business. The issue of compliance with the statute is often presented after written or telephonic contact is commenced by the debtor or the debtor’s attorney seeking payment of the debt. Unfortunately it can also be brought to the unsuspecting creditor’s attention by either a lawsuit filed by the debtor alleging violation of the law or as a counterclaim in response to the creditor’s action seeking recovery of the monies owed to it. Given the significant consequences of a violation of the law, attorneys for creditors should be aware of the law, its purpose, its application, its requirements, its prohibitions, proper notices and the serious damages assessed in the event of a violation of its requirements.

 

Specifics

 

The WFDL was originally titled the “Wisconsin Fair Franchising Law” and was to apply to various small businesses such as gas stations, lumber yards, motels, farm implement dealers, restaurants and sports equipment stores. Although the word “franchise” was removed from the title of the statute, the statute’s legislative history and plain language evidence that it applies to any business that, like a franchisee, makes substantial investments in its relationship with its grantor. The Act recognizes that termination of such a relationship would have a devastating impact on the business being terminated, requiring the need for very significant protections. The law’s language is clear and concise. It states that the law’s purposes are:

  1. Promotion of the compelling interest of the public in fair business relations between dealers and grantors; and in continuation of dealerships on a fair basis.
  2. Protection of dealers against unfair treatment from those organizations having superior economic and bargaining power.
  3. Providing dealers with specific rights and remedies.

 

The Act also states unequivocally that it is to be “liberally construed and applied to promote its underlying remedial purposes and policies.” Although to be applied liberally, it does not protect every company or individual that sells another company’s product or services. The most obvious question is whether the law applies to the specific business relationship that is presented. The answer to that question depends on a series of inquiries. First, it must be determined whether the “person who is the grantee of a dealership” is “situated” in Wisconsin. The test to make that determination is not whether the dealer is incorporated or physically located with Wisconsin, but whether the dealer is “doing business” within Wisconsin. The concept of “doing business” equates to offering sales or services within Wisconsin.

 

After determining whether a person or entity is “situated” in Wisconsin, the second inquiry is whether the business relationship falls within the definition of a dealership. A “dealership” is defined as “(1) a contract or agreement, either expressed or implied, whether oral or written between 2 or more persons; (2) by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark logo type, advertising or other commercial symbol; (3) in which there is a community of interest in the business of offering, selling or distribution of goods or services at wholesale, retail, by lease, agreement or otherwise.” Independent sales agents and manufacturers generally do not fall within the act’s provisions because they fail to meet the requirement that they can commit the grantor to the sale of the product. Even where a distributor markets and services a product and resembles a dealer, if it does not have the authority to consummate a sale, it is not a dealer under the act.

 

The issue most litigated is whether a specific relationship meets the definition of “dealership.” Courts have applied an interpretation broad enough to cover many non- traditional business relationships, yet restrictive enough to avoid including every vendor-vendee relationship. When making the determination, several critical concepts are considered. There must be a right to sell. The dealer must have the right to commit the grantor to the sale, and there must be involvement by the grantor in the sale. A business may qualify as a dealer if it “distributes” a grantor’s product or services by delivering them to a final point of sale, enabling the customer to choose the grantor’s product or service. In addition to selling or distributing a product, a dealer may qualify to be covered by the act through the use of a grantor’s trade name, trademark, service mark or advertising through a substantial investment.

 

The law requires that the dealer and grantor have a “community of interest” or a “continuing financial interest between grantor and grantee in the operation of the business or the marketing of such goods and services.” To make this determination, ten facts are to be considered. These are:

  1. What is the length of the relationship?
  2. Are there specific minimum purchase or inventory requirements? Is there a best effort clause or specific sales quota?
  3. Does the grantee sell the grantor’s products or services exclusively or nearly exclusively?
  4. What is the percentage of the grantee’s gross profit which is derived from the grantor’s product or services?
  5. Is the grantee’s territory exclusive or is the market critical to the grantee?
  6. What are the extent and the nature of the grantee’s use of the grantor’s commercial symbols?
  7. What are the extent and nature of the grantee’s financial investment in inventory?
  8. Do any of the grantee’s personnel devote all of their time to the sale of the grantor’s products or services?
  9. How much does the grantee spend on advertising the grantor’s product or services?
  10. What supplementary services does the grantee provide after sale?

 

Making the determination of “community of interest” is critical in defining whether the typical vendor- vendee relationship is covered and protected by the Wisconsin Fair Dealership Law. Unfortunately, the courts have not made this determination easy for parties and their lawyers. The determination is further complicated because Wisconsin courts and the federal courts have developed different tests for the analysis as to when a “community of interest exists.”

 

Although the Wisconsin courts rely on the ten factors stated above, the federal courts, and specifically the Seventh Circuit Court of Appeals, emphasize two factors in determining whether the “community of interest” exists: the alleged dealer’s financial investment and the percentage of profits and revenues attributable to the grantor. Determining whether a dealership exists will often depend on what court takes up the issue and the test or tests used.

 

If it is determined that a WFDL relationship exists, the dealership can only be terminated, cancelled, refused renewal or have the competitive circumstances of the dealership changed upon the requirements of “good cause.” The concept of “good cause” is defined by both the statute and case law. “Good cause” may be the failure of the dealer to comply substantially with the essential and reasonable requirements imposed or sought to be imposed by the grantor. It includes the dealer’s bad faith, insolvency and/or failure of the dealer to pay monies owed to the grantor arising out of the relationship. “Good cause” may exist as the result of the grantor’s economic circumstances.

 

Written notice of ninety (90) days is required to terminate, cancel, or substantially change a dealership relationship. The written notice must state specifically all of the reasons for the grantor’s actions and how the dealer can correct those reasons. The notice must state specifically what action will be taken at the end of the 90 days. The dealer must be advised that it has sixty (60) days to correct the deficiencies. If the reason for the grantor’s termination of the relationship is the dealer’s failure to pay monies due to the grantor, the time for curing this specific deficiency is ten (10) days. If the debt is not paid within that time period, the dealership can be terminated eighty (80) days later. No notice of termination is required if the dealer becomes insolvent, files bankruptcy or makes an assignment for the benefit of creditors.

 

Should a grantor fail to comply with the WFDL by engaging in an improper termination, cancellation, or substantial change in the relationship, the dealer may seek an injunction to prevent the grantor’s action. The dealer can also recover its damages as the result of the grantor’s wrongful actions. Included as part of the dealer’s damage claim are the dealer’s actual costs including reasonable actual attorneys’ fees. Additionally, once a dealership has been terminated, at the dealer’s option, the grantor must repurchase at a fair wholesale market value all identifiable inventory sold by it to the terminated dealer.

 

Given the WFDL’s complexity and its serious consequences for violation, creditors should seek the advice of knowledgeable Wisconsin counsel prior to establishing a relationship with a distributor targeting Wisconsin markets or taking any action involving the termination, cancellation or substantial change in the relationship with a customer. Proper determination as to whether a dealership may exist, and the prevention of a violation can spare a grantor from substantial damages and protect the grantor’s lawyer from much professional embarrassment. Use of the Wisconsin Fair Dealership Law can also be a very effective collection tool in the hands of knowledgeable creditor’s counsel.

Consideration of Where to Sue in Commercial Collection Litigation

When a delinquent account receivable cannot be collected amicably, legal action is indicated. The initial issue is in what location will suit be filed? The answer is easy if both the creditor and debtor are located in the same state. The general rule is that the legal action may be commenced where the debtor resides or does business, or where the claim arose. The creditor’s attorney should commence suit in the court that is most favorable to the creditor.

 

This is done for several reasons. Once the creditor starts suit in the court most favorable to the creditor, the debtor’s counsel is often required to travel longer distances, thus increasing costs of litigation to the debtor. Additionally, a “hometown” court may be more favorable to the creditor and its position. Finally, it saves the creditor time and money by minimizing the travel distances of its lawyers and employees to appear for depositions and court hearings.

 

If the Debtor is in a Different State

How does this play out if the debtor resides or is located outside the state where the creditor is located? Where can the suit be commenced? This question requires a detailed and complex examination of jurisdictional statutes, constitutional law and costs considerations. Generally, each state has a series of statutes providing the rules under which that state’s courts may exercise its powers over an individual or business organization that is a debtor/defendant located outside its boundaries. However, these statutes must be interpreted in light of constitutional guarantees of due process protecting any debtor/defendant.

 

A court may not exercise its jurisdiction over a nonresident individual or business entity, unless that nonresident has engaged in a series of “minimal contacts” within the respective state seeking to obtain or take jurisdiction over the debtor/defendant. In addition, the nonresident must have “purposefully availed” itself of the respective state and jurisdiction seeking to impose its court system on the subject nonresident. If these tests cannot be met, suit must be commenced in the state of the debtor’s residence or domicile. If this occurs, then costs considerations must be considered.

 

Using the Forum Selection Clause

The smaller the amount of the claim involved, the less likely suit will be a viable option, since the costs of providing witnesses for depositions and/or trial in another state where the debtor/defendant is located may be prohibitive. This dilemma can often be avoided by the use of a “forum selection clause”.

 

Simply stated, a forum selection clause is a provision in a written purchase order, sales agreement, credit application, personal guaranty, promissory note or any other form of agreement or contract between the debtor and creditor, which directs and provides for what law will apply, and what court or courts will have jurisdiction over any dispute that may arise between the parties, including the collection of any indebtedness owing. Such a clause typically reads:

 

“This agreement shall be governed by, and interpreted in accordance with the laws of the State of (creditor’s choice of residence or domicile) and (customer, guarantor or debtor) agrees to submit at the option of (creditor), to the jurisdiction of the state or federal courts of (creditor’s choice residence or domicile state) to determine any matter arising out of this (type of agreement).”

 

Generally, most state and federal courts have determined this provision to be enforceable. In addition, if the transaction involves a sale of goods and the Uniform Commercial Code has been adopted in the subject jurisdiction, most courts would permit the application of the choice of law provision (forum selection clause) provided the transaction is one that has a reasonable relation and/or connection to the jurisdiction that is selected for the legal action.

 

Both state and federal courts have carefully considered the jurisdiction aspects of these types of clauses. Generally these types of clauses will be given effect, provided they are not unfair or unreasonable.

 

The rationale for accepting such clauses is that parties should be free to contract with each other as to what forum will be convenient for them should a dispute arise. Such a clause, however, will not be enforced if the result is considered overreaching; its use is unfair and unequal in bargaining power; or if the forum chosen would be seriously inconvenient for one of the parties. These are a formidable number of “ifs”, but the clause still has strong value for consideration.

 

Conclusion

In dealing with a customer outside its state of residence or domicile, a creditor should consider the incorporation of a forum selection clause in any appropriate document utilized in its contracting. It will provide a valuable “insurance policy” for the creditor. If done properly, it will ensure that when any dispute arises in collection of the account, any litigation will be in a forum of the creditor’s choosing, or in the location most favorable to the creditor. Legal counsel well versed in this consideration should be consulted in drafting such document language. The forum selection clause is a formidable tool for the creditor if considered and utilized correctly, properly and intelligently. Don’t accept the risk without it! It is especially valuable in a well-drafted and state-of-the art credit application.

 

Reprinted as published Creditor’s Edge.

 

The language of the credit applications drafted by KMK provides the legal contractual language to bind the purchasing customer to the payment of interest, collection costs and all other damages as the result of defaulted payment. KMK can historically document clients that have delinquent accounts receivable that nevertheless maintain a strong and positive recovery rate. Call Attorney Steve Kailas at 414-962-5110 to discuss and confirm this phenomenon.

Consider the following scenario: The debtor filed a Chapter 11 reorganization case a couple of weeks ago and you just received an invitation from the Office of the United States Trustee to volunteer to be a member of the Official Committee of Unsecured Creditors of the debtor. Should you seek to join the committee? Is it worth the trouble? Hard questions to answer so soon into the bankruptcy case. It is difficult for anyone to ascertain with certainty during the first few weeks of a bankruptcy, whether the debtor can make a worthwhile go of it—even with all of the protections afforded it by the U.S. Bankruptcy Code and a post-petition line of credit which the debtor is certain will solve all of its problems. The statistics suggest that the odds are against a successful reorganization. One study indicated that only 17% of all Chapter 11 filings result in a confirmed reorganization plan and fewer than 7% of all Chapter 11 filings make it to consummation of the plan (meaning that the debtor actually paid out on the plan).

 

So why be a member of the creditors’ committee? The simplest answer is that the opportunity to be on the committee may be the best, and perhaps last, opportunity to see for yourself that every reasonable alternative is explored to develop the best distribution possible for unsecured creditors. Regardless of the most heartfelt assurances from the debtor and its representatives that the debtor is doing all that it can for creditors, only creditors can and will look out for the best interests of creditors. And, in this regard, the creditors’ committee is the best vehicle to protect the interests of unsecured creditors.

 

Depending upon the size of the bankruptcy case and the number of interested creditors, the creditors’ committee generally consists of three to seven members who are drawn from the twenty largest unsecured creditors. With bankruptcy court approval, the committee may retain counsel to act on its behalf (counsel for the committee looks to the debtor’s estate for payment of fees; the creditors’ committee is not directly responsible for the payment of its counsel’s fees). The Bankruptcy Code specifically empowers the committee to, among other things, consult with the debtor concerning the administration of the case; to investigate the acts, conduct, assets, liabilities and financial condition of the debtor and the operation of the debtor’s business; and to participate in the formulation of a plan of reorganization and to perform such other services as are in the interests of the represented creditors.

 

The combined credit experience of the committee members can be effective in assisting the debtor to develop a consensual plan that is both feasible and worthwhile for unsecured creditors. At the same time, a determined committee can be equally effective in going to the mat for in appropriate circumstances to fight for better payment terms. As a committee member, you will have access to the debtor’s financial information and documentation to assess whether the debtor is paying all that

 

it can. An active creditors’ committee can make the difference between a debtor’s plan that attempts to slip by with a token payment to creditors and a plan scrutinized by the committee that requires the debtor to make a fair payment to unsecured creditors.

 

The reorganization case may ultimately be a “bust”. As with any collection effort, there will be situations where the matter may have to be closed as uncollectible. However, participating in a committee will give you the opportunity to maximize the return in those cases where a distribution can be available to unsecured creditors. Nonetheless, this result is only possible if the committee ensures that it is represented by an experienced commercial law firm that has the reputation of understanding and keeping the best interests of creditors of paramount importance.

 

Reprinted as published in Creditor’s Edge.

 

Call Attorney Steve Kailas at 414-962-5110 to discuss this and other issues related to bankruptcy.

If a business creditor located outside the USA should research collection procedures against commercial debtors situated in the United States, it would likely conclude that it would involve significant problems and cost. It is true that there are difficulties in recovery, yet American businesses have faced the same problems for decades and achieve excellent results in collecting commercial debt.

 

American businesses have found solutions that are equally applicable to foreign business creditors. Unfortunately, the nature of the problems are not clearly understood outside of the United States and not frequently publicized. This is unfortunate in a world where international commerce has increased dramatically in volume and importance, and with it, the number of debts owed to foreign companies by businesses in the United States, the world’s largest single market. An understanding of these solutions requires some explanation of the causes of the problems.

 

Defining the Problem

 

One Nation, 55 Legal Systems
Though the United States is one nation, it is comprised of 55 legal systems. The US is essentially the product of a compact whereby the 50 states have ceded certain powers to their federal government. A fundamental premise of US law remains the notion of a federal government with limited power in parallel with individual states that retain all powers not ceded exclusively to the federal government in the US Constitution. The result is that the US is not one, but 55 distinctive and sometimes parallel legal systems, comprised of the 50 states, 4 territories and a separate and distinct federal legal system.

 

Obstacles to Collection
Whether a creditor is based in the US or elsewhere in the world, collection across the fifty-plus legal systems in the US raises issues that would not arise in the unitary legal systems that generally exist in the rest of the world.

 

Any individual collection matter may be capable of being filed in multiple legal systems and may possibly require action in more than one jurisdiction to achieve ultimate recovery in American courts. Furthermore, choices of venue and law often have a considerable positive or negative impact on the likelihood of success and costs of any collection effort.

 

Another challenge involves collecting from a multiple-state debtor. If a company trades in a number of states, it is likely that it will have bad debt in multiple states. Although incurring the debt in one state, the debtor may be based, or have its principal operations in, another state. In such circumstances, there is the issue of which state is more advantageous in which to act or commence suit. In the US, contract law is primarily a state law matter. Federal jurisdiction is often available to foreign businesses through diversity jurisdiction when the litigants are citizens of different states or nations. Federal jurisdictions in the US require diversity of citizenship and an amount in dispute of over $75,000, exclusive of interest or attorneys’ fees. However, though federal jurisdiction is available, state contract law is likely to provide the basis for the decision, even in an action started in a federal court. State proceedings may still be an alternative option for proceeding and may be preferable in a given situation.

 

A further complication arises from the fact that US bankruptcy law, frequently resorted to by debtors attempting to evade their obligations, is a federal matter. Thus a case can involve a mixture of federal and state issues. This can result in parallel proceedings with actions in both state and federal courts, or proceedings in either state or federal systems.

 

Attorneys Cannot Practice In Every US Jurisdiction
Attorneys are admitted by state bars, and admittance in one state does not automatically confer the right to practice in another state. The vast majority are licensed to practice in only one state, and occasionally additional states. Furthermore, each state has significantly different procedural rules, as do the federal courts around the country. As a result, practitioners in state courts are not necessarily knowledgeable in locally-situated federal courts.

 

This fragmentation of legal practice has a direct impact on collection procedure. The collection process in the US, as in most countries, generally starts with non-legalistic collection efforts in an attempt to collect a matter amicably. Since the US is a litigious society, the success of the attempt to collect without legal action often hinges on the debtor’s belief that the creditor is prepared to resort to legal action if necessary. This is particularly true with respect to foreign business creditors, partly because debtors are often aware of the tendency of foreign creditors to write off the delinquent account if non-lawyer methods fail. Lay collection agencies generally call on the help of attorneys when necessary, but few attorneys are able to handle a volume of collections in multiple-state scenarios because of licensing issues, forcing collectors to deal with a multiplicity of law firms. This creates greater costs, and more importantly, serious delays. As with collection anywhere in the world, delay drastically reduces the prospects of recovery.

 

Commonly Cited Solutions Are Imperfect
Four choices are available for the foreign business creditor seeking to collect debt in the US:

  1. A claim may be submitted to a collection agency for collection, but if amicable collection is not successful, the debt is written off as a complete loss, in the event the creditor will not take on the expense of legal action.
  2. Another alternative is to use non-lawyer collection agencies, and when amicable payment is not achieved and legal action is necessary, accept their choice of law firm or attorney in the given location of the debtor where suit must be brought.
  3. An additional approach is to engage individual collection lawyers in each state where representation becomes necessary on an ad-hoc basis so as to be able to sue in whatever state jurisdiction may be required to enforce payment. The selection of untested attorneys inherently carries risk.
  4. The final choice is to resort to one of the mega law firms that may have offices in a number of state jurisdictions, and therefore attorneys licensed in various states where legal action may be brought to enforce payment.

 

Unfortunately, large law firms typically have an extensive cost base that filters through into higher fees, and they often disfavor collection work. Adopting the policy of writing off debt whenever non-lawyer collection activity fails is a very expensive alternative which produces unnecessary losses. Evaluating and working with law firms across the US on an ad-hoc basis is both time consuming and costly to manage, and the lawyer chosen may prove unreliable. Furthermore, this approach can conflict with the need to plan litigation strategy in advance in order to both maximize the opportunity to recover and minimize the cost of doing so. In US collections, the early bird gets the worm as surely as anywhere else in the world. Relying on non-lawyer collectors to choose local counsel in a foreign environment is at the risk of possible costly, improper choices affecting venue and other important issues critical to success if litigation becomes essential.

The Ultimate Solution: Commercial Law Firms with Nationwide Practices.

In the United States, law firms that concentrate in the collection of debts and enforcement of contractual rights are generally called “commercial” law firms. A few operate national and continental practices. Though such firms will probably have only one office, they have acquired a multi-state capacity to collect delinquent debts through:

  1. a long-standing and tested network of local collection counsel across the United States;
  2. a strong record of collection recoveries throughout the US, with and without legal action;
  3. a network of clients represented throughout the US; and
  4. an impressive practice in associated areas of business litigation, transactional and financial law, including bankruptcy, that are essential to managing litigation and debt recovery throughout state and federal US jurisdictions.

 

Such a firm is likely to employ experienced non-lawyer collectors in addition to dedicated collection attorneys and commercial litigators.

 

Cost-Efficiency
Commercial law firms provide legal oversight from day one. Legally-trained personnel review the facts of the matter from the outset, as well as the legal issues as they arise. Amicable collection is the first priority, but should that attempt fail, a commercial law firm is in a position to make an immediate and accurate assessment of the prospects and costs of recovery, without the loss of valuable time waiting for an attorney to get up to speed. Sophisticated commercial law firms differ from most law firms in that they handle large volumes of claims and are able to offer contingency or success-oriented fee options, allaying the cost fears overseas companies often associate with US law firms.

 

Because such firms deal with volumes of cases, either directly or by managing the work forwarded to their selected local counsel, they are generally adept in developing a litigation strategy or avoiding the need to resort to court action where an appropriate and client-pleasing, out-of-court resolution can be achieved. Experienced negotiators move to secure additional guarantees from a debtor to cover payment of the principal, attorneys’ fees and interest. Good collection lawyers are often able to circumvent the need for, and cost of, calling witnesses to prove up a claim before a court, and often return net recoveries to clients that exceed the full principal placed for collection.

 

Strategic Advantage
Some claims will end up in court and possibly involve bankruptcy issues. In the US it is essential to have knowledge of all of the alternative venues that a case may be conducted in and of the laws of the jurisdictions involved. Both state and federal jurisdictions may be available. Accordingly, there are frequently significant tactical opportunities that should be addressed as soon as litigation is contemplated. Several state jurisdictions may be available depending on where the sale or services occurred, where the debtor has its head office, where the contract was signed, where the defendant has its major assets or where the goods in question are located.

 

It is always of prime importance to determine the best available jurisdiction that can be invoked, which is a consideration best handled by experienced litigators. Decisions made at this stage may reduce the risks in court, significantly decrease costs and increase the success of the proceedings. Moreover, they have a material bearing on the outcome. A competent national commercial law firm will apply its knowledge of local and regional attitudes as well as potentially applicable laws in different venues, including arbitration and other alternative dispute resolution forums, to maximize the potential for success.

 

In the US, success may not only require a court judgment, but also the recognition of that judgment by another state where assets exist, a process known as domestication. Decisions between state and federal systems can also be enforced by their counterpart jurisdictions. Thus, a California state court would be expected to enforce a federal court judgment entered in Iowa. Such considerations should ideally be considered at the outset of the collection process, when overall collection strategy is determined. For a commercial law
firm with experienced local counsel and intimate knowledge of the proceedings to date, the legal procedure between two states is easily facilitated by domestication of any judgment in the jurisdiction of a sister state.

 

Conclusion: What to Look For
A nationwide commercial law firm can provide a “one-stop” resource to manage all commercial delinquent debt recoveries, for both businesses and non-lawyer collection houses. The firm should have the ability to demonstrate continuous successful collection of delinquent commercial debt throughout the US, regardless of industry or nature of creditor within reasonable cost standards.

 

A competent commercial law firm will have a strong reputation confirming its ability to act reliably nationwide, should possess an active practice in related aspects of business law and demonstrate a client base supporting its claims to national acclaim in the collection industry and legal circles. Seek references from verifiable clients.

 

It is also important that the chosen “one-stop” firm understands the distinctive practices and instruments associated with international trade and is familiar with the rules and proceedings of international alternative dispute forums. Finally, look for evidence of some appreciation of the difference in legal principles and processes between your domestic legal system and those of the US. Good transnational legal advice needs to identify and address such differences if surprises and misunderstandings are to be avoided.

 

If you have any questions about this article, please contact Attorney Christopher C. Kailas at ckailas@kmksc.com or 414.962.5110.

Could return hundreds of millions of dollars to the Wisconsin economy.

 

Milwaukee, Wis. April 21, 2015…..Kohner, Mann & Kailas, S.C. (KMK), today announced that the Supreme Court of the United States has issued an opinion in favor of KMK’s clients that strongly protects Wisconsin businesses and could return hundreds of millions of dollars to the Wisconsin economy. The opinion addresses lawsuits KMK brought, on behalf of Wisconsin industrial and commercial users of natural gas, to address alleged price-fixing in the natural gas industry.

 

Steve Kailas, President of KMK, believes that, while this is a seminal achievement for the firm, it has far wider significance. “The Supreme Court today has clearly stood up for Wisconsin’s right to protect Wisconsin businesses, its economy and the welfare of its citizens.”

 

The Wisconsin plaintiffs contend that retail prices for natural gas more than doubled in the early 2000s as the result of a conspiracy by large supply companies. KMK’s lawsuits seek damages for the exorbitant prices Wisconsin businesses paid for natural gas. The lawsuit excludes customers who purchased gas from public utility companies because long-standing law places these purchases beyond the reach of state antitrust regulation.

 

The natural gas company defendants sought to dismiss the suits, arguing that the Wisconsin plaintiffs’ state law claims would interfere with the authority of the Federal Energy Regulatory Commission (FERC), which oversees interstate natural gas markets. Federal authority, the defendants argued, renders state law invalid.

 

The Ninth Circuit Court of Appeals sided with KMK, and the Supreme Court affirmed, ordering the lawsuits to proceed. The next steps are to determine class certification and proceed to trial on conspiracy and damages. Attorney Robert L. Gegios is available to speak with reporters and editors about the lawsuit. He can be reached at (414) 962-5110.

Overview
On February 17, 2015, the Supreme Court of Wisconsin issued its opinion in Bank of New York Mellon v. Carson, 2015 WI 15. This opinion may prove to have significant implications for lenders and servicers in Wisconsin where a mortgaged property is abandoned prior to commencement of a foreclosure action or becomes abandoned any time prior to confirmation of the foreclosure sale.

 

Background
Shirley Carson defaulted on her mortgage loan and the bank brought a foreclosure action. The bank waived its right to seek a deficiency judgment, represented that the property was non-owner occupied, and obtained a judgment of foreclosure with a three-month period of redemption (in Wisconsin, waiver of deficiency judgment provides a six-month period of redemption for owner-occupied properties and three-month period of redemption for non-owner occupied properties, and abandoned properties provide for a five-week period of redemption).

 

After the three-month redemption period expired, the bank did not take the property to sheriff’s sale. The record of the case indicates that representatives of the bank knew the property was not occupied and was uncared for and derelict even before the bank obtained the foreclosure judgment. Approximately sixteen months after the bank obtained the foreclosure judgment, Carson brought a post-judgment motion to amend the judgment of foreclosure requesting the lower court (Circuit Court) to specifically find that the property had been legally abandoned (as opposed to merely vacated) and that the bank was required to take the property to sheriff’s sale.

 

The Circuit Court found that during the months after the bank obtained its foreclosure judgment, the house was uncared for, burglarized, and vandalized on numerous occasions, all while slipping into a condition that led to the municipality fining Carson $1,800.00 and that Carson and the bank failed to take effective steps to prevent waste on the property, or to ensure it was secured against unauthorized entry.

 

However, the Circuit Court denied Carson’s motion because the court determined that the court lacked the authority to order the bank to sell the property even if the court were to find the property was deemed abandoned under Wis. Stat. § 846.102.

 

Carson appealed the court’s ruling and the Court of Appeals reversed the Circuit Court’s ruling. The Court of Appeals held that the language of the abandonment statute allowed the Circuit Court to make a finding of abandonment on a motion by an interested party other than the plaintiff (i.e. Ms. Carson, the mortgagor) and to require the bank to take the property to foreclosure sale.

 

The bank appealed the Court of Appeals’ ruling to the Supreme Court of Wisconsin. The Wisconsin Supreme Court agreed with the Court of Appeals and ruled that Wisconsin courts do have that authority to order abandoned properties to sale, “based upon the statute’s plain language and context we conclude that when the court determines that the property is abandoned, Wis. Stat. § 846.102 authorizes the circuit court to order a mortgagee to bring a mortgage property to sale after the redemption period.”

 

Impact

(1) Borrowers Can Force A Sale on Abandoned Properties:
Under the Wisconsin Supreme Court’s ruling, “Wisconsin Stat. § 846.102 mandates that the court order a sale of the mortgaged premises if certain conditions are met. Those conditions do not depend on action by the mortgagee alone and are not dependent on its acquiescence or consent” (emphasis added). As a consequence of this ruling, it is likely that certain borrowers and their counsel may see § 846.102 as a means to manipulate the equities to the detriment of lenders. Once a judgment is issued, a party with no likelihood of surplus may construe the above interpretation as an incentive to abandon care and seek to force the property to a quick foreclosure sale under the abandonment statute.

 

Perhaps of greater concern, given that the Court does allow for review of the circumstances surrounding abandonment, certain cities, most notably Milwaukee, have indicated that they intend to be very aggressive in seeking to exercise this new opportunity. However, if the city is not a party to the action, the city’s lack of standing in the action may prevent it from advocating abandonment. But again, this impediment will be removed in cases where the city is named as a party (either due to municipal fines, holding of a junior mortgage, or junior judgment lien). This decision may increase costs for lenders and, presumably have a deterrent effect on lending.

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(2) Defining Abandonment in Wisconsin:

Abandonment in Wisconsin is not the same as vacancy. A property that is vacant, but cared for is not necessarily an abandoned property. However, if a property is left uncared for, the conditions for abandonment logically follow and are closely linked to the characteristics of neglect that municipalities closely monitor and pursue penalties for reasons of public safety, crime, and health. Indicia of abandonment per Wis. Stat. § 846.102(2) include:

 

(a) Boarded, closed, or damaged windows or doors to the premises.
(b) Missing, unhinged, or continuously unlocked doors to the premises.
(c) Terminated utility accounts for the premises.
(d) Accumulation of trash or debris on the premises.
(e) At least 2 reports to law enforcement officials of trespassing, vandalism, or other illegal acts being committed on the premises.
(f) Conditions that make the premises unsafe or unsanitary or that make the premises in imminent danger of becoming unsafe or unsanitary.

 

It seems clear that failure to maintain property in condition that rises to a level of abandonment is unanimously viewed as a basis for at least allowing interested parties to seek a judicial order for “sale of his or her property or the conveyance of his or her property.” Probably the most clearly expressed message from the Wisconsin Supreme Court is that ineffective and untimely property preservation will have serious implications for the rights of a Plaintiff.

 

Had the servicer taken effective steps to remedy the city’s complaints and maintain the Carson property, it is likely that the property in Carson would not have been deemed abandoned (even had an action been brought) and, as such, Wis. Stat. 846.102 would not have applied. As a result, the bank would have had time to sell its interest, donate via quit claim, or place the property into REO.

 

In short, we see this ruling as warning servicers and investors that if one causes a property to be vacated through foreclosure proceedings (including pre-foreclosure), one must take positive action to ensure that that property does not become a source of burden, and must dispose of it in some form (and, in the interim, preserve it from draining the municipal purse until such time as legitimate options for disposal can be identified) or be forced to proceed to sale of the property post-judgment. Steps taken should include assurance or implementation of streamlined procedures for investors to provide servicers timely notice of complaints and orders to correct violations, in order for Servicer property preservation functions and legal counsel to be in a position to take early proactive action to minimize or prevent maintenance issues and municipality complaints.

 

(3) Potential for Both Short-Term and Continuing Impact:
Carson only applies where a judicial finding of abandonment has been entered, or the conditions that provide a potential basis for such a finding are allowed to develop. While the change only applies to vacant and ill cared-for properties, the factors for abandonment are such that vacancy, coupled with a cessation of maintenance, can be expected to rapidly provide a motivated borrower or municipality with a basis for intervention. As such, all properties potentially represent a possible future candidate for abandonment in on-going course of proceedings, until confirmation of sale is actually achieved.

 

A borrower can also apparently now force a servicer to inherit the liability for neglect or even, potentially, affirmative wastage of a property by the borrower during a period where the lender/servicer had no control over the property. In short, the lender loses not only the amount of the debt unrepaid, but also the cost of repair or other palliative action. Moreover, the impact is not limited to properties on which judgment has been already secured. Any property on which a motion for judgment in foreclosure has been filed will now be potentially subject to third-party assertions of abandonment, unless there is clear evidence that a borrower is affirmatively in possession or the property is adequately maintained.

 

(4) Abandoned Properties must be Promptly Sold:
“…The circuit court shall order the property to be brought to sale within a reasonable time after the redemption period. The circuit court’s determination of what constitutes a reasonable time should be based on the totality of the circumstances in each case.”

 

While the opinion did not specifically require that a lender bid on the property at sale, the court may have the power to order the lender to make repeated efforts to conduct sheriff’s sales of the property which can be a costly utilization of staff and out-of-pocket costs; and, the text of the opinion appears to envisage that the servicer or lender will bid (and move for confirmation promptly thereafter depending on the circumstances of each case). We also note that it is currently unclear how courts will look upon servicer or lien ownership transfers of such properties once a motion for abandonment is filed, and particularly, after a sale timetable has been court ordered.

 

Conclusion
At this time, the implications of the new opinion have not been tested. Therefore all conclusions are, obviously, somewhat speculative. However, we believe that the Carson opinion is likely to prove significant for lenders and servicers of loans. The lack of certainty is over precisely how radical a change has been mandated.

 

Lenders and servicers of loans on property in major conurbations, notably Milwaukee, should expect particularly aggressive action by the municipality to address any properties that are currently vacant and subject to complaints and fines, and from borrowers or their counsel trying to force sale on abandoned properties. Accordingly, we recommend focus on ensuring that violation orders and complaints are notified to servicers and in turn to local counsel that address municipal violations as soon as possible, which is essential to minimizing the risk of abandonment.

 

We will continue to monitor both application and interpretation of the Carson opinion in the weeks and months ahead.

 

The information in this article is provided for general educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.


If you have any questions about whether the information reviewed in this article may affect your financial institution, please contact Matthew Gerdisch (mgerdisch@kmksc.com) or Christopher Shattuck (cshattuck@kmksc.com) at (414) 962-5110.



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