The Courts Give Creditors a Powerful New Weapon to Fight Debtors

One of the most frustrating aspects of collections that creditors face, is dealing with a debtor who unquestionably knows that the debt is due and owing, but who spitefully forces the creditor to proceed with costly litigation to collect their money.

This type of debtor usually has no remorse for his debt and will even go so far as to hire an attorney to complicate and stall the litigation for as long as possible.

Most debtor’s attorneys hired to stall a collection case, know that the only punishment he and his client face for such tactics, is potential liability for the attorney’s fees incurred by the creditor during litigation.

However, liability for a creditor’s attorney’s fees is not a certainty , but rather is based upon the creditor’s ability to produce a signed contract by the debtor containing an attorney’s fees provision.

Generally, only one-half of our clients are able to produce such contracts, and of the ones that are, only about one-half of those actually collect their attorney’s fees from the debtor.

This is because the debtor will typically offer a settlement of his debt on the eve of trial which does not include reimbursement for attorney’s fees, and the creditor frequently accepts the offer to get the matter settled and avoid the trial.

As is evident from the proceeding, creditors face a very frustrating situation in that there is very little legal punishment available to them to motivate a debtor to settle his debt expediently.

However, I am very pleased to report that all of that has changed with the California Code Of Civil Procedure, Section 128.7. This statute, which applies to all complaints, petitions and motions filed on or after January 1, 1995, allows debtors and their attorneys to now be punished where:

(1) the debtor or his attorney’s primary purpose for filing a document with the court is for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. (It is the intent of the Legislature that courts shall vigorously use its sanctions authority to deter such improper conduct or comparable conduct by others similarly situated.); (2) the debtor files a document that contains defenses or claims that are not warranted by existing law or that contain frivolous arguments; (3)the debtor uses allegations and/or factual contentions that have no evidentiary support; (4)the debtor denies the creditor’s factual contentions and said denial has no evidentiary support.

Examples of the types of motions and pleading that could lead to the imposition of these sanctions by the court are; where the debtor files a cross-complaint against the creditor for violation of consumer protection laws, intentional infliction of emotional distress, fraud, tortious action allowing for punitive damages, etc.

Other types of sanctionable actions by the debtor and his attorney include the purposeful setting of creditor’s deposition on a Sunday, or the filing of repeated challenges to creditor’s complaint on small technical issues that are not necessary for the resolution of the matter.

Once a creditor files a “128.7” motion against the debtor, the hearing date for the motion is set thirty days into the future. The purpose of this is to give the debtor and his attorney an opportunity to withdraw their motion to avoid monetary sanctions being imposed against one or both of them for their conduct.

If the debtor and his attorney refuse to withdraw their document, and if the court finds them in violation of “128.7”, then the court may impose a variety of punishments against them. The court may:

1) impose a nonmonetary sanction against the attorney and his law firm such as striking the answer filed by them; 2) impose a monetary sanction against the attorney and his law firm ordering them to pay a fine directly to the court or to creditor’s attorney; 3) impose a monetary sanction against the debtor ordering him to pay a fine directly to the court or to creditor’s attorney.

What makes this new statute so powerful, is that it can be used directly against the debtor’s attorney to sanction him individually for filing harassing motions and pleadings with the court.

When the money is coming directly out of an attorney’s pocket, that attorney will be much less willing to risk filing ridiculous motions and pleadings intended for harassment purposes only.

Since this statute has taken effect, trial judges have reported hearing far fewer frivolous motions then prior to the statute being enacted.

Hooray for “128.7”!