CHAPTER 2 à State Law Debt Collection
A. Collection Remedies
1. Introduction to Judgment Collection
→ Creditor pursuing collection through court system; first step is to establish debt owed, could involved complex trial, or more abbreviated UCC Article 3 suit for negotiable instrument or default judgment might have been entered
a. Execution (33)
→ Judgment itself gives nothing, gives them no interest and no priority in any of the debtor’s property or income, The judgment creditor remains an unsecured general creditor until execution is obtained on the judgment, only improvement is that the claim has become liquidated and there is no dispute as to its validity
→ Collection process begins with a writ, often called writ fi fa, or writ of attachment, writ orders sheriff or marshal to look for non exempt property of a judgment debtor, to seize it, sell it and pay proceeds the judgment creditor until paid in full, Writ is issued by court clerk and is delivered to sheriff for EXECUTION
→ Usually climbs in pick up and looks, lawyer might go with to show, if too big it is tagged with a notice, since real property can never be loaded into the pick up it is always seized by a posting notice of seizure or sale or similar method, this entire process of seizure is called the LEVY, and what the sheriff does to LEVY UPON the property, Whole process from writ issuance to seizure is often called an EXECUTION
→ Once sheriff has levied upon piece of debtor’s property, the judgment creditor becomes JUDICIAL LIEN CREDITOR as to that property, or LIEN CREDITOR, sheriff sells property and uses proceeds of sale to pay levying judgment creditor in full, Remaining à given back to judgment debtor, unless subsequent judgment by creditor is levied while stored, Entry made in books showing either full or partial satisfaction, if not enough sheriff continues looking for property
b. Turnover Orders (34)
→ Today, judgment debtors have property scattered all over the world, might even be in intangibles, etc.
→ Texas Statute Example
¶ The judgment debtor may be ordered to turn over property he possesses . . .
¶ Risk of imprisonment for contempt if don’t comply
→ Considerable advantages
¶ All have to do is get necessary info about asset, Typically allows for examination of debtor under oath, so assets found, This remedy reintroduces the threat of incarceration into the debtor creditor game, on narrow basis
☺ OJ Case Study
1. had to hand over his SUV and a piano to help pay for the 33. million dollar judgment to the Goldman and Browns
c. Other Writs (36)
→ Variety of others can be used, many jurisdictions have “WRIT OF SEQUESTRATION” which may be used in defined circumstances to seize and hold specific property of the debtor, often property in which the creditor has a security interest
d. Judgment Liens by Recordation (36)
→ Nearly every state special recordation procedures make it possible to obtain a lien on debtor’s property quickly and simply, don’t have to do full blown execution process
→ Usually involves real estate but in some jurisdictions can be on personal property as well, judgment lien against real property obtained by a recording instrument is at the country land records where deeds of sale and mortgage are filed, Thus hard to find buyers when selling if title is clouded and can’t hide this asset or move it, When they can’t sell often will buck up and pay the $ voluntarily
e. Dormancy and Limitations (36)
→ Judgment that has not been subject of enforcement efforts for a long period of time faces disability in two ways, DORMANCY and LIMITATIONS
→ DORMANCY à judgment still exists but must be revived to be enforceable, LIMITATIONS à if the statute of limitations period has expired its terminal unless new suit filed
f. Debt Collection by the Federal Government (37)
→ For 200 years, federal government used these procedures, Wake of great saving and loan debacle we get “Federal Debt Collection Procedures Act”, Real point is uniformity, only applies to judgments in favor of the federal government
g. Family Debts (37)
→ High divorce rates and the low marriage rate have left an increasing number of middle class Americans struggling financially, bankrupt men and women are far more likely to be divorced and then less likely to be remarried
→ Single mothers file for bankruptcy more than any other
→ Child support and alimony are among the most difficult debts to collect
→ Imprisonment has been retained as an enforcement tool for family support payments despite the fact that it has been abolished almost everywhere in the US for all other sorts of debt
→ States often exempt some or all wages from garnishment but provide for child support
h. Voluntary Liens (38)
→ Obtaining mortgages and security interests in the debtor’s property, many creditors make themselves secured creditors by obtaining voluntary liens from their debtors, if they can agree then the creditor has a legally enforceable lien without the assistance of court action, The property on which the debtor grants is called collateral, the home is collateral for a mortgage and the car for a car loan
→ Those who take security interests are called MORTGAGEES in case of real property lending and secured parties and secured creditors in the case of all other property
→ Distinguished from those without consensual liens called GENERAL CREDITORS or UNSECURED CREDITORS
→ Must record to make sure other third parties are not affected, through RECORDATION
→ Some types of property notice is given when possession is taken
→ A consensual lien assures the creditor that if the debt is not paid, the lien holder may force the sale of collateral and use the proceeds to repay its outstanding loan, Consensual liens may be PURCHASE MONEY LIENS, those liens used to furnish the credit necessary for the purchase of collateral, called PMSIs, debtors may borrow money and give a lien on property they already own to secure their promises to pay, this is a non PMSI loan
→ In business transactions debtors frequently will gives a security interest in property they plan to acquire in the future
¶ “all my equipment, current and after acquired” à automatically attaches
→ sometimes more than one creditor may take a consensual lien on property
→ creditor with consensual lien often can seize collateral more quickly and cheaply than a judgment creditor that has to go through suit and execution
¶ seizure
☺ called FORECLOSURE with real estate
☺ called REPOSSESSION in personal property
→ in some states a mortgagee must go to court for a decree of foreclosure, finding by court that mortgage is in default and sale of property in order
→ in all states detailed regulations govern notice of foreclosure that mortgagee must give, details conduct of sale, tile during which debtor may reclaim, etc.
→ Creditor with Security Interest has two ways
¶ The Article 9 creditor can seize the property without help from other SELF HELP REPOSSESSION
☺ No fist fight, breach of peace, etc.
¶ or offer to keep the property in satisfaction of the debt without sale RETAIN IN SATISFACTION
¶ Additionally, the secured creditor has all the remedies of any other creditor, can sue on behalf of debt and get judgment and ask sheriff to seize
→ DEFICIENCY JUDGMENTà most important problem
¶ If seized and sold for less than full amount
☺ Then has to sue and scramble with all the others
¶ Might claim that they didn’t sell for enough
¶ Or violated one of the complex rules governing the system
☺ If debtor is a consumer and is correct in claiming that the proper notice wasn’t given then often stick creditor with deficiency
i. Statutory Liens and Trust Funds (41)
→ State law also creates liens by operation of law in favor of certain types of creditors, land lords lien and artisan’s lien
→ Charging lien of lawyers
→ The trust fund statutes
¶ Make the debtor a trustee of certain property for the favored creditors, who as beneficiaries of the statutory trust, effectively get priority in that property
j. Property Exempt from the Collection Process (42)
→ Typical examples are protection for family home and household good
→ States vary widely in the protection they give debtors
→ The protection never extends to protecting a debtor from a secured creditor
¶ Like a mortgage, etc.
☺ This matches up with E & T stuff, for homestead (the three exceptions)************
k. Collection in Other Jurisdictions (42)
→ State judgments can be enforced under common law doctrines because the full faith and credit clause of the Constitution requires each state to recognize and enforce the judgments of sister states, subject to numerous caveats
→ CL method involves filing new lawsuit, serving summons, resulting in new local
→ Many states have also adopted the UNIFORM ENFORCEMENT OF FOREIGN JUDGMENTS ACT
→ Judgments in district court are enforceable locally, difficult in foreign countries that require reciprocity because US is not a party to any treaty on enforcement of judgments
→ Gerdes v. Kennamer
¶ TRIAL COURT CAN COMPEL JUDGMENT DEBTOR TO EXECUTE DOCUMENTS, A TURNOVER ORDER IS APPROPRIATE WHEN THE PROPERTY CANNOT BE ATTACHED READILY OR LEVIED ON BY THE ORDINARY LEGAL PROCESS
¶ Appeal to the terms of a turnover order issued pursuant to section 31.002 of the civil practice and remedies code as well as findings of non compliance
¶ Gerdes is judgment debtor of Kennamer, Gerdeses each own 50% of a Mexican company, this is the only avenue to collect on a 915,392.65 judgment against Gerdes
¶ Gerdes also failed to produce a bunch of documents
¶ Kennamers’ counsel presented seven documents which executed by the Gerdese would effect the issuance of the stock to the Gerdes claimed was never issued
¶ Standard of Review
☺ Statutory remedy grounded in equity
¶ Analysis
☺ Execution by Carolyn
1. the trial court’s order that Gerdes deliver originals of documents executed by both himself and his wife to effect a turnover of ownership in Don Rogelio is not beyond the scope of the turnover statute
☺ Non Existent Documents
1. while the turnover statute does not specifically provide that a trial court can compel a judgment debtor to execute documents, the statute does not limit the trial court’s powers to ordering only the turnover of property and documents, the statute provides that a judgment creditor is entitled to aid from a court through injunction or other means to reach the debtor’s property, THE TRIAL COURT HAS AUTHORITY TO COMPEL A DEBTOR TO EXECUTE DOCUMENTS THAT WILL AID IN COLLECTING A JUDGMENT DEBT
☺ Inadequacy of Legal Process
1. Gerdeses contend that the Kennamers failed to establish that the
to ensure the defendant debtor due process of law
b. state statutes typically require
→ showing of need
→ a bond, often in twice the amount of the value of the property, to provide a fund for the defendant’s damages if the pre judgment remedy turns out to have been wrongfully employed
c. Summary of other cases
→ A defendant’s property may not be seized without an order issued by a judicial officer upon a factual showing of need, once seized, the defendant must be given a hearing and a chance to get the property back very quickly
d. Preliminary Injunction Freezing assets of a defendant
e. Prejudgment attachment is less often used now as a device to seize all the goods of low income consumers and more often to be in cases where there are millions at stake
5. Problem Set 2 (Page 53)
6. Garnishment
a. Garnishment in General (54-55)
→ Not all property is physically in the hands of the true owner, some property exists only in the abstract, most common example is debt owed to the debtor by a third party
→ Law has developed a means by which creditors can direct these third parties to turn over the debtor’s property or to divert payments that otherwise would have gone to the debtor
→ Most common is writ of GARNISHMENT; a garnishment writ is typically used to attach debts owed to the debtor for the benefit of the debtor’s judgment creditor
→ Garnishment writ has two parts
¶ A set of question designed to determine whether the party served with the writ – the garnishee (employer or bank), owes any money to the debtor or has any property belong to the debtor and a command to the garnishee to withhold payment or return of the debtor’s property pending further order of the court
→ Garnishee answers question falsely or disobeys the command to withhold payment or delivery may be liable
¶ Examples of disobeying; employer who pays wages to debtor after service of writ or bank that honors the debtor’s checks after service of the writ
→ Procedural Matter
¶ Garnishment is ancillary lawsuit against third party garnishee
→ Garnishee might try to say in defense that has some sort of superior right and might be trial
¶ If garnishee found to owe money to debtor or have debtor’s property with no superior rights, then judgment against the garnishee, judgment satisfied when garnishee delivers debtor’s property or pays debt, deliver or payment satisfies the garnishee’s obligation to the debtor
→ Most states let the garnishing creditor have a temporal net, time between service of the garnishment writ and the garnishee’s answer, during which the creditor can hope to catch obligations arising in favor of debtor
b. Webb v Erickson
→ Facts
¶ W obtained a default judgment against Erickson for 5k plus interest, and 1.5k in attorney’s fees, judgment based on some promissory notes
¶ E earned commission by selling houses, one house he sold was to Bates (B)
¶ W caused several writs of garnishment to be served on houses, one was to B
¶ B had had many bad things go wrong, says he didn’t understand what the paper meant, so he didn’t answer, default judgment entered against him
¶ W then served writ of garnishment on B’s employer for amount of 6,500
¶ B filed motion to vacate and motion to stay execution of the judgment, superior court granted, then trial court reversed, and now this court reverses
→ Issue:
¶ Whether the default judgment entered against B should be vacated?
→ Holding:
¶ Yes
→ Rule:
¶ When extraordinary circumstances justify relief a court may set aside a default judgment
→ Reasoning:
¶ B was a defaulting garnishee; court has held that more liberality should be shown in setting aside a judgment against a defaulting garnishee than in setting aside judgment against defaulting defendant
☺ He seems to be a disinterested party
¶ Under Arizona law a judgment can be entered against a defaulting garnishee for the full amount of the judgment against the defendant, defaulting garnishee often can become liable for higher amount than debt owed to defendant
¶ Should have also considered the confusing nature of the entire proceedings, the parties named and the wording of the summons, didn’t say when to answer or where and when to appear
¶ Should have also considered B’s physical and mental condition in November of 1975
