Steve Harms

Thursday, February 7, 2013

Using the appropriate legal theories

After you figure out who you’re going to sue, you need to spend a bit of time thinking about your causes of action — the legal theories you’re going to present in your complaint for why the debtor owes you money.

Contract theories

The most common legal theories are based on principles of contract. Possible causes of action include:

* Breach of contract: That is, you had a contract with the defendant, you fulfilled your side, she didn’t fulfill her obligations, and she owes you money.

* Complaint on an account stated: In many states, you can file a special cause of action based on your final statement of account. You support your complaint with a copy of the statement of account and an affidavit attesting that the statement of account is accurate. This shifts the burden of proof to the defendant, and if the defendant doesn’t file a proper response disputing the debt, the court will issue a judgment in your favor.


In simple terms, a claim of fraud alleges that the debtor made a false claim or representation to you, knowing that their claim was false and that you were acting in reliance upon that statement, and that as a result of your reliance you suffered an injury. Fraud involves more than a claim that the debtor said he was going to pay you but didn’t.

For example, fraud may be alleged where a customer presents you with false bank statements, or a fraudulent letter of credit, making you believe that the customer is financially strong when in fact he has no resources and no intention of paying you, and he gets you to ship goods to him based on his false representations.

Suing owners of corporations

Normally, the owners of an incorporated business are shielded from personal liability for corporate debts. However, corporate officers may be held personally liable to pay you under a number of different theories( but never on a contingency fee, well, almost never), including:

* Undercapitalization: Not enough money was invested at the start to adequately finance the business, or the principals withdrew too much money from the business, resulting in its financial problems.

* Commingling personal and corporate assets: No clear line exists between the personal assets of the owner and the assets of the business. For example, funds belonging to the business may be instead used for personal purposes, such as paying the college tuition of the owner’s children. Or the owner of a small corporation treats the corporate bank account as if it’s his private checking account, keeping his own money in the account and using it to pay household bills.

* Piercing the corporate veil: Seeking to hold corporate officers personally liable as the result of extraordinary misconduct on the part of the officers. For example, you may allege:

* The corporate entity is a mere instrumentality of another entity or individual. The corporation isn’t treated as a separate entity, following the required protocols (holding board meetings, keeping corporate records, and so on), but is instead an alter ego for its principals, who want to avoid personal responsibility for their questionable conduct.

* The corporate entity was used to commit a fraud or a wrong. The primary purpose for the corporation’s creation was to further a wrongful act.

* The corporate entity created an unjust loss or injury to your company. Courts have had difficulty articulating the circumstances under which unjust or inequitable conduct can justify piercing the corporate veil. Suffice it to say, it’s extremely rare.

Most states don’t have a clear standard governing when a corporate entity may be disregarded and the officers sued personally. However, no state makes it easy to pierce the corporate veil.

It’s rare to be able to successfully allege undercapitalization or commingling, as in most cases you don’t have access to any information that would reveal undercapitalization or commingling of funds. Similarly, it’s very unusual to successfully pierce the corporate veil.

Foreclosure and recovery of property

If you’re foreclosing on a lien or mortgage, you may be able to choose between judicial and nonjudicial foreclosure. If your state’s laws require judicial foreclosure, or you believe you may benefit from judicial foreclosure, you file a foreclosure lawsuit. The procedures for filing a foreclosure suit are different in each state. Foreclosure lawsuits can be tricky, so consider getting help from a lawyer.

You may initiate litigation to recover items of property that are in the possession of the debtor. For example, if an invoice wasn’t paid, you may want to recover goods you have shipped to the debtor. Actions to recover physical property are sometimes called replevin actions when based on statute, or detinue actions when based on common law principles.

Bad check actions

If your debtor has paid you with a bad check, you probably have a statutory claim for a civil penalty in addition to recovering the face value of the check. Some states also permit you to recover attorney fees.

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