Collecting When Your Debtor Transfers Assets and Cannot Pay

COLLECTING WHEN YOUR DEBTOR TRANSFERS ASSETS AND CANNOT PAY

By: Larry Leiby, Esq. and Robert S. Tanner, Esq.

About the Authors: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com.

Robert S. Tanner, Esq., has worked with Mr. Leiby in construction matters since 2006, occasionally covers Mr. Leiby's classes at FIU law school, and has been litigating commercial cases for more than 10 years. He can be reached at rob@mkpalaw.com. For more information, please visit www.mkpalaw.com.

Collecting on debts owed to those in the construction industry can be challenging in recent times. Players at all levels, from Owners to material suppliers, have gone through bankruptcies. Property values plummeted so drastically that construction liens against them frequently had no value. Projects, and the cash flow they generate, have been in short supply. Collecting on debts under these circumstances can mean a lot to a business in these times. Being successful in your collections efforts may also require some thinking outside the box, since those from whom you would collect the debt frequently also are faced with bankruptcies of their debtors, value-less claims of liens, and choppy and maybe insufficient cash-flow.

Two potential places where a creditor may find value among an otherwise broke debtor's assets are in claims that the debtors have against third parties and in fraudulent transfers of assets made by the debtors to third parties. In the first, you as the creditor would obtain all rights that your debtor has against someone who owes money to it. In the second, you take back for the payment of the debt owed to you any personal property that your debtor transferred to someone else in the preceding year in attempt to avoid paying the debt. Both of those potential sources of recovery may be reached by using a statutory mechanism known as proceedings supplementary.

In B & I Contractors, Inc. v. Mel Re Construction Management, 2011 WL 3300328 (2d DCA Aug. 3, 2011), B & I Contractors ("Subcontractor") had a subcontract with Mel Re Construction Management ("Contractor") for work on a project owned by Bella Casa, LLC. Subcontractor obtained a $190,212.71 judgment against Contractor, which Contractor did not pay. Subcontractor sought to initiate proceedings supplementary against Contractor and Edward Adkins who allegedly owned and controlled Contractor. Mr. Adkins allegedly also owned and controlled Bella Casa, LLC.

Subcontractor alleged that Contractor and Mr. Adkins entered into a settlement agreement with the Bank of Florida (apparently a lender for the project) and Owner, and that as part of the settlement agreement Contractor and Mr. Adkins released rights they had against Bank of Florida. Subcontractor argued that by entering the settlement agreement, Contractor released claims that it had against the bank, which claims could have been used to satisfy Subcontractor's judgment. Additionally, Subcontractor argued that Contractor released those claims in order to obtain a release of Mr. Adkins' liability on a personal guarantee he owed to the bank, apparently as principal of Bella Casa. Subcontractor argued that giving up those claims for the release of the personal guarantee constituted a fraudulent transfer.

The trial court denied Subcontractor's request for proceedings supplementary. Subcontractor appealed. The appellate court ruled that Subcontractor had properly invoked the statutory mechanism for proceedings supplementary. The appellate court noted that the governing statute, which has been largely unchanged in the 90 years of its existence, is not a model of clarity and the Rules of Procedure do not clarify how to utilize the statute.

One situation in which we have used proceedings supplementary is where our clients have obtained a judgment against their customer who subsequently sells real property they own. When properly handled, a judgment can be a lien against the debtor's real property. When the debtor sells his property that is subject to a judgment lien, the buyer "takes" that property "subject to" the judgment lien. Proceedings supplementary may be used to enforce the judgment lien, even though the property is now owned by someone other than the debtor.

Collecting on debts often is an exercise of patience and diligence. Proceedings supplementary, although an extension of the legal proceedings that themselves may already have been lengthy, can be an effective way to turn that paper judgment into real dough.