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Legal Notes Blog

Disclaimer: The blog content on this website is provided for informational purposes only; it is not legal advice and may not be relied upon as such. Comments are solely the work of their authors and as such do not necessarily reflect the views of Kohn Law Firm. Neither the use of content provided on Kohn Law Firm blogs nor the submission of any information through Kohn Law Firm blogs creates an attorney-client relationship between you and Kohn Law Firm. Please be aware that any information that you provide through Kohn Law Firm blogs is not secure and it is not privileged or confidential. In fact, by posting you intend that your comment be displayed so that others can read it and comment on it. Kohn Law Firm reserves the right to edit submissions for any reason in its sole discretion.
 Maria N. Lewis, Shareholder/Compliance Manager 

In a traditional law firm, the existence of a department or specific staff focused solely on internal compliance is not common. However, because of the regulatory environment surrounding debt collection and litigation, firms that practice in this area must devote staff and resources to actively monitor their internal practices and procedures for compliance with all applicable legal and regulatory requirements. This has been a “new normal” for debt collection firms ever since the publication of the Consumer Financial Protection Bureau’s (CFPB) Supervision and Examination Manual in 2012, as well as the many recent Consent Orders the agency has entered into with credit issuers, debt buyers, and law firms. 

                In adjusting to this new reality, it is important that debt collection law firms learn what works in terms of structuring their internal compliance system and what does not work in order to efficiently devote resources towards the effective monitoring of internal processes and procedures. Compliance staff should have a role in call monitoring, procedure development and approval, complaint and dispute review and reporting, and communication with clients as well as implementation of client requirements. So, what works when developing a compliance department? First, it is often helpful to have compliance staff members that have previously held positions in other departments within the firm. For example, having compliance attorneys who previously litigated collection cases creates a level of credibility in the eyes of the attorneys who are actively litigating cases. The litigation attorneys can rest assured that even though the compliance attorney may be dictating a client or legal requirement that affects the practice of law, the compliance attorney understands how that requirement will affect their practice. 

Additionally, employing former collectors in a compliance department can be beneficial both from the standpoint of rolling out new requirements such as voice mail or disclosure scripts, as well as call monitoring. Having a staff member who has previously sat in the place of collectors on the phone on a daily basis again lends credibility to the compliance department’s work, especially in the area of call monitoring. Importantly, having compliance staff who worked in other areas of the firm opens the lines of communication between departments because staff already has a relationship with each other. 

It is also very important to get input from other departments before changing a procedure or rolling out a new process. Again, this allows for buy-in and opens the lines of communication firm wide.  Lastly, and perhaps most importantly, shareholder/partner involvement is crucial when structuring a compliance department within a debt collection law firm. Compliance staff should report directly to a shareholder or partner who is not directly involved in managing or directing the firm’s revenue-generating functions on a daily basis. This allows for independence from other departments and operations to ensure that the compliance department has the freedom to properly implement procedures and monitor those procedures. 

While the above ideas are important to consider, it is equally important to take into consideration what may not work when structuring a compliance department. Operating in a silo between departments and between tasks definitely does not work well for a compliance department in a debt collection law firm. Other firm departments, including collections, litigation, IT and other support staff, need to feel comfortable bringing potential problems or questions to compliance attorneys and staff. If a problem or even a potential process improvement is not communicated between departments, it cannot be implemented successfully. This must include involvement of the firm’s compliance staff to ensure any changes in firm process and procedures comply with all legal and client requirements. What is more, operating in a silo between departments can cause an “us versus them” mentality.  For example, collectors may feel like internal auditors are “out to get them” during call monitoring if defects are identified. Opening the lines of communication between departments allows staff to identify training opportunities, rather than just focusing on and pointing out the problems. This will ensure the firm’s collection procedures are strong going forward. 

                Although the allocation of specific staff to focus on compliance within a debt collection law firm is extremely important, it is also necessary to remember that it is not solely the compliance department that is responsible for compliance. Every employee of a debt collection law firm must play a role in compliance. And hopefully with the above concepts of what can work and what may not, debt collection law firms can build a culture of compliance.

 

Posted: 5/9/2017 9:01:19 AM by Tom Connor | with 0 comments


 By: Joseph R. Johnson and Tyler Helsel

            In recent years, limited liability companies (LLC’s), have become the default entity for business owners.   In fact, per the Wisconsin Department of Financial Institutions website, 34,067 new LLC’s were formed in 2016 and already 2017 is 7.0% ahead of that pace.[1]   With LLC’s coming to dominate the business landscape, a question we often get from our clients is what options are available for collecting against an LLC, particularly one that has minimal or no assets. 

            One option available to creditors to satisfy a judgment is to pierce the corporate veil to reach the assets of the owner and/or members of the LLC.  However, as noted below, a creditor cannot pierce the corporate veil just because an LLC owes a debt and has insufficient assets to satisfy said debt.  There is a strong presumption that the members or owner of an LLC cannot be held liable for acts of the LLC.  So what must a creditor do to overcome that presumption?

           The first prevalent corporate veil case in Wisconsin is Milwaukee Toy Co. v. Industrial Com. of Wisconsin, 203 Wis. 493 (1931).  In that case, the court stated the corporate veil could be pierced if leaving the veil intact “would accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim.” Id. at 496.  

           Today, to determine whether the corporate veil can be pierced, a plaintiff must overcome the burden of the alter-ego test, with Consumer’s Co-op v. Olsen being the lead case. 142 Wis. 2d 465.  In Consumer’s Co-op, a corporation owned by Olsen took out a substantial line of credit with the plaintiff.  Id. at 471.  The plaintiff sought to impose liability on Olsen for the debt of the corporation.  

           The Consumer’s Co-op court held that the corporate veil may be pierced only when the “corporate fiction would accomplish some fraudulent purpose, operate as a constructive fraud, or defeat some strong equitable claim.” Id. at 475.  When considering what fraud is, courts are to look at factors such as undercapitalization and lack of corporate formalities. Id. at 478-85.  In Consumer’s Co-op the court used the “alter ego” approach, where “corporate affairs are organized, controlled, and conducted so that the corporation has no separate existence of its own and is the mere instrumentality of the shareholder and the corporate form is used to evade an obligation, to gain and unjust advantage or to commit an injustice.” Id. at 476.  The court looked at various factors in making its determination.  First, the court stated that undercapitalization is an important factor in determining if a fraud has occurred. Id. at 477.  The court analyzed capital at the time and formation of the corporation to determine if it is fraudulent. Id. at 486.  For example, if capital is rapidly increased immediately prior to the opening of a store at the formation of the corporation, this is likely to purchase the building or some other business asset.  In Consumer’s Co-op, the initial capital was small, and was to start the corporation. Id. at 491. The increases thereafter did not suggest something inappropriate was occurring.  Id. at 491-92. 

            Additionally, corporate formalities are an important factor when analyzing fraud.  Id. at 484. When determining formalities, courts will look to three factors: (1) control of finances and other transactions that are not separate in mind or will from the defendant and the corporation; (2) that control is used in a fraud; and (3) the fraud caused an injury or unjust lost.  Id.  In Consumer’s Co-op, the court held that the defendants had adequate corporate formalities: stock was issued, officers were elected, meetings were held and records of meetings kept, and all business interactions were undertaken under business name.  Id. at 488.  This evidenced corporate control of finances and business transactions. Id.  As such, the court declined to pierce the corporate veil in Consumer’s Co-op. 

             In addition to the specific factors above, courts are to look at the totality of all factors to determine if a plaintiff should be permitted to pierce the corporate veil.  Michels Corp. v. Haub, 2012 WI App 106, ¶20.  In Haub, the court held that control, sophistication, and corporate procedures on their own may not be sufficient to pierce the corporate veil, taken together are more than sufficient to show the Consumer’s Co-op test.  Id., ¶20.  The court further held that the facts supported the notion that the defendant had exclusive control of the finances, was the corporation’s president and sole employee, and had sole authority within the corporation.  Id., ¶19.  Additionally, the corporation had separate tax returns and bank accounts, but the defendant moved substantial funds from the business accounts to personal accounts of the defendant.  Id., ¶¶24-25. As the Court in Consumer’s Co-op stated, the court is to look at “reality and not form.”  Id., ¶23.  Although separate accounts give the form of separation, complete control and moving funds to private accounts does not give the reality of separation.  Id., ¶25. 

             In Sprecher v. Weston’s Bar, the court held that the corporate veil should be pierced. 78 Wis. 2d 26, 39 (1997).  The defendant held no corporate meetings nor maintained any records, the corporation had no substantial assets, and the defendant took out all corporate profits as salary. Id. at 38-39.  The defendant even used the corporate bank account as a personal checking account. Id.  There, the court stated the corporate veil could be pierced. Id.  

Overall, there is a strong presumption against piercing the corporate veil and creditors should be cautioned that piercing is not a “magic bullet” that can be used to collect on every LLC that lacks the assets to satisfy a judgment.  However, if through investigation, discovery, and/or supplemental examinations, a creditor learns or has reason to believe that the LLC is simply an alter ego of its owner, piercing can be an effective tool to collect.



[1] www.wdfi.org

Posted: 3/14/2017 11:34:29 AM by Tom Connor | with 0 comments


By: Jason D. Hermersmann, Litigation Manager

          We are pleased to announce that Attorney Joseph Johnson and Attorney Maria Lewis have become shareholders at the Kohn Law Firm.  In addition, we are happy to announce the addition of four new attorneys to the Kohn Law Firm staff over the past year.  We have added Ellen French in our Compliance Department. Tyler Helsel and Charles Fiergola have joined the Litigation Group and Kirk Emick has joined the Post-Judgment Group. 
          Joseph Johnson started working at the Kohn Law Firm in February 2010.  He graduated from the University of Wisconsin Law School in 2006.  He has been a valuable attorney in the Litigation Group handling consumer litigation since joining the firm and, most recently, has been the lead attorney in the firm’s municipal litigation practice.  On December 1, 2015, he was promoted to a supervisory role in the Litigation Group overseeing the consumer litigation and became a non-equity partner.  Joe became a shareholder at the beginning of this year.  Joe has earned respect at the firm through his hard work and dedication to the practice.  He has also been instrumental in assisting the firm in training and mentoring new attorneys.  When Joe is not practicing law, he enjoys spending time with his family and is an avid sports fan, cheering for both the Badgers and Packers. 
             Maria Lewis started working at the Kohn Law Firm in February 2011.  She graduated from Hamline Law School in May 2010.  She began her career in the Litigation Group handling files across the state of Wisconsin. In June 2014, she joined the firm’s Compliance Department as an attorney handling client audits and ensuring that the firm complies with various client requirements.  She has since become the manager of the Compliance Department and is relied on extensively by the attorneys and management at the firm.  When Maria is not practicing law and managing the compliance department, she enjoys spending time with her family, interior decorating and relaxing at the family cabin.  
           We appreciate the contributions of both Joe and Maria throughout the years and look forward to the future with them as part of the ownership group.  Furthermore, we welcome the important additions of Tyler, Ellen, Charles and Kirk as they build their careers and anticipate a successful 2017.      

Posted: 1/17/2017 10:37:37 AM by | with 0 comments


 By Attorney Ellen French

Once a creditor has obtained a judgment, a supplemental examination is one of the first steps in collecting the judgment.  Pursuant to Wisconsin law, judgment creditors may apply for a supplemental court commissioner to order a judgment debtor to appear before the commissioner to answer questions under oath regarding the judgment debtor’s income and assets.
[1]  These supplemental examinations can be a critical part of discerning the location of a judgment debtor’s assets and lead to an eventual resolution of the judgment.  The resolution may entail either a voluntary payment arrangement or the discovery of involuntary means of collecting on the judgment.

During these supplemental examinations, a number of disputes and complaints may arise regarding the debt underlying the judgment, the sufficiency of the underlying legal proceedings, or the prior actions of the judgment creditor or its counsel.  This article shall focus on two of the more common disputes and complaints that arise during supplemental examinations and the available remedies to resolve these issues.

Generally speaking, the most common dispute encountered during supplemental examinations is a request for validation of the debt by the judgment debtor.  As supplemental examinations may occur at any point after a judgment has been entered, judgment debtors often appear at supplemental examinations years after a judgment has been entered against them.  When this occurs, the original judgment entered often may have been a default judgment and the supplemental examination may be the first contact between the judgment creditor and the judgment debtor.  Judgment debtors may see the supplemental examination as an opportunity to dispute the merits of the underlying debt or request documents indicating that the debt is owed.

In these cases, it is critical to recognize that the judgment debtor is not entitled to dispute the merits of the judgment during a supplemental examination.  As the supplemental examination serves solely as an opportunity for the judgment creditor to ask the judgment debtor questions under oath regarding his or her income and assets, a supplemental examination is the improper venue for such disputes.  Furthermore, the validation period requiring judgment creditors, as debt collectors, to provide documents regarding the underlying debt has passed once a judgment has been entered.  The Fair Debt Collection Practices Act (FDCPA) dictates that debt collectors must send out written notice of the debt to consumers “[w]ithin five days after the initial communication with a consumer in connection with the collection of any debt… unless the [required] information is contained in the initial communication or the consumer has paid the debt.”
[2]  This written notice must contain the following:

(1) the amount of the debt;
(2) the name of the creditor to whom
the debt is owed;
(3) a statement that unless the consumer,
within thirty days after receipt of the notice, disputes the validity of
the debt, or any portion thereof, the debt will be assumed to be valid
by the debt collector;
(4) a statement that if the consumer notifies
the debt collector in writing within the thirty-day period that the debt,
or any portion thereof, is disputed, the debt collector will obtain
verification of the debt or a copy of a judgment against the consumer
and a copy of such verification or judgment will be mailed to the
consumer by the debt collector; and
(5) a statement that, upon
the consumer’s written request within the thirty-day period, the debt
collector will provide the consumer with the name and address of the
original creditor, if different from the current creditor.
[3]



Therefore, when a judgment debtor is appearing at a supplemental examination after a judgment has been entered, this validation period has inevitably passed.  Consequently, the judgment debtor is not entitled to documentation underlying the debt nor is he or she permitted to use the supplemental examination as a second opportunity to litigate the judgment.  It is essential to refocus supplemental examinations back to the discovery of the judgment debtor’s income and assets.

Judgment debtors also often raise complaints during supplemental examinations regarding the frequency and timing of supplemental examinations.  As previously indicated, judgment creditors are entitled to have a judgment debtor appear before a supplemental court commissioner to answer questions regarding said judgment debtor’s income and assets under oath.

 

[4]  When a judgment goes unpaid, multiple supplemental examinations may be needed, especially when the judgment debtor is self-employed or unemployed at the time of the supplemental examination.  With respect to a self-employed individual, frequent updates on a judgment debtor’s financial situation is necessary for the successful pursuit of non-earnings garnishment, which relies heavily on well-timed execution on the judgment debtor’s assets. Accordingly, until a judgment has been satisfied, judgment creditors are able to proceed with multiple supplemental examinations, as needed, in order to pursue a resolution of the judgment.[5]

In sum, supplemental examinations are a valuable tool in collecting on a judgment.  When proceeding with a supplemental examination, judgment creditors must be sure to maintain a clear focus on determining the judgment debtor’s income and assets available for execution rather than be stymied by the judgment debtor’s efforts to re-litigate the underlying judgment or make complaints regarding the continued need for the judgment debtor to appear for supplemental examinations.  If able to maintain this emphasis on the judgment debtor’s income and assets, a supplemental examination can be an effective means of resolving a valid judgment.


[1] Wis. Stat. 816.03(1)(b)

[2] 15 U.S.C. § 1692g(a)
[3] Id.
[4] Wis. Stat. 816.03(1)(b)
[5] Judgment creditors prefer to keep open lines of communication with judgment debtors, as opposed to formal supplemental proceedings, however the supplemental proceedings are necessary when those open lines of communication break down.
Posted: 12/14/2016 9:15:47 AM by Tom Connor | with 0 comments


 By Attorney Jennifer Anderson 

            If someone with insurance sustains damages or is injured as a result of another person’s negligence and the at-fault party is uninsured, the injured insured’s insurance company pays for his or her damages and injuries and then has a right of recovery against the at-fault party for the amounts paid to and/or on behalf of its insured.  However, sometimes the insured settles with or files a lawsuit against the at-fault party for various claims without the insurer’s knowledge. 

            When an insured sues an at-fault party, also known as a “tortfeasor,” without the insurance company knowing, how does that affect the insurance company’s rights of recovery?  Generally, an insured cannot extinguish an insurer’s right to recovery against an at-fault party if: (1) the insured is made whole; (2) the insured did not sign an indemnity agreement; and (3) the insured recovered different damages from the tortfeasor than those for which the insurer paid to the insured.1  

            When the insurer makes claims against the at-fault party who has already paid the insured directly, there are several typical arguments that the at-fault party will make in furtherance of the claim that the insured’s rights should be extinguished. Likely, the tortfeasor will claim that Wis. Stat. §803.03 requires the insured to join all parties asserting a claim for subrogation (for our purposes, the repayment of amounts paid by the insurer to the insured for damages caused by the at-fault party) in the action and failure of the insured to do so eliminates the insurer’s right to recover.  However, the remedy for such a failure on the part of the insured should not be the extreme measure of extinguishing the insurer’s rights when the insurer had no knowledge and no control over the insured’s actions.

             Tortfeasors will also argue that claim preclusion or res judicata operates to extinguish an insurer’s rights of recovery.  Claim preclusion has three elements: (1) identity of parties or their privies (those with a mutual interest); (2) identity of causes of action; and (3) a final judgment on the merits.2  Not all of the elements are present in these situations.  There is no identity of parties in these matters, nor are the insured and the insurance company privies because they have different interests and claims.  The causes of action are also different.  For example, the insured may be seeking to recover on a property damage negligence claim while the insurer has a lien for medical payments.  These claims have different elements which must be proven.

             Another argument to be made by the at-fault party to extinguish an insurer’s lien when the insured has already filed suit is that the insurer’s lien has already been discharged by the insured because they share the same claim.  However, the insurer and the insured each own separately a part of the claim against the at-fault party.  “[W]e have characterized the interests of the insurer and the insured as each owning separately a part of the claim against the tortfeasor.”3   When the insured settles a claim, it only settles that part of the claim owned by the insured; the part of the claim owned by the insurance company remains unsatisfied and the insurance company can pursue a suit against the tortfeasor.

             Finally, it can be argued that insurer’s recovery rights are prevented by the terms of the policy itself.  The argument is as follows: There is no right of recovery against the at-fault party because the insurance payment was voluntary since the policy language revokes the insured’s right to payment under “any affected coverage” if the insured recovers from another without the insurance company’s written consent.  The Milwaukee County Circuit Court recently accepted the argument that payment to the insured by the at-fault party only revoked coverage for the specific bills paid by the “other source.”  For example, if the at-fault party paid for a doctor bill from January 1, 2016 directly to the insured and the insurer paid for a chiropractic bill from February 1, 2016 the affected coverage wherein the insured’s right to payment from the insurance company was revoked was only the coverage for the January 1, 2016 medical bill that was paid for by the at-fault party (the “other source”).  Any bills not paid for by the “other source” are not affected and the insurer’s recovery rights remain intact for those bills.

             The bottom line is that the right of an insurer to recover from the at-fault party is equitable in nature.  The party responsible for causing the accident should be responsible for paying the bills incurred as a result thereof, regardless of whether the insured sued that party without the insurance company’s knowledge.  The insurance company should not lose its right to recover the money it paid to its insured from the at-fault party simply because the insured settled other claims with that party or filed suit against that party without its knowledge and, as illustrated above, the law supports this argument. 

 


1  There are exceptions to this; however, for the limited purpose of this article, we will assume that the damages recovered by the insured from the at-fault party are different than those paid by the insurer

2Wis. Public Service Corp. V. Arby Construction, Inc., 2012 WI 87, ¶35, 342 Wis. 2d 544, 557, 818 N.W.2d 863, 870 (citations omitted).

3Mutual Service Casualty Company v. American Family, 140 Wis. 2d 555, 561, 410 N.W.2d 582, 585 (1987)(citations omitted).

Posted: 11/18/2016 1:57:10 PM by Tom Connor | with 0 comments