Collection of Trade Credits in the United States

Spring 2012 Article

COLLECTION OF TRADE CREDITS IN THE UNITED STATES

The United States acts as a world class, key market and a very important window of opportunity for foreign producers. American consumers appreciate Italian products, especially in the food, fashion and automotive industries. For foreign companies the ability to sell products in a very competitive and selective market is rightly an indicator of the recognition of the quality of their products.

However, those planning to export, or already exporting, to the United States must take into account the differences between Italy and the United States in regard to the collection of commercial credits.

I. The injunctive relief, an instrument unknown to the US legal system

In the U.S. an action for injunctive relief is not available to plaintiffs in the field of debt collection. In other words, those who intend to bring a legal action to recover a commercial credit cannot do so by filing an ex parte action for injunction to the court, which becomes enforceable if not opposed by the other party within a certain time. Instead, the creditor must file a lawsuit, which starts with the filing of the complaint and the service of the same to the defendant, continues with the phase of discovery,[2] a mandatory mediation,[3] and ends with the trial. The process differs not only in the timing of the procedure, but also in its costs, which are much higher in the United States.

II. How attorneys' fees are calculated

Additionally, in the United States there are no statutory attorneys' fees set forth and periodically updated by law, indicating the minimum and maximum amounts for each judicial activity.

Lawyers work at an hourly rate (consequently, any judicial activity can have quite a range of costs depending on the time required to complete it, as well as on the hourly rate applied by the lawyer). This means that a lawsuit could cost several thousands of dollars and therefore, when the amount of the credit is not significantly high, the legal costs could exceed the credit itself, thus making a legal action ineffective.

Alternatively, many lawyers enter into contingency fee agreements with their clients, under which the attorney will receive a percentage of the amount actually recovered by his client. In this scenario, however, a lawyer will unlikely be interested in representing a client when the amount of the claim is not substantial, because the attorney's fees would in any case not be sufficient to cover the costs incurred.

III. Other important differences with the Italian legal system

Attorneys' fees are almost never recoverable against the defaulting debtor. Unlike under Italian law, in the United States the court does not have the power to order the defendant to reimburse the costs of litigation, unless expressly provided by law (which is not the case for commercial credits), or by a specific agreement between the parties.

Conversely, if such an agreement exists, the court does not have the discretion of the Italian courts in deciding how to apportion the costs: the agreement of the parties is king, provided that it is valid.

The same is true with respect to the payment of interest on late payments: unless the law or a contract between the parties expressly provides for it, the judge cannot order the defendant to pay.

Ultimately, the maximum which the plaintiff can obtain is the payment of the amount shown in the invoices, and nothing more.

This implies further consequences: a high percentage of lawsuits in the United States do not reach trial, but are settled before trial. Even those plaintiffs who have an undisputed claim, when facing the certainty of spending their money in legal fees with no possibility of recovering them, prefer to settle the dispute as soon as possible, although this involves giving up part of their credit.

The advice of many civil defense attorneys plays more or less like this: regardless of wrong or right, the defendant must always file an answer to the complaint, to compel the plaintiff to carry out further activity and incur costs, and ultimately cut a better deal. Many Italian exporters, unaware of these profound differences with the Italian system, realize only when it is too late that, in the absence of the appropriate measures, even a legal action for a credit amounting to several thousands dollars can be unreasonably expensive and uneconomic.

Therefore, it is essential to enter into a written contract containing a clause stating that the prevailing party in a litigation will be entitled to recover costs and fees, as well as interest on late payments. This constitutes also an important bargaining leverage in a negotiation in the event of litigation: the defaulted party will have an interest to pay what is due as soon as possible, to avoid being convicted to reimburse the expenses incurred by the plaintiff and to pay the interest.

IV. The choice of the forum and the preference for arbitration

The parties may also contractually agree on the appropriate forum for the resolution of their disputes. The choice of the Italian forum is not recommended, not only for the average length of civil proceedings[4], but also because the post-judgment process will inevitably occur in the United States. For that purpose, the Italian trial documents would need to be domesticated by the U.S. court. Therefore, it is preferable to choose the U.S. forum.

It is also recommended that disputes be referred to arbitration. In the U.S. the American Arbitration Association (AAA) is an organization which administers arbitration proceedings, and whose rules on commercial arbitration are often invoked in contracts. The preference for arbitration depends on several factors: arbitration is confidential, generally less expensive and faster than ordinary litigation, it is final, and allows the parties to choose an arbitrator with specific expertise in the field of the dispute, as well as the venue of the arbitration itself.

V. The Statute of Limitations

Another very important aspect to consider in a debt collection is the statute of limitations, which bars the collectability of a credit when the creditor does not exercise his rights within the term set forth by the law. This is basically the time after which an attempt to recover the credit is no longer available in a court of law. In the United States the statute of limitations varies from State to State, but it is almost everywhere much shorter than the ten-year term set forth by Italian law for contractual obligations[5]. Most states have adopted a four-year statute of limitations[6]. Some states have adopted a five-year or a six-year term, while only the State of Louisiana, whose legal system, for historical reasons, is based on continental European law, has a ten-year statute of limitations on contracts[7].

Moreover, unlike in Italy, merely submitting a demand letter to the debtor is not sufficient to interrupt the statute of limitations. The only way to interrupt the statute of limitations is filing a lawsuit.

VI. How to limit the credit risk: the UCC-1 financing statement filing

The legal systems of all States have adopted an instrument by which the seller can eliminate, or at least considerably limit, the risk connected to the contractual breach of the purchaser. This is known as UCC-1 financing statement filing, set forth by Article 9 of the Uniform Commercial Code (UCC), the law applicable to secured transactions of movable, tangible property which has been adopted, albeit with different texts, in all States.

This instrument allows the parties to create a security interest in a particular item by filing with the Secretary of State of the State where the debtor resides (or, in the case of a legal entity, in the State of its incorporation) a form containing certain information about the creditor, the debtor, and the collateral within twenty days after the delivery of the goods[8]. The purpose of this filing is to disclose to third parties the creditor's ability to attach certain assets of the debtor to repay a specific debt. In this way the creditor becomes a preferred creditor and with specific reference to the collateral has a priority over other creditors.

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The characteristics, timing, and costs of debt collection in the U.S. are different than in Italy. For this reason, it is extremely important for Italian firms wishing to sell their products in the United States to protect themselves with the right contractual tools. Our firm may provide adequate legal assistance in negotiations and, where necessary, in litigation. Requests for information or insights on this issue may be addressed to stefano.abbasciano@vallalaw.com.

This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor its receipt constitutes, an attorney-client relationship between sender and receiver. You should not act on the information contained in this article without first seeking the advice of an attorney.



[1] After practicing law in Italy, Stefano Abbasciano (stefano.abbasciano@vallalaw.com) was admitted to the California Bar, and is Associate Counsel at Valla & Associates, Inc., P.C. (www.vallalaw.com).

[2] Discovery is aimed at collecting the evidence: each party has a right to request that the other party submit all the documents relevant to the controversy, to depose the other party and the witnesses.

[3] To reduce the workload of the courts, the parties have the obligation to attempt to mediate their case with the supervision of a mediator. The mediator does not have a judging role, but helps both parties to try and reach a settlement.

[4] When the defendant opposes an injunction, an ordinary civil trial begins.

[5] Article 2946 of the Italian civil code.

[6] In California the statute of limitations is four years for written contracts, and two years for oral contracts.

[7] Louisiana was first a Spanish and then a French colony, and was purchased by the United States only at the beginning of the XIX century. Its legal system is partly based on French and Spanish law, deriving from the Roman law, instead of on the English common law.

[8] If the filing is made on inventory, the procedure requires further formalities. In fact, the creditor must notify his intention to create a purchase money security interest in such goods to other creditors who have a conflicting interest on the same inventory (such as a bank which issued a loan), and file the UCC-1 financing statement before the delivery of the goods.