Pre-Suit Collection Strategies

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1 Pre-Suit Collectio Strategies Writte by Charles PT Phoeix How to Decide Whether to Pursue Collectio Calculatig the Value of Collectio As with ay busiess litigatio, all factors associated with the process should be assiged probabilities, assumed cash flows, ad assumed timig of paymets ad receipts i order to arrive at a ratioal decisio that maximizes shareholder wealth. If the Net Preset Value of the cash flows associated with collectio is positive, the collectio should be pursued. Mathematically: If NPV(collectio) > 0, the proceed Of course, this begs what cash flows should be cosidered i the NPV calculatio. Here are some: Expected cash collected Filig costs Legal costs Iteral persoel costs Ivestigative costs Each of these cash flows should be assiged probabilities ad expected cash flow. For example, a decisio maker might believe there is a 25% chace of collectig $100, a 50% chace of collectig othig, ad a 25% chace of collectig $1,000. A decisio maker might also believe there is a 100% chace that the accoutig departmet will work 10 hours at $10/hour. The decisio maker might also kow that the collectio lawyer s fees are pied to a variable cost of 50% of the amout actually collected (icludig outside costs). Mathematically: Ε(collectio retur) = P i C i = (25%) ($100) + (50%) ($0) + (25%) ($1,000) = $25 + $0 + $250 = $275 Ε(iteal persoel costs) = P i I i = (100%) ($10) (10 hours) = $100 Ε(legal costs) = P i L i = (100%) (50%) (collectio retur) *Sice the actual collectio retur caot be kow util after it occurs, a decisio maker muse use the Expected Collectio Retur derived above = (100%) (50%) ($275) = $ Copyright 2014 Rhodes Tucker Phoeix Chartered

2 Ε(et collectio) = Ε(collectio retur) Ε(iteral persoel costs) Ε(legal costs) = $275 $100 $ = $37.50 Next, the decisio maker eeds to load the model with values for moral, behavioral or emotioal factors. For example, a decisio maker might believe that there is a moral hazard associated with ot collectig that ca be quatified ad is empirically prove (i the example, that value is a fixed umber of $10). A decisio maker must also decide if this value should be cosidered as a beefit of collectio (a positive value) or a detrimet of collectio (a egative value). I the example, the factor is a positive value i other words, there must be weight i favor of collectig. Mathematically: Noecoomic Load = Moral, Behavioral ad Emotioal Factors = $10 Ε(collectio value) = Ε(et collectio) + Noecoomic Load = $ $10 = $47.50 If Ε(collectio value)is positive, the the decisio maker should determie the time value of moey associated with the effort (that is, the Net Preset value) makig this more complicated calculatio is t warrated if the decisio maker ca t get a positive Ε(collectio value)i the first istace. I order to determie that Net Preset Value, the decisio maker must determie a cost of capital (iterest rate) associated with usig moey i the collectio effort versus other busiess fuctios 1. The example assumes: the busiess has a hurdle rate of 12%, Ε(iteal persoel costs) of $80 will likely occur i the 1 st moth, $5 i the 12 th moth, ad $15 i the 24 th moth, Ε(legal costs) will occur at the time of the Ε(collectio retur) (the lawyer deducts them upo receivig the collectio cash), Ε(collectio retur) ($275) will likely occur i the 24 th moth, ad the Noecoomic Load is worth $9 i moth 1 (provig the poit that collectio will occur), is worth $1 i moth 13 (as the poit was prove), ad othig i moth 25 (the calculated moral priciple value depletig i the face of a legtheig battle or because, i this case, the creditor has collected some or all of the judgmet or debt prior to moth 25). The Net Preset Value i this example is $22.62 (istead of $47.50) as demostrated i the followig table. Because Net Preset Value is positive, collectio should proceed. Cash Flow Period E(iteral persoel costs) $ (80) $ (5) (15.0) E(legal costs) (137.5) 1 This rate is ofte called the hurdle rate as it is the retur value eeded for a busiess to cosider goig forward with a project because all busiesses have limited resources ad, therefore, caot pursue all thigs oly those that, at a miimum, expect to icrease shareholder wealth at a certai rate. Copyright 2014 Rhodes Tucker Phoeix Chartered

3 E(collectio retur) Noecoomic Load 9 $ 1 - Net cash flows per period $ (71) $ (5) $ $ - Hurdle Rate 12.0% Net Preset Value $22.62 What if, however, there is o possibility of collectig $1,000? What if the largest possible collectible assets were oly $800 2? Some expectatios, the, chage as calculated below. Ε(collectio retur) = P i C i = (25%) ($100) + (50%) ($0) + (25%) ($760) = $25 + $0 + $190 = $215 Ε(iteal persoel costs) = P i I i = (100%) ($10) (10 hours) = $100 Ε(legal costs) = P i L i = (100%) (50%) (collectio retur) *Sice the actual collectio retur caot be kow util after it occurs, a decisio maker muse use the Expected Collectio Retur derived above = (100%) (50%) ($215) = $ Ε(et collectio) = Ε(collectio retur) Ε(iteral persoel costs) Ε(legal costs) = $215 $100 $ = $7.50 It appears that movig forward with collectio is still warrated, but the decisio maker eeds to check Net Preset Value before fially cocludig that collectig is the correct form of actio. Usig our assumptios (as modified by the revised optimistic case for collectible assets), Net Preset Value becomes egative ad, therefore, the creditor should ot proceed to collect. Cash Flow Period E(iteral persoel costs) $ (80) $ (5) (15.0) E(legal costs) (107.5) E(collectio retur) Noecoomic Load 9 $ 1 - Net cash flows per period $ (71) $ (5) $ $ - Hurdle Rate 12.0% Net Preset Value ($1.01) 2 Of course, a decisio maker might ever kow what was possible to collect, but assume the realities revealed after collectio efforts cocluded. Copyright 2014 Rhodes Tucker Phoeix Chartered

4 All of this might appear to be very basic; that everyoe should be satisfied if there is a collectio. I reality, without makig these types of calculatios (icludig factorig for iteral burdes ad o-cash flow items), decisio makers misapply corporate resources ad fail to maximize shareholder wealth. What Is Theoretically Collectible? Ultimately, of course, the lawyer has to provide iformatio ecessary for a decisio maker to make a iformed decisio. The most obvious questio becomes what ca actually be collected? usually startig with the questio, is the debtor collectible? I the ed, those aswers are more art tha sciece. See the sectio etitled How to Discover Assets? for iformatio sources available to help make iformed decisios. Discussio What other costs should be cosidered? What other cash flows are possible? How ca the Net Preset Value be augmeted usig the same factors? As a group, desig a decisio rule formula Prevetative Collectio Collectig Without Filig a Lawsuit Thik before suig: Kow yourself Kow the eemy Kow the terrai Ca collectio be achieved pre-suit? Self-help ad actios agaist secured properties Negotiate forbearace agreemets to: o Elimiate defeses to suit o Secure collateral o Gai iformatio o Marry debtors to fiacial iformatio Write demad letters that get results o Elimiate trite phrases like gover yourself accordigly o Develop acceptable alteratives ad let the debtor choose his or her ow course o Ecourage actio without scarig the debtor ito hopelessess o Use civil theft otices where possible o Use active voice o Write like humas talk: o such or said o Write like a jouralist: Simple seteces Who, what, where, whe, how ad why o Do ot threate crimial actio o Read it agai ad make your child or mother the recipiet: Copyright 2014 Rhodes Tucker Phoeix Chartered

5 Are you cocered? Are you agry? The differece is success or a lawsuit Discussio What else? What to iclude i a forbearace agreemet Split ito groups ad draft a demad letter Desigig a Collectios System I order to desig a collectio system, a desiger must cosider how the system iteracts with the outside world. I other words, what prompts collectio to begi ad how does it iterface oce it has begu. From that, a desiger ca develop a process flow that sesibly ad efficietly guides the process. There are may cosideratios, but desigig a system that satisfies customer eeds is probably most importat. Who is the customer? Who is the target? What resources are available? I other words, kow yourself, kow the eemy, ad kow the terrai. Discussio Desig a workflow as a group How to Discover Assets Resources available to idetify assets iclude: Govermet databases o Property appraisers o Secretaries of State o USPTO Almost always overlooked o Courts May soud strage, but good iformatio ca be available uder a lawyer s ose Bakruptcy courts Divorce judgmets Real estate records o Licesig agecies o Tax collectors o Secured trasactios registries Services Copyright 2014 Rhodes Tucker Phoeix Chartered

6 o Westlaw o Lexis-Nexis o Private detectives Iteret search egies Social etworkig websites Iformatio from debtors themselves o Do t forget to review isurace policies Discussio What else? Copyright 2014 Rhodes Tucker Phoeix Chartered

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