REPORT FROM THE CHAIR

By Christine Hayes Hickey, Esq.

As we bring in the fall with football and political hoopla, I am happy to report that the Section is not only alive and well, but it is bursting at the seams. We have taken this year to concentrate on Section benefits, and as the New York convention draws near, I would like to dedicate this, my final article as CRS Chair, to highlighting those benefits for you.

CRS Pictorial Directory

After much blood, sweat and tears, the CRS pictorial directory is a finished product that was well worth the wait. Years in the making, the Directory is an indispensable tool to locate other CRS members by name, state and face. Helping to "put a face with a name," the Directory is free to CRS members and is a must-have for your desk.

Increased Communication

Since the last issue of the Free Press, you have received interim reports via e-mail or fax regarding Section updates. You also should have received a request from the League office to confirm your e-mail address and remove filters or spam blockers that would prevent our e-mails from reaching you. If you have not already done so, please take a moment to ensure that the League has your correct information. Recognizing that communication with CRS members is key to the health of our Section, you can look for more interim reports between issues of the Free Press. Just as important, we encourage your feedback either through the League office or direct to the chairperson, ch@rubin-levin.net,and incoming chairperson, jrubin@mialaw.com.

A United Voice on Matters of Import

Earlier this year, CRS took a formal position with the League stating that it objected to an exhibitor being allowed to participate in CLLA conventions or advertise in League publications. This was based on the objectives of the Section being directly contrary to the business practices employed by the exhibitor. Since that time, there have been three opinions handed down by Indiana courts that have found that entities’ actions vis a vis creditors in those cases to be fraudulent. CRS remains a Section that will continue to protect creditors’ rights and take positions to strengthen the creditors whom we represent.

More Quality Education

New York will once again boast quality educational programs sponsored by the Section. The educational programming will include: a forms program, geared toward serving as a "forms swap" to enhance your practice—a must-attend for our members; information about suing and defaulting debtors who are on active military duty—what you need to know before you sign those non-military affidavits and much, much, more; and, last but not least, FDCPA Part II. In addition to providing quality programming at CLLA conventions, the Section was instrumental in the production of an educational video. CRS co-sponsored the 2004 FDCPA Training Video, which is now offered for sale and will be available for purchase at the New York convention. To order the video now, you can log on to www.fdcpavideo.com or call 1-800-281-6016. Section members not only have a quality product available to assist in FDCPA training, but the Section receives 20 percent of sale proceeds, which is used to support more CRS initiatives mentioned below.

Into the Electronic Age

You are now receiving this Free Press electronically. For most, this is preferable to paper, and the ease with which you receive and can retain the Free Press in such a format is unequaled. Interim updates and Practice Alerts will also be sent electronically, and CRS continues to strive for more convenient methods of informing and communicating with Section members.

Practice Alerts and Practice Groups

We are well on our way to implementing Practice Alerts, which will keep you abreast of the most recent developments in our practice areas. CRS is contracting with a provider to give members electronic news flashes in areas of interest to CRS members. The alerts are timely, easy to read, and will keep you well-informed and educated. You can look for these to come within the next few months. In addition, the Section is continuing to work toward implementing Practice Groups to allow for a convenient forum to exchange cases, ideas and discussion in practice-specific areas of the law. In New York, we will continue to take steps toward this goal through our first-ever "Meet Your Members" event.

"Meet Your Members" Event

At the New York convention in November, CRS will host its first-ever "Meet Your Members" event, designed to provide an opportunity for you to meet the other Section members, in a social setting, not just by name, but by practice area. Shortly after the CRS general membership meeting where elections will be held, you will be served beverages and light hors d’oeuvres while you mix and mingle with the other CRS members. The event will take place from 4 to 5:15 p.m., Saturday, November 13, 2004, in the Princess Ballroom, finishing just in time to attend the Eastern Region Cocktail Reception. This event is a social precursor to our implementing Practice Groups, and we hope to see record numbers of CRS members attend the New York convention and meet their fellow members.

Now more than ever, this is the time for your membership, involvement and interest in CRS. The years ahead promise even more as the incoming chair and officers share a common vision and dedication to the success and growth of the Section. The leadership and commitment of your committee chairs, the executive council, your board representative, League liaison, and the officers of CRS is unsurpassed. To them, I send a personal "thank you" and express a deep appreciation for their past and future, talents and contributions to the Section. To the members, I encourage you to take advantage of all that the Section has to offer, and you can look forward to more "bursting at the seams" reports from the incoming chair.

Editor’s Note: Christine Hayes Hickey, Esq., CRS chair, is a partner in the law firm of Rubin & Levin, P.C., in Indianapolis, IN. She specializes in the areas of commercial collections and creditors’ rights law.

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Washington Legislative Report

By David P. Goch, Esq.

Bankruptcy

As has been the case in recent years, bankruptcy issues always come back around at the end of a Congressional session. However, this time, no major reform proposals are involved (at least not at this writing). The following is a summary of recent events.

S. 878, The Bankruptcy Judgeship Act, which among other things authorizes an additional permanent judgeship in the District of Idaho, passed the Senate and is scheduled to be taken up by the House on October 5, subject to a Rule.

On September 29, Reps. Baldwin, D-Wis., and Smith, R-Mich., introduced HR 5167, to restore Chapter 12 bankruptcy protections for farmers for 18 months (beginning January 1, 2004). Apparently re-thinking the concept, Smith introduced HR 5195 the next day to make Chapter 12 permanent.

The House is expected to begin floor debate on the 9/11 Commission recommendations as early as October 6. The bill contains, after the Financial Services Committee mark, the provisions of HR 2120, which protect financial markets from a domino effect from the failure of one party to certain derivative contracts that are not covered by current law.

Social Security Privacy Bills

On September 14, the House Ways and Means Committee filed its report on HR 2971, the Social Security Number Privacy and Identity Theft Prevention Act of 2004. The act restricts the sale and public display of Social Security numbers (SSNs), limits dissemination of SSNs by credit reporting agencies, and makes it more difficult for businesses to deny services if a customer refuses to provide an SSN.

In related news, on September 14, Sen. Feinstein, D-Calif., introduced S. 2801. The bill amends the Social Security Act to enhance Social Security account number privacy protections, to prevent fraudulent misuse of Social Security account numbers, and to otherwise enhance protection against identity theft, among a number of other provisions. The bill has been referred to the Committee on Finance.

IRS Resources for Collection

Senate Finance Committee ranking Democrat Baucus (Mont.) called on Congress to fully fund the IRS budget request after a report released earlier this month by the Treasury Inspector General for Tax Administration stated that the number of potential individual non-filers has increased from 6.1 million in the 1994 tax year to 8.9 million in tax year 2001, owing in excess of $1 billion, while the resources devoted to notifying taxpayers of noncompliance has been reduced. This obviously draws attention to the question "why not allow the private sector to assist?"

As previously reported, in debating the IRS FY 2005 Funding bill (HR 5025), Rep. Capito, R-WV, successfully offered an amendment to bar the IRS from hiring private-sector collection agencies to collect taxes owed to the federal government. There is no word yet on what impact this may have on the language in the Export Tax bill (HR 4520), which does provide for private collection professionals to assist the government in the collection of Federal tax debt. HR 4520 is expected to go to conference in the near future.

Editor’s Note: David P. Goch, Esq., is the CLLA Washington Legislative Counsel.

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Consignments: My, How You’ve Changed!

By Robert S. Bernstein, Esq.

(This article appeared in Equipment Leasing Today, September 2003, published by the Equipment Leasing Association.)

While lessors are rarely involved directly with inventory financing, there are times when it is important for them to understand the issues surrounding security interests in inventory. Once in a while, a lessee’s inventory may be looked to as additional collateral in certain transactions. A lessor may also lease/ finance goods that become "inventory" in the hands of the lessee (e.g. an equipment rental lessee). A lessor may place recovered goods with a remarketer "on consignment." As such, it is important for lessors to understand the treatment of consignments under revised Article 9 of the Uniform Commercial Code (UCC).

Consignments underwent a radical change in July 2001, when major revisions to UCC Article 9 went into effect. Specifically, the revisions brought all consignments entirely under the scope of Article 9 and removed "non-security" consignments from the purview of UCC Article 2 (in Section 2-326(3)), as that section has been deleted from Article 2.

What is a consignment?

A consignment is generally understood to be a method by which a vendor (consignor) delivers goods to a customer (consignee) for that customer to hold until it uses them (either in its own operations or by sale to another). When the consignee uses the consigned goods, the consignee has "purchased" the goods and is liable to the consignor for the price of the goods. If he does not sell the goods, he must either return them to the consignor or be liable for the price of the goods. Title to the goods remains with the consignor during the consignment and passes directly to the purchaser, when the goods are sold.

To qualify as a "consignment" under revised Article 9, the goods must be delivered to a merchant for the purpose of sale, have a value over $1,000, and not be consumer goods in the hands of the person making delivery to the merchant. The merchant must deal in goods of the kind under his own name, not be an auctioneer, and not be generally known to sell goods of others. If the consignor does not meet this definition, either because it is consigning consumer goods or the merchant does not deal in goods of the kind, Article 9 offers little protection. The non-Article 9 consignor must look to pre-code law to determine his/her rights. While the drafters of the UCC may have intended that non-Article 9 consignors would treat such consignments as bailments and allow them to recover their goods without following the normal steps under the UCC, there is no guarantee this will be the result in the various state courts. Non-Article 9 consignors should familiarize themselves with the applicable state common and statutory law pertaining to bailments to protect themselves in these types of transactions.

It used to be that a consignor protected itself against creditors of the consignee (or against the consignee’s trustee in bankruptcy) by either clearly marking the goods as property of the consignor or by filing a financing statement (UCC-1) covering the consignment. The "marking" frequently took the alternative forms of

(a) labeling each piece of the goods as property of the consignor, or

(b) segregating the goods in a discrete area designated as containing property of the consignor.

The rationale for this previous system may be instructive. Inventory financers are (or should be) accustomed to regular inspections and counting of inventory securing their debts. Their inspectors will come to the warehouse of, let’s say, a widget seller, looking for security for the debt and see, for instance, a thousand cases of widgets for sale. Since the inventory financer knows the number of widgets in a case and the value of a widget, it could calculate the value of its security.

If, among the cases of widgets, it saw a hundred cases marked "property of and consigned by ABC Manufacturing Co.," it could know that the inventory secured by the inventory financer’s loan was only nine hundred cases of widgets, rather than the entire thousand. A problem with this system is that there was no convenient way to determine quickly whether the "consigned" widgets were really new inventory or whether those cases had previously been part of the inventory financer’s product. Further, while the "marking" system made logical sense, it left a myriad of questions for courts about how much marking or segregation was enough.

One of the difficulties with the system of "perfecting" consignments by filing UCC-1 financing statements was that when the consignor filed a financing statement covering the goods, it often conflicted with the prior perfected inventory financer and caused the court difficulty in determining the priorities among conflicting holders. Also, the filing often left the consignor (who hadn’t expected to be a secured creditor at all) with a security interest that might not meet all of the tests of perfection.

Consignments as Security Interests

With the 2001 revisions to Article 9, the drafters determined to place consignments squarely within the realm of security interests. Since the consignor intended to get his specific goods back if there was a problem, the drafters likened the consignor’s interest to a purchase money security interest (a "PMSI") in inventory (of the debtor). Of course, a PMSI is the lien that a seller (or financer) obtains on goods he sells on credit (or for which he provides funding). Article 9 has always had special treatment for PMSIs. For a PMSI in inventory, there are special priorities as well as special perfection requirements. Since the law now treats a consignment just like a PMSI in inventory, one needs to understand those rules in order to be able to operate in the world of consignments.

Although obvious, it should be noted here that inventory is the kind of secured property that is fungible and changes over time. As old inventory is sold or used and new inventory is purchased, the whole still remains "inventory." Once a creditor perfects a security interest in a debtor’s "inventory," all after-acquired inventory falls under that security interest. Therefore, a debtor’s "inventory" can be fluid, simply identified as "inventory" without having to specify what is exactly contained within that description. Of course, where appropriate, a seller or lender could identify specific inventory, such as "all inventory of 10-inch widgets" or "all widgets manufactured by ABC Manufacturing Co."

In order for a PMSI in inventory to have the first lien, meaning a first position ahead of an existing inventory financer, the seller (for our purposes, "seller" includes the provider of the purchase money, whether the seller or another financer) must:

(a) have perfected (by filing a UCC-1 financing statement) the PMSI prior to the time the debtor receives possession of the property;

(b) must send notice of the intended delivery to the inventory financer;

(c) the prior perfected inventory financer must receive the notice within five years before the debtor receives possession of the property; and

(d) the notice must tell the recipient that the seller intends to acquire a PMSI and must describe the inventory to be sold.

These four requirements blend the historical rationale with the desire for uniformity and clarity. The prior perfected inventory financer gets notice before the new goods are delivered, so there is no misunderstanding. The PMSI must be perfected (by filing) before the goods are delivered, which prevents the prior security interest in inventory from attaching to the new inventory before the PMSI can attach. Determining the appropriate party to whom to give notice is still a bit of a challenge (at least until 2006). Under former Article 9, security interests in inventory were generally recorded in the jurisdiction where the inventory was located. For example, if the inventory was located in the New Jersey warehouse of a Delaware corporation, whose headquarters are in Pennsylvania, the UCC-1 was probably filed in New Jersey. What’s more, in some states, secured creditors were required to dual file, that is, file with both the state and local government.

Filing Requirements

Under revised Article 9 (effective in almost all states in July 2001), the filing place is the state where the debtor is located. In the above example, since the debtor is a Delaware corporation, it is considered to be "located" in Delaware. This means that, until the old financing statements lapse (a maximum of five years from effective date of revised Article 9), when searching for a security interest, one must examine the filings made in the "old Article 9" filing jurisdictions, as well as the revised Article 9 filing places. What one is looking for is all evidence of existing security interests in "inventory."

There is good news on the searching front, however. Since all filings (other than for fixtures) are now made centrally (with the state), and since the revisions to Article 9 were also meant to facilitate electronic filing and searching, many states have improved their online searching availability. The bad news is that these online results do not always disclose exactly what the security interest is in, leaving consignors in the dark when looking for inventory financers.

The answer to this dilemma depends on how much lead time you have before the delivery of the consigned goods to a merchant. If there is ample time, then one can order copies of the prior financing statements to determine the inventory financers and send them notices of the intended consignment before the goods are delivered. The other alternative is to notify all of the holders of security interests that could possibly cover the merchant’s inventory.

Assess Risk

Sellers often assess risk when selling on credit. Similarly, they should assess the risk of selling on consignment. When doing so, the seller must understand that an "unperfected" consignment is nothing more than a sale on open account. The seller is relying solely upon the credit of the customer. If the customer fails to make payment, chances are that the "consigned" goods will be snapped up by the inventory financer or by a bankruptcy trustee, and will not be available as security for the consignor. The consignment method was probably chosen in the first place because the seller wasn’t willing to sell on open account. An unperfected consignment means that the seller/consignor has lost its "string" on its goods.

Consignments can be a valuable credit enhancement in the right situation. Like other enhancements, the proper steps must be followed in order to be afforded the appropriate protections. Failure to follow the rules can lead to unintended risks and a failure of protection.

Editor’s Note: Robert S. Bernstein, Esq., is the managing partner of Bernstein Law Firm, P.C., of Pittsburgh, PA, concentrating his practice in bankruptcy and creditors’ rights. He holds a dual certification as a Bankruptcy and Creditors’ Rights specialist from the American Board of Certification. He is a past-president of the CLLA and founder of LEAN, Lease Enforcement Attorney Network.

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Chair-Elect Report

Where Do We Go From Here?

By Jeff E. Rubin, Esq.

As Chris Hickey’s year as chair of the Creditors’ Rights Section winds down, we owe her a great big "thank you" for her hard work and leadership. It has been a good year thanks to Chris’s commitment to her Executive Council members, committee co-chairs, committee members and section members. She set and achieved goals that have made our Section even stronger than it was a year ago. She will be a tough act to follow.

As I prepare to take over as CRS Chair, I would like to share with you some of the many goals I will focus on achieving during my tenure.

Education

Educational programs at meetings have been one of the strongest contributions of the Section. Randy Slovin has agreed to continue his great work as co-chair of the Education Committee. CRS will continue to commit time and money to ensure the best possible educational programs at CLLA conferences throughout the year. If you would like to be a part of a future educational program, I encourage you to join the Educational Committee. You can contact Randy at rtslovin@sclpa.com.

Membership

We must continue to cultivate and attract new members. The CRS has grown by leaps and bounds over the past few years, and we must maintain that momentum. We not only have an obligation to attract new members to our Section, but also to the League, which continues to be the backbone of our existence. I have appointed Joe Terkell and Arnie Dashoff to co-chair our Membership Committee this year. I also encourage everyone to take advantage of the benefits of being a CRS member and spread the word to others.

Promotion

A few years ago, CRS established the "Award of Excellence" because it believes it is important to award a deserving individual who has been a positive influence and has excelled in our profession. We are now looking for nominations. CRS will continue publicizing this award, and I hope that we will be able to present the first "Award of Excellence" in Chicago

Practice Alerts and Practice Groups

In Chris’s "Report from the Chair," she addresses practice alerts and practice groups. This year’s CRS Executive Council has provided new and updated benefits to its members. This coming year we will continue the tradition by putting in place "Practice Alerts" that will be e-mailed to you. We hope that in the coming months the "Practice Alerts" will be in place and flashing on your computer screens. We also will continue a tradition started this year—the establishment of "Practice Groups" at upcoming meetings. The groups give Section members a place to discuss their practice ideas and concerns. The first Practice Group gathering will take place on Saturday afternoon in New York.

Forms

CRS established an Ad Hoc Forms Committee headed by Bill Brosha. The goal of the committee is to establish forms that can be utilized by all CLLA members, and downloaded from the CLLA Web site. The forms will be generic in nature so that anyone looking for a standard Request to Produce, Collection Interrogatories, etc., will be able to get ideas with the simple click of a mouse at www.CLLA.org. The goal is to have as many useful forms as possible in place on the Web site by the Chicago meeting in 2005. If you have not sent your forms to Bill he can be reached at bbrosha@stark-stark.com

Future Goals

As the new section leadership takes the reins this year, we are looking for new goals to achieve to make the Section better for each of you. I encourage you to send me your thoughts and ideas so your Executive Council can act. Also, there are many committees that make up the CRS. Get involved! Come to a committee meeting in New York. The committees are: Education, Free Press, Technology, Uniform Laws, Membership, Promotion and Development, Forms and Practice Groups.

I look forward to the upcoming year and to working hard for the Section. Let me know how to help. My e-mail address is jeff@mialaw.com.

Editor’s Note: Jeff E. Rubin, Esq., is a partner in the Law firm of Talianoff Rubin & Rubin located in Miami, FL. He concentrates in the areas of commercial and retail collections, creditors’ rights, real estate, workers’ compensation and the general practice of law.

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Promotion and Development Committee

By Beau Hays, Esq.

The Promotion and Development Committee is working on the new "Award of Excellence." Nominations have been solicited and the committee will consider the nominees while in New York. However, since the first award will not be given until Chicago 2005, there is still time to nominate someone who has merited consideration for the award by demonstrating excellence in the field of creditors’ rights. The recipient is not required to be an attorney or a member of the CLLA.

Upon consideration of the candidates, the committee will make a recommendation to the Executive Council regarding the individual to be given the award. The committee will then continue to develop the award program for successive years.

Please submit your nominations for the "Award of Excellence" to: The Commercial Law League of America, 70 East Lake Street, Suite 630, Chicago, IL, 60601, or by fax to (312) 781-2010.

Editor’s Note: Beau Hays, Esq., is a partner in the Atlanta, GA law firm of Hays & Potter, P.C., practicing in the areas of creditors’ rights, construction law, bankruptcy, business law, commercial law, collections and civil litigation. He is the CRS Officer Liaison to the CRS Promotion and Development Committee.

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Education Committee Report

By Randy Slovin, Esq.

As I write this column, October is here. The leaves are changing, the Yankees are in the playoffs again, and after just a few games, the Cincinnati Bengals once again have been eliminated from the post-season. The election is heating up. Martha Stewart’s line of autumn prison garb is due on the shelves soon. And the New York meeting will soon begin.

Once again, the Creditors’ Rights Section has worked hard to bring you the best in educational programs to help make your trip to New York that much more valuable. The program "Forms, Forms, and More Forms: A Must for Any Collection Practice" is designed to assist you with ideas for new forms and provide some that you can begin using immediately.

Part II of our FDCPA Workshop, which is organized to provide the collection attorney with a foundation for a law firm compliance manual, will focus on volume collections. Come hear Manny Newburger address the subtler points of "meaningful involvement," the standard set by the courts that governs an attorney's level of involvement in his or her collection files. We are lucky to have Manny's expertise available to us in a program designed for audience participation.

Finally, an expert in the newly amended Servicemembers Civil Relief Act (formerly the Soldiers and Sailors Civil Relief Act) will address recent changes in the law that impact the filing of civil suits against those in the military.

Come get educated in New York. We know it will be a rewarding experience.

Editor’s Note: Randy Slovin, Esq., is a partner in the newly formed law firm of Slovin & Cummins Co., L.P.A., in Cincinnati, OH. He concentrates his practice in the areas of creditor representation in commercial litigation, banking, leasing, bankruptcy and creditors’ rights law.

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Hot Issues in Retail Collections

By Stuart R. Blatt, Esq.

Recent developments in the retail credit and collection industry are numerous. This article will highlight and focus on several "hot issues." Please keep in mind that retail collections is national and international (offshore) in focus. A retail collections practitioner needs to count on continuing legal education to be informed of constant changes.

Your Retail Committee explores these changes at two major conferences. The next conference is scheduled for New York City in November. Make it a point to attend this continuing education event. Be prepared to listen, contribute and discuss vital issues with fellow experts in your field.

Generally, we can approach some "hot issues" by identifying them within categories. Below I have arranged some concerns and answers, which also represent practice tips in this industry. Nationally prominent issues are dealt with in this article rather than specific individual states.

MAJOR INDUSTRY DEVELOPMENTS

For the first time in the history of collections, credit and collection associations will hold a meeting together in Chicago. After all these years, I am able to report to you that I have succeeded in forging a meeting for the associations to discuss organizing and developing a common strategy to foster and protect all members in this industry.

I wish the association officers and executive directors success in this monumental display of solidarity. Our host for this function will be the publishing house of Thompson Media. Our CLLA President, Executive Director and Chairman of the Creditors’ Rights Section of the League will be present along with myself, the President and Executive Director of NARCA, the President and Executive Director of DBA and representatives of the ACA.

New Federal Act – FACTA

The Fair and Accurate Credit Transactions Act (FACTA) requires the Federal Reserve to create a model notice to consumers that "financial institutions," as defined by the Gramm-Leach-Bliley Act (GLBA), which extend credit and report to credit bureaus, will be required to give to consumers. "Financial institutions" must give consumers notice when they report negative information to the credit bureaus. A debt buyer must extend credit to the consumer before this notice provision is applicable. The FTC was required by statute to have model language as a final rule by June 4, 2004. It will have to be used beginning December 1, 2004.

Judgments and Garnishments

A common question arises in collections concerning jurisdiction in post-judgment recovery. You have a judgment against an individual who lives in one state and works in another state, and the employer has a corporate office in yet another state. Consider where the legal jurisdiction would be for your garnishment.

Please review the following federal cases as a start for your research for an answer. Fox v. Citicorp, 15 F.3d 1507 (9th Cir., 1994) and Pickens v. Collection Services of Athens, 165 F.Supp. 2d 1376 (M.D. Ga, Feb. 8, 2001). The Fox case states that a garnishment in any state other than the one in which the debtor resides violates the FDCPA, while the Pickens case reached the opposite conclusion.

Collection During Litigation

a. Promissory Notes and Stipulations

Some firms have the debtor sign a promissory note for the amount due the creditor during the course of the collection process. Consider whether you have to comply with the Truth In Lending Act (TILA) and give them disclosures in accordance with the provisions of TILA.

A recommendation would be to enter into a stipulation filed with the court that can be enforced in the event of a default. A note even for 0 percent interest may subject the transaction (note) to the requirements of TILA. Further, the interest on a stipulation that is reduced to a judgment may carry a higher interest rate than prevailing rates in effect in your state.

b. During the collection process you are informed the debtor has granted a security interest to a commercial debt workout firm, and perfected it by filing a UCC-1.

A commercial debt workout firm on behalf of debtor files a UCC-1 on all the bank accounts and receivables, which subjects all assets to a purportedly superior lien.

Consider the UCC provision, Article 9, which provides that you can only perfect a security interest in a demand account or receivable by possession. If the holder of the security interest isn't the bank where the money is deposited, there is no perfected security interest and an attachment is superior. You may also argue that a putative security interest never attached.

UCC §9-203(2) lists three elements that must exist before a security interest attaches: (1) value has been given, (2) the debtor has rights in the collateral, or the power to transfer those rights to the secured party, and (3)

(i) the debtor has authenticated a

security agreement that adequately describes the collateral;

(ii) the collateral is not a certificated security;

(iii) if a certificated security, the

certificate has been delivered;

(iv) the collateral is a deposit account and the secured party has control

of the account under the security agreement.

Bankruptcy

a. Non-dischargeable Claims

A debtor files for Bankruptcy under Chapter 7 and lists a debt that is non-dischargeable. The conversion of the case by the bankrupt debtor to a Chapter 13 does not maintain the non-dischargeable status of that debt, and the bankruptcy case requires your close attention.

If a timely objection to confirmation is not filed and heard, you may lose the non-dischargeable status of your claim. Accordingly, file an objection to confirmation of the Chapter 13 Plan. Also consider preparing and filing a motion to increase payments of the Chapter 13 payment plan, if your debtor has a salary/income increase.

b. Bad Checks

Debts arising from bad checks are generally non-dischargeable in bankruptcy. A creditor must commerce an adversary proceeding before the debtor’s discharge and obtain a determination from the Bankruptcy Court that the debt is not discharged. If the creditor fails to timely commence the adversary proceeding or does not prevail in the adversary proceeding, the debt is discharged. 11 U.S.C. Section 523.

c. Collection Letters

The unintentional sending of a collection letter to a debtor who has filed for bankruptcy could be a violation under both the Fair Debt Collection Practices Act and the federal Bankruptcy Code. It is important that safeguards are in place to avoid violating the automatic stay.

According to data released in the second quarter by the Administrative Office of the U.S. Courts, the total number of bankruptcies filed in federal courts declined in the 12-month period ending June 30, 2004, for the first time since 2000.

Debtor Abuses

A couple of frequent hot issues are still important to you when a debtor files a defense utilizing arguments and forms bought or acquired from a Web site.

a. Copyrighting

Debtor claims in a written communication/notification or in a defense or counterclaim that he/she has obtained a copyright on their name and that you have violated the copyright but using their name in collection letters or writings involved in litigation. The debtor may bring action against your client and firm for the alleged violations.

Be aware that a personal name is not protected by state or federal trademark statutes unless the name is used in a commercial manner. Section 102 of the Copyright Act protects "original works of authorship." Absent is any case law that establishes liability for the use of a person’s name in a non-commercial setting.

b. Arbitrations

Another popular debtor scam occurs when debtors notify you in writing or as a defense during litigation of an allegedly obtained "Arbitration Award." Debtors/money protesters then file bogus UCC-1 financing statements against your client or your firm.

Such arbitrations are void for lack of due process and lack of jurisdiction. For case references to assist you in your research, you can refer to Citibank ( South Dakota), N.A. v. American Arbitration Forum, et al., Case No. 02-8143, Hillsborough County, Florida (an arbitration forum was enjoined from issuing awards). See also, Citibank ( South Dakota), N.A. v. Southeast Arbitration Service, et al., Case No. 02-1902-CA-G, Marion County, Florida (a temporary injunction restrained the issuing of arbitration awards).

The Federal Arbitration Act (FAA) and many state Uniform Arbitration Acts allow for an action to vacate an award, after it has been entered. Consider commencing an action under the FAA if your client finds itself faced with such a bogus arbitration award.

Under The FAA, a court may vacate an arbitration award in four instances: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators, or either of them; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior that prejudiced a party’s rights; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a).

Applying these standards, courts vacate arbitration decisions in only the most narrow circumstances. See also 67 ALR 5th 179 dealing with arbitrators. Consider filing a UCC-3 termination statement if this happens. Take discovery of all matters and documents used in the process. Report the actions to your state’s Attorney General and pursue your state/federal rules that provide for sanctions for filing frivolous causes of action (i.e., Fed.R. Civ.P. 11 or your state’s equivalent Rule).

Corporate Credit Cards with a Personal Guaranty

Some credit cards are guaranteed by a corporate principal. Principals may use their business credit cards to make some personal purchases that are not legitimate business expenses. Hence, consideration must be given to personal liability as opposed to corporate liability.

Be aware of the proposition found by at least one Federal District Court. A District Court in Hawaii held that the actual

use is what made the credit card debt a consumer debt, and that the debt collector had to look at the use rather than the contract. Next, consider whether the requirements of the FDCPA must be followed.

OFFSHORE COLLECTIONS

A duly organized offshore corporation performing collections from offshore and contacting U.S. residents for payments are subject to (1) the FDCPA and/or (2) the licensing requirements of the various states.

Private Corporations Owned by Law Firm Members - Liability Insurance

Under many insurance liability policies, attorneys and their firm are not covered under their professional liability policy for work done for an entity in which the attorneys or the firm own more than a 10 percent interest.

Closed Border States

Some states have burdensome licensing requirements, debt collection laws and consumer laws and require an out-of-state attorney to be licensed. If you send a letter across your state border into their "closed border" and you are not licensed, you are violating their state laws. A recent status indicates the following states are considered closed-border states: Connecticut, Delaware, Hawaii, Massachusetts, New Jersey, Texas, West Virginia, Wisconsin and Wyoming.

The credit and collection industry continuously evolves. Keep pace with the changes. See you in New York at the CLLA Retail Committee meeting.

Dedication:
In Memoriam: Judge Frank W. Koger

Copyright © 2004 Stuart R. Blatt.
All rights reserved

Editor’s Note: Stuart R. Blatt, Esq., is a principal in the Baltimore, MD, law firm of Margolis, Pritzker, Epstein, Blatt & Franklin, P.A., which specializes in retail and commercial collections, debt buying, business, real estate matters and general civil litigation throughout Maryland and Washington, D.C. He serves on the Executive Council of the Creditors’ Rights Section of the CLLA, and is co-chairman of the Retail Collections Committee.

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Time to Go Paperless?

By John P. Plovie, Esq.

In a previous article for the Free Press, I discussed electronic filing of court documents. In this article, I will discuss the "paperless" collection firm.

First of all, it is a worthy goal to have a paperless office but it is likely to be a goal few offices achieve because paper is too integrated into the legal process to be eliminated completely. We still need papers to show witnesses on the stand and papers to assist us in making oral arguments before the court. Nonetheless, we are moving ever closer to eliminating the banks of file cabinets and storage boxes that cost money and take up valuable office real estate.

Many League members and other collection professionals are using scanned documents and are well into the concept of the paperless office. If you haven’t taken the leap yet, you need to consider how it will change your practice and procedures. For example, if you make a note of a telephone call, you probably throw it in the file for future reference. In a paperless system, you have no file to hold that piece of paper. You can scan it, but that takes time and costs money, or you can make a note in your collection system history notes and throw the piece of paper away. If you choose to do the latter, there will be certain pang as you toss that paper into the recycling bin. Is this act going to come back and cause you to lose the case because there was something on that piece of paper that did not get into the computer notes? After many years of saving every scrap of paper, it is hard

to believe that you can survive without that comfort of the file folder with its semi-organized accumulation of correspondence, pleadings and accounting data complete with coffee stains and doodles.

Scanning

It is a cost/benefit decision that can cause angst to any attorney. In my area, commercial scanning services charge 71⁄2 cents per page to scan a document. While most offices do not outsource their scanning, there is a cost to scan a page nonetheless. Is it worth the cost to scan a page to give you that extra assurance that a piece of paper can give? It is ultimately a case-by-case decision that has to be made. If you take a few minutes to page through a file, you will find all sorts of file "flotsam and jot some" from check stubs to court receipts, and so on. Once you have to scan each item, it becomes clear that a lot of things in the paper file have to be eliminated from the scanning process.

Benefits

However burdensome dealing with these issues can be, the benefits of scanning are worth it. Once you can bring up a file in the comfort of your office chair and refer to it while opposing counsel is on the phone, you will wonder why you didn’t scan your documents a long time ago. Another benefit is that with the availability of e-mail, you can attach a copy of the scanned document and have it in the hands of opposing counsel in minutes. Hopefully, the opposing attorney will be so overwhelmed by your response, that his only response will be to ask to whom the check should be made payable.

Costs

What do you need to get started? I would suggest that you first become acquainted with scanning if you have no experience with scanners. Hewlett Packard makes a good sheet-fed, entry-level scanner for about $300. It is the HP Scanjet 4500c and comes with a good assortment of software including PaperPort. If you have a pleading such as a set interrogatories from the opposing party, PaperPort allows you to scan the pleading and convert it into a Word document for editing. It works pretty well and can be a real timesaver. Using a low-end scanner such as this will do about everything you need to get started, but it won’t do it quickly.

If you want speed and productivity, you will spend about $3,000 to get a high-end scanner. I recommend the Canon line. See www.canon.com. The DR-3060 has a feeder capacity of 100 sheets and scans at a fast 32-inches-per-minute (about 3 pages per minute). It also comes with Capture Perfect, a pretty darn good software solution for scanning. In addition, you will need Windows XP and a SCSI driver for your computer.

Finally, you will need to decide how to access your scanned documents. The major collection software programs all offer interfaces for scanned documents, which can be used with great success. However, it is not a requirement to have such an interface. Using available space on your network, you can set up a folder for each file and scan each document into that folder just as you would file a document into a paper folder. In my office, we further divide each folder into letters and pleadings, just as we did with our old-style paper folders. We then code each document with a file name that has an alpha and date component. For example, a letter from an attorney received on May 15, 2004 would be coded "LFA20040515." It seems to work pretty well.

The technology is here for paperless offices, and it is not as costly or complicated as it once was. Apart from the benefits of using scanning technology, it is only a matter of time before the courts demand it as the only permissible way to file a document. In summary, the time to go paperless is here.

Editor’s Note: John P. Plovie, Esq., is the principal of Plovie Law Firm, P.S., practicing in Redmond, WA, concentrating his practice in the areas of commercial litigation, creditors’ rights law and collection law. He is co-chair of the Internet and Technology Committee.

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E-Filing: Ready or Not, Here it Comes (IS)

By Louis A. LeLaurin III, Esq.

First came PACER (Public Access to Court Electronic Records), which for a small fee, permits electronic viewing and downloading of docket sheet information on cases filed in participating federal courts. Next, many of those courts began to scan all filings, and make them available for viewing, downloading and printing through the PACER system. A nationwide index of federal courts with varying degrees of online information is accessible through http://pacer.uspci.uscourts.gov. Now, many federal courts are encouraging, and some require, e-filing.

While it is still a relatively new technology, e-filing—the electronic filing of documents by uploading to a Web-based virtual clerk’s office—will increase substantially in the near future. The federal courts' Electronic Case Filing (ECF) and online Case Management (CM) programs are scheduled to be available in all federal jurisdictions during 2005. A current list of federal courts accepting e-filings appears at http://www.uscourts.gov/cmecf/cmecf_court.html. Training and certification are required before a user is granted filing privileges, but since there is no standard nationwide curriculum, and training requirements vary within circuits, you should inquire further at the clerks’ offices of the federal jurisdictions to which you are admitted. If you are not already certified, take a moment to view your future at an online training site developed by the John H. Wood Federal Judicial Training Center at http://www.txwb.uscourts.gov/cmecf/cmecf_attorney_tutorial/index.html.

After completion of training, and a few test runs, the system is user friendly and efficient. Everything that can be filed in paper form can be filed electronically—Proofs of Claim, Motions to Lift or Modify the Automatic Stay, Objections to whatever the debtor wants to do, etc. All can be filed online, and served electronically on the attorneys registered to participate in the system. (Paper copies must still be served on Neanderthal practitioners.) Exhibits may also be electronically filed and served. (There is a high-speed document scanner in your future.) Proposed orders, referred to as "Eorders", may be submitted for consideration and entry. And yes, filing fees may be paid online by credit card in certain jurisdictions, for example: http://www.txwb.uscourts.gov/ cmecf/CMECF_WEB-Credit_Card_Tutorial/index.html

Requirements

The difficult part? There is none. There are, however, some hardware and software requirements. For instance, every document filed through this system must be in Adobe PDF format so you must purchase the Adobe Acrobat software that allows you to create and read a PDF document. A good resource for becoming familiar with the vagaries of PDF files is http://www.pdfforlawyers.com. A site for FAQ about common issues regarding the CM/ECF system is also helpful: http://www.txwb.uscourts.gov/cmecf/cmecf_attorney_tutorial/library/faq.html

All of this is building the foundation for expansion of the "electronic courtroom," enabling attorneys to bring a laptop computer to court and have immediate wireless access to the filings in the court’s system. For information on implementation of this system, visit http://www.txwb.uscourts.gov/wifi/ default.htm.

State vs. Federal

A review of e-filing in state courts reveals that the story is very different from that in the federal courts. It is too early to tell whether "different" means better or worse. Texas has implemented e-filing, as trumpeted at http://www.texasonline.state.tx.us/app.jsp?language=eng&pageId=info. Although availability of the system was announced to the Texas bar with much fanfare, very few practitioners seem to be using it. Inquiries at several Texas clerks’ offices in the state are met with "deer in the headlights" stares, and mumbled responses roughly equating to "the person responsible for that is on extended leave." Clerks probably view e-filing as a threat to empire building, since it is supposed to be more productive and efficient, and thus will afford fewer opportunities to employ second cousins to handle additional paperwork. Nevertheless, e-filing is inevitable, so state and local officials should be encouraged to embrace it. I suggest that all who read this should encourage their court administrators and clerks to attend "E-Courts 2004: Linking the Legal System," an event sponsored by the National Center for State Courts, to be held in Las Vegas, Nevada at the Mirage Hotel, December 13-15, 2004. See http://www.e-courts.org/. Perhaps a trip to Vegas for professional education will help practitioners overcome the natural tendency to do things as they have always been done.

Lexis/Nexis has recently taken a leading role in fostering e-filing in state courts. Information on availability of training appears at http://www.lexisnexis.com/fileandserve/training.asp

A current list of e-filing programs in state courts appears at http://www.lexisnexis.com/fileandserve/courtsavailable.asp. In addition, a pilot program in New York is described at http://fbem.courts.state.ny.us/ef/mainframe.html.

E-filing promises increased productivity, efficiency and cost savings. Experience with the CM/ECF system in Bankruptcy Court has convinced me that it can meet expectations. Whether this will hold true as the federal system goes nationwide in the next year remains to be seen as, contrary to the concept of uniformity in the federal system, each circuit and district involved will have options to modify the system as implemented in their jurisdiction. The state court prospects are less reassuring, but I encourage each of you as regular, high-volume users of your respective state court systems, to insist upon technological progress at your local level, as it will improve your bottom line.

Editor’s Note: Louis A. LeLaurin III, Esq., is a past President of the CLLA. His firm, LeLaurin & Kessler, LLP in San Antonio, Texas, pursues business and commercial litigation in the south Texas area.

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LETTERS TO THE EDITOR

Do you have a compliment, a suggestion, a constructive criticism or an observation to make about League or CRS issues? This is your forum for making your feelings known to the CRS leadership. They read the Free Press and appreciate your input and feedback. Send your "Letter to the Editor" via e-mail to Nick Krawec at nkrawec@bernsteinlaw.com. You need not wait to the last minute before a League meeting or just before an anticipated publication date of the Free Press. Send the letter whenever the spirit moves you, and they will be kept on file for publication in the Free Press.

Dear Editors:

I've just read the current issue of the Free Press. Publishing it on-line is an excellent idea.

For many years I have been a huge fan of the Free Press. Like most lawyers, I am overwhelmed with reading material. Most of it I skim and discard. In contrast, I am always glad to receive the Free Press and in its pages find items of interest, which are "relevant" to my practice.

Making sure that what we do is relevant to our members is a key to success for the CRS and the League itself. The ideas and initiatives coming from Chris Hickey and your Council are excellent.

The Section does a great job offering value to its members - lawyers who do this work every day. Free Press, practical seminars, Web site improvements and more offer us what we need to enrich our practices.

Keep up the good work!

Rick Johanson
 Birmingham, AL
Treasurer and Past President, CLLA

The Availability of the Doctrine of Substantial Compliance to an Unlicensed Contractor in California

By John Guerrini, Esq.

The California Business & Professions Code requires contractors performing construction work to be licensed by the Contractors’ State License Board.i The purpose of the Contractors’ License Lawii ("CLL") is to "protect the public from incompetent or dishonest contractors by requiring that contractors be licensed by the state and that, to obtain a license, they show knowledge, experience and good character."iii The CLL was enacted for the safety and protection of the public against imposition by persons inexperienced in contracting work, and for prevention of fraudulent acts by contractors resulting in loss to subcontractors, materialmen, employees and owners of structures.iv Section 7031 is designed to enforce the licensing law by precluding unlicensed contractors from using the courts to recover money owed for contracting work. Local regulations may not modify the mandates of the licensing law.v

Section 7031 of California’s Business & Professions Code provides in relevant part:

"[N]o person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of that act or contract, regardless of the merits of the cause of action brought by the person[.]"

" [A] person who utilizes the services of an unlicensed contractor may bring an action in any court of competent jurisdiction in this state to recover all compensation paid to the unlicensed contractor for performance of any act or contract."

When counsel is confronted with a licensure issue, counsel must first determine whether a license is required. If the claimant is a contractor or subcontractor and does not possess a valid license,

counsel must ascertain whether the contractor (1) may be exempt from Section 7031, or (2) has substantially complied with Section 7031.

Who is a Contractor?

Section 7031 applies only to contractors. The CLL defines "contractor" as "any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, or submits a bid to, or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, parking facility, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or other structures or works in connection therewith, or the cleaning of grounds or structures in connection therewith, or the preparation and removal of roadway construction zones, lane closures, flagging, or traffic diversions, or the installation, repair, maintenance, or calibration of monitoring equipment for underground storage tanks, and whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project, development or improvement herein described of any material or article of merchandise."vi The term "contractor" includes subcontractor and specialty contractor.vii

A "contractor" includes an individual, a firm, co-partnership, corporation, association or other organization, or any combination of any thereof.viii

Under certain limited circumstances, a developer who "acts like a contractor" may be held to be a "contractor" within the meaning of the statute.ix Similarly, unlicensed sureties who undertake to complete a project for a defaulting principal may be denied the right to recover from the owner for labor and materials furnished in completing the project.x

Who is Exempt From the Licensing Law?

It is important to determine if a claimant is exempt from the licensing requirement. The CLL provides exemptions for more than 10 categories of people, but

there are certain key exemptions for the following people:

• The United States government, the State of California, or any incorporated town, city, county, irrigation district, reclamation district or other municipal or political corporation or subdivision of California.xi

• Officers of a court.xii

• Public utilities.xiii

• A property owner who does the work himself or through his own employees with wages as their sole compensation, provided none of the structures, with or without the appurtenances thereto, are intended or offered for sale.xiv

• A homeowner improving his or her principal place of residence or appurtenances thereto.xv

• A real estate licensee acting within the scope of his/her license.xvi

• Any person who only furnishes materials or supplies without fabricating them into, or consuming them in the performance of, the work of the contractor.xvii (Indeed, a manufacturer, not licensed as a contractor, may bring unassembled parts to a construction site, assemble them on site, and install the finished product on site.xviii)

• An employee of a person who is required to be licensed, who receives wages as his sole compensation, does not customarily engage in an independently established business, and does not have the right to control or discretion as to the manner of performance so as to determine the final results of the work performed.xix

RMOs and RMEs

Sometimes a business organization must be licensed through a Responsible Managing Officer ("RMO") or a Responsible Managing Employee ("RME"). The RMO or RME must be licensed in the same license category as that sought by the business organization. If the RMO or RME is terminated, then the license obtained by the business also terminates. In general, the RMO or RME is employed by the organization and is "actively engaged" in the same type of work for which the RMO/RME holds a license.xx

Substantial Compliance with Section 7031

Section 7031 has spawned an enormous amount of litigation. And although Section 7031 has undergone numerous legislative revisions over time, the fundamental issue arises when an unlicensed contractor makes a claim for compensation for work performed. For many years, there has been a tug of war in the courts between strict interpretations of statute versus a somewhat relaxed approach. Three situations are generally presented: (1) the contractor who has never been licensed, (2) the licensed contractor whose license is terminated (for any reason) during the course of the project, and (3) the contractor who starts the project as an unlicensed contractor and obtains the required licensed during the course of construction.

Lack of a license bars actions for collection, breach of contract and enforcement of mechanics’ liens, as well as actions to enforce stop notices and bond claims.xxi Historically, contractors who were licensed at the beginning of their performance at the project but whose licenses were suspended for even a few weeks during the project were denied recovery.xxii

In 1989, to avoid the hard results of non-compliance with licensing statutes, the legislature amended Section 7031, which largely eliminated the doctrine of substantial compliance from the CLL.xxiii Five years later, in 1994, the legislature again amended Section 7031 to permit limited application of the substantial compliance doctrine, as follows:

"The judicial doctrine of substantial compliance shall not apply under this section where the person who engaged in the business or acted in the capacity of a contractor has never been a duly licensed contractor in this state. [T]he court may determine that there has been substantial compliance with licensure requirements under this section if it is shown at an evidentiary hearing that the person who engaged in the business or acted in the capacity of a contractor (1) had been duly licensed as a contractor in this state prior to the performance of the act or contract, (2) acted reasonably and in good faith to maintain proper licensure, (3) did not know or reasonably should not have known that he or she was not duly licensed when performance of the act or contract commenced, and (4) acted promptly and in good faith to reinstate his or her license upon learning it was invalid."xxiv

At this point, a contractor who has never been licensed in California cannot use the substantial compliance doctrine, and such a contractor is generally barred from recovery. It should be noted that the burden of proof of proving licensure or substantial compliance with the statute is always the contractor’s. Even when the defendant denies that the contractor was licensed (i.e., puts licensure at issue), the burden of proof still remains with the complaining contractor.xxv

But despite the "clarification" to Section 7031, there is still no clear consensus in the courts as to whether to enforce strict or relaxed compliance with Section 7031, as several recent cases make clear.

In Ranchwood Communities Limited Partnership v. Jim Beat Construction Co.,xxvi the court was faced with the

question of whether an unlicensed contractor who worked on a project could seek equitable indemnity from the subcontractors it hired to perform other work on the project, on the basis that such subcontract work was negligently performed. The trial court denied recovery, but the Court of Appeals found a way to permit recovery. It determined that because the contractor acted "like a developer," taking on the dual functions "of developers’ and general contractors’ functions," it would not be subject to Section 7031’s bar on recovery. It must be noted that this decision is limited to the tort context (i.e., the claims of indemnity and contribution). The court reinforced Section 7031’s general rule that "an unlicensed contractor cannot recover either for the agreed contract price or for the reasonable value of labor and materials. Actions for breach of implied contract, fraud, on the contract or in quasi-contract, and actions to enforce a mechanic's or vendor’s lien are all prohibited by this statute." xxvii

Three years later (in a different appellate district), in ICF Kaiser Engineers, Inc. v. Superior Court (Hatteras),xxviii the court permitted recovery to a contractor that was undisputedly unlicensed during a part of its performance of the project. Neither party was aware that the contractor’s license had been suspended, and apparently not even the State Contractors’ License Board was aware of it. The trial court rejected Kaiser’s contention that it had substantially complied with Section 7031, finding that Kaiser should have known its license was suspended. The Court of Appeal reversed, finding that "no one at Kaiser had a clue that its contractor’s license had been suspended," and that the Licensing Board "was for all practical purposes unaware of the suspension at the time of its occurrence." The court found that Kaiser’s employees "thought they had done everything they were required to do." Thus, Kaiser was excused from its failure to be properly licensed during the entire time it performed construction services.xxix

Slatkin v. Whitexxx concerned a contractor who was licensed when he started work on the project. However, during the course of construction, the license was suspended for approximately 180 days due to the contractor’s failure to maintain a statutorily required bond. The contractor was over two years into the project with only a few months remaining, and when he received notification from the state of the bond issue, the notice informed him that the effective date of his license suspension was nearly 90 days prior to the date of

the letter. Although the contractor did everything he could do to obtain a new bond, his new bond’s effective date left him with a six-month time period during which he was technically unlicensed.

The court held that the contractor had "substantially complied" with the statute and permitted him to proceed with his action. Critical to the court’s determination was the finding that the contractor had "acted reasonably in maintaining licensure after learning of the defect."xxxi

Recently, in M.W. Erectors, Inc. v. Niederhauser Ornamental and Metal Works Company,xxxii a subcontractor (MW) on a large commercial project suffered the consequences of its failure to complete the application process and obtain the requisite contractor’s licenses before signing two separate contracts. Of the two contracts at issue, the structural steel contract would ultimately implicate Section 7031. The problem arose because MW became licensed to perform structural steel work more than two months after signing the contract and approximately 18 days after actually starting work. MW’s contract was terminated before the projects were completed and without MW being paid for its work then completed. When MW filed its lawsuit seeking compensation, it was met with a successful motion for summary judgment, based on its noncompliance with the licensing requirements. The court held that despite MW’s admitted lack of a required license at the inception of the work, its subsequent licensure did not bar its ability to recover for work completed while actually licensed. (No doubt due to this strange holding, the California Supreme Court recently accepted the case for review.)

A Bit of Advice

For attorneys who are defending against claims from unlicensed contractors, motions for summary judgment are clearly the best offense. Section 7031 claims can generally be resolved at the summary judgment stage. For attorneys who are prosecuting claims on behalf of unlicensed contractors, they (and their clients) must be aware of the dangers associated with entering into contracts and beginning work, which require a license not possessed by the client. The current inconsistency in the decisions concerning Section 7031 is no doubt due to the courts’ attempts to achieve equity. Because there is no consensus among the various appellate districts, I am hopeful that the California Supreme Court will issue an opinion in M.W. Erectors that will clarify the interpretation of Section 7031. In the meantime, counsel must be careful to advise their contractors who do work in California to make sure (1) they are properly licensed to do the work for which they contract, (2) their license(s) are up to date and not suspended, and (3) they have an internal procedure in place in order to ensure periodic review of license status with the State Board.

Editor’s Note: John Guerrini, Esq., is an attorney with Freedman & Taitelman, LLP, of Century City, CA, a practice that emphasizes business and appellate litigation concerning real estate, creditors’ rights and unfair business practices claims. He may be reached at guerrini@ftllp.com.

I Business & Professions Code section 7031. All further undesignated statutory references are to the Business & Professions Code.

II California’s Contractors License Law can be found beginning at Business & Professions Code section 7000.

III Knapp Development & Design v Pal-Mal Properties, Ltd. (1985) 173 Cal.App.3d 423.

IV Fraenkel v Bank of America (1953) 40 Cal.2d 845.

V Agnew v. Los Angeles (1958) 51 Cal.2d 1 (the state has pre-empted the field of regulating contractors).

VI Section 7026.

VII Section 7026.

VIII Section 7025.

IX Vallejo Development Co. v. Beck Development Co. (1994) 24 Cal.App.4th 929.

X General Insurance Co. of America v. St. Paul Fire & Marine Insurance Co. (1974) 38 Cal.App.3d 760.

XI Section 7040.

XII Section 7041.

XIII Section 7042.

XIV Section 7044.

XV Section 7044.

XVI Section 7044.1.

XVII Section 7052.

XVIII Walker v. Thornsberry (1979) 97 Cal.App.3d 842.

XIX Section 7053.

XX Section 7068.

XXI K&K Services, Inc. v. City of Irwindale (1996) 47 Cal.App.4th 818; Cash v. Blackett (1948) 87 Cal.App.2d 233.

XXII Pacific Custom Pools, Inc. v. Turner Construction Co. (2000) 79 Cal.App.4th 1254.

XXIII Cal. Stats. 1989 ch. 368 sect. 1. The 1989 amendment added former subdivision (d) which read, "The judicial doctrine of substantial compliance shall not apply to this section."

XXIV Cal. Stats. 1994 ch. 550 sect. 1.

XXV Buzgheia v. Leasco Sierra Grove (1997) 60 Cal.App.

4th 374.

XXVI (1996) 49 Cal.App.4th 1397.

XXVII Id.

XXVIII (1997) 75 Cal.App.4th 266.

XXIX Id.

XXX (2002) 102 Cal.App.4th 963.

XXXI Id.

XXXII (2004) 115 Cal.App.4th 512, (review granted,

depublished by 2004 Cal. LEXIS 4026, 2004 Cal. Daily Op. Service 4101, 2004 D.A.R. 5719).

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Spotlight on Winner of Best Feature Article Award

Full Name: John P. Plovie

Residence/Hometown: Redmond, Wash.

Education: 1971 University of Washington, B.S. in Preventive Medicine; 1973 University of Washington, Master’s in Health Administration; 1980 Seattle University, J.D.
Work History: Partner, Creighton and Plovie, 1984 to present; Plovie Law Firm P.S., owner
Family: Wife Barbara; daughters Katie and Tiffany
Areas of practice and specialties: Commercial litigation, creditors’ rights law, collection law

What year did you join the CLLA?:
1983

What offices or committee chairmanships have you held in the CLLA?
Chair Western Region; Chair, Uniform Laws Committee; Convention chairs for Western region meetings in Seattle and Hawaii; Member Executive Council CRS; Chair Internet and Technology Committee CRS

Tell us about your family/home life away from the office
I recently took up golf, and I am hooked on it. My wife and I golf every weekend. I also like the outdoors here in the beautiful Pacific Northwest and try to get in some hiking every year. I live on several acres so when I have time, I also like to work on projects to improve the property.

You are the first recipient of the Free Press Best Feature Article award. Were you surprised when you were informed that the Free Press judges selected your article "Not So Harmless Error" as the winner?
Yes, I was very surprised to be honored in such a way. Coming from my peers who I greatly respect made it very special.

Have you written other articles besides the writing you have done for CLLA, and if so, for which publications have you written?
I wrote an article about the benefits of using shared collection services for the Journal of the American Hospital Association.

Have you received other recognition for the writing you have done?
Yes, the article about using shared collection services received an honorable mention.

What would your advice be to other League members who may be thinking of submitting an article to the Free Press for consideration for the Best Feature Article Award?
First of all, write about something you are interested in. Secondly, budget some time to sit down and write. Anyone can be a contributor and many people have more talent than they might think. The CLLA is a great venue to get an article published because there are a number of publications associated with the CLLA and one of them is likely to be a good fit for whatever someone is interested in.

When you’re not practicing law or tending to League matters, what do you do for fun and relaxation?
Golf, hike, work on my property

If you did not become a lawyer, what do you think would have become your life’s work?
I would have been a real estate developer.

What one thing do you think we would be surprised to know about you that most people don’t already know?
I have a Master’s Degree in hospital administration.

What is your favorite quote or "words to live by?"
""I never met a man I didn’t like"…Will Rogers.

Did you have any role models when you were growing up and in your law career? If so, who are they and why were they your role models?
My father. He believed in working hard and always doing your best. He also believed in having fun along the way.

If you could have dinner with one famous person in history and one famous person alive today, who would they be and why?
Abraham Lincoln because he was a lawyer first and a great leader second. I think he would have a lot to say that would be very relevant today. Bill Gates of Microsoft. I think Gates is a very intelligent and successful person who would be very knowledgeable about the future of business and society on both national and global levels.

What is your favorite...

Car: Lexus

Food: Everything

Vacation spot: Palm Springs

Actress/Actor: Tom Hanks

Movie: "Chinatown"

Holiday: Christmas

Musical group/Singer: The Eagles

Book: I read a lot of books but can’t say I have a favorite.

Author: Clive Cussler

Sports figure: Tiger Woods

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Turnover Orders and Charging Orders: Additional Tools for Creditors’ Rights Attorneys

By Joseph A. Maker, Esq. 1

Judgment creditors often rely on bank executions and property executions to recover their judgments. However, some cases may present factors, or obstacles, that make collection more challenging, requiring the creditor’s attorney to resort to other procedures, if available in his or her jurisdiction. This article addresses two such procedures—turnover orders and charging orders.2

A turnover order is a court order directed against a third party to transfer to a levying officer specified personal property of the judgment debtor held by such third person, or a debt owed by such third person to the judgment debtor. Under Connecticut law, a judgment creditor may serve a property execution on a third person and demand delivery of such personal property, including a debt due, from such third person.3 If the third person fails to comply with the levying officer’s demand, the turnover order becomes necessary.

Connecticut General Statutes, Section 52-356b, provides that a judgment creditor may apply to the court for an order in aid of an execution, requiring the judgment debtor or third person to deliver to the levying officer the specified personal property held by the third person, including a debt due from the third person, as well as documentary evidence of title to such property or such debt owed.4 As for drafting, the pleading is known as an Application for Order in Aid of Execution, wherein counsel identifies the judgment obtained, the judgment debtor, the third person, the property held or debt owed by the third person, the issuance of the execution, demand by the levying officer and non-compliance with the demand. Generally, the court may issue a turnover order after notice and hearing.5 Once the turnover order is granted, failure to comply with the order may subject the person to being held in contempt.6

I recently had an occasion to file an application for turnover order in a case to collect on a judgment against a corporation from an officer of the debtor corporation. A default judgment was obtained against a corporation that had ceased operations. After obtaining a small (but surprising) recovery on a bank execution, the officer of the debtor corporation was questioned at an examination of judgment debtor.7 The records produced at the examination showed a debt from the officer/shareholder to the corporation. Subsequently, a property execution and an application for turnover order were filed against the corporate officer, to compel the officer/shareholder to pay over to the judgment creditor the debt owed to the debtor corporation. After service of the application papers, notice of hearing and a subpoena, the case settled.

While turnover orders essentially serve as a garnishment device, charging orders effect a lien on a judgment debtor’s interest in a partnership or limited liability company.8 For example, Connecticut General Statutes, Section 34-171, provides that a judgment creditor of a member of a limited liability company may apply to the court for an order charging the member’s limited liability company interest with payment of the judgment. The charging order replaces a levy of execution and imposes a lien on the judgment debtor’s right to payment of profits or distributions as a member of the limited liability company. See PB Real Estate v. DEM II Properties, 20 Conn.L.Rptr. 418 (Superior Court, J.D. of New Haven 1997).

There are limitations to a charging order. "The judgment creditor has only the rights of an assignee of the member’s limited liability company interest."9 The LLC or partnership is left intact. A charging creditor "‘does not become a full partner, is not entitled to manage the partnership, and has no right to attach specific partnership property.’" PB Real Estate v. DEM II Properties, supra, quoting Madison Hills Limited Partnership II v. Madison Hills, 35 Conn. App. 81, 84-85, cert. denied, 231 Conn. 913 (1994).

Despite the limitations, there are some teeth to charging orders. With respect to a judgment debtor that has an interest in a partnership, a court, in connection with entering a charging order, may also "appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts and inquiries the judgment debtor might have made or which the circumstances of the case may require."10 A charging creditor may also request the court for an order of foreclosure of the interest subject to the charging order.11

While the provision for a charging order under the Uniform Limited Partnership Act, C.G.S., Section 34-30, does not contain the enforcement language (i.e., receivership and foreclosure) that appears in the Uniform Partnership Act, C.G.S., Section 34-349, the Connecticut Appellate Court has held that the remedies under the Uniform Partnership Act are available to a judgment creditor of a debtor with an interest in a limited partnership. Madison Hills Limited Partnership II v. Madison Hills, supra. With this ruling, the argument may be made that the remedies under the Uniform Partnership Act should be available to a judgment creditor under the Connecticut Limited Liability Company Act, since the charging order provisions of the Limited Liability Company Act and the Uniform Limited Partnership Act are almost identical. Check your state’s statutes and case law on charging orders against partnerships, limited partnerships and limited liability companies, and compare the statutory language.12

Judgment enforcement can be a challenging area of law. If standard executions are not successful in recovering for your client, consider remedies such as turnover orders and charging orders to assist in your efforts.

Editor’s Note: Joseph A. Maker, Esq., practices in Stamford, CT, in the areas of creditors’ rights, insurance defense litigation and real estate transactions. He is a member of the CLLA’s Creditors’ Rights and Bankruptcy sections.

1 Of the Connecticut Bar and Massachusetts Bar.

2 This article does not cover other common devices for judgment enforcement, such as wage garnishments or judgment liens.

3 See. C.G.S., Section 52-356a(4). The procedures for demand, notice and transfer of demanded property differ if the judgment debtor is a natural person. See C.G.S., Section 52-356(a)(4)(C). Of course, a judgment debtor that is a natural person is entitled to claim exemption rights available under C.G.S., Section 52-352b. Furthermore, the third person demand procedure under the property execution statute is distinct from process of foreign attachment or garnishee process under C.G.S, Section 52-329, which is a prejudgment remedy. To enforce a judgment in an action by foreign attachment, a writ of scire facias is available under C.G.S., Section 52-381.

4 C.G.S., Section 52-356b(a)(1)(2). Note also, that the application for turnover order may be applied for simultaneously with the application for execution.

5 C.G.S., Section 52-356b(b). However, upon showing of need, by way of an affidavit stating facts from which the court may find that there is a "reasonable likelihood that the judgment debtor is about to remove the property from the state or is about to fraudulently dispose of the property with intent to hinder, delay or defraud his creditors", the court may issue an ex parte turnover order.

6 C.G.S., Section 52-356b(d).

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Nominations for CRS Elections in New York 

The Nominating Committee reports the following slate of candidates for the Creditors’ Rights Section officers and Executive Council: 

Unopposed

Chair: Jeff E. Rubin, Miami, FL

Chair-Elect: Robert A. Bernstein, Charleston, SC

Treasurer: Beau Hays, Atlanta, GA

Secretary: Ed Friedman, Baltimore, MD 

Executive Council:

The following seven candidates are running for four open seats on the Executive Council. 

Marc J. Bressler, Edison, NJ

Marty Goldman, Los Angeles, CA

John Pappanastos, Montgomery, AL

Tony Picheca, Far Hills, NJ

Randy Slovin, Cincinnati, OH

Liviu Vogel, New York, NY

Fred Weinberg, Philadelphia, PA 

The CRS Elections will be held at the general membership meeting in New York, on November 13, 2004. Please attend and participate in the selection of the CRS leadership for the coming year. Only fully paid CRS members are eligible to vote.

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