Los Angeles Commercial Collections Attorney
Southern California Commercial Collection Dispute Lawyer
Clients usually only seek out attorneys after a business or personal deal
has gone bad. Patients regularly see doctors for "check ups,"
yet resist seeing lawyers for preventive advice that could save thousands
of dollars in litigation fees.
Accordingly, our law office — the Law Office of Steven R. Lovett — is taking this opportunity to give advice that most people and businesses only learn the hard way... after they are facing litigation over commercial collections. Whether you want advice about collecting on a debt or are facing a commercial collection dispute, Contact us by e-mail for a free telephonic consultation with an experienced and dedicated Los Angeles commercial collections lawyer.
1. Get it in writing!
Yes, it is true that the law generally does not require written contracts
(except in specific instances, such as contracts for sale of real estate
or contracts involving the sale of goods over $500.00). Despite the lack
of a formal requirement, it is almost always advisable to get an agreement
First, a writing shows that a meeting of the minds occurred and demonstrates that a contract exists. (This fact is often disputed, especially in partnership situations).
Second, a writing prevents an after-the-fact (sour grapes) denial of value. For example, a party's claim that he or she does not owe a full debt or that services were not satisfactory is highly suspect when there is an express promissory note admitting that funds are due.
Third, a written agreement extends the statute of limitations. When the parties only
have an oral agreement, a party has to file suit within two years from the date of breach (i.e., nonpayment). However, when there is a written agreement, the plaintiff has four years to sue before his or her claim is forever barred.
Fourth, a written agreement with appropriate language can entitle the victorious party to recover his or her attorney's fees. With certain minor exceptions, one can generally only recover attorneys' fees when there is a contract provision entitling the prevailing party in a lawsuit to recover their collection or legal expenses.
2. Invoice regularly!
It is good business practice to send out invoices or statements on a regular basis. It shows your accounts receivable that you are not going to forget about them. In addition, if the customer does not object to this statement within a reasonable time, an "account stated" may be created. The creation of an account stated will greatly increase the ease and likelihood of prevailing in any lawsuit.
3. Document your position!
It is critical to document your position (or, as the vernacular goes, to
cover your rear). When a telephone order comes in from a new account,
write down who placed the order.
That person may not still be with the company by the time the case goes to suit, and his or her replacement may not know the goods or services were even ordered. Also, at the first sign of trouble, create a telephone log that lists the date, time and summary of the conversations. Such a log is very impressive when memories become hazy and the other party states, "I never said that."
Finally, when you come to an important agreement with someone, write a confirming letter. You can even have the other party sign and return the original letter if it accurately reflects your agreement (there are no magic words to create a binding contract). In this age of fax, there is no excuse not to memorialize an agreement or a modification of an agreement. As a rule of thumb, get in the habit of asking the name of the individual with whom you are speaking. If someone claims that there is no excuse for nonpayment other than cash-flow problems, a letter should be sent documenting that fact. This helps to eliminate excuses which are often concocted on the steps of the court house. Any writing should be met by a corresponding writing. For example, if there is a contract with a written deadline, and the parties agree to extend that deadline, the extension agreement should be in writing. Similarly, if there is a written invoice and somebody agrees to excuse or reduce that invoice, there should a memorandum or credit memo evidencing that fact.
These simple steps can prevent the swearing match which often occurs once a dispute goes to litigation.
The Binding Effect of a Contract
In the case of Larsen v. Johannes, the California Court of Appeal recognized
rule that when a person with the capacity of reading a contract signs it, that person, in the absence of fraud, is bound by the contents of the contract. The signator of the contract cannot state that the contract's explicit provisions are contrary to the signatory's intentions or understanding. People often underestimate the legal effect of a written contract. Nine times out of ten, the party will be bound by the terms of a written agreement.
Often times, a party may attempt to maintain that a salesperson make contrary representations at the time that the contract was entered into. In addition, occasionally a party will maintain that they orally resolved the matter with somebody after the contract was executed. The typical contract has two provisions that prohibit the use of such oral statements in evidence. A so-called "integration clause" typically states that the writing supersedes any prior or contemporaneous oral agreements, and the written agreement is the final agreement of the parties. This prevents any prior or contemporaneous oral deviations from the contract.
The second mechanism to bind a party by the contract's terms is the equal dignities rule. This provision is generally combined in the same paragraph as the integration clause. Typical language will state that the agreement can only be modified or amended by a writing signed by both parties. The equal dignities provision will generally be enforced absent a waiver or executed oral agreement between the parties.
Determining Exactly With Whom You Are Doing Business
In many instances, I have found that the individual handling a debtor's
account had no idea with what type of entity he or she was doing business.
It is important to know who is buttering one's bread so that, for
example, personal guarantees can be sought from corporations. It is not
uncommon to invoice one entity, and receive a check from another distinct
entity. It is prudent to secure credit applications or subscribe to a
business credit reporting entity. It is also prudent to keep copies of
checks which are received and to update credit information on a regular basis.
While going through the process of determining with whom one is doing business, it should be kept in mind that in some instances it may not matter. Thus, if a debtor gives an improper name, a partial name, or fails to disclose their corporate status, they may still be liable as an agent for an undisclosed or partially disclosed principal. For example, it is not uncommon for the creditor to be thinking it is dealing with an individual sole proprietor. When a demand for collection is made, the debtor may assert that it is a corporation. The question is what did the debtor tell the creditor, and what did the creditor believe?
A debtor has a two-fold duty to disclose: 1. It must disclose its representative capacity (the fact of agency), and 2. It must disclose its corporate capacity ( the identity of the principal). If it does not disclose both of these elements, there may be individual liability on behalf of the person obtaining credit.
It is clear that the obligation is on the part of the debtor/ agent to disclose its status, and not on the creditor to diligently investigate with whom they are dealing. Courts have held that creditors are not obligated to review checks which are sent to lock boxes in order to determine that the name is a fictitious name of a corporation. Similarly, courts have held that it is not incumbent upon creditors to search out fictitious filings to determine with whom they are dealing (although it is definitely prudent to do so).
Determining Whether to Sue
The following are some of the questions that should be asked before the determination to sue is made:
- Is the debtor still in business and is there is a legitimate dispute?
- Where should the case be handled?
- On what fee terms should the case be handled, contingent or hourly?
- Who or what entity is liable?
- Can a judgment be obtained?
- Is the judgment ultimately collectible?
Starting with the first factor, the simplest way to determine whether or
not a debtor is still in business is to simply pick up the telephone and
dial the number. Doing so will determine two things:
First, that the defendant is still in business; second, the form of business. How the telephone is answered should be noted. For example, the receptionist may respond with either a different name than your debtor's name or in some variation on that name that should be noted in order for the judgment to be enforceable.
Another way to determine whether or not a defendant is still viable is to simply mail a letter. By sending a letter with the notation "address correction requested," the creditor can obtain a new address for the debtor. Similarly, when a telephone number has been changed, the first question out of the creditor's representative's mouth should be, "have you moved?" A new address should be instantly noted. It is also vital to determine that the business is the same one with which the creditor originally did business. For example, it is common practice for a client to call and say the person they did business with two years ago who owes them $10,000.00 has just opened up a new business up the street. In reality, it may turn out that the new debtor is a wholly distinct corporation. In the absence of a clear act of fraud, the only way to hold the new entity or individual responsible for the debt of the old corporation is to attempt to pierce the corporate veil and determine that the new corporation and individual involved is the alter ego of the old corporation. This is not a simple procedure, it involves extensive work, and should only be considered on larger dollar amounts.
A Summary of the Legal Process in California
The following is a very brief overview of the California legal process.
Please keep in mind that this is a short summary, and much of the procedure
and court costs change at least once a year.
If the amount in controversy in the matter is $25,000.00 or less, the superior court-limited jurisdiction (formerly municipal court) has jurisdiction. Any amounts over $25,000.00 must be filed in superior Court-general jurisdiction. At this writing, the filing fee in Los Angeles superior court is $320.00. Unfortunately these fees vary from county to county.
After the lawsuit is filed, it must then be served. The sheriff charges roughly $30.00 for personal service and an additional $20.00 for each document served. The average cost of service of process is roughly $50.00 per defendant. Needless to say, in a case where there are multiple defendants, service of process can be quite costly. On the average, it takes a process server or sheriff three weeks to effect service of process. Generally, a defendant can be served the same day for a nominal additional charge.
Once a defendant is served, the next step is for the defendant to either answer the lawsuit or have its default entered. Entry of Default is a separate step from obtaining a default judgment. The entry of default merely cuts off the defendant's right to answer. This is a relatively simple step which occurs by following a one-page document. In a simple case based upon a book account, the clerk can enter judgment with little documentation. However, in a more complex case involving a bad check, lease payment, etc., the attorney may need to obtain an affidavit or declaration under penalty of perjury signed by the client along with appropriate supporting information. It typically takes two to four months to obtain a default judgment in most courts in Los Angeles. Other branch courts in other counties require significantly less time. This time frame may get worse with budget cuts.
If the defendant files an answer to the lawsuit, the next step is to initiate discovery in appropriate cases. Discovery consists of interrogatories (written questions), demands for production of documents, depositions and requests for admissions. Discovery is not just a harassment tool. If the defendant does not respond to the discovery, the defendant's answer can be stricken and a default judgment entered.
After an answer is filed and any required discovery has been answered, the case must be evaluated for the possibility of prejudgment attachment or a summary judgment.
Prejudgment attachment allows the creditor to levy on the debtor's assets before trial or a
judgment is obtained by showing a reasonable probability of prevailing at an eventual trial.
Summary judgment is an expedited procedure to obtain a final judgment in a case by showing that there is no triable issue of material fact and that the plaintiff is entitled to judgment as a matter of law. Essentially, the summary judgment asks the court to rule that the defendant's case has no legal merit. If there is an issue as to apparent agency or the reasonableness of a commercial sale upon a lease deficiency, these are typically issues that cannot be resolved at summary judgment level.
Many courts require a judicial arbitration prior to trial. This a non-binding arbitration, as opposed to the more familiar binding arbitration under the rules of the American Arbitration Association. The judicial arbitration is generally conducted before an attorney or retired judge. The attorney can attempt to have the client's declaration introduced as evidence and avoid the personal appearance of a witness. However, the defendant has a right to request the physical presence of the client upon at least 10 days' notice. In such an event, the client may have to attend the arbitration proceeding and then attend again at the time of trial. Typically, the losing defendant will request a new trial after a judicial arbitration. Occasionally, the cases do settle after arbitration. Many courts require mediation as an alternative to judicial arbitration. Generally, the mediator is an attorney or experienced layperson who offers services on the court's panel. In many instances, if the case does not settle after arbitration or mediation, the cases will settle at a mandatory settlement conference which precedes the actual trial.
If all else fails, the case must go to trial. Most courts are now initiating periodic status conferences where the attorney must attend. Many courts then have a mandatory settlement conference where the client must either attend or be available by telephone if they are out of state. If the case is not settled, the case will go to trial and appropriate witnesses must be provided. Most southern California courts are currently taking anywhere between six months and fifteen months for a case to go to trial. This is a significant improvement over the 4-5 years that it took to go to trial before the onset of so-called "fast track" procedures. We attempt to give as much notice as possible of a trial date, and we attempt to minimize the expense to the client of travel and staying at hotels in the event of such a trial. Most collection-type cases are bench trials before a judge and typically take two days or less. In the event that the defendant requests a jury trial, the length of trial is generally doubled.
After a judgment is obtained, either through trial or default judgment, the attorney can obtain a lien on the defendant's real estate (called an Abstract of Judgment) and in appropriate cases, a lien on personal property. The personal property lien is filed with the Secretary of State, in a form similar to the UCC-1 financing statement. In order for the sheriff to execute upon the judgment, the attorney must designate specifically upon what the sheriff is to levy. The attorney must also have the court issue a Writ of Execution. The courts take between several days and several weeks to issue these writs.
It costs additional money to enforce a judgment after the judgment has been obtained. The least expensive mechanism is to levy on a bank account. This procedure costs roughly $30.00 at this writing. If the client does not have a copy of the defendant's check and has no way of knowing where the debtor banks, a private investigator can obtain this information. Another possible way to effect execution is to install a sheriff (a so-called "keeper") in the defendant's place of business. This works especially well in restaurants and other retail establishments. A keeper runs roughly $250.00 for an 8-hour period at this writing. It costs substantially more money to install a keeper for several days. The sheriff can also levy upon a vehicle which is owned outright and can inventory the defendant's business and sell it. Both of these procedures are quite costly and should be used as a last resort.
When no asset information is available, the defendant can be required to go to court for a Judgment Debtor Examination. The examination is also called an ORAP or OREX. The difficulty with this procedure in most courts is that, first the debtor must be personally served with the process. It is not uncommon to schedule an examination date and then be unable to serve the defendant. Secondly, even if the defendant is served, if they fail to appear at the examination.
We hope that this information proves helpful in understanding the California judicial process.
Questions of Law Impacting Commercial Collections
Attorneys' Fees On Open Book Account
On all open book accounts entered into after January 1, 1987, the court
attorneys' fees of 25% of the principal obligation or $660.00, whichever is less. This law does not apply if there is a written contract between the parties. This section, California Civil Code section 1717.5, was enacted by the California legislature as a mechanism to subsidize collection actions by commercial interests.
Legal Rates of Interest
Section 3289 of the California Civil Code provides that the legal rate
of interest on a contract entered into after January 1, 1986 is 10% per annum.
On certain contracts, such as retail installment contracts, where the contract requests interest at the maximum rate allowable by law, one must be careful not to run into
problems with usury. Pursuant to California constitution, article 15, section 1, the maximum allowable interest is 5% over the Federal discount rate in effect at that time.
The California Supreme Court held in Southwest Concrete v. Gosh that charging a service charge of 1.5% per month on any amount not paid within a specific time period does not violate state usury laws. Also, to constitute usury there must be a borrowing and lending or
forbearing and money. Hence, in a bona fide sale, where a seller offers property at a certain price for cash and a much greater price on credit, there is no usury. For example, there is no restriction on interest for a bona fide business equipment lease.
In California, one can receive damages of three times the face value of
a check, of at least $100.00 up to $500.00, if a non-sufficient funds
check is written. To recover these punitive damages, however, it is required
that a written demand for payment containing certain prescribed language
be sent to the maker by certified mail. A similar letter and similar penalty
exists in the event of a stop payment check if a court determines that
a good faith dispute could not be found under the circumstances of the
case. This law is codified at section 1719 of the California Civil Code.
It is critical to note that if the transaction involves a consumer debt, the creditor must also comply with the federal Fair Debt Collection Act (FDCPA), and provide the written warnings established by that law.
In 1988, Civil Code section 1526 was enacted in order to provide that when
a check is restrictively endorsed with "payment in full" or
other words of a similar meaning, the creditor can strike out or delete
that notation and accept the check. Similarly, if the acceptance of the
check or draft was inadvertent or without knowledge of the notation, the
check does not operate to fully discharge the claim. This law seems to
address the so-called lock-box that many business operations employ. The
only way for a debtor to ensure that a restrictively endorsed check will
operate a complete accord and satisfaction is for that individual to send
written notice at least 15 and not more that 90 days prior, that a check
or draft will be tendered with a restrictive endorsement and that the
acceptance and cashing of that check will result in a complete settlement.
However, this statute may have been superseded on January 1, 1993 by the enactment of California Commercial Code section 3311. Under this new section, a debt is discharged when:
- The debtor tenders the check in good faith as full settlement of the claim;
- The amount of the claim was unliquidated or subject to a bona fide dispute;
- The creditor obtained payment of the instrument; and
- The instrument or accompanying written statement conspicuously states that the check is tendered in full satisfaction of the claim.
The only exceptions to this rule arise in two circumstances: (1) if the creditor had previously designated the individual to whom communication should be directed, and the debtor since the communication is someone else, or(2) if the creditor tenders repayment of the check within 90 days. In Directors Guild of America v. Harmony Pictures, Inc. (CD Cal 1998) 32 F. Supp. 2d 1184, the federal court held that section 3311 should prevail since it was enacted later. Given the current uncertainty in the stated law, the newer, more restrictive statute should be complied with.
"Reasonable" Attorneys' Fees
In California, courts will award "reasonable" attorneys' fees. In the event of a default, these fees are based upon scheduled rates. In the event of trial or summary judgment, courts will award reasonable attorneys' fees and not actual attorneys' fees. There is a common misconception that one can impose actual collection costs in the full contingent fees set forth in a contract. The California Supreme Court has held that such a charge was an invalid liquidated damages provision and an unfair business practice under the state Business Professions Code. Accordingly, even in the contingent fee setting, the creditor will probably have to show the reasonable amount of time expended in order to obtain an award of attorneys' fees. Also, in many instances, the attorneys' fees will be less than the contingent fee of 20% to 33 1/3%.
Ex-parte Pre-judgment Attachment
Effective January 1, 1989, the state attachment law was amended so that an attachment can issue against a defendant ex parte (technically "without notice of" but effectively most courts require 24 hours' notice) if the client can prove that the defendant is insolvent in the sense that the defendant is generally not paying his or her debts as debts become due. This law is found at the Court of Civil Procedure section 485.010, subsection (b)(2).
Contact Us for a Free Telephonic Consultation
Learn more about how we can help you with your commercial collection needs. Contact us by e-mail or call us for a free telephonic consultation with Los Angeles commercial collections lawyer Steven R. Lovett.