In these difficult economic times, more
than ever companies seem to be defaulting on their financial responsibilities.
As a creditor, prejudgment remedies are
options you have for maximizing the chances
of recouping at least some of the money that
is owed to you. These remedies are often
used in instances where there is a danger that
the debtor will not have the money or property by the time a final judgment is rendered.
Because they indicate to the debtor that you
are serious about collecting what is owed, in
many instances, the dispute may be resolved
quickly.
“Your primary benefits are pressure and
priority,” says Leonard M. Shulman, managing partner, Shulman Hodges & Bastian LLP.
“If you are a creditor and are concerned
about being diluted by other claims, this is a
way to put yourself ahead of others in the
pecking order. Certain prejudgment remedies can freeze the debtor’s assets until
there’s a judgment.”
Smart Business talked to Shulman about
the procedures and rationale involved in pursuing prejudgment remedies.
What is the purpose of prejudgment remedies?
First, they put pressure on the account
debtor to pay what is owed to the creditor.
Second, if the pressure is not motivating
enough, then the remedy provides the client
the ability to procure a lien on assets of the
account debtor so that when the client ultimately receives a judgment, it will stand
ahead in priority of other creditors.
What are the most commonly used prejudgment remedies?
The most commonly used prejudgment
remedy is an attachment lien, whereby a lien
is sought that attaches to both known personal and real property of the account
debtor. An attachment lien is only as good as
the knowledge you have as to where the
assets exist. If you are a creditor, you should
know where the debtor banks and you
should have an idea of where other assets —
like real estate and other tangible property —
are located.
A prejudgment freeze or injunction is an
option that prevents the debtor from transferring or otherwise converting assets. It is
commonly used when the debtor has intentionally been involved in some wrongdoing.
The third possible remedy is a receiver,
who handles disbursement of the debtor’s
accounts receivable and may administer
other assets for the benefit of the creditor.
The receiver can also control the debtor’s
real property to maintain and preserve its
value and to collect rents.
All three tactics are very invasive because
they impact the debtor’s cash flow and ability to transfer assets.
Is there a point to threatening a prejudgment
remedy before actually using one?
You might want to threaten — but on the
other hand you might not, because you may
not want to tip off the account debtor. When
a debtor becomes aware of prejudgment
remedy intentions, it could move its assets or
find a different way to manage cash.
What are the risks of using a prejudgment
remedy?
The main risk is that your action may put
the debtor out of business and you will never
get all the money owed to you. But if the
company is that fragile, it is unlikely that you
will ever get paid anyway. Some of these
remedies can be obtained without giving any
notice whatsoever to the debtor. As a result,
there are safeguards built into the process
that allow a debtor to recover damages if the
creditor does not proceed with care. So you
have to have your ducks in order from a legal
prospective to get what you’re asking for.
Of course, there are legal fees. Seeking a
prejudgment remedy is not incredibly expensive, but the expense is not insignificant.
What are the procedural hurdles?
Prejudgment remedies work as well as the
creditor’s knowledge of the account debtor’s
assets. The better the knowledge, the better
they work.
Prejudgment remedies are also very fast to
implement. If you can demonstrate that
there’s some nefarious conduct by the debtor
(for example, secreting assets, moving
accounts or converting collateral of creditors), then you can seek the remedy through
the courts on extremely short notice — 24 to
48 hours. If you cannot show any questionable conduct, two to three weeks’ notice of
the proposed action will be required. It really
depends on the local rules, and it depends on
the facts and exigencies of the case.
What is the key to procuring a prejudgment
remedy?
The key is demonstrating to the court that
you are likely to succeed on the merits of
your collection action. To get a prejudgment
remedy, you have to file a lawsuit to commence the action. The lawsuit must be based
upon a contractual relationship with the
debtor. Then you are asking through a
motion to the court for the prejudgment remedy so that you can perfect an interest in
some personal or real property prior to getting the judgment.
A prejudgment remedy is a provisional
remedy. Immediately after final judgment,
you then ask the court, again through a
motion, to release the assets that you
attached to satisfy the judgment.
LEONARD M. SHULMAN is the managing partner with Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or
[email protected].
