When your company is sued, the person suing you is looking for money. However, the mechanism for doing this is obtaining a judgment. After a trial or a motion for summary judgment the Judge (or Jury) will make a finding that you owe some money, and that finding will be reduced to a judgment. The question I want to address in this article is: what happens then?
First and foremost, you can pay the amount owed, and either no actual judgment will be entered, or a satisfaction of judgment will be entered and the matter will be resolved. (A satisfaction is required to be entered within 7 days after payment and request).
If you do not do that, then a judgment will be entered against your company. As soon as a judgment is entered, if it is docketed (just requires the payment of a nominal fee) then the judgment becomes a lien against any real property (real estate) owned by the entity whom the judgment is against. This entitles the judgment holder to insist on payment of their judgment before the property can be sold or refinanced. It even allows the judgment holder to initiate foreclosure proceedings to sell the land if they so choose.
In addition, a judgment holder may execute upon assets of the company by having the Sheriff seize assets and sell them at auction. A judgment holder can also file a non-earnings garnishment on your Company’s bank or financial institution and simply have them withdraw the money from your account to pay the debt. This can be a hassle and an expense for a judgment holder, so unless they believe they will be successful, they may not bother trying these collection techniques. If your company does not have sufficient assets or cash flow to pay the debt, it may be difficult for the judgment holder to collect and it may just mean that the judgment forever remains unsatisfied. (Collection on judgments is a multi-million dollar annual business precisely because it is hard to do).
However, even if the company does not have the wherewithal to pay the judgment, you have to be careful about being held personally responsible for business debts as a result of a fraudulent transfer or piercing of the corporate veill. You can take a look at two articles on these topics titled “Can I just close my doors if my business is sued?” and “Are you actually getting the personal liability protection from your LLC or Corporation?” for a discussion of what to watch out for.
The main take away is that if you are sued, you should hire counsel to deal with it before it is reduced to a judgment. In the event you have a judgment against your company, you should either pay it, or work with an attorney to ensure that you, as the business owner, do not end up being personally liable for the debt.