Most businesses avoid filing a lawsuit to resolve disputes. However, judicial intervention is sometimes the only way to recover a debt. As such, it is important that business owners and credit managers are aware of the basics of a civil action. Generally, there are four stages to a legal action: 1) Pleadings/Service; 2) Discovery; 3) Summary Judgment/Trial; and 4) Post-Judgment Executions.
After a credit manager or business owner authorizes their attorney to file a lawsuit, their attorney will prepare a Complaint at Law. A Complaint describes the facts of the given case and the legal theory they are suing the debtor under (i.e. breach of contract, unjust enrichment, fraud, etc.) To help your attorney prepare the Complaint, it is critical to preserve and provide him with the following documents: 1) emails between the creditor and the debtor, especially those showing that the debtor agreed to the services and/or goods provided; 2) contracts or credit applications signed by the debtor, especially originals with “wet” signatures; 3) a statement of account showing all invoices and payments; 4) all unpaid invoices at issue; and 5) evidence showing that the creditor attempted to remediate any dispute the debtor raised.
After counsel files the Complaint, a clerk of the Court provides the filed Complaint and a summons, which is an official notice of lawsuit and order to appear before the Court, to a Sheriff or private process server to serve upon the debtor. Most states require service directly to the debtor. If the debtor is a business, then the Sheriff or process server can effectuate service on the company’s Registered Agent. If the debtor evades service, the Court may grant permission to serve the debtor via regular or certified mail or by publication (i.e. newspaper) or posting a copy of the Complaint and Summons on the debtor’s door.
Once served, the debtor has usually 30 – 45 days to file a response (aka: an Answer) with, or appear before, the Court. If the debtor fails to file an Answer or appear, then the creditor may request a Default Judgment. If the debtor timely answers and/or appears, then the next step is typically Discovery.
The purpose of Discovery is to narrow the issues of the case prior to trial. Discovery generally involves a combination of Interrogatories (requests for further information), Depositions (sworn, out-of-court oral testimony), Requests for Production (i.e. documents), and Requests for Admissions (i.e. facts). Requests are made to show the opposing party does not have sufficient evidence to support their position or to learn and obtain all evidence, so counsel can prepare the strongest arguments for Trial. Typically, a party has 30 – 60 days to respond to a discovery request. The Court may also set its own long-term discovery timeline leading up to a Trial date.
A party may file a Motion for Summary Judgment with the Court if they believe there are no genuine issues of material fact and are entitled to judgment as a matter of law. If the Court agrees, the Court will enter an immediate judgment in the movant’s favor. Conversely, in the light most favorable to the non-moving party, if there are any conceivable issues of material fact, the Court will deny the motion.
Once discovery concludes, the Court will set the matter for trial. Please note, most Courts prefer settlement rather than litigation. Since most settlements arise prior to trial, many Courts direct the parties to alternative dispute resolution forums such as mediation or arbitration. In some jurisdictions, Courts require mediation or arbitration prior to putting a case on a trial calendar. Sometimes, the parties agree to mediation or arbitration within their contract.
When the matter is scheduled for Trial, the creditor will be expected to provide a witness who has firsthand knowledge of the case and is familiar with the documents counsel intends to use as exhibits. Most often the witness will be required to attend in person, though if circumstances warrant, some jurisdictions may allow testimony via telephone or Skype. During the Trial, the creditor will be allowed to present their case first. As the Plaintiff, it will be up to the creditor to prove upon a preponderance of the evidence (51%) that the debt is legitimately owed by the debtor. Once the Plaintiff has concluded their case (rested), the debtor will be allowed to offer rebuttal testimony and/or present any defense they may have. Thereafter, the court will render its opinion and enter a Judgment in favor of the prevailing party.
After a party obtains a judgment, the other party has at least 30 days to contest the judgment or appeal the judgment to a higher Court. Once this period ends, the judgment becomes final and the creditor can begin to enforce the judgment through various post-judgment actions. Judgment creditors initiate post-judgment actions in the judgment debtor’s domicile (i.e. the debtor’s permanent home) since this is where the debtor’s assets are typically located. Post-Judgment enforcement options vary by jurisdiction. However, the most basic and widely available remedies are: 1) bank garnishments on known bank accounts; 2) wage garnishments against individual judgment debtors; 3) debtor’s examinations whereby debtors, under oath, must answer questions pertaining to finances and ability to pay the judgment; 4) property levies; and, 5) receiverships. The method(s) a creditor pursues will depend largely on the debtor’s known assets, the ability of the creditor’s attorney or a third-party investigator to locate undisclosed assets, and jurisdictional idiosyncrasies.
Although the litigation process can seem daunting and lengthy, it can often be one of the more powerful tools in handling a difficult situation. While not every lawsuit will result in immediate recovery, developing a reputation for tenacity in enforcing your agreement can have a meaningful impact in how future customers deal with your company.
Paulina Pashov is the Legal Forwarding Coordinator and Operations Manager of American Financial Management. She can be reached at (847)483-6204 or firstname.lastname@example.org.