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"Commercial Collections Litigation," Carol Morokoff

Link to Lawline seminar: www.lawline.com Commercial collections litigation has increased as a result of the recent economic downturn, and as a result, more attorneys are expanding into this practice area. Join collections attorney Carol Morokoff for her presentation on the specific remedies available under the Fair Debt Collection Practices Act (FDCPA) and her best practices recommendations to improve collection success. Ms. Morokoff covers the entire litigation process from the type of summons and complaint to use to the awarding of default judgments. Finally, find out why collections attorneys should make the city marshals their "best friends." Ms. Morokoff's candor and humorous anecdotes make this program enjoyable to watch and a good primer on representing plaintiffs in collection actions.

Introduction to ECI - Commercial Investigations and Debt Collection

If you are chasing people or businesses for money then meet Stanley Silver from ECI, he will get the job done with minimal fuss. www.debt-collections.co.uk

FASB Proposed Lease Accounting Changes - Impacts on Commercial Real Estate

Introduction:

The Financial Accounting Standards Board (FASB) on August, 17, 2010 released their "exposure draft" requiring companies to record nearly all leases on their balance sheets as a "right to use" asset, and a corresponding "future lease payment - liability".  What does this mean to your business in layman terms?  This proposal in essence does away with operating leases; all leases (unless immaterial) would be capitalized using the present value of the minimum lease payments.  Therefore, businesses who in the past had off-balance sheet lease obligations, must now record these obligations on their balance sheet.

A key point to consider with regards to the proposed lease accounting changes is that, in all likelihood, existing operating leases, signed prior to the implementation of the new rules, will require reclassification as capital leases that must be accounted for on the balance sheet. This means that real estate professionals must immediately consider the effect that existing and planned leases will have on financial statements once the proposed rules are implemented. Since operating lease obligations can represent a larger liability than all balance sheet assets combined, lease reclassification can significantly alter the businesses balance sheet.

The impact of recording these lease obligations on the balance sheet can have multiple impacts, such as: businesses needing to alert their lenders as they will now be non-compliant with their loan covenants, negotiating new loan covenants with the lenders due to the restated financial statements, ratios used to evaluate a businesses potential of credit will be adversely impacted and the restatement of a lessee's financial statement once the change takes effect may result in a lower equity balance, and changes to various accounting ratios

The conceptual basis for lease accounting would change from determining when "substantially all the benefits and risks of ownership" have been transferred, to recognizing "right to use" as an asset and apportioning assets (and obligations) between the lessee and the lessor.

As part of FASB's announcement, the Board stated that in their view "the current accounting in this area does not clearly portray the resources and obligations arising from lease transactions." This suggests that the final result will likely require more leasing activity to be reflected on the balance sheet than is currently the case. In other words, many, perhaps virtually all, leases now considered operating are likely to be considered capital under the new standards. Thus, many companies with large operating lease portfolios are likely to see a material change on their corporate financial statements.

Part of the purpose for this is to coordinate lease accounting standards with the International Accounting Standards Board (IASB), which sets accounting standards for Europe and many other countries. The IASB and FASB currently have substantial differences in their treatment of leases; particularly notable is that the "bright line" tests of FAS 13 (whether the lease term is 75% or more of the economic life, and whether the present value of the rents is 90% or more of the fair value) are not used by the IASB, which prefers a "facts and circumstances" approach that entails more judgment calls. Both, however, have the concept of capital (or finance) and operating leases, however the dividing line is drawn between such leases.

The FASB will accept public comments on this proposed change through December 15, 2010.  If FASB makes a final decision in 2011 regarding this proposed change to lease accounting, the new rules will go into effect in 2013.

Additionally, the staff of the Securities and Exchange Commission reported in a report mandated under Sarbanes-Oxley, that the amount of operating leases which are kept off the balance sheet is estimated at $1.25 trillion that would be transferred to corporate balance sheets if this proposed accounting change is adopted.

Commercial Real Estate:

The impact on the Commercial Real Estate market would be substantial and will have a significant impact on commercial tenants and landlords.  David Nebiker, Managing Partner of ProTenant (a commercial real estate firm that focuses on assisting Denver and regional companies to strategize, develop, and implement long-term, comprehensive facility solutions) added "this proposed change not only effects the tenants and landlords, but brokers as it increases the complexity of lease agreements and provides a strong impetus for tenants to execute shorter term leases".  

The shorter term leases create financing issues for property owners as lenders and investors prefer longer term leases to secure their investment.  Therefore, landlords should secure financing for purchase or refinance prior to the implementation of this regulation, as financing will be considerably more difficult the future. 

This accounting change will increase the administrative burden on companies and the leasing premium for single tenant buildings will effectively be eliminated.  John McAslan an Associate at ProTenant added "the impact of this proposed change will have a significant impact on leasing behavior. Lessors of single tenant buildings will ask themselves why not just own the building, if I have to record it on my financial statements anyway?" 

Under the proposed rules, tenants would have to capitalize the present value of virtually all "likely" lease obligations on the corporate balance sheets.  FASB views leasing essentially as a form of financing in which the landlord is letting a tenant use a capital asset, in exchange for a lease payment that includes the principal and interest, similar to a mortgage.

David Nebiker said "the regulators have missed the point of why most businesses lease and that is for flexibility as their workforce expands and contracts, as location needs change, and businesses would rather invest their cash in producing revenue growth, rather than owning real estate."

The proposed accounting changes will also impact landlords, especially business that are publically traded or have public debt with audited financial statements.  Mall owners and trusts will required to perform analysis for each tenant located in their buildings or malls, analyzing the terms of occupancy and contingent lease rates.

Proactive landlords, tenants and brokers need to familiarize themselves with the proposed standards that could take effect in 2013 and begin to negotiate leases accordingly.

Conclusion:

The end result of this proposed lease accounting change is a greater compliance burden for the lessee as all leases will have a deferred tax component, will be carried on the balance sheet, will require periodic reassessment and may require more detailed financial statement disclosure.

Therefore, lessors need to know how to structure and sell transactions that will be desirable to lessees in the future. Many lessees will realize that the new rules take away the off balance sheet benefits FASB 13 afforded them in the past, and will determine leasing to be a less beneficial option. They may also see the new standards as being more cumbersome and complicated to account for and disclose. Finally, it will become a challenge for every lessor and commercial real estate broker to find a new approach for marketing commercial real estate leases that make them more attractive than owning.

However, this proposed accounting change to FAS 13 could potentially stimulate a lack luster commercial real estate market in 2011 and 2012 as businesses decided to purchase property rather than deal with the administrative issues of leasing in 2013 and beyond.

In conclusion, it is recommended that landlords and tenants begin preparing for this change by reviewing their leases with their commercial real estate broker and discussing the financial ramifications with their CFO, outside accountant and tax accountant to avoid potential financial surprises if/when the accounting changes are adopted. 

Both David Nebiker and John McAslan of ProTenant indicated their entire corporate team are continually educating themselves and advising their clients about these potential changes on a pro-active basis.  

Addendum - Definition of Capital and Operating Leases:

The basic concept of lease accounting is that some leases are merely rentals, whereas others are effectively purchases. As an example, if a company rents office space for a year, the space is worth nearly as much at the end of the year as when the lease started; the company is simply using it for a short period of time, and this is an example of an operating lease. 

However, if a company leases a computer for five years, and at the end of the lease the computer is nearly worthless. The lessor (the company who receives the lease payments) anticipates this, and charges the lessee (the company who uses the asset) a lease payment that will recover all of the lease's costs, including a profit.  This transaction is called a capital lease, however it is essentially a purchase with a loan, as such an asset and liability must be recorded on the lessee's financial statements. Essentially, the capital lease payments are considered repayments of a loan; depreciation and interest expense, rather than lease expense, are then recorded on the income statement.

Operating leases do not normally affect a company's balance sheet. There is, however, one exception. If a lease has scheduled changes in the lease payment (for instance, a planned increase for inflation, or a lease holiday for the first six months), the rent expense is to be recognized on an equal basis over the life of the lease. The difference between the lease expense recognized and the lease actually paid is considered a deferred liability (for the lessee, if the leases are increasing) or asset (if decreasing).

Whether capital or operating, the future minimum lease commitments must also be disclosed as a footnote in the financial statements. The lease commitment must be broken out by year for the first five years, and then all remaining rents are combined.

 A lease is capital if any one of the following four tests is met:

 1) The lease conveys ownership to the lessee at the end of the lease term;

 2) The lessee has an option to purchase the asset at a bargain price at the end of the lease term

 3) The term of the lease is 75% or more of the economic life of the asset.

 4) The present value of the rents, using the lessee's incremental borrowing rate, is 90% or more of the fair market value of the asset.

Each of these criteria, and their components, are described in more detail in FAS 13 (codified as section L10 of the FASB Current Text or ASC 840 of the Codification).

Commercial Debt Collection Interview

Burt and Associates Jerry Curtis CEO interviews a customer concerning debt collection issues of today

The commercial debt recovery and enforcement of judgments in California

The debts are not primarily for commercial purposes (as opposed to consumer debt) subject to the Federal Fair Debt Collection Practices Act or the Fair Debt Collection Practices California.

Enforce judgments in other states of California

(If you already have a trial in California, you should go directly to the next section.)

If 'lender has a state court litigation by a state other than California, the first step is to obtain a sister state court by a California court. (If the creditor has a final-statement of a federal court outside of California, the penalty can be done by recording in a federal district court in California, and then applied as if the process had gone there in the first place.)

The process of obtaining a sister, evaluationbegan to apply for entry of the court with a California court. The application must be filed in the county where the principal place of business - but it can be presented to a county if the company is a "nonresident". A copy of the original sentence has been duly authenticated by the issuing court must be submitted with the application. Once the request is made in California, the Chancellor must go to trial.

Ifis the possibility of irreparable injury or large (for example, the debtor is hiding or transferring assets, is on the verge of bankruptcy, or intend to leave California), the application can ask the Court to the application of or perform one immediately.

In any case, notice of entry of the sentence must be served on the debtor in the same manner as an appeal and complaint. Unless the creditor gets half of mandate or other application based ongreat or irreparable damage, the creditor must wait 30 days before starting enforcement proceedings, including obtaining an execution order, obtain and record a summary of the proceedings for the property sector, or the filing of a lien assessment of personal property. If the debtor does not file a motion to leave the decision within 30 days, the penalty comes as a failure in California was obtainedoriginally.

Implementing acts

A writ of execution is a key instrument to enforce a ruling. The debtor is not notified of this, so they usually do not find out until it is used to benefit the debtor's income or assets.

A special law enforcement should be issued for each region in which a withdrawal must be done. As a result, immediately after trial entry the best frequency to obtain a specific mandate for each provincethat the debtor has a place of business or assets. Each quote is good for 180 days and can be renewed once. Multiple sampling can be based on a single reading of the execution. Withdrawals can be drawn on bank accounts, loans, personal property, etc. Even if the intangible personal property (bank accounts, loans, notes, etc.) often has to be done first, because it is more expensive and more difficult to collect material property (inventory,equipment, etc..) However, if the debtor is a work in progress, a lien on the shares or the installation of a caregiver can be very effective, although expensive.

If time is essential - for example, due to concerns that the debtor may dispose of or give guarantees - the order of execution can be treated ex parte, which is usually faster than the process. In addition, while a temporary restraining order may be obtained ex parte against the debtor "and / or"Moreover, to provide protection if the Court refuses to issue the execution order ex parte.

If the debtor is hiding assets or keep them at home, or the activities are outside California, then a "rotation" of order can be obtained from the Court directing the debtor to transfer the property to the charging officer. This type of order is enforceable by contempt of court which may make it more effective collection of the property. Because of this, a turnoverorder must be served on the debtor personally. This type of order can not be used with third parties, even if the third party holding property of the debtor can be served with a copy of the order of execution and the notification of withdrawal.

You can also get a garnishment order if the property is held in a private residence or any other "private place". (An official may not take this collection of his property without a warrant.) It is also possible to obtain an orderappointment of a receiver or collection officer to take the measures necessary to preserve the property, for example, a debtor to avoid the expense or transfer of credits received.

Failure

Of course, the debtor may file for bankruptcy. Entities (corporations, LLC, etc.) may be a Chapter 7 bankruptcy (liquidation) or Chapter 11 bankruptcy (reorganization intended to maintain the current activity). People (Including businesses) may be a Chapter 7 bankruptcy (liquidation) or Chapter 13 bankruptcy (sometimes called a wage earner plan), with the latter often used to prevent the execution of a personal residence.

The first things to do in a bankruptcy must file a request for special notice (notice to assure receipt of all hearings, etc. in case of bankruptcy) and file a claim for the debt unless the debtor is the amount and typeDebt> and the value of assets to secure the debt due indicated on the document file or bankruptcy of the debtor is not a chapter-7 of the asset.

Each creditor has a great advantage in case of failure. Claims (debt) in bankruptcy fall into three categories. Priority claims, including costs of bankruptcy proceedings (including the costs of care receivers), and most taxes have priority over allmore. The second category is insurance claims, a secured creditor the right to be paid for security, only if there are enough other assets to pay claims of priority. If the value of assets to ensure a secured claim is not worth enough to cover the entire claim, the creditor is a creditor secured by the value of these assets and an unsecured creditor for the rest. The third category are loans that are secured by all assets.

In a Chapter 7 liquidation, the assets are sold (with some exceptions for individual debtors as "tools of trade"). So claims priority creditors are paid first, pay insurance to the extent that the value of assets to ensure their applications to cover the debts, and the rest is paid in proportion to the unsecured creditors.

In Chapter 11 reorganization (for institutions) or a plan for Chapter 13 (for people), a repayment plan isapproved. Refunds are usually three to five years. The plan need not pay unsecured claims in full all the time until the unsecured creditors receive at least part of the plan as they would if the debtor's assets were liquidated.

In Chapter 11 reorganization or Chapter 13 wage floor, the debtor must not use any "cash collateral" (as accounts receivable) securing a secured claim, unless the debtor receivesCourt approval. In these situations, the lender may require it to be "adequately protected". Some borrowers, however, the use of cash collateral without the approval of the Court. If this happens, the creditor may have to file an application for protection measures to protect your warranty. (The creditors have the opportunity to vote for or against payment plans, but the process can be complicated and will not be discussed here).

If bankruptcy is rejected (which can happen ifthe debtor does not have adequate programs or act according to the bankruptcy law), then resume collection efforts in state courts.