Importance of Collection Strategy: Ensuring Judgement Collection

By: Darrell P. White and Maxx E. Sharp

Knowing the available judgment collection methods is important when setting realistic expectations for a case. This is equally helpful for attorneys who regularly take contingency fee cases or operate with flexible billing arrangements. The collectability of a potential judgment determines whether a case is worth filing and the amount of resources that should be allocated to the matter. Understanding the available collection methods available to the plaintiff (and potential creditor) is pertinent to properly framing a case for collection.

Pre-Judgment Asset Investigation

When it comes to collection, information about the debtor’s assets is pertinent to deciding whether obtaining a judgment is worth the time and money. Thus, it is important to have a discussion about the defendant’s assets with the plaintiff before filing a case. Additionally, public information such as bankruptcy proceedings, civil litigation, judgments, and liens can be obtained before a case is filed. This information may reveal that a defendant has outstanding liabilities exceeding any collectable assets. These searches can also be conducted on a defendant’s companies, which weighs the general character of the defendant as it relates to debts. If a potential defendant is already dealing with multiple creditors, then joining that list may be an exercise in futility. However, if the Plaintiff is informed and still wants to proceed, a prompt money-upfront settlement with the defendant may be a good way to cut the line of creditors. Additionally, once a case is commenced, discovery of relevant information will often lead to disclosure of information that provides the plaintiff with a better understanding of the defendant’s assets. Note that any applicable discovery related protective orders could interfere with using said information in collection efforts, depending on the language of the order. Thus, it is pertinent to evaluate protective order language carefully under the perspective of a potential creditor.

Preliminary Relief to Protect Collectable Assets

When dealing with a defendant who is at risk of liquidating assets, the plaintiff may be able to obtain preliminary relief to ensure collectible assets are available by the time a judgment is obtained. To obtain a temporary restraining order or preliminary injunction, the moving party must make a showing of irreparable harm if the requested relief is not granted. (Cal. Civ. Proc. Code § 527.) Insolvency or the inability to otherwise pay money damages is a classic type of irreparable harm supporting the issuance of an injunction as a provisional remedy. (See California Retail Portfolio Fund GMBH & Co. KG v. Hopkins Real Estate Group (2011) 193 Cal.App.4th 849; see also Earth Island Institute v. U.S. Forest Service, (9th. Cir. 2003) 351 F.3d 1291 (holding degree of irreparable harm required for preliminary injunction increases as probability of success on merits decreases, and vice versa.)) Additionally, in suit for a preliminary injunction ancillary to an accounting and dissolution of a limited partnership, preliminary injunction was properly issued as necessary to prevent “irreparable injury” to the partnership assets where it was necessary to assure that the partnership assets would remain intact pending an accounting and a final hearing on the merits. (See Wind v. Herbert (1960) 186 Cal.App.2d 276.) Further, receivership of a company can be granted “[w]here a corporation is insolvent, or in imminent danger of insolvency, or has forfeited its corporate rights… [and] In all other cases where necessary to preserve the property or rights of any party. (Cal. Civ. Proc. Code § 564(b). The plaintiff should be sure to assert her rights to preserve collectable assets by requesting preliminary relief when necessary. Even when not enough information is known to request a remedy like an account freeze, a precautionary order preventing the liquidation of funds can set up for contempt sanctions if this order is violated.

Judgment Debtor’s Exam

Once a judgment is obtained, a judgment debtor’s exam is a useful tool to apply pressure on a debtor and to obtain complete information about a debtor’s assets. A debtor’s exam requires a debtor to appear at Court and answer questions under the penalty of perjury about their finances and ability to pay the judgment owed. If a debtor does not appear at a debtor’s exam at the time, date, and location ordered by the Court, the debtor will be subject to a bench warrant for arrest for contempt of Court. Indeed, California’s Debtor’s Exam form (EJ-125) puts the debtor on notice of this, stating: “if you fail to appear at the time and place specified in this order, you may be subject to arrest and punishment for contempt of court, and the court may make an order requiring you to pay the reasonable attorney fees incurred by the judgment creditor in this proceeding.” This threat of a potential bench warrant assists with inducing compliance. Once the debtor appears, the presiding judge will explain the seriousness of the exam and the debtor will be sworn in under oath. The presiding judge may also warn the debtor that the creditor’s attorney has a right to return to the courtroom and compel the disclosure of certain information if the debtor refuses to answer the creditor’s questions. After that, the attorney and the debtor will leave the court room with a court reporter to begin questioning. Note that this proceeding can be recorded, so the creditor should bring a court reporter.

The scope of a debtor’s exam is extended to any information that will aid in the enforcement of the judgment or that relates to the debtor’s assets or liabilities. Note that it may be helpful to review the applicable collection forms to determine which information is necessary. For instance, the bank levy collection form requires the bank name and the account number of the account sought to be levied. Additionally, the bank levy form requests the social security number of the debtor, thus making this information relevant to the collection efforts. Further, the debtor’s exam may extend to review of any documents furnished by the debtor and even the review of the wallet of the debtor. The debit or credit cards in a debtor’s wallet could also be used to cross-examine any previous answers relating to the debtor’s bank accounts.

Post-Judgment Asset Investigation

In some situations, like a default judgment, a creditor might not be able to find the debtor in order to serve him with notice to appear at a judgment debtor’s exam. In this situation, an asset search conducted by a private investigator may be the best available option to obtain information concerning a debtor’s assets. It is important to ensure that the private investigator’s findings are made in compliance with the law, such as the Gramm–Leach– Bliley Act (GLBA) Section 313.15 (a)(2)(ii). Additionally, it is important to ensure that the private investigator obtains this information in a Court admissible manner. Many private investigators are commonly used for this reason and will have no issue with making these representations to attorneys to provide peace of mind that the information can be used for collection purposes.

Bank Levy

The Plaintiff may be surprised to learn that, after obtaining a judgment, the Plaintiff is permitted to collect the judgment directly from the debtor’s bank account(s). Learning this information can potentially alleviate the Plaintiff’s concerns of inability to collect and help the Plaintiff understand the power of a legal judgment.

A bank levy is a collection method conducted by the Sheriff’s Department, wherein the Sheriff will serve legal notice on a bank and collect funds due under a judgment directly from the debtor’s bank account. When attempting to obtain a bank levy, it is important to note that a Writ of Execution must be signed by the Court permitting the Sheriff to begin the transfer of property under the judgment.

After the writ is obtained, the creditor must send the Sheriff instructions for each bank account sought be levied. Note that the applicable Sheriff’s Department is based on the location of the bank designated in the Sheriff’s instructions. For instance, if a bank in Orange County is served with the levy, then the Orange County Sheriff’s Department must receive the Sheriff’s instructions. These instructions may vary between jurisdictions and are generally accessible from the Sheriff’s website. Also, while some banks accept service at any branch, other banks have set locations for service for the entire State of California. The California Department of Financial Protection and Innovation maintains an easily accessible list of designated locations for service of a legal process at: https://dfpi.ca.gov/central-locations-for-service-of-legalprocess/. If a bank does not appear on the State of California website, it can likely be served at any branch. (Cal. Civ. Proc. Code § 684.115(b) [“Should a financial institution required to designate a central location fail to do so, each branch of that institution located in this state shall be deemed to be a central location at which service of legal process may be made, and all of the institution’s branches or offices located within this state shall be deemed to be a branch or office covered by central process.”].)

When serving the bank levy, the Sheriff will also serve the debtor with notice of levy to inform the debtor that the levy is occurring. Upon receiving this notice the debtor has the right to object to the levy. The debtor can object and argue that funds should be exempted from collection “to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.” (Cal. Civ. Proc. Code § 704.225.) Also, the debtor is automatically protected from a levy to the extent that it would reduce her account below $1,788. (Cal. Civ. Proc. Code § 704.220.)

Vehicle Levy

Similar to a bank levy, a creditor may request the Sheriff to levy and subsequently auction the debtor’s vehicle to satisfy a judgment. This collection device goes beyond the monetary realm and will apply significant pressure on the debtor. To serve a vehicle levy, there is no requirement to exhaust all possible monetary collection methods, thus this method could potentially be used to induce a payment of the full judgment amount if the debtor has a compelling reason to remain in possession of the applicable vehicle (i.e. luxury vehicle or classic car). Note that if the property to be seized is in a private place, such as a garage or fenced lot, the Sheriff cannot seize it without a private place court order issued pursuant to Code of Civil Procedure § 699.030 unless the debtor voluntarily surrenders it. Thus, when conducting a debtor’s exam be sure to request the debtor to identify locations where his vehicles are stored to determine whether a private place order is necessary. Also, a vehicle levy may require the creditor to pay the Sheriff’s office to store the vehicle.

Property Lien

A property lien provides the creditor with the opportunity to secure her judgment using the debtor’s real property. To secure a lien against real property, the creditor must obtain a signed Abstract of Judgment from the Court. Then, the creditor must record this Abstract of Judgment with the recorder’s office in the county where the property is located. A lien will remain on the property for 10 years, but can be re-extended if necessary. The lien will permit the creditor to collect on his judgment when the when the debtor refinances or sells the property. If the debtor’s property is foreclosed upon, keep in mind that the debtor’s mortgage company(ies) may hold first priority in terms of payment on said lien. Note that mortgage and property tax liens will almost always take priority over judgment liens, so this collection method may not lead to any recovery on an underwater property.

Wage Garnishment

Wage garnishment permits a creditor of a consumer debt to take a percentage of a debtor’s wages to satisfy a judgment. This order will go directly to the debtor’s employer, thus avoiding having to deal directly with a debtor. The percentage of wages that a creditor can garnish depends on the type of debt as well as federal and state garnishment limits. Title III of the Consumer Credit Protection Act (CCPA) prohibits an employer from discharging an employee whose earnings have been subject to a garnishment for one debt. But Title III does not protect an employee from discharge if the employee's earnings have been subject to garnishment for a second or subsequent debt. (See 15 USC §1671 et seq.; 29 CFR Part 870.) Thus, creditor’s should be cognizant of whether there an existent creditor already has a garnishment in place.

Collection from International Defendants

For Defendants located outside of the United States or who maintain bank accounts in other countries, it is pertinent to gather information concerning the location of their assets. When it comes to collection, the location of the assets determines the applicable entity involved with collection. While the Hague Convention permits service of complaints in many jurisdictions outside of the United States, there is no guarantee of enforcing a United States judgment in jurisdictions outside of the country. Still, if the debtor owns tangible assets in the United States, such as real property, this can provide a method for judgment enforcement via property lien, even if a defendant is not in the United States. Relating back to preliminary relief, when dealing with a defendant with significant assets outside of the United States, ensure that the plaintiff asserts her right to obtain preliminary relief preventing the irreparable harm that would occur due to conduct such as transferring assets out of the United States (i.e. moving money offshore).

Importance of Assessment of Collection

There are many collection devices available, thus it is important to evaluate a wide variety of potential assets and revenue sources for any defendant or potential debtor. In doing so, attorneys can set realistic expectations for collection for their clients. This is equally helpful for attorneys who regularly take contingency fee cases or operate with flexible billing arrangements. If you are unsure whether a case has collection potential, you can contact Kimura London & White LLP.

Darrell P. White, co-founding partner at Kimura London & White LLP, specializes in business trials and commercial litigation. (949) 474-0940 or [email protected]

Maxx E. Sharp, litigation associate at Kimura London & White LLP, handles commercial litigation matters. (949) 474-0940 or [email protected]