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Even During Litigation, Courts Can Protect You As a Creditor

by | Jan 7, 2019 | Civil Litigation

Even During Litigation, Courts Can Protect You As a Creditor

A plaintiff only becomes a judgment creditor after a judgment is entered in the lawsuit. Once a party makes the transformation from plaintiff to judgment creditor, the law provides for additional rights and remedies to protect the creditor against fraud by the debtor. But what options does a plaintiff have during the litigation, before a judgment is entered, if the defendant starts disposing its assets by moving them to family members, affiliated entities, or other “insiders”?

To start, if the plaintiff has sufficient information to file a claim for constructive or actual fraud, the court can issue an injunction or restraining order prohibiting the debtor from transferring certain property. Violating the order could lead to contempt charges, which could lead to the debtor being fined or even jailed, and could expose the person or entity to whom the property was transferred to liability.

Another option is to have the court appoint a receiver to take control of and manage the asset at issue. If the asset in question is a building with 20 tenants, the receiver would collect rent, enter into new leases, and pay the bills on behalf of the building. Any profits from the building would be deposited into a side account maintained by the receiver during the pendency of the litigation. That way, someone the court trusts is ensuring that the asset is not being disposed of or manipulated by the defendant.

Suppose a plaintiff learns that, during the litigation, the defendant transferred the family house to her spouse or children without consideration. The court can issue an order setting aside the transfer and requiring that the deed be transferred back to the defendant, preserving the property as an asset of the defendant against which the plaintiff can later use to try and enforce a judgment.

Since the law cannot account for every possible means by which a defendant may attempt to defraud a plaintiff, courts have the discretion to provide plaintiffs with other remedies and protections that the court deems appropriate in order to protect plaintiffs who have not yet matured into judgment creditors.

Of course, when a claim matures into a judgment, courts can also protect the interests of a creditor if a debtor fraudulently transfers its assets. In the situation where the debtor transferred the deed to her spouse, the court can still undo the transfer, or even issue an order to disregard the transfer because it was fraudulent. If the property was transferred to the spouse and then sold to an unrelated third party who bought it for fair value, the court cannot undo that transaction. Fortunately for creditors, in a situation where the fraudulently conveyed property is unavailable to satisfy the judgment, the court can grant the creditor a money judgment. In this example, if the creditor is owed $200,000 and the house was sold for $100,000, the creditor can enter a judgment against the non-debtor spouse for $100,000.

These remedies can help creditors directly recover what is owed to them, either by preventing or undoing fraudulent transfers, or allowing creditors to recover money damages when the property at issue is no longer available.

Kenneth J Katz.jpgKenneth J. Katz
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