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Recent events have caused many lessors, lenders and lease originators to reexamine their policies and procedures when customers fail. This article will provide a practical review of what can be done operationally before a lawyer is called in or while the lawyer is doing his or her work.
1. Stop and review the file. It is a good idea to take a look at the file before sending an email, default notice or any other correspondence in order to be sure everything is in order. If there are any defects noted in the file, correct what you can without the help of the customer. If you need the assistance of the customer, it is easier to get this when you are negotiating a forebearance or amendment to the financing document.
Among other things, the following should be checked immediately:
(a) If the transaction has been brokered in any way, the originator and funder should both be looking at their documents to determine what their respective rights and responsibilities are. Coordinating efforts and communicating may be the best way to minimize losses to everyone involved. The originator can suffer a loss of reputation and goodwill even if the originator is not responsible financially.
(b) All the documents should be signed and originals available. It is possible to litigate with copies but originals are greatly preferred. If there are any irregularities in the documentation they should be noted and cleared up immediately if possible.
(c) Security Agreements, UCC Filings, copies of invoices, etc. should be checked. It must be absolutely clear whether there is an issue with ownership or the security interest of the equipment. This includes determining whether the lessor has purchase money security interest protection and whether the collateral description is accurate. When was the equipment delivered and was the UCC filed within 20 days? Did any portion of the payment go to the lessee or anyone other than the vendor?
(d) All of the "silly little documents" should be in proper order, such as Secretary Certificates and Resolutions. If not, this should be cured immediately.
2. Determine what you want. It is surprising how many times a lessor goes down the path of recovering equipment only to realize that the equipment has little or no value. If that is the case, the focus should be on getting as much money from the customer as possible. If the equipment is valuable, consideration should be given to requiring the customer to turn the equipment over voluntarily for its and the lessor's benefit.
(a) If equipment collateral value is going to be a key factor, it is usually wise to do a UCC search to determine if there are any other potential claimants. This is particularly important if the purchase money security interest protection is questionable.
(b) Inspections and appraisals are a very good idea at this point if financially justified. If nothing else, it will determine that the equipment exists and is located where it should be. Determining whether the equipment has been properly maintained can also be crucial.
(c) Especially if the equipment collateral will have little value, requesting evidence of the customer's ability to continue to make payments or reach a compromise is not out of line. Copies of financial statement, bank statements, etc can be requested.
3. Guarantors! If the obligation is guaranteed, it is essential to include the guarantors on all correspondence and to be sure they are aware of the situation. Determining whether the guarantor has maintained its good credit is also important at this stage.
4. Additional collateral. If a bank account, real estate mortgage or other collateral is pledged, it is essential to check whether any security interest has been properly perfected, real estate mortgage properly filed, etc. Often this requires a lawyer to go back over what was done at closing.
5. Demand/Default letters. There is no good rule of thumb for when to send what and what to say in which. Here are a few thoughts, however:
(a) Be clear. Give a definite date for performance and not something that is subject to interpretation ("in a timely manner") or something that may require additional proof ("within 10 days after your receipt of the letter").
(b) Be sure that the letter is addressed to the customer by its proper legal name with copies to all guarantors.
(c) It is never a bad idea to send a copy by certified mail and one by regular mail. This will insure that the copy is received even if the customer refuses to sign for it. Of course, the notice language of the lease must be checked and complied with strictly. Do not send an email unless it is specifically permitted by the document.
(d) Be sure to give contact information for one or more specific persons in the office who should be contacted if the customer wants to talk. Do not leave grounds for the customer to say that it called and couldn't find anyone to talk to or that will allow the customer to leave a message on a general recording machine where it may be heard by those not involved in the matter.
(e) If the transaction may be a consumer transaction (e.g. for personal, family or household purposes), debt collectors must comply with the Federal Fair Debt Collection Practices Act. There may also be applicable State laws for consumer debt collection. If the originator has no financial stake in the transaction, you may be considered a "debt collector" under the FPCPA and subject to certain disclosure requirements and limitations on your actions.
6. Lawyers. When referring to a lawyer, always give the lawyer complete information, including a copy of any correspondence that may be relevant. Tell the lawyer what it is you want to do and give the lawyer some idea of how much money is involved and what you expect from the lawyer.
7. Workouts. If there is a workout, consider which of these alternatives is what you really want:
(a) A Forebearance Agreement. This acknowledges that the default exists and does not change the terms of the underlying deal, merely agrees that you will accept alternative performance for some period of time.
(b) An Amendment. This actually changes the basic deal so that the default is cured. Once a document is amended, there is no going back.
(c) Accepting alternative performance without agreement. Be cautious in accepting lump sum payments from the customer. The customer may later argue that the payment was supposed to be payment in full or cured defaulted payments - even though you have accepted the debt. Consult your lawyer if you receive a check or money order marked "paid in full". Otherwise, this, of course, puts the customer in the position of claiming that whatever performance it has rendered cured the default and whatever performance it renders in the future, if in accordance with the demand, keeps you from taking any rights. For that reason, a carefully drafted response letter that states that you will forebear from taking action only if there is no other reason for you to consider yourself insecure but that you do not waive any default and retain the right to take action maybe the best way to go for a small matter over a short period of time.
Barry S. Marks has concentrated his practice in the areas of equipment leasing and finance since 1977. He has authored chapters in both the Matthew Bender and Practicing Law Institute leasing treatises and is co-author of three leasing books available from Leasing Power Tools Press www.leasingpress.com and on Amazon.com).
Barry is listed in The Best Lawyers in America®; Best Lawyers in Alabama and Alabama Super Lawyers. He has served or serves as counsel to the National Association of Equipment Leasing Brokers, on the editorial boards of Journal of Equipment Lease and Financing and LJN Equipment Leasing Newsletter, and the Legal Committee of the Equipment Leasing and Finance Association. He is a Certified Lease Professional (CLP), a member of the Alabama State Bar, The Florida Bar and State Bar of Georgia and a graduate of Emory University (B.A., magna cum laude and LLM-Taxation) and the University of Florida (J.D., high honors).
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BARRY S. MARKS
MARKS & WEINBERG, P.C.
Financial Center - Suite 1615
505 North 20th Street
Birmingham, Alabama 35203
P. O. Box 11386
Birmingham, Alabama 35202
bmarks@marksweinberg.com
www.leaselawyer.com
205.251.8303
fax 278.8905 (Direct) 251.8305 (Main)
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