TOWARDS MORE COLLECTIBLE JUDGMENTS

by Jonathan Sauer

I. INTRODUCTION

I have noticed that many of our construction clients are complaining about being slow. On top of that, the news is that May, 2007 had a record number of residential foreclosures. Also, in the last several years, there have been a number of significant general contractor bankruptcies and insolvencies, hurting all manner of material suppliers and subcontractors (and general contractors who sometimes work as subcontractors). Thus, notwithstanding fairly consistent record and near-record Dow Jones’ averages, there is other indicia that the economy isn’t doing all that well, with high gas prices, concerns about a war that simply refuses to end, concerns over global warming and the uncertainties of a change in leadership for 2008. In all likelihood, your company is carrying more accounts receivable presently than it did in its better years.

Many folks really don’t understand what happens after ‘they go legal’. There is an article on my website - www.sauerconstructionlaw.com - which explains in some detail the various litigation steps, titled “The Litigation Process”. (If you haven’t been to the website, there are thirty-two articles and forms on a wide variety of collection, contract, bid law and other issues.) Too often, unfortunately, clients do not realize that the filing of a complaint is only the first of many other steps that have to be taken to bring a case to judgment. And, all that a judgment is is a legal piece of paper which says that “A owes B” a certain amount of money. The fact that people owe money isn’t the same thing as their having an ability (or desire) to pay it. As we all know, there is a certain group of unscrupulous businessmen out there who don’t seem to ever intend on paying any bill fully, if there is some way around payment in full. Hence, in most instances, it is worthwhile to investigate obtaining some form of prejudgment security when a law case has to be filed. ‘Prejudgment security’ references different steps a creditor might take before judgment is achieved which will have the tendency of making the judgment more collectible by securing the anticipated judgment with something of tangible value. What is available in this regard is the scope of this particular article.

Keep in mind that only a small percentage of civil cases actually go to and through a complete trial. Particularly for those customers who are ethically-challenged, they are going to pay when they are good and ready or when you have forced them to pay through the exercise of a prejudgment remedy, whichever comes first. Moreover, if your non-paying debtor ever goes into bankruptcy, then you want your claim to go in as a secured claim (where you have some chance of getting paid) as compared with an unsecured claim (where you have almost no chance of getting paid, particularly in a liquidation.) As there are certain contestability issues in terms of when a security interest is created prior to bankruptcy - i.e. many secured interests created within 90 days of the filing of bankruptcy are automatically dissolved by the Bankruptcy Code - getting your interests created sooner rather than later may be all the difference in the world as to whether or not you will get paid - ever.

Folks, many of these remedies are going to require some advance planning on your part. Where do your customers (debtors) do their banking? What other jobs are they currently working on? These - and other things - your lawyer might need to know before attempting some of the remedies hereinafter-described. Keeping copies of checks you receive in payment of periodic requisitions may answer the first question. Making notes as to jobs your debtor is bidding and being awarded may answer the second question. After all, some of the bidding services provide this information regularly. These are factual issues - not legal issues - and your lawyer has no innate crystal ball to develop this information for you short of hiring a private investigator or conducting discovery in a case you might file. You really need to have this information before you file the case, in most circumstances.

II. THE USUAL SUSPECTS

One of the things that is best understood about collection activities is that they should be viewed as cumulative. In other words, the fact that there is a payment bond available does not necessarily mean that one should forego filing a mechanic’s lien as well and conversely. (On the website, there are four articles on various aspects of claims against payment bonds, bid bonds and performance bonds.) Smaller debts may warrant less collection activity while larger debts might justify the expense of pursuing the debt on more than one front. So, for example, although a payment bond claim (and suit) will probably produce a check down the road, the court ‘track’ for these types of action suggests that no trial is likely on such a claim prior to at least three years after the filing of the case - actually four to five years in many busy counties such as Worcester and Middlesex. Those familiar with the process understand that the very fact a surety has been sued does not equate to producing an immediate check. Cases, by my experience, tend to settle more during the second half of their pendency rather than during the first half. (One remembers the old saw about cases settling on the courthouse steps.)

So, if enough money is owed, one might consider filing, in addition, a mechanic’s lien. (On the website, there is a lengthy article explaining various aspects of mechanics’ liens - “The New Mechanics Lien Law” - along with five separate mechanics’ lien forms.)

Curiously, commercial mechanics’ liens rarely work in terms of accomplishing their statutory purpose: getting an equity interest in the real estate convertible to cash. This is because any particular subcontractor would most likely lack the will or resources to buy, for example, a Stop & Shop and, in any event, prior mortgages, liens and attachments often indicate that there is or will be no ostensible equity in the property after paying off senior security interests, particularly in a forced sale. After all, who would be interested in buying a Stop & Shop other than Stop & Shop?

However, mechanics’ liens often ‘work’ quite well short of such a result due to the fact that a mechanic’s lien, generally speaking, comes ahead of construction financing as to undisbursed and uncommitted funds. This means, rather simply, that if there is construction financing for ten million dollars and only four million dollars has been paid or is presently committed for imminent payment, a mechanic’s lien today will come ahead of the bank - have a higher security interest - for the remaining six million dollars. This is a situation a bank never knowingly allows to happen. Thus, once a bank knows about a mechanic’s lien, it will more likely than not stop financing the job: the money spigot is turned off. Also, many loan agreements have fairly standard language that an owner’s allowing a mechanic’s lien to stay on the title record for thirty or more days accelerates the note underlying the mortgage. These and other difficulties occasioned by mechanics’ liens tend to facilitate payments sooner, rather than later, although those who have participated in this process understand that this may be done amidst serious nail biting, cursing and threats of one kind or another. (A certain small framing contractor reports that upon filing a mechanic’s lien, the real estate developer threatened to kill him with a gun - by actually holding it against his head - if he didn’t dissolve it. He eventually got paid and wasn’t shot.)

On public jobs, certain subcontractors may have a right to file a demand for direct payment. (There is an article on this on the website.) And, although they are nowhere near as good or as effective as material suppliers and subcontractors think they are, attempting to get paid via joint check agreements is another option. (There is an article on this on the website with two different model forms.)

From a material supplier’s standpoint, there is simply no substitute for a good credit application with personal guarantors. Without a credit application, the usual contract interest rate in litigation in Massachusetts is 12% simple interest per annum. The last time I checked,
under Massachusetts law, one can charge up to 20% interest per annum. (Charging more than that is a crime, the crime of usury.) Also, without a credit application’s providing for attorneys’ fees, the “American Rule”, which Massachusetts generally follows, has each party to a litigation paying its own counsel fees. (In this regard, see “The Recoverability of Interest and Attorneys’ Fees in Massachusetts”, also on the website.) Providing for a higher rate of interest and for attorneys’ fees and having personal guarantors for a corporation’s debts along with other key credit application terms tend to promote better and quicker collections. (A model form for a credit application is located on the website.)

III. STATUTORY PREJUDGMENT REMEDIES

A. TRUSTEE PROCESS

Practically speaking, a trustee process is usually a bank account attachment of your debtor’s bank account. This is obtained only with court approval. Courts will generally give you such an attachment upon proper showings (no insurance to pay debt, likelihood of success on the merits and others) without notice to the other party. In other words, generally you can attach someone’s bank account without their having prior knowledge of the attempt - a so-called ‘ex parte’ attachment.

(1) How Obtained:

This is provided for by Court rule. Massachusetts Rules of Civil Procedure (Mass.R.Civ.P.), Rule 4.2. Trustee Process provides:

“(a) Availability of Trustee Process. Subsequent to the commencement of any personal action under these rules, except actions only for specific recovery of goods and chattels, for malicious prosecution, for slander or libel, or for assault and battery, trustee process may be used, in the manner and to the extent provided by law, but subject to the requirements of this rule, to secure satisfaction of the judgment for damages and costs which the plaintiff may recover, provided, however, that no person shall be adjudged trustee for any amount due from him to the defendant for wages or salary for personal labor or services of the defendant except on a claim that has first been reduced to judgment or otherwise authorized by law; and in no event shall the attachment exceed the limitations prescribed by law.”

(2) Statutory Limitations:

The statute describing trustee process is absolutely enormous, being eighty-three numbered sections of Chapter 246 of the General Laws, some of which have sub-parts. There are three specific limitations that are threshold in nature and are commonly encountered.

The first is that one can not attach pure payroll accounts:

§ 20. Effect of attachment

“The goods, effects or credits of the defendant intrusted to, or deposited in the hands or possession of, a person summoned as his trustee shall, except as hereinafter provided, be attached and held to respond to the final judgment, as if they had been attached upon an original writ of attachment; provided, that any moneys of the defendant deposited in any account designated as a payroll account shall not be subject to attachment hereunder. Any defendant who deposits moneys in such payroll account with intent to evade attachment by trustee process shall be punished by a fine of not less than one hundred nor more than one thousand dollars or by imprisonment in the house of correction for not more than three months, or both. If such a deposit or deposits are made by a corporation, the president and the treasurer and any other officer or agent causing such deposit or deposits to have been made shall be subject to prosecution as defendants under this section, and each of such persons shall be jointly and severally civilly liable to the plaintiff for any loss suffered by the making of such deposit or deposits.”

The second is that certain portions of wages and retirement accounts are protected:

§ 28. Wages and pensions; exemptions; exceptions

“If wages for personal labor or personal services of a defendant are attached for a debt or claim, an amount not exceeding $125 out of the wages then due to the defendant for labor performed or services rendered during each week for which such wages were earned but not paid shall be reserved in the hands of the trustee and shall be exempt from such attachment. Except as otherwise permitted by law, amounts held by a trustee for a defendant in a pension shall be reserved in the hands of the trustee and shall be exempt from attachment. For the purpose of this section, the word "pension" shall mean any annuity, pension, profit sharing or other retirement plan subject to the federal Employee Retirement Income Security Act of 1974, any plan maintained by one or more self-employed individuals as a Keogh Plan, so-called . . . .”

The third is that certain minimum amounts can not be attached:

§ 28A. Monies held by banks or similar institutions; exemption; limitations

“Five hundred dollars of any natural person in any account or accounts in a trust
company, savings bank, cooperative bank, credit union, national banking association or any other banking institution doing business in the commonwealth shall be exempt from attachment by trustee process. A joint account shall be treated for the purposes of this section as if each depositor owned one half of the amount thereof. Every trustee summons served on such an institution shall describe such exemption with reference to this section. Upon service of such a summons the trustee shall answer as subject to attachment only so much money of the defendant as exceeds five hundred dollars.

No business, trust or organization shall be entitled to the exemption hereunder, and no natural person shall be entitled to more than a five hundred dollar exemption at any one time. In any action the plaintiff may apply to the court for further attachments upon proof by certified records of the trustee or trustees that the defendant has received an exemption not authorized hereunder or that the five hundred dollar exemption of the defendant has been in whole or in part exhausted or exceeded.”

(3) The Part You Play:

It is critical to keep copies of checks from potential non-paying debtors. Trustee process goes against accounts in specific banks and you have to know where your debtor maintains his account. Quite simply, you have to know the identity of the bank where the debtor keeps his money. Inasmuch as today’s business life-threatening debtor may have been last year’s customer of the year - i.e. you never know who will go bad or when - making periodic copies of checks - say, copy one every three or four months - will help your attorney at such time as you try your luck under this remedy. Here’s a tip. If your debtor’s payment frequency is getting longer and longer or you receive some checks with ‘insufficient funds’ or you see that the current payer is a new named company, then save, from that point, copies of every check. This is because of the fact that debtors who are players will be changing banks frequently at this point, specifically to limit the amount of trustee process attachments under the theory it is harder to hit a moving target.

Keep in mind that some debtors who have been around the track before may pay their creditors - sometimes - out of payroll accounts. However, I think that a court considering any particular trustee process attachment will presume that the checking account which paid any prior requisition is not a payroll account and is, therefore, exempt from the payroll account limitation.

B. REAL ESTATE ATTACHMENTS

This is probably not a remedy to be employed in the typical dispute among material suppliers, subcontractors and general contractors. An exception might be a case against a personal guarantor of the credit of a business entity as contained within a written credit application. In such a case, a collection effort against the debtor corporation will also include counts against the personal guarantor and a creditor can attempt to attach the personal guarantor’s bank account and real estate. Also, real estate attachments can also be useful in cases against real estate developers and in cases against homeowners, although mechanics’ liens might also suffice in those situations provided the legal niceties for liens have been complied with. If, for whatever reason, a mechanic’s lien is no longer viable (i.e. post 90 days of completion), a real estate attachment might accomplish a similar result. In olden legal days - say, more than thirty years ago - many lawyers would accomplish a back door real estate attachment by the filing of a lis pendens, which practice has been since severely curtailed. It is important to note that it is harder to get an ex parte real estate attachment as compared with an ex parte trustee process attachment. The theory behind that is that providing notice to the debtor of an attempted bank account attachment causes money to ‘walk’ (more likely, fly) away, often to parts unknown. Real estate conveyances being a more cumbersome and time-consuming procedure makes this less likely (particularly with consideration of statutes involving setting aside fraudulent conveyances.)

(1) How Obtained:

This is provided for by Court rule. Massachusetts Rules of Civil Procedure (Mass.R.Civ.P.), Rule 4.1. Attachment provides:

Rule 4.1. Attachment

“(a) Availability of Attachment. Subsequent to the commencement of any action under these rules, real estate, goods and chattels and other property may, in the manner and to the extent provided by law, but subject to the requirements of this rule, be attached and held to satisfy the judgment for damages and costs which the plaintiff may recover . . .

No property may be attached unless such attachment for a specified amount is approved by order of the court. Except as provided in subdivision (f) of this rule, the order of approval may be entered only after notice to the defendant and hearing and upon a finding by the court that there is a reasonable likelihood that the plaintiff will recover judgment, including interest and costs, in an amount equal to or greater than the amount of the attachment over and above any liability insurance shown by the defendant to be available to satisfy the judgment. . . .”

(2) Statutory Authority:

M.G.L.A. 223 § 42. Property subject to attachment

“All real and personal property liable to be taken on execution, except such personal property as, from its nature or situation, has been considered as exempt according to the principles of the common law as adopted and practiced in the commonwealth, or which is specifically exempt from execution under section thirty-four of chapter two hundred and thirty-five, and except as provided in the four following sections, may be attached upon a writ of attachment in any action in which the debt or damages are recoverable, and may be held as security to satisfy such judgment as the plaintiff may recover; but no attachment of land shall be made on a writ returnable before a district court unless the debt or damages demanded therein exceed twenty dollars.”

(3) The Part You Play:

Certainly - with one big exception - there is less detective work here than there is in divining where other assets may be located. For, real estate has to always be owned by someone and this can usually be determined by checking the records of the local tax assessor and those of the appropriate registry of deeds. Now, having said that, there are a variety of trust mechanisms that do the very best they can to protect the identity of the names of the beneficiaries. But, at least, the name of the trust itself is fairly easily determined.

Where you can be of assistance here is to keep your ears open in the ‘honeymoon’ (pre-suing) phase of your relationship. Where does your debtor like to go on vacation? Does he or she talk about having property anywhere? Any talk about a boat or an airplane?
People tend to be fairly careless in their speech and this type of information forms the basis for talk around the water cooler (or the lunch truck).

C. REACH AND APPLY

This is a situation where you can go and attach other assets of your debtor - with court permission. Typically, what one attaches here is contract rights or claims of your debtor against third parties. So, your debtor owes you money from job A but claims he isn’t getting paid, lost money or the usual raft of excuses. However, you learn that your debtor is working on job B, job C and job D. Through a reach and apply action, you can get injunctions withholding the sum of money owed to you for job A by your debtor from monies to be earned by your debtor on job B, job C and job D - with prior court approval. The statute favors such a remedy when there is a ‘debt’ - a liquidated amount, such as a judgment - as compared with simply a ‘claim’, although I am aware of there being success with this remedy in both situations.

This procedure can have its own dynamic, much as mechanics’ liens have their dynamics in that if the owners of jobs B, C, and D are added into litigations on account of claimed non-payment by the debtor to you relative to Job A, a lot of things can happen: (a) they are super-annoyed to have to incur the expense and inconvenience of having to participate in a litigation they literally have nothing to do with; (b) they wonder if your debtor is paying his suppliers and subcontractors on theirjob. Essentially, what this type of action can accomplish is to embarrass your debtor into paying you, if he or she has the ability to pay, to prevent damage to your debtor’s new business relationships.

(1) Statutory authority:

M.G.L.A. 214 § 3. Special jurisdiction

“The supreme judicial and superior courts shall have original and concurrent jurisdiction of the following cases:

. . . . . “(6) Actions by creditors to reach and apply, in payment of a debt, any property, right, title or interest, legal or equitable, of a debtor, within or without the commonwealth, which cannot be reached to be attached or taken on execution although the property sought to be reached and applied is in the possession or control of the debtor independently of any other person or cannot be reached and applied until a future time or is of uncertain value, if the value can be ascertained by sale, appraisal or by any means within the ordinary procedure of the court. In such action, the interest of the defendant in partnership property may be reached and applied in payment of the plaintiff's debt; but unless it is a judgment debt, the business of the partnership shall not be enjoined or otherwise interrupted further than to restrain the withdrawal of any portion of the debtor's share or interest therein until the plaintiff's debt is established, and if either partner gives to the plaintiff a sufficient bond with sureties approved by the clerk, conditioned to pay to the plaintiff the amount of his debt and costs within thirty days after it is established, the court shall proceed no further therein than to establish the debt; and upon the filing of such bond, any injunction previously issued in such action shall be dissolved.” . . . .

(2) The Part You Play:

It should be noted that some of these efforts may involve some measure of personal and legal risk. Find out where your debtor is working other than at your job. Sometimes this information is available through the various bidding services which announce who is awarded various jobs. I have had clients who literally follow a debtor’s trucks from the yard first thing in the morning to see where they go. Quite often, personal relationships develop between your people and the people who work for a debtor. If a debtor is not paying its debts in the ordinary course of business, chances are that it is not the best employer in the world to work for and will have disaffected employees. Sometimes this information can be developed through those employees. Another source of information is the debtor’s former employees. Keeping track of the whereabouts of former laid-off and fired employees may have value. Private investigative services obtain information about people and businesses by going through their rubbish on trash day or by going through their dumpsters.

IV. CONCLUSION

Folks, good collection activities and results - including, but not limited to, minimizing those cases where you have to ‘go legal’ - involve two things that you have some measure of control over. (No one has complete control over ‘good luck’ or ‘bad luck’, although some think that they do.)

First of all, you have to know what your rights are in advance of having the problem.
Towards that end, I have written numerous articles and presented numerous seminars along with bearing the considerable personal expense of this magazine for more than a dozen years and of the website with a primary motivation being to assist folks before the trouble arose to be in the best possible position for a good result after the problem needs to be dealt with. Read these articles, particularly those that most apply to you and to your business. If you have the basic information in your head, I have no doubt but that this will help you be more profitable.

Secondly, good collection activities involve some exercise of will and determination. It means to be something other than just completely sales-driven in undertaking new business with customers. It means not letting statutes of limitations on bond and lien claims to fall by the wayside because Joe Blow is a ‘good guy’. In the final analysis, good collections are like making omelets. A few eggs will have to get broken. But, all told, I’d rather end up with the egg rather than ending up only with a few broken pieces of the shell!