This article is Part Five in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default; Default by a Customer; Knowledge is Power and What to Consider When Non-Payment Leads to Litigation. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.
You have obtained money judgment against your debtor, thus turning you into a "judgment creditor" and them into a "judgment debtor", and now it's time to convert that important piece of paper called a "certificate of judgment" into cash or something that can be reduced to cash. First, determine what assets are available to pay your judgment, then determine how to access them.
Analyze the Debtor's Assets
There are a number of sources of information about your judgment debtor's assets and financial situation, including the following:
• Examine financial statements that the judgment debtor provided during the course of your business relationship to identify available assets.
• If you subscribe to Dun and Bradstreet, obtain a Dun and Bradstreet report.
• Determine whether there are any legal actions pending against the judgment debtor, which may mean you will be in a race to recover assets, or whether the judgment debtor is suing someone, which may provide you a source of recovery. Most court clerks' records are available on line and are searchable by name. If you are concerned that your judgment debtor has filed for bankruptcy protection, contact the Bankruptcy Court clerk for the district where your business judgment debtor was incorporated or formed or has its principal place of business.
• If the debtor is a corporation it may be possible to pierce the corporate veil and recover against assets of stockholders.
• Determine if there has been a preferential transfer or a fraudulent transfer in violation of the governing state's law.
• Once you are a judgment creditor, you may also ask the court that issued your judgment to schedule a judgment debtor examination of the judgment debtor or a third party. This is an examination under oath with a court reporter at which a judgment creditor may ask the judgment creditor questions about their assets, liabilities, cash flow and expenses.
• Keep your ear to the ground. Competitors, clients, customers, neighboring businesses and co-defendants of the judgment debtor may be sources of information regarding who the debtor does business with, what accounts receivable are available or whether the judgment debtor is still in business or has formed a new business.
• Locate bank accounts. First, if you have a financial statement, it should provide bank account information. You should also keep copies of the checks your judgment debtor used to pay you during the course of the relationship in the event you later need to garnish that account. There are also companies that specialize in locating debtor bank account information for a fee. Check applicable laws before engaging such a company. If you know where your judgment debtor banks and have an account number, call the bank, inquire about the balance of account, then proceed with non-wage garnishment as discussed below.
• If your judgment debtor has assets that are in your state, but in a county other than the county that issued your judgment, you can file your judgment in that other county for a nominal fee. This will facilitate your recovery of assets in that other county.
• If your judgment debtor has assets in a state other the state where you obtained judgment, retain an attorney in that state to domesticate your judgment under the Uniform Enforcement of Foreign Judgments Act, which will permit you to pursue the judgment debtor's out-of-state assets.
Foreclose on Property
A judgment creditor may foreclose on real property or on personal property. Such actions are conducted through the appropriate court and county sheriff, and a judgment creditor will first have to verify whether other creditors, whether by virtue of secured loans or judgments, will have a prior claim to the property and whether after such prior claim there will be any value left for the judgment creditor.
Obtain the Appointment of a Receiver
Although you usually see the appointment of a receiver pursuant to a mortgage of rental property, a receiver can be very valuable if the debtor engages in the business of selling products to companies on account and refuses to turn over the proceeds of the collection of its receivables to a creditor holding a security interest therein or to a judgment creditor. Most states permit the appointment of a receiver in a number of circumstances, including the following:
• in an action by a vendor to vacate a fraudulent purchase of property;
• In an action by a creditor to subject property or a fund to its claim;
• In an action by a party whose right to or interest in the property or fund, or the proceeds of the fund, is probable, and when it is shown that the property or fund is in danger of being lost, removed, or materially injured;
• In an action by the holder of a mortgage, for the foreclosure of the mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, or materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt;
• After judgment, to carry the judgment into effect;
• A corporation has been dissolved, is insolvent, in imminent danger of insolvency, or has forfeited its corporate rights; or
• After judgment, to dispose of property, to preserve property pending appeal, or when an execution is returned unsatisfied and the debtor refuses to apply property to satisfy the judgment.
Although the powers of a receiver will vary by the state, a receiver can generally bring and defend actions, take and keep possession of property, receive rents, collect and compromise demands, make transfers, and do such acts respecting the property as the court authorizes.
Garnishment – A garnishment is a legal proceeding in which a creditor attempts to obtain payment of a debt out of property of the debtor in the hands of a third person. The most common example is a bank account, which is why creditors are advised to keep copies of the checks that your debtor used to pay you during the course of the relationship.
Injunctive Relief - There are certain situations in which injunctive relief is available from a court to assist a creditor in a collection action. Under Ohio Civil Rule 65(A) and analogous civil rules in other states, a temporary restraining order may be granted without written or oral notice to the judgment debtor or its attorney only if it clearly appears that the party requesting such relief will suffer immediate and irreparable injury, loss or damage, which is typically defined as an injury which is not capable of being remedied by money damages.
There are a number of avenues a judgment creditor may take to collect a judgment, but the best way to be prepared to collect a judgment is to compile and retain information about your customer's financial situation and its banking relationships during the course of your dealings with them. In the unfortunate event you go from being a vendor or a service provider to being a judgment creditor, you will be armed with information about what assets are available to satisfy your judgment, and will then be able to determine how to collect them in the most cost-efficient manner possible.