United States: Collecting Charge-Offs: A Valuable Source Of Revenue (Part Three Of Three-Part Series)

Co-authored by: Robin Frazer, Summer Associate

In this three-part series, Stites & Harbison ("S&H") is examining how banks can take advantage of the opportunities to recover loans that were charged off in the Great Recession.  As the economy recovers, borrowers are now more likely to have sufficient assets to pay back the charged-off loans and the time is ripe for banks to collect this valuable source of income.  The first part of the series described the approximately $294.8 billion that has not yet been collected from the post-2008 charge-offs and the success S&H has had in assisting its clients to recover these.  The second part of the series discussed how S&H makes the recovery process economical for banks by using its resources to ascertain the borrower's location, the value of the borrower's assets, and to determine if recovery efforts would be worthwhile.  Now, the third and final part of the series will discuss why statutes of limitation concerns should prod banks to seek recovery now; and collecting charge-offs in foreign countries.

A. Statutes of Limitations

Banks must act promptly to recover Recession era charge-offs. Recovery efforts will be barred if not brought within the time allowed by the applicable statutes of limitations.  Furthermore, statutes of limitations vary dramatically among different jurisdictions; in the U.S., statutes of limitations for written contracts (which apply to contracts for loans) can range from three to fifteen years.  Additionally, statutes of limitations often change—for example, the Kentucky legislature recently reduced the statutes of limitations for written contracts from fifteen years to ten, and the change will apply to contracts written after the enforcement date of July 15, 2014.  Accordingly, in advising its clients, S&H takes into account variations among states and stays aware of changes in the law that may prevent a client from bringing suit. 

The following is a chart of the statutes of limitations for written contracts among the fifty states and the District of Columbia, and it illustrates the variation that exists between the statutes:

Similarly, S&H is aware that statutes of limitations in foreign countries vary as well.  For example, Canada has a similar system to the U.S. and each of its provinces has statutes of limitations for collecting debts ranging from two to six years.¹ Furthermore, acknowledgement of the debt in several Canadian provinces can extend or restart the statutes of limitations.² In sum, S&H is cognizant of the different statutes of limitations that apply both domestically and abroad, and can help banks plan their recovery efforts to comply with the relevant time bars.

B. Enforcing U.S. Judgments Abroad

In an increasingly global world, S&H recognizes that individuals and companies that incur debt with U.S. banks often reside outside of the country.  Accordingly, S&H is equipped to advise its clients on how to collect debts from borrowers located abroad.  Through the state's long-arm statutes, S&H can assist banks in obtaining jurisdiction over foreign individuals or businesses that entered into transactions with banks and can aid banks in securing judgments for the amount of the debt.  However, a court's entry of a judgment against a debtor does not automatically produce payment and the judgment must then be enforced against the debtor to collect the money.  While the Constitution's Full Faith and Credit Clause permits a litigant to collect a judgment rendered in another jurisdiction, its scope is limited to the U.S.'s borders and to enforcing judgments between the states.³ Instead, to enforce U.S. judgments abroad, international treaties and the individual laws of foreign countries govern.  Enforcement of U.S. judgments abroad is often confusing and varies among countries—however, S&H has the international expertise necessary to advise banks on how to collect judgments on charged-off loans by successfully navigating treaties and the laws of foreign countries.

For the collection of many charged-off loans, the Hague Convention on Choice of Court Agreements ("Hague Convention") will provide a method of enforcement.  Signed by the U.S. and the European Union and ratified by Mexico,⁴ the Hague Convention provides that when two commercial entities from different signatory countries enter into a contract with a "choice of forum" provision that specifies where disputes will be litigated, signatories to the treaty agree to enforce judgments entered in that forum.⁵  As sophisticated commercial parties, many banks include such choice-of-forum provisions in their loan contracts.  Thus, if the borrower of a charged-off loan is another commercial entity located in one of the signatory countries of the Hague Convention and it agreed to litigate disputes in the U.S., a U.S. judgment for recovery on a charged-off loan will be enforced by the foreign court.

Additionally, loan disputes that are decided in arbitration rather than by a traditional court are very likely to be enforced abroad.  Under the New York Convention, 147 countries have agreed to recognize all arbitral awards rendered pursuant to a written arbitration agreement that were entered in a country other than the enforcing country.⁶  As long as the award was properly entered and does not violate due process or the enforcing country's public policy, member countries must recognize the award as binding and enforce it in accordance with local procedural requirements.⁷  As the Wall Street Journal reported, banks have increasingly included arbitration provisions in their contracts with borrowers.⁸ Accordingly, S&H can help banks take advantage of the benefits of the New York Convention in enforcing arbitral awards abroad.

In cases not covered by the Hague Convention or the New York Convention—such as judgments entered pursuant to traditional lawsuits involving borrowers that are not commercial entities—enforcement of U.S. judgments abroad varies and greatly depends on the individual laws of the enforcing country.⁹ In these situations, S&H has the experience in legal research to ascertain and comply with the foreign country's laws for enforcement of U.S. judgments.  Common law countries such as the United Kingdom and Canada typically view U.S. judgments as an "implied contract to pay," and U.S. litigants must seek recognition and enforcement of the judgment by initiating a new proceeding in the foreign court.¹⁰ Additionally, civil law countries such as those in continental Europe will almost universally enforce a foreign judgment if the original court possessed jurisdiction and gave the defendant proper notice; however, enforcing judgments can become difficult because some foreign courts do not recognize all forms of American personal jurisdiction and notice as valid.¹¹ For example, civil law countries are more likely to recognize U.S. judgments if notice was given in accordance with the Hague Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, which codifies accepted procedures for service of process among signatory parties.¹² Therefore, by conducting careful research of the laws of the foreign country where enforcement will be sought, S&H can advise its clients on how to secure a U.S. judgment in the manner most likely to be enforced by the foreign country's courts.

Summary

Over the past three weeks, S&H has discussed the opportunities banks have to take advantage of valuable sources of income by collecting on loans that were charged off in the Great Recession.  Over $335.5 billion has been charged off since 2008; however, only $40.6 billion has been collected.  Moreover, as the economy improves and charge-off rates return to pre-Recession levels, borrowers are more likely to have sufficient resources to pay back those loans.  Additionally, S&H has the experience needed to aid banks in tapping into this valuable source of income.

Due to changes in technology and internet searches since 2008, S&H has the tools and resources necessary to ascertain both the location of the borrower and the value of the borrower's assets before recovery efforts begin.  Banks may worry that it will be difficult to identify those borrowers with sufficient assets; however, S&H can help banks avoid expending resources and attorneys' fees on unreachable or insolvent borrowers by gathering information about the borrower through S&H's access to LexisNexis Public Records, EDGAR, PACER, Dun & Bradstreet, PrivCo, social media searches, and private investigators.

Importantly, banks must act promptly so as to avoid allowing statutes of limitations to run rendering charge-offs unenforceable.  Finally, S&H is cognizant that collection efforts may take place in multiple jurisdictions with varying laws.  Accordingly, S&H utilizes the  law of relevant jurisdictions to collect U.S. judgments against debtors in foreign countries.

¹ Limitation Act, BRITISH COLUMBIA (last visited June 29, 2014); Limitations Act, RSA 2000, c L-12, CANLII (last visited June 30, 2014); Civil Code of Québec, LRQ, c C-1991, CANLII (last visited June 30, 2014); Limitations Act, SNL 1995, c L-16.1, CANLII (last visited June 30, 2014); The Limitations Act, GOVERNMENT OF SASKATCHEWAN (last visited June 30, 2014); The Limitation of Actions Act, CCSM c L150, CANLII (last visited June 30, 2014); Limitations Act, 2002, SO 2002, c 24, Sch B, CANLII (last visited June 30, 2014); Limitation of Actions Act, SNB 2009, c L-8.5, CANLII (last visited June 30, 2014); Limitation of Actions Act, NOVA SCOTIA OFFICE OF LEGISLATIVE COUNSEL (last visited June 30, 2014); Limitations of Actions Act, REVISED STATUTES OF THE YUKON 2002 (last visited June 30, 2014); Limitation of Actions Act, RSNWT 1988, c L-8, CANLII (last visited June 30, 2014); Limitation of Actions Act, RSNWT (Nu) 1988, c L-8, CANLII (last visited June 30, 2014).

² Blair Wettlaufer, How Long is a Debt Good For?, CREDIT INSTITUTE OF CANADA (Summer 2012).

³Matthew H. Adler & Michele Crimaldi Zarychta, The Hague Convention on Choice of Court Agreements: The United States Joins the Judgment Enforcement Band, 27 NW. J. INT'L L. & BUS. 1, 2-3 (2006).

⁴ Status Table: Convention of 30 June 2005 on Choice of Court Agreements, HAGUE CONFERENCE ON PRIVATE INTERNATIONAL LAW (last updated Nov. 19, 2010).

⁵ Adler & Zarychta, supra note 21, at 1.

⁶ Yuliya Zeynalova, The Law on Recognition and Enforcement of Foreign Judgments: Is It Broken and How Do We Fix It?, 31 Berkeley J. Int'l L. 150, 178-79 (2013).

⁷ Id. at 179.

⁸ Robin Sidel, No Day in Court for Bank Clients, THE WALL STREET JOURNAL (Aug. 2, 2011).

⁹ Zeynalova, supra note 24, at 163.

¹⁰ Id. at 164.

¹¹ Id. at  165-65.

¹² Id. at 166.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.