Creditworthy News - 11/24/14 Edition
COURT JUDGMENTS AND TURNOVER RECEIVERS
By David Balovich
After the lengthy process of litigating a claim against the debtor, we finally received a judgment in our favor allowing us to recover against the opposing party.
Theoretically, this is the last we will see of the courtroom. In reality, we may have another fight ahead: collecting on our judgment. Debtors can be deceitful and attempt to hide their assets so they do not have to turn them over to us. While some of the debtor's property may be protected from a judgment, there are tools available to help us collect on our judgment.
Whether we have recently received a default judgment on our claim or received a judgment several years ago that we have failed to collect, one valuable option for judgment creditors in many states is to invoke what is commonly known as the "turnover statute." The turnover statute has been available for a long time, for example in Texas it has been available since 1979, but surprisingly few attorneys know about it. In California, it is referred to as the "Sheriff's Keeper". It may go by different names in other states but it is commonly found in the law as the "Turnover Statute". The turnover statute allows the court to appoint a receiver to seize and sell a judgment debtor's non-exempt assets, including present or future rights to property. The statute was created to help seize assets that are easily hidden from a levying officer, such as stock certificates, and to help recover intangible assets, like accounts receivable.
The turnover statute usually provides that:
A judgment creditor is entitled to aid from a court of appropriate jurisdiction through injunction or other means in order to reach property to obtain satisfaction on the judgment if the judgment debtor owns property, including present or future rights to property, that:
1. cannot readily be attached or levied on by ordinary legal process; and
2. is not exempt from attachment, execution, or seizure for the satisfaction of liabilities.
Depending on state law, the Court has the authority to:
1. order the judgment debtor to turn over nonexempt property that is in the debtor's possession or is subject to the debtor's control, together with all documents or records related to the property, to a designated sheriff or constable for execution;
2. otherwise apply the property to the satisfaction of the judgment; or
3. appoint a receiver with the authority to take possession of the nonexempt property, sell it, and pay the proceeds to the judgment creditor to the extent required to satisfy the judgment.
Three Key Observations on the Turnover Statute
Judgment creditors may use the turnover statute to collect the entirety of the original award-actual damages, prejudgment interest, exemplary damages, interest, court costs, and attorney's fees. Here are three important things to know about utilizing the turnover statute as a judgment creditor.
1. Creditor Must Follow Proper Procedure
The Turnover Statute requires the judgment creditor show the writ of execution was returned nulla bona, and that the debtor's assets are not subject to ready attachment or levy by the ordinary legal process. The creditor may then file a turnover application with the Court which includes a description and some evidence of the non-exempt property thought to be held by the judgment debtor. When these initial measures are followed, the open-ended nature of the turnover statute allows the Court to exercise its own discretion to consider property owned and controlled by a debtor that would not be available to the creditor under any other circumstance.
Debtors often go to extreme measures to attempt to protect and hide their assets, and several state law makers have responded accordingly to help creditors collect on their judgments. For example in Texas, in World Fuel Services Corp. v. Moorehead, the Court permitted turnover relief for the creditor's $4.4 million debt, finding the debtor had pledged or assigned assets to third parties in the six months following judgment, including stock and receivables, going from a stated net worth of $34 million to a point where the debtor maintained he lacked sufficient unencumbered assets to pay the judgment.
1. The Debtor has the Burden to Show Property is Exempt
While the creditor must initially identify any property at issue, if the judgment debtor asserts the asset is exempt from turnover, it is the judgment debtor's burden to prove the exemption. Importantly, multiple courts have found that the "mere fact that assets have been pledged to third parties does not necessarily mean that they are not owned by or subject to control of debtor." Property that may be included in turnover relief may include property located outside the judgment state, secreted property and any intangible property rights. Negotiable instruments, rental income, interest income, and cash in a judgment debtor's possession or control are also subject to the turnover statute. The Court will usually decide what property, if any, may be exempt from turnover.
1. Collection Includes Attorney's Fees
Plaintiffs are entitled to recover all reasonable and necessary attorneys' fees and court costs in connection with a turnover motion. In fact, Texas courts have found the award of attorney fees and costs is mandated under the turnover statute where the party has successfully obtained turnover relief. If the judgment creditor is unsuccessful in seeking recovery via the turnover statute, no attorney's fees are awarded.
Powers of a Turnover Receiver
Some of the things a turnover receiver can do to help collect a judgment are: direct the postal service to deliver the judgment debtors' mail to the receiver; seize the defendant's bank accounts; sell any transferable property right of the debtor (for example, a taxi permit); obtain information from third parties which may lead to asset information; levy on anticipated proceeds from a lawsuit; seize accounts receivable; take control of contract rights; search through the defendant's office; obtain copies of tax returns; sell real property; and sell tangible personal property.
The traditional requirements we often think about when considering a receivership do not apply. We do not have to wait 30 days from the date of our judgment. We do not have to show that we have exhausted our remedies or that other methods of collecting the judgment have failed. We do not have to show that the property is in danger of being lost, or whether the debtor is insolvent. None of these factors apply to a turnover receivership.
The elements to prove up are that: the creditor has won its judgment; the defendant owns property that is non-exempt; and the property is not readily leviable by regular process. That's it. Once we show the defendant has some assets of this kind, the door opens wide and all of the debtor's non-exempt property can be placed into the receivership.
Consider all of the non-exempt, intangible types of property that we may be able to prove up: valuable contract rights, interests in a business, accounts receivable, a good domain name or telephone number, rents and stocks. Arguably, ownership of a bank account supports turnover relief because the statute requires a showing of property that "cannot readily be attached or levied on by ordinary legal process." The usual way to seize a bank account is through a garnishment, which is an extraordinary remedy. Therefore, a bank account is property that "cannot readily be attached."
The turnover order does not have to detail specific property. A laundry list type order is perfectly acceptable. Accordingly, the order could empower the receiver to seize and compel the debtor to turn over "all real estate" (except the homestead where homestead law applies), "all bank accounts," and so on.
Getting a Receiver Appointed
Getting a receiver appointed is motion practice. We may bring an application for turnover relief ex parte. An ex parte order does not unfairly surprise a judgment debtor because the judgment puts the defendant on notice that post-judgment collection proceedings will follow. The debtor has already had his day in court.
Generally no bond is required for a turnover receiver, however laws vary from state to state so it is wise to check first. The idea of a receiver's bond comes from pre-judgment receiverships where one party seeks to put another party's business or property into receivership. Usually, the bond in a traditional receivership protects the respondent from damages in a pre-judgment context. If the movant loses its case, the respondent would have been wrongfully placed into receivership. But a bond is not needed to protect a debtor from a wrongful receivership where the creditor has already won its judgment. The whole point is to liquidate the debtor's assets.
Receivership is affordable on small cases as well as large ones. Most turnover receivers take their fee from what is collected and usually seize enough property to also cover his fee. The next time you gear up to do a garnishment, consider using a receiver. A receiver could levy on several accounts receivable or several banks. Without a receiver, we would have to do a separate garnishment for each one.
Turnover receivership has been available to creditors for several years, in Texas since 1979. It is a powerful, flexible collection tool that should be a regular part of our tool box.
SAY GOODNIGHT GRACIE
It was September 1997 that I first began writing for the Creditworthy News. It began as just one column and over 17 years evolved into the newsletter you are now reading.
Rich Hill, the creator of Creditworthy, and I worked together for the same company 39 years ago. Many things have occurred and changed during that short spell and the most obvious is that we are older although perhaps not much wiser. I'll let others speak to that. Another obvious thing is there will not be an 18th year. This is my last newsletter, the time has come for me to move on.
I have had the good fortune to work for many good companies and a couple that were not-so-good but all of them contributed in some fashion to providing me the information that often found its way into these 170 plus newsletters. I have had the opportunity to experience the U.S. business evolve from largely agricultural, to industrial, to retail, and to its present position as the leading provider of services. I have watched and participated as our profession, credit, has evolved from a profession into one of the largest service industries, one that impacts every facet of both consumer and commercial enterprise.
After selling my business two years ago with the intention of retiring, I was fortunate to find my "dream" job with a company I thought only existed in my imagination and writings. An 80 year old family owned company and respected leader in its industry whose management leads through the daily practice of five core "values"; Ethics, Excellence, Commitment, Success, and Dynamics. These "values" unite the 2400 plus employees, working as a team, to provide "legendary customer service" to both the internal and external customer. These "values" have proven to be instrumental in providing the customer what they want, when they want it, and guarantees the customers' return but also the prompt payment of their obligation. For the first time as a credit professional, my performance is not judged by DSO, bad debt, and the other tired and worn performance measures of our profession but rather by customer satisfaction, repeat sales, product support, and team involvement.
Thank you Rich for the opportunity and thank you readers for your following and support. I know that you did not always agree with my opinions but if they made you think about what you were doing and how you were doing it then I did my job.
I wish you well.
David Balovich is an author, business credit consultant, educator, and public speaker and has written for the Creditworthy News for over a decade. He can be contacted at firstname.lastname@example.org.
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