Rights of Unsecured Creditors
Phillip L. Kunkel, Attorney
Scott T. Larison, Attorney
Hall & Byers, P.A.
St. Cloud, MN
Copyright ©
2008 Regents of the University of
Minnesota. All rights reserved.
Today's farmer deals with many business people on an ongoing basis, purchasing needed supplies and making payments in the normal course of business. Such transactions usually do not involve granting the supplier special protections such as a security interest. In times of financial distress, it may prove difficult for the farm operator to pay his or her unsecured creditors while dealing with his or her secured creditors. As a result, unsecured creditors may be forced to initiate legal action to collect on their accounts.
Civil Actions
An unsecured creditor who resorts to legal action must initiate a lawsuit in the appropriate court to seek payment of the amount owed. Subject to legal limitations, the creditor can determine in which court the action is brought. If brought in state court, the action generally will be brought in the county where the defendant (the party who owes the money) resides or in the county the facts involving the lawsuit occurred. The creditor (also known as the plaintiff) must determine in which court in the appropriate county to bring the lawsuit. There are two possibilities: The lawsuit may be brought in Conciliation Court if the amount claimed, exclusive of the court filing fee, is $7,500 or less; or, the lawsuit may be brought in District Court regardless of the amount involved.
In some cases, it may be possible for the creditor to bring a lawsuit in U.S. District Court, although this court is limited by law to hearing only those lawsuits that involve the interpretation and application of a federal statute or that involve residents of different states. In either case, the amount in controversy must be greater than $75,000. Because of these restrictions, most claims by unsecured creditors against farm operators are heard by state courts.
If a plaintiff elects to proceed in Conciliation Court, the lawsuit will be handled in an informal manner. Attorneys will not be involved in most cases. To initiate a lawsuit in Conciliation Court the plaintiff must file his or her claim with the court clerk. The clerk will send a copy of the claim to the defendant and will notify him or her of the hearing date. At the hearing, each party presents its case and argues its position to the court. The court renders a decision based on the evidence presented at the hearing. Either party may appeal to the State District Court.
Procedures for Municipal, County, and District Court lawsuits are similar. To initiate a lawsuit in these courts, the plaintiff must prepare and personally serve upon all defendants a complaint outlining the claim. In most cases, this complaint need not specifically state all the facts that gave rise to the claim; rather, it may merely set forth sufficient facts to notify the defendant of the nature of the claim. Upon receipt, the defendant has 20 days to respond. The defendant generally responds by serving upon the plaintiff's attorney an answer to the complaint. In his or her answer, the defendant may assert claims against the plaintiff, other defendants, or other third parties that may be responsible to the plaintiff.
Once the defendant has answered, the parties to the lawsuit may undertake discovery procedures. Court rules allow parties to a civil action to identify witnesses, identify documents, develop the facts that gave rise to the lawsuit, limit the contested issues at any trial, and foster settlements. Under the court rules, either party may submit a series of written questions to the opposing party. These questions, known as interrogatories, must be answered under oath by the opposing party. The questions may relate to any facts in dispute in the lawsuit, to the identity of witnesses that the 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 developing the facts of the case so that each party is aware of the opposing party's position.
Interrogatories frequently accompany requests for inspecting and copying documents. Under the court rules, both parties may compel the other party to produce any and all documents that may be relevant.
It is possible for either party to examine any potential witness under oath through a deposition. Witness testimony will be preserved by means of a transcript prepared by a court reporter. It also may be preserved by means of a video tape. Examination of a witness can deal with any facts relevant to the lawsuit.
Once discovery has been completed, the lawsuit, if not already settled, will be ready for trial. It may be possible, at this point, to obtain a ruling from the court without a full trial. In cases in which there are no disputes of fact and it can be shown that one of the parties is entitled to prevail as a matter of law, the court may grant a motion for summary judgment. The effect is to obtain an order from the court that results in a determination for either the plaintiff or the defendant. It is rare for a court to grant such a motion because most cases involve factual disputes.
If the case must go to trial, the trial may or may not involve a jury. In general, a person being sued for the recovery of money is entitled to a jury if he or she so demands. At the trial, the plaintiff must prove that he or she is entitled to the amount he or she claims. The plaintiff may introduce evidence before the defendant introduces evidence.
Collection of Judgments
If the court determines the plaintiff is entitled to recover a sum of money from the defendant, the court will order the court clerk to issue a judgment in favor of the plaintiff. Once this judgment has been obtained, the plaintiff can file it with the court clerk by filing an affidavit giving the defendant's name, occupation, and address. As soon as the judgment has been docketed, it creates a lien to the extent of the unpaid amount on all of the defendant's real property located in the county in which it is docketed. To get a lien on other real property located in other counties, the plaintiff must transfer the docketed judgment to the other counties. This docketed judgment creates a lien on real property owned by the judgment debtor at the time of the docketing and on all property that he or she may later acquire. In other words, the judgment lien automatically attaches to any real property later acquired by the debtor. This lien is good for 10 years after the judgment is entered, and may be extended for additional 10 year periods. Additional procedures must be followed by the judgment creditor if the judgment debtor owns registered (or ÒTorrensÓ) property, since the mere docketing of a judgment does not result in the creation of a lien on registered property.
Once a judgment lien has been docketed, the judgment creditor has priority over other judgment creditors who obtain later judgments against the debtor. This lien prevents the judgment debtor from selling the property because any potential purchaser of the property will not buy the property unless the judgment has been satisfied. A judgment lien will not, however, grant the judgment creditor a priority over a prior mortgage or any purchase money mortgage that the judgment debtor grants to a seller of real property in conjunction with the purchase of additional real property. For a more detailed discussion of mortgages and purchase money mortgages, see Mortgages and Contracts For Deed.
Besides a lien on real property, the court may authorize the sheriff to carry out the court's decision in favor of the judgment creditor. This court order is known as a writ of execution. It allows the judgment creditor to have the judgment debtor's property seized and sold in satisfaction of the judgment. Such a writ is issued by the clerk of the court in which the judgment was entered. Usually the sheriff serves the writ, but when the judgment creditor proposes to make an execution of not more than $5,000 for money owed to judgment debtor by a third party, the execution may be made by the judgment creditor's attorney. To do so, the attorney sends a registered or certified letter of execution to the third party or has it served personally. No notice is required prior to executing with a writ of execution. If, however, the judgment creditor seeks to levy earnings in the possession of an employer, the creditor must first serve a notice upon the judgment debtor no less than 10 days prior to service of the execution.
A writ of execution can be used to collect the judgment from real or personal property, provided that the property is not exempt from levy under Minnesota law. Personal property that can be delivered manually is levied on by the sheriff taking physical custody of it. Other personal property is levied by leaving a certified copy of the execution and a notice specifying the property levied on with the person holding the property. Growing crops may be levied after they have been planted, but they may not be sold until they mature. If mortgaged property is levied, the purchaser may acquire only the rights that the debtor had in the property. That is, if there is a prior lien against the property, the purchaser receives the property after sale subject to the prior lien.
Property that is subject to a levy may be sold by the sheriff to satisfy the judgment. If personal property is involved, the sheriff must give 10 days posted notice of the time and place of the sale. If the sale is to be of real property, six weeks posted and published notice must be given. Regardless of the type of property, the sheriff must serve copies of the sale notice, execution, and inventory of the property to be sold on the judgment debtor before posting any notice of sale. The sale is held by the sheriff as an auction.
Once the sale has occurred, there is no redemption from the sale in the case of personal property. In the case of real property, the judgment debtor may redeem from the sale within one year of the sale date by paying the sale price, interest, taxes, assessments, and payments on prior liens made to the purchaser, the sheriff, or the clerk of court. Subordinate lien claimants may redeem from the sale, if, within one year, they file a notice of intention to redeem with the court clerk where the judgment was entered. They are given a five-day period within which to exercise their redemption rights.
A judgment creditor often looks to monies owed to the judgment debtor by a third party as a source of payment for his or her claim. Such indebtedness can be reached by writ of execution. It also can be reached by a garnishment. To use a garnishment, the judgment creditor or his or her attorney prepares and issues a garnishment summons to the third party. This summons, together with appropriate fees, must be personally served on the third party by the judgment creditor. The third party must disclose, within 20 days of service, the amount of indebtedness owed to the judgment debtor. The garnished party also must retain all property disclosed subject to release or further order of the court. If the third party owes no debt to the judgment debtor, the garnished party will be discharged upon making such a disclosure. If an indebtedness is disclosed, the judgment creditor must collect the property held by the garnished party. This may be done either by obtaining the consent of the judgment debtor or by means of an execution.
If wages are to be the subject of an execution or garnishment, an advance notice of 10 days must be given to the judgment debtor. The notice can be served personally or by first class mail and must inform the debtor that a summons or levy will be served on the debtor's employer in 10 days; that the debtor can serve on the creditor a statement asserting that he or she is entitled to exemptions from garnishment or execution; that wages are exempt from garnishment in certain cases; that the debtor is entitled to relief if the creditor, in bad faith, disregards a valid claim of exemption; and that the debtor will be subject to fees and a penalty if he or she claims an exemption in bad faith or takes any action to frustrate the collection process.
Where the property to be seized or executed is property used in the farming operation, including equipment, crops, and livestock, or where it is serving as collateral on a loan used for farm operations, it is deemed agricultural property and Minnesota's farmer-lender mediation statute generally requires the creditor to offer mediation of the debt prior to seizure or execution. The farmer-lender mediation statute began requiring mediation in 1986. Generally, the statute requires that a creditor seeking to seize agricultural property first send notice to the debtor and offer the debtor the opportunity to mediate a resolution to the debt prior to beginning such action. If the debtor elects to mediate the debt, the creditor's seizure of the property can be suspended for a period of up to 90 days pending completion of the mediation. When the debt or obligation involved has been scheduled by the debtor in a bankruptcy or involved in a previous farmer-lender mediation, it is not subject to the farmer-lender mediation statute and the creditor can seek repossession of the property without first offering mediation.
Exemptions
Regardless of the collection procedure used by the judgment creditor, certain property remains free from the claims of such creditors under Minnesota law (see Table 1 below and on the next page). To claim such property as exempt, it must be disclosed to the judgment creditor who gives the debtor an exemption notice. The homestead may be claimed as exempt by filing with the county recorder a declaration of homestead that includes a legal description of the property claimed as exempt.
Conclusion
Unsecured creditors may initiate legal actions against those who owe them money on accounts. To employ legal collection procedures, in most cases they must first obtain a court determination that they are legally entitled to the amount of money they claim. They are therefore at a disadvantage to secured creditors.
Table 1. Minnesota Exemptions*
|
Items |
Exemptions |
|
Homestead; rents and proceeds of homestead. |
160 acres if rural; 1/2 acre if in platted city; $200,000 limit if non-ag whether joint or individual; $500,000 limit for ag. |
|
Family bible, library, musical instruments. |
Unlimited |
|
Church pew and burial lot. |
Unlimited |
|
Wearing apparel, one (1) watch, utensils, foodstuffs. |
$8,100 |
|
Household furniture, household appliance, phonographs, radio and television. |
|
|
Farm machines and implements used in farming by a debtor engaged principally in farming; livestock; farm produce; standing crops; tools; implements. |
$13,000 |
|
Tools, implements, machines, instruments, office furniture, stock in trade. |
$9,000 |
|
All money arising from any claim on account of destruction or damage to exempt property. |
|
|
Life insurance proceeds. |
$36,000 plus $9,000 for each dependent |
|
Police Relief Association, Firemen’s Association, or Fraternal Benefit Association Benefits. |
Unlimited |
|
Manufactured home actually occupied as home. |
Unlimited |
|
Motor vehicle. |
$3,600 |
|
Vehicle modified for disability. |
$36,000 |
|
75 percent wages. |
Unlimited |
|
Public Assistance Benefits. |
Unlimited |
| Earnings of a minor child or proceeds by reason of any liability of debtor not for the special benefit of child. |
Unlimited |
| Claim for damages recoverable by any person by reason of levy upon or sale under execution of exempt property. | Unlimited |
| Personal injury or wrongful death claim (General Damages). | Unlimited |
| Loan value, accrued interest on dividends in life insurance policy. | $7,200 |
| Stock bonus, pension, profit sharing benefits, annuity, IRA, employee pension or contract on account of illness, disability, death, age or length of service reasonably necessary for the support of debtor. | $54,000 |
| Veteran's benefits. | Unlimited |
| Disability benefits. | Unlimited |
| Public employee and teachers pension benefits. | Unlimited |
*In a joint case, these exemptions other than the homestead exemptions, are available to each spouse
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