You get a hit on your website. It’s an out-of-state customer! You send your goods across state lines. The customer doesn’t pay. What do you do?
The Internet has transformed virtually every aspect of life, including commercial collections. More than ever, the debtor (or would-be defendant) is “foreign” (which, in the civil law context, means out-of-state individuals and entities).
The bad news is that ultimate collection of the debt may be more complicated with a foreign debtor. The good news is that multi-state collections give you something that is always a good thing: choice.
You can always sue a defendant in their home state—where an individual resides or where an entity (corporation, limited liability company, etc.) is formed. This is also, presumably, where the defendant has assets upon which you can collect if they refuse to pay until you obtain a judgment.
But you can also sue a company anywhere that it conducts business. State law varies on this point, but the limits of jurisdiction for purposes of the Constitution are exceedingly broad. Every state has adopted some form of the colorfully-titled “long-arm statute”, which governs when and for what you can sue non-citizens of that state. The test is, basically, whether a debtor “purposefully availed” themselves of the state (or “forum”) in which you would like to sue them. Remember when they clicked on your website? If that website clearly delineated your location, then they’ve done enough to allow you to sue them in your backyard.
If you have the leverage to compel a customer to sign (by hand or electronically) an agreement prior to delivery of the goods, you can also contractually bind them to your forum (or any forum with a reasonable connection to the transaction). This is a smart thing to do, as will be explained below. (Spoiler alert: make sure the agreement has an attorney fee provision.)
So how do you decide whether to pick your state or theirs? The answer is simple: what’s in it for you?
State laws vary considerably in terms of their statutory interest rate (the rate you get if your contract does not specify another one), the highest rate you can agree upon in a contract, and the collection tools available to judgment creditors. The terms of your judgment depend on where you obtain it.
The State of Washington has some of the most creditor-friendly laws in the country. According to a 2019 article in the Seattle Times, Washington protects creditors “unlike anywhere else in the country.” This includes a default interest rate of 12% per annum (tied for the highest in the nation), the right to collect attorney fees incurred in wage and bank garnishments, and other powerful collection procedures such as writs of execution (where you seize someone’s personal property). You can also commence a lawsuit by simply serving it on the defendant. Often, service of a lawsuit is all a debtor needs in order to be convinced that it’s time to stop ducking and start paying.
So if you’re a Washington creditor, your best bet is often to sue your out-of-state defendant in Washington and obtain your judgment there. You can then “domesticate” that judgment in any other state. Under the “Full Faith and Credit” Clause of the U.S. Constitution, that state must honor the terms of that judgment (most fundamentally, the attorney fees awarded and the pre-judgment and post-judgment interest rate). So if you sued a Pennsylvania defendant in Pennsylvania, your judgment might carry 6% interest—rates vary greatly by state. But your domesticated Washington judgment will carry a 12% interest rate; or higher if one is provided in your contract. There are also some collection tools that you can commence from Washington that have interstate effect; most basically, bank garnishments if the defendant uses a bank that has branches in Washington.
And if you’re owed money by a Washington defendant, your best bet is likely to hire Washington counsel and sue in the Evergreen State. You obtain the benefit of Washington laws, and you can immediately begin collecting on your judgment once you obtain it. It can be scary to hire a lawyer half a country away; but so is hiring a lawyer anywhere. Ideally, you rely on word of mouth. Failing that, you do a web search and hope to find someone who knows what they’re doing.
Make your customers sign the right contract. Before you send your goods across state lines (or across the street), make sure your customers agree to the forum you want, to the interest rate you want, and most importantly: to pay attorney fees and costs if you have to pursue collection. (Not just filing a lawsuit; any attorney fees or costs incurred by hiring a lawyer to engage the debtor regarding the debt.)
Pursue collection as soon as possible. Debtors can smell the difference between creditors who will stop at nothing to get paid and those who consider write-offs “the cost of doing business”. Every day you do not go after your money is another day they assume that you don’t need it.
Hire a lawyer who will engage the debtor before filing a lawsuit. Competent collection counsel can often secure payment without even having to file a lawsuit. When recalcitrant debtors see that you’ve hired an attorney who knows how to collect, most pay if they have the money. Especially if faced with creditor-friendly laws like those in the State of Washington.
Most importantly: don’t give up. However you go after the money you earned, go after it. Don’t get discouraged just because someone has not paid. Instead of viewing write-offs as a cost of doing business, view hiring counsel that way. A write-off will never yield profit, but the right attorney-client relationship can pay for itself many times over.