Prejudgment Remedies: General Principles, Attachment

Most debtors don't have many assets, so, if faced with a lawsuit for a payment of debt, they may act to protect what they have or take some other action to thwart the creditor from getting anything. To prevent this, common law has developed a number of provisional remedies that allow creditors to protect assets during the pendency of the lawsuit. Most of these remedies have now been codified into state law, and include attachment, prejudgment garnishment, replevin, and lis pendens.

These prejudgment remedies are provisional, in that they last only from the commencement of the lawsuit until a judgment has been rendered. Prejudgment remedies are only permitted in extraordinary cases, since they deprive the debtor of the use or alienation of his property. Hence, the creditor must provide substantial evidence that the assets that can be protected may be lost if no action is taken until judgment.

Prejudgment remedies must strictly conform to state law and to constitutional due process limits set by the Supreme Court. Each prejudgment remedy has a specific purpose, specific procedures that must be followed, and has specific requirements as to eligibility.

Overview of the Legal Process

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If the creditor believes that assets may be hidden or transferred before judgment, the creditor plaintiff may ask the court for a prejudgment remedy at the outset of the case. If the remedy is granted, then it lasts only until judgment. If the creditor wins, the provisional remedy is superseded by the judgment and its remedies. If the creditor loses, then not only does the provisional remedy end, returning the property to the debtor, but the creditor will probably be liable for damages to the debtor, since the creditor deprived the debtor of his property.

To get a prejudgment remedy, the creditor must show by substantial evidence that it will prevail. Furthermore, state law dictates eligibility, bonding requirements, and liability to the debtor if the creditor loses its case.

Due Process

Previous to some Supreme Court decisions on due process, creditors could often get writs of attachment or garnishment from the court clerk. Now, only a judge, after a hearing, can grant a writ.

The 14th Amendment of the United States Constitution protects Americans from the confiscation of their property by the government without a notice and a hearing. Hence, any prejudgment remedy requires that the debtor be given a notice and opportunity to oppose the action at a hearing. If the creditor prevails or the debtor doesn't show up, then the prejudgment remedy will probably be granted.

In rare cases, particularly for secured creditors, an ex parte request for seizure may be allowed, but only under extraordinary circumstances, where the creditor fears that the debtor may hide or transfer assets or even destroy the assets if the debtor is given a notice of the lawsuit.

An ex parte request will only be granted by a judge, if the creditor can provide substantive factual allegations to support the ex parte relief. The creditor must also post a bond to pay damages to the defendant if the seizure turns out to unjustified. The defendant must also be given a hearing immediately after the seizure so that his case may be heard.

In almost all cases, an ex parte seizure of wages is not permitted.

Attachment

Attachment is the process whereby the sheriff seizes the debtor's nonexempt property and holds in legal custody until the final outcome of the trial. If the creditor wins, then the sheriff sells the property for the benefit of the creditor.

To qualify, the creditor must have an unsecured money claim. Only nonexempt property can be attached, and, in some states, might be even more limited than simply being nonexempt.

To begin the process of attachment the creditor must file a motion and submit an affidavit that states the grounds for the attachment and the merits of the claim. The creditor will have to post a bond to indemnify the defendant for the possibility of wrongful attachment or if the creditor loses the case. The amount of the bond is either determined, depending on the state, by statute or by the court.

If the application for attachment is approved by the judge, then notice is served on the defendant so that he has the opportunity to contest the attachment at a hearing.

If the attachment is approved, then the court issues a writ, allowing the sheriff to levy any property that it finds in an investigation. However, the sheriff must be certain that the property is not exempt and that it is owned by the debtor and not by a 3rd party; otherwise, the 3rd party can oppose the attachment, and sue the sheriff for wrongful attachment and conversion. Hence, the creditor must also post a bond to indemnify the sheriff for wrongful attachment. Once the property is levied, then an attachment lien is created on the property, which will remain until final judgment.

The debtor can challenge the attachment for cause, such as the creditor failing to prosecute the case for judgment or that the debt is not owed. If the debtor prevails, then the debtor can sue the creditor for damages for wrongful attachment.

However, if the creditor prevails with a judgment, then the sheriff sells the property and pays the creditor an amount up to its debt and expenses, and the rest, if any, is paid to the debtor.

To get back his property before judgment, the debtor can post a bond from an approved surety to cover any potential judgment. A debtor can obtain either a redelivery bond which guarantees that the debtor will redeliver the property or its value should the creditor win, or a dissolution bond (aka dissolving bond, discharging bond) which substitutes for the property and simply pays the creditor for the amount of the judgment. With a redelivery bond, the debtor takes the property back, but the attachment lien remains on the property; a dissolution bond removes both the property from attachment and the attachment lien.

In September 2014, the New York Court system has enacted new rules requiring detailed proof of any debts before a default judgment will be rendered. Because most debts are purchased from loan originators or from other debt collectors, the buyers of that debt frequently do not have documentation to support the validity of the debt. Henceforth, the courts will require the credit agreement, recent monthly statements, and other documents that correctly identify the debtor. Additionally, the debt collector will have to supply affidavits from the originating creditor and all subsequent debt buyers, and those affidavits will have to be executed by individuals with actual personal knowledge of the debt. Because lawyers often file lawsuits even after the statute of limitations has expired, they will be required to affirm that the statute of limitations has not expired. To alert the debtors that legal action is being pursued, the debt collectors must provide the court with an additional copy of the lawsuit that the court will mail to the debtors. If the notice is returned as undeliverable, then no default judgment will be allowed.

Source: New York State Judiciary Adopts Rules to Protect Debtors - NYTimes.com