Speed and Know-How: Weapons for Winning the Collection Race

Leader's Equipment Leasing Newsletter
April 1996

by Lisa Spiwak and Nick Iezza

Over the past several years, delinquencies on equipment leases have risen dramatically. Not only are more leases in default, but collection of these leases has become far more difficult. Although it is difficult to control the volume of leases that go into default, it is possible to control them and thereby maximize your collection of the monies owed on those defaulted leases. They keys are speed and know-how.

Most lessors (and their attorneys) don't realize that the collection of a bad debt is a race among creditors to collect money before the debtor's assets are completely depleted. In the "good old days" of the 1980s, when a lessee's business fell upon hard times or experienced cash flow problems, a small reprieve from creditors to get past the problem could usually get a company back on track.

Today, when a business gets into trouble, the likelihood that it will recover is more questionable. Due to smaller profit margins, more competition and greater multiple outstanding receivables, a troubled company more typically winds up in a downward spiral, ultimately resulting in the business going defunct. Consequently, it is usually those creditors that take immediate collection action that recover their debts. The other, more passive, creditors usually collect nothing because, by the time they enter - and ultimately finish - the collection race, the debtor has no remaining monies or assets to collect.

Collections have become an intense and competitive race. To stay ahead of the field, a creditor must not only start the legal process sooner than others, but must also make sure it doesn't lose momentum along the way.

The following course of action is recommended to lessors to maximize their recoveries and eventually win the collection race.

Start Immediately

Once you detect a collection problem, take action. Give debtors a set timeframe in which to bring their leases current. One of the most common mistakes made with delinquent lessees is to become involved in fruitless negotiating in an attempt to get the matter resolved without the help of an attorney. This is, of course, done to avoid expensive legal fees. But is is "penny wise and pound foolish" because these lessors typically not only fail to get the lease brought current, but also waste critical time in the process. By the time an attorney is retained, the lessee usually has little or no remaining assets.

Remember this: Hiring an attorney doesn't have to cost anything. As long as the lease has a provision for attorney fees (which they all do), those fees expended to recover will be tacked onto the amount of the judgment so that the lessor ultimately receives the total amount due on the lease.

Under no circumstances should a lessor wait longer than 30 days from the date the lease goes into default to initiate legal action. The reason: If the lessee is serious about bringing the lease current, he will be willing to execute a binding agreement to obligate himself to a short turnaround time to do so. However, if the lessee continuously attempts to delay the settlement for cure of his default, the probability is that no matter how long you give him, the lease is not going to be brought current on a voluntary basis.

You can expect settlement problems with the lessee when:

Your phone calls are not promptly answered or totally ignored;

The lessee frequently asks that you call back next week because he is "meeting with his accountant," going out of town or working to put a deal together to raise capital;

The lessee tells you he will sign whatever agreement you want and all you have to do is send it to him.

These are but a few of the common alert signals to be aware of when dealing with the lessee in default. If any one of the foregoing scenarios prevails, the chances of settling this matter without litigation are slim to none. The matter should be turned over to counsel promptly.

Choose an Experienced Collection Attorney

Quick entry into the race is only half the battle. A lessor may still lose the collection race if it retains the wrong "runner." In today's marketplace, attorneys have become almost as specialized as doctors. Just as you would never think to go to a foot doctor for chest pain, neither should you go to a family law attorney or a probate attorney for a collection problem.

Collection litigation has become a highly specialized area of law, and if an attorney does not practice within this area on a regular basis, she will be at a disadvantage facing a sophisticated debtor's attorney. Thus, make sure that your lawyer is commercial collection attorney.

Monitor Your Attorney's Efforts

One of the biggest mistakes in lease collections is the failure of the lessor to recover and sell its collateral while simultaneously proceeding with collection of the deficiency balance for the remainder owed. This typically occurs because the attorney doesn't know that both actions can be implemented at the same time pursuant to California Code of Civil procedure, Sec. 483.010(b) or because the attorney doesn't wish to undertake the preliminary work necessary to pursue both sides of collection simultaneously.

California Code of Civil procedure, Sec. 483.010(b) states, in pertinent part, "that an attachment may not be issued on a claim which is secured by any interest in real or personal property arising from agreement, statute or other rule of law... However, an attachment may be issued (1) where the claim was originally so secured but, without any act of the plaintiff or the person to whom the security was given, the security has become valueless or has decreased in value to less than the amount then owing on the claim, in which even the amount for which the attachment may issue shall not exceed the lesser of the amount of the decrease or the difference between the value of the security and the amount then owing on the claim, or (2) where the claim was secured by nonconsensual possessory lien but the lien has been relinquished by the surrender of the possession of the property." Repossessing collateral prior to judgment is done with a "prejudgment writ of possession" and attaching personal property to secure a judgment prior to obtaining that judgment is done with a "prejudgment writ of attachment."

In almost every state, a lessor may go into court at the beginning of a lawsuit and get a court order enabling repossession of his leased equipment without having to wait to obtain a judgment against the lessee. In California, this procedure is called a "prejudgment writ of possession" and used on a regular basis.

The typical debt collection process begins by filing an application for the writ of possession. A court date is set for the hearing on the application and, if the application is granted, the lessor's attorney will prepare an order for the judge to sign.

Preparation Time

The attorney will generally take two weeks to prepare the application, two weeks to serve the lessee with the paperwork, three weeks to wait for the court hearing date and additional time to prepare the order and have it signed off by the judge.

This entire process could take as long as two to three months. Then the attorney will proceed to instruct the sheriff to repossess the equipment and turn it over to the creditor for sale. (This aspect of the process adds to the delay.)

Once the equipment is sold, the attorney will credit the lease account accordingly and establish the deficiency balance owed by the debtor. However, it could take you months or years to find a buyer for the equipment and complete the sales transaction. Thus by the time the deficiency balance owed under the lease is collected, probably a minimum of six months has passed and there are few - if any - of the debtor's assets remaining.

Interestingly, the work outlined above would be considered good solid legal work. But there is a much more efficient and effective way to proceed. That is to establish the fair market value of the equipment prior to the sale and to set a writ of attachment hearing for the same time as the writ of possession hearing. As stated above, a writ of attachment is a prejudgement remedy available for unsecured commercial creditors. It empowers the creditor to get a court order to enable it to attach the debtor's assets, such as bank accounts and inventory, prior to obtaining a judgment against the debtor.

These attached assets remain within the possession of the sheriff until the judgment is obtained. It not only provides security for the creditor during the litigation, but also usually forces the debtor to settle the matter and pay the debt because he cannot run his business if his bank account and/or inventory is attached.

Even though the writ of attachment is only a remedy available to unsecured creditors, it can be used by secured creditors if the secured creditor can show that the value of his collateral is less than the amount of debt. Thus, with a declaration as to the value of the equipment, an astute collection attorney can file the writ of possession and writ of attachment applications simultaneously and have both heard at one hearing. This, in turn, will not only reduce the collection process by months, but also force a settlement of the matter at the onset of the litigation.

Obviously, the choice of an attorney will determine whether you win the collection race or come in last, winning nothing.