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Finishing What You Started

Collecting on Judgments for Low-Wage Workers

By Michael Hollander

As employment attorneys, we must ask ourselves what rights we are vindicating for our worker-clients when we win a judgment against a bad employer but do not collect on that judgment. To many small employers on the margins of the business world, a judgment is nothing more than a pesky piece of paper. Unless that paper is turned into real consequences, the employer will freely go about business as usual: shortchanging workers.

Here I examine the collections process for wage judgments, with a focus on employment cases for low-wage workers. I review how to collect in employment cases and touch on ancillary issues that may come up in collections cases. I discuss “wage liens,” a new tool being introduced throughout the country to aid in collections of wage judgments for low-wage workers. Although I focus on collections in low-wage-worker cases, the concepts can be applied to any collections case.1

A Typical Worker Story

Javier Lopez worked at a trendy restaurant in downtown Philadelphia in 2008.2 Lopez was fired and, as is common, was not paid for his last two weeks of work. He was owed just over $700. Community Legal Services filed suit for Lopez for $2,700, a figure that included penalties and attorney fees, and we won a default judgment. Then the real work began.

Although the restaurant was still operating, it was doing very badly. We tried to garnish the restaurant’s bank account, but it was empty. The owner offered to pay $75 a week, but Lopez rejected that offer, as it would have taken Lopez the better part of a year to collect his judgment with such a low weekly payment. And the owner’s proposed plan assumed that the restaurant would stay open that long.

What rights are we vindicating for our worker-clients when we win a judgment against a bad employer but do not collect on that judgment?

Ultimately we listed the contents of the restaurant for sheriff’s sale. To generate bidders for the sale and put pressure on the owner, we notified all of the local restaurant supply stores about the pending sale. For fear of losing all of his equipment at pennies on the dollar, the owner had his brother pay the judgment the night before the sale. The restaurant permanently closed the next day.

The Collections Process for Wage Judgments

The collections process for wage judgments begins the moment a client walks into your office. From the inception of a case, a lawyer should evaluate, with respect to collections, (1) whether there are assets that would allow collections on an eventual judgment and (2) whether there are alternatives to litigation that will improve the client’s chances of getting paid and getting paid more promptly.

Making the first evaluation can be difficult, if not impossible, before a case begins. Large employers and their assets can be tracked by using various online databases.3 Small, fly-by-night employers, however, may leave no trace of their existence (often by design).

Prelitigation Asset Evaluation. When evaluating whether the employer has assets, look for these generally good signs:

When evaluating whether the employer has assets, look for these generally bad signs:

The difficulties in determining whether the employer has assets and the many employers who are able to make themselves judgment-proof (or judgment-immune) make figuring out alternatives to litigation all the more necessary.

Finding an Alternative to Litigation. The best way to collect what a client is owed is to do so with a willing employer. A settlement agreement obviates the need to file a lawsuit, win the lawsuit, do an asset search, engage with the courts to dispose of the employer’s assets, and take all other steps to collect.

Some Employers Are Willing to Pay from the Outset. These employers may have made an honest mistake, had a good-faith dispute that they wish to resolve, or have consulted with an attorney who advised them that they are in the wrong. With these employers, the only real issue is entering into a strong settlement agreement. You may consider adding liquidated damages and attorney fees to your agreement in the event of nonpayment; you may consider gaining a security interest in the employer’s assets if the settlement is large and you fear default. Settlement agreements are outside my scope here.

Small, fly-by-night employers may leave no trace of their existence (often by design).

Other Employers Have to Be Made to Want to Pay. We have tools at our disposal to convince the employer that paying our clients is in the employer’s best interest:

The idea in these methods of collecting wage judgments is to get sufficient leverage on an employer before filing a lawsuit to get the employer to want to come to the bargaining table. If you can turn that leverage into a settlement agreement, your client will be in a much better position.

Postlitigation Collections. Often a settlement is not possible, and we find ourselves postlitigation with a judgment in hand. Certain methods can turn the judgment into something more meaningful (read: money). These methods are available in every state, though with variations on the name of the processes, particular restrictions, or timelines. The following should serve as a point of departure for research about your own state’s practices.

Garnishment. Satisfying a debt by attaching property held by or owed by a third party is garnishment.10 In the simplest of cases, garnishment most commonly refers to attaching a bank account or wages.

In a case that has gone to judgment, garnishing a bank account is the easiest way to collect on the judgment. A bank that receives a garnishment notice must generally immediately freeze the account and send notice to the garnishor (your client) of the funds held in the account. Once the garnishment is in place, the employer is neither able to move funds out of the account nor able to object to the garnishment for reasons other than legal exemptions to the garnishment. The exemptions most likely to come up are for public benefits, retirement funds, certain insurance benefits, and fees that may be taken by the bank for processing the garnishment.11

In many cases, we lack information about what bank the employer uses. Often our clients were paid in cash or never paid at all. Some methods may work to find an employer’s bank account. In the case of an individual debtor (as opposed to a corporate one), a credit report may contain information that could lead you to a bank account.12 Credit reports are not always cheap or good leads to helpful information, but they can be invaluable in finding assets.13

Alternatively you can try to make an educated guess as to the bank the employer uses. Likely the employer uses one of the five biggest banks in your area or one of the banks within several miles of the employer’s home or business. People are lazy; use this to your advantage.

You are not limited to garnishing bank accounts and wages. Any property that is owed to the employer-debtor may be garnished. You may garnish rent owed to a landlord, payments due to a construction contractor from a recent job, or proceeds from a brokerage account.

Try to think through your employer-debtor’s business and personal life (if you have a personal judgment) to figure out sources of income. For a construction contractor, for example, you may call your municipality to see if any building permits have been issued with the employer as the contractor. You may then garnish income from the worksite’s owner. Against a retailer that does a significant amount of in-person business, you may be able to get the local sheriff to stand at the cash register and collect payments made to the retailer. This method has the obvious side-effect of embarrassing the employer and perhaps leading to full payment of the judgment. As for many professional services companies, you can determine their major clients and try to seize the accounts receivable from these companies to your debtor. Your client likely will know the employer’s clients.

Levy. The actual or constructive seizure of the employer-debtor’s property to pay off a judgment is levy.14 The difference between a garnishment and a levy is that in a garnishment the property is held by a third party; in a levy the property is held by the debtor.

Levy is most often used in conjunction with a sheriff’s sale: the sheriff seizes the property and makes it available for a sheriff’s sale.15 Property seized can range from personal property such as furniture and equipment to jewelry or a vehicle to alcohol and the liquor license on the premises of a restaurant to real property. It may be intellectual property.16 As in garnishments, there are often exemptions to what may be sold. Examples of state-specific exemptions are clothes, bibles, sewing machines, and motor vehicles or tools of trade up to a certain value.17

Even if you never conduct a sheriff’s sale, the threat of a sale can be a huge leverage. Schedule a sheriff’s sale of someone’s personal items, and the spouse will likely pressure that someone to settle. Schedule a sheriff’s sale of a business, and the possibility of losing assets at terrible prices will also force a settlement.

Keep these in mind: First, you need to find the physical assets of your employer-debtor before you can levy them. Finding the assets of, say, a fly-by-night construction contractor or janitorial company may be more difficult than finding the assets of a restaurant.

Second, the assets have to have value, either to the debtor or to a third party, before levying them makes sense. Sometimes the assets have little monetary value (think: old computers, specialized signage, or an old pickup truck), but the business relies on them to operate. If you are able to take the computers away from an accounting firm, that firm will fold immediately. Generally the judgment creditor (your client) can “credit-bid” against the judgment creditor’s own judgment for items at the sheriff’s sale. Credit-bid to buy up less valuable but crucial tools of the business to get leverage for a settlement.

If items have external value, you can drum up excitement about the sale among competing businesses. A sheriff’s sale of a restaurant may entice restaurant-supply stores; a sheriff’s sale of an auto body garage may entice other mechanics who want to get their hands on otherwise expensive equipment at a good price. The job of advertising the sale is often left to you, and so get creative and use the Internet to find local businesses that would benefit from the sale.

Not all items are worth selling, however. Cars, for example, are often not worth selling except to put pressure on a business. Newer cars are often underwater on their loan (since a car’s value drops quickly after leaving the lot); cars that no longer have loan payments are often not worth enough to entice buyers without a proper inspection. Personal clothing items and old furniture in a house are not worthwhile either—you will have a lot of trouble finding a buyer for someone’s old, ratty couches and suits.

Sometimes you need to think through a business and put all of the previous ideas together to come up with a good sheriff’s sale strategy. The fact of the sale itself may be enough to garner media and other unwanted attention to get your client paid. Even the threat of sale and the subsequent harm it will cause a business may help your client get paid without actually going through with the sale.

Selling the right items can be helpful as well. Having a liquor license physically levied (and removed from the premises) will essentially shut down a restaurant. If the levy is not enough to get your client paid, the license may be valuable. A liquor license is worth upward of $85,000 in Philadelphia and more than $150,000 in other parts of Pennsylvania.18 Real property, by contrast, may come with too many restrictions and requirements to make a sheriff’s sale worthwhile in less valuable cases.

Judgment Liens. A lien imposed on a judgment debtor’s property is a judgment lien.19 What this generally means is that if you win a money judgment, you get a lien on some defined amount of the defendant’s property. You may have to take some action to create the lien; in California, for example, you have to file an abstract of judgment with each county recorder’s office where you want the lien to be in effect.20 In some states, however, creation of the lien is automatic.21

The scope of the lien also varies by state. In Pennsylvania and California the lien is effective against all real property in the county where the judgment is indexed.22 In New Jersey the judgment acts as a lien on all real property within the entire state; no indexing in different counties is required.23

The beauty of a judgment lien is that it is a passive remedy—no work required on the part of the attorney once the lien is indexed. Once the lien is in place, any time that the debtor-employer tries to dispose of property or refinance the loan on any property, the debtor-employer has to clear any liens on the property. In practice, this means that some time, years after your judgment, you may get a call from a title company asking to satisfy the lien. You will be invited to come to the closing, and a check will be given to you.

The two big legal catches on judgment liens are that (1) they are effective only if your employer-debtor owns real property in the jurisdiction of the lien and (2) they often need to be reindexed after a certain number of years or else they disappear.24

Emerging Collections Tool: Wage Liens

Over the past four years, a number of attorneys for low-wage workers from around the country have been collaborating on monthly calls about judgment collections.25 One of the more interesting developments from the group has been the rediscovery of a tool used in several states for judgment collections: wage liens. Modern wage liens are in their infancy—only a few states can claim use of them, and only two states have recently updated their lien laws—but a movement is growing to implement this tool throughout the country.26

Wage liens allow any worker to place a lien on the employer’s property, as well as the property where the work was performed, for the value of the workers’ unpaid wages.

Wage liens, on a most basic level, are mechanic’s liens generalized to all workers. In their ideal implementation, they allow any worker to place a lien on the employer’s property, as well as the property where the work was performed, for the value of the workers’ unpaid wages. A wage lien is a prelitigation tool that gives a worker early leverage to force the employer or property owner into settlement negotiations.

In practice, wage liens have proven extraordinarily effective in getting money into the hands of unpaid workers. A 2013 study by the National Employment Law Project found that in Wisconsin, a state that has wage liens, 80 percent of workers who had a wage lien were able to recover some of their unpaid wages.27 By contrast, in California, a state without wage liens, only 17 percent of workers who prevailed in administrative wage claims were able to recover some of their unpaid wages.28

The monthly judgment-collections group has drafted model legislation that has been modified and introduced in at least five states.29 Maryland passed wage lien legislation in 2013 and recently finalized the implementing regulations.

Here is an example of how a wage lien can be effective: Janitor Jane works for Carmela’s Cleaners and cleans Nick’s Nightclub daily. She is unpaid for her last four weeks of work. Were she to file a lawsuit, she would have to spend months or years in litigation before she could recover anything. During her lawsuit, she would likely litigate whether Nick’s Nightclub, the proverbial deep pocket, is her employer, as she was hired by Carmela’s Cleaners. Even if she won her suit, nothing would guarantee that either the nightclub or the cleaning company would exist—her victory would have been Pyrrhic.

However, were she able to file a wage lien immediately, she would attach not only any assets that Carmela’s Cleaners owned (likely few) but also any assets on the property of Nick’s Nightclub (both personal and real property).30 This potential lien would likely prompt a quick settlement and payout for Jane.

Important Considerations

Judgment collections intersect with many other areas of law. Discussing the details of each of these areas of law here is impossible; each could fill a textbook. Instead here is a summary of what you should take into consideration throughout the collections process.

Bankruptcy. Many defendants end up in bankruptcy during a wage case or during collections. Once a defendant files for bankruptcy, an automatic stay of all proceedings against that defendant takes effect. If the defendant successfully receives bankruptcy protection, any claims that predate the filing of the bankruptcy will be wiped out or heavily discounted.

If a defendant enters bankruptcy, you, as the plaintiff’s attorney, must keep these points in mind: First, if you are prejudgment, you should file a proof of claim with the bankruptcy court for any worker you represent. You may get priority position depending on how recently the work was performed.

Second, you may be able to have your client’s claims declared nondischargeable in the bankruptcy by filing an adversary proceeding under 11 U.S.C. §§ 523(a)(2)(A) or 523(a)(6).31 If you are able to do that, you can continue to litigate your wage case.

Third, if you have a judgment and have perfected any judgment liens (or mechanic’s liens or wage liens), those liens will survive the bankruptcy. The debt may have been discharged with respect to the employer but not with respect to the employer’s property. With secured liens, your client may have more rights to priority payments and more leverage than an unsecured creditor.32

Fair Debt Collection Practices Act. Your client is likely considered a debt collector under the Fair Debt Collection Practices Act, which is meant to eliminate abusive practices in the collection of consumer debt.33 The Act has stiff penalties and strict liability for violators. The good news is that it applies only to transactions that are for “personal, family, or household purposes.”34 What that means is that unless your client is a domestic worker or a day laborer working directly for the homeowner, the Act probably does not apply to your client. But be aware of it if you tread anywhere near consumer debt.35

Piercing the Corporate Veil or Alter Ego Liability. Eventually you will run into a situation where a company has hidden its assets within a shell corporation or in the accounts of one of the company’s shareholders. To get at these funds, you will have to “pierce the corporate veil” or look beyond the corporate structure to find a more equitable solution to liability. One of the common ways to pierce the corporate veil is to prove that an individual or corporation is a mere alter ego of the original employer.36 You may have to file a new lawsuit against the alter ego to show that it is liable for the original judgment.37

Lawsuit for Improper Distribution of Corporate Funds. Creditors may be able to bring a lawsuit against corporate shareholders and directors who pay themselves before creditors and leave a company insolvent.38

Successor Liability. If a business continues to exist in substantially the same form but under a different name or ownership, you can hold the successor corporation liable under the doctrine of successor liability.39 Genuine transfers of ownership do not necessarily carry over liability unless one of the following is true: (1) the transfer contains an assumption of liability; (2) the transaction was a consolidation or merger; (3) the transaction was fraudulent and intended to avoid liability; (4) the transfer was not a purchase in good faith, such as when the consideration was inadequate; or (5) the new corporation is just a continuation of the previous corporation.40 A common scenario is a business closing upon being sued and then reopening with a new name but with all of the same employees, the same location, and the same equipment as the previous company.41

Fraudulent Transfers. If an employer transfers assets to another person or business (e.g., a spouse or a family member) for the purpose of avoiding judgment, you should be able to go after those assets by using your state’s implementation of the Uniform Fraudulent Transfers Act.42 Generally a creditor needs to show something fishy—usually called “badges of fraud”—about the transfer in question. Some badges of fraud are (1) transfers of property during the pendency or threat of litigation, (2) a transfer of property that leaves the debtor insolvent, (3) inadequate consideration, (4) a transfer in which the debtor maintains an interest in or control over the property, and (5) conveyance of property to someone with no apparent use for that property.43

As low-wage-worker lawyers we have to dedicate some of our practice to putting teeth into the judgments that we win.

Finding Assets. Critical to collections, asset searches for small businesses can be difficult, but they are not impossible. Start with any known prior bank accounts that the employer used. If you do not know of any bank accounts, try sending garnishment paperwork to the five biggest banks in your area or the five banks closest to the employer’s home or business.

Real property can generally be found by using Lexis or Westlaw’s real property locators. Your locality should also have a recorder’s office (possibly online) or other repository for property transactions. Some states allow you to find vehicles by sending the proper paperwork to the department of motor vehicles.

Of course, if the business has a physical location, any assets on-site are fair game for attachment. Another useful trick is to find other cases where the same defendant was sued. You may be able to see what assets were used to satisfy the judgment in that case and use the same (or similar) assets in your case. For example, you may see the bank from where the defendant’s assets were garnished.

You should be able to conduct postjudgment discovery against your debtor. Depending on how little the debtor owes, the debtor may not answer the discovery. If the only real sanction for not answering the discovery is more fines and penalties, why answer them if no one knows where your assets are? In larger cases, however, the time it takes to compel compliance may be worthwhile. More fruitful may be third-party subpoenas to banks, accountants, customers who may have accounts receivable, and the like.

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There is no one right way to do judgment collections. Here I give advocates a toolbox of collections techniques that can be applied to cases large and small. In many cases, collections of wage judgments are easier than we think, even with seemingly insolvent businesses. Although I do not advocate spending inordinate hours on collections in low-dollar cases, as low-wage-worker lawyers we have to dedicate some of our practice to putting teeth into the judgments that we win. If we do not, our clients do not get the true benefit of our services, and employers fail to learn the consequences of wage theft.

 

Author’s Acknowledgments
I would like to acknowledge the incredible contributions of Matt Sirolly of the Wage Justice Center in Los Angeles to my understanding of and practice in wage-judgment collections. Matt also kindly reviewed this article and made a number of important additions. Thanks also to the wage-judgment-collections group that has been meeting monthly for almost five years. This group has pushed our community to understand collections better and has been incredible in its efforts to expand wage liens throughout the country. I began working on judgment collections as a Skadden Fellow, and so I would be remiss if I did not thank the Skadden Fellowship Foundation and Susan Plum. Finally I would like to thank Community Legal Services and Sharon Dietrich for giving me the latitude to work on these important issues.

Michael Hollander
Staff Attorney

Community Legal Services
1424 Chestnut St.
Philadelphia, PA 19102
215.981.3794
mhollander@clsphila.org

1 The wage-judgment collections discussed here present a role reversal for typical legal services attorneys—usually we are defending our clients against creditors, rather than acting as a creditor’s advocate. But regardless of which side of the table our clients sit on, they are always at a disadvantage compared to their larger and more sophisticated adversary. Helping our clients collect their unpaid wages is critical to their economic security and finding a road out of poverty.

2 I am using a pseudonym for our client.

4 See, e.g., Va. Code Ann. § 43-3 (2014).

5 Id.

6 See Steeplechase Subdivision Homeowners Association v. Thomas, No. 2006-CA-002146 (Ky. Ct. App. 2008).

7 Whether employees of contractors may file for mechanic’s liens varies by state (see, e.g., Bender v. Beverly Anne Incorporated, 651 N.W.2d 642 (N.D. 2002) (disallowing claim by employee of subcontractor); Judd Fire Protection Incorporated v. Davidson, 773 A.2d 573, 575 (Md. Ct. Spec. App. 2001) (allowing claim of employee of subcontractor)).

8 See Inflatable Rat, Wikipedia (Nov. 29, 2014).

9 See, e.g., Victor Fiorillo, Workers at Fat Salmon Sushi Go on Strike, Philadelphia (May 1, 2013).

10 Black’s Law Dictionary 794 (10th ed. 2014).

12 Under the Fair Credit Reporting Act, a credit report can be pulled for a judgment debtor without permission; this is not true prior to judgment (15 U.S.C. § 1681b(a)(3)(A) (2011)).

13 Microbilt.com is an example of a company that offers a relatively reasonably priced report for this purpose.

14 Black’s Law Dictionary 1047 (10th ed. 2014).

15 In Pennsylvania the sheriff generally does not physically seize the property—the sheriff just declares the property seized. Because the debtor may go about using the property until there is a sheriff’s sale, sometimes levied property mysteriously disappears the day before a sheriff’s sale. Technically this is conversion, although I have never seen the crime prosecuted. You may want to work with the sheriff to seize property if you worry that it will disappear. The seizure and storage fees will likely cost you, however.

19 Black’s Law Dictionary 1064–65 (10th ed. 2014).

21 See, e.g., 231 Pa. Code § 3023 (2014).

22 Cal. Civ. Proc. Code § 697.310; 231 Pa. Code § 3023. Note that the lien can be reindexed in any county to reach property in that county.

24 See, e.g., Cal. Civ. Proc. Code § 697.310 (10 years); 231 Pa. Code § 3023 (5 years).

25 If you would like to join the calls, please email me at mhollander@clsphila.org.

27 Cho et al., supra note 26, at 3.

28 Id. at 14. In California only 15 percent of the total wages owed were recovered (id.). In Wisconsin 25 percent of the total wages owed were recovered (id. at 18).

29 Contact me at mhollander@clsphila.org if you would like a copy of the model legislation.

30 Note that this is under the model wage lien legislation. In practice, the wage liens that have been introduced would not allow attachment of Nick’s Nightclub unless the nightclub could be shown to be a joint employer.

31 See, e.g., Petralia v. Jercich (In re Jercich), 238 F.3d 1202 (9th Cir. 2001).

32 See U.S. Courts, Bankruptcy Basics (3d ed. Nov. 2011).

35 For more information on the Fair Debt Collection Practices Act, see Federal Trade Commission, Debt Collection (Nov. 2013).

36 18 Am. Jur. 2dCorporations § 47 (2014).

37 For more information on piercing the corporate veil, see Jonathan R. Macey, The Three Justifications for Piercing the Corporate Veil, Harvard Law School Forum on Corporate Governance and Financial Regulation (March 27, 2014).

39 19 Am. Jur. 2d Corporations § 2326 (2014).

40 49 A.L.R.3d 881 (2011).

41 See generally John H. Matheson, Successor Liability, 96 Minnesota Law Review 371 (2011).

43 37 Am. Jur. 2d Fraudulent Conveyances and Transfers § 14 (2014). See Jay D. Adkisson, Three-Step/Four-Test Analysis of the Uniform Fraudulent Transfers Act (2003).

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