Business Law Bulletin: Questions of interest answered |

Business Law Bulletin: Questions of interest answered

As promised, here are answers to some recent questions of interest.

Q: One of our customers owes us about $8,000 for merchandise we sold her for her business. It seems like the cost of suing her isn’t worth it – there won’t be much left after we pay the lawyers and other costs. Any thoughts?

A: Many business people ” and, sometimes their lawyers ” overlook the potential benefits of going to Small Claims Court to enforce a debt. The Small Claims Court has jurisdiction over claims for recovery of money, if the amount demanded does not exceed $5,000. Small Claims Court is a relatively quick and inexpensive process.

The parties cannot be represented by attorneys, but simply appear (normally before a volunteer “judge pro tem” who is a lawyer) to present their case. Because the process is inexpensive and lawyer-free, sometimes it makes economic sense to sue in Small Claims Court and seek only $5,000, rather than suing in Superior Court for what may be only a slightly higher amount. The down side of Small Claims Court ” for the plaintiff ” is that you might lose. And if the plaintiff loses, he has no right to appeal; generally, only a defendant can appeal from a small claims judgment.

Also, keep in mind that with few exceptions, no one may file more than two small claims actions in which the amount of damages sought exceeds $2,500 anywhere in the state in any calendar year.

Small claims forms are available in the Clerk’s Office at the Nevada County Courthouse, 201 Church Street, Nevada City. In addition, the Court’s Public Law Center offers the services of a Small Claims Advisor, who provides free assistance to small claims litigants and potential litigants. The Small Claims Advisor is located in the Public Law Center at the Courthouse; the phone number is (530) 470-2594.

Q: We have a customer who has stopped paying us; and we think they’re not paying their other debts as well. Can we force them into an “involuntary” bankruptcy?

A. Maybe ” but talk to a bankruptcy lawyer first.

If statutory standards are met, a company or individual can be forced into bankruptcy against its will (hence the term “involuntary bankruptcy”) if at least three creditors join in signing a “petition.” There are sometimes very good reasons for creditors to do this, but in many cases the risks to the petitioning creditors outweigh the benefits.

First, the filing of the involuntary bankruptcy triggers an “automatic stay” of any collection efforts against the debtor. On the other hand, the debtor can usually conduct “business as usual” for up to 30 days (the time period in which the debtor can contest the involuntary petition). So the filing of an involuntary case can tie all the creditors’ hands, while giving the debtor 30 days to continue the same faulty, futile or questionable business practices that got it into financial trouble in the first place.

Second, if it turns out that the debtor was not really insolvent or that its alleged debts were actually the subject of a bona fide dispute, then the petitioning creditors may be responsible for the damage resulting from the involuntary filing. This means that if you sign an improper involuntary petition, and the resulting bankruptcy unjustifiably forces the debtor out of business, you may be liable for the economic losses the debtor suffers. This risk is so huge that some bankruptcy law firms, as a matter of policy, will never file an involuntary petition!

Bottom line: Consult a lawyer before thinking too seriously about forcing someone into bankruptcy.

Q: One of your recent columns discussed how to settle a dispute through mediation. Are there any organizations in Nevada County that assist people in mediating their disputes?

A: In addition to private mediators, low-cost mediation for relatively small disputes is available through the community mediation service of the Conflict Resolution Center of Nevada County. The Center is a non-profit corporation that provides volunteer mediators. Usually the parties are not represented by counsel. The cases typically involve disputes between neighbors, family members, and parties to transactions.

The Center’s trained mediators conduct three-hour mediation sessions, and work on a volunteer basis to help parties settle their disputes. The base fee is $300 per session, divided between the parties. (The fee can be waived on the basis of hardship.) A mediation usually can be scheduled within a week or 10 days after both sides have agreed to mediate.

The Center can be reached at (530) 470-9700.

Q: My wife and I sold equipment to someone who has now filed a Chapter 7 bankruptcy case. He still owes us money. He has called and offered to sell us some of his other assets, or maybe give us back our equipment, to help reduce his debt to us. Can we make a deal with him?

A: In a word, no. When a person or company files a Chapter 7 bankruptcy case (i.e., a liquidation, not a reorganization), control over the assets of the debtor pass to the Bankruptcy Trustee ” the person appointed at the outset of every Chapter 7 case to administer the debtor’s assets. The debtor himself (or itself) does not have the power to make any disposition of assets without the approval of the Trustee (and, usually, of the Bankruptcy Court). While the Trustee can “abandon” to the debtor any asset which is not believed to have any significant value to the creditors, even that must be approved by the Court after notice to creditors and other interested parties. Remember that in general, any action outside the bankruptcy court process to collect any debt from someone who is in bankruptcy is prohibited.


In two weeks: “He’s gone Chapter 13!!!” What is a “Chapter 13” bankruptcy, and why is it sometimes very unlucky for creditors?


Peter C. Bronson, a Nevada County attorney, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency and commercial litigation. Send him your questions at This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.

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