Damages from an insolvent defendant
In tough economic times, like the present, one might try to be creative in seeking money damages from an insolvent defendant. The idea of using an equitable lien against the personal property of the another may prove tempting, but it is not likely to result in a successful outcome.
While equitable liens are commonly found in matters involving real property, attempting to attach to the personal, tangible property of another by use of the equitable lien theory has been disfavored by Pennsylvania Courts. The Courts have routinely applied a three part test to determine if an equitable lien has arisen. That is “there must be an obligation owing by one person to another, a res to which that obligation attaches, and an intent by all parties that the property serve as security for the payment of the obligation.” Hoza v. Hoza, 448 A.2d 100, 104 (Pa. Super. Ct. 1982). As a result, the court stated, in Hoza, that without “clear, precise and indubitable” evidence as to the intent of the parties, an equitable lien will not be found to exist. This requirement essentially forecloses any assertion of an equitable lien, but for those which are subject to a written agreement formally declaring that an equitable lien exists.
In fact, even when a relationship exists between the tangible property and the outstanding debt, courts may not find that an equitable lien existed. For example, in Jorritsma v. Tymac Controls Corp. 864 F. 2d 597 (8th Cir. 1988), Jorritsma worked as a salesman for Tymac Controls and was involved in a dispute with the corporation over sales commissions which were not paid to him. Notwithstanding the fact that the corporation owed the Plaintiff money from earned sales commissions and the corporation was believed to be insolvent by Jorritsma, the court still found that the Plaintiff converted the corporation’s equipment when he held it as security for his back pay. Furthermore, in Jorritsma, the equipment that was converted was demonstration equipment to be used in the exercise of his job function -- the same job function which resulted in his earning the commissions which were not paid to him by the corporation. Regardless of this close and entangled relationship between the equipment and the money owed, the court concluded that Jorritsma converted the equipment because there was no equitable lien on the same.
While Pennsylvania Courts have not ruled directly on this issue, the Eighth Circuit (applying Missouri law) stated that “the doctrine of equitable lien applies only in cases in which the law fails to give relief and justice would suffer without the equitable remedy.” 864 F. 2d at 599. In one instance, a Pennsylvania Court, however, concluded that equitable liens will result in order to prevent the unjust enrichment of a party. Morgan v. Martin, 66 Luz.L.R 24 (1975). In any event, it should be expected that if a cause of action arises under another legal theory (for example, breach of contract or breach of fiduciary duty) then one will not be able to secure an equitable lien on the personal property of another.
In a case where you face an insolvent party, the most viable - and realistic - option is to proceed through the under lying action to a verdict and then use more traditional means of recovery like garnishment; a writ of levy upon tangible personal property, or mortgages upon real property.
