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@example.com.