As Rosanne Rosannadanna, Gilda Radner's noisy news reporter, used to say, "It's always something." As a credit manager, you open up the mail one day and there is a notice from a company of which you've never heard. The letter carries a business-like, almost modern, logo and is probably advertising. When you open it, however, the greeting carries your name and indicates that it is about one of the companies that owes you money but is paying slowly, or not at all.

This slick letter goes on to suggest that this new outfit, as a white knight, will solve all problems. Not only your problems, as the credit manager seeking to be paid, but those of your slow-paying customer as well. The letter makes the suggestion that out of the weak credit position of your debtor, this company will produce all of the money that is likely to be needed, and this will be done not only in your best interest but also in the best interest of your customer and society as well. There will be platitudes about a fair distribution, and a new deal worthy of Franklin Roosevelt himself. Also, this will be done without the burdensome effort of collection, preserve a customer relationship, and will carry no risk to anyone. Could it be? Effortless collection, your money from a slow pay for no effort?

But there's a kicker. If you read on, the letter will tell you that you have no choice. The letter tells you that this company now holds a security interest in your former customer. Accordingly, you have a choice of several payout options, none of which are to your liking. Plan A might have you being paid ten percent after a hiatus of several months. Plan B would have you being paid twenty-five percent but you would have to wait six months before your payments begin. Plan C has you getting forty percent, but you would have to wait eight months and accept the long payout terms given to you. And finally, according to this letter, if you do not accept any of these options, you will get paid nothing. Quite a strong arm job!

You have finally met the bullet-proofer. The agency claims that they can secure all of your former customers' assets and make them bullet-proof against you as well as litigation, collection, attorneys, and even judicial process.

What is a bullet-proofer? "Bullet-proofer" is a slang term for a debt reconciler, or any of the other terms these entities will call themselves. The business model is to take troubled companies, gain an advantageous position as to that company, and then utilize this to cram down debts based upon a voluntary plan, and profit through this. "Bullet-proofer" is only one of the many terms used and comes from the advertising used by one particular company. This group asserts that they can make any company "bullet-proof," which means immune to judicial process. If this sounds too remarkable to be true, then you are in very good company.

Let's start from the very beginning. What is a security interest? A security interest is the interest held by a bank through a mortgage or a deed of trust. It is also similar to the interest that a bank or finance company holds with a car loan. They hold some interest in a property, in addition to the actual owner of the property. However, in this case, the debt reconciliation agency has not actually provided any cash or assets as in the loan situation above.

The Uniform Commercial Code (the "UCC") is almost identical in each of the fifty states. Therefore, section 9-203(b) of the UCC in Virginia is the same as in all of the other states. This compels that a security interest must have three elements before it has any validity. There must be a filing, there must be a value given, and there must be possessory rights granted.

The easiest of these is the filing. In order to file a security interest, one must fill out a form, file it in the appropriate state office, and pay the fees. These fees can be anywhere from $20.00 and $50.00 in most states. This is not the hard part; often, this is the only part the bullet proofer has done.

But there are two other prongs that must be met. The secured party must have provided value and must have secured rights in the property itself. It is upon these two prongs that the bullet-proofer will likely fail.

I faced this same issue in a case that was tried fairly recently. We filed a garnishment and the bank reported that they were holding something over $10,000. I then received a letter from the bullet-proofer telling me that I would be paid (with my client's own money), a fraction of what we were owed in the case sometime in the future, and that we should be grateful for the receipt of this because the bullet-proofer held a security interest. Neither I nor my client was interested in giving up the money being held in the garnishment. Indeed, that money belonged to my client and did not belong to this stranger to the funds. We therefore compelled the bullet-proofer to try this matter, and prove its case.

During the course of this litigation, I was able to learn more about the bullet-proofing industry. In fact, this is a rapidly growing industry and an extremely profitable one. This is because of the business method utilized by the bullet-proofer. This bullet-proofer, along with others, has a simple method to this madness.

A bullet-proofer works on a negative contingency. Every credit manager is familiar with collections which work on a contingency basis. This is straightforward: for every dollar that is recovered, an attorney, or other party working on a contingency basis, would return a percentage to their client, the creditor, and retain a smaller percentage of the fees for making the collection. However, a negative contingency works a little differently. In this case, if a dollar was owed to the creditor from the debtor and the bullet-proofer was able to have his client, the debtor, pay only forty cents on the dollar, then sixty cents was saved. In this case, a contingent portion of that sixty cents is retained by the bullet-proofer. In short, for whatever is saved, the bullet-proofer is owed money. This is why the funds flow through the bullet-proofer, so they can get the first crack at the funds.

Left unexplained is how the debtor can survive when a large portion of its cash is going to the bullet-proofer and the bullet-proofer controls the bank account. In my example, there was never any opportunity to question the wisdom of this from the creditor's standpoint during this proceeding. Indeed, within the litigation, there was testimony that the acts of the bullet-proofer rendered its own client insolvent and likely unable to pay its own debts, at least not without the consent and permission of the bullet-proofer.

Nonetheless, in this case, the bullet-proofer was compelled to obtain local counsel to assert the security interest, in an attempt to take those funds being held in the garnishment for the bullet-proofer, as opposed to my client, the creditor, who had been compelled to sue for its own money.

During the course of this trial, it was necessary for the bullet-proofer to prove the validity of its security interest. As previously mentioned, this is done under section 9-203 of the Uniform Commercial Code.1 Under section b of this particular code section, the secured party must demonstrate three things:

1. That value has been given; and
2. That the debtor has rights in the collateral with the power to transfer rights in the collateral to a secured party. In other words, the debtor must own what it is conveying to the secured party; and
3. Proof of the filing of the security interest.

In that the debtor in this case was based in California, the demonstration of the security interest in California would have been shown by a simple filing. The bullet-proofer was unable to demonstrate this at trial.

More importantly, the question of value was never fully demonstrated. In short, the bullet-proofer gave nothing to the debtor except the burden of its own fees. Stated in other terms, the value that the bullet-proofer gave to the debtor was the security interest itself, which could be used to prevent legitimate creditors from getting paid. This is, at best, circular. Traditionally, there is a benefit and burden to both the secured party (typically a bank) and the party subject to the security. For example, a bank would lend money. The lending of money is a benefit to the party subject to the security agreement, and that same party carries the burden of repaying the loan itself. The arrangement of the bullet-proofer does not seem to satisfy this.

Further, the question of whether the creditor or bullet-proofer had rights in the garnished bank account was also left open during this litigation. After all was said and done, the bullet-proofer did not carry the day, and the creditor was able to retain the funds in the garnishment.

Also interesting in this litigation, principally because the assets were located in California, was the question of whether or not the transfer itself of any security interest from the debtor to the bullet-proofer was a violation of the California Uniform Fraudulent Transfer Act. This act, to be found in the California Civil Code Section 3439, indicates that a transfer made by a debtor is fraudulent if the transfer was made with the actual intent to hinder, delay, or defraud any creditor, or was without value. Additionally, under California Civil Code Section 3440, any transfer made which was not accompanied by immediate delivery of value is void against the transferor's creditor. In that the bullet-proofer was unable to prove its own security interest, these issues were not raised.

It should be noted that Virginia has a similar code section, although not as strong as the California Code sections discussed above. Virginia Code § 55-80 indicates that every "... conveyance, assignment, or transfer... given with the intent to delay, hinder, or defraud creditors, purchasers, or other persons, of or from what they are or may be lawfully entitled to, shall, as to such creditors, purchasers, or other persons... be void." Additionally, Virginia Code § 55-81 renders "void, as to creditors, a conveyance, assignment, or transfer which is not upon consideration deemed valuable at law... or... by an insolvent transferor or by a transferor who has thereby rendered it solvent... as to creditors whose debts shall have been contracted at the time it was made."

During the time I was litigating this case, I was unable to find a single reported case in which this issue had been brought all the way by the bullet-proofers. Understandably, none of them would like to have a judicial opinion condemning their business practices. Most of them back down, or will back down, when compelled to litigate. However, the pitch is still a powerful one.

Therefore, when the letter comes from the bullet-proofer, contact an attorney or someone who is knowledgeable in this area. It is an area of the law that will soon be widely litigated, but somebody has to jump into the deep end of the pool first. Nonetheless, don't believe everything that you read in that letter.