1st Source Advisors LLC Litigation: Why Default Judgment Is the Real Risk

If your business has been sued by 1st Source Advisors LLC, your first reaction may be that the lawsuit is frivolous and not worth worrying about. Unfortunately, the risk of default judgment makes this a bigger concern than you think. In a default judgment, the court gives the plaintiff everything it asked for without hearing your side of the story. The facts in the complaint are deemed admitted, even if they aren’t true. Your defenses are lost, even if you would have won. Never assume the courts will sort this out later, or that the other side will do the right thing after it has won.

Know Your Time Limits for Answering a Lawsuit

For your own protection, know your time limits for answering a lawsuit, and avoid the knee-jerk response of thinking that “there is plenty of time.” Court filing deadlines vary by court, and some run surprisingly fast. In New York, for example, the time to answer a lawsuit served by personal service is 20 days, but if service is made by substituted service or service through the Secretary of State, your deadline is 30 days after service is complete. If the case is in federal court, the rule is 21 days.

| Court and how you were served | Days to appear or answer | When the clock starts | | New York state court, summons handed to you personally in New York | 20 days | After service | | New York state court, served through the Secretary of State or by substituted service | 30 days | After service is complete | | Federal court, service not waived | 21 days | After you are served with the summons and complaint |

Once the plaintiff has paid to file and serve the lawsuit, the informal phase is over. A letter or phone call will not resolve the case at this stage. The plaintiff might still settle for whatever you can offer, but you will still need to answer in court to keep the default judgment from being entered. In New York, a corporation must answer through an attorney, except in some small claims-type courts. Write down the date you were served and your deadline to appear or answer. Collect the contract, correspondence, financial records, text messages and emails between you and the plaintiff that may be relevant to your case. A business lawyer can judge your defenses more quickly if the relevant documents and records are gathered.

If you miss the deadline in New York, the plaintiff has one year from the default to apply for a default judgment. In some courts, like New York’s, the plaintiff can obtain the judgment without the court holding a hearing, if the claim is for a fixed sum and all the paperwork is in order. If not, a separate hearing is held to assess the actual damages. If you skip that hearing, everything the other side claims is assumed to be true, and nothing you say in your defense is considered. If service was made through the Secretary of State, you are protected by New York’s extra mailing requirement: the plaintiff must mail the summons to the company’s last known address at least 20 days before the default judgment is signed.

Once a court has signed a judgment against you, your bank account becomes fair game. The judgment creditor’s attorney can serve a restraining notice on your bank, and the bank must freeze up to twice the amount of the judgment until one year after the date the account is restrained, or until the judgment is paid or vacated. This can easily take the company down, so fight hard if you still have the chance to win your case.

A court judgment gives the judgment creditor extraordinary powers to find your assets, and it has far more options than waiting for the bank to restrain your account. The judgment creditor can serve interrogatories under oath to find your assets, and can take garnishments against non-bank accounts. These might include third parties who owe you money, like customers, tenants, PayPal and Venmo accounts, brokerages. The sheriff can even be ordered to take your property away from you, like vehicles and equipment, and to hold a public sale. In some cases, the sheriff can even sell your ownership interest in the company. Once you have a judgment against you, you are not in control of the situation.

A judgment is like an unshakeable collection machine, unless and until you vacate it in court. Once it is on the books, it grows and grows at the legal interest rate. In New York, that’s 9 percent a year. If the judgment creditor takes the judgment to a county in which you own real estate, it becomes a lien on your real property in that county. The judgment will stay a lien for 10 years. Any payment or signed acknowledgment restarts the clock, and a judgment lasts 20 years before it is presumed paid. A lien against real estate is something you can’t hide. When you try to sell, buy or refinance property, you’ll need a lien search, and the purchaser’s title insurance company or lender will never approve the transaction unless the lien is paid. The judgment will stay on your credit report generally for seven years from the date the court entered the judgment, sometimes longer. If you move after the judgment is entered, the plaintiff can easily transfer the judgment to wherever you go.

Ask the Court to Relieve You from the Default

If your problem is that you never knew the case existed, the case is still not over. Talk to an attorney, because you may still be able to have the judgment vacated, but time is not your friend.

If you miss the deadline to answer a lawsuit, one option is to ask the court to relieve you from the default. This is not a get-out-of-jail-free card, but you can get a second chance in some cases. To open the default judgment, you file papers proving both a good reason for the default and a valid defense to the case. This option is often cut off if you don’t act quickly. The court will strike the judgment if you can point to a defect in the papers or procedure, which appears to the court from the record without needing to look for external evidence. If the court opens or strikes the judgment, it can then set it aside and let you answer the case.

No matter how you discover the judgment against you or your business, the first thing to do is get a copy of the judgment from the court. You’ll need to know when it was entered and when you were served with notice of entry. These dates start your deadlines for action.

If you were never served, or were served in violation of the New York procedural rules, and you were never heard in court, you can ask the court to vacate the judgment. You have one year after service of the judgment and notice of entry of judgment to bring your excusable default motion. New York law gives no deadline for the court to consider lack of jurisdiction.

A second route to a vacatur is to come into court within one year of when you learned of the judgment and ask for permission to defend the action, under New York’s CPLR section 317. However, the court must receive your papers within five years of the date the judgment was entered. New York rule requires service other than personal delivery, a meritorious defense and that you had no personal notice.

If the lawsuit is in federal court, the clerk’s entry of default is not a judgment. The plaintiff must take an extra step under Rule 55(b) to obtain a final default judgment. There is also a chance that the court will set aside the default for good cause under Rule 55(c), if you act promptly. Even a final default judgment can be attacked under Rule 60(b). If a federal judgment is void, you can raise that in a Rule 60(b) motion, in which you ask the court to set aside the judgment. All Rule 60(b) motions must be brought ”within a reasonable time.” If the federal court entered the judgment based on a mistake or excusable neglect, there is a one-year time limit under Rule 60(b)(1). If your argument is based on Rule 60(b)(4), the judgment is void, and the one-year limit does not apply.

In a recent case, Coney Island Auto Parts v. Burton, the Supreme Court held Rule 60(b)(4) applies to void judgments, and the motion had to be filed within a reasonable time, which the defendant failed to do. The Court left open the question whether other provisions of Rule 60 could attack a void judgment. A bankruptcy court entered the judgment against the business in 2015, after service by mail. Once the business found out in 2021 that a marshal had seized money from one of its bank accounts, it moved to vacate the judgment. The lesson of that case is that the business lost only because it waited; the court said nothing about whether the service really made the judgment void. As soon as you learn of a judgment, you should bring it to the court’s attention, even if you think it is procedurally void.

If you are sure you lost and owe the money, a default is still not the cheapest route. Fighting to open a default judgment always makes the case more expensive. Consider what it will cost you to reopen the case, and what you might have gotten if you had appeared on time. If you are looking at a default judgment for a sum you truly owe, talk to the plaintiff’s attorney. It might be possible to negotiate a settlement or payment arrangement, even at this late date, so that you will have a chance to rebuild in the future. Once you pay or settle, ask for a copy of the satisfaction of judgment, and be sure it is recorded on the court’s docket.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.