Business Collections in Small Claims Court

During the worst days of the recent economic downturn, we wrote of the unfortunate business necessity of pursuing delinquent bills through small claims court. Many businesses are now faring better, but aging accounts receivable remain. Before spending a hundred dollars or more on filing fees, or potentially “throwing good money after bad” in chasing past due bills, there are various factors to consider, as well as a significant change in the law. Here are a few:

$12,000 Jurisdictional Limit. When we last visited the topic, the maximum amount for which one could sue in Pennsylvania small claims courts, technically known as magisterial district courts, was $8,000 ($10,000 in Philadelphia Municipal Court). Since then, on January 22, 2011, the jurisdictional limit was increased statewide to $12,000.  As a result, the value of pursuing delinquent accounts through small claims court has increased — by a full one third. But what if the amount of your receivable is more than $12,000? Under Pennsylvania law, if the amount of your claim exceeds $12,000, and if you still would like to take advantage of the fast and simple process of the magisterial district court, you can waive or give up the part of your claim in excess of the $12,000 jurisdictional limit. If either you or your opponent appeals the district court judgment (to the county court of common pleas), you can then seek the full value of your claim, even if you previously gave up amounts in excess of $12,000 in order to sue in magisterial district court.

Statute of Limitations. Claims for breach of contract or for breach of an implied contract (such as claims based on goods or services provided on the basis of purchase order and invoice where there might not have been an express contract) are generally governed by Pennsylvania’s four-year statute of limitations. This means that if you do not file suit within four years after payment was due, your claim will generally be barred by the statute of limitations. You should think twice about shelling out money for filing fees on such claims.

Determination of Proper Venue. You should file your small claim only in a magisterial district which has venue over your case. In claims against individuals, venue is proper only in a magisterial district where the individual may be served (typically where he or she works or resides), or where the cause of action arose or where a transaction or occurrence took place out of which the cause of action arose. The venue rules for claims against partnerships, corporations and unincorporated associations are similar, but also allow for venue in magisterial districts where the entity regularly conducts business. Actions against municipalities and other political subdivisions may be brought only in a magisterial district wholly or partly within the political subdivision.

Once you have filed your case, the district court will serve your complaint upon the defendant. If the defendant fails to notify the court of his/her intent to defend the claim or fails to appear for a hearing, the district court will enter a default judgment for the amount requested in the complaint. If the defendant gives notice of intent to defend or appears in court to defend the case, you will then have to present and prove your case at hearing. You will then have to consider these next factors.

No Right to Discovery in District Court Proceedings. Neither party has a right to conduct pre-hearing discovery in a magisterial district court case. This means that both parties are going into court blind, often with little or no idea of what facts or legal positions the other party may attempt to introduce into evidence. This can be an advantage in that the other party will not know the details of your case until you present them in the courtroom. It can be a disadvantage too, in that you will not know the details of your opponent’s case either until the time of hearing. 

Affidavits Are Hearsay. Lay persons often assume that they can come into small claims court armed with affidavits or written testimony of witnesses who have attested to the facts of their case, and that such affidavits are a fair substitute for the live testimony of the person who made the affidavit.  This is simply not true. If your opponent knows anything about the rules of evidence, he or she will object to those affidavits on grounds that they are the “hearsay” statements of persons not present in court to testify, and the court will generally sustain that objection. In short, affidavits are not a substitute for the live testimony of a witness. Make sure you have your witnesses available to appear in court with you.

Estimates, Invoices, and Proof of Damages. Although affidavits are hearsay, the Rules of Civil Procedure Governing Actions and Proceedings Before Magisterial District Justices do make some allowances for the admission of documents without sponsoring witnesses. Under District Justice Rule 321, “a bill, estimate, receipt or statement of account which appears to have been made in the regular course of business may be introduced in evidence by any party without affidavit or other evidence of its truth, accuracy or authenticity.” What this means is that if the bill, estimate or invoice appears to be a proper document made in the usual course of the contractor’s business, the district judge should admit it into evidence even if the contractor is not present in court to testify to its authenticity. 

However, if a business is suing on an unpaid account, it is best practice to come into court with a witness who can testify to the nature and quality of the goods sold or work performed, and a witness who has firsthand knowledge of the accuracy of the bill and the defendant’s failure to pay that bill. Depending on the size of the business, the person with firsthand knowledge of the work or products sold may or may not be the same person with knowledge of the bill and the lack of payment.

Interest Claims. If your claim is for a fixed amount of money, and if you prevail on your claim, you will generally be entitled to receive an award of interest calculated from the date the sum was due. If there is a fixed amount of money due but no fixed due date, however, you are entitled to interest from the date you made a written demand for payment. Interest will generally be awarded at the interest rate stated in the contract or promissory note. If there is no stated rate, it will be calculated at Pennsylvania’s “legal rate,” which is six percent simple interest. If you are making a claim for interest, you should calculate the interest prior to the hearing, and then be prepared to present your interest calculations to the judge at the close of your case.

Filing Costs and Attorney Fees. If you prevail on your claim, the court will usually award you your filing fees in addition to the principal amount of your claim. However, the award of attorney fees is the exception and not the rule, and is quite rare at the district court level. The court is permitted to award attorney fees to the plaintiff only if the contract, lease or statute on which your suit is based specifically provides for the award of attorney fees. Even then, magisterial district judges tend not to award attorney fees. This is due largely to the fact that a defendant who is ordered to pay the plaintiff’s attorney fees is likely to appeal that judgment to the court of common pleas, and magisterial district judges often issue compromise judgments with the goal that their judgments will not be appealed.

De Novo Appeals. District court judgments are always appealable “de novo,” or anew, as if the district court proceedings never happened. What this means is that if either party is dissatisfied with the district court judgment, he or she can file a simple one-page notice of appeal within 30 days after the entry of the district court judgment. By doing so, the appealing party effectively wipes out the district court judgment. You as the plaintiff will then be required to file a new complaint at the common pleas court level, and be required to prove your case all over again, as if the district court judgment had never happened. In fact, the results of the district court proceedings are not even admissible at hearing on the appeal.

Collecting on Your Judgment. If you win your case before the district court and the defendant neither appeals the judgment nor pays it, then after the expiration of the 30-day appeal period, you can either ask the district court to order execution on the judgment or else transfer the judgment to the court of common pleas of any Pennsylvania county for execution there. Generally, execution takes place in the county where the defendant’s residence or property is located, and determining whether to execute through the magisterial district court or through the court of common pleas requires the consideration of a number of factors. While execution through the office of the district justice is relatively inexpensive, it is also limited to tangible, non-perishable personal property (i.e. not real estate), which a constable is able to locate within the county where the execution order is issued. If the most appropriate property on which to execute is real estate, a bank account or other intangible property, the plaintiff will have no choice but to pursue execution through the court of common pleas and the county sheriff.

The seemingly simple process of going to the local magisterial district court to collect on a debt can often become far from simple. Consulting with your legal counsel before you file can save you time, money and headaches.