Collecting Accounts Receivable Part X: Proceedings Supplementary
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This Blog is Part X in a series of Blogs designed to provide business owners with a high-level overview of the legal process for collecting on past-due accounts receivables. Specifically, Part X focuses on the utilization of proceedings supplementary as a tool for satisfying the outstanding judgment balance owed by a judgment debtor.
When typical post-judgment collection remedies, such as garnishment or execution and levy, are inadequate or have been exhausted to no avail, the Florida Statutes provide creditors with recourse via proceedings supplementary. Proceedings supplementary is codified in Section 56.29, Florida Statutes and is most often used in situations where the debtor has committed the fraudulent transfer of assets or to pierce the corporate veil in certain situations where the debtor has ownership interest in a closely-held corporation. See MCI v. O’Brien Marketing, Inc., 913 F.Supp. 1536 (S.D. Fla. 1995). This process is also used to bring the debtor before the judge for examining when the judgment creditor has clear evidence that the debtor has provided false information in post-judgment discovery.
Proceedings supplementary results from a court order requiring the debtor, and/or any impleaded third party, to appear before the judge for an examination proceeding that is supplemental to the original action. Fla. Stat. § 56.29(2). Stated another way, this additional court-ordered proceeding is considered separate from, but collateral and ancillary to, the underlying action between the parties. Advertects v. Sawyer Industries, 84 So.2d 21, 23 (Fla. 1955); Schwartz v. Capital City First National Bank, 365 So.2d 181 (Fla. 1st DCA 1979). The proceedings supplementary must be set in the county in which the debtor, or the impleaded third party, resides. Conrad v. McMechen, 338 So.2d 1306 (Fla. 4th DCA 1976).
Proceedings supplementary is an equitable remedy, and as such, the laws governing it should be liberally construed, giving the court broad powers to subject the debtor’s property and property rights to execution. Fla. Stat. § 56.29(9); Amjad Munim, M.D., P.A. v. Azar, 648 So.2d (Fla. 4th DCA 1995). From the creditor’s perspective, a very powerful provision of the proceedings supplementary process is the presumption of a fraudulent transfer if the debtor owned certain property within a year of the underlying action commencing but, at the time of examination, certain third parties now own that same property. Fla. Stat. § 56.29(6)(a). In that situation, the burden of proof actually shifts to the debtor, meaning the transfer of that property is presumed fraudulent and the debtor must now prove to the court that the transfer was for legitimate purposes and not to “delay, hinder, or defraud creditors.” Id.
In order for a creditor to motion the court for a proceedings supplementary, the creditor must show that it owns a valid and unsatisfied judgment or lien and also provide an affidavit affirming that a valid and unsatisfied writ of execution exists, along with a list of third parties to implead in the proceedings. Fla. Stat. § 56.29(1); General Trading, Inc., v. Yale Materials Handling Corp., 119 F.3d 1485 (11th Cir. 1997). If the creditor meets these requirements, it is a reversible error for the court to refuse to enter an order for proceedings supplementary. Biloxi Casino Corp. v. Wolf, 900 So.2d 734 (Fla. 4th DCA 2005).
Proceedings supplementary can be an excellent tool for a creditor to utilize for collecting on its judgment, because if the court’s examination uncovers nonexempt property deemed owned by the debtor, the court could immediately order that property be applied toward the satisfaction of the judgment balance owed. Fla. Stat. § 56.29(5). If the court makes such a determination and order, it matters not who is in actual possession of the property and the order will act similar to a garnishment or levy.
The biggest advantage to a creditor who pursues a proceedings supplementary may be the ultimate upgrade in the creditor’s priority status if there are other creditors with superior judgments and/or liens against the debtor. For example, even if a previously recorded lien against the debtor exists, a judgment creditor who conducts a proceedings supplementary has priority in any of the debtor’s assets that are uncovered and levied as a result of the proceedings supplementary. Salina Manufacturing Co. v. Diner’s Club, Inc., 382 So.2d 1309 (Fla. 3d DCA 1980). Thus, when all else fails for the creditor, if he or she can gather enough evidence to support a proceedings supplementary, it can be a very lucrative and worthwhile last-ditch effort for collecting on an otherwise uncollectable judgment.