Tuesday, November 22, 2011

Collecting Judgments in Texas: Is it Easy or Difficult?

The answer is: difficult.

Many times I get asked, "I have this Texas judgment. So now what?"

Well, that is precisely the issue in Texas. Many collections lawyers will not talk about the collectability of a judgment before taking your retainer and starting the collections process. This may not be a big issue in some other states, but in Texas you really do have to know the difficulties our fine (cough) legislature has made collections in this state.

The only state in which I've worked with local counsel that has it harder than Texas lawyers in collections was the time I worked with a Florida lawyer on a domesticated Texas judgment. In Florida, as I understand it, you could (at that time, a few years ago) convert non-exempt assets into exempt assets so long as you transferred it to your homestead. Basically, if you prepay your mortgage with the money you owed someone else, that was protected. At least in Texas we consider that a fraudulent transfer.

So how is it otherwise difficult to collect a Texas judgment? Well, there are many procedural reasons why it is difficult to collect a judgment in Texas, too many to fully mention, but I'll try to give you a flavor.

First of all, Texas is one of the two most debtor friendly states in the union, particularly when it comes to exempt property. Texas in some cases has unlimited values in its exempt property, largely unheard of in other states.

Also, Texas requires fraudulent transfer actions as a separate lawsuit, and not as an ancillary proceeding in post judgment. This basically means that if the debtor moves his or her property to an insider, largely you have to sue and serve the debtor and the debtors transferee in a whole new lawsuit. That is always fun.

One of the most commonly referenced limitation in Texas law for collection against individuals is the infamous garnishment law in Texas. First, unless it is child support, you can't garnish wages. So in other states where you just notify the employer that you'd like certain moneys to be directed to you as creditor, in Texas this is actually illegal. Furthermore, in non-wage situations the garnishee is usually a bank...and guess what? Bank lobbies in Texas were apparently at one time (I'm guessing before 2008) pretty strong. Banks apparently got tired of having to incur legal expenses to answer for debtors that either currently or recently had bank accounts, so now the creditor, who is largely already out money due to the actions of the judgment debtor, may end up having to pay for the legal fees of the bank if they go wildcatting and drill a dry hole. So congratulations, you get to risk even more money than paying your lawyer, Ms. Creditor...you also may have to pay the bank lawyer's fees too. Oh, and there's almost no way, other than asking the debtor for statements (which they always gladly give, right?), to find out in advance what money is in the account due to privacy laws.

Oh, and if there is money in the bank account? Yeah, it might end up all going to the bank anyway, since their right of offset against their own loans gives them the opportunity to pay themselves first once you notify them that their debtor is in trouble.

Another challenge is in business entities. The legislative creation of Limited Liability Companies and other "partnership corporations" add a very real layer of complications to the judgment creditor. Texas law has not done a very good job of making single member LLC's veil piercable, in fact making it one of the most challenging things to do. Furthermore, often collection is restricted to "charging orders", which is really not much of an order at all. Basically, charging orders give you no power of control over the limited liability company assets...so no voting, no control...merely a right to be paid if and when there is a decision by the LLC to do a distribution. So, by all means, hold your breath for that to happen.

So what is a good creditor to do? Well, know these are limitations and factor them into your business practices. If you're doing business with a subsidiary or a single member LLC, get a corporate parent or personal guaranty or consider adding explicit collateral and securitize the loan. Also, think about collection rates when you consider the cost of doing business in Texas.

And finally...don't hire just any litigation lawyer to do your collection. Hire someone experienced and familiar with these laws so that you do not throw good money after bad.