01/10/11

What Every Florida Business Owner

Should Know about Collections

Business owners and people in the marketplace often speak of “collections.”  While there is no textbook (or legal) definition for a collection, it is fair to say that a collection is any successful attempt—whether through the submission of a letter or through the institution of formal legal proceedings—to recover something that is owed by one individual or entity to another individual or entity.  A small business, for example, engages in a collection when it resorts to the court system to collect a past due balance.  Moreover, the large volume of mortgage foreclosure cases that are currently flooding the courts’ dockets are properly viewed as collections, because such cases involve lenders that are seeking possession and ownership of collateral property to satisfy a past due balance under a promissory note. 

There are many reasons why collections are (or at least should be) important to Florida business owners, especially in a soft market where customers and clients are defaulting at unprecedented levels. Unlike employees of a business who receive a salary or wage, a business owner’s livelihood is directly attributable to the degree to which his or her business gets paid for its services or products.  Furthermore, an unpaid balance represents an injustice: a person or entity receives the benefit of a service or product without paying fair value for it.   

The Collections Process

Unlike non-lawyer collection agencies, lawyers have a powerful tool in their arsenal: they may file a lawsuit on a creditor’s behalf. Thus, from the perspective of a collections lawyer, the first step in collecting a past due balance from a debtor is almost always the institution of formal legal proceedings.  Before filing suit, however, some collections attorneys will first write a formal demand letter to the debtor, identifying themselves as the creditor’s attorney and demanding payment of the amount alleged to be owed. Typically, such a letter informs the debtor that the failure to pay will immediately result in a lawsuit. 

While drafting a demand letter may potentially spare the creditor from having to file a lawsuit, an unsuccessful demand letter may protract the process of collecting a debt.  If the letter’s purpose is to be achieved, then the creditor must give the debtor sufficient time in which to respond.  In addition, because a creditor’s attorney is deemed a “debt collector” under federal law, he or she must scrupulously follow the provisions of the Fair Debt Collections Practices Act (“FDCPA”).  Among other things, the FDCPA affords debtors an opportunity to dispute the debt in writing and triggers additional obligations on the part of the creditor’s attorney, including the obligation to provide the debtor with verification of the debt.  See 15 U.S.C. § 1692g.(b) (2006).  Failure to abide by the mandates of the FDCPA subjects the debt collector to liability.  See generally 15 U.S.C. § 1692k. (2006).   

Can I Still Bring a Lawsuit If There Is No Written Contract?

Many creditors wonder whether they can bring a lawsuit against a debtor without a written contract.  While a written contract is probably the best evidence for the existence of an agreement, it is not necessary to prove breach of contract or numerous other causes of action.  A contract can be proved by testimony, the parties’ course of dealing, and documents evidencing the existence of an agreement.  To this end, an invoice may evidence an agreement for payment of services or products. 

In debt collection cases involving an invoice but no written contract, the most common cause of action brought by creditor’s attorneys is “account stated.”  The Florida Fourth District Court of Appeal has held that a plaintiff properly pleads a case for account stated when he or she alleges “an agreement between the parties that a certain balance is correct and due and an express and implicit promise to pay this balance.”  Merkle v. Health Options, Inc., 940 So. 2d 1190, 1194 (Fla. 4th DCA 2003).  When there is no invoice or written contract, a creditor may bring an action for “open account,” using its accounting records to show an unsettled debt.  See, e.g., H & H Design Bldrs., Inc. v. Travelers’ Indemnity Co., 639 So. 2d 697, 700 (Fla. 5th DCA 1994).  While describing each and every possible cause of action is beyond the scope of this article, it is sufficient to note that there are several causes of action that may be brought in the absence of an express written contract between the creditor and the debtor.  An experienced collections attorney will know which causes of action to assert. 

Should I File a Lawsuit Pro Se (Without the Assistance of an Attorney) If the Amount in Dispute Is Small?

Many creditors incorrectly think that, because the amount in dispute is small, he or she should prosecute a case without the assistance of an attorney.  While such pro se litigants may occasionally get a debtor to pay them after bringing a lawsuit, there are numerous reasons why proceeding without assistance of counsel may be unwise. 

The first reason involves protecting one’s own interests, because filing a lawsuit against a debtor invites the debtor to file a lawsuit against the creditor.  Think about it: If a lawsuit is analogous to a fight, the most natural response to being hit is to hit back!  The author of this piece recounts a plaintiff who, while pro se, sued a defendant for roughly $1,200.00.  The debtor’s attorney immediately counter-claimed for over $15,000.00, asserting that the plaintiff had defamed his client while trying to collect the debt.  Because the defendant’s claim possessed merit, the plaintiff was not only unable to collect the amount owed, but he spent a sizable sum of money defending the counterclaim.  If the plaintiff had hired an attorney from the outset, the attorney would almost certainly have assisted the plaintiff in properly demanding the money owed. 

The failure to recognize potential valid counterclaims is only one reason to hire an attorney.  Other reasons include properly drafting the lawsuit, complying with necessary pre-suit procedures, and utilizing any statutes, causes of action or rules that might allow for an award of attorney’s fees to the prevailing party. Because attorney’s fees continue to accrue as the action is litigated, the possibility of recouping those fees may cause a debtor to feel a greater sense of pressure to settle.     

In some instances, hiring a lawyer may be required.  Although a business owner may represent his or her business in the small claims context, he or she must hire a lawyer if the case is brought in (or transferred to) county or circuit court.  A case is properly brought in county court if the amount in dispute is between $5,000.00 and $15,000.00 (exclusive of court costs, interest, and attorney’s fees), and a case is properly brought in circuit court if the amount in dispute is in excess of $15,000.00 (exclusive of court costs, interest, and attorney’s fees). The cost involved in hiring an attorney for a simple collection is usually not overly burdensome.  Most collections attorneys (including the author) frequently take cases on a contingency fee basis, which means that the creditor’s attorney’s fee is paid directly out of the proceeds of a money judgment.  In other words, no fee is charged if there is no recovery.    

Can a Creditor Recoup Attorney’s Fees and Costs from a Debtor after Bringing Suit?

One of the most common questions posed by creditors seeking legal representation in a collections lawsuit is whether they will be able to recoup attorney’s fees and costs.  In debt collection context, a creditor may generally recoup attorney’s fees if: (a) the debt is premised on a contract, and (b) the contract provides for the award of attorney’s fees.  Even then, the award of attorney’s fees will be limited to that which is determined by the court to be reasonable.  See,e.g., Tutor Time Merger Corp. v. MeCabe, 763 So. 2d 505, 506 (Fla. 4th DCA 2000).  Depending on the circumstances of a case, there may be additional methods of acquiring a fee award, such as by making a demand for judgment that is rejected by the defendant where the final judgment is at least 25% greater than the demand.  See Fla. R. Civ. P. 1.442 (2010). Here, the plaintiff is entitled to reasonable costs and attorney’s fees incurred from the date of filing the demand.   

As for recouping court costs, a judgment debtor will be responsible for any court costs incurred as a result of bringing the action.  See Fla. Stat. § 57.041 (2010).  Court costs vary depending on the applicable filing fee and on whether the creditor spends money engaging in discovery, which is the “compulsory disclosure, at a party’s request, of information that relates to the litigation.”  Black’s Law Dictionary 207-08 (2d. ed. 2001). Depending on whether the suit is filed in small claims court, county court or circuit court, the cost of filing and serving a lawsuit in Broward County, Florida, is usually somewhere between $195.00 and $411.00. 

Additional Considerations for the Prudent Creditor-Business Owner

A prudent business owner should not only assess its business’s ability to win a case, but he or she should also consider the practical implications of bringing a lawsuit, such as how the filing of a lawsuit may impact the business’s goodwill.  Indeed, it may not make sense for a creditor to sue a debtor for a small amount of money if the lawsuit will cause harm to the creditor’s reputation. 

Furthermore, a creditor should weigh the costs of bringing a lawsuit against the likelihood of any potential recovery.  Even if a creditor obtains a money judgment against a debtor, a debtor’s assets may be exempt from execution, preventing the creditor from having its judgment satisfied.  See, e.g., Fla. Const. art. 10, § 4 (2010) (exempting homestead property from forced sale except for the payment of taxes, mortgages, or improvements or repairs); see also Fla. Stat. § 222.11 (2010) (providing a wage garnishment exemption to heads of a family who contribute in excess of 50% of dependent’s support when the wage earner has a legal or moral obligation to support such dependent).  Worse still, the debtor may not have anything to pay the creditor.  In those cases, the best course of action for the judgment creditor is to record his or her judgment and hope that the debtor one day acquires property on which an execution may be made.  A collections attorney may assist a creditor in determining whether bringing a lawsuit makes economic sense.    

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JUSTIN C. CARLIN, attorney at The Carlin Law Firm, P.A., provides legal representation throughout the State of Florida to small businesses and entrepreneurs.  Mr. Carlin can be reached at (954) 522-9202 or at jcarlin@carlinfirm.com.  Information contained in this article was accurate as of January 7, 2011. This article is for general information use only and does not substitute for specifically tailored legal advice.