Collection of Professional Accounts David W. T. Carroll, Esq.
Carroll, Ucker & Hemmer LLC
175 S. 3rd St., Suite 200
Columbus, Ohio 43215
(614) 547-0350
fax: (614) 547-0354
When a client has financial trouble, the
client's professional accounts are the easiest to avoid paying.
Often the professional gets caught in a
trap. Have you ever heard yourself say or think, "If I press too
hard for collection this time, the client may not use my services the
next time?" Collection decisions on overdue professional fees are
difficult, because any suit for collection may bring a claim for
malpractice, warranted or not. This paper is intended to serve as
a guide through the collection process, but every decision whether to
take collection action must be made on its own merits, preferably with
the help of counsel knowledgeable in malpractice issues.
In the Beginning
The best start to collections is in the
selection of clients. Avoid clients unfamiliar with construction
and those new to working with design professionals.
Alternatively, understand that these clients require you to train
them. They need constant attention. You need to document
carefully all additional services. You need to explain the many
hours of work that go into drawings and specifications. You need
to explain that every structure is a first of a kind. Even houses
with similar floor plans have dissimilar sites and dissimilar
contractors.
You need to explain that the construction
process is not perfect and that professional services are most assuredly
not perfect. With professional services, the client buys the
professional's skill, not a finished product. In other words, you
must carefully and in detail explain the scope of services and create
reasonable expectations on time, money, construction administration,
and quality of finished product given the budget.
Avoid doing design work for small, inexperienced developers, because they seem always
to want you to work on a contingent fee, without any premium for the extra
risk. Avoid contracting with small corporations, because they
often have no assets from which to collect when the funding falls
through. If you knowingly take a project on the contingency that
the developer will get funding, you ought, at least, be paid for the
risk.
Consider the client. If you have a
reason to be uncertain about collection (i.e., any small client), ask
for a cash payment up front to be applied to the last payment.
Finally, provide for the charging of interest
in the contract. This a particularly helpful with large corporate
clients, many of whom will delay your payment as a matter of corporate
policy, because the corporation makes money on the float. In
fact, this is very unfair, because you and your consultants have paid
salaries and overhead, too. You should be compensated for the
additional time you have to finance the work due to tardy payments.
The Clients
Corporations and Limited
Liability Companies. As clients, corporations and limited
liability companies are worth only the value of their assets at
collection time. Some large entities are quite collectible.
Smaller entities pose a significant risk to the design
professional. Unless an individual guarantees to corporate debt in
writing, the design professional will be limited to collecting from
company assets, no matter who is behind the corporation or limited
liability company. Most developer entities have no assets from
which to collect.
Partnerships and Joint Ventures. With a partnership or joint venture, the creditor may
collect from the assets of the partnership or joint venture and then
when those are exhausted from the assets of the individual partners or
joint venturers. Of course the partners may corporations without
assets.
Limited Partnerships. A limited partnership is a partnership that has a
general partner and additional partners called limited partners.
Limited partners are not liable for the debts of the limited
partnership, except to the extent of any unpaid subscriptions for the
limited partnership interest. However, the general partner's
assets are available for collection after exhausting limited partnership
assets.
Government entities. Government entities present special collection problems
on those rare occasions when they are recalcitrant (as opposed to being
normally merely slow). Those problems are beyond the scope of
this paper. Fortunately government clients rarely plead poverty
after contracting for design services--at least as an excuse for
non-payment. In Ohio, anyone contracting with a government
entity below the level of the state government has a duty to obtain a
fiscal officer's certificate with the contract by which the chief fiscal
officer certifies that the funds to pay the contract have been
appropriated and are either collected or are in the process of
collection. To be valid, the contract with a school
district also requires a certification signed by the treasurer,
superintendent and the President of the Board of Education stating in
effect that the school district has enough funds to operate for the
entire school year. Without those certificates, there is no
right to collect on an unpaid contract!
Individual. The
individual contract signer is the most likely pay. If a contract
is with a corporation or some other entity, it is best to have the
contract co- signed (i.e., jointly signed) by an individual principal
of the corporation or other business entity. Although trickier,
you may also request that the individual guarantee the contract in a
written guarantee.
Written guarantees are difficult to draft
well. A simple guarantee may be discharged in many ways not
obvious. For example, any deferral or compromise of the debt
may, in the proper circumstances relieve the guarantor of
liability. Before entering into a written guarantee (as opposed to
a joint obligation due to co-signing), consult with legal counsel.
During the Project
The more quickly invoices are billed, the more
quickly they are paid. The longer the billing from the service,
psychologically, the easier it is for the client to avoid paying,
especially if your services are no longer needed. (What have you
done for me lately?)
When the client runs out of money, many will
then complain about the quality of the service. This translates to
real problems in collection, as discussed below.
During the project, find subtle ways to
confirm in writing the client's expressions of pleasure.
At the first sign of slow payment, confirm
orally that the client is happy with the services and then confirm it in
writing, perhaps coupled with a short extension of time to pay. If
possible, get the owner's signature agreeing to the
satisfaction.
Confirming the owner's satisfaction does two
things. First, if the late payment is truly a temporary
phenomenon, you concern for the client's satisfaction will promote good
client relations. Second, it will make it more difficult for the
client's lawyer, if collection really falls apart, to make malpractice
claims or claims that you failed to live up to your end of the contract.
The Seriously Overdue Invoice
The most cost effective collection
methods are your personal contacts followed by confirming collection
letters. Your follow-up letters should again confirm that the
client has expressed satisfaction, or possibly no dissatisfaction, or
define the only areas of dissatisfaction and the agreed resolutions.
If the client complains of financial problems,
and you believe there is some prospect for eventual collection, there
are a number of avenues to consider.
1. Payment Schedule. A
voluntary payment schedule, with or without interest, as you may
agree. It is best if the payments are secured by a note,
preferable cognovit in form. A cognovit note is a note that
confesses judgment in advance. If any payment is missed, the
noteholder may go into court and get a judgment in one day. With
any other type of note, judgment arrives only after the 28 days after
service and then only if no defense is offered, otherwise judgment may
be weeks or months afterward, if at all.
A debtor may apply to the court to vacate the
cognovit judgment if the debtor can show that there is a valid defense
to the note. Usually, by that time, the debtor is more interested
in paying to get the creditor off his back than to pay a lawyer to
fight a once-lost battle.
2. Voluntary liens.
Along with, or in lieu of a note, try to get the debtor to give you a
voluntary lien on property. Rarely will you find that the debtor
has real estate without any prior liens, but any lien is better than no
lien at all. Even a junior creditor may cause serious problems
(resulting in an increased desire to resolve the debt), especially if
the property is valuable to the debtor. You will need a lawyer
to prepare the mortgage and security agreement.
Liens may be granted on any property, not just
real estate. Stocks, bonds, CD's, receivables -- all may be
subjected to liens. To perfect the liens, you will need to consult
a lawyer. It is not difficult so much as tricky. One small
error may render the liens worthless. You will need a security
agreement and proper filings under the Uniform Commercial Code.
Fair Debt Collection Practices Act
The Federal Fair Debt Collection Practices Act
was initially enacted to protect consumers from professional
collectors. Although the Act has been expanded beyond its original
intent by both by legislation and by court decision, it's still does not
apply to collection actions by the original debtor (i.e., the architect
trying to collect its own debt) or generally to business debts.
In cases involving architectural fees, it applies to collection of fees
for the design of a home, for example, when the architect is hired by
the homeowner, but only if a professional collector attempts to collect
the fee.
While this Act as a limited application to
collection of architectural fees today, be alert to any changes (which
undoubtedly would make the news in at least the business section of the
newspaper).
Methods of Collection
1. Collection
Agencies. Collection agencies charge a percentage of the
collections, plus court costs if it goes that far. Unfortunately,
collection agencies are not geared to recognize the peculiar problems
of professionals. Collection agencies work best for multiple,
recurring collection of trade debts, and in our judgment, are not
really suitable for the collection of professional fees.
2. Suit. Law
suits are expensive, but in collection cases may be done based upon a
percentage of the amount collected. Often that is not an
appropriate method of legal compensation. That compensation
method is more likely acceptable to the lawyer for a regular client,
particularly if the collection is relatively small.
Unfortunately, collection suits frequently
result in malpractice claims. When suit is filed, a party must
make a counterclaim for any claim the party may have arising from the
same facts and circumstances as the original claim. When the
original claim is collection of professional fees, a debtor's lawyer
will ask his client if there is any reason to believe there was
malpractice. A pressed debtor often will think of something,
however insubstantial. The lawyer will then make a malpractice
counterclaim, to avoid being accused of malpractice himself.
A malpractice claim requires the professional
to notify the malpractice insurer, which will result in the employment
of a lawyer knowledgeable in malpractice issues. Unless the design
professional's original lawyer regularly works through insurance
companies in malpractice cases, the insurer will require another
lawyer--who the design professional will pay for through the deductible.
If a malpractice counterclaim is made, the
nature of the construction process is such that the defense will rarely
be lower than a small deductible ($10,000 to $15,000).
3. Small Claims. If
the debt is less than $3000 or if you are willing to accept only $3000,
you may bring an action in the small claims court without a
lawyer. The debtor may still counterclaim for malpractice, but
unless the debtor asks for over $3000, any judgment will be limited to
that amount. Any request for more than that will cause the action
to be transferred either to municipal court or to common pleas court
where both parties will need lawyers.
As a practical matter, debtors rarely make
malpractice counterclaims in small claims court. Because small
claims court allows both parties to proceed easily without a lawyer,
the debtor usually will save money (the debtor is generally short of
money anyway) and will not consult a lawyer who would suggest the
counterclaim.
After judgment--getting the money
A judgment is no guarantee that a debtor will
pay. The creditor must take certain steps to collect. Which
steps are up to the creditor.
1. Judgment lien. A
judgment creditor may get a lien on all real property owned by the
debtor by getting a certificate of judgment from the court clerk and
filing that certificate in the county in which the debtor owns property.
The lien will attach to any real property
owned by the debtor when the lien is filed. It will not attach to
property recorded by the debtor after the filing of the lien. It
will not attach to stock, bonds, accounts receivable, automobiles or
any other property that is not real estate. The lien will have
priority over liens filed after the lien filing, but not those filed
before. It will not have priority over a pre-existing mortgage,
for example.
If the debtor owns the property with his wife,
the lien will not attach to the wife's half ownership. If the
debtor owns property in the name of a corporation or a partnership, the
lien will not attach to the property.
2. Attachment by
Execution. Personal property in possession of the debtor may be
attached by an execution. The creditor having a judgment files a
writ of execution with the sheriff describing the property to be
attached and the sheriff may seize the property. The property
then gets sold at sheriff's sale to the highest bidder. The
proceeds pay first the costs then the judgment.
3. Wage garnishment.
Garnishment is a means of seizing property of the debtor in the hands of
another. In a wage garnishment, the creditor causes the clerk of
courts to issue a writ of garnishment which is served on the debtor's
employer ideally the day before payday. The employer must then
answer to the court paying the court a certain amount which is withheld
from the employee. The amount required to be paid to court and the
permitted frequency of garnishments are limited by law.
The debtor may obtain a prompt hearing to
raise any valid objections to the garnishment. The hearing is
usually held in five to ten days from the service of the
garnishment.
A wage garnishment is a powerful incentive for
employees to make other arrangements to pay, because many employers
will fire an employee rather than suffer continued garnishments.
4. Non-wage
Garnishments. Non-wage garnishments seek to obtain property of the
debtor in the hands of a third party, other than wages. For
example, non-wage garnishments are used to attach funds in bank
accounts.
The creditor files a writ garnishment with the
clerk of courts identifying the garnishee (and if a bank, the debtor's
account numbers if possible) and causes the writ to be served. The
bank (or whoever) is required to pay the money into the court (or
explain why not).
The debtor has five days in which to request a
hearing which is usually held 5 to 10 days after service of the
writ. The debtor may raise any proper issue in that hearing, such
as whether the debt has already been satisfied. Whether the
judgment should have been granted is not a proper issue.
5. Judgment Debtor
Examination. A judgment creditor may, by filing the appropriate
writ, require the debtor to come to court and tell the creditor about
the assets available to answer for the debt. The debtor is put
under oath and must answer any question put to him about his assets and
recent transfers of the assets. The creditor may use that
information to pursue other collection methods.
6. Execution Against the
Person. Although the Ohio Constitution forbids imprisonment for
debt, there is an exception for debts resulting from fraud or where a
debtor fraudulent transfers or conceals assets. Ohio has a rarely
used procedure to allow execution against the person by which the
debtor is put in jail until the debt may be paid or secured or it is
proven that the debtor lacks the means to satisfy any further portion
of the debt. Yes, Virginia, there is a limited form of
imprisonment for debt in Ohio.
Pre-judgment Liens
1. Mechanic's Liens.
Ohio does not specifically recognize mechanic's liens for design
professionals. In Ohio design professionals have no mechanic's
lien right except possibly for services actually performed physically
on the property. There is a school of thought that surveyors who
physically stake property for construction may have lien rights for the
portion of the work performed on the property. However, clearly
there are no lien rights for the development of drawings and
specifications for the work.
The theory is that there is fair notice of the
possibility of a mechanic's lien if the passerby can see that work has
been physically performed on the site or that materials have been
delivered. There is no such physical evidence of the commencement
of drawings.
2. Prejudgment
Attachment. Generally in Ohio, a creditor may get a lien on the
property of a debtor only if the creditor has performed physical work to
improve the property on which the lien is claimed. However, there
is no right to obtain any other prejudgment lien on the property of a
debtor unless the creditor can show that the debtor is about to flee the
jurisdiction or hide the property.
This is a rare remedy in Ohio and is very
difficult to prove. However, if a creditor can make the proof, a
court will allow prejudgment attachment of property if the creditor
will furnish a bond in double the amount of the amount sought in the
judgment.
Transfers in Fraud of Creditors
Any transfer of an asset to hide it from
present or future creditors made without sufficient consideration (for
example, transfer by gift) is in fraud of creditors. As a result,
those assets may be garnisheed or attached by the creditors.
There are also rarely enforced criminal penalties for such transfers.
Of course, there is usually a fight over
whether the transfer was valid.
Exemptions
Not all assets of a debtor may be attached by
a creditor. The statute gives the debtor the right to claim
certain exemptions. The trick is that the debtor must
affirmatively claims those exemptions before the property is sold or
the money turned over the creditor.
Bankruptcy
Bankruptcy of the debtor presents special
problems, the full scope of which fills volumes. The design
professional is well advised to consult with counsel about how best to
proceed. One thing is certain. As soon as you know of the
bankruptcy, you must immediately stop all collection efforts.
As soon as a debtor files bankruptcy, an
automatic stay goes into effect. That stay prohibits almost all
(but not quite all) creditors from taking any collection action.
Any attempt to collect debt could result in a finding of contempt of
the bankruptcy court.
If you have collected money from the debtor
within 90 days of the bankruptcy filing (longer if you are an insider of
the debtor), you may have to give that collected money back to the
bankruptcy court. You will have to give that money back unless it
was paid for services rendered within 45 days of the date the money was
paid to you. This is called a preference. In theory, the
bankruptcy court is leveling the playing field because the debtor has
preferred you over other creditors due to the recent payment.
All too often, bankruptcy means the creditor
takes nothing. However, sometimes the aggressive creditor can
create problems in the bankruptcy that encourages payment.
There are two types of bankruptcy most
commonly seen. A chapter 7 bankruptcy results simply in
liquidation of a creditor's assets supposedly for the benefit of the
creditors. Usually the trustee, if anyone, benefits the
most. If the bankruptcy is a "no asset" estate, count no
not collecting anything from that debtor.
A chapter 11 bankruptcy is supposed to be a
reorganization of the debtor. In a chapter 11, the debtor keeps
operating. The debtor has four months (and longer actually) to
propose a plan of reorganization. Basically the plan tells how
much of the debt the debtor proposes to repay on what payment
schedule. The largest unsecured creditors form creditor's
committee to act on behalf of the creditors to negotiate the plan.
Usually, the plan results in a few cents on the dollar of repayment, but
only if the debtor lives up to the plan.
As a practical matter, a chapter 11 bankruptcy
usually helps only the debtor, the secured creditors (usually the
largest creditors), the trustee (who gets a fee) and the lawyers (who
all get fees). The smaller creditors, especially if unsecured,
usually get little return. Even secured smaller creditors usually
have liens subordinate to the larger secured creditors and the assets
securing the liens usually have insufficient value to pay the lower
priority secured debts.
Conclusion
Probably our best advice is to select
your clients well. Your collection will be aided by good
communications before and during the project. Always confirm in
writing that the client was pleased with the services (if that is
true).
The information on this web site is for general reference
only. To apply the information to an individual situation, you
must consult a qualified professional. Unless you contract for
specific services from us, there is no attorney-client relationship
established.
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