Now you must turn to the question of whether a judgment can ever be collected from the defendant. If the defendant does not pay a judgment voluntarily, the plaintiff is then forced to resort to time-consuming collection efforts such as placing liens on property or garnishing wages. A crafty defendant can dodge legitimate collection efforts for years. And, of course, a plaintiff cannot get blood from a stone. A person or company against whom a judgment cannot be collected due to poverty or insolvency is known as “judgment proof.” As a defendant, you may wish to argue that you are judgment proof, or that your company is judgment proof. If you can convince a plaintiff that their case–however strong–will never result in a recovery, you may be able to shake them off you. A plaintiff might have a slam-dunk case, but that case may not ever yield any recovery because the judgment cannot be collected.
First, you need to determine who the defendant is going to be. Is the defendant an individual or a corporation or LLC? Individual defendants are generally easier targets for collecting judgments. Nevertheless, many individuals are judgment proof. Corporations and LLCs are generally harder to collect judgments from. Here’s why:
– First of all, LLCs and corporations are liability shielding entities–they protect their owners from the debts of the company.
– Individuals must maintain a good credit rating in order to have access to home loans, car loans, credit cards, and other credit privileges. Thus, individuals tend to care much more about having an unpaid judgment appear on their credit report. Corporations and LLCs don’t require a good credit rating to the same extent as individuals, so the threat of a lingering judgment won’t necessarily influence a corporation or LLC.
– Individuals are more likely to own tangible property that can be attached for collection, such as houses, and bank accounts. Corporations and LLCs typically rent their office space rather than own, so they generally have no real estate to attach. Furthermore, Corporations and LLCs tend not to maintain large amounts of cash in bank accounts.
– Corporations and LLCs that fall into financial trouble will simply shut their doors, leaving creditors in the lurch. Individuals do not have that option.
So, what is the lesson here? There are several. First of all, you should never run any business outside of the protection of an LLC or corporation–the liability exposure is just too great a risk to take. LLCs and corporations protect your personal assets from the reach of lawsuits and creditors. Entrepreneur Press offers many books on setting up your own LLC or corporation. For plaintiffs, the lesson is that you want to bring your case against individual defendants if you can. Furthermore, you can engage in pre-litigation planning by contracting with an individual rather than with a corporation, or by insisting that an individual personally guarantee performance under the contract. This practice is universally followed by commercial landlords. They nearly always require a personal guarantee when they lease commercial space. Their reasons are obvious; they want to avoid collection difficulties against a corporation or LLC in the event the tenant goes out of business.
So, as a plaintiff, you want to bring your suit against individual defendants. To bring a case against an individual defendant, that individual defendant must have been an actor in the underlying claim. For example, the individual defendant must have signed a contract in his or her own name. Or, the individual must have caused the harm to you or your business. If you cannot by any reasonable argument bring your claim against an individual defendant, you may be forced to bring your case against a corporate or LLC defendant. An alternative, however, is to check out the corporation to make sure it is up-to-date with its required filings and in good standing. Perhaps the corporation or LLC is dissolved for failure to pay taxes. Research the corporation or LLC at the website of the secretary of state in the entity’s state of incorporation. If the corporation is not in good standing, you can bring claims against the individual owners, but be prepared to prove it to the judge.
Is Your Opponent’s Corporation in Good Standing?
When pursuing a corporate defendant or when defending against a corporate plaintiff, always check to be sure that the corporation is 1) in good standing in its state of incorporation, and 2) properly qualified and registered to do business in a state other than its state of incorporation. Look for blemishes in the corporation’s (or LLC’s) filings with the state. You can use this information to go around the entity to reach its owners.
Potential plaintiffs should also investigate whether the potential defendant is insured for the plaintiff’s losses. If the defendant is insured, that’s good news for both the plaintiff and the defendant. Motor vehicle insurance is legally required in most states, although some drivers violate the law by not keeping up with their premium payments. Most businesses carry some form of liability insurance that cover accidents and some business-to-business lawsuits. It is in the defendant’s interest to disclose insurance coverage to a plaintiff, so plaintiffs should ask the defendant whether or not they have insurance coverage. Most defendants will answer that inquiry. If the defendant is insured, the plaintiff will negotiate with the insurance company, rather than directly with the defendant.
If your research into the likelihood of recovery leaves you with no clear answer, you can always do an asset search. There are dozens of firms that perform these searches, and the prices range from about $50 to $80 per search. These searches will nearly always reveal land and homes owned by the target defendant, and some searches even yield bank accounts. The searches will also show existing judgments. A defendant with existing judgments is not a good target. Experienced lawyers use these searches before agreeing to take on cases. For defendants, always consider that such searches can find your property, if the plaintiff is resourceful and determined enough to use such searches.