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.
http://www.carylippincott.com/Attorney_SarahBerry.php

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.

Texas Lawyer Tip: Commercially Reasonable Sale

As you are probably aware, debtors and guarantors who are pursued for a deficiency often attempt to raise every defense imaginable to attempt to avoid liability, and one of the most frequently used defense is that the diposition of the collateral following a foreclosure of personal or real property was not conducted in a commercially reasonable manner. See UCC Sections 9-625, 9-610(b) and 9-626.

As a creditor planning for avoidance of this defense, it is helpful if the secured party and these obligors, at the time requesting the loan, contract for and agree to the method of the disposition of the collateral and accept the method/manner of the sale detailed to be commercially reasonable. This is particularly helpful if the collateral being financed is unique or very large equipment, or something where it is difficult to find a buyer or a "market" for the goods.

Interesting case on Reaffirmation Agreements in Texas

Hat tip to Stephen Sather, this is an interesting case where the Texas bankruptcy court denied a reaffirmation agreement due to the hardship it placed on the debtor. The judge goes through the process of when a court will deny a reaffirmation agreement (even if debtor and creditor agree), and has some advice for Chapter 7 attorneys in practice on how to deal with debtor clients.

If you're not familiar with reaffirmation agreements in bankruptcy, basically a reaffirmation agreement under Section 524(c) is a new contract between a debtor in bankruptcy and a creditor (typically a secured creditor) wherein the debtor "reaffirms" the debt owed to the creditor in order to not have to surrender the property to the creditor with that lien interest/security interest. Typically there is an agreement on the fair market value of the property to be paid back with an agreed interest rate, and it is enforceable as a post bankruptcy debt that will not be discharged in the bankruptcy. This is usually done with vehicles used by the debtor, but it also is used to keep household property like washers and dryers, etc.

Copy of the case is here.

Texas Guarantor Not Liable Under Lease Renewal

The Texas Legislature made couple of revisions to the Texas Property Code during the 81st Legislative Session. They added Section 92.021 which addresses liability of guarantors under lease renewals. Under the new code section, for lease agreements executed on or after January 1, 2010, a guarantor is not liable under a lease renewal unless the guarantor expressly agreed to be liable under a lease renewal in the original lease. The original lease must contain specific information as set out in the new code section to bind a guarantor under a lease renewal. Landlords should review and revise their leases as necessary before January 1, 2010.

Texas Public Works Bond Claim Case

A recent case, brings good news for material suppliers and subcontractors. The Texas Supreme Court ruled in favor of an unpaid supplier regarding statutory and common law claims, even though the unpaid material supplier missed their bond claim deadlines. In Dealers Electrical Supply Co. v. Scoggins Construction Co. Inc., 2009 WL 1901638, Slip op No. 08-0272 (Tex. July 3, 2009), an electrical subcontractor on a bonded public-works project walked off the job and left his parts supplier, Dealers, unpaid. The supplier missed the McGregor Act deadline to pursue a claim on the bond, but filed suit against the prime or general contractor for violation of the Texas Construction Trust Fund Act and breach of a separate Joint Check Agreement.

At trial, it was held that the prime contractor's president violated the Trust Fund Act by failing to pay the supplier, and had guaranteed the payment of the supplier’s materials under a Joint Check Agreement, and was therefore liable. The court of appeals reversed incorrectly ruling that that the McGregor Act was the supplier’s exclusive remedy. The Texas Supreme Court disagreed, holding that the McGregor Act is the unpaid laborer and materialman's exclusive remedy against the payment bond but does not otherwise limit their other statutory and common-law claims. Dealers Electrical Supply Co. v. Scoggins Construction Co. Inc., 2009 WL 1901638, Slip op No. 08-0272 (Tex. July 3, 2009).