Litigation Round Two: Collecting on Your Judgment

Author: hedwards Date: 06/19/2014

Categories: Tax Services

Congratulations on winning your lawsuit.  You now have an official piece of paper from a court that says you are owed a lot of money.  But your frustration may just be beginning because judgments do not enforce themselves. The same company you had to drag to the courthouse will probably drag its heels in paying.  Those who owe you money often owe other people money, and they tend to be less than proactive in living up to their obligations.

Yet, after the trouble of a lawsuit, you owe it to yourself to make a plan for getting repaid.  The first step is to assess whether it’s even worth your time to attempt to collect.  Then, if you choose to pursue the process, you need to be realistic about what you can get.  There are legitimate reasons why some debtors might not be able to pay up. Many are companies that have gone out of business or have other financial problems.  Others are individuals with few assets.  A court may have awarded you treble damages, but that doesn’t mean that money is waiting for you in a bank vault.  Likewise, the ability of companies to legally sell their assets, or simply dissolve themselves, means their principals can try to move forward as if the lawsuit never happened.

To improve your chances of success, here are some tactics we can implement to enforce your judgment, or at least pressure the debtor into offering some sort of payments:

Make your dedication clear. A strongly worded letter is often enough to open a wallet. After going through and losing a lawsuit, many intelligent people will realize that the time has come to give in. But unless you make clear that you plan on tracking down every penny you are owed, some debtors will sit back and try to forget they owe you anything. When faced with the options of paying you or paying their lawyer to fight you off and potentially failing, they might realize the best course is to pay and be done with it.

Record the judgment. When a judgment is recorded, the county where the case took place will take notice of that judgment and place a lien on any real estate owned by the judgment debtor. The effect of this is that if they want, or need, to sell that property, the proceeds will likely be directed to you in satisfaction of your judgment. But many companies have property in other places, so you may need to record your judgment in those other jurisdictions. If you don’t know what or where their property is located, see the next item, post-judgment discovery, below.

Post-judgment discovery. When you win a lawsuit, the courts allow you to inquire about what assets the debtor has and where those assets are located. After a judgment, you can even depose the debtor in some circumstances. The responses to these requests for information, which can be compelled by a court if need be, will show you exactly which assets you can pursue. Potential targets of this discovery are tools, vehicles, ownership interests in other companies, accounts receivable, lines of credit, bank accounts, etc. These discovery requests are very useful whether you know of assets or not, or if you simply want to continue making clear that you will locate and come after the debtor’s assets. Of course, you may also learn that the debtor has nothing left and is probably not worth your time or money to pursue.

Judgment lien on personal property. Once you’ve identified some personal property (objects as opposed to land), you can obtain liens on that property to secure your interest. If the property is sold then the proceeds will go to you in the amount you are owed. You might need to place liens on several pieces of property, and unfortunately many types of property might depreciate rapidly. But this strategy will make clear that you mean business and that your debtor is better off paying you than having you looking through its affairs and tying up its assets.

Garnishment. If you identify intangible assets, including income streams, you can garnish those sources of money. A garnishment is sent to a person or company who owes money to your debtor. It directs them to pay you and not the debtor until you are paid in full. Companies who receive this garnishment are far more likely to pay than your debtor is, since they are (hopefully) not already involved in a lawsuit and will do what it takes to stay that way.

Substitution. After the case is complete, courts may also allow you to replace the company that you sued with its “successor in interest,” or the entity that now owns its assets and obligations. A favorite move of less-than-scrupulous businesses is to create many successive entities in hopes of evading payment. But substitution will let you pin your judgment debt on them through these transformations.

Pierce the veil. In some cases, your debtor may be a company that an individual was using as a personal checking account. If so, the court might allow you to put that person on the hook for the company’s liability, even if the company doesn’t have any assets. This “veil-piercing” can yield good results, but you will have to make a showing of inequitable conduct or fraud on the part of the individual, which can be quite challenging in some cases.

When we win a judgment in favor of a client, we follow up by realistically evaluating the chances of collecting and consider the best of these tactics to deploy. Collection is always the goal. However, we remember that making a debtor’s life miserable will not necessarily make your life better. We will advise you about how to choose your battles wisely and work to carefully manage the time and resources that are invested in the process.