ABA Section of Business Law

A person buys something; it's not paid for. What to do? As the true tales that follow will show, if your client company hasn't called you yet, don't think it never will.

A few years back, your client hired a collection agency, which is now out of business, to go after a $3,000 undisputed debt. Imagine explaining to the client that the wrongful actions of the collection agency have resulted in a judgment against the client for a sum more than four thousand times the debt.

Visa, it's not where you want to be. In 1991, a debtor owed $2,700 for Visa card purchases. Unsuccessful in its own collection efforts, the creditor hired a collection agency to pursue the account. Although there is much disagreement as to what followed, it is certain that the debtor filed a lawsuit and was awarded $11.7 million by a Texas jury against both the creditor and the collection agency. The damages arose from a series of phone calls during 1991 and 1992 to the debtor's home and job.

The debtor first testified that she and her husband were bombarded with disrespectful, nasty and horrible collection calls from the creditor, which were often made four to five times a day and at odd hours. The creditor vehemently disagreed and swore that any and all of its calls were courteous in nature, made no more than twice in a seven-day period, only once on any single day and only between 8 a.m. and 9 p.m.

The debtor told the jury that when the collection agency took over and began calling, the intensity and frequency got worse. Calls were made to the debtor's home and work. Her employer testified that calls to the office were so numerous that at times the employer's phone lines were tied up with calls just from the collection agency. The debtor even brought evidence before the jury that the collection agency had made threats on her life.

The employer also received an anonymous bomb threat. The receptionist for the employer swore at trial that she recognized the caller's voice as one of the employees of the collection agency. Finally, the debtor quit her job and moved from El Paso to New Mexico. The jury found that the creditor should pay the debtor $11.7 million. The collection agency failed to appear at trial to defend either itself or the creditor, leaving the creditor holding the bag.

On appeal, the creditor argued that it could not be held liable for the actions of the collection agency because it was an independent contractor for the creditor. The appellate justices disagreed and ruled that the collection agency was the creditor's agent and not an independent contractor, even though the agency was separately licensed, operated its own facilities, maintained its own bonding and insurance, and supervised, trained and paid its own employees.

The justices pointed out that the creditor retained rights of control over significant details of the collection agency's work. Written service agreements required the collection agency to perform under set standards dictated by the creditor, such as when to make calls and how many, when to send letters and how many, and what to do with "broken promises." Some situations specifically required supervisory review. As principal, the creditor was liable for damages caused by the tortious conduct (including punitive damages) of its agent, the collection agency.

In further support of the ruling, the justices wrote that even if the collection agency were not the agent of the creditor, the creditor ratified the agency's improper acts because the debtor in early 1992 personally notified the creditor of specific malicious conduct by the collection agency, a notice the creditor ignored.

The jury verdict, however, was reduced by the appellate justices on purely legal grounds (based on the principle that an injured party cannot recover multiple times for the same injury) to only $1,475,000. Household Credit Services Inc. v. Driscol, 989 S.W.2d 72 (Tex. App.—El Paso 1998, n.w.h.).

If polled, most businesses would list past due receivables among their top five business concerns. Many take aggressive action to control the problem and a good number seek legal advice and legal action. Beyond the basic cost-benefit analysis (which can be easily tracked) is the issue of risk. Counterclaims for defective product, untimely delivery and the like should be well understood by businesses that use the legal system for debt collection, but claims arising from the collection process itself, such as a creditor's liability for the wrongful actions of its independent contractors, can be unexpected bombshells.

Creditor action or even nonaction can be woven into the wrongdoings of the independent contractor to create joint liability. Simple and well-meant control over an agent or independent contractor can be a lynchpin for joint liability, too.

Wring that Bell. An individual used Southwestern Bell for business phone services. In 1984, one of his businesses suffered a major theft that sent his Bell account into arrears. Bell sued, but the parties agreed that Bell would take a $9,500 judgment premised on Bell not executing the judgment for six months. The debtor planned to raise cash during this time, but failed. Bell hired lawyers to go forward with the writ of execution.

The debtor claimed he was damaged by the execution levy. A lawsuit ensued against Bell, its lawyers and others involved in the court-ordered execution. At trial, the debtor testified his heart condition was gravely worsened by the levy and as a direct result, the debtor's businesses failed. At the conclusion of the trial, the Texas judge concluded that Bell would pay the debtor more than $5 million in damages. Bell appealed, arguing it could not be held liable for the intentional and tortious conduct of its agents whose actions gave rise to the debtor's damages.

The appellate justices ruled against Bell and wrote, "A principal is responsible for an unlawful act of his agent where the act is committed by the agent for the purpose of accomplishing the mission entrusted to him by his principal.... Here the alleged intentional torts were committed in furtherance of the collection efforts for Bell's benefit. While there is no direct evidence that Bell encouraged or ordered the tortious behavior, the acts were committed for the purpose of accomplishing the mission entrusted..."

The justices further wrote that although the trial testimony as to critical events occurring on the day of the execution levy was absolutely conflicting, it was no reason to set aside the decision of the trial judge. However, on purely legal principles, the judgment was reduced to only $2,457,789.24. Southwestern Bell Telephone Co. v. Wilson, 768 S.W.2d 755 (Tex. App. — Corpus Christi 1988, writ denied).

Creditor liability may also come as a matter of law, not based on the relationship of agency, but on the nature of the activity.

The Doberman and the debtor, alone at last. In 1990, MBank El Paso hired a recovery service to repossess an automobile secured by a note in default. This was the third time repossession was required on the debtor's car. The repo service found the car and hooked it up to the tow truck. Before it could drive away, the debtor appeared. She began arguing with the repo service to cease its efforts and leave. She was ignored, so she jumped into the car and locked the doors.

Tending to the task at hand, the repo service then towed the car with the debtor inside across town at a high rate of speed (presumably to make up for the time delay caused by the debtor) to the repossession yard. The car, with the debtor still inside, was parked in the fenced repo yard that was also home to a Doberman pinscher guard dog. The dog had full run of the facility. The yard gates were padlocked.

To no one's surprise, the debtor sued MBank and the repo service. MBank argued to the court that the repo service was an independent contractor and since the tortious conduct of the independent contractor gave rise to debtor's damages, the bank had no liability. The trial judge agreed with MBank and entered summary judgment in its favor.

Through appeals, the issue reached the Texas Supreme Court. The justices disagreed with the trial court and ruled that a secured party bears a nondelegable duty to avoid breaching the peace during self-help repossession. MBank was liable for any physical harm and damages that resulted from the independent contractor's failure to take reasonable caution against danger. The case was sent back for jury trial where damages sought by the debtor totaled $1,250,000. MBank El Paso v. Sanchez, 836 S.W.2d 151 (Tex. 1992).

The sheriff as repo man. In 1976, an Arizona debtor failed to carry insurance on his car required by the loan and security agreement. This put the loan in default. To assure a smooth repossession, the creditor hired a deputy sheriff to come along. With the deputy in full uniform, the creditor went to debtor's home and with the debtor's express consent took possession of the vehicle. Debtor later sued the creditor arguing that he breached the peace in bringing an officer with him for the repossession. It was undisputed that the creditor brought the officer along to keep the peace, rather than breach it, because the creditor was concerned that an altercation might occur. The case was dismissed on summary judgment.

On appeal, the appellate court reversed the trial court. It wrote, "the introduction of a law enforcement officer in the area of self-help repossession, regardless of degree of participation or nonparticipation by officer in actual events, would constitute state action, thereby invalidating a repossession without a proper notice and hearing." The matter was sent back for a jury trial to assess damages against the creditor. Walker v. Walthall, 588 P.2d 863 (Ariz. Ct. App. 1978).

Clients must be generally advised of possible liability for actions of their agents and independent contractors. It will at least ease meeting with your client should an adverse judgment come in. Their best protection is insurance. Independent contractors and agents should be well bonded or insured.

Many businesses may feel immune from the problems set out above, arguing that their employees and agents are reputable and courteous. However, at trial, reality and the imagined can often become entwined, rendering truth unrecognizable. A reputable doctor once asked me, as a trial lawyer, if I found that people lied much on the stand. I replied, "I have learned to expect all witnesses to lie."

Just pay me anytime. In 1978, an installment sales contract was executed in Arkansas to sell a bulldozer. The debtor fell into arrears and on Oct. 31, the bulldozer was peacefully repossessed. The debtor responded with a lawsuit for wrongful repossession. At trial, the debtor swore that a finance representative of the creditor told him there would be no repossession if a payment were mailed by the end of October. In reliance, debtor put his payment in the mail on Oct. 28.

The creditor rejected the payment on receipt as the bulldozer had already been repossessed. The creditor's testimony differed vastly from the debtor's on the October events. The finance representative flatly denied any extension agreement was ever made. However, the jury chose to believe the debtor and awarded damages against creditor in the sum of $35,000. The result was affirmed on appeal. Rogers v. Allis-Chalmers Credit Corp., 679 F.2d 138 (8th Cir. 1982).

Two lousy days off. A creditor sold a 1961 Ford Thunderbird in 1966. The $1,052 balance owing was put into a promissory note secured by the car. The debtor made payments totaling $621, but on Nov. 25, 1966 failed to make the payment due and the creditor repossessed the vehicle, undeniably without a breach of the peace. The creditor sued on the note deficiency and the debtor counterclaimed arguing fraudulent conversion of his automobile.

At trial, the debtor testified that the creditor orally agreed that his monthly payment date would be changed from the 15th to the 27th. The creditor adamantly denied that any such agreement was made. However, the April through October payments were made after the 15th and on or before the 27th of each month.

The judge decided that the pattern of conduct by the creditor in accepting payments on or before the 27th, but after the 15th, gave credence to the debtor's story and ruled that the written agreement to make payments on the 15th was changed by the parties to the 27th. Hence, the creditor wrongfully repossessed the car as the November payment was, under the modified agreement, not due until two days after the repossession. The creditor was denied all relief requested from the court and was required to pay to the debtor damages. Margolin v. Franklin, 270 N.E.2d 140 (Ill. App. Ct. 1971).

A client's concurrent and well-documented account of activity and audio or even video recordings carry great weight at trial in exposing an untruthful debtor. Getting clients to follow this practice is invaluable. The recorded trail is also valuable for early analysis of potential problems, not only in litigation but in averting future problems as well. Systematic credit procedures help, too, sometimes.

Posting deadbeats. A retailer in 1980 posted in its store a listing of names, in plain view to its customers, under a heading "no checks." An individual listed sued the retailer for shame, humiliation and punitive damages totaling $57,500. The court, in an opinion that allowed the case to go to a jury trial, stated that although the information posted may have absolute validity, one's financial dealings are private matters in which the public has no reasonable interest. The posting was therefore actionable. Mason v. Williams Discount Center Inc., 639 S.W.2d 836 (Mo. Ct. App. 1982).

A written credit policy and a coordinated set of credit application and transaction forms can prevent many potential problems. Toward that end, most businesses use forms and practices in an attempt to avoid past-due receivables. However, many fail to train their people to properly use the forms or to implement proper preventative measures.

Just turn it over. A manufacturer of motorcycle front fork tubes entered into an oral agreement to buy steel tubing from a supplier. The supplier sent a written acknowledgment and the reverse side contained various conditions, including a waiver of the supplier's liability for any consequential damages. "Conditions of sale on reverse side" was printed in the legend on the front of the written acknowledgment. On the form sent to the manufacturer, clarification of terms was added by rubber stamp. Mistakenly, the printed legend was stamped over making it hard to read.

Although the terms of the written acknowledgment were not discussed, the goods were shipped and received by the manufacturer. During processing, the manufacturer determined that the steel was inadequate for the intended purpose. The manufacturer notified the supplier that it was revoking the acceptance and that it would hold the goods for 30 days. The manufacturer also informed the supplier that if it failed to retrieve the steel within that time, the steel would be sold and any amount received credited to the supplier. No response came from the supplier and the steel was scrapped as unsalable.

The manufacturer sued the supplier for the entire purchase price, the cost of the "cover" replacement in excess of the purchase price, surface-grinding expenses, machining expenses as well as chrome-plating expenses. The supplier argued that the contractual waiver found in the written acknowledgment barred the manufacturer from recovering any of its consequential damages. The judge ruled that the damage waiver in the written agreement was unenforceable. In his ruling, the judge found that the printed legend referencing the conditions on the reverse side was stamped over indicating that the printed legend was irrelevant. Frank's Maintenance & Engineering Inc. v. C. A. Roberts Co., 408 N.E.2d 403 (Ill. App. Ct. 1980).

Some businesses use criminal procedures against recalcitrant debtors. This practice can give the creditor a lot of leverage, but is fraught with problems. A crime is committed when a creditor threatens criminal prosecution in aid of debt collection. Moreover, such procedures open the creditor to a whole range of new damages arising from constitutional-based violations of freedom, privacy and dignity.

Making a deadbeat wealthy. A 90-day note was executed by a debtor in the sum of $6,000 in favor of a bank. As collateral for the loan, the bank took a security interest in office equipment and furniture. Shortly before the note came due, the debtor filed bankruptcy. The bank was not named as a creditor in the bankruptcy and received no notices. The bank tried to secure the collateral but was always frustrated, because the debtor frequently moved the collateral just out of the bank's reach.

Finally, the bank filed a criminal complaint seeking an indictment against the debtor for hindering a secured creditor. After filing the criminal indictment, but before the grand jury met, the bank heard rumor of the bankruptcy, but made no attempt at verification. When the matter was presented to the grand jury, the bank did not disclose the debtor's bankruptcy.

Even worse, at the time of its grand jury testimony, the bank had knowledge that the debtor was no longer concealing the collateral, for the debtor, a short time earlier, had arranged for the bank to pick up the collateral. The bank, for reasons unknown, failed to keep the appointment. This knowledge was not disclosed to the grand jury. The debtor was indicted. In a civil action, he sued the bank for damages he claimed resulted from the criminal indictment.

In the civil trial to the bench, the debtor testified that he underwent substantial changes in his personality, attitude and work habits after the indictment. His testimony was collaborated by business associates. A doctor testified that the debtor had become seriously depressed and suffered from post-traumatic stress syndrome, a psychological condition coined from disorders of returning Vietnam war veterans who faced tragic war experiences.

The judge awarded the debtor punitive damages in the sum of $1,535,000 plus all actual damages. The award was affirmed on appeal, with the appellate court noting that the bank showed no remorse for its actions. Ellis County State Bank v. Keever, 936 S.W.2d 683 (Tex. App. — Dallas 1996, no writ).

The stopped payment. In June of 1994, an individual purchased a vehicle at auction for the sum of $400 and paid the auto dealer by check. The buyer did not take delivery of the vehicle. It was blocked by other cars. The auto dealer agreed that the car could be left on the lot for up to five business days. Three days later the buyer returned for the vehicle and found that the battery, spare tire and some other items from it were missing. The buyer left the vehicle on the lot and stopped payment on the $400 check.

A little more than a month later, the auto dealer swore out an affidavit for the arrest of buyer. In the affidavit, the auto dealer stated that the buyer stopped payment on his check and that the vehicle had not been returned to the auction premises. The buyer was subsequently arrested and jailed.

Shortly after the arrest, the buyer's father called the auto dealer to discuss the matter and was informed that the charges would be dropped if the $400 was paid. During the same time frame, a lawyer for the buyer contacted the auto dealer and told him that the vehicle was still on the lot, which the auto dealer then verified. The auto dealer's response to the lawyer was that storage charges would accrue. The criminal matter continued forward and the local municipal judge found probable cause for the theft arrest based on the testimony of the auto dealer.

The buyer filed a civil lawsuit against the auto dealer claiming damages resulting from his humiliation, emotional distress and general fright. A psychologist testified that because of the buyer's status as a young African-American, the arrest struck at the core of his identity and that "something important has been taken from him and I think he is going to continue to suffer from that." The jury awarded the buyer $1,000 in actual damages and $75,000 in punitive damages. Routh Wrecker Service Inc. v. Washington, 980 S.W.2d 240 (Ark. 1998).

Most readers, at least by now, may view collection activity as dangerous and uninviting. Most collection agencies see it more like a manageable plague. But have heart, the stories above are worst case examples and should not discourage the courageous. From experience, I can testify that collection through the courts is important, if not essential, to most businesses.

The best client advice is to create an effective credit and collection program with the aid of lawyers, to be reasonable in all efforts, to seek legal advice whenever considering a creative or new approach and to use a lawyer as a sounding board in the inherently sensitive areas of credit and collection.