Accounts receivable Featured

7:00pm EDT November 1, 2005

Everyday, businesses face the basic problem of securing payment for goods and services rendered. Farming out troubled accounts to a collection firm is one option to possible recovery. In such an arrangement, a collection agency is retained to collect the debt on a company’s behalf for an agreed upon, predetermined flat-fee or a percentage of the outstanding amount recovered.

Typically, collection agencies act as the creditor’s agent and if the debt must be reduced to a judgment, a lawyer is engaged to secure the judgment and to proceed with judgment execution. In this scenario, both the creditor and the collection agency share the credit risk that debt may not be recovered.

Rather than hire a collection agency, some companies will retain legal counsel to secure a judgment and proceed with judgment execution. Securing a judgment, however, is no guarantee that the judgment will be paid.

Whether payment on the judgment can be secured depends not only on the debtor’s available assets, but also on such varied circumstances as the existence of liens (recorded and unrecorded), competing creditors (both active and passive), facts to indicate that the debtor committed acts constituting fraudulent transfers in avoidance of the debt and the impact of the bankruptcy laws, should the debtor file for bankruptcy protection.

Whether counsel can be retained on an hourly fee verses contingency basis will often depend on the amounts at issue and the information available on the debtor’s assets. More atypical fee structures are hybrid arrangements where a maximum fee is imposed. If the attorney’s fees associated with execution on a judgment exceed that maximum, the remaining work will be performed on contingency.

If a company pays an hourly legal fee, it alone retains all of the credit risk. If the fee arrangement is either partially or entirely on contingency, the company and its lawyers share in the credit risk. However, even with a pure contingency arrangement, the company nonetheless retains a degree of credit risk because the underlying debt has never been paid.

When a company has written-off a difficult-to-collect debt and the prospects for securing repayment appear bleak, company executives can find themselves asking whether the exercise of securing a judgment under such circumstances is nothing more than an effort in futility. Even then, the answer to the question is no — not necessarily.

First, depending on the jurisdiction, judgments may provide a lien on real property belonging to the judgment debtor. In states such as Pennsylvania, one can secure a countywide lien on the debtor’s real estate in the county where judgment is entered, while in jurisdictions such as New Jersey, it is a statewide lien.

Second, depending on the jurisdiction, judgment liens may remain of record and in effect for periods ranging from five years to 20 years, and may be renewed in order to maintain the lien’s priority.

If active execution efforts are or appear to be unfruitful, simply allowing the judgment to remain of record harbors the inherent potential that someone interested in purchasing or foreclosing on the debtor’s real estate may, by necessity, contact you in an effort to make some payment to secure the real estate for a sale that is free and clear of all liens.

If you are able to keep tabs on the whereabouts of the judgment debtor, you can transfer your judgment to other jurisdictions where the judgment creditor can be found.

Third, selling and transferring the ownership of the judgment by assignment to a third-party is another means to secure a negotiated recovery, while also putting an end to one’s credit risk exposure and continued recovery efforts.

In other words, the sale of a company’s rights in the judgment will provide it with a definite payment amount as opposed to the vagaries, costs and uncertainties associated with continued judgment recovery efforts.

Potential judgment purchasers can be found through attorney networking and word-of-mouth, general internet searches and referrals from industry professional groups such as the National Judgment Network (www.nationaljudgment.net).

John J. Jacko, III is a commercial and business litigator in the Creditors Rights Practice Group at Buchanan Ingersoll PC. Reach him at jackojj@bipc.com or (215) 665.3923.