Collecting a Judgment against a Failed Business

Failed Businesses

One of the most difficult and frustrating situations for consumers is when a business closes its doors while owing goods, services, refunds or other amounts of money to consumers. A consumer may have a legal right to reimbursement, goods or the performance of services, but practically speaking, enforcing payment or performance from a closed business is difficult. All too often no satisfactory remedy can be found. This section explores the mechanics of this situation as well as the benefits and drawbacks of four remedies: private lawsuit, filing a proof of claim in bankruptcy, private settlement, and walking away.

Private Lawsuit

Usually when a business defaults on its obligation to a consumer, the consumer has the right to sue the business for a full or partial refund, and sometimes for other damages either in NH Superior Court or NH Circuit Court - District Division. If the amount in dispute is less than $25,000, the title to real estate is not involved and a jury trial is not requested, the case may be filed in the Circuit Court.  In general, it is easier for people without a lawyer to proceed in Circuit Court. 

Small Claims Complaints

If you decide to proceed in Circuit Court and the amount of your dispute is less than $10,000 and the title to real estate is not involved the case and a jury trial is not requested, you may proceed in the Circuit Court through the Small Claims process.  The procedure for judicial resolution of a Small Claim complaint is designed to be faster and more informal than a typical lawsuit.  Most people who file a Small Claim complaint do not have a lawyer.  Keep in mind, even when you represent yourself, you are expected to familiarize yourself and abide by the local Court Rules.  There is lots of Self-Help Information on the NH State Court website to guide you through the process.  

If you chose to file a lawsuit, it is important to familiarize yourself with the applicable law as well as local Court Rules.  Every type of court has its own set of local rules.
Often a business that has stopped operating will no longer defend itself in a legal action. When a business does not appear to defend itself, the consumer may ask the court to enter a "default judgment" against the business. A judgment is, in practical terms, an order by a court for one party to pay another party a sum of money. Obtaining a judgment does not mean you will be paid.  It is step one of the collection process.  

Motion for Periodic Payments

If the business does not voluntarily pay the judgment, you will have to go back to court to get another order directing the business to pay.  This is called a Motion for Periodic Payments.   After you file your Motion, the Court will establish a judicially ordered payment plan for the business to pay.  

An Order directing Periodic Payments is useful if the business is operating.  However, if the business is not operating it likely has no income or other monies to pay the judgment or assets to sell to obtain money to pay the judgment.  In this circumstance, there is not much more a person can do.  

Seeking Payment from Owners of the Business

Under New Hampshire laws, and those of most states, a corporation or a limited liability company is a separate and distinct entity from its owners, officers, employees, members and board of directors.  Legally, it is a separate "person." In most instances if the debt is owed by the corporation or limited liability company, the people who own or run the business are not liable for the debt.

Furthermore, the owners, directors, members and shareholders are legally free to either work for another business or start a new one. The new business usually does not have to fulfill the old business's obligations to consumers or other creditors. As a practical matter, however, they may not be able to get financing because of their connection to the failed business.

Some exceptions to this rule exist. A court may decide that the owner of a business is liable for the debts of the business under a legal doctrine called "piercing the corporate veil." The court will “pierce the corporate veil” and disregard the fiction of the corporation or limited liability company when circumstances would leave to an inequitable result.  

A lawyer usually must help you decide whether there is a factual basis for seeking to hold corporate officials personally liable for corporate debts.  Circumstances in which the court has pierced the corporate veil include whether the business suppressed the fact it was incorporated, misled its creditors as to the corporate assets or otherwise used the corporate entity to promote injustice or fraud.   

It is worth noting that New Hampshire's Consumer Protection Act gives important protections in this area. Corporate officers and directors may be liable to you if they personally participated in or were aware of, and authorized, actions that violate the Consumer Protection Act.

In summary, bringing a suit in Small Claims Court is relatively inexpensive and does not require that you be represented by a lawyer. Keep in mind, however, that even if you receive a judgment and an order to pay, if the business does not have money or assets, you still may not receive your money. 

Bankruptcy

Sometimes, a business in financial distress will file for federal bankruptcy law protection from creditors. Once a business files for bankruptcy protection, you are legally prohibited from attempting to collect any debt owed outside the bankruptcy process.  This is called the Automatic Stay.  In a bankruptcy proceeding, a business will either reorganize its debts and continue operating or liquidate its assets and close the doors.  In either case, payments to creditors must be made according to a

Payment Priority System established by the Bankruptcy Code.

Under the Bankruptcy Code, some debts, such as wage claims, child support arrearages and most taxes, are considered priority debts and must be paid in full.  If a consumer has a deposit with a business, a portion of that deposit may be considered a priority debt that must be paid in full.  In addition, secured creditors, such as mortgagors or vehicle lenders, must be paid at least as much as the value of the underlying security.  Finally, unsecured creditors, like trade debt or credit cards and most consumer creditors, only get paid if there is money left after priority and secured debts are paid.  In most bankruptcies, unsecured creditors are paid pennies on the dollar or nothing at all.   However, occasionally, businesses that file for bankruptcy protection have enough cash available to pay all creditors, even unsecured creditors, in full.  Each case is different.       

If a business files a bankruptcy or you hear about a business filing bankruptcy and that business owes you money, it is a good idea to file a Proof of Claim in the bankruptcy case to advise the court how much you believe you are owed.    Directions about how to file a Proof of Claim can be found on the New Hampshire Bankruptcy Court website.  If the business filed for bankruptcy protection in a state other than New Hampshire, you can find directions on how to file a Proof of Claim on that court’s website.    

Again, filing a Proof of Claim does not mean you will be paid what you are owed.  It means that you will participate in the payments, if any, according to the Payment Priority System.  Failure to file a Proof of Claim may result in you not being included in any distribution.  

Private Settlement

Occasionally a business will have neither enough money to keep operating, nor enough money or the right incentives to file for bankruptcy. A business may, however, have some money available to provide some or all of the goods or services owed to its customers. In these cases, a business may be able to settle consumer claims informally. Settling a claim may allow a consumer and a business to avoid legal proceedings while giving the consumer some satisfaction. The private settlement approach is not without its drawbacks:

•    The business's financial position may be difficult to assess (thus making it hard to evaluate its settlement offers).
•    The person within the business with authority to make promises on behalf of the business may not be easy to identify.
•    Business people in financial difficulty can be evasive about when and how promises will be performed; informal settlement agreements are often broken because the business continues to disintegrate and/or the promises were unrealistic or made in less than complete good faith.
•    Finally, informal agreements are difficult to enforce in court when they are broken.

If you are able to negotiate an informal settlement with a failed or failing business, you should try to get the agreement in writing, with clear, realistic dates for the business to perform.

Walking Away

Sometimes, the most reasonable thing a consumer can do when dealing with a failed business is to walk away. Although walking away all but guarantees you will not be paid, you also will forgo the frustration, stress and cost of attempting to collect a debt.  Depending on the amount owed and the likelihood of recovery, walking away may be the best option.  Every situation is different.  Only you can decide the best course of action for you.  

Where To Go If You Have a Problem

Consumer Protection & Antitrust Bureau
NH Department of Justice
1 Granite Place South
Concord, NH 03301-6397
603-271-3641

US Bankruptcy Court
District of New Hampshire
Warren B. Rudman U.S. Courthouse
55 Pleasant Street, Room 200
Concord, NH  03301
603-222-2600

603 Legal Aid
93 North State Street, Suite 200
Concord, NH  03301
1-800-639-5293 or 603-224-3333

NH Bar Association
Lawyer Referral Service
603-229-0002 (Full Fee Program)
603-715-3290 (Modest Means Program)