When Frank Martinez Jr. just can't get a borrower to repay a loan, he often turns the matter over to the big guns: outside attorneys who specialize in collecting bad debts.
"The tricky thing is to see how much you can get out of an individual before they file a chapter on you," said Mr. Martinez, an assistant vice president at San Francisco's Wells Fargo Bank, referring to bankruptcy filings.
Mr. Martinez works in Wells' loan adjustment group. If a loan for $2 million or less goes into arrears and the branch or loan officer can't convince the borrower to make good, the case lands on his desk. If, after working the loan, Mr. Martinez determines the loan can't be saved and must be liquidated, he assigns the case to an outside counsel. That's where Lisa Spiwak and Nick Iezza (pronounced Yatza) come in.
Ms. Spiwak and Mr. Iezza, law partners in Encino, Calif., have made it their business to help bankers like Mr. Martinez collect loans that have gone sour. Often, the notes have already have been written off; other times, they're seriously in default and on the verge of being written off.
"By the time we assign these cases out, time is critical," said Mr. Martinez. The objective, he explained, is to get the money or get a judgment as quickly as possible. Spiwak & Iezza has a better track record of accomplishing this time-critical mission than do most other attorneys - close to 90% of the cases assigned are solved by the firm.
What makes Ms. Spiwak and Mr. Iezza successful at the collections game, according to Mr. Martinez and others, is a combination of raw skill and technological know-how. Although automation is not unique to the legal profession, these collection lawyers have taken the process further than most attorneys. They maintain a data base of pleadings, motions, and other legal briefs that can be customized and printed for a particular case with the push of a few buttons. According to Ms. Spiwak, the legal arguments presented in these documents have been tried and tested before numerous judges, and have been honed over the course of years of thorny cases.
"Everything needs to be tailored to each individual case. But the guts of everything is already done," explained Ms. Spiwak. So, instead of spending two days in a law library, preparing briefs, the attorneys at Spiwak & Iezza spend a few minutes tailoring a computerized brief to the specifics of the case at hand. They may go to court and file the required motion that same day.
"It's a matter of pushing a button on the computer to get them out," said Ms. Spiwak. "There's absolutely no delay."
That's music to the ears of bankers like William McDonald, an assistant vice president at American Pacific State Bank in Sherman Oaks, Calif. "The longer you wait, the further away the debtor can get," he said.
A $289 million-asset bank that specializes in small-business lending, American Pacific is no stranger to delinquent loans. "Sometimes, a debtor just gets numb," said Mr. McDonald, a hard-nosed collector. At that stage, the debtor won't budge, no matter what Mr. McDonald says or does. That's when he changes the collection approach, bringing in Spiwak & Iezza. Mr. McDonald said he likes the law firm's no-nonsense approach to collecting delinquent debts.
"This is really a big drama game," said Mr. McDonald. If the collector doesn't come across as stern and deliberate, he suggested, the debtor will think they can skip out on the loan balance.
"If there's money there, they've gotten it," said Mr. McDonald.
Clearly, the tools Ms. Spiwak and Mr. Iezza have amassed do much to support their practice. In addition to the data base of legal forms, they maintain accounts with courts in a variety of jurisdictions that allow them to file documents instantaneously via modem or fax. This enables the firm to file motions faster than many of its peers, and it alleviates the need for process servers and messengers, which holds down client costs.
Spiwak & Iezza also is on-line with a data base that provides instant access to any documents filed with the court system. Using this data base, the firm can determine on behalf of its client if the debtor in question is a defendant in any other lawsuit pending in a California court. "The value to our client is great," said Mr. Iezza. For example, if the debtor is in default on a loan from another bank, that knowledge would help Mr. Iezza and his partner push for a faster settlement.
"Speed is the name of the game," observed Ms. Spiwak. "To us, hours can mean the difference between collecting and not collecting, especially when you have a corporate debtor who's going down fast."
In addition to its technology, Spiwak & Iezza brings to the collection process an assortment of other professionals, like private investigators and registered process servers, who help them get at deadbeats. By tapping into a network of investigators, for example, the law firm often can learn of assets the borrower would rather not have found, like secret bank accounts. Once discovered, Ms. Spiwak explained, the necessary documentation is generated and these accounts can be frozen within a matter of hours.
Considering that many of the cases turned over to Spiwak & Iezza involve loans that either have been or are about to be written off by client banks, the firm's successes make for real balance sheet results. "We're talking direct bottom-line profits," said Mr. Martinez of Wells Fargo.
That's why many banks, said Ms. Spiwak, are willing to pay for the firm's services on a contingency basis. Although lawyers often ply their trade on a contingency basis, it's often difficult for an attorney to justify working for a cut of the take when he or she is in pursuit of a recalcitrant debtor. The risk of not collecting, Ms. Spiwak suggested, is simply too high for many lawyers to bear. On the other hand, bankers tend not to want to commit to the hourly fees lawyers typically charge when there is no guarantee that the debt in question will be satisfied.
According to Mr. Martinez, the normal contingency rate lawyers charge for debt collections ranges from 20% to 30%. However, he added, competition can often drive those rates as low as 17%.
"Our philosophy is collecting the money," said Ms. Spiwak.
Often, that means leveraging the law firm's technological know-how and court-room expertise, noted Mr. Iezza. But just as often, he said, it requires personal contact with the debtor. "Some times it just doesn't make sense to file a complaint," then wait around for the legal discovery process, Mr. Iezza said. "We believe before we do all that we should see if we can talk them into paying their debt."
"Actually," added Ms. Spiwak, "very few cases have to go all the way through trial."
It's really a matter of timing. The faster Spiwak & Iezza can work out a repayment scheme, the faster its bank client can collect the money it's owed, and the quicker the firm can turn its attention to the next case.
"We believe collections is a race," said Ms. Spiwak. And, clearly, it's a race she and Mr. Iezza are primed for winning.
Patricia A. Murphy is a regular contributor to Management Strategies.