Prejudgment Collection Remedies
By Joshua W. Casselman
This article addresses three legal remedies that may assist creditors in preserving and protecting assets of debtors prior to the entry of final judgment so that those assets are available to creditors once judgment is obtained. These remedies are prejudgment garnishment, attachment and replevin.
I. Types and uses of prejudgment remedies.
Prejudgment garnishment is the legal process of seizing property of the debtor in the possession or control of another person for the purpose of securing satisfaction of a judgment that has yet to be entered. By contrast, prejudgment attachment is the legal process of seizing property in the possession or control of the debtor that can later be used to satisfy the debt owed to the creditor. Although both garnishment and attachment relate to securing property of the debtor, the garnishment remedy is used where property is possessed or controlled by someone other than the debtor and the attachment remedy is used where the property is possessed or controlled by the debtor.
The prejudgment replevin remedy is typically used where the property the creditor seeks to secure is specifically at issue in the case and the creditor claims it holds a right or interest in that property which is superior to that of the debtor. For example, because of its more stringent requirements discussed below, the creditor would not use the prejudgment attachment remedy to obtain possession of property the creditor leased to the debtor or to obtain possession of property of the debtor subject to the creditor’s lien. Instead, the creditor would assert a replevin claim and seek prejudgment possession based on its secured interest in the property.
The seemingly subtle differences between prejudgment garnishment, attachment and replevin are best illustrated by the following fact pattern from a hypothetical case. Bank makes a loan to Company. The loan is secured by a lien in Company’s equipment, but not any of Company’s other assets. Company defaults under the loan. Bank discovers that Company is closing its doors and attempting to transfer all of its assets to a successor entity located in a different state with common ownership to Company. Bank demands that Company surrender the equipment that secures the loan to Bank, but Company refuses.
Bank files a lawsuit to recover the money loaned to Company and to obtain possession of Company’s equipment that secures the loan. Bank believes it could take several months before a final judgment is entered in its favor. Bank is concerned that Company’s assets will be further dissipated by the time the final judgment is entered and that Bank’s collateral will be transferred or sold and become increasingly difficult to locate and recover as time passes.
To protect and preserve its potential sources of recovery, Bank could assert a replevin claim and request prejudgment possession of the equipment that secures its loan to Company. Bank would argue that its security interest gives it a superior right to Company’s equipment. If Bank has information that Company owns accounts receivable, Bank might seek to recover the receivables from the third parties through prejudgment garnishment. If Bank believes Company owns unencumbered property in addition to the equipment that secures the loan, Bank might pursue prejudgment attachment of that property to prevent Company from transferring or selling it.
II. Requirements of prejudgment remedies.
Prejudgment garnishment, attachment and replevin each require that an affidavit be filed in support of the requested relief. However, the requirements of each affidavit and the showing that must be made by the creditor before the court may grant the requested relief differ under each remedy.
Indiana’s prejudgment garnishment statute requires an affidavit stating that (i) the creditor has good reason to believe, and does believe, that the third party (referred to as a garnishee) possesses or controls property of the debtor; (ii) the garnishee is indebted to the debtor; (iii) the garnishee has the control or agency of property, money, credits, or effects of the debtor; or (iv) the garnishee has control over the debtor’s share or interest in the stock of an association or corporation. In addition to the prejudgment garnishment statute, Indiana Trial Rule 64(B) provides that prejudgment garnishment and attachment may be used where the creditor is “suing upon a claim for money, whether founded on contract, tort, equity or any other theory.”
The prejudgment attachment statute requires an affidavit (i) stating the nature of the creditor’s claim; (ii) that the claim is just; (ii) the amount of the claim; and (iii) showing that one of the grounds for attachment exists. These grounds include that the debtor (i) is a foreign corporation or a nonresident of Indiana; (ii) is secretly leaving or has left Indiana with intent to defraud the debtor’s creditors; (iii) is concealed so that a summons cannot be served on the debtor; (iv) is removing or about to remove the debtor’s property subject to execution, or a material part of the property, outside Indiana, not leaving enough behind to satisfy the creditor’s claim; (v) has sold, conveyed, or otherwise disposed of the debtor’s property subject to execution, or permitted the property to be sold with the fraudulent intent to cheat, hinder, or delay the debtor’s creditors; or (vi) is about to sell, convey, or otherwise dispose of the debtor’s property subject to execution with the fraudulent intent to cheat, hinder, or delay the debtor’s creditors.
An unsettled issue in Indiana is whether the prejudgment garnishment remedy exists only in conjunction with an affidavit which also establishes the grounds for prejudgment attachment. In other words, it remains unclear whether Indiana law permits a prejudgment garnishment order to be entered where the creditor has shown that money is owed by the debtor, but has not shown that one of the grounds for prejudgment attachment exists. A case decided by the Indiana Supreme Court over 100 years ago suggests that an affidavit supporting the grounds for prejudgment attachment must be filed before a prejudgment garnishment order can be issued. However, much more recently the Indiana Court of Appeals appears to have declined to follow that holding in a not for publication case.
The grounds for prejudgment replevin are less difficult to establish than those required for prejudgment garnishment and attachment. The creditor seeking prejudgment possession of property must file an affidavit showing that (i) it is the owner of the property or lawfully entitled to possession of the property; (ii) the property was not taken for a tax, assessment, or fine under a statute or seized under an execution or attachment against the property of the creditor; (iii) the property has been wrongfully taken and is unlawfully detained by the debtor or is unlawfully detained; (iv) include a particular description of the property; (v) state the estimated value of the property; and (vi) identify the county in which the property is believed to be detained by the debtor. A hearing must be held on the request for prejudgment possession and the court then makes “a preliminary determination which party, with reasonable probability, is entitled to possession, use, and disposition of the property, pending final adjudication of the claims of the parties.”
III. The downside of exercising prejudgment remedies.
There can be significant expense to the creditor in pursuing the prejudgment remedies discussed above. First, Indiana courts will not grant prejudgment garnishment, attachment or replevin relief unless the creditor files a written undertaking (typically in the form of a bond) providing that the creditor and surety will pay all damages sustained by the debtor if the proceedings are later found to be wrongful or oppressive or, in the case of replevin, if the property is determined to have been wrongfully taken from the debtor. The surety will charge the creditor a premium for the bond and the creditor faces potential liability up to the amount stated in the bond in the event its actions are later determined to have been wrongful.
Second, the prejudgment remedies require that a motion and affidavit be filed setting forth the grounds for prejudgment relief. In the vast majority of cases, the motion will be set for an evidentiary hearing. The expense associated with preparing the motion, affidavit and supporting brief and attending the hearing, as well as sending a witness, may increase litigation costs.
Third, the creditor should consider the financial impact on the debtor and its ability to continue to operate its business in the event the creditor is successful in obtaining prejudgment relief. If, for example, the creditor obtains prejudgment possession of a piece of equipment critical to the debtor’s business, the debtor may be unable to generate additional income from which the creditor’s claim could be paid and the debtor may have to shut down its business or file bankruptcy.
Finally, if the creditor is granted prejudgment possession, it should be cognizant that the prejudgment order is interlocutory and not final. This means that the creditor may have to return the property in the event it does not ultimately prevail on its claim on summary judgment or at trial. The creditor incurs the expense of storing the property and the risk of loss until the final judgment is entered.
Due to the heightened standards for establishing the grounds for prejudgment relief and the expense of obtaining that relief, motions for prejudgment garnishment, attachment or replevin will not be appropriate in every case. However, where the creditor’s claim is secured by property of the debtor, where the debtor is in possession of property owned by the creditor or where the creditor can establish that the debtor is attempting to convey or conceal property to avoid collection, commit fraud or render itself insolvent, these remedies provide effective tools to protect and preserve the creditor’s source of collection until a final judgment is entered.