May 2011: Legal Issues

Words: Dan Kamys Legal Issues Not Quite There Yet: Collecting Your Judgment

Litigation often is an arduous journey for anyone involved. It generally involves at least several months of court proceedings and discovery. Many plaintiffs going through this process may find themselves looking forward to the moment when a jury awards damages, a judge bangs the gavel, and the case is over. Unfortunately, many plaintiffs who get to this point realize that their cases are still far from over.

The fact that a court has awarded a judgment to a plaintiff does not automatically mean that the plaintiff can expect a check to arrive in the mail. Many individuals or companies that have suffered court judgments against them (known as “judgment debtors”) do not have the immediate means to pay those judgments. Unless a judgment debtor has insurance coverage that would pay in the event of a judgment, the plaintiff (also known as a “judgment creditor”) generally can expect to resort to collection proceedings in order to compel payment.

A judgment can be thought of as a court-imposed debt: The judgment debtor may owe the money to the judgment creditor, but will not be compelled to pay unless the judgment is enforced. A judgment debtor may not have available cash to pay a judgment but, in many cases, has other assets that may be used to pay the judgment. In order to bring these assets into play, a judgment creditor has a surprising number of available tools. To name a few, these include perfecting judgment liens, garnishments, executing against personal property, receivership and involuntary bankruptcy.

A judgment lien is, in many ways, the simplest collection procedure and can be effective against judgment debtors that own land. Where a judgment is appropriately docketed in a jurisdiction, generally, the county court where a judgment debtor owns land, a judgment lien acts as an extra mortgage. If a judgment debtor sells a property that is subject to a judgment lien, the judgment debtor must pay the judgment lien with the surplus from the sale. A judgment creditor can even compel the sale of the property to satisfy the judgment lien.

That said, a judgment lien on a property does not guaranty collection: If the property was subject to pre-existing mortgages or other debts before the judgment lien was perfected, the sale price will be used to satisfy these debts first. If these pre-existing mortgages equal or exceed the sale price, no funds will be available to pay the judgment lien. On the other hand, a judgment lien generally can be effective for many years and subject to renewal. If the property accumulates a large amount of equity and is sold years later, those proceeds will be applied to the outstanding judgment. In this respect, a judgment lien can act effectively as a “dormant lottery ticket” that will be paid when the property is sold.

Garnishments also are effective tools. A garnishment is a proceeding by which the court compels the judgment debtor’s employer or bank to pay to the judgment creditor funds otherwise owed to the judgment debtor. These funds can include portions of the judgment debtor’s monthly salary or bank account balances. A judgment debtor typically is allowed to claim exemptions that may blunt a garnishment’s harsher effects.

A judgment creditor also may execute against a judgment debtor’s personal property. Such property can include a debtor’s personal possessions, or other tangible property, such as a company’s machinery or inventory. Executions against personal property typically involve action by the sheriff to sell the property in order to satisfy the judgment. Once the property has been sold, the proceeds are applied toward satisfaction of the judgment.

More extreme measures may involve actions such as receivership and involuntary bankruptcy. Receivership is a process by which a court will appoint an individual to manage the affairs of a company that has become insolvent, generally to oversee the orderly liquidation of its assets in order to satisfy the company’s creditors.?? While this process is not often used, it can be an effective way to ensure that multiple judgment creditors are compensated fairly. Involuntary bankruptcy is a similar measure by which a judgment creditor will file a petition with the bankruptcy court to initiate bankruptcy proceedings against an insolvent corporate debtor. In bankruptcy, the corporate assets sometimes are sold, and the business terminated. Sometimes, however, the corporation may continue through a workout to operate in order to pay off the maximum amount of its debts and then continue operations.

Regardless of the amount of the judgment involved, a judgment creditor who is having difficulty collecting a judgment will want to know what assets a judgment debtor actually has. To find this out, the judgment creditor may compel the debtor to appear in court to answer debtor’s interrogatories, by which the creditor asks a series of questions about the debtor’s assets. A debtor must provide this information under oath, and may subject to contempt of court for failing to appear and answer these questions.

A judgment is sometimes viewed by litigations as the end of a long and difficult road. Unfortunately, and for many, the judgment can be just the start of another journey, if the judgment remains unsatisfied. Familiarity and understanding of collection processes and risks associated with collecting on a judgment can permit claimants to properly weigh the risks, benefits and costs of litigation.

William Groh is an associate with Bean, Kinney & Korman and can be reached at Return to Table of Contents
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