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Creating leverage in commercial collections

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A primary objective in collecting commercial debt is creating leverage. While collecting debt from an ongoing business is more art than science, there is perhaps no better method of commercial debt collection than third-party examination proceedings.

The third-party examination can be used to disrupt a company's relationship with a client or customer. By using a third-party examination proceeding, a creditor can require the client or customer of a commercial defendant to appear in court to answer questions concerning the relationship between that client or customer and the commercial defendant. This proceeding, while highly effective, is underused by even sophisticated and savvy collection lawyers.

Post-judgment discovery proceedings are not limited to the in-court examination of the judgment debtor. By statute, a judgment creditor is entitled to examine third parties who:

(1) are in possession or control of property in which the debtor has an interest, or

(2) are indebted to the judgment debtor in an amount over $250.

From a commercial collection standpoint, these third parties can include any client or customer who has an unpaid invoice from the defendant that exceeds $250. At any given time, almost any client or customer of the commercial defendant could fall within this category.

To obtain a court order requiring a third party's appearance in court, a creditor may apply ex parte. The creditor must submit a declaration to the court showing that the third person possesses money or property of the debtor or owes more than $250 to the debtor. Courts typically require creditors to be quite specific in the factual assertions contained in the declaration prior to issuing the order for appearance.

Once obtained from court, the order must be personally served upon the third person along with a tender of mileage fees to the courthouse where the examination will be conducted. If mileage fees are not tendered at the time that the order is served, the examination order is ineffective.

A third party examination is best utilized when the creditor suspects that the defendant company enjoys a business relationship with some third party. Typically, the examination is used to ascertain the breadth, scope, and nature of that relationship. Once the nature of the relationship is established, the creditor can choose which judicial enforcement technique best serves the creditor's interest.

For example, if a creditor learns that the third party is a regular customer of the defendant, the creditor may pursue a motion for assignment order to intercept the stream of income from the customer to the defendant company.

Many times, service of the order for a third party's appearance alone results in a successful collection against a business since most defendants take great pains in protecting their income. Moreover, no defendant appreciates a collection lawyer interfering with existing business relationships.

In any event, the failure to pursue third-party examinations, when appropriate, is an oversight that can be costly.


O'Laughlin is a partner with Kimball Tirey & St. John LLP. He may be contacted at (800) 575-1770. The preceding article is for general information purposes only. Seek legal advice before acting. For past articles on other related topics and a list of the firm's offices, consult the resource library at www.kts-law.com.

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