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Ranking Creditors. China Comes In Dead Last.

By Dan Harris and Steve Dickinson

I had a long and arduous meeting recently with a long term client. The client had called me to discuss its difficulties in getting paid and its difficulties in making its payments. I suggested a big meeting, to which he bring all of the documents relating to those to whom his company owed money and all of those who owed his company. I have modified the facts a bit to disguise the specific company, but the substance is all there. Six companies owed my client amounts ranging from around $15,000 to $350,000. Half were in the US, half were in Asia. My client owed around 40 companies amounts ranging from around $1000 to $100,000. About 90% of these debts were to Asian and Russian companies, with the other 10% (all small) to US companies. We went through the receivables first and decided I would call or write all six companies right away. Within two weeks, all of the American companies had either paid, or, in one case, signed a pretty much airtight promissory note to pay within three months, with non-payment leading to a quick, local, judgment, along with a default interest and attorneys' fees. We also took a security interest so that even if this company files for bankruptcy, my client will have some priority. We are in still in the process of negotiating with the three Asian companies and plotting strategies if negotiations fail. What we did with the payables is more interesting. I asked the client why 90% of his payables were Asian and Russian when I had always thought only about half its business was with Asia/Russia, with the other half being with North America. He responded by saying I was right about his business, but the Asian/Russian companies just "didn't bug us as much to get paid." We then started examining the payables and ranking them in terms of contract quality. In other words, of these approximately 40 creditors, how did they rank in terms of the strength of their contracts. By this ranking, all of the bottom seven were Chinese companies. We then talked about how many of these companies had made any real effort to collect. A bunch of the Korean and Russian companies had retained lawyers who had written demand letters. The letters for the Korean companies (all in English) came from Korean lawyers in Korea and Korean lawyers in Los Angeles, none of which we believed would be able to sue my client quickly. The letters for the Russian companies (all in English) came from lawyers in Moscow. We decided I would contact the Korean and Russian lawyers to work out payment deals, which I subsequently did. The few Japanese to which my client owed money were deemed by the client too important not to pay and so we agreed he would contact them himself, explain the situation, and start paying. Not a single Chinese company had yet retained a lawyer and I explained to my client my firm's history in trying to represent Chinese companies owed money in the United States. I told him of how Chinese companies expected my firm to take on these sorts of cases on a 5% contingency fee basis, with my firm paying all costs, and, believe it or not, sometimes even requesting we guarantee full payment. I told him of how we had successfully handled a number of business collection cases for Korean, Russian, and Japanese clients, but had not once even taken one on for a Chinese company. I recently received an email from a very savvy Chinese national who is attending law school in the United States. This law student wrote this email to a lawyer in China who had contacted him regarding their working together to collect debts on behalf of Chinese companies. The translation of that email is as follows:

What does the contingency fee option look like? The biggest issue is of course the percentage that the attorney can deduct (both attorneys fees and costs, i.e. court costs, travel, etc.). The typical arrangement is 30--35% of any recovery after deducting fees and costs for the attorney, and the rest for the plaintiff(s) if there is no appeal. In appeal situations, the attorney gets 40%, in addition to costs. These figures might sound alarmingly high, but they are the norm in the United States, and frankly, lawyers just put these figures in a contract as a matter of course, and there is hardly any bargaining. With the above said, Chinese companies must adapt to the rules of the game in the U.S. in order to get competent counsel to collect their debt. My understanding is that most Chinese companies don't want to advance court costs, and they want attorneys to retain 5%-10% of any recovery. Based on my knowledge and experience, U.S. lawyers/firms will absolutely not take on very risky representations with such a low percentage. 5% -10% is not worthy of their time and efforts, and they might end up losing money after paying their overhead. I am sending you this note not to educate or offend you, not at all. Rather, I think that in order for the vast number of Chinese companies to have a chance of getting their money back and to fight back when wronged, they must know the rules of the game and play by them over here. And they must not insist that the rules here be the same as in China; otherwise, they lose money rightfully belonging to them, and a chance to get it back through competent representation in the courts. Since you are, apparently, leading the efforts in debt collection, I think it is important that you start informing the Chinese companies what is reasonably expected over here by U.S. attorneys in terms of percentages, so that they don't overlook collection of their money entirely simply because U.S. lawyers demand more in their contingent fee agreements.

He decided he would not pay any of the Chinese companies unless and until his company got flush again. I have another such meeting next week.

Full post as published by China Law Blog on December 06, 2008 (boomark / email).