Succeeding in Your Business: Collecting your overdue debts from a distance

“Your YouTube video on collecting from deadbeat clients was truly inspiring. I am an electrical contractor who is owed $3,000 from a customer located way on the other side of the state. His business is selling a product made by others and installed by electrical contractors such as myself. He has no business assets, works from home and has no job site work (he may be on a site for 1-2 hours). He is, however, incorporated. I won a small claims court judgment against his corporation, but the court will not enforce the judgment because of the great distance, and I have spent approximately $2,300 for my attorney to get the judgment. Collection agencies will not help either. I am at wit’s end. Are there any options I may have overlooked?”

First of all, here are a couple of tips about suing in small claims court. Generally, courts are required to enforce judgments rendered by other courts elsewhere in your state. This principle (known as “comity”) is enshrined in your state constitution.

But there’s a catch. A court is obligated to enforce another court’s judgment only if the case was fully litigated: The other side showed up on the court date, both of you argued your case before the judge, and the judge rendered a decision based on all the facts presented to him. If (as I suspect) what you got was a “default judgment” — the other side simply didn’t show up in court because of the great distance involved — his local court may refuse to enforce your judgment on the grounds that a local citizen didn’t have his day in court.

    Whenever you sue someone in small claims court and that person lives remotely from you, you always, always, always bring the action in the court where he is located or has his place of business, not where you are located. Yes, it’s inconvenient for you, but at least you will know that if you win, the other court will always enforce its own judgment against the deadbeat (even a default judgment). Also, if your case is a really strong one, you may (no guarantee here) be able to persuade the court to reimburse you for travel, lodging and other out-of-pocket expenses you incurred getting the judgment. If that doesn’t happen, good-faith attempts to collect a debt (including travel) are an “ordinary and necessary business expense” you can deduct on your taxes.

Secondly, I always advise against hiring an attorney to represent you in small claims court. Some judges don’t like to deal with attorneys and it takes just as much time for an attorney to prepare for a small case as it does a much bigger one. This is one situation where you are better off representing yourself, as it doesn’t make sense to spend $2,300 and countless hours and days of your life to collect a $3,000 judgment.

Lastly, you are assuming that your customer was the one-person corporation and not the individual himself. People are allowed to form corporations and limited liability companies for the sole purpose of avoiding personal liability to creditors. But if you can prove that you dealt with the individual directly, not his corporation, you may be able to enforce your judgment against the individual’s personal assets, such as his house, automobiles and salary from his day job.

Look at the invoices you sent him. Were they addressed to him or his corporation? If you treated his corporation as your customer, then there’s little you can do to reach his personal assets. You will have to prove in court that he treated his corporation as a personal piggy bank and otherwise treated it with so little respect that it should be disregarded (this is called “piercing the corporate veil”). If, however, your bills were addressed to him individually and he wrote checks to you from his personal bank account, you may have a case for pursuing him individually, which is much more likely to get you paid.

Going forward, you should have your attorney prepare a short retainer agreement that your customers will sign before you begin working for them. Make sure the agreement contains the following clause: “My agreement is to perform services for the person or persons signing this agreement in their individual capacities, and I will look to them personally for the payment of my fees and expenses. While I may accept payment from a corporation, limited liability company or other legal or business entity that is related to you, I will not be obligated to rely on such entity for the payment of my fees and expenses unless I expressly agree in writing to do so.” That language could have saved you a ton of time and frustration here.

My YouTube video “Dealing With Deadbeats” can be found by searching YouTube for “Cliff Ennico Dealing With Deadbeats.”

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.” 

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