Getting paid when things go badly; How to collect what you are owed
QUESTION: Now that I have a new rental contract and know what my rights are, how do I go about collecting what I’m owed when a customer defaults or tears up my equipment? To be honest with you, the only paper I really care about has Ben Franklin’s face on it. Any suggestions you can provide would be appreciated.
Answer: In order to collect when things go badly, you only can collect the amounts to which you are legally entitled. Now that you have a legally enforceable rental contract, let’s discuss some tools for collecting what you’re owed. Here are a few things every equipment lessor should know:
Get all the information you can up front. Early on in most transactions, including rentals, parties tend to be optimistic and just anxious to “get the contract signed and get started.” There will almost never be a better opportunity to obtain critical collection-related information than in this euphoric phase. So, do a little planning before you start:
- Have your contract ready to go and make certain it gives you the legal rights to collect rent and, if applicable, delivery and setup charges, late charges, repair costs, tolls, taxes, late fees, fines, recovery costs, interest, attorneys’ fees, court costs and more, and to repossess your equipment in the event of a default. Not all states permit self-help repossession, so check with an attorney before you enter upon someone else’s property to retrieve your equipment.
- Decide what other information you might need in order to collect should an accident occur or a dispute arise.
- Make a list of that information.
- Require a provision of that information before releasing equipment to the customer.
- Treat this as just part of the usual process of onboarding a customer.
- Remember that most customers, having rented a car at some point, recognize that they will be required to provide a certain amount of information at the outset, and aren’t likely to get upset unless they feel they’re being singled out or insulted.
Information you need. Here is a short list of the information every equipment lessor should try to obtain before letting a new customer leave with valuable, and often potentially dangerous, equipment:
- Start with all of the customer’s identifying and contact information. Ensure it is legible and includes a physical address. Post Office boxes are often used to conceal parties’ whereabouts and/or avoid being served with lawsuits.
- The physical address for the job site where your equipment will be used and/or parked can be valuable for purposes of repossession efforts, but it also can yield significant leverage in those states that allow equipment lessors to file liens for non-payment. In those states, a contractual prohibition on relocating your equipment to another job site also can be crucial for preserving such lien rights.
- The name of and contact information for the owner of the job site can be important as well. Beyond enabling the lessor to ensure that the owner has knowledge of, and has approved, the work being done, lessors are typically required to deliver notice to the owner if and when such lessors elect to file liens and/or replevin/repossession lawsuits.
- The name(s), addresses and telephone numbers of any and all upstream contractors — those who occupy positions between the owner and the equipment lessor, such as the general contractor and any subcontractors — can be equally important for the same reason. Notices to such upstream contractors are usually required before a lien filing can be validly effected by an equipment lessor. Upstream contractors, and particularly the general contractor, are likely to be very interested in making certain that lower-tier suppliers, including equipment lessors, are fully and timely paid for. Upstream contractors often are required to withhold a retainage from their subordinate contractors in order to ensure such payments are made, failing which, they may themselves be held liable for the retainage amount, and if a lien is filed, the owner of the real estate may well sue the general contractor for breach of contract, breach of fiduciary duty, breach of the implied duty of good faith and fair dealing, fraud, slander of title, consequential, exemplary and/or punitive damages, interest, attorneys’ fees and more. This can trigger a cascade of additional claims down the line. In short, things can get ugly in a hurry when liens are filed. That gives the equipment lessor the unique ability to dictate whether this happens or not by simply obtaining the necessary information up front.
- If a payment bond has been posted with respect to the project on which the equipment will be used — bonds are typically provided on public projects — try to obtain the name of the project, the name, address and telephone number of the bond surety and principal, the name(s) of each upstream contractor including the general contractor and the amount of the bond. You likely will not be able to file a lien on the real estate if a bond has been provided, particularly on public projects. Obtaining bond information after a default can be difficult. This underscores the importance of determining whether a bond has or will be filed and obtaining the above referenced bond information in advance of the rental.
- Getting debit/credit card information and authorizations can be helpful with respect to more limited charges in many cases, subject credit limits and the threat of chargebacks — the possibility that the customer will contact his/her credit card issuer and decline the charge. Losing a chargeback does nothing to limit the right of a lessor to pursue its remedies in court, but it can make the recovery process far more burdensome and expensive. For that reason, it can pay big dividends to include a comprehensive debit/credit card authorization in your new customer onboarding packet.
- Obtaining credit information on a new business customer in advance also can be immensely helpful, particularly when the economy turns down. This area has seen significant advances in the past few years. The reports commonly obtained from credit ratings agencies such as Experian, TransUnion, Equifax and Dunn & Bradstreet (D&B) continue to be used throughout the industry, but smaller private investigatory agencies are gaining ground. Some of such agencies’ reports can be used to access more granular information regarding structure, payment status and history, legal filings and more on a customized basis immediately via a web portal and can do so without impacting the customer’s credit score/history. The advantages of speed, clarity and limited customer impact are starting to change the credit information landscape for both sellers and lessors. Have the customer sign a credit application and be sure to include bank account information — you may need it later, for example, in garnishment proceedings.
- You will need the name and contact information of your customer’s insurer. If your equipment is damaged or destroyed while on rent, you will want to be able to submit a claim for repair/replacement as soon as possible, remembering that you only might be able to recover for your equipment’s downtime. Whether or not you are able to recover for that downtime, your equipment lender will require you to continue paying for that piece of equipment.
Steps worth considering. In addition, you can consider taking the following steps:
- Installing telematics or GPS tracking devices on your equipment is a good way to ensure your equipment is being used properly and that you have the site-specific knowledge you may need in order to locate and/or repossess your equipment. It also can be helpful in determining where and for how long your equipment was used for purposes of lien filings. In the past, such systems had a reputation for being too expensive to be used on smaller equipment. That, however, is changing as prices for telematics devices and monitoring continue to fall apace with other digital technologies. Be careful to include written authorization to use this technology in your rental contract, as a number of states have enacted laws making its use illegal stalking or the like, unless written consent of the lessee is first obtained.
- As referenced earlier, in states that authorize mechanics’ lien filings for unpaid rental-related charges, instituting a process whereby liens are automatically noticed and filed within the usually extremely strict lien deadlines can yield considerable leverage for collection purposes. Also as referenced earlier, if the project is public — for example, a government building — it ordinarily will not be possible to file a lien; instead, a payment bond typically will have been provided. Your ability to file a claim on that bond likely will hinge upon obtaining the necessary bond information and timely providing the required notices. On larger rentals, it can make sense to use a Lien/Bond Claim Worksheet as a reminder to counter personnel of the information that must be collected in advance of the rental — which also tends to streamline the claims process.
- Consider using a separate insurance authorization that, among other things, names you, the lessor, as an additional insured and loss payee under the customer’s property damage or inland marine policy; enables you to notify the customer’s insurer directly of any damage suffered by your equipment; and appoints you, the lessor, as the customer’s agent and attorney-in-fact for purposes of submitting and negotiating claims on that policy. Insurers have ample economic incentive to deny claims and/or refuse to cooperate with anyone other than the insured when claims are made. Your customer, the insured, is unlikely to feel particularly motivated to help anyone, including an equipment lessor, make a claim on his policy after an accident because doing so likely will drive up his premiums and may result in cancellation of his policy. Having the customer appoint you as his agent and attorney-in-fact in advance of the rental can save you a great deal of trouble and go a long way toward getting you paid.
- Include personal guarantee language in your rental contract. Not all customers will be willing to sign it, nor will it be enforceable against some customers’ representatives, such as lower-level employees, but for small contractor customers, personal guarantees can mean the difference between exposing the $1,000 worth of tools they have in their company or all of their seizable personal assets to your claim. People whose personal assets are exposed to claims tend to pay them. Again, this is at least as much about collection leverage as it is about the amount owed.
- Often forgotten in the collection process is the value of maintaining the relationship with the customer. Many customers who fall on hard times want to pay but simply are unable to do so. Continued contact handled properly and courteously can maintain the relationship, protect your reputation, serve as a reminder to the customer and provide some moral motivation for the customer to pay you — perhaps before others — at least in part. Remember, each dollar you collect is one less dollar you have to divide with a collection agency or attorney.
- Collection agencies aren’t cheap, but virtually all of them take cases on a contingency basis, meaning they only take a portion of the amount, if any, recovered as opposed to billing their clients on an hourly basis. This tends to yield recoveries on only more lucrative, less time-consuming, collections, but it often seems to work well for those who enter the process with reasonable expectations.
- Many states have adopted theft-of-services laws that make failures to pay for services or equipment which are available only for hire criminal offenses, thereby enabling parties such as equipment lessors to seek compensation through the criminal justice system, rather than hiring a lawyer or collection agency to pursue a civil collection action. The level of justice meted out tends to hinge to a large extent on the level of motivation felt by the local authorities, but in some areas, they can be surprisingly helpful. Expect them to first say, “It’s a civil matter.” You will have to try to convince them to pursue such matters in most cases and a properly written theft-of-services provision included in your rental contract can be extraordinarily helpful here.
- A collection lawsuit can be useful as a last resort, but such lawsuits tend to be expensive both in terms of time and legal fees. Most jurisdictions have small claims or similar courts in which individuals can pursue lawsuits for amounts of up to $10,000 to $15,000 without the need of a lawyer. This can still be a stressful and time-consuming process, but for those who become familiar with it, small claims court actions can be a useful and less expensive alternative for recovering amounts that are too small to warrant hiring an attorney, but too large to simply walk away from. For larger amounts, say greater than $20,000, hiring an attorney usually is warranted. Many will work on a contingency basis; others will bill their time but will seek recovery of such fees from the customer as part of the amounts to be recovered in the lawsuit. Check your rental contract. If it doesn’t include a provision authorizing you, the lessor, to recover reasonable attorneys’ fees in the event of a dispute, add one.
- After taking a judgment against a defaulting customer, don’t stop there. Have your judgment recorded in the real estate records where the customer resides, as a lien on his/her real estate. Then, have the sheriff seize and sell any property of the customer that is subject to seizure and sale for satisfaction of judgments under applicable law. Finally, seek to garnish the customer’s bank account(s) and wages. Specific statutory requirements exist with respect to each, but compliance is relatively simple and the results can be worthwhile.
- In extreme situations, other remedies such as receiverships — in which a court appoints a disinterested party to act as a receiver for a company to represent and protect the interests of creditors and other parties in the company’s assets — may be warranted. Such remedies are exceedingly rare, harsh and typically require the posting of a bond and significant judicial oversight, but they do exist in various forms for particularly egregious situations.
- Before proceeding with any of the above, check to make certain the customer has not filed bankruptcy. A bankruptcy filing automatically imposes a stay of collection proceedings. Violating it is illegal and can subject anyone who does so to penalties under unfair trade practices laws, the Fair Debt Collection Practices Act, similar state act(s) and/or the Fair Credit Reporting Act, among others. If you find that your customer has filed bankruptcy while still in possession of your equipment, you will need to request a Relief from Stay in order to retrieve it. I would recommend contacting an experienced bankruptcy lawyer to do so.
Collection actions rarely are simple and generally take considerably more time and effort than lessors anticipate. By the time pursuing a collection action becomes necessary, the relationship with the customer usually has been severely compromised or destroyed, making recovery all the more problematic. Adding to the difficulty is the array of debtor protection laws, which further complicate the collection process. Failure to comply with these laws can yield severe consequences. Preparation is vital. Instituting an onboarding process that enables you to quickly and inoffensively collect the information you will need in order to fully recover from a non-paying customer can mean the difference between obtaining a full recovery and walking away with nothing and perhaps even losing your equipment.