Imagine the following scenario – you, a credit manager, open the mail one day to find a notice from a company that you have never heard of, indicating that it is writing with regards to one of the debtors who owes you money and is paying slowly, if at all. The letter goes on to suggest that this new outfit, as a white knight, will solve any and all problems – yours, as the credit manager seeking to be paid, as well as those of your slow-paying customer. The letter makes the suggestion that out of the weak credit position of your debtor, this company will produce all of the money that is likely to be needed to settle the debtor’s outstanding obligations, and that doing so is not only in your best interest but also in the best interest of your customer and society as well. There are platitudes about a fair distribution, and a new deal worthy of Franklin Roosevelt himself. Additionally, all of this will, purportedly, be done without the burdensome effort of collection, will preserve a customer relationship, and will carry no risk to anyone. Could it be? Effortless collection, your money from a slow payer for no effort?
But, of course, there’s a kicker. If you read on, the letter will tell you that you have no choice but to go along with the company’s plan. The letter tells you that this company now holds a security interest in your former customer/debtor and, accordingly, that you have a choice of several payout options, none of which are likely to be to your liking. Plan A might have you being paid ten percent after a hiatus of several months. Plan B would have you being paid twenty-five percent but you would have to wait six months before your payments begin. Plan C has you getting forty percent, but you would have to wait eight months and accept the long payout terms given to you. And finally, according to this letter, if you do not accept any of these options, you will get paid nothing. Quite a strong arm job!
You have finally met the bullet-proofer. The agency claims that they can secure all of your former customers’ assets and make them bullet-proof against you, as well as against litigation, collection, attorneys, and even judicial process.
What is a bullet-proofer, you ask? “Bullet-proofer” is a slang term for a debt reconciler, or any of the other similar names that these entities give themselves, which asserts that they can make any company “bullet-proof” or immune to judicial process. Their business model is to take troubled companies, gain an advantageous position as to that company, and then utilize that position to cram down debts based upon a voluntary plan, all the while profiting from such efforts. A bullet-proofer works on a negative contingency, whereby if the debtor owed the creditor a dollar and the bullet-proofer was able to have his client, the debtor, pay only forty cents on the dollar, then sixty cents was saved and a contingent portion of that sixty cents is then retained by the bullet-proofer. In short, for whatever amounts the bullet-proofer manages to save the debtor, the bullet-proofer is owed money; this is why the funds flow through the bullet-proofer, so they can get the first crack at the funds.
Now that we understand what a bullet-proofer is, and how they work, we can begin to deconstruct their claims of having a security interest in your debtor. First, what is a security interest? A security interest is the interest held by a bank through a mortgage or a deed of trust, and is similar to the interest that a bank or finance company holds with a car loan. They, in addition to the actual owner of the subject property, hold some interest in that property. Unlike the situation where a bank or mortgage lender provides cash or other assets to the property owner, upon which its interest in the property is based, the bullet-proofer in the above scenario has not actually provided any cash or assets on which to base its alleged security interest.
As the Uniform Commercial Code (the “UCC”) is almost identical in each of the fifty states, section 9-203(b) of the UCC in Virginia, which compels that a security interest must have three elements before it has any validity, is essentially universal. In order for a security interest in property to be valid, then there must be (1) a filing; (2) value given; and (3) some possessory rights granted.
The easiest of these is the filing, which can be completed simply by filling out the requisite form, and filing said form in the appropriate state office, with the necessary fees. This first requirement is the simplest to carry out and, often, is the only action that the bullet-proofer has taken towards perfecting its alleged security interest. In fact, the bullet-proofer will likely fail to make its alleged security interest valid as there is little likelihood that s/he has, or can assert that they have, provided value for the same, or secured any rights in the property itself.
In a recent case in which we filed a garnishment and the bank reported that they were holding something over $10,000, I then received a letter from a bullet-proofer telling me that I would be paid (with my client’s own money) a fraction of what we were owed in the case sometime in the future, and that we should be grateful for the receipt of this because the bullet-proofer held a security interest in the debtor’s assets. Neither I nor my client was interested in giving up the money held in the garnishment as it was clear that such funds belonged to my client and, and not to this stranger to the funds – the bullet-proofer. As such, we compelled the bullet-proofer to try this matter and prove its case. During the course of this trial, it was necessary for the bullet-proofer to prove the validity of its alleged security interest, by demonstrating three things:
That value has been given;
That the debtor has rights in the collateral with the power to transfer rights in the collateral to a secured party. In other words, the debtor must own what it is conveying to the secured party; and
Proof of the filing of the security interest.
In that the debtor in this case was based in California, the demonstration of the security interest in California would have been shown by a simple filing. The bullet-proofer, however, was unable to demonstrate this at trial. More importantly, though, the question of value was never fully demonstrated. In short, the bullet-proofer gave nothing to the debtor except the burden of its own fees. Stated in other terms, the value that the bullet-proofer gave to the debtor was the security interest itself, which could be used to prevent legitimate creditors from getting paid. This is, at best, circular. Traditionally, there is a benefit and burden to both the secured party (typically a bank) and the party subject to the security. For example, a bank would lend money. The lending of money is a benefit to the party subject to the security agreement, and that same party carries the burden of repaying the loan itself. The arrangement of the bullet-proofer does not seem to satisfy this.
Further, the question of whether the creditor or bullet-proofer had rights in the garnished bank account was also left open during this litigation. After all was said and done, the bullet-proofer did not carry the day, and the creditor was able to retain the funds in the garnishment.
Also interesting in this litigation, principally because the assets were located in California, was the question of whether or not the transfer itself of any security interest from the debtor to the bullet-proofer was a violation of the California Uniform Fraudulent Transfer Act. This act, to be found in the California Civil Code Section 3439, indicates that a transfer made by a debtor is fraudulent if the transfer was made with the actual intent to hinder, delay, or defraud any creditor, or was without value. Additionally, under California Civil Code Section 3440, any transfer made which was not accompanied by immediate delivery of value is void against the transferor’s creditor. In that the bullet-proofer was unable to prove its own security interest, these issues were not raised.
It should be noted that Virginia has a similar code section, although not as strong as the California Code sections discussed above. Virginia Code § 55-80 indicates that every “… conveyance, assignment, or transfer… given with the intent to delay, hinder, or defraud creditors, purchasers, or other persons, of or from what they are or may be lawfully entitled to, shall, as to such creditors, purchasers, or other persons… be void.” Additionally, Virginia Code § 55-81 renders “void, as to creditors, a conveyance, assignment, or transfer which is not upon consideration deemed valuable at law… or… by an insolvent transferor or by a transferor who has thereby rendered it solvent… as to creditors whose debts shall have been contracted at the time it was made.”
During the time I was litigating this case, I was unable to find a single reported case in which this issue had been brought all the way by the bullet-proofers. Understandably, none of them would like to have a judicial opinion condemning their business practices. Most of them back down, or will back down, when compelled to litigate. However, the pitch is still a powerful one. Therefore, when you receive a letter from a bullet-proofer, do yourself a favor and contact an attorney or someone who is knowledgeable in this area, and who can help to ensure that you are not stripped of your valid claims by someone lacking any real interest in the same.