Tuesday, November 22, 2011

Collecting Judgments in Texas: Is it Easy or Difficult?

The answer is: difficult.

Many times I get asked, "I have this Texas judgment. So now what?"

Well, that is precisely the issue in Texas. Many collections lawyers will not talk about the collectability of a judgment before taking your retainer and starting the collections process. This may not be a big issue in some other states, but in Texas you really do have to know the difficulties our fine (cough) legislature has made collections in this state.

The only state in which I've worked with local counsel that has it harder than Texas lawyers in collections was the time I worked with a Florida lawyer on a domesticated Texas judgment. In Florida, as I understand it, you could (at that time, a few years ago) convert non-exempt assets into exempt assets so long as you transferred it to your homestead. Basically, if you prepay your mortgage with the money you owed someone else, that was protected. At least in Texas we consider that a fraudulent transfer.

So how is it otherwise difficult to collect a Texas judgment? Well, there are many procedural reasons why it is difficult to collect a judgment in Texas, too many to fully mention, but I'll try to give you a flavor.

First of all, Texas is one of the two most debtor friendly states in the union, particularly when it comes to exempt property. Texas in some cases has unlimited values in its exempt property, largely unheard of in other states.

Also, Texas requires fraudulent transfer actions as a separate lawsuit, and not as an ancillary proceeding in post judgment. This basically means that if the debtor moves his or her property to an insider, largely you have to sue and serve the debtor and the debtors transferee in a whole new lawsuit. That is always fun.

One of the most commonly referenced limitation in Texas law for collection against individuals is the infamous garnishment law in Texas. First, unless it is child support, you can't garnish wages. So in other states where you just notify the employer that you'd like certain moneys to be directed to you as creditor, in Texas this is actually illegal. Furthermore, in non-wage situations the garnishee is usually a bank...and guess what? Bank lobbies in Texas were apparently at one time (I'm guessing before 2008) pretty strong. Banks apparently got tired of having to incur legal expenses to answer for debtors that either currently or recently had bank accounts, so now the creditor, who is largely already out money due to the actions of the judgment debtor, may end up having to pay for the legal fees of the bank if they go wildcatting and drill a dry hole. So congratulations, you get to risk even more money than paying your lawyer, Ms. Creditor...you also may have to pay the bank lawyer's fees too. Oh, and there's almost no way, other than asking the debtor for statements (which they always gladly give, right?), to find out in advance what money is in the account due to privacy laws.

Oh, and if there is money in the bank account? Yeah, it might end up all going to the bank anyway, since their right of offset against their own loans gives them the opportunity to pay themselves first once you notify them that their debtor is in trouble.

Another challenge is in business entities. The legislative creation of Limited Liability Companies and other "partnership corporations" add a very real layer of complications to the judgment creditor. Texas law has not done a very good job of making single member LLC's veil piercable, in fact making it one of the most challenging things to do. Furthermore, often collection is restricted to "charging orders", which is really not much of an order at all. Basically, charging orders give you no power of control over the limited liability company assets...so no voting, no control...merely a right to be paid if and when there is a decision by the LLC to do a distribution. So, by all means, hold your breath for that to happen.

So what is a good creditor to do? Well, know these are limitations and factor them into your business practices. If you're doing business with a subsidiary or a single member LLC, get a corporate parent or personal guaranty or consider adding explicit collateral and securitize the loan. Also, think about collection rates when you consider the cost of doing business in Texas.

And finally...don't hire just any litigation lawyer to do your collection. Hire someone experienced and familiar with these laws so that you do not throw good money after bad.

Monday, August 15, 2011

How is a Promissory Note Different from a Forbearance Agreement?

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.

Tuesday, July 5, 2011

Charging Interest in the Absence of a Contract Term for Interest

The best practice for businesses supplying goods and services on credit is to include a contractual provision regarding interest. However, a creditor can charge interest if there is no contract provision regarding interest. Under Texas law, this is called legal interest. Legal interest does not begin to accrue until 30 days after the debt was originally due, and it accrues at a rate of six percent a year. The legal interest rate of six percent per year is simple interest. That is, the interest accrued each year is not compounded by adding it to the principal balance before computing the interest due in each subsequent year. This interest rate is actually “read into the agreement” and becomes the maximum rate that may be charged.

A lender must be careful not to charge in excess of six percent in the absence of a contract provision to do so. Charging a higher rate of interest may result in penalties for usury. Unilateral charging of interest by the lender, even with advance notice, is not enough to establish an agreement to pay interest at a rate greater than the legal rate of six percent.

If a lender charges more than twice the amount allowed by law, or 12 percent, he or she may be subject to penalties under Texas law. These penalties include forfeiture of the principal amount of the loan, reimbursement of any amounts paid by the debtor that was subject to the usurious interest rate, and three times the amount of usurious interest charged, even if the interest was never collected. The lender may also have to pay the debtor’s attorney fees.

Blog prepared by Chris Patterson.

Blog reviewed and posted by Sarah F. Berry.

Saturday, January 15, 2011

Texas Property Exemptions from Execution

Texas exemptions are very broad, as many Texas collection attorneys will tell you. As of 2011, Texas property in the following categories is exempt from execution, whether for a family or for a single adult:

1. The homestead (Texas Constitution);

2. Personal property up to the aggregate fair market value of $60,000.00 for a family or $30,000.00 for a single adult who is not a member of a family. The personal property must fit into categories as described in the statute (Tex. Prop. Code §42.001);

3. Current wages for personal service (except for payment of child support) and unpaid commissions for personal services not to exceed twenty-five percent (25%) of the $30/$60,000 aggregate limitations (Tex. Prop. Code §42.001);

4. Prescribed health aids (Tex. Prop. Code §42.001);

5. Worker's compensation payments (Tex. Labor Code §408.201);

6. Cemetery lots held (Tex. Prop. Code Ann. § 41.002);

7. Art held on consignment;

8. Assets in the hands of the trustee of a spendthrift trust for the benefit of the judgment debtor;

9. Certain types of insurance benefits;

10. Certain savings plans, including retirement benefits and health savings plans; and

11. College Savings Plans (Tex. Prop. Code Ann. § 42.0022).

There are others, but this is a basic list that should be reviewed before seeking to collect on any debt. Texas is obviously debtor friendly in its broad exemptions, so if you are an out of state collector, it would be important to discuss strategy before hiring local counsel for domestication of foreign judgments in Texas.

Austin Texas Lawyer Tip: Texas Collection Law Basics

Texas is an interesting state to attempt collection, and for our out of state readers, it is probably important to do a brief overview of collection in Texas. At the outset, collection in Texas is extremely difficult compared to other states, and activities that you may be used to doing in other states are very often not available in Texas. Although literally books could be written on this subject, I've compiled a list of the 10 things you need to know about Texas collection law.

1. There are large property exemptions -- The Texas homestead exemptions are more expansive than you might experience in states that do not begin with the letters "Florida". This makes turning judgments into cash difficult and futile. The good news is that, if you can prove it, debtors cannot convert non-exempt property into exempt property undert Tex. Prop. Code Section 42.004.

2. Texas allows non-judicial foreclosure. The creditor in Texas with a security interest very frequently can recover their collateral without involving the court system at all.

3. Texas bank garnishment allows banks to charge for their fees. No one says the bank lobby in Texas doesn't do its job. When a creditor attempts to seek a garnishment of a bank account, not only do they not have much ability to get access to the account balance without a voluntary statement from the debtor, often if a post judgment garnishment is filed, the already harmed creditor may have to pay the bank for its fees in filing answers to garnishment actions (often as much as $1500 just to file an answer and saying, "nope, he ain't got nothin'").

4. There is no wage garnishment in Texas. Yep, you read that right. Unless you are collecting for child support, wages are exempt, so attempting to garnish wages can make you a defendant in another action.

5. There is an excellent Turnover Statute. One good statute for collectors of unsecured claims is the turnover statute, which allows you to either set up a receiver to run businesses for the purpose of turning funds over, or to take assets that are not subject to execution and turn them into cash. And even better, the burden is on the debtor to show that the property is exempt.

6. There are no exempt assets for a business. Most businesses have lines of credit, so unsecured creditors are often unable to collect anyway, but businesses do not get the benefit of the vast exemptions. So if your debtor puts his car in the company's name and it doesn't have a lender? Have at it.

7. Texas follows the Uniform Enforcement of Foreign Judgments Act. So if you need a judgment domesticated in Texas, and you're familiar with UEFJA procedures, they will be very familiar to you.

8. The Texas Homestead Property Exemption is unlimited in value. Yep, if you have $10,000,000 in equity in your homestead, 100% of that is exempt from execution, and there is no forced sales of homestead by unsecured judgment creditors.

9. The Mechanics Lien Statutes are complicated. As a bonus, they are strictly interpreted, so if you don't do your notices correctly, you may very well be toast. However, you will always have that contract claim against the defunct general contractor and an unjust enrichment claim against the owner who doesn't pay for value.

10. Fraudulent Transfer Actions are often separate lawsuits. Unfortunately, there is often not a post judgment procedural remedy related to fraudulent transfers, and often involves filing suit after the judgment for such a determination. Texas has particularly weak successor liability statutes as well, determining that the buyer of the asset at an asset sale usually has no liability to the unsecured creditors of the asset seller (unless there was an insider relationship and/or less than reasonably equivalent value was given).

Thus, Texas is a challenging place to collect on a judgment, and the best place to be in most litigations is to be a secured lender. So if you are lending to a Texas debtor, it is very important to attempt to get a security interest in collateral since that is very often the only asset available for collection.