When Customer Won’t Pay, Should you go to Collection Agency or Attorney?, by Sam Fensterstock, AG Adjustments

Your internal efforts have failed to collect a severely past due account. Now, it’s time to call in another source. But who should you call, your corporate/general counsel, a collection attorney or a collection agency? Let’s look at all three and determine what your best course of action is.

USING YOUR CORPORATE/GENERAL COUNSEL

Corporate counsels are lawyers who work directly for a business and general counsel is a law firm that is on a retainer to work a certain amount of time each month for your company. As such, all their time and energy is spent on their employer’s requirements in various capacities and do not have a specific focus in collections. Their main job is to provide legal representation to their employer and their employees. Specifically, they will offer advice on legal matters and perform legal research for the benefit of the corporation. Additionally, they will offer opinions on issues like contracts, property interests, collective bargaining agreements, government regulations, employment law and patents. They may also represent their employers in court on defense matters and they are also utilized in forwarding litigatory matters to experts in pending litigation matters.

Now when it comes to handling a collection situation, yes, they can handle it, but will they do the best job for you? If you have a large volume of placements can they handle it? Corporate/general counsel typically have little (if any) collections experience and very little of their day-to-day time is focused in this area. Collection agencies and collection attorneys have specific training and experience in handling collections that a corporate/general counsel usually does not have.

Also, if you use your corporate/general counsel to file suit against a customer who operates in another state, normally they file the suit where your company is located as it is much easier to do. However, once you obtain a judgement, you will need to find an attorney in the local jurisdiction of your customer to domesticate and enforce it. Now you have two attorneys involved, a delayed resolution and increased expense.

Using your corporate/general counsel to collect a debt may be easier as they are either part of your company or are local and on a retainer and you might think your costs will be less but the retainer is only a charge against their hourly billing. A collection matter can cost a lot of money to pursue with no guarantee of success based on an hourly structure, especially if your customer files a counter claim, it could wind up costing you much more in the long run. So, will using your corporate/general counsel get the best results? We do not think so.

USING A COLLECTION ATTORNEY OR A COLLECTION AGENCY?

Based on the previous assessment the choice is now a collection attorney or a collection agency? There are hundreds of collection attorneys listed with the Commercial Law League of America and all of them have experience in collections and many do a great job. But, if your customer is delinquent and you cannot get paid, should your first stop be a collection attorney or a collection agency? This is a choice that companies frequently face as they try to find a collection professional to handle their placements who will provide the greatest chance of collection in the shortest period of time with the lowest costs. We think the decision is a straight forward one.

To further explain, let’s look at the differences and why one choice is rather clear: collection agencies work on a contingency basis. That is, they will keep a portion of what is collected. If nothing is collected there is zero fee. When they do collect, a contingent fee is charged on the amount collected. Often these fees can be negotiated based upon the volume of accounts placed, size of the account and circumstances such as age of invoices, disputes, etc. A collection agency’s goal is to collect to collect your money in-house in the shortest period of time, without having to use an attorney. When a collection agency has to forward a file to an attorney, it is their last resort in trying to get your money.

Collection attorneys, while many may work on a contingency basis, there are those that work on a fee for service basis. They will earn a fee based on the time spent regardless of the outcome. Additionally, attorneys earn their living by suing and filing a lawsuit costs money. Included in the suit costs will be the cost of filing a summons and complaint, serving the debtor, and various required attorney actions during the lawsuit. Collection attorney’s make more money litigating. Unnecessary lawsuits are filed frequently and as the collection effort is non-apparent during the time of litigation, many times your customer can go out of business, pay other suppliers instead or file a counter suit, which will further increase your exposure. Once a lawsuit has been filed you are now at the mercy of the courts and the time frame to get you paid just got extended 6-12 months.

Collection attorneys are also normally regionalized to geographic locations. They usually do not have the reach to handle accounts in multiple states let alone matters that are international. Furthermore, if your placements are spread though out the country or around the globe you have much more “clout” when dealing with a national or international collection agency as opposed to a local law firm.

One of the critical difference between collection agencies and attorneys is that collection agencies are equipped to handle a large number of accounts. They are specifically designed and have the personnel and computer capability to deal with thousands of accounts at any one time and handle files that range in dollar amounts from $100 to millions of dollars. Collection attorneys rarely have the capability to properly control a large volume of collections files and do not typically want to handle low dollar files. Agencies are designed with this capability, in mind. If they cannot successfully handle high volumes and low dollar files they will not be a very profitable business. Attorneys have assistants and associates handling incoming calls and payments while working on other more important business, themselves. They are law firms not collection agencies and therefore do not operate like a traditional collection agency

If litigation is needed using a collection agency is still your best bet as collection agencies usually have a network of local attorney’s that they utilize to bring suit, secure judgments and collect in a creditors behalf. They are staffed to “quarterback” attorney efforts to move the case as swiftly as possible. When questions arise, collection agency staff are versed in the various nuances of the litigatory process and are well prepared to get you the answers needed quickly and efficiently. Reputable agencies are fully bonded and insured and only utilize attorneys who are equally bonded and insured to provide creditors with maximum protection.

As collection agencies handle a large volume of accounts they also place substantial business with local law firms. Agencies have vetted the law firms they use who they feel do the best job in securing recovery for the creditor. Furthermore, an agency that is national in scope actually has more clout with a given law firm than any single creditor. Those attorneys that accept business from both collection agencies and credit grantors are bypassing the triadic system that has been in existence for over 100 years. It is unethical to accept business from a creditor as well as a collection agency. While you certainly want recovery of your funds we would believe that it should be accomplished in the most ethical manner possible.

CONCLUSION

Collection agencies FULL time responsibility is to collect the delinquent debt of their customers in the shortest period of time without litigation. Collection agencies are set-up and geared to making a maximum number of attempts at third party intervention to bring forth payment, quickly. When a customer asks that the agency call back next Tuesday at 10am, the agency has software to ensure that the call is made next Tuesday at 10am. This is what they do all day, every day. This is not how your corporate/general counsel or collection attorney is set up to operate and therefore they cannot deliver the results that a collection agency can. Also, if litigation is needed a collection agency will hire for you the best collection attorney in the jurisdiction of your customer, contain your costs and make sure the account is handled as efficiently as possible and bring you the results expected. A collection agency’s goal is to collect your money in the shortest period of time and that means doing It ethically and as expeditiously as possible.

Sam Fensterstock is Vice President of AG Adjustments, CMA’s chosen collections partner. For over 40 years, AGA has been the most respected commercial collection agency in the nation. The company assists corporations with improving cash flow, while preserving a positive image with customers. It accomplishes this by employing the best and brightest talent in the industry, with low turnover and unparalleled tenure.

How Antitrust Laws Affect Your Credit Functions, by Michael C. Dennis

Penalties for violations of applicable federal or state antitrust laws can include fines, imprisonment, and liability for up to triple damages. How do antitrust laws affect day-to-day credit decision making and business activities? To what extent is pricing and payment terms subject to U.S. antitrust laws? Is it a violation of one or more antitrust laws to offer Customer A payment terms of Net 30 days and a direct competitor of Company A payment terms of Net 60 day? Are cash discounts an element of price? In other words, if we offer a 2% early payment discount to Company A, must we offer that same discount to its competitors?

It’s time to do a self quiz. I think the answer to one or more of these questions may surprise you. Did they? As always, I welcome your feedback.

Michael C. Dennis is the author of the Encyclopedia of Credit, a free, fast, internet resource for credit and collection professionals. He is a frequent instructor at CMA-sponsored educational events. His most recent book, “Happy Customers, Faster Cash,” is available at amazon.com. He can be contacted at 408-204-0129.

Can the Credit Department Reduce (or Withdraw) Open Account Terms?, by Michael C. Dennis

In business-to-business credit granting, can the credit department withdraw or reduce open account terms at any time for any reason or for no reason? I think most people would say ‘Yes’. In my opinion, the answer is ‘Maybe’. For example:

  • You cannot reduce or withdraw open account terms if the decision to do so is based on factors including Race, Religion, Age, or Sexual Orientation.
  • You cannot reduce or eliminate open account terms if there is a law that prevents you from doing.

You might respond that this is not the case in the United States. Assuming that is true, my question is this: Are there laws limiting your right reduce the credit limit in the other countries in which you do business?

If you have a contract with a customer that limits or prevents you from taking unilateral action in connection with lowering the credit limit, then obviously the actions of the credit department in this regard are constrained.

What are your opinions of this subject? As always, I welcome your feedback.

This topic will be covered at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas. For more information about the conference, visit www.creditscapeconference.com. I hope to see you there.

Michael C. Dennis is the author of the Encyclopedia of Credit, a free, fast, internet resource for credit and collection professionals. He is a frequent instructor at CMA-sponsored educational events. His most recent book, “Happy Customers, Faster Cash,” is available at amazon.com. He can be contacted at 949-584-9685.

To Cash or Not to Cash? How to Handle “Payment-in-Full” Checks, by Christopher Eric Ng, Esq.

What should you do when you receive a check from a customer for an amount less than your total claim, but the check is marked with a “payment in full” or similar restrictive notation? Should you return the check to the debtor? Or can you simply cross out the “payment in full” language, deposit the check and pursue the unpaid balance? And what if you use a lockbox to handle the numerous checks you receive and those checks are deposited before you see them?

The answer to this question depends on what state law applies to your customer’s account. In the vast majority of states, if you are not willing to accept the amount of a “payment in full” check, the only safe action is to return the unnegotiated check. If you have accidentally negotiated a restricted check, many state laws give you a period of time (e.g., 90 days) to return the funds to the debtor to avoid an “accord and satisfaction” (the acceptance of a certain sum as payment for the entire disputed amount) of the claim. Finally, even if you have negotiated a “payment in full” check, you may be able to avoid waiving your right to pursue the balance if the debt was undisputed, or if the debtor did not act in good faith.

Creditors that want to expansively address the problem of inadvertently accepting “payments in full,” resulting in an unintended accord and satisfaction, can create and conspicuously designate a “debt dispute office” in credit agreements and invoices to customers. If such a debt dispute office procedure is appropriately implemented, an accord and satisfaction will not be established unless a person who is charged with the responsibility of dealing with such issues makes a knowing, affirmative decision to accept the partial payment. If such a procedure is not established, creditors should implement an alternative process to identify all partial payments made by a customer that could result in an inadvertent accord and satisfaction within 90 days from the date payment is received.

It goes without saying that it is imperative that you understand the applicable state law, consider including a favorable governing law provision in your credit and sales agreements and consult with an experienced commercial attorney regarding your particular situation. If this topic has piqued your interest and you want more information, please read Christopher Ng’s complete LinkedIn blog post at https://www.linkedin.com/pulse/cash-cashhow-handle-payment-full-check-christopher-ng?

Join me as we cover this topic in much more detail at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas. For more information about the conference, visit www.creditscapeconference.com. I hope to see you there.

Christopher Eric Ng, Esq. is a Partner of Gibbs Giden, Los Angeles, CA, and will be speaking at the upcoming CreditScape Fall Summit. He can be reached at cng@gibbsgiden.com.

Offshore Suppliers Beware of the Insolvent U.S. Customer and the Terms of Sale: What the World Imports Bankruptcy Case Teaches the Credit Team, by Scott Blakeley, Esq.

Scott Blakeley, esq.

The global supply chain is an often written topic in the press. Recent public company chapter 11 filings (usually Delaware or the Southern District of New York) highlight the global network of suppliers reflected in debtors’ lists of 20 or 30 largest unsecured creditors. This list often consists of offshore creditors from around the globe, whether Asia, Europe or South America.

Offshore suppliers who ship goods to the U.S. on credit should be wary of insolvent, or potentially insolvent, customers. Although U.S. Bankruptcy Code section §503(b)(9) provides that suppliers of goods are entitled to an administrative expense claim for the invoice value of the goods received by the customer within 20 days prior to their filing, an issue arises as to when the goods are received.

For many offshore suppliers, it is advantageous to ship goods to a U.S. customer “Free on Board port of origin” (“FOB”) as it places risk of loss during transportation on the customer. However, shipping goods FOB would also mean that the goods are technically received by the customer on the date of shipment. For many offshore shipments, this would mean that the shipment may have been received prior to the 20 day period of the customer’s bankruptcy filing, even if the goods were actually in the customer’s possession within the 20 day period.

The recent decision in In re World Imports, Ltd2, however, takes the §503(b)(9) priority claim protection away from the offshore supplier. There, the Bankruptcy Court held that an offshore supplier who provided goods to a U.S. debtor within 20 days of the bankruptcy was not entitled to a priority claim under Bankruptcy Code §503(b)(9) because the goods were “received by the debtor” at the time they were placed on the vessel at the port overseas more than 20 days before the debtor’s bankruptcy filing, even though the debtor took physical possession of the goods within the 20 day period.

The ruling of World Imports is a red flag for offshore suppliers and their global supply chain selling to U.S. customers on credit who are insolvent as they may not have a priority claim, leaving them with a non-priority claim, which translates to no distribution on the invoices. To avoid this harsh result, we consider ways the foreign supplier can reduce this payment risk.

The World Imports Court Ruling
In World Imports, a Chinese supplier had shipped goods to the Debtor within 20 days of the bankruptcy filing, and claimed that such prepetition delivery entitled them to an administrative priority claim pursuant to §503(b)(9). The supplier asserted that because §503(b)(9) does not define “receipt,” the Uniform Commercial Code should apply, which defines “receipt” as occurring when the buyer takes physical possession of the goods, which occurred within the 20 days required by §503(b)(9).

However, the debtor argued that given this was a contract for the international sale of goods the UCC was preempted by the federal CISG treaty. Under this treaty, Free On Board (“FOB”) delivery provides that the customer’s “receipt” occurs not when the customer takes physical possession, but when the vendor delivers the goods to the agreed upon carrier.

The bankruptcy court found that the contract was governed by the CISG. The court noted that the parties did not opt out of the CISG and concluded the delivery occurred outside of the 20 day window and barred the offshore supplier from administrative priority under § 503(b)(9). The World Imports only applies to international contracts between countries that have adopted the CISG treaty. The CISG has been ratified by 80 countries, including: Argentina, Australia, Bahrain, Belgium, Brazil, Canada, China, Columbia, France, Germany, Italy, Japan, Korea, Mexico, Netherlands, Russia, Singapore, Spain, Switzerland, Turkey, the United States, and Venezuela.

The Creditor Waterfall in Chapter 11
Suppliers selling on credit to an insolvent customer know well that when the customer files chapter 11, the value of the prepetition invoices that are very old, say 100 days, will typically bring but a few cents on the dollar, often years after the filing. The reason is the creditor waterfall or priority scheme of creditors. Secured creditors are entitled to be paid first from the collateral in which they have a security interest. After secured creditors, administrative or priority creditors are next in line. Each of these creditor classes are entitled to be paid in full prior to a junior class of creditor. Last in line of the creditor class is suppliers that have provided trade credit. Even though these suppliers may have undisputed invoices entitling them to payment, the problem is that they are at the bottom of the creditor waterfall and they face a shortfall. Thus, the World Imports case is significant as the §503(b)(9) claims are often paid in full.

The Credit Team Reducing the Risk of Being Ensnared in an In re World Imports Setting
So what steps can the offshore supplier take to reduce the payment risk that World Imports creates when that customer is insolvent? One step is for the supplier to opt out of the CISG’s application. Another option is moving the customer to CIA. However, the supplier may lose the business if terms are cut off. A supplier may also require the customer to post a letter of credit at the time it delivers the goods to the carrier, which insures that payment is made to the supplier at the time the “risk of loss” shifts to the customer. With a drawdown of an L/C, the supplier is protected from preference as the payment comes from a third party, the issuing bank of the L/C, and not payment from the debtor.

Key Concepts & Terms

§503(b)(9) of the Bankruptcy Code – provides that suppliers of goods are entitled to an administrative expense claim for the invoice value of the goods received by the customer within 20 days prior to their filing

FOB Origin – The acronym for Free on Board. A shipment for which the seller is responsible for transportation and shipping costs to the point where the goods are delivered to and loaded onto a carrier.

CISG: The Convention on Contracts for the International Sale of Goods. This international treaty has been signed by most industrialized nations and many that are not. Its provisions govern the formation and subsequent rights and obligations of the parties to international contracts, meaning those entered by parties in different countries, both of which countries are signatories to the convention. The list of countries changes almost every year. Current status of accession of a particular country to this convention can be checked, for prospective sales and international law concerns, at the CISG database.
Scott Blakeley, Esq., is a founder of Blakeley & Blakeley LLP, where he advises companies around the United States and Canada regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He can be reached at seb@blakeleyllp.com.