Rights of Unsecured Creditors Phillip L
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Agricultural Business Management FARM LEGAL SERIES June 2015 Rights of Unsecured Creditors Phillip L. Kunkel, Jeffrey A. Peterson Attorneys, Gray Plant Mooty INTRODUCTION After determining the proper county, the The modern farmer establishes ongoing creditor (also known as the plaintiff) must relationships with many businesses for the determine in which court to bring the purchase and payment of necessary supplies lawsuit. There are two possibilities. The in the normal course of business. These lawsuit may be brought in Conciliation Court, transactions usually do not involve the also known as Small Claims Court, if the farmer granting the supplier any special amount claimed, exclusive of the court filing protections to secure the repayment of the fee, is $7,500 or less. The alternative, debt, such as a security interest. These bringing the lawsuit in District Court, may be suppliers are considered unsecured creditors; used regardless of the amount involved. because the debt that is owed to the supplier In some cases, it may be possible for the is not secured by any property of the farmer. creditor to bring a lawsuit in federal court. This fact sheet discusses the legal remedies Federal court is limited by law to allow only and issues surrounding unsecured creditors. those lawsuits that involve the interpretation and application of a federal statute or that CIVIL ACTIONS involve residents of different states. In either Unfortunately, in times of financial distress, case, the amount in controversy must be a farmer may have trouble paying both his greater than $75,000. Because of these unsecured creditors and his secured restrictions, most claims by unsecured creditors. As a result, unsecured creditors creditors against farm operators are heard by may decide to initiate legal action to collect one of the two state courts. on the debt. An unsecured creditor who resorts to legal action must initiate a lawsuit Initiating the Lawsuit in the appropriate court to seek payment of If a plaintiff elects to proceed in Conciliation the amount owed him. Court, the lawsuit will be handled in an informal manner. Attorneys will not be Choosing the Court involved in most cases. To initiate a lawsuit Subject to legal limitations, the creditor can in Conciliation Court the plaintiff must file determine in which court the action is his claim with the court clerk. The clerk will brought. If brought in state court, the action send a copy of the claim to the defendant generally will be filed in the county where the and will notify him of the hearing date. At debtor farmer (the defendant) resides or in the hearing, each party presents its case and the county the facts involving the lawsuit argues its position to the court. The court occurred. renders a decision based on the evidence heard at the hearing. Either party may appeal developing the facts of the case so that each to the District Court. party is aware of the opposing party’s position. Summons and Complaint Interrogatories frequently are accompanied The procedures for district court lawsuits are by requests for inspecting and copying similar. To initiate a lawsuit, the plaintiff documents. Under the court rules, both must prepare and personally serve upon all parties may compel the other party to defendants a summons and complaint that produce any and all documents that may be outlines the claim. In most cases, this relevant to the lawsuit. complaint need not specify all the facts that gave rise to the claim; rather, it may merely It is possible for either party to examine any set forth sufficient facts to notify the potential witness under oath through a defendant of the nature of the claim. deposition. Witness testimony will be preserved by means of a transcript prepared Answer by a court reporter. It also may be preserved Upon receipt, the defendant has 20 days to by means of a video tape. Examination of a respond. The defendant generally responds witness can deal with any facts relevant to by serving upon the plaintiff’s attorney an the lawsuit. answer to the complaint. In his answer, the Trial defendant may assert defenses and/or claims against the plaintiff, other defendants or Once discovery has been completed, the other third parties that may be responsible to lawsuit, if not already settled, will be ready the plaintiff. If the defendant fails to answer for trial. It may be possible, at this point, to within 20 days, the court will grant the obtain a ruling from the court without a full plaintiff request though a default judgment. trial. In cases in which there are no disputes of fact and it can be shown that one of the Discovery parties is entitled to prevail as a matter of Once the defendant has answered, the parties law, a motion for summary judgment may be to the lawsuit may undertake discovery granted by the court. The effect is to obtain procedures. Court rules allow several an order from the court that results in a procedures that enable the parties to a civil determination for either the plaintiff or the action to identify witnesses, identify defendant. It is rare for a court to grant such documents, develop the facts that gave rise a motion because most cases involve factual to the lawsuit, limit the contested issues at disputes. any trial and foster settlements. Under the If the case must go to trial, the trial may or court rules, either party may submit a series may not involve a jury. In general, if a person of written questions to the opposing party. is being sued for the recovery of money, he is These questions, known as interrogatories, entitled to a jury if he so demands. At the must be answered under oath by the trial, the plaintiff must prove that he is opposing party. The questions may relate to entitled to the amount he claims. The any facts that are or may be in dispute in the plaintiff may introduce all his evidence lawsuit, to the identity of witnesses that the before the defendant introduces any of his. opposing party will be calling at the trial and to the amount of the plaintiff’s claim. The use of interrogatories can be a first step in MONEY JUDGMENTS registered property. However, a judgment for debt on agricultural property, personal Issuance of the Judgment property used in the farm operation, owned If the court determines that the plaintiff is by a farm debtor is only good for 3 years. entitled to recover a sum of money from the Moreover, in this situation, the judgment defendant or the defendant failed to answer does not attach to real or personal property the complaint), the court will order the clerk acquired by the farm debtor after the of court to issue a judgment in favor of the judgment is entered. plaintiff. Once this judgment has been obtained, the plaintiff can file it with the Priority clerk of court by filing an affidavit giving the Once a judgment lien has been docketed, the defendant’s name, occupation and address. judgment creditor has priority over other Once this is completed the judgment is judgment creditors who obtain later considered “docketed.” judgments against the debtor. This lien prevents the judgment debtor from selling Creation of a Lien the property because any potential purchaser As soon as the judgment has been docketed, of the property will not buy the property it creates a lien to the extent of the unpaid unless the judgment has been satisfied. A amount of the judgment on all of the judgment lien will not, however, grant the defendant’s nonexempt real property located judgment creditor priority over a prior in the county in which it is docketed. To get a mortgage or any purchase money mortgage lien on other real property located in other that the judgment debtor grants to a seller of counties, the plaintiff must transfer the real property in conjunction with the docketed judgment to the other counties. purchase of additional real property. For a This docketed judgment creates a lien on real more detailed discussion of mortgages and property owned by the judgment debtor at purchase money mortgages, See Mortgages the time of the docketing and on all property and Contracts For Deed. that he may later acquire. In other words, the judgment lien automatically attaches to any COLLECTION OF MONEY JUDGMENTS real property later acquired by the debtor. A judgment creditor can attempt to collect The judgment lien is not on the judgment on the money judgment in two primary ways: debtor’s personal property or exempt 1) through a writ of execution and 2) through property. For a general discussion of exempt garnishment. property, see section titled “Exemptions” below. Writ of Execution In addition to acquiring a lien on real Duration of the Lien property, a judgment creditor may obtain This lien is good for 10 years after the from the court an order authorizing the judgment is entered, and may be extended sheriff, the creditor, or the creditor’s for additional 10 year periods. Additional attorney to carry out the court’s decision in procedures must be followed by the favor of the judgment creditor. This court judgment creditor if the judgment debtor order is known as a writ of execution. It owns registered (or “Torrens”) property, allows the judgment creditor to have the since the mere docketing of a judgment does not result in the creation of a lien on judgment debtor’s property seized and sold properly levied on. Growing crops may be in satisfaction of the judgment. levied on after they have been planted, but they may not be sold until they mature.