Cost assessment for debt collection abroad: a US perspective

In an increasingly digital economy that extends across borders and where globalisation continues to accelerate in both pace and intensity, there has been a significant growth in cross-border insolvency matters in recent years. What this means is that, upon being appointed, an insolvency practitioner will often need to consider collecting and distributing assets across multiple jurisdictions, whether as part of formal recognition proceedings or otherwise.

This will often involve the resolution of complex creditor claims, and an insolvency practitioner must assess whether it is economically viable to commence debt recovery proceedings in light of the costs involved and the expected return to creditors.

Often, insolvency office holders have to deal with the complex issue of determining the expected costs of debt collection measures as well as the possibilities of how costs may be reduced where possible. The chapters also cover the issue of costs incurred by foreign insolvency practitioners when they have to enforce foreign judgments.

There are very specific rules when recovering debt in the US
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It appears that there are very different views about what it may or should cost to gain access to the courts to enforce a claim, and what flexibility plaintiffs and litigators should have with regard to financing the costs of litigation, in particular lawyers’ fees. An interesting finding was that a few countries like Mexico and South Africa in principle offer free access to justice by not charging court fees. Most of the other jurisdictions covered in this report charge court fees and in many cases a prepayment is required in order to start proceedings. Surprisingly, whether court fees are charged and the quantum of fees charged does not seem to have an influence on the average duration of court proceedings.

With respect to professional litigation financing, in countries like in the USA, India and Germany parties that do not have sufficient funds are able to gain access to the court system and this has been a long-established practice. In some countries however like Croatia, Mexico and the Caymans litigation financing is not available.

There seems to be a tendency, though, that this possibility becomes increasingly widespread, and it is now starting to get established in countries like Brazil, France and Spain. An interesting issue is the admissibility of contingency fee agreements: While some countries consider restrictions on lawyers’ freedom of contract to be problematic, the majority of countries provide for prohibitions or restrictions on contingency fee arrangements, probably because of concerns that those arrangements would impair objectivity.

Another financial obstacle for litigation can be the fact that in some countries the principle of the losing party bears all costs does not apply. Particularly in the USA and the UK, where the basic principle applies that each party bears its own costs, the question of whether it is worth taking legal action in view of the probable costs – insofar as these can be estimated in the first place – becomes a game of calculation or chance. Even with the prospect of at least partial reimbursement for the winner, the lawyer’s fees usually represent the most problematic factor in forecasting costs, because very few countries have regulations for statutory fees like in Germany, which allow a fairly accurate calculation based on the value in dispute.

The US

Scenario 1: Claim not yet been subject to court proceedings
Recognition proceeding and costs
What is the proceeding and what are the estimated costs for the recognition of the foreign insolvency proceeding and the IP’s power to pursue a claim?

A foreign insolvency administrator may pursue an out-of-court agreement to settle a claim without initiating a separate legal process in the United States (US). Such actions could take the form of a demand letter or referral of the claim to a local insolvency practitioner or collections agency. Costs in this regard would be minimal for simple correspondence and most likely be recovery-based if using a local practitioner or collections agency. There are law firms in the US that limit their practice to debt collection and would usually work on a contingent basis that may be more cost-effective than a general practitioner but may be unable to handle more complex negotiations if they are required.

Also, a foreign insolvency administrator can seek to have his or her client’s claims against a US entity settled without initiating separate insolvency proceedings in the US on behalf of the foreign debtor, especially where the foreign debtor has no assets in the US, but the success of such an action would be highly dependent on the factual bases of the claim. Although the foreign insolvency administrator would not have to initiate insolvency proceedings in the US, he or she would have to file a complaint against the target they seek to recover from in either state or federal court. In this regard, the foreign insolvency administrator should consider in advance factors such as jurisdictional requirements, the ability to collect from the target of recovery, and potential challenges under the doctrine of forum non conveniens.

Forum non conveniens defences arise where a court might decline to adjudicate a case when the defendant or the judicial system would be inconvenienced, even though jurisdiction and venue are proper. If the court determined that another jurisdiction, such as the foreign administrator’s own, were better suited to handle the litigation (the injury occurred there, the contract was signed there, the depositions would need to be taken there etc.), the court might decline to hear the case. As mentioned above, the foreign insolvency administrator would have to file the claim in either state or federal court. Claims of $75,000 and under would have to be brought in state court, while claims over $75 000 could be brought in federal court. The filing fee for a complaint in state court in New Jersey is $250; in New York it is $305. The filing fee for a complaint in federal court is $400.

Contingency fees are a hot topic in the US
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Financing
Does your jurisdiction allow or provide for the following?

  • Contingency fee agreements. Yes, contingency fee arrangements are allowed, and a typical arrangement is 33⅓% of recovery to the attorney, plus costs. However, arrangements could be more or less. In commercial matters, the maximum contingency fee under New York or New Jersey law is 33.3%. Specifically, in New Jersey, contingency fee arrangements are governed by rule 1:21-7 of the Rules of Court. An attorney shall not contract for, charge, or collect a contingent fee in excess of the following limits:
  • 33⅓% on the first $750,000 recovered;
  • 30% on the next $750,000 recovered;
  • 25% on the next $750,000 recovered;
  • 20% on the next $750,000 recovered; and
  • on all amounts recovered in excess of the above, by application to the court for reasonable fees if the attorney considers the fee collected already to be inadequate.
  • In New York, the standard contingent fee arrangement is 33⅓% of the recovery.
  • Is legal aid for litigation available for a foreign IP? Legal aid for litigation is not practised in the US and is normally accomplished through contingent fees as discussed above. However, if many actions are being pursued, there may be an avenue for the foreign insolvency administrator to seek accommodations from the Clerk’s Office for filing fees and have such fees paid out of recoveries.
  • Are litigation financing and / or insurance for litigation costs provided and, if so, starting at which amount? Yes, litigation financing is allowed. There is no government-subsidised litigation financing, however. All litigation funding is provided by private parties. There is no floor below which litigation funding cannot start, but the decision to approve funding is done on a case-by-case basis and takes a variety of factors into consideration including likelihood of recovery, amount of required funding, length of time to recovery, and the nature of the case. It is unlikely litigation funding would be available for claims under several hundred thousand dollars. Funding in this regard is usually provided in an amount of 10%–20% of the anticipated settlement. However, a recipient of litigation funding need not accept a lump sum at one time. Rather, the recipient can incrementally request litigation funding.

Obtaining an enforcement order
Besides commencing regular civil proceedings, are there easier and cheaper ways to obtain an enforcement order?
There are no “dunning procedures” in the US. Only a court can issue a judgment against a defendant in the US. However, there are ways to streamline issuances of a judgment in cases where a plaintiff seeks to recover a debt from a defendant that is uncontested, which would be the most akin to a judicial dunning procedure. The plaintiff can file a complaint with supporting documentary evidence of the debt owed. If the debt is uncontested, after the period to reply to the complaint has lapsed, the plaintiff can request that the clerk of court enter default against the defendant. After default is entered against the defendant, a plaintiff would normally need to request a judge to enter a final judgment of default against the defendant.

However, in a situation where the debt is for a “sum certain”, the plaintiff can have the clerk of court enter the final judgment and avoid the costs associated with appearances in court before a judge. The plaintiff is required to file an affidavit setting forth the amount owed and the dates the debt was incurred, as well as any payments against the debt and a calculation of interest. At that point, the clerk of court can enter final judgment which can be used in collection actions against the defendant. The costs associated with such a process would include the statutory filing fee for a complaint ($250 in New Jersey and $210 in New York), but additional fees would be greatly reduced because the practitioner would not have to rebut any denials from the defendant regarding the validity of the debt, nor would the practitioner incur additional costs related to appearing in court.

Lawyers’ fees
What are the legal provisions for lawyers’ fees and are there compulsory statutory fees for some or all activities?
There are no compulsory statutory lawyers’ fees in the US. Fees incurred by lawyers on an hourly basis are pursuant to a contract between lawyer and client, and non-payment can be pursued through contract law. Contingency fee arrangements normally require a recovery on the claim in order for the lawyers’ fees to be paid, and these are paid out of said recovery pursuant to the terms of the agreement between the parties, subject to limitations discussed.

Court fees
In order to take legal action does a foreign plaintiff have to provide security and / or make a prepayment for court costs and, if so, how is the amount calculated?

No security is required, but court costs will be required at the time of filing.

What are the legal provisions for court fees in civil proceedings?

The filing fee for a complaint in state court in New Jersey is $250; in New York it is $305. The filing fee for a complaint in federal court is $400.

New York is one of the major economic hubs in the US
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Refund of legal costs and expenses
Is the winner of a court proceeding entitled to reimbursement for the legal costs and expenses?
No. Courts in the US follow the “American Rule”, meaning each side bears its own fees. Recovery of legal fees from the losing side is only available if:

  • the litigants have an existing contract that is the subject of the dispute which provides that the losing side is responsible for the winning side’s legal fees if there is a dispute under the contract; and
  • in rare circumstances where costs are awarded as a punitive measure where the litigation, usually brought by the losing side, is determined to be frivolous.

Examples of legal costs and expenses
What would be the roughly estimated litigation costs and expenses – first instance including lawyer and court – for a (simple) claim in the amount equivalent to $5 000, $50 000 and $500 000?
Filing fees in New Jersey are:

  • $5000 demand – $75 plus $5 for each additional defendant after the first (Special Civil);
  • $50,000 demand – $250 (Law Division); and
  • $500,000 demand – $250 (Law Division).

Filing fees in New York are:

  • $5000 demand – $140 (Supreme Court, NYC Civil Branch);
  • $50,000 demand – $210 to file, $95 for request for judicial intervention (Supreme Court); and
  • $500,000 – $210 to file, $95 for request for judicial intervention (Supreme Court). The fee for a federal court action is $400.

Beyond filing fees, it is very difficult to estimate lawyer costs without knowing the applicable facts and law. With that said, a “simple claim” would likely be pursued on a contingent fee basis, so as a general matter it is probably fair to view the typical lawyer costs for a “simple claim” to be 33⅓% of the recovery.

Average duration of litigation
It is difficult to determine the average duration of litigation because there are many variables such as amount of discovery, if any, anticipated motion practice, and appetite of the adversary to bog down the litigation. Any case that is completed in under six months would be considered fast and would likely experience few, if any, roadblocks. However, a litigation in the US can last multiple years depending on the complexity of the subject-matter as well as the obstinacy of one’s adversary and opposing counsel.

Scenario 2: Enforcement order (judgment) exists and needs to be enforced abroad

Recognition proceeding and costs
What is the proceeding and what are the roughly estimated costs – including lawyer and court – for the recognition of the foreign enforcement order for a claim in the amount equivalent to $5 000, $50 000 and $500 000?
Short answer: the procedure is the Uniform Foreign Country Money Judgments Recognition Act (UFMJRA) in New York and New Jersey. The cost to initiate a proceeding in New Jersey is $250, and in New York it is $305. The cost for the foreign insolvency administrator to pursue claims of varying amounts is not much different because the work involved will almost always be a contingency fee arrangement.

Long answer: under the US constitution, judgments obtained in one state are entitled to full faith and credit in any other state if the judgment meets certain standards of due process. Similarly, in New Jersey, a foreign country money judgment is enforceable in the same manner and entitled to full faith and credit, provided that the provisions of the UFMJRA are met. The procedure will vary depending on which state recognition is sought; New Jersey and New York will be discussed as examples.

Recognition of the foreign judgment traditionally was accomplished through a uniform submission by an attorney licensed to practise law in New Jersey. First, the practitioner would need to obtain an authenticated copy of the foreign judgment with the seal of the issuing court affixed thereto. Second, the judgment creditor or the judgment creditor’s lawyer must include an affidavit setting forth:

  • the name and last known address of the creditor;
  • the name and last known address of the debtor;
  • the date and amount of the judgment;
  • whether the time to appeal the foreign judgment has expired in the court of origin;
  • whether the court of origin has granted a stay; and
  • whether or not the foreign judgment was entered by default.

If the foreign judgment was entered by default, the affidavit must indicate the date under the rules of the court of origin for vacating the default with a copy of the cited court rule. Finally, the application to have the foreign judgment docketed in New Jersey (original and two copies) must be mailed to the Superior Court Clerk’s Office with a filing fee payment in the amount of $35. The filing fee did not change based upon the amount of the judgment. Many states continue to adhere to this process.

However, in January 2018, the outgoing governor of New Jersey enacted a revised version of the UFMJRA on his last day in office. Whereas previously the judgment creditor just had to mail the application to the clerk, the creditor is now required to file a complaint seeking recognition of the judgment. The filing of a complaint incurs an additional $250 fee. Additionally, the creditor carries the burden of establishing that the judgment is final, conclusive and enforceable under the foreign country’s laws and that it is not a judgment for taxes, fines, or rendered in connection with a domestic relations action.

Unfortunately, the need to now file a complaint in New Jersey, whereas in the past an affidavit was sufficient, may provide the debtor with an opportunity to relitigate issues that were already decided in the foreign jurisdiction. Moreover, the revised UFMJRA introduced a nebulous legal standard that permits refusal of recognition of a foreign judgment in situations where “the judgment was rendered in circumstances that raise substantial doubt about the integrity of the rendering court with respect to the judgment”. Because this revision to the UFMJRA was just recently introduced, there exists no jurisprudence in our jurisdiction at the moment, but surely that will change in the future with such uncertain language inserted into the UFMJRA.

In New York, the UFMJRA is codified under Article 53 of the Civil Practice Laws and Rules.

The standards for enforcing a foreign money judgment in New York are the same, in that the judgment must be final, conclusive and enforceable in the country it was rendered in. The procedure by which a foreign money judgment is enforced in New York is usually by a motion for summary judgment in lieu of a complaint, although any properly initiated proceeding will suffice. If an action is already pending, enforcing a judgment through the UFMJRA can be accomplished by cross-claim, counterclaim, or affirmative defence. However, service on the defendant must be properly made pursuant to New York law and the Hague Convention; New York need not have personal jurisdiction over the defendant though, nor does the defendant need to have assets in New York.

There are also a standard set of defences associated with the UFMJRA. These defences are almost always based on the argument that a court should not recognise a foreign country judgment if:

  • the judgment is “rendered under a judicial system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law, as determined by the court using standards developed by the American Law Institute and the International Institute for the Unification of Private Law to govern resolution of transnational disputes”;
  • the foreign court lacked personal jurisdiction over the defendant; or
  • the foreign court lacked jurisdiction over the subject-matter.

Furthermore, a court may refuse to recognise a foreign judgment in certain situations, including if the foreign court failed to give adequate notice to the debtor, the judgment was obtained by fraud that deprived the losing party of an adequate opportunity to present its case, or if the judgment or cause of action on which the judgment is based is repugnant to the public policy of the particular state or the US.

Finally, if the foreign award is pursuant to an arbitration award, there is a federal court rule that provides for having the award recognised: 9 United States Code (USC) §201 et seq. codifies the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958. Cases involving this code section are heard in federal district court, with all the venue and removal rights of a standard case in the US. Within three years after an arbitral award falling under the Convention is made, any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award as against any other party to the arbitration. The court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.

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Obtaining information about the debtor
Are there any sources of information about whether a debtor of a claim is without means or subject to an insolvency proceeding?
Yes. A search for insolvency proceedings, or any judicial proceedings as well as any docketed judgments or liens, pertaining to a debtor can be done through various databases. For the most part, all of the databases are available online, but in some instances, it may be necessary to appear in person or inquire telephonically. Such instances are rare and might happen at a town or county level. Acquiring copies of papers filed with the courts in judicial proceedings, or copies of liens filed against a debtor will usually incur nominal costs, somewhere in the range of $0.01 to $0.15 per page, and many times they are capped at $5–10 (i.e., PACER is $0.10 per page and capped at $3 per search / document).

Determining the amount and location of available assets of a debtor is more onerous. There is no central database that tracks assets. Searches can be done to see what kinds of real or personal property are registered to the debtor, but those assets would then have to be run through various other databases to determine if they are encumbered and, even then, one could not be 100% certain to have located an unencumbered asset. Uniform Commercial Code filings are public information and detail collateral that was pledged as security. Corporate and Securities Exchange Commission filings can be searched to see corporate ownership or certain disclosures such as sock options to executives that may provide a source of funds. Additionally, intellectual property can be searched to see if the debtor has any potentially valuable patents or trademarks. Bank and financial records are usually off limits unless the searcher has proper authorisation from the debtor or a court order.

Moreover, there are services that gather public information (and possibly some non-public information) about corporate entities and individuals which can be obtained for a fee (either an annual fee or for a one-off report). Private investigators can also be hired to search for assets.

Enforcement measures
What main enforcement measures are available and what are the costs – including lawyer and enforcement authority – for enforcing a claim in the amount equivalent to $5 000, $50 000 and $500 000?
Once a judgment has been recognised and docketed, it must next be enforced. A creditor that obtains a judgment against a debtor in New Jersey has the right to take discovery of people with knowledge of the debtor’s assets, as well as serve the debtor with an information subpoena under New Jersey Court rule 6.7. An information subpoena is a useful tool because it does not require leave of court and presents written questions that the debtor must answer under oath with regard to location of the debtor’s assets. In such a subpoena, the judgment creditor could inquire about bank accounts and other financial abilities of the debtor. Once the judgment creditor has a good handle on the location of the debtor’s assets, multiple avenues of recovery are available to it.

A request can be made to execute on a debtor’s goods and chattels whereby a civil officer will seize the debtor’s goods or chattels so that they can be used to satisfy the judgment. With a state court judgment, this is accomplished through sending a writ of attachment for the sheriff to levy on the debtor’s assets located within the sheriff’s jurisdiction (blind levy). With a federal court judgment, a writ of attachment is sent to a US marshal to levy on the debtor’s assets located within the marshal’s jurisdiction. The marshal or another person, presumably a law enforcement officer, will serve the writ, seize the assets and maintain custody of the attached property under court supervision. Writs that seek to enforce judgments may be served by the US marshal but are governed by the law of the state in which they are being served. In New York, the cost is $40 for each piece of real or personal property upon which the writ is to be levied. Bank accounts can be levied on if the judgment creditor knows where the debtor has a savings or checking account in the state. Once levied upon, any funds in the bank account are considered “frozen”, and the judgment creditor would have to file a motion to turn over the funds. It should be noted that this remedy is not a continuing remedy, and a levy only serves to seize the funds that were in the account at the time of the levy. However, additional levies can continue to be made, but each time funds were frozen, a turnover motion would need to be filed. Also, a judgment creditor can garnish a debtor’s wages if the target of the levy earns more than $217.50 per week. The amount of the judgment does not influence the cost to collect on the judgment, but, as noted above, if multiple levies are required, the process may take a long time and incur additional costs from the attorneys making the requests and interacting with the court and officers of the court.

Similar remedies are also available in New York. Information subpoenas can be served on debtors to determine where the debtor’s assets are once a judgment has been obtained. The court clerk must sign the information subpoena, and, once it is served, the recipient must respond within seven days. Article 52 of the Civil Practice Law and Rules (CPLR) governs the enforcement of money judgments in New York and includes such remedies as garnishment of wages, liens on real property, restraints on transfer of property and forced sales of personal property.

The initial costs for enforcement (drafting the writ, sending writ to sheriff / marshal, drafting and sending out information subpoena) will be the same for a $5 000 or a $500 000 judgment. Court actions to pursue additional remedies will be more likely when pursuing a larger judgment. Depending on how the contingency fee arrangement is drafted, those additional court costs could come off the top if there is a recovery.

Recovering debt in the US is a long journey
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Alternatives to lawyers
Are there specialised debt collection agencies (or equivalent) which buy claims or work more cost-effectively than lawyers?
Generally speaking, no. As noted above, there are law firms that specialise in collecting claims / judgments. Collection agencies can send out demand letters like a law firm. However, a collection agency would need to retain a lawyer to pursue a court action if the demand letter was unsuccessful. The costs of a collection agency versus lawyers that do collection work are not significantly different and going with attorneys that do collection work can be more efficient if court proceedings are necessary. Lastly, there are collection lawyers that have related collection agencies that “buy” claims and then handle the legal work if necessary.

Insolvency proceeding
What costs are involved – including lawyer and court – for commencing and participating in insolvency proceedings against the debtor of a claim in the amount equivalent to $5 000, $50 000 and $500 000, if he is not able to pay?
If the debtor individual or debtor company is already in an insolvency proceeding under the US Bankruptcy Code, it is relatively easy and inexpensive for a foreign creditor to assert a claim in those proceedings. A proof of claim would need to be filed in the US Bankruptcy Court, which claim form is simple and needs to be signed under penalty of perjury. Once filed, the claim is prima facie evidence of the amount of the claim asserted. The cost of filing a proof of claim for $5 000, $50 000 and $500 000 is the same – there is no filing fee to file a claim.

In the event the debtor objects to the foreign creditor’s claim, then the foreign creditor would need to respond to the claim objection to avoid having the claim expunged by the US Bankruptcy Court. The cost of responding to the claim objection is fact-specific, but it would be up to the foreign creditor to weigh the cost / benefit analysis of litigating its claim.

If the debtor is not already in an insolvency proceeding under the US Bankruptcy Code, there are provisions to “force” the debtor into such a proceeding through an involuntary proceeding. If the foreign creditor holds a claim, it may seek to utilise sections 303(b)(2) or (b)(3) of the US Bankruptcy Code, which provide for a procedure to initiate such an involuntary bankruptcy. These involuntary bankruptcy provisions are a bit complex and would normally not be worthwhile to pursue unless the foreign creditor holds a large claim that the foreign creditor has been unable to collect through other litigation in the US.

Another potential alternative under the US Bankruptcy Code which may be relevant for a foreign representative of a foreign estate that is seeking to collect a larger claim ($500,000) from an entity in the US is chapter 15 of the Bankruptcy Code. Chapter 15 provides the legal basis by which foreign insolvency proceedings are recognised in the US. The purpose of Chapter 15 is to “incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency”.

To initiate a chapter 15 proceeding, the foreign representative files a petition in the US Bankruptcy Court. The US Bankruptcy Court will consider entry of an order recognising the foreign insolvency proceeding. Assuming recognition is granted, the foreign representative may then seek to pursue collection of its claim through the US bankruptcy court, which may be viewed as a friendly forum for the foreign representative. The fee to file a chapter 15 proceeding is approximately $1 700.

There is another, potentially less costly, option available to a foreign insolvency administrator.

Section 1509(f) does provide that: “the failure of a foreign representative to commence a case or to obtain recognition under this chapter does not affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor”: 11 USC §1509(f). This is a limited exception to the “prior recognition” rule, discussed above, and allows for collection of a claim which is the property of the debtor, for example an account receivable, by a foreign representative without commencing a chapter 15 proceeding. The jurisprudence surrounding section 1509(f) and when and how it may be used is still developing in this country. However, at least one court has suggested 1509(f) can be “interpreted broadly, thereby permitting U.S. non-bankruptcy courts to grant many kinds of relief to a foreign representative in a non-qualifying proceeding as long as that relief is related in some way to ‘collect[ing] or recover[ing] a claim which is property of the debtor’.”

A potential defence to a direct action in a non-bankruptcy court is that the foreign representative lacks standing to bring a claim on behalf of the debtor in the USA. That argument was defeated in federal court in New York under the reasoning that, there, the plaintiffs were not requesting comity or cooperation from the court with respect to foreign insolvency proceedings but were seeking to recover an independent claim that was the property of their receivership, rendering the prior recognition proceeding unnecessary to confer standing on the foreign representative.

Economical conclusion
Taking into account the costs and expenses for a foreign IP, what is the minimum claim amount at which it makes sense to start litigation or enforcement?
There are many factors that impact this decision, such as the strength of the particular claim and the ability of the target to pay any award. However, assuming the claim is near indisputable, and the target can easily pay the award, $30 000 seems appropriate as the minimum claim amount to start litigation or enforcement in New Jersey or New York, which assumes one-third ($10 000) will be utilised to cover the fees of the local practitioner so the net to the IP would be $20 000.

In the third part of this series, we will take a look at this from an Australian perspective.