The Attachment Remedy
Frederick J. Northrop
If you are contemplating or in a lawsuit, it is important to remember that winning the suit is only part of the battle. There isn't much value in getting a judgment if the defendant is insolvent by the time the litigation is over or if his assets have all been transferred out of the state or out of the country and have to be hunted down. Mechanics liens, stop notices, and payment bonds assure some claimants of eventual recovery, others may want to employ the prejudgment remedy of obtaining a writ of attachment.
A Writ of Attachment is a court order which imposes a lien on specified property of the defendant until judgment. This lien, once perfected, prevents the defendant from dissipating his assets and gives the attaching party a secured interest in the property, should the defendant declare bankruptcy (unless the defendant files before 90 days have elapsed). When considering whether to seek attachment, a claimant must consider the probability of getting an order, the likelihood of finding and successfully attaching assets, and the costs involved. This article will review these considerations in light of a recent case decisions.
Requirements for Attachment
The statutory provisions for attachment are found at sections 481.010 through 493.060 of the California Code of Civil Procedure. A plaintiff can seek attachment by filing an application for a right to attach order and writ of attachment together with a declaration under oath which establishes the necessary facts. These facts are: (1) the claim is for payment of money based on a contract or debt; (2) the amount due is readily ascertainable and greater than $500; (3) the debt is not be secured by real estate; (4) the claim is commercial in nature; (5) the claim is probably valid; and (6) a proper purpose.
Attachment is only available for a claim on an express or implied contract, not a tort, such as a claim for negligence. This becomes an important tactical consideration, because some claims, such as for defective construction, can be pursued both as contract claims and as negligence claims. The decision of which legal theory to pursue depends on problems of proof and available damages. It can be delayed until trial, at which point it is easier to evaluate the case. If you obtain a writ of attachment, however, you will be deemed to have elected to pursue the contract claim and to have waived the tort.
The amount of the claim must also be readily ascertainable, generally by reference to the contract itself. A subcontractor can usually meet this test, because the price is generally stated in the contract or in the invoices rendered. A prime contractor can also quantify a claim for liquidated damages or completion costs fairly easily, but claims for indemnity or claims based on impacts of delay, interference, or defective work will not usually be readily determinable before trial.
While a debt secured by real property cannot be used for attachment, this limitation does not apply to a debt which can be collected through a mechanic's lien. A contractor can pursue both the attachment and mechanic's lien remedies. Where a debt is secured by a mortgage or deed of trust, however, seeking attachment forfeits the right to foreclose.
Attachment cannot be used to collect a consumer debt or for any purpose other than to secure collection of the judgment. Nevertheless, nothing prevents a party from benefiting from the fact that attachment ties up assets and tends to pressure litigants into settling. That benefit can be overstated, however, because the attachment may prompt a defendant into filing for bankruptcy protection.
A party must show that it is more likely than not to prevail on its claim. Because the court will almost always decide that issue based on affidavits and documents, it is difficult to obtain an attachment order where proof depends on the credibility of a witness or on complex or close questions. In fact, a party should hesitate to seek attachment in those situations. If you win the attachment hearing, but lose at trial, the attachment will be deemed "wrongful" and the plaintiff will be liable for any resulting damage to the defendant.
The problem of proving that a claim is probably valid was the subject of a recent court decision in Kemp Brothers Construction, Inc. v. Titan Electric Corp. (2007) 146 Cal.App.4th 1474, 53 Cal.Rptr.3d 673. In that case Kemp was a prime contractor on two public works projects and was suing its subcontractor for breach of contract. In the course of performance, Kemp had agreed to advance payroll payments to Titan against Titan's receivables on the two contracts. Later Kemp stopped making the advances and Titan was unable to meet payroll. The workers stopped working and Kemp requested permission to substitute subcontractors.
Titan opposed the substitution. The request for substitution was granted after hearing. The hearing officer determined that Kemp was entitled to stop advancing the payroll. Substitution was granted on the alternate grounds that Titan failed to perform the subcontract and was substantially delaying or disrupting progress of the work. (Public Contract Code § 4107(a)(3) & (7)).
Kemp then sued Titan for breach of contract and sought to attach settlement proceeds Titan was about to receive. Kemp argued that its claim had probable validity because the hearing officer's decision precluded Titan from disputing it had breached the contracts. This rule, called "collateral estoppel," says that parties cannot relitigate a question which they have already litigated in a different proceeding if the issue was actually and necessarily decided in the first proceeding.
Kemp argued that the public authority's determination that Titan was not performing the subcontract amounted to a finding that the Titan had breached the subcontract. The trial court agreed and issued a writ of attachment. Titan appealed from the order but the court of appeals reversed.
The court held that the hearing officer's decision did not prove breach, because the determinations necessary to allow substitution are not the same as those involved in a breach of contract claim. The court noted that a subcontractor might be failing to perform the subcontract, which would support substitution, but may have been justified in doing so, which would not be a breach. Since the trial court had relied on the earlier proceeding and had not considered evidence on the breach issue, the attachment order was reversed.
The Kemp case illustrates that a party seeking an attachment order should be prepared to put on convincing evidence showing it will probably recover a judgment on the contract. In particular, it shows that a party cannot rely on the result of a substitution hearing alone to establish that probability. It also points out that substitution decisions should be based on one of the nine conditions listed in Public Contracts Code section 4107 and not on whether a subcontractor has breached its contract or bid.
Enforcing Attachment Orders
Once a plaintiff has an attachment order, he still must attach assets. If the defendant is a corporation, nearly all of its assets are subject to attachment. Individuals, however, have an extensive list of exemptions which they can claim. Furthermore, many assets are subject to pre-existing security agreements in favor of lenders or sureties which supersede the right to attach. Also, only assets in California can be attached by a California court.
The defendant's accounts receivable are a popular focus and the first one a subcontractor is likely to focus on will be construction funds due from the owner. This is a particularly valuable tactic where the plaintiff for some reason cannot pursue a lien or stop notice remedy or where it appears funds will be used to preferentially pay some claims and not others.
This situation arose in the case of Hall's Air Conditioning & Plumbing v. Hicks (1963) 217 Cal.App.2d 315, 31 Cal.Rptr. 576. In that case a writ was served on the owner attaching amounts due on the prime contract. The owner resisted the writ, asserting that he needed the funds to clear lien claims of other subcontractors. The owner argued that any payments made to clear the liens would be an offset against the money due. The trial court dissolved the attachment, but the court of appeals reversed. The court held that the value of the offsetting lien claims could not be determined until they were tried. The owner would have to pay the funds over to the marshal until all the claims and priorities were determined. The court did not rule on whether the owner's offsets or the attachment lien would take priority over the funds.
Real property is one of the more popular targets of attachment because it can usually be discovered through a search of public records and is easily attached by having the sheriff record the proper documents. Inventory and equipment of a going business can be attached by filing the proper document with the California Secretary of State, but this does not prevent the defendant from selling inventory in the normal course of business.
If the plaintiff is willing to advance the cost, a "keeper" can be installed to take charge of the business for a short time. The keeper retains any payments the business receives and those funds are then held under attachment.
Bank accounts can be attached by having a writ of attachment served on the bank. Plaintiffs sometimes target the defendant's bank accounts in hopes of interfering with the defendant's continue business operations and thereby pressure a settlement. This only works, however, if the account has funds when the writ of attachment is served. The defendant, once informed, can be expected to open a new account at an out-of-state bank in order to keep control of his cash and pay his ordinary expenses.
Most other property must be attached by taking physical custody of it. This involves costs for keeping and/or selling the property.
A detailed listing of the means of attachment, the property which can be attached, and the exemptions available to defendants is beyond the scope of a short article. But these should be considered before seeking an attachment order. There is little point in seeking attachment if there is nothing worth attaching or the defendant's major assets are out of reach or already subject to security interests or liens.
Costs and Risks
In deciding whether to seek attachment and what assets to pursue, a plaintiff should seriously and coldly evaluate the costs involved along with the risk of being subjected to liability for wrongful attachment. The costs include the costs of investigating the assets, preparing and arguing one or more motions which the defendant will usually fight vigorously, and the costs of enforcement.
Enforcement costs include recording fees, sheriff and process server fees, and keeper or receiver fees. Finally, the court will require the posting of a bond to secure the potential damages to the defendant if the attachment is later found to be wrongful or excessive in amount.
A plaintiff should seriously consider the risk of liability for wrongful attachment. A plaintiff who attaches property without probable cause or for an improper purpose or in an excessive amount is subject to a suit for abuse of process. An attachment is also "wrongful" (1) when property is attached which is not legally subject to attachment; and (2) when the plaintiff later fails to recover judgment in the action.
This article, was written by Frederick J. Northrop and William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California A and B license. Mr. Northrop has been practicing construction, insurance, and commercial litigation for over fifteen years. Both can be contacted at 415-764-1990 or 650-425-7679. A number of Mr. Last's past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.