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Anatomy Of The Collections Process:  An Overview With Efficiency Tips From A Seasoned Collections Lawyer

the names of all partners when extending credit and, if at all possible, obtain their signatures as guarantors.  Amendments to the Partnership Act effective January 1, 1994, restrict the order of collection against the individual partners unless they are otherwise liable (i.e. by guaranty).  Tex.Rev.Civ.Stat.Ann.Art. 6132b-3.05 (Vernon Supp. 1998).  Once determined, all general partners should receive a demand and be included as parties to the suit.

D. Corporations.  

One  of  the  purposes of  incorporating a business is to limit its liability to the assets of the corporation and to protect  its owners  from  personal  liability.   The president of  the corporation is generally authorized  to  bind the  corporation in  routine   matters  in  the  ordinary  course  of business.  Recovery is limited to the assets of the corporation.  Corporate information can be obtained from the Secretary of State (512) 463-5555, or at SOSDirect, http://www.sos.state.tx.us/corp/sosda/index.shtml.

E. Limited Partnerships.  

Limited partnerships are often as insulating from personal liability (and hence collection) as corporations. While individuals are usually the limited partners, the partnership will often have a corporation as the general partner. General partners are authorized to bind the limited partnership in the ordinary course of business.  Recovery is limited to assets of the limited partnership and those of the general partner.

F. Other Entities.  

A full discussion of Limited Liability Companies, Registered Limited Liability Partnerships, Associations and Non-Profit Organizations is beyond the scope of this paper.  The key is determining the entity you’re dealing with, the identity of the parties who can bind the entity, and the assets available to satisfy creditor claims.

Tip:The opportunity to impose personal liability should never be missed.  Personal liability based on forfeiture is an invaluable way to move payment of your client’s debt to the top of the debtor’s list.

G. Personal Liability when Charter Forfeited.   

When presented with a corporate debt to collect, one should always check with the Comptroller of Public Accounts to determine if the charter of the corporation has been forfeited.  Current forfeitures (with a notation that the corporation is not in good standing) are available at http://ecpa.cpa.state.tx.us/coa/coaStart.html.  To get complete official

information, you can send a letter to the Comptroller.  See form included at Attachment 5.  This information is important because each director and officer of a corporation whose right to do business within Texas is forfeited will be held liable for any debt of the corporation incurred or created in Texas after the date when the report, tax or penalty is due.  The liability accrues as if the officers and directors were partners.  Tex.Tax Code Ann. §§171.252, 171.255 (Vernon 1992).  Similar provisions apply to limited liability companies.

H. Trust Fund Theory.  

The officers and directors of a corporation that ceases doing business hold the corporate assets in trust for the benefit of creditors.  Hixson v. Pride of Texas Distributing Co., 683 S.W. 2nd 173 (Tex.App. - Fort Worth 1985, no writ).

I. Transfers in Fraud.  

Closely held corporations that have closed their doors should not be viewed as a dead end for the debt collector.  Often, when the corporation is about to fail, shareholders of these corporations repay loans they made to the corporation, pay long unpaid salaries to themselves, or distribute equipment and inventory in satisfaction of shareholder loans.  These can be considered transfers to insiders for antecedent debts in fraud of creditors and can be set aside under the Fraudulent Transfer Act.  See Chapter 24 of the Texas Business and Commerce Code.

VII. Avoiding the Usury Trap.  

Tip:All debts referred for collection which include interest or finance charges should be examined closely to determine the rate charged and whether there is an agreement in writing supporting a charge in excess of 6% per annum.

Small (and sometimes large) business owners often fall into the usury trap by adding to their invoices and billing statements “1 ½% interest on all past due amounts.”  Sometimes they include this language at the suggestion of their printer or because they see it on so many invoices and billing statements.  A full discussion of usury is beyond the scope of this paper, but the guidelines are as follows:

A.Interest can be charged on past due accounts at the rate of 6% per annum beginning on the 30th day after the account is due, even if there is no agreement to pay interest;


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