One of the ways that a creditor can establish liability against a customer in court is based upon a cause of action in a complaint known as an Account Stated. What that cause of action means is that a customer has been billed for a reasonable period of time, and they have received and retained, without objection, the invoices that the creditor has sent to them seeking payment such that as a matter of law, liability on an Account Stated cause of action arises.
After an initial invoice is sent to a customer, and thirty days, or whatever the terms of payment are, expire without payment having been made, the creditor must take a further step. It is then very important for creditors to follow up at least once per month, with an additional invoice, or a statement of account before the unpaid debt is referred to an attorney for collections. It is important in court to be able to establish that at least three or four months of invoices or statements of account were sent to the customer without any objection having arisen. There is ample case law in New York law establishing the principle that liability arises as a matter of law from a failure to object to invoices that have been received and retained.
One way to attempt to confirm that such bills have been received and retained would be to send out some bills by certified mail, return receipt requested. A creditor should retain the U.S. Postal Service green card confirming that the bill has been received and retained. Most of the case law in the State of NY that pertains to the subject is based upon attorneys suing for legal fees, because attorneys, of course, are the ones who know about this Account Stated cause of action. Nevertheless, it is applicable to any business seeking to recover its balances due, just as it has been held to apply to attorneys seeking to recover on an Account Stated.
Some additional advice for creditors is to attempt to obtain credit applications from their customers, and if their customers do pay the creditor, it is important for creditors to retain copies of the customers’ checks. Those copies of checks will be extremely useful later on when the account is sent to an attorney for collection. One reason is that the customer’s check will help to identify the customer’s correct legal composition, such as a corporation or a limited liability company. Thus, when a lawsuit is started, the exact defendant will be named in the lawsuit. If not, there may be a problem later on in attempting to enforce a judgment. For example, if a corporation is ABC Corp., but they are sued as ABC LLC, a sheriff will not enforce the judgment against the improperly named defendant. In addition, another reason to retain copies of customers’ checks is that sometimes a debtor will allow a default judgment to be entered and fail to submit an answer to a summons and complaint.
Once a default judgment is entered, an attorney for the judgment creditor has a right to issue a restraining notice to a bank to attempt to freeze any money that is on deposit in the former customer’s, now judgment debtor’s, bank account. Now, it is not permissible under New York law to send out restraining notices to every bank in the State of New York. There has to be some good faith belief that the bank seeking to be restrained has some connection with the judgment debtor. Obviously, if the judgment debtor formerly banked at a certain bank, then the restraining notice to that bank would be perfectly appropriate, and in my experience, very often results in the freezing of substantial funds that belong to the debtor. Sometimes the debtor will claim that the restraint to the bank account is the first notification that they ever had of the lawsuit. At that point, it is incumbent upon counsel to attempt to settle the matter with the defendant rather than have the defendant bring on an Order to Show Cause in an attempt to vacate the judgment.
Since there is a general policy in the courts to allow all parties their day in court on the merits of an action, if they have a “meritorious defense,” it is extremely important to try to avoid the judgment debtor bringing on an application to vacate a default judgment. Once the case is litigated, that bank account may no longer exist and it may take up to a year or two to reinstate that judgment. For that reason, settlement for reasonable sums, whether it be 90% or 80% or 75% or something in that vicinity of the principal balance due, will invariably be in the creditor’s best interest.
Settlement is always preferable to litigation. Litigation is to be avoided if possible. It gives the debtors time to go out of business, or shift their assets to another entity. It also avoids substantial delay in the court system, and the possibility that a judge or jury will not see the case the way the creditor does. The ultimate results of litigation are slightly unpredictable. Unless the defendant being sued is “solid gold,” delay only plays into the hands of the debtor. I have heard it said by lawyers in billion dollar cases that even if they know their clients owe the money, their clients would prefer to gain interest on their money, and as long as they are paying their attorneys less than they are earning in interest, they would prefer to litigate the case as defendants. In more mundane types of cases, with thousands of dollars at stake instead of millions, the same attitude is prevalent. Defendants would prefer to pay their lawyers small amounts of money instead of paying the larger amount they truly owe to their creditors. So settlement early on is the smartest thing a creditor can do.