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Collecting a Judgment Against the Founder of a Startup

by | Feb 14, 2019 | Judgments

Collecting a Judgment Against the Founder of a Startup

Savvy creditors can employ various strategies to enforce judgments and collect on debts. Our next several posts highlight real-world scenarios, each of which illustrates a different technique that can be used to enforce judgments.

The first example involves a creditor that obtained a judgment against an individual who was the founder of a small startup company. Though the debtor sometimes received income from the company, he did not take a salary and was not paid on a regular basis by the startup. The debtor also did not possess hard assets or personal bank accounts with significant funds with which to satisfy the judgment. While an income execution was put in place, the payments made were inconsistent and too small to make a significant dent in the amount owed under the judgment.

Through post-judgment discovery we learned that, while the startup company was not yet profitable, it was making concerted efforts to grow by moving to a new location, hiring more executive-level employees, and attempting to attract investors. Since the startup was a corporation, rather than a limited liability company, we decided that the most effective way to secure our client’s judgment was to leverage the debtor’s only major asset his shares in the startup company.

In a special proceeding, a judgment creditor may force a debtor to sell the debtor’s shares of a corporation. We threatened to file such a claim and force the debtor to sell his shares of the startup. While the shares of a small, closely held corporation, such as the debtor’s startup company, would not likely have been worth much to a buyer on the open market, this tactic achieved its objective perfectly.

Any company in the process of growing and seeking investors would naturally wish to avoid the negative publicity that would be generated by its founder being forced to sell his shares due to an outstanding debt. So even though the shares have little value to the creditor, keeping the shares in the possession of the debtor would be immensely important to the company, and of course to the debtor himself. As a result, the corporation quickly agreed to a settlement in which the corporation guaranteed the debtor’s payments on the judgment, in order to ensure that the matter would be resolved promptly and quietly.

Threatening to sell the founder’s shares of a closely held corporation led to a speedy resolution because the practical value of those shares to the company was high enough to motivate its leaders to satisfy the judgment, even though selling the shares on the open market would have yielded little money for the creditor. This is just one example of a creative way in which creditors can enforce their judgments against debtors who may appear to have assets with minimal value.

To learn more about how Katz Melinger can help you, contact us.

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Adam J. Sackowitz
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