collect_2013

GENERAL COLLECTION LAW Leonard N. Math Chambless Math Carr, P.C. 5720 Carmichael Rd. Montgomery, Alabama 36117 334-272-2230

These materials are a copyrighted work and may not be reproduced and\or shared with other persons, parties or entities without the permission of the author. The discussion and opinions herein are those of the author. The discussion and opinions expressed herein are for general educational purposes and are not to be construed as legal advice or a legal opinion on any specific case or matter. These materials reflect an analysis of selected provisions of the collection law not legal precedents applicable to specific collection cases. Questions about individual cases, policies or procedures should be discussed with your legal counsel.

To the extent that these materials and accompanying presentation is construed to be a solicitation by the Alabama State Bar Association, we are required to advise you that “No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.”

Dated: 03/21/13

TABLE OF CONTENTS

I. The Fair Debt Collection Practices Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 C. Prohibited Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1. General standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Harassment or abuse § 1692d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. False or misleading representations § 1692e . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Unfair practices § 1692f . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5. Communications with the debtor § 1692g & c . . . . . . . . . . . . . . . . . . . . . . . . . 7 a. The Debt Validation Notice § 1692g . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 b. Other Communication Requirements § 1692c . . . . . . . . . . . . . . . . . . . . 8 c. Termination of Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ..........................................................9 d. Communication with third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 II. Collection Techniques and Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 A. Purpose of Collection Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B. Assessment of the Ability to Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 C. Securing Information and Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 D. Internet Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 E. Payment Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 F. Phone Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 G. Forbearance and Workout Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 H. Collection through Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1. Pre-Suit Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Filing and Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3. Judgment and Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4. Post Judgment Execution and Garnishment . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5. Renewal and Revival of Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 III. Legal Aspects of Repossession of Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 A. Conditions for Repossession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1. Acceleration of the Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2. Right of Self-Help Repossession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3. Notice of Intent to Repossess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 B. Judicial Repossession - Detinue and Replevin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 C. Notice of Sale and Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2. Standards for Disposition of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 a. The Commercially Reasonable Standard . . . . . . . . . . . . . . . . . . . . . . . 26 b. The Secured Party’s Right to Purchase . . . . . . . . . . . . . . . . . . . . . . . . 27

c. Disclaimer of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 d. Time for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 e. Duty to Repair or Process for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 f. Public vs. Private Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 g. Relevance of Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 h. Retention of Collateral in Lieu of Disposition . . . . . . . . . . . . . . . . . . . 28 I. Mandatory disposition of consumer goods. . . . . . . . . . . . . . . . . . . . . 29 3. Notice of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 D. Notice of Deficiency or Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 E. Liability for Unauthorized Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 IV. Legal Aspects of Non Judicial Mortgage Foreclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 A. Conditions for Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1. Acceleration/Notice of Default and Right to Cure . . . . . . . . . . . . . . . 32 2. Title Issues, Tax Liens and Subordinate Liens . . . . . . . . . . . . . . . . . . . . . . . . 32 3. Insurance and Ad Valorem Tax Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 B. Sale Under Power of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1. Publication Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2. Sale and Bidding Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3. Post Sale Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 A. Statutory Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 B. Ejectment Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 C. Ad Valorem Tax Issues and Other Issues . . . . . . . . . . . . . . . . . . . . . . 39 C. Deed in Lieu of Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

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I. The Fair Debt Collection Practices Act A. Introduction The Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. ยง 1692 et. seq., is a federal law which regulates the collection of consumer debts by third-party debt collectors. The FDCPA generally prohibits third-party debt collectors from engaging in harassing or abusive conduct, from using any false or misleading representations, or from using any unfair means to collect debts. Violations of the FDCPA can result in liability for actual damages, additional statutory damages of up to $1,000 per violation, and attorney fees and costs.

B. Coverage The FDCPA applies to third-party debt collectors. A third-party debt collector is defined by the FDCPA as a person or entity whose the principal purpose is the collection of debts or who regularly collects debts owed to another party. ยง 1692a(6). Attorneys who regularly collect consumer debts are debt collectors as are collection agencies. Heintz v. Jenkins, 115 S. Ct. 1489 (1995). Entities who purchase or take an assignment of debts which are already in default, check guarantee and collection services are also subject to the FDCPA. Holmes v. Telecredit Service Corp., 736 F. Supp. 1289 (D. Del. 1990); Kimber v. Federal Fin. Corp., 668 F. Supp. 1480 (M.D. Ala. 1987).

The FDCPA does not apply to a creditor collecting its own debts in its own name. If a creditor uses a name other than its own name, then it becomes subject to the FDCPA. It also does not apply to assignees of debts which are not in default when assigned. ยง 1692a(4). In addition, the FDCPA only applies to the collection of consumer debts. A consumer debt is defined by the act as one in which the debt is primarily for personal, family, or household purposes. Therefore, business debts are not generally subject to the FDCPA. As a general rule, if there are any questions as to whether the FDCPA applies, a debt collector should follow the act.

Even though the FDCPA does not apply to creditors collecting debts in their own name or to the collection of commercial debts, many creditors still choose to comply with the provisions of the FDCPA to avoid potential liability under other state law theories of harassment and intentional infliction of emotional distress.

Some states outside Alabama have their own Fair Debt Collection Practices Act which is more restrictive than the federal FDCPA. Therefore, you must learn these general principles as well any state specific requirements which apply to your geographic territory.

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C. Prohibited Acts 1. General standard The FDCPA prohibits communication and conduct that is deceptive, misleading, unfair or harassing. In determining whether specific conduct violates the FDCPA, Courts view the conduct of the debt collector from the standpoint of the “least sophisticated consumer.” Jeter v. Credit Bureau, Inc., 760 F.2d 1168,1172 (11th Cir. 1985). Therefore, the question is not whether the complaining debtor was mislead or harassed, but rather whether a “least sophisticated” debtor would have been misled or harassed by the conduct of the debt collector.

2. Harassment or abuse § 1692d FDCPA § 1692d makes unlawful any conduct, the natural consequence of which, is to harass, oppress, or abuse any person in connection with the collection of a debt. This section specifically lists the following examples of harassment and abuse: a. The use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person. b. The use of obscene or profane language or language the natural consequence of which is to abuse the hearer or reader. c. The publication of a list of consumers who allegedly refuse to pay debts d. The advertisement for sale of any debt to coerce payment of the debt. e. Causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number. f. The placement of telephone calls without meaningful disclosure of the caller's identity.

3. False or misleading representations § 1692e The FDCPA also prohibits false and misleading representations in any oral or written communications with the debtor. The statute lists the following as examples of false, deceptive, or misleading representations: a. The false representation or implication that the debt collector is vouched for, bonded by, or affiliated with the United States or any State, including the use of any badge, uniform, or facsimile thereof.

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b. The false representation of the character, amount, or legal status of any debt; or any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt. c. The false representation or implication that any individual is an attorney or that any communication is from an attorney. d. The representation or implication that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, or the garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action. e. The threat to take any action that cannot legally be taken or that is not intended to be taken. f. The false representation or implication that a sale, referral, or other transfer of any interest in a debt shall cause the consumer to lose any claim or defense to payment of the debt; g. The false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer. h. Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.

I. The use or distribution of any written communication which simulates or is falsely represented to be a document authorized, issued, or approved by any court, official, or agency of the United States or any State, or which creates a false impression as to its source, authorization, or approval. j. The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer. k. The failure to disclose in the initial written communication with the consumer and, in addition, if the initial communication with the consumer is oral, in that initial oral communication, that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose, and the failure to disclose in subsequent communications that the communication is from a debt collector, except that this paragraph shall not apply to a formal pleading made in connection with a legal 3

action. l. The false representation or implication that accounts have been turned over to innocent purchasers for value. m. The false representation or implication that documents are legal process or not legal process forms.

n. The use of any business, company, or organization name other than the true name of the debt collector's business, company, or organization. o. The false representation or implication that a debt collector operates or is employed by a consumer credit reporting agency Most of the litigation under the FDCPA has related to whether the debt collector made a false or misleading communication. FDCPA violations have been found where a lawyer sent form collection letters without reviewing them or the underlying accounts, and where the letters’ language indicated that the lawyer had personally considered the accounts. Clomon v. Jackson, 988 F.2d 1314 (2nd Cir. 1993).

A collection notice which falsely implied that some type of legal action has been or will be taken violates the FDCPA. Pipiles v. Credit Bureau of Lockport, Inc., 886 F.2d 22 (2nd Cir. 1989). An implied threat that legal action was imminent when it was not violates the act, as does the mention of possible post-judgment remedies when the actuality of suit being filed was highly unlikely. Bentley v. Great Lakes Collection Bureau, 6 F.3d 60 (2nd Cir. 1993); United States v.

National Fin. Serv., Inc., 820 F. Supp. 228 (D. Md. 1993). A threat to sue in an improper venue and the inclusion of draft collection documents not yet filed both violates the FDCPA. Wiener v.

Bloomfield, 901 F. Supp. 771 (S.D.N.Y. 1995).

A letter stating that a judgment will result in wages being garnished and cars, trucks, houses, land, furniture, and appliances being seized and sold by the Sheriff states a claim under the FDCPA where the letter does not distinguish between exempt and non-exempt property under Alabama law. Bice v. Merchants Adjustment Service, Inc., 85-0283-H-S (S.D. Ala. 11120/85) (unpublished). A letter threatening to garnish a specified sum of wages violates the FDCPA where debt collector does not know whether the consumer makes enough money to be garnished.

Seabrook v. Onodago Bureau of Medical Economics, Inc., 705 F. Supp. 81 (N.D.N.Y. 1989).

The language of a threat to investigate employment and assets suggested to the least sophisticated debtor that creditor would illegally contact consumer’s employer and so violated the FDCPA. Swanson v. South Oregon Credit Service, 869 F.2d 1222 (9th Cir. 1988). Letters which imply that suit can be filed before the expiration of the debtor’s 30-day right to dispute the debt have been found by some courts to violate the FDCPA. Crossley v. Lieberman, 868 F.2d 4

566 (3rd Cir. 1989). A letter containing a suit caption in the heading accompanied by a proposed consent judgment violates the FDCPA where no lawsuit has been filed. Johnson v. Eaton, 873 F. Supp. 1019 (M.D. La. 1995). A post-judgment letter falsely implying the existence of a judgment lien violates the FDCPA. Dutton v. Wolpoff and Abramson, 5 F.2d 649 (3rd Cir. 1993).

A debt collector’s statement about retaining or referring a debt to counsel can violate the FDCPA if the debt collector does not intend to retain or employ counsel. Juras v. Aman Coil.

Serv., Inc., 829 F.2d 739 (9th Cir. 1987), cert. denied 109 S. Ct. 192 (1988). An implication that the debt collector was affiliated with the government is also a violation under the act. Gammon v.

G. C. Serv. Ltd. Partnership, 27 F.3d 1254 (7th Cir. 1994). Similarly, a threat to sue by an out-ofstate lawyer not licensed in the consumer’s state violates the FDCPA. Rosa v. Gaynor, 784 F. Supp. 1 (D. Conn. 1989).

4. Unfair practices § 1692f Under § 1692f, a debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt. Some examples provided by this section are: a. The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law. b. The acceptance by a debt collector from any person of a check or other payment instrument postdated by more than five days unless such person is notified in writing of the debt collector's intent to deposit such check or instrument not more than ten nor less than three business days prior to such deposit. c. The solicitation by a debt collector of any postdated check or other postdated payment instrument for the purpose of threatening or instituting criminal prosecution. d. Depositing or threatening to deposit any postdated check or other postdated payment instrument prior to the date on such check or instrument. e. Causing charges to be made to any person for communications by concealment of the true purpose of the communication. Such charges include, but are not limited to, collect telephone calls and telegram fees. f. Taking or threatening to take any nonjudicial action to effect dispossession or disablement of property if there is no present right to 5

possession of the property claimed as collateral through an enforceable security interest; there is no present intention to take possession of the property; or the property is exempt by law from such dispossession or disablement. g. Communicating with a consumer regarding a debt by post card. h. Using any language or symbol, other than the debt collector's address, on any envelope when communicating with a consumer by use of the mails or by telegram, except that a debt collector may use his business name if such name does not indicate that he is in the debt collection business Since an attempt to collect a time-barred debt is an attempt to collect an amount not permitted by law, Courts have held that the filing a time-barred lawsuit violates this section.

Kimber v. Federal Fin. Corp., 668 F. Supp. 1480 (M.D. Ala. 1987). Letters sent to debtors in an attempt to collect on debtors' dishonored checks violated the FDCPA by seeking overstated interest charges not permitted by law. The interest charges were overstated by $1.29, $1.84, and $.65 for the three debtors, respectively, but were still held to violate the FDCPA. Duffy v.

Landberg, 215 F.3d 871 (8th Cir. 2000). Therefore, all collection letters must be accurate in the balance claimed due because any overstatement of the contractual amount due can violate the FDCPA as an attempt to collect an amount not expressly authorized by the contractual agreement.

One of the most recent areas of litigation under the FDCPA has been the demand for payment of charges other than the principal and interest due on the debt. It is clear that when debt collectors attempt to include court costs or attorneys fees prior to suit being filed, that such demands violate the FDCPA. In fact, one case has gone so far to say that the attempt to collect court costs after suit but before judgment violated the FDCPA because the court did not award any costs or enter order obligating debtor to pay costs, and there was no contractual agreement to pay court costs, so that collection of costs was not permitted by law. Shula v. Lawent, 359 F.3d 489 (7th Cir. 2004). A collection agency's practice of routinely collecting attorney fees, costs, and interest without first obtaining a judgment violated the FDCPA. Hage v. General Service Bureau, 306 F.Supp.2d 883 (D.Neb.2003). A collection agency and its employee violated the FDCPA by attempting to collect from lessee a 15% attorney fee when no attorney had worked on the case.

The lease did not authorize the collection of attorney fees where no such fees had been incurred.

The communication of the demand occurred when the collection agency's employee faxed a print-out of agency's in-house computer screen to lessee's representative and it contained a line item of $428.76 for "15% Attorneys Fees." Spencer v. Hendersen-Webb, Inc., 81 F.Supp.2d 582 (D.Md.1999).

Third-party debt collectors may not use a form letter which is signed by an independent attorney who has no knowledge of and has not conferred with the debt collector concerning the particular debt. Masuda v. Thomas Richards & Co., 759 F.Supp. 1456 (C.D.Cal.1991).

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5. Communications with the debtor § 1692g & c A number of provisions of the FDCPA apply to communications with the consumer debtor. Each of these provisions requires careful and effective management of communications with the debtor. a. The Debt Validation Notice § 1692g At the time of the initial communication with the debtor or within five days after the collector’s initial contact with the consumer, the debt collector must send a written debt validation to the consumer debtor. That notice must state the amount of the debt, the name of the creditor and the following statement: Unless the you dispute the debt or any portion thereof within 30 days, the debt will be assumed to be valid. If you notify us in writing within 30 days that the debt is disputed, we will provide you with verification of the debt and the name of the original creditor, if different.

If the consumer contacts the creditor, within the 30-day period, the debt collector must cease all collection efforts until the creditor provides verification of the debt. § 1692g(b). The FDCPA does not define what constitutes verification of the debt. However, at a minimum it would appear to require a copy of the signed contract or credit agreement and statement of all charges and credits from the inception of the debt or a current statement of account. Senftle v.

Landau, 390 F.Supp.2d 463 (D.Md. 2005).

Despite its language stating that the debt will be presumed valid, a consumer’s failure to dispute the debt cannot be considered an admission of liability in a later court proceeding. § 1692g©. A communication to the debtor after the expiration of the 30-day period that he has admitted liability for the debt would be a misleading communication which could be a basis for liability under § 1692e or f. The debt validation notice is only required to be given in the initial communication with the debtor. Subsequent communications are not subject to the debt validation notice requirements.

Most of the litigation under this section deals with language in letters which overshadows the debt validation notice to the “least sophisticated consumer.” If the language is such that the debtor validation notice is overshadowed or the “least sophisticated consumer” would be in doubt as to their rights, the debt validation is not effective and the communication violates § 1692g. It also a misleading communications which violates § 1692e. A debt collection letter indicating that legal proceedings had or would be instituted "as soon as possible notwithstanding the debt validation notice violates the FDCPA, because including both statements makes a least sophisticated consumer uncertain as to her rights. Greer v. Shapiro & Kreisman,152 F.Supp.2d 679 (E.D.Pa.2001). A debt collector violated the FDCPA debt validation requirement where the collector sent second letter urging payment "today" to avoid adverse "lawful action" less than 30 7

days after notifying the debtor of her right to dispute the claim. The Court reasoned that from perspective of least sophisticated consumer, the language contained in second notice overshadowed or contradicted the mandatory validation notice contained in first letter.

Barrientos v. Law Offices of Mark L. Nichter, 76 F.Supp.2d 510 (S.D.N.Y.1999) Even language instructing debtors to contact the debt collector creditor “immediately” can be deemed to contradict the debt validation notice. Beeman v. Lacy, Katzen, Ryen & Mittleman, 892 F.Supp. 405 (N.D.N.Y.1995). An attorney's debt collection letter which demanded that balance due be paid “immediately” to avoid possible legal action which could obligate debtors to pay for court costs and miss time from work to attend court violated § 1692g because it overshadowed validation notice placed at end of letter. Cortright v. Thompson, 812 F.Supp. 772 (N.D.Ill.1992).

The placement of the debt validation notice must be such that it is seen and understood by the “least sophisticated consumer.” A collection letter where required notices appeared on reverse side of form letters and notices which were printed in odd configuration and in light grey ink on lighter shade of grey computer paper and in a type size that was barely seven point violated the FDCPA. Rabideau v. Management Adjustment Bureau, 805 F.Supp. 1086 (W.D.N.Y.1992). b. Other Communication Requirements § 1692c All communications from a debt collector are required to state “This communication is an attempt to collect a debt and any information obtained will be used for that purpose.” § 1692g(a).

A debt collector must disclose clearly in all phone or written communications made to collect a debt that the communication is from a debt collector. Tolentino v. Friedman, 46 F.3d 645 (7th Cir. 1995); Dutton v. Wolpoff and Abramson, 5 F.3d 649 (3rd Cir. 1993); Frey v. Gangwish, 970 F. 2d 1516(9th Cir. 1992); Carroll v. Wolpoff& Abramson, 961 F.2d 459 (4th Cir.1992); Pipiles v. Credit Bureau of Lockport, Inc., 886 F.2d 22 (2nd Cir. 1989); Emanuel v. American Credit Exchange, 870 F.2d 805 (2nd Cir. 1989); Hulshizer v. Global Credit Serv., Inc, 728 F.2d 1037 (8th Cir. 1984). The failure to identify yourself as a debt collector and the purpose of the communication can give rise to a claim of a false and misleading communication.

Under Section 1692c, a debt collector may not communicate with a consumer in connection with the collection of any debt at any unusual time or place or a time. In the absence of knowledge of circumstances to the contrary, a debt collector must assume that the convenient time for communicating with a consumer is after 8:00 a.m. and before 9:00 p.m. at the consumer's location. In a case where the evidence indicated that telephone calls were made to debtors before 8:00 a.m. and after 9:00 p.m., that debtors' places of employment were called after agency was told not to do so by debtors or employers, that third parties were contacted about debts without debtors' consent, that racial slurs and obscenities were used in attempting to collect debts, and that collectors falsely represented to debtors that they would be arrested or jailed or that property would be seized or garnished, the debt collector was held liable for multiple 8

violations of the FDCPA. U.S. v. Central Adjustment Bureau, Inc., 667 F.Supp. 370 (N.D.Tex.1986).

Finally a debt collector may not communicate by phone or in writing at the consumer's place of employment if the debt collector knows or has reason to know that the consumer's employer prohibits the consumer from receiving such communication. A collection letter addressed to consumer at his place of employment under circumstances which were such that reasonable person, in consumer's position, would be humiliated and embarrassed, was a held to be violation of FDCPA and the creditor was liable for any mental and emotional distress, embarrassment and humiliation caused by the letter. Kleczy v. First Federal Credit Control, Inc., 486 N.E.2d 204 (Ohio App.1984). Moreover, a debtor's statement to debt collector that she "could not talk to him at work," while ambiguous, was nevertheless sufficient to put debt collector on notice that employer had policy prohibiting its employees from receiving communications about debts while at work, and to subject debt collector to liability under the FDCPA for again contacting debtor at work regarding debt, absent evidence that debt collector knew, contrary to debtor's representations, that debtor's employer had no such policy. Horkey v.

J.V.D.B. & Associates, Inc., 333 F.3d 769 (7th Cir.2003). c. Termination of Communications The debtor’s right to stop all debt collector contact is an essential safeguard granted by the FDCPA. If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector may not communicate further with the consumer with respect to such debt, except to advise the consumer that the debt collector's further efforts are being terminated; to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor; or where applicable, to notify the consumer that the debt collector or creditor intends to invoke a specified remedy. d. Communication with third parties Without the prior consent of the consumer given directly to the debt collector, a debt collector may not communicate with third parties other than the consumer and his attorney in connection with the collection of any debt. If the debt collector knows or should know that the consumer has an attorney, the debt collector cannot communicate with anyone other than the attorney, unless the attorney fails to respond within a reasonable time. § 1692b(6). This section prohibits communications with spouses, parents or other family members who are liable for the debt. Therefore, it is essential that any attempt by those persons to discuss the debt be avoided until and unless you receive some written confirmation that you are authorized to discuss the debt with that other party.

There are exceptions which allow for communications with third parties for reporting to a credit reporting agency and for purposes reasonably necessary to effectuate a post judgment 9

judicial remedy, such as garnishment or execution.

A debt collector can contact third parties to find out the location of the consumer. In doing so, the debt collector must identify himself and state that he is trying to find the consumer, but he cannot say that the consumer owes a debt. The debt collector can identify his employer only if asked. § 1692b(1).

II. Collection Techniques and Tools A. Purpose of Collection Techniques To be a successful collector, you must have an understanding and knowledge of the techniques and tools at your disposal, but more importantly, you must also understand the reasons for using those tools. The ultimate goal of all collection activity is to secure payment of a debt, but the reason for using different collection tools in pursuit of that goal varies depending on the individual circumstances of each account.

Most successful collection programs are based on making increasingly firmer demands for payment followed by specific consequences if the debtor fails to respond to each demand. In order for these demands to be effective, they must be continuous and persistent. Making firmer demands without any consequences for the failure to comply, is usually time consuming and ineffective. Once the debtor determines that there are no consequences for the failure to comply with payment demands, calls will go unanswered and demands will be ignored. On the other hand, when the debtor realizes that a broken promise to pay will result in another phone contact and that the length of time he has before the account will be referred for repossession or legal action, he will take the demand for payment seriously. It is only when the debtor realizes that the consequence for ignoring the payment demand is greater than he is willing to bear, that the debtor will make some attempt at payment.

In many respects, collections are like a game of poker. Like a card player evaluating his opponent’s hand, you are making an evaluation of the debtor’s circumstances. Like a card player, you are betting by using negative consequences as money and you have to determine which consequence will ultimately make the debtor pay the debt. Likewise, the debtor is making an evaluation of what will happen if he does not pay and what you will do if he fails to pay. If the debtor thinks you are bluffing, he will call the bluff and ignore your demands.

B. Assessment of the Ability to Pay While the goal of collection activity is to secure payment of the debt, there are several purposes for collection activity. First and foremost of these purposes is to make an assessment of the debtor’s ability to pay the debt. While most collectors are good at making demands for payment, they often fail to recognize that if the debtor does not have the present ability to pay the amount being demanded, the demand for payment will not be successful. Moreover, if the debtor 10

does not have the present ability to pay, if no attempt is made to evaluate whether the debtor will have the ability to pay in the immediate future, the persistent and continuous demand for payment and imposition of consequences based on that failure to pay will also fail. The end result will be time consumed on an account that was not collectible in the first instance and delay in imposing the ultimate consequence, legal action or repossession.

Making an assessment of a debtor’s ability to pay requires some finesse and good communication skills. In some cases, you will be dealing with sophisticated debtors such as self employed persons and small business owners. In other cases, you will be dealing with poorly educated persons with poor communication skills. You must tailor your approach depending on the knowledge and education of your debtor. Moreover, in my experience, rather beginning cross examination of the debtor and his finances, many times engaging the debtor in other conversation about their circumstances will yield better results.

There are certain basic elements of the debtor’s ability to pay: 1. Is the debtor employed and if so, where and what kind of income does the debtor have?

2. Is the debtor married and if so, is there other household income?

3. How many persons depend on that income and what are their ages?

4. How much is the debtor’s monthly rent or mortgage obligation?

5. What has caused the debtor’s default in payments?

6. Are the circumstances that caused that default temporary or permanent?

7. Does the debtor have a motivation to pay the debt according to its terms?

8. Does the debtor dispute liability for the debt?

9. Does the debtor have the ability to borrow sufficient funds from another source such as family member or other financial institution to become current or payoff the debt.

C. Securing Information and Verification The second purpose of contacting a delinquent debtor is to secure information and verification about the debtor, their employment, and your collateral which serves as security for the loan. This information can be essential if a promise to pay is later broken.

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At a minimum, your contacts with the debtor should be designed to obtain the following information: 1. The debtor’s current physical and mailing address.

2. The debtor’s employment and income from employment.

3. The location and condition of any collateral which secures the loan.

It is important to realize that as a condition of accepting a payment promise or granting an extension of payment that you can request virtually any information from the debtor which verifies the information provided by the debtor. Therefore, you can request a copy of the debtor’s most recent pay stub and copies of tax returns and W-2 forms to verify that the information provided by the debtor is truthful. You can also sometimes obtain information from sources within your institution or company. For instance, most insurance binders will list an address for the debtor which can then be used to verify the debtor’s physical or mailing address and any discrepancy can be addressed at this time. Insurance binders may also list additional covered drivers, which may be the family member who is an actual possession of a vehicle which secures your debt.

D. Internet Resources The internet has a wealth of public and sometime non public information about delinquent debtors which can be a useful tool for evaluating the collectability of an account.

Most of these resources involves a modest subscription fee for use. The most often used information sites in our firm are the following: 1. Lexis Nexis Accurint - http://www.accurint.com/ This site compiles information from various public sources to provide a list of possible addresses for a subject debtor. This is a pay per search site and the fee is modest. This is the site that we use most often for address verification because it purportedly uses landlord leases as part of their background information.

2. Alacourt - https://v2.alacourt.com/ This site contains information for all Alabama state court civil, criminal and domestic relations cases. This is a subscription site which includes a given number of pages for viewing each month. This site will reflect any recent traffic citations, pending warrants, pending divorce cases and other collection lawsuits. From this site, we can often determine whether the debtor has a vehicle listed in a traffic citation, and sometimes, current service addresses, recent successful garnishments against banks or employers for other creditors and other useful information.

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3. Alabama Dept of Corrections Inmate Search http://www.doc.state.al.us/inmsearch.asp This website will locate by name or AIS number an inmate incarcerated in the State of Alabama. From this site and Alacourt, we can determine an estimated release date for the subject and when to commence collection activity. This is a free service.

4. Montgomery County Judge of Probate Land Records http://pjr.mc-ala.org/weblandrecord/ Mobile County Judge of Probate Land Records http://www.mobilecounty.org/probatecourt/frame-documentrecording.htm These websites allow for search and viewing of deeds, mortgages and other recorded documents at the Probate office. They can be used to determine whether property has been foreclosed, transferred or mortgaged. Montgomery County allows free searches, but requires a registration to view and print documents. Charges are based on pages printed. The Mobile County website is a free service. Several other counties have similar websites.

5. Emaps - http://www.emapsplus.com/ This website provides information regarding real estate tax assessments for selected counties in Alabama. This a subscription based service.

6. GIS Flagship - http://mapguide.flagshipgis.net/ This website provides information regarding real estate tax assessments for selected counties in Alabama. Most of the Alabama counties allow for free searches but others are based on subscription.

7. State of Alabama County Government Websites http://www.info.alabama.gov/directory_county.aspx This free website provides access the county websites for selected counties in Alabama. It is a good portal to the tax and assessment records for the counties listed.

8. The Work Number - http://www.theworknumber.com/ This subscription site provides information about the current employment of persons employed by their participating employers. It is the website we first use to secure employment information.

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9. Open Alabama - http://open.alabama.gov/Checkbook/Payee/ This free website allows searches for payees receiving payment from the State of Alabama. This is a the place to start to confirm employment of a State of Alabama employee and provides the amount of the gross pay, the name of the paying agency and the date of payment.

10. Dept of Defense Active Duty Search https://www.dmdc.osd.mil/appj/scra/scraHome.do This free website allows a check of whether a person is on active duty for the purposes of the Servicemember’s Civil Relief Act. Dept of Defense Request for Military Address http://www.defense.gov/faq/pis/pc04mltr.html This website provides information on how to request a mailing address or forwarding address for persons in or just leaving the military. There is a charge for each request.

E. Payment Demands Most collection activity begins with one or a series of mildly worded letters inviting the debtor to contact the bank about missed payments. A debtor who responds to these letters is, by his very actions, indicating a desire to pay the debt or make arrangements to pay the debt. Of course, it is only when the desire to pay is coupled with a present ability to pay, that the collection action is successful.

Most collection departments have guidelines which determine what accommodations may be made to delinquent debtors. The important thing at the early stages of collection is to determine whether the debtor will be able to comply with the accommodations available. In other words, if the debtor must cure a 90-day delinquency within 15 days and simply does not have the income to pay that amount or the ability to borrow that amount, there is no reason to allow the debtor 15 days to do the impossible. It is far better to concentrate your time on those persons who have an ability and desire to pay. Not surprisingly, when you tell the debtor there is nothing you do to help them get current and you need to make arrangements to recover the collateral, the debtor often finds an undisclosed source of income or ability to borrow from a third party.

The most important thing about payment demands is that they must be clear and unconditional and the debtor must be advised at the time the demand is made that there will be consequences for his failure to comply. If there is sufficient time, a confirmation letter should be sent to the debtor which reminds the debtor of his new payment obligation. Finally, there must be timely follow up to determine whether the debtor has complied with the payment demand.

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F. Phone Contacts When making a phone contact with the debtor, it is best to start with an objective or series of objectives in mind. If the phone contact is initiated by the debtor, which indicates a desire to pay, that debtor will often provide employment and other information which you need to make a determination of the ability to pay. If you are one who initiates the phone contact, the purpose of the call may be to determine why the default occurred and whether it can be remedied.

If it is a second or third contact or a follow up on broken promise to pay, a firmer tone can be effective in communicating to the debtor that this a serious matter and that if he fails to comply with your demands that there will be consequences for that failure. Communicating consequences for failure to comply need not be threatening. But the debtor should be reminded that you are trying to assist him and if he does not meet you half way, your options to assist him become limited by Institution policy and practices. Almost all communications should be ended on a positive note indicating that you really want to assist the debtor within the limits of your authority. Only the most recalcitrant debtors should be outright threatened. You will generally do better with the carrot than the stick.

G. Forbearance and Workout Agreements In many cases, a Workout Agreement or Forbearance Agreement can maximize the recovery of a delinquent account. Workout agreements usually take the form of a Modification Agreement. They generally involve a compromise on the part of the lender to accept less than the terms of the loan with the borrower would otherwise provide or a modification of the terms, such as a lower payment or longer term of repayment than provided in the original contract. Lenders may be willing to compromise and enter into a workout because they believe they will recover more than they would through liquidation of the collateral.

By their very nature, no two workouts are the same since their terms are dependent upon the lender’s and borrower’s creativity in putting together an alternative to collection or repossession. Such a plan will take into account any number of factors such as collateral loan to value ratio, the borrower’s financial resources including present and projected income, and/or the borrower’s ability to pledge additional collateral. Workouts may involve a payment grace period, a temporary or permanent reduction in the regularly required payments, a principal and/or interest reduction, extension of the note term or the pledge of additional collateral by the borrower. Whatever its terms, the goal of any workout from the lender’s perspective is to maximize recovery of its loan.

Forbearance agreements differ from workouts in that they are temporary arrangements to delay collection of the debt usually without a modification of the loan terms. They generally do not involve long-term rearrangement of debt or a compromise by the lender to accept significantly less than it would receive under the terms of the original loan documents.

Forbearance agreements are typically used when the borrower defaults as the result of what appears to be a short-term income or expense or when the lender is willing to provide the 15

borrower with a set period of time to refinance the defaulted loan with another lender.

Forbearance agreements are structured so that the lender has the right to immediately repossess or foreclose collateral in the event the borrower fails to meet the terms of the forbearance agreement within the specified time frame. Often forbearance agreements are accompanied by a payment in exchange for the delay n collection or repossession.

In forbearance agreements, it is often possible to establish terms which permits the expedited liquidation of the loan and the waiver of any potential defenses to the enforcement of the debt. It is common to require the borrower to agree: 1. That a default has occurred and the loan has been properly accelerated and is fully due and payable; 2. Lender agrees to forebear from foreclosing so long as borrower makes all payments required by the forbearance agreement and otherwise complies with its terms; 3. Lender has the right to commence repossession or foreclosure in the event borrower defaults under the terms of the agreement and/or the borrower agrees to execute a deed in lieu of foreclosure or surrender other collateral on demand; 4. Borrower waives all defenses to the enforcement of the debt and releases the Lender from any and all claims against the Lender for existing or future conduct related to the collection of the debt; and 5. After the forbearance period has ended, the Lender may repossess or foreclose on the collateral if not paid in full and\or the borrower consents to entry of judgment for the balance due on the debt.

A forbearance agreement is therefore used to provide the borrower one last chance to become current or pay off the loan without significant compromise of the lender’s position.

Whether to forebear, workout or repossess\foreclose on collateral is a business decision.

In evaluating how to proceed, the Lender must evaluate its options in light of the value of the collateral securing the loan, the borrower’s ability to meet the proposed financial requirements, and whether the proposed arrangement is likely to yield a greater recovery or avoid greater losses than would be expected if the Lender immediately proceeded with foreclosure, repossession or legal collection.

H. Collection through Suit After all attempts at collection have failed, it sometimes becomes necessary to employ legal counsel to reduce your claim to judgment and seek enforcement of the judgment through garnishment and execution. Often, the success of the legal collection depends on the groundwork 16

laid during the pre-suit collection process. Generally, the more information obtained prior to the filing of suit, the greater the chance for recovery through suit and judgment. Particularly, information relating to current employment and the cause of the delinquency are often essential to collecting the account. In fact, credit card companies routinely use computerized scoring models to determine the collectibility of an account and the appropriate range for settlement of the account.

1. Pre-Suit Demands Most Lenders employ some series of collection letters prior to suit which become progressively stronger in language and ultimately threaten referral to an attorney for collection.

The last of the letters sent to the borrower should, at a minimum, advise the borrower that the balance of the debt is being accelerated and that payment in full is required. Generally, once a debt has been accelerated, partial payments of less than the full balance due should not be accepted. The acceptance of a partial payment after a demand for payment in full can sometimes be construed as a waiver of the acceleration of the debt and serve as defense in a legal collection action. If a Lender elects to accept a partial payment after acceleration as part of a payment plan and the borrower later defaults in payments, it is recommended that another letter be sent to the borrower advising that as a result of the subsequent payment default, that the debt is being accelerated and that payment in full is once again due.

It is often advisable to have legal counsel send an initial demand letter prior to suit. There are some knowledgeable borrowers who understand that until they get the letter from the attorney that they have additional time to avoid the payment of the debt. The main difference between the attorney demand letter and the client demand letter is that the attorney demand letter must contain the FDCPA debt validation notice permitting the borrower to dispute the debt and request verification of the debt within thirty days of the attorney demand letter. A notice of dispute of the debt in response to the validation notice provides a means of acquiring information about perceived defenses to the enforcement of the debt through legal process. In other cases, it permits willing debtors an last opportunity to make payment arrangements prior to suit.

2. Filing and Service If there has been no response to the Lender’s demand letters and attorney demand letters, the legal process is started with the filing of a complaint with the district or circuit court. Once the complaint is filed, the clerk of the court must execute a summons which informs the debtor that they are being sued and which provides information regarding their rights to respond to the complaint.

Alabama law permits service of the summons and complaint by personal service or by certified mail. In personal service, the summons and complaint are then directed to either the local sheriff or a private process server if a process server is requested by the Lender. The sheriff or the process server then proceeds to deliver the summons and complaint to the borrower at the 17

address provided by the Lender. If the sheriff or process server is unable to locate the borrower at the address provided, they will return the summons to the clerk with a notation that the borrower was not found at the address provided. The Lender can then attempt to locate a new address for the borrower and request a re-issuance of the summons and complaint with the new address. The clerk then reissues the summons and complaint to the sheriff or private process server for service on the borrower. The summons and complaint may be delivered to the borrower personally at any location where they can be located. In addition, personal service may be accomplished by delivering the summons and complaint to any person over eighteen years old at the borrower’s usual place of abode. Most workplaces have strict rules which limit the possibility of personal service at the workplace. Initially, the borrower must be at work at the time the sheriff or process server arrives to deliver the court papers. Further, the employer must be willing to allow the borrower to come to the reception area to accept the papers. While it is occasionally done in error, leaving the court papers with a receptionist or manager at the borrower’s place of employment is not proper service on the borrower.

Certified mail service can be used for service of the summons and complaint. However, certified mail service is only effective if the borrower personally signs the green return receipt card. In most cases, the borrower is astute enough not to accept service of the papers and they are returned as unclaimed. Unclaimed certified mail service is not sufficient to obtain a judgment.

In few cases where the borrower is intentionally avoiding service and such facts can be shown by an affidavit of the private process server, Alabama law allows service by publication in the county where the borrower is known to reside. Most judges are reluctant to grant such motions absent sufficient evidence that the borrower is actually living within the county and is intentionally avoiding service.

Most Courts have established limited time frames to secure service on the borrower. If the service is not accomplished within that time frame, the Court dismisses the complaint without prejudice to the Lender’s right to bring a suit in the future if the borrower can be located.

3. Judgment and Trial Once the borrower has been served with the summons and complaint they are given a period of time to respond to the complaint. The time period is fourteen days for small claims and district court cases and thirty days for circuit court cases. If the borrower fails to respond to the complaint within that time, the Lender may apply to the Court for entry of a default judgment.

The motion for default judgment must generally be supported by an affidavit from the Lender as to the genuineness of the documents and the balance due. Some courts, including Montgomery County, are now requiring a copy of the last demand letter sent to the borrower, documents showing the disposition of collateral and a copy of a payment history for the loan. If those supporting documents are not provided, the case is sometime dismissed without judgment.

If the borrower answers the complaint, there are generally three types of answers; 18

complaint denied, complaint agreed and complaint agreed in part and denied in part (usually as to the amount claimed). If the borrower agrees to the allegations of the complaint, the Lender can file a motion for judgment on the pleadings and secure a judgment for the amount sought in the complaint. If the complaint is denied in while or in part, the case is set for trial before the judge.

At trial, the Lender must prove the following elements in order to prevail; that there was an agreement for the loan of money to the borrower, that the borrower has breached that agreement by failing to make payments and the amount that is due on the loan. If the Lender proves these elements to the satisfaction of the judge, then the Lender receives a judgment against the borrower for the balance due. If the Lender fails to prove any element of the debt, then the judge may enter a judgment for less than the amount sought in the complaint or enter a judgment in favor of the defendant borrower. It is rare for the borrower to prevail in a collection case.

There are a few defenses that can result in a judgment in favor of the borrower. The statute of limitation is one defense that can result in a judgment for the borrower. The minority age of the borrower, being under nineteen year of age at the time of the execution of the contract, can sometimes be a defense. Lastly, the forgery of the borrower’s name on the contract or the failure to obtain the borrower’s signature on the contract can also be a basis for defense. More commonly, the borrower complains about the amount of the judgment requiring the Lender to prove up the amount of the late charges and interest due and establish the contractual right to attorneys fees. It is also common for borrowers to assert the existence of credit insurance which should be paying the loan balance. While this defense generally fails in the face of a complete payment history, it can be problematic in cases where the Lender’s records are difficult to explain or are otherwise incomplete.

In those cases where there is collection of a deficiency balance after repossession, it is essential that the file be reviewed and counsel be provided with copies of the required notice of disposition of the collateral and notice of deficiency or surplus. Borrowers often want to contest the amount received from the sale of collateral and if there has a failure to give the required notices, it can result in an unexpected counterclaim against the Lender for an unauthorized disposition. Some courts also require these documents as a condition of entry of judgment for the Lender.

Once a judgment is entered, the losing party has a right to appeal. In district and small claims court, the appeal period is fourteen days and the appeal is taken to the circuit court where the cases is tried again. In the circuit court, the time for appeal is 42 days and the appeal is usually to the Alabama Court of Civil Appeals and the case is argued on issues of the law based on the facts adduced at trial and transcribed by the court reporter.

4. Post Judgment Execution and Garnishment Once the judgment is entered, it constitutes a legal determination that the debt is owed. A 19

certificate of judgment is secured from the clerk of the court and that certificate can be recorded in any county where the borrower owns any real or personal property. The recording of the judgment creates a lien in favor of the Lender on all real and personal property of the borrower located within that county.

Alabama law allows certain non-exempt property to seized by the sheriff and sold for satisfaction of the debt. This process is called levy and execution. The process is started by the filing of a request for execution describing the property which is subject to be seized for the payment of the judgment. The execution is endorsed by the clerk of the court and then directed to the sheriff for service on the borrower. The rules for service discussed above apply to service of executions, except that because of the extreme nature of the remedy, service must be had by personal service by the sheriff. Once the execution is served upon the borrower, the sheriff levies upon the property. In the case of real property, the levy is just a notice to the defendant that the sheriff holds the property subject to the execution. In the case of personal property, the sheriff actually seizes the personal property and holds until the date of sale. Once the levy has been served by the sheriff, a sale date is set for the sale of the property. The sale date is published in the local newspaper and the sale is held by the sheriff at the local courthouse. At the execution sale, the property is sold by the sheriff subject to any existing liens on the subject property and the purchaser at the sale receives a Sheriff’s Deed for real estate or Sheriff’s Bill of Sale for personal property. The money paid at the sale, less the expenses of publication and sale, are remitted to the creditor for application to the judgment. If the creditor is the purchaser at the sale, they also receive the property which was executed upon by Sheriff’s Deed or Bill of Sale and they can proceed to sell that property for satisfaction of the debt.

The advantage of the execution sale is that most debtors faced with the loss of title to their home will contact the Lender or their counsel and make payment arrangements to avoid the execution sale. Generally, sheriffs will not execute on automobiles that are subject to prior liens although there is no statutory authority to refuse to levy on such property. Some local sheriffs require the Lender to post an indemnity bond agreeing to pay the costs of defending the sheriff in the event of a lawsuit against the sheriff for conducting the execution sale. In order to execute on either real or personal property, the Lender must have a proper legal description of the property in the form of a deed for real estate or title for an automobile. This often requires a title search of the judge of probate real estate records or a car title search with the Department of Revenue.

Despite the difficulties involved, an execution sale is a valuable collection tool.

The other way to collect a judgment is by way of garnishment of wages or bank accounts.

The garnishment process begins with the filing of the garnishment naming the employer or financial institution where the borrower has an account. The garnishment is endorsed by the clerk of the court and directed to the sheriff or in some counties to a private process serve at the request of the Lender. Bank garnishments are usually directed to a specific department by certified mail as proper service. The garnishment process must be served on the borrower and the employer to be garnished. Once served, the employer or bank has thirty days to file an answer advising whether the defendant is employed or not in the case of an employment garnishment or 20

whether the defendant has an account with funds on deposit in the case of a bank account. Under Alabama law, the employer or bank is supposed to pay the funds over the clerk of the court at the time of the garnishment answer. In the case of an employment garnishment, they are supposed to continue withholding and remitting funds to the clerk until the amount of the garnishment has been paid over the court.

Once the borrower has been served, the borrower has thirty days to assert that the property being garnished is exempt from garnishment. Wages are subject to an automatic exemption which is in excess of the constitutional minimum exemption of property from garnishment and therefore, it is unusual to receive a claim of exemption to a wage garnishment.

Bank garnishments are subject to several exemptions under Alabama law, but it rare for those exemptions to be asserted. Unlike a wage garnishment which is continuing in nature, a bank garnishment is a one-time garnishment and the amount recovered depends on the balance in the account on the date the garnishment is served on the financial institution.

Once the thirty day answer period has passed, the Lender may file a motion to condemn the funds paid over to the court. The condemnation of the funds terminates the borrower’s right to claim an exemption to those funds and otherwise terminates the debtor’s interest in the funds.

Once condemned, the funds are paid over to the Lender for application to the debt. Because garnishments are continuing in nature, it is not unusual for post-judgment interest to accrue during the garnishment. Alabama law is split on whether post-judgment interest accruing on the judgment during the garnishment may be collected by a subsequent garnishment without further court proceedings adjudicating the post-judgment interest due. Our approach is to treat the judgment as garnishment paid-remaining balance without releasing the recorded judgment lien at the judge of probate office or satisfying the judgment in the court record. Often, this results in a later payment of the remaining balance due when the debtor applies for new credit or for a real estate loan.

5. Renewal and Revival of Judgments A judgment is good for twenty years under Alabama law. However, the recorded judgment lien is only good for ten years. In addition before post-judgment collection action can be taken on judgment more then ten years from the date of entry, the judgment must either be renewed or revived. A motion to renew a judgment is made within the original ten year period and requests that the judgment be renewed for another ten years to allow additional postjudgment collection. A motion to revive a judgment is made after the initial ten years has expired and before the end of the twenty year period and it also requests additional time for postjudgment collection. Both motions require an affidavit from the client attesting to the fact that the judgment remains outstanding and uncollected.

III. Legal Aspects of Repossession of Personal Property Once it has been determined that a delinquent account debtor does not have the ability or 21

desire to voluntarily repay the debt according to its terms, the Institution has the option to recover any collateral which secures the loan. Repossession of security is one of the primary means of collecting a debt and done properly can reduce losses that would otherwise occur in the absence of collateral. However, even a slight error in the repossession process can expose the Institution to damages for an improper repossession. Policies and procedures are a starting point for reducing the potential liability for an improper repossession. You should be aware that even a small deviation from established procedures can be very costly.

A. Conditions for Repossession 1. Acceleration of the Debt The loan agreement between the Institution and the borrower is a contract between the parties. It contains certain terms and conditions between the parties, which in some cases, establish conditions before one party can enforce their rights. In other cases, state law may impose additional conditions which are not expressly set forth in the contract. If you have not already done, so you should take a minute to read the terms of the contracts which your Institution uses and familiarize yourself with the basic terms.

The basic loan agreement, often referred to as the promissory note, is an agreement by the borrower to repay a sum of money borrowed at an certain interest rate and in specified monthly installments. An additional agreement for a secured loan is called a security agreement. Though technically a separate agreement, the security agreement is basically an agreement that if the borrower defaults on the loan agreement, that the Institution may take and sell the property pledged as collateral for the loan. If after the sale of the collateral, there remains a balance due, that is referred to as a deficiency balance. In most states, after the repossession and sale of the collateral, the Institution is entitled to collect the deficiency balance from any parties liable on the loan agreement. Most common loan forms combine the promissory note and security agreement on one document.

Since the basic loan agreement only obligates the borrower to repay according to a specific installment schedule, when a borrower defaults in payments, the only amounts owed are the number and amount of payments that have come due. Therefore, most promissory notes have provision which allows the Institution to accelerate all the installment payments which have not yet come due in the event the borrower defaults in payments. This is sometimes called “calling the note.� Most promissory notes allow the creditor to do this with or without notice, although most Institutions send a notice to the borrower that they have made a decision to accelerate the balance due. Some contracts expressly require that the borrower be provided with a notice of default and be given a specified time to cure the default prior to acceleration. Therefore, before an account is assigned for repossession, it is very important to follow your Institution’s procedures for accelerating the balance due on the promissory note.

Acceleration is also one of the consequences which you can use to convince debtors that 22

they need to keep payment arrangements. You may advise a debtor that if they fail to keep their promise to pay, that you will call the note due and then the debtor will have to the pay the entire balance in a lump sum payment.

2. Right of Self-Help Repossession The vast majority of states have adopted a set of uniform laws regarding security agreements called the Uniform Commercial Code (UCC) which governs the rights of a secured party upon default. Section 9-609(b) of the UCC provides: 9-609. Secured party's right to take possession after default (b) Judicial and nonjudicial process. A secured party may proceed under subsection (a) of this Code section: (1) Pursuant to judicial process; or (2) Without judicial process, if it proceeds without breach of the peace.

Therefore almost every state authorizes self-help repossession without court order if there is a “default” and if it is done “without a breach of peace.” The only exceptions appear to be Wisconsin which only allows a repossession if the debtor signs a voluntary surrender form and Louisiana which requires certain specific contract language in the security agreement as a condition of self-help repossession.

Whether a default exists is requires reference to the contract terms. A default can be based upon a failure to pay, a failure to maintain insurance or breach of any other term of either the promissory note or the security agreement. If there is no default, there is no right to repossess.

That is why acceleration of the debt is important to make sure that if the debtor attempts to cure by paying only the delinquent payments, the debtor remains in default for the remaining balance that has been called due. However, some states require that the debtor be given an opportunity to cure by paying only the delinquent amounts due and acceleration in those states cannot be done until after the required notice has ben given to the debtor.

There are numerous cases which describe conduct which constitutes a breach of the peace and they are some of the most interesting cases in the UCC. Courts have struggled to consistently define what constitutes a breach of the peace, so the cases are decided based on their individual circumstances. There is no bright line test of what constitutes a breach of the peace.

Under Alabama law, the secured creditor, in exercising the privilege to enter upon the premises of another to repossess collateral, may not perpetrate "any act or action manifesting force or violence, or naturally calculated to provide a breach of the peace," Crews & Green v.

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Parker, 192 Ala. 383, 387, 68 So. 287, 288 (1915). Neither may a creditor resort to constructive force, such as "threats or intimidation," Ford Motor Co. v. Ditton, 295 So.2d 408 (Ala.Civ.App.1973); or to "fraud, trickery, chicanery, and subterfuge," Ford Motor Credit Company v. Byrd, 351 So.2d 557 (Ala.1977).

The phrase "breach of the peace" has been defined as any "situation tending to disturb the public order." Reno v. General Motors Acceptance Corp., 378 So.2d 1103 (Ala.1979). It is "a disturbance of the public tranquility, by any act or conduct inciting to violence or tending to provoke or excite others to break the peace, or, as is sometimes said, it includes any violation of any law enacted to preserve peace and good order." City of Akron v. Mingo, 169 Ohio St. 511, 513, 160 N.E.2d 225, 226 (1959). Consequently, actual "confrontation or violence is not necessary to finding a breach of the peace." Salisbury Livestock Co. v. Colorado Cent. Credit Union, 793 P.2d 470, 474 (Wyo.1990).

The courts of Alabama, as well as those of its sister states, have recognized that a mere trespass does not automatically constitute a breach of the peace. Reno v. General Motors Acceptance Corp., 378 So.2d 1103 (Ala.1979). A creditor has a privilege to enter the parking lot of a business open to the public in order to take possession of collateral and collateral may be repossessed without the debtor’s knowledge and outside their presence Ash v. Peoples Bank of Greensboro, 500 So.2d 5 (Ala.1986). A vehicle can be repossessed from parking lot at debtor's place of employment without debtor's knowledge. Ford Motor Co. v. Ditton, 52 Ala.App. 555, 295 So.2d 408 (Ala.Civ.App.1974) and a repossession may also be performed from the debtor's open driveway. Butler v. Ford Motor Credit Co., 829 F.2d 568 (5th Cir.1987). A vehicle may be repossessed from a partially enclosed carport in debtor's driveway where no door or garage on the premises was opened or broken. Raffa v. Dania Bank, 321 So.2d 83, 85 (Fla.Dist.Ct.App.1975).

Finally, a vehicle may be repossessed from the parking lot of apartment building where debtor lives. Census Federal Credit Union v. Wann, 403 N.E.2d 348, 351 (Ind.App.1980).

However, when the collateral is located inside fences or is otherwise enclosed, the secured creditor's privilege is limited and creates an issue of fact whether a breach of the peace occurs. Rogers v. Allis-Chalmers Credit Corp., 679 F.2d 138 (8th Cir.1982). The creditor's privilege is most severely restricted when repossession can be accomplished only by the actual breaking or destruction of barriers designed to exclude intruders. Thus, at least one case has held that the actions of a creditor's agents in "cutting a chain used to lock a fence which enclosed the debtor's property" to gain access to collateral "constituted a breach of the peace under Pennsylvania law. Laurel Coal Co. v. Walter E. Heller & Co., 539 F.Supp. 1006 (W.D.Pa.1982) and Bloomquist v. First National Bank of Elk River, 378 N.W.2d 81 (Minn.App.1985) found that removing cracked window pane to gain entry constituted breach of the peace as a matter of law.

In summary, the right to take possession under Section 9-609 includes the reasonable right to enter the open areas of the debtor’s property as well as the property of third parties to recover the collateral. However, particularly with mobile home loans it is customary to obtain a landlord’s waiver and right to enter property owned by the landlord when a mobile home is 24

placed on property not owned by the debtor.

Other than breaking or entering closed spaces, no breach of the peace occurs unless there is some confrontation with the debtor or damage to collateral or other property belonging to the debtor. Chrysler Financial Co., L.L.C. v. Flynn, 88 S.W.3d 142 (Mo.App.S.Dist. 2002). The breach of the peace must occur during the repossession at not after the repossession has been completed. Confrontations which occur after repossession and some distance from the site of repossession do not constitute a breach of the peace. Ellis Contracting, Inc. v. Komatsu Financial, 2004 WL 2857601 (Miss.App.,2004).

Since the Institution has little control over the conduct of the actual repossession, most Institutions require their recovery agents to maintain minimum insurance levels and sign agreements that they will indemnify the Institution against claims for loss or damage due to a breach of peace claim made against the repossession agent.

3. Notice of Intent to Repossess Some states condition the right of self-help repossession on providing the debtor with a notice of intent to repossess and right to cure the payment default by paying the delinquent payments due. It is only after the time period for the right to cure expires that the Institution may accelerate the balance and assign the account for self-repossession. Some states allow an exception to the right to cure notice for situations where the collateral is impaired or uninsured.

The various right to cure requirements as well as other helpful information for out of state repossession requirements can be found at http://www.repo.org/stateReq.asp.

B. Judicial Repossession - Detinue and Replevin All states allow for some form of repossession by Court order. To secure the Court order, the Institution must initiate a lawsuit by filing a Complaint for possession of the property. In most states there is a procedure for securing possession of the property pending a trial on the merits by posting a security bond. The purpose of the security bond is to allow the debtor to recover damages from either the creditor or the bonding company in the event that the trial results in a judgment in favor of the Defendant. Generally, the only time such liability occurs is when the creditor’s right to repossess does exist, such as cases where the debtor did not sign a security agreement or the debtor was not in fact in default at the time of repossession. It can also occur where the creditor has failed to send the required notice of right to cure in those states that require such a notice.

Once the lawsuit has been filed, the debtor has an opportunity to respond to the Complaint and if necessary, a trial is held to determine whether the creditor has a valid security interest, whether a default has occurred and whether the other conditions for repossession have been met. The vast majority of replevin and detinue cases are not contested and result in a judgment for possession of the collateral.

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If the collateral has not been recovered prior to the final judgment, the creditor then files a request for the sheriff to execute on the judgment and take possession of the collateral. Once the collateral is in the possession of the secured party, the secured party must follow the normal procedures for providing notice of sale and notice of the deficiency balance or surplus from sale.

Some states allow the creditor to seek both a judgment for possession and a judgment for the balance due on the contract in the same lawsuit. If that occurs, the proceeds from the sale are credited against the judgment for the balance due.

C. Notice of Sale and Right of Redemption Once a creditor obtains possession of the collateral, either through self-help repossession or by court order, all states require some form of notice of the sale of the collateral and the right to redeem the collateral. The notice of sale forms vary somewhat from state to state and as of 2002, there is a form notice for each state which contains the required information as to the date, time, place and manner of sale and which advises the debtor of his state law right to redeem the collateral prior to sale.

1. Right of Redemption The right of redemption is a state law right which allows the debtor to buy back his collateral from the creditor after repossession by paying to the creditor the amount of the debt, plus certain other allowable charges such as costs of repossession, insurance and other expenses of securing and protecting the collateral prior to sale. There is a minimum period of redemption, which in Alabama is ten days, but which varies from state to state. Notwithstanding the expiration of the period for redemption in the notice of sale, a majority of courts hold that the debtor may redeem at anytime prior to the actual sale of the collateral. If the debtor fails to redeem prior to the sale date, the creditor may dispose of the collateral by public or private sale or by retaining the collateral in full or partial satisfaction of the debt.

2. Standards for Disposition of Collateral The UCC gives the secured party the right to dispose of collateral upon default and repossession. The disposal of collateral involves the competing interests of the creditor in obtaining a prompt liquidation of its collateral and the interests of the debtor in securing the highest and best price for the collateral, thereby reducing any remaining balance owed after sale of the collateral. a. The Commercially Reasonable Standard Section 9-610 of the UCC permits the secured party to dispose of the collateral by sale or lease. The main requirement for all dispositions is that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private 26

proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms. b. The Secured Party’s Right to Purchase The secured party is not required to sell the collateral to a third party. The secured party may itself purchase the collateral if the sale is a public sale. If the collateral is disposed of by a private sale, the secured party may not purchase the collateral unless the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations. This is because the private sale of collateral is not as likely to generate a fair market price for the collateral. By requiring the recognized market and standard price quotations, it is easy to establish whether the secured party’s purchase of the collateral at a private sale is a commercially reasonable disposition. c. Disclaimer of Warranties The secured party may and generally does disclaim any warranties regarding the title to the property or its condition. Such disclaimers are generally done in writing and communicated to the potential purchasers of the property by describing the sale in terms like “the property is being sold in as is condition. d. Time for Sale The UCC does not specify a period within which a secured party must dispose of collateral. It is clear that the sale cannot occur until after the debtors right of redemption has expired.

In some cases it may not be prudent to dispose of goods when the market has collapsed or if the collateral is business inventory, it might be more appropriate to sell a large inventory in parcels over a period of time instead of in bulk. However, every aspect of a disposition of collateral must be commercially reasonable. Therefore, if a secured party does not proceed to promptly dispose of collateral for a long period of time, and if there is no good reason for not making a prompt disposition, the secured party may be determined not to have acted in a "commercially reasonable" manner. e. Duty to Repair or Process for Sale There is some question as to whether a secured party has an affirmative duty to process or prepare the collateral for disposition. The UCC does not expressly require a secured party to perform necessary repairs prior to sale. However, some courts have held that the commercially reasonable standard nevertheless could impose an affirmative duty on the secured party to process or prepare the collateral prior to disposition. The UCC drafting comments state that courts should not be quick to impose a duty of preparation or processing on the secured party. A 27

secured party may not dispose of collateral "in its then condition" when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition.

Most creditors spend at least some money on detailing auto and mobile home collateral prior to sale and many will perform necessary repairs that will allow the creditor to recoup more than the costs of repair on sale. f. Public vs. Private Dispositions.

The UCC makes several distinctions between public and private dispositions. Public dispositions are the preferred method of sale, but many auto lenders utilize dealer-only auctions for the disposal of automobiles because they are regularly scheduled and provide a ready pool of willing buyers. Many institutions do not have a place for the storage or showing of vehicles available for sale.

One of the differences is in the information about the sale that must be provided to the borrower. If the sale is by public disposition, the debtor is entitled to notification of "the time and place of a public disposition." If the sale is by private disposition, the debtor is entitled to notification of "the time after which" a private disposition will be made. The reason is that if it is a public sale, the debtor should be given an opportunity to notify potential purchasers how and where they can purchase the collateral. g. Relevance of Price.

A low sale price alone is generally not sufficient to establish that a sale was not commercially reasonable. However, a low sales price suggests that a court should scrutinize carefully all aspects of a disposition to ensure that each aspect was commercially reasonable.

There are also special rules which affect the amount of the deficiency if the purchaser is the secured party or a person related to the secured party and the amount of proceeds of the disposition is significantly below the range of proceeds that might have been obtained from an unrelated party. h. Retention of Collateral in Lieu of Disposition The UCC also has procedures for the creditor to retain the collateral in lieu of sale and to make ether a full or partial credit to the debt. The procedure for such retention in full or partial satisfaction of the debt require that a notice of such action be provided to the debtor and if the debtor objects, the creditor must proceed with a sale of the collateral. In consumer goods transactions, retention of the collateral must be made in full satisfaction of the debtor and no deficiency balance claim may be made against the debtor.

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I. Mandatory disposition of consumer goods.

Under certain circumstances, a secured party that has taken possession of consumer goods as collateral must dispose of the collateral within 90 days after taking possession of the collateral or such longer period as the debtor may agree to in writing after taking possession. The mandatory disposition rules apply if: 1. 60 percent of the cash price has been paid in the case of a purchase- money security interest in consumer goods; or 2. 60 percent of the principal amount of the obligation secured has been paid in the case of a non-purchase-money security interest in consumer goods.

3. Notice of Sale The UCC requires that each debtor and each person who has signed the security agreement, whether or not they are obligated on the promissory note, be given notice of the sale of the collateral. It is also customary to send a notice of sale to any subordinate lien holder, so they are given an opportunity to protect their subordinate lien at the time of sale. The failure to transmit notice, or the transmission of insufficient notice, is as a matter of law, commercially unreasonable behavior and subjects the Institution to liability for an unauthorized disposition of the collateral. However, the requirement that reasonable notification be sent to the debtor does not require that the debtor receive it. It is generally sufficient if the notice is sent to the last known address of the debtor. Therefore in pre-repossession collection contact with the debtor, it is very important to verify the debtor’s correct address. If the debtor claims to have provided notice of his correct address in a communication with a collector and then the notice of sale is sent to a different address, the Institution may be exposed to a claim of insufficient notice and unauthorized disposition.

The UCC does not require notices to be sent by certified mail. However, most Institutions send the notice of sale by certified mail and some use both regular and certified mail. The advantage of using both regular and certified mail is that if the debtor fails to claim the certified mail, but the regular mail copy is not returned, it can create a presumption that the debtor actually received the regular mail copy even though they failed to claim the certified copy.

There are technical requirements for the notice of sale. In a consumer-goods transaction, the following information must be provided: a. b. c. d.

the names of debtor and the secured party; the collateral that is the subject of the intended disposition; the method of intended disposition; the debtor is entitled to an accounting of the unpaid indebtedness and 29

e. f. g. h.

states the charge, if any, for an accounting; and the time and place of a public disposition or the time after which any other disposition is to be made. any liability for a deficiency of the person to which the notification is sent; a telephone number from which the amount that must be paid to the secured party to redeem the collateral is available; and a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.

While no particular phrasing of the notification is not required, the UCC does provide a safe harbor notice format which if used, protects the creditor from claims of inadequate notice.

D. Notice of Deficiency or Surplus The 2002 amendments to the UCC added a provision which requires the creditor to send a notice to the debtor after the sale of the collateral advising the debtor of the amounts realized from the sale and the calculation of any remaining balance due after credit of the sales proceeds to the loan balance.

In a consumer-goods transaction in which the debtor is liable for a deficiency, the Institution must send an explanation to the debtor after the disposition and before the Institution first makes written demand on the debtor for payment of the deficiency. The information required for the notice must be set forth in the following order: 1. the aggregate amount of obligations secured by the security interest under which the disposition was made, and, if the amount reflects a rebate of unearned interest or credit service charge, an indication of that fact, calculated as of a specified date: 2. the amount of proceeds of the disposition; 3. the amount due after deducting the amount of the proceeds of sale; 4. the amount of expenses, including expenses of retaking, holding, preparing for disposition, processing, and disposing of the collateral, and attorney's fees secured by the collateral which are known to the secured party and relate to the current disposition; 5. the amount of credits, including rebates of interest or credit service charges, to which the debtor is known to be entitled and which are not reflected in the amount in paragraph (1); and 30

6. the amount of the surplus or deficiency.

A particular phrasing of the explanation is not required. An explanation complying substantially with the requirements is sufficient, even if it includes minor errors that are not seriously misleading.

E. Liability for Unauthorized Disposition When the Institution fails to comply with the UCC provisions for the sale of collateral or where the sale of the collateral is not done in a commercially reasonable manner, the Institution is liable to the customer for all damages resulting from that conduct as well as certain minimum statutory damages. Claims for unauthorized disposition are usually raised as a defense to collection of the deficiency balance, but they can be raised independently of any claim for the deficiency balance due.

Section 9-625 sets forth the basic remedy for failure to comply with the requirements of the UCC. The debtor is entitled to damages in the amount of loss caused by the noncompliance.

Those damages are usually measured as the difference between the amounts obtained from the sale of the collateral versus what could have been obtained had the sale been performed in a commercially reasonable manner. In cases involving a failure to provide notice of sale, some courts allow additional damages based on the unauthorized disposition of the collateral, including in some cases, punitive damages.

Section 9-625 provides a minimum statutory damage recovery for a debtor in a consumer goods transaction. It is designed to ensure that noncompliance with the UCC in a consumer-goods transaction results in liability, regardless of any injury that may have resulted.

The statutory damages provided by that section are the amount of the “credit service charge” plus 10% of the principal amount of the debt or the sales price differential plus 10% of the cash price of the sale on disposition of the collateral. Unfortunately, the UCC does not define the term “credit service charge.”

When the Institution fails to comply with the UCC regarding the repossession and sale of collateral, it can also affect the Institution’s right to collect the deficiency balance due. There are three approaches to the regarding the right to collect the deficiency balance where the secured creditor has failed to comply with the UCC. Some courts have held that a noncomplying secured party may not recover a deficiency (the "absolute bar" rule). A few courts held that the debtor can offset against a claim to a deficiency all damages recoverable under the UCC resulting from the secured party's noncompliance (the "offset" rule). Most Courts hold that the noncomplying secured party is barred from recovering a deficiency unless it overcomes a rebuttable presumption that compliance with the UCC would have yielded an amount sufficient to satisfy the secured debt. Alabama law follows the offset rule where damages resulting from the creditor's failure to comply with the notice requirements may be set off against the total deficiency. Abston v. Central Bank of the South, 492 So.2d 1298 (Ala.1986); First Alabama 31

Bank of Montgomery, N.A. v. Parsons, 390 So.2d 640 (Ala.Civ.App.1980); Henderson v.

Hanson, 414 So.2d 971 (Ala.1982).

IV. Legal Aspects of Non Judicial Mortgage Foreclosures Mortgage Foreclosure actions are some of the most difficult and costly collection actions undertaken by a creditor. They often involve a greater potential for loss than other collateral repossessions and if done improperly, can result in significant exposure to liability to both the original borrowers and any guarantors or to subsequent purchasers upon resale of the foreclosed property. Therefore, before any mortgage foreclosure action is contemplated, a careful review of the loan documents and recorded mortgage should be made to ensure that the mortgage loan documents have been properly executed and recorded in the proper recording office.

A. Conditions for Foreclosure 1. Acceleration/Notice of Default and Right to Cure It is generally a prerequisite to foreclose that the debt secured by the real estate must have matured by its own terms or by acceleration. Acceleration usually occurs after a default in payment although it may result from any non-monetary default under the terms of the note or mortgage. The promissory note and mortgage determine whether prior notice is required prior to the acceleration of the balance due or whether the debtor has a right to cure any delinquent payments prior to sale. Alabama law does not impose any requirement of prior notice for acceleration or right to cure.

However, many institutions using the FNMA\FHLMC mortgage form produced through a computer program include a “non-uniform� acceleration clause which requires that prior to acceleration of the debt, that the borrower be provided with a notice of default specifying the default and providing the borrower with a right to cure of at least thirty days and informing the borrower of their right to reinstate the loan by curing the payment default at anytime prior to the actual foreclosure sale or to bring a legal action to assert that no payment default actually exists.

The non-uniform right to cure and reinstate is not actually required unless the loan is actually guaranteed by FNMA\FHLMC or unless the mortgage loan is intended for re-sale on the secondary market. However, many computerized form programs routinely insert this nonuniform clause even in circumstances where it is not required. Once inserted, that clause becomes a contractual term and the Lender is bound by that clause and its requirements.

2. Title Issues, Tax Liens and Subordinate Liens To a large extent, the recovery on a mortgage foreclosure depends on the ability to secure clear title upon completion of the foreclosure sale subject only to the borrower’s right to redeem the property under Alabama law. Several things can arise in the foreclosure process which can 32

interfere with the Lender’s ability to secure such title.

As a general rule, the foreclosure a mortgage, converts all subordinate liens from liens against the property, from real estate liens to a right of redemption under Alabama law. Code of Alabama § 35-10-12 and § 6-5-248. In plain language, this is referred to as stripping the subordinate liens, but in reality, the liens are actually transformed into non-real estate liens. The right of redemption is discussed below.

Most Lenders secure title insurance at the time of loan closing to insure that their mortgage has the required priority among other liens existing at the time of closing. However, occasionally, the closing agent or title company errs in their title search and the foreclosure process discloses a prior lien ahead of the mortgage to be foreclosed. Many times, these prior encumbrances can be cleared in the foreclosure process such as a prior unreleased mortgage which has actually been paid in full. Other liens cannot be cleared and result in a claim under a title insurance policy. Title insurance claims are complicated and time consuming and generally require the assistance of counsel. Often times, the title company will make a decision between payment of the claim or curing the title defect by use of a legal action called a quiet title action.

Federal and State tax liens create special issues in the foreclosure process. While the presence of such liens which are filed after the date of the mortgage do not prevent the foreclosure of a prior mortgage lien, IRS regulations require a specific notice be sent to the technical services division office prior to the sale and that the notice of sale be acknowledged by the division office as a condition of stripping the IRS lien in the foreclosure process. Due to this requirement, the date between the first publication notice of the sale and the actual sale date is generally extended from three weeks to about six weeks. State tax liens do not require a specific notice, and as long as they post-date the mortgage recording, such liens are stripped in the foreclosure process. Nonetheless, it is customary for notice of the sale to be provided to the Alabama Department of Revenue as well as other lien holders, such as judgment creditors.

Workman’s liens present special and often complicated issues in the foreclosure process.

The general rule is that a workman’s lien dates to the date on which work is performed on the property, notwithstanding the fact that the lien may not actually be filed for up to 120-days after the last work has been performed. However, a workman’s lien for work commenced after the date of the recording of the mortgage, is generally subordinate to the mortgage lien, unless the lien relates to improvements on the property that can be severed without permanent damage to the value of the property. Many workman’s lien claimants mistakenly believe that their workman’s liens prime a prior recorded mortgage, but generally that is not the case and the proper foreclosure of the mortgage converts their lien to a right of redemption as discussed below.

There are certain statutory liens which may not be foreclosed over as a matter of law.

These liens are generally municipal liens for weed or garbage abatement, sewer or water liens, or certain fire district dues. Prior to or at completion of the mortgage foreclosure sale, such liens 33

must be paid by the Lender to ensure clear title after the sale.

3. Insurance and Ad Valorem Tax Issues In evaluating a mortgage delinquency, special attention should be paid to hazard insurance and local ad valorem tax issues. Many times, a mortgage delinquency is accompanied by a failure to pay such items and unless the loan involve an escrow agreement for taxes and insurance, the failure to maintain such items greatly endangers the value of the collateral to be recovered. In addition, the failure to maintain taxes and insurance is a separate default under the terms of the mortgage and therefore, if the mortgage requires a notice of default prior to acceleration, the Lender should make sure that such items are included in the notice of default.

Virtually all mortgages allow a Lender to advance funds for taxes and insurance which are past due regardless of the existence of an escrow account and to treat such advances as additional amounts due under the mortgage. In the absence of insurance, the Lender should be prepared to force place insurance. Also, you should be aware that the failure to pay annual ad valorem taxes can result in a tax sale of the property and the purchase of the property by a thord party at a tax sale. While tax sales are generally made subject to existing mortgages, there are provisions of Alabama law which allow for prior mortgages to be subordinated and eventually lost after proper notice by a tax deed holder. Such risks generally dictate that past due taxes should be paid or redeemed prior to or at the time of the foreclosure sale.

B. Sale Under Power of Sale 1. Publication Requirements Alabama is commonly referred to as a “strict foreclosure� state, meaning that a mortgage lien may be foreclosed without the need for a lawsuit or judicial order of foreclosure and without the need for confirmation of the sale by court order after the sale. Alabama law sets forth certain requirements for the sale of property under a power of sale contained in the mortgage.

Under Alabama law, unless the mortgage provides otherwise, a Mortgage Foreclosure Sale Notice must be published for once per week for three successive weeks in a newspaper published in the county or counties in which such land is located. If there is land under the mortgage in more than one county the publication is to be made in all counties where the land is located. The notice of sale must give the time, place and terms of said sale, together with a description of the property. If no newspaper is published in the county where the lands are located, the notice shall be placed in a newspaper published in an adjoining county. The notice shall be published in said adjoining county for three successive weeks. Code of Alabama § 3510-13. Except for contractually required notices of default, not other notice other than publication notice is required for a valid foreclosure sale under Alabama law.

Publication for three successive weeks" are terms defined in other statutes. Code of 34

Alabama ยง 6-8-62 states that when notice is to be given for a specified number of weeks, there must be weekly insertions for the specified number of weeks and a certain number of days. If the notice is to be for three weeks, the first insertion must be at least 18 days before such day. In practice, the rule has developed to exclude the first day and include the last day in the computation. Johnson v. Salter, 359 So.2d 417, 418 (Ala.Civ.App. 1978); Bullock v. Bishop, 435 So.2d 24 (Ala 1983).

The foreclosure sale must be conducted at the front or main door to the courthouse of the county where the mortgaged land or a substantial and material part thereof, is located. The sale must be held between the hours of 11 A.M. and 4 P.M. on the day designated for the exercise of the power to sell the land. Code of Alabama ยง 35-10-14. Most notices in Alabama today use the expression "between the legal hours of sale." This expression is taken from Section 6-8-41, which states that "All public sales shall be made between the hours of 11 A.M. and 4 P.M., but in the event such sale is not completed by 4:00 P.M., the same may continue until 5:00 P.M." The Alabama Court of Civil Appeals has held that a notice of sale to be held "between the legal hours of sale" was sufficient notice to inform prospective bidders of the time of the sale. Helms v.

First Alabama Bank of Gadsden, 386 So.2d 450 (Ala.Ct.Civ.App.1980).

Alabama Courts have been unusually lenient in upholding notices of sale which contained error or defects. An inaccurate statement in foreclosure notice's preamble as to county in which property was located did not render the foreclosure notice invalid, where the legal description of the property in the notice accurately stated in which county the property was located, and notice accurately described the recording information regarding the mortgages under which the sale was being conducted. Richards v. Phillips, 925 So.2d 216 (Ala.Civ.App. 2005). Failure to specify in notice that foreclosure sale would be for cash did not prejudice those interested in the sale.

Unless otherwise specified, a foreclosure sale is always made for cash due at the time of sale.

Farmers' Sav. Bank v. Murphree, 76 So. 932 (1917). A published notice of sale was held sufficient against an objection that it did not locate the land as to state and county. Nichols v.

Nichols, 68 So. 186 (1915). Where the notice of sale recited the name of the mortgagee, giving the correct date of the mortgage and the correct book and page of the record where it was recorded, together with the description of the lands, was sufficient notice even though it recited misnamed the borrower. Drake v. Rhodes, 46 So. 769 (1908). The notice does not need to specify the amount of the debt which is to be paid. Wiswall v. Ross, 4 Port. 321 (1837).

2. Sale and Bidding Considerations Many factors must be considered in establishing the amount to bid. The primary consideration is that the amount bid at the sale must be credited against the debt. Therefore, if the Lender bids the full amount of the debt at the sale, the debt is extinguished and no further recovery may be had against the borrower if the property later re-sells for the less than the amount bid at the sale.

On the other hand, the amount bid at the sale establishes the amount that the borrower or 35

any subordinate lienholder must pay in order to redeem the property from the foreclosure sale.

Therefore, if the bid amount is too low, a Lender may be faced with a redemption of the property from the sale.

In order to establish a bid amount, we generally recommend that the Lender obtain at least a drive-by appraisal to determine the amount the Lender can expect to receive from a subsequent re-sale of the property.

Many Lenders attempt to estimate their costs of re-sale of the property, the cost of taxes and insurance that need to be paid after the sale. These post-sale costs are deducted from the estimated appraised value to approximate the net amount that the Lender will receive from the subsequent disposal of the property after the foreclosure sale. This approach maximizes the recovery to the Lender by preserving he possibility of collection of a deficiency balance from the borrower after disposition of the property.

Other considerations in the bidding process include the amounts which may be required to satisfy a prior first mortgage lien in those cases where the Lender is foreclosing a second or subordinate lien. In commercial property situations, the previous use of the property which involves the potential for environmental contamination must be considered. The most common uses that implicate environmental issues are gas stations, car repair facilities, printing facilities and dry cleaning businesses. In cases, involving such properties, consideration should be given to an environmental assessment prior to the commencement of the foreclosure process.

Foreclosure of construction loans also involve special considerations due to the fact the Lender will be required to expend further amounts needed to complete construction of the property. In such cases, it may be necessary to adjust the bid amount lower from the value of the property as completed by the amount that will be required to complete construction. Also, in many cases where the Lender completes the construction, it may be required to honor purchase or provide a builder’s warranty for the new construction even though the original contractor does not provide one and the subsequent contractor engaged to complete construction may not provide such a warranty.

Easements and Restrictive Covenants can also greatly impact the value of the property.

Many subdivisions have somewhat comprehensive covenants that restrict the appearance, use and modification of the homes located within the subdivision, which may make potential purchasers wary of purchasing the property. Some subdivisions also have homeowner’s association dues which may need to be brought current after the sale and which also discourage some potential buyers. Lots without new homes in certain subdivisions may also have builder tie-ins or restrictions which only allow certain approved builders to build upon the property and some subdivisions require certain floor plans or types of homes to built which may delay or affect the value of the disposition of vacant residential building lots. Easements which allow others to use portions of the subject property can also affect the value of the property. Such easements may allow neighboring property owners to use a common driveway or prevent the use or development 36

of portions of the property which are subject to drainage or utility easements. Such easements and restrictions must be evaluated in the title search process and considered in the bidding process.

Some Lenders use competitive bidding to ensure the best price for the property at the foreclosure sale. In those cases, the Lender sets an opening bid which will be the highest bid if no other bidders appear at the sale and then set a maximum bid amount at which they are prepared to have a third party purchaser acquire the property at the foreclosure sale. In some cases, this results in a better recovery than a simple open bid amount.

Mere inadequacy of price will not invalidate a sale under a power of sale contained in a mortgage. Hunter-Benn & Co. v. Bassett Lumber Co., 139 So. 348 (Ala. 1932). The mere fact that the amount paid at a foreclosure sale is less than or disproportionate to the value of the land does not entitle mortgagors to have a foreclosure sale set aside. Dinkins v. Latham, 79 So. 493 (Ala. 1918). In order to have a foreclosure sale set aside, the foreclosure sale price must be so low, so inadequate, and so disproportionate that it shocks the conscience of the court. If a foreclosure sale price is so inadequate as to shock the conscience, it may itself raise a presumption of fraud, trickery, unfairness, or culpable mismanagement, and therefore provide sufficient grounds for setting the foreclosure sale aside. Berry v. Deutche Nat. Trust, Co., 1010 WL 3377712 (Ala.Civ.App.2010).

In Mt. Carmel Estates, Inc. v. Regions Bank, 853 So.2d 160 (Ala. 2002), for example, the Alabama Supreme Court examined whether a bank breached its duty of fairness and good faith to the borrowers, when the bank’s bid at the foreclosure sale was an amount less than the amount due under the terms of the note secured by the mortgage. The balance due the bank in Mt. Carmel was $1,611,686.99, and the mortgagors offered evidence that the appraised value of the property was $1,530,000.00. At the foreclosure sale, the bank was the only bidder and made a credit bid of $1,242,000.00. The bank’s bid was calculated to be 81% of the appraised value of the property. Ultimately, the Alabama Supreme Court affirmed the summary judgment awarded to the bank by the trial court. Further, the Supreme Court held that the bank’s bid was not so low as to shock the conscience or create a presumption of fraud or unfairness as grounds to deny the bank its claimed deficiency balance.

The Mt. Carmel Court took particular note of the fact that the appraisal value was made on the premise that the property was a long-term development and subdivision marketing plan, not a foreclosure. The Court also noted that a purchaser at the foreclosure sale would be required to hold the property for the one year redemption period.

3. Post Sale Disposition A. Statutory Right of Redemption Code of Alabama § 6-5-248 sets forth the basic right of redemption after a 37

foreclosure sale. The following persons are entitled to redeem after the foreclosure sale: (1) Any debtor, including any surety or guarantor.

(2) Any mortgagor, even if such mortgagor is not personally liable for payment of a debt.

(3) Any junior mortgagee, or its transferee.

(4) Judgment creditor, or its transferee.

(5) Any transferee of the interests of the debtor or mortgagor, either before or after the sale. A transfer of any kind made by the debtor or mortgagor will accomplish a transfer of the interests of that party.

(6) The respective spouses of all debtors, mortgagors, or transferees of any interest of the debtor or mortgagor, who are spouses on the day of the execution, judgment, or foreclosure sale.

(7) Children, heirs, or devisees of any debtor or mortgagor.

Depending on the party who redeems the property either prior recorded liens or all recorded liens can be revived against the property. When any debtor or persons claiming under the debtor redeem, all recorded judgments, recorded mortgages, and recorded liens in existence at the time of the sale, are revived against the real estate redeemed and against the redeeming party.

Once the debtor or persons claiming under them redeem, further redemption by some party other than the debtor is precluded.

When any judgment creditor or junior mortgagee redeems under this article, all recorded judgments, recorded mortgages and recorded liens having a higher recorded priority in existence at the time of the sale are revived and must be paid at the time of off at redemption.

Once any lienholder, recorded judgment creditor, or junior mortgagee is paid the amount of such person's debt and any accrued interest and other contractual charges, such person has no further right to redeem. Thus, a subordinate lienholder must satisfy all prior recorded mortgages and liens as a condition of redemption, but they do not have pay any liens which are subordinate to their liens. Those further subordinate lienholder, recorded judgment creditor, or junior mortgagee with a lower recorded priority may redeem from those having a higher recorded priority who have redeemed.

The right of redemption must generally be exercised within one year from the date of the sale. However under limited circumstances, a party in possession of foreclosed property can lose their right of redemption if they fail to vacate the property after demand. Code of Alabama ยง 6-5-251. This Section provides that possession of the land must be delivered to the purchaser at the foreclosure sale within 10 days after written demand for the possession has been made. If the land is in the possession of a tenant, written notice must be given to the debtor or mortgagor, and the debtor or mortgagor must direct the tenant to deliver possession or recognize the purchaser as his or her landlord. If the debtor or mortgagor cannot be found, notice to the tenant is sufficient and he must deliver possession within 10 days. Notwithstanding this provision, it is customary to provide notice to both the borrower and the tenant in possession of 38

the property. The failure comply with the provisions of this section forfeits the right of redemption of the debtor or one holding possession under the debtor.

Because of the right of redemption it is imperative that the Lender make sure that any re-sale of the property during the one year right of redemption be made expressly subject to the right of redemption. Failure to make any re-sale of the property expressly subject to the right of redemption could result in exposure to the Lender-Seller for breach of the warranty of title to the subsequent purchaser of the property.

B. Ejectment Proceedings In many cases, it is impossible or impractical to proceed with re-sale of the property while it is occupied by the borrower or a tenant of the borrower. In these cases, once the 10-day notice to vacate has been provided and the property remains occupied, the Lender may initiate a legal action for ejectment to obtain possession of the property. In such cases, a complaint for possession of the property is filed with the Circuit Court and generally results in an order for possession which ay enforced by the sheriff. An ejectment proceeding requires service on the debtor or persons occupying the subject property and allows 30-days for an answer or response to the Complaint. If no response is filed, a default may be filed after the 30-day period.

Once the judgment for possession is obtained, an application for enforcement by the sheriff may be filed after 30 days from the date of the judgment. Given these timelines, it generally takes between 70-120 days to obtain possession of property which the debtor or occupant refuses to voluntarily vacate. While Alabama law allows a judgment for the reasonable rental value of the property during the time of possession, such a judgment is usually uncollectible once the occupant is ousted from the property.

C. Ad Valorem Tax Issues and Other Issues Once the foreclosure sale is completed, the Lender is the owner of the property for all intents and purposes. Therefore, the Lender must pay all ad valorem real estate taxes which come due after the sale as well as homeowner’s dues and assessments. It is critically important that the Lender implement a system for tracking the payment of these items post sale and that the appropriate taxing authorities and associations have the proper billing address for such charges.

C. Deed in Lieu of Foreclosure Borrowers seeking to avoid the stigma of foreclosure and a potential deficiency sometimes ask if they may voluntarily deed the property to the lender in exchange for release from the note. Such a transfer is referred to as a “deed in lieu of foreclosure” (“Deed In Lieu”).

Deeds in Lieu may be especially appealing in situations where the lender has no intention of seeking a deficiency and where it would seem, therefore, that the lender is giving up nothing by accepting a Deed in Lieu. Lenders usually view acceptance of a Deed in Lieu as a quicker, less expensive alternative to foreclosure. While this may be true in many states, because of the 39

streamlined non-judicial foreclosure process in Alabama, accepting a Deed in Lieu is not necessarily faster or less costly than non-judicial foreclosure. Accepting a Deed in Lieu on the other hand, carries with it significant risks under Alabama law.

When a mortgage lien is properly foreclosed non-judicially, most liens, leases and other intervening real property interests recorded or becoming enforceable after the mortgage is recorded (with the exception of ad valorem tax liens, weed liens and other encumbrances with special priority) are “cut off’ by operation of law. Title is effectively “wiped clean” as to such interests from the effective date of the mortgage lien through the date of foreclosure. The problem with a Deed in Lieu is that it does not cut off any subsequent interests. Under Code of Alabama § 35-10-51, the effect of a deed in lieu imply transfers to the Lender all right, title and interest of the mortgagor in the property, including but not limited to all rights of redemption. It does not effect a foreclosure of the mortgage covering the mortgaged property and does not affect the rights or interests of any person or entity other than the mortgagor in the mortgaged property.

When legal issues are the only consideration, Deeds in Lieu should not be used.

However, some circumstances may make a Lender willing to accept risks attendant in using Deeds in Lieu for business reasons. Such reasons include preventing the property from being tied-up in bankruptcy or to preserve a valued customer relationship. When a Lender makes the business decision to use a Deed in Lieu, certain precautions are required to minimize the Lender’s risk.

Deeds in Lieu should not be utilized in Alabama without first obtaining a clean title commitment showing no intervening liens from the date of the mortgage to the present. In this respect, a title report is insufficient as it does not warrant title or insure against defects.

Lenders should recognize accepting a Deed in Lieu in reliance on a clean title commitment is not without risk. In short, intervening liens normally extinguished through foreclosure may pose problems not otherwise encountered if a Deed in Lieu is accepted.

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