Those First in Line Get Paid Quicker

Getting paid money you’re owed is a challenge to many businesses and individuals alike. When a customer refuses to pay, a lawsuit may be filed. If the lawsuit concludes favorably, the client obtains a judgment, which is often when the real work begins. In other words, the client must now collect on the judgment.

Tennessee, like most jurisdictions, allows judgment creditors to record their judgments turning them into judgment liens. Once a judgment lien is recorded, that lien takes priority over later recorded liens and unrecorded judgments. In other words, the recorded judgment lien sets the client’s place in line which can preclude others from “line cutting”.

The timing of when the judgment is obtained and when the judgment lien is recorded is crucial. The recent case of Hitachi Capital America Corp., v. Community Trust & Banking Co., et al., highlights this.

Simply put in Hitachi, three creditors were all owed money from the same debtor. Each creditor separately sued the debtor and each creditor obtained a judgment, and then later recorded its lien. Creditor One sued earliest, but filed its lien second. Creditor Two sued second, but filed its lien first. Creditor Three sued last, and filed its lien last, but made the argument that it was actually second in line, because of a technical issue pertaining to Creditor One’s judgment lien.

The Court ultimately disagreed with Creditor Three and the priority remained: Creditor Two, Creditor One, and then Creditor Three. Although the technical issue caused Creditor One to spend more on litigation against Creditor Three than it needed to, it still prevailed. Another interesting aspect of this case, is that Creditor One actually could have been first because it filed suit first and obtained its judgment first. For some reason though, it didn’t record its lien until one week after Creditor Two. So, technically correct, prompt, and timely filing are always crucial, but especially so when trying to get paid on a past due bill.

Wage Garnishments Gone Wrong

When someone obtains a judgment against another, the person or company with the judgment becomes a judgment creditor, while the party against whom the judgment was rendered becomes a judgment debtor. A judgment creditor has several available options when trying to collect money from the judgment debtor. One such option is a wage garnishment.

Generally, to perform a wage garnishment, the judgment creditor files it with the appropriate court and obtains service of process on the judgment debtor's employer. In other words, proper notice must be given to the employer who is being asked to pay the judgment debtor's wages directly to the judgment creditor. If proper notice is given, and the employer refuses to cooperate, the judgment creditor can seek a judgment directly against the employer. In other words, the employer, who had nothing to do with the underlying lawsuit, could be on the hook for the full amount owed.

The recent case of Cash America International, Inc. v. Geico General Ins. Co. touches upon the potential perils when an employer ignores a wage garnishment, but, equally importantly, reinforces the hard and fast rule that the judgment creditor's failure to properly give notice to the employer voids the proceeding (as if it never occurred). In the Geico case, Geico first set in motion the wage garnishment by hand delivering a copy of the garnishment to an hourly employee at a local branch who had no management authority. This "notice" wasn't sufficient and the subsequent judgment Geico obtained against the employer was deemed void, long after both sides spent a lot of time and money in litigation.

Why is all of this important? First, anytime you receive documents from a court, it is important to share those with your attorney so that a plan to respond can be made. Simply ignoring such papers is not typically a sound approach. Second, companies may consider putting in place basic employee training of what to do if they receive court documents. Had the hourly worker been trained properly, the employer may have been able to avoid much of the hassle it endured. Third, if you are owed money, an attorney can work with you to determine whether or not it makes economic sense to pursue a claim against the debtor. In the case where the debtor is gainfully employed such as in Geico, it may make sense to explore collection avenues. A wage garnishment, done properly, can chip away at the judgment much like an annuity.

Personally Guaranteeing Company Debt

One of the benefits of forming a company instead of operating as a sole proprietorship, is to try and limit personal liability for company debts. Generally, an owner of a company is not liable for the company's obligations so long as the company and its owner act as distinct and separate entities. However, in practice, personal liability cannot always be guarded against, especially when the company's owner signs a personal guaranty.
In the recent case of Cardinal Health 108, Inc., et al. v. East Tenn. Hematology-Oncology Associates, P.C., et al., a physician medical practice entered into a credit application with a specialty pharmaceutical supplier for various medications. As part of the application, the three physician-owners of the medical practice company each signed a personal guaranty for all supplies purchased. The medical practice racked up over $1.2 Million in unpaid orders and the supplier demanded payment. Ultimately, the supplier filed a lawsuit and obtained a judgment against the practice as well as the individual practice owner physicians. The Court of Appeals affirmed the judgment.
Personal guarantees may appear inescapable as many business owners find that suppliers or lenders require such documents. However, in negotiating for any business transaction which seemingly requires such a guaranty, it never hurts to try to negotiate the guaranty out of the transaction, a limitation on the amount guaranteed, or simply negotiate with other suppliers who may not require such agreements. If a guaranty is in place, however, and a dispute arises between the company and the supplier, care must be taken in the approach to resolving that dispute, or more than just the company's assets will be at stake. Legal counsel can be helpful with both the negotiations as well as if a dispute arises.