Examination of Judgment Debtors Concerning Cryptocurrency Assets | A Primer for California Attorneys
Updated: Oct 28, 2020
Judgment creditors (prevailing parties in litigation that have obtained a money judgment in their favor) often fail to appreciate the realities of the road ahead after entry of their judgment. After losing, it is not uncommon for judgment debtors to adopt a "pry it from my cold, dead hands" approach, thereby forcing judgment creditors to continue to expend considerable time, energy and resources to finally put the dispute to rest -- either by way of a reduced dollar amount, structured settlement or a lump sum payout. In order to gain leverage during this process, many judgment debtors will at this stage threaten to file for bankruptcy protection and/or become super passive-aggressive and "forgetful" about their assets. As collections attorneys, it is our job to do what we can to get the judgment creditor paid as much as possible, as expeditiously and efficiently as possible.
In order to be successful, creditor's counsel must gain their own leverage by being appropriately aggressive, sharp, inquisitive, detail-oriented, and willing to dig deep to investigate and exploit opportunities. When done right, the judgment creditor's attorney can either pry assets loose and get them liquidated and paid out or coerce a compromise with the judgment debtor so as to efficiently lay the matter to rest.
The purpose of this article is to touch upon what issues and sensitivities modern collections attorneys need to focus on and hone in order to be more effective in the modern world of cryptocurrencies, including Bitcoin.
(This article assumes that the reader has a general working knowledge concerning the definition of cryptocurrency and Bitcoin, which terms are used interchangeably herein. For those that do now have a reasonable degree of competency with regard to this new-ish asset class, please consider reading other articles concerning cryptocurrency and the law authored by Bob Benjy, Esq. of Benjy Law Corporation, including this one.)
A. Order to Appear for Examination.
In California, after a money judgment is successfully entered, judgment creditors will often apply to the court to obtain an order requiring the judgment debtor to show up at a post-judgment collection "hearing" and testify concerning their financials, business, job, assets, debts, net worth, etc. This court order is known as an Order for Appearance and Examination and is routinely issued on an ex parte basis by California state courts. (It is authorized by California Code of Civil Procedure Section 708.110 and may also be utilized for money judgments issued by California federal courts.) Once issued, the Order to Appear must be personally served on the judgment debtor (or its agent for service of process) and will require him, her or it to testify under oath concerning their current (or recent) financial condition. Experienced collections attorneys will also pay to have a certified court reporter attend the judgment debtor examination or ORAP (ORAP) so as to have a clean record of questions asked and responses given, much like a deposition transcript.
In California, ORAPs often occur outside the presence of a judge. ORAPs are usually taken in the courthouse after the judgment debtor is sworn in by the clerk and released to the custody of the judgment creditor's attorney. The ORAP itself is usually taken either in the hallway outside the courtroom or in a "semi-private" space somewhere in the courthouse (e.g., counsel meeting rooms or, in some instances, in the cafeteria). Failure to appear may, in rare instances, result in the issuance of a bench warrant for the arrest of the judgment debtor and/or issuance of a civil contempt citation. As a matter of established law, judgment creditors are given very broad leeway in the scope of questioning. That said, it is not uncommon for judgment debtors to feign forgetfulness, lack of knowledge, or to play other passive-aggressive games during ORAPs -- which is understandable since the entire purpose of an ORAP is to allow the judgment creditor to find and apply valuable assets towards reduction or elimination of the debt.
At the same time as the judgment creditor's attorney causes the entered Order to Appear to be personally served on the judgment debtor, he or she will often also cause the judgment debtor to simultaneously also be served with a Subpoena Duces Tecum requiring the judgment debtor to bring to the ORAP a host of financial documents to assist in the taking of the ORAP. These may include copies of filed federal and/or state income tax returns, financial statements, loan applications, wage statements, 1099s, check registers, copies of cancelled checks, etc. These documents, when turned over by the judgment debtor, can serve as a valuable tool to enable the judgment creditor's counsel to drill down on the existence of assets that may be utilized to pay down or pay off the judgment debt. (This article will focus on the oral questioning process at an ORAP and the issue of what documents should be subpoenaed for production at an ORAP will be reserved for a future article.)
B. Cryptocurrency, Collections and Legal Malpractice.
As the author has previously penned, cryptocurrencies such as Bitcoin (collectively Crypto) are a new-ish asset class. Crypto does not fall squarely within the prior, more commonly known asset classes such as real estate, FIAT currency, securities, intellectual property, etc. While Crypto shares similarities with more well-known asset classes, it is for most purposes an entirely new animal and cannot be pigeon holed or ignored, especially within the arena of post-judgment collections. Going forward collections lawyers will face an increasingly challenging and difficult time in their endeavor to get paid on money judgments entered in their clients' favor. The reasons for this are extensive and beyond the scope of this article and the reader is encouraged to read other articles by this author concerning the topic.
Before we venture further, note that there are no silver bullets or "easy solutions" to the issues at hand. That said, with regard to ORAPs there are questions that collections attorneys must begin to routinely ask (and Crypto-related documents that must be subpoenaed for production at ORAPs). Many of these questions will undoubtedly seem foreign to old school collections attorneys, but failure to ask these questions may arguably constitute legal malpractice. Why? Because the questions at issue are necessary for the purpose of deciphering whether the judgment debtor owns Crypto and/or engaged in Crypto-related fraudulent conveyances and, if so, analyzing whether those assets can be forcibly liquidated to pay down/off the debt.
Only after these questions are explored and drilled down on can the collections attorney efficiently, effectively, and intelligently counsel his or her client about what additional legal maneuvers are appropriate to explore. In the absence of this line of questioning and investigation, the collections attorney is irrationally burying his or her head in the sand and likely wasting valuable resources.
C. Crypto-Related ORAP Questions.
Every attorney practicing any form of financial litigation, including collections attorneys, bankruptcy attorneys and family law attorneys, must get sufficiently acquainted with Crypto, including obtaining working knowledge of how Crypto is valued, bought, sold, stored, and encrypted. Failure to do so is a serious impediment to the requirements of the job; certainly within the context of post-judgment collections. To that end, we will now explore the appropriate line of questioning for purposes of taking an ORAP in a post-Crypto world. (NOTE: These questions can also be easily modified, adopted and utilized within the context of other financial litigation, including divorce and bankruptcy proceedings.)
In the past X years, have you bought or sold, whether directly or indirectly, any Bitcoin? Ethereum? Bitcoin Cash? Ripple? ZCash? Litecoin? Monero? How about any other form of Crypto or electronic currency assets?
[If yes, drill down on how the purchase or sale was achieved.] Did you purchase the Crypto on a peer-to-peer (direct) basis or did you purchase it on a Crypto exchange?
What crypto exchange did you utilize to buy/sell the Crypto? Gemini.com? Coinbase.com
Drill down on when each purchase and sale transaction occurred - since the value of Crypto tends to fluctuate wildly on a day-to-day basis. Also inquire about the estimated U.S. dollar value of each purchase and sale transaction.
Remember to inquire about the FIAT entry or exit point of the Crypto purchase/sale transaction(s) at issue. In other words, at some point FIAT currency was utilized to purchase Crypto. Perhaps Crypto1 (e.g., Bitcoin) was purchased with U.S. dollars and then, later, Crypto1 was traded in its own indigenous "crypto-state" (e.g., as Bitcoin, not FIAT) for Crypto2 (e.g., Ethereum). You will want to get as much information as possible concerning these sorts of details so that, if necessary, you can put humpty back together again by figuring out the various values at various points in time (e.g., FIAT, Crypto1 and Crypto2).
What did you do with the Crypto you previously owned?
Do you presently own any Crypto? If so, where does that Crypto reside? [These question need to drill down on the "physical location" of the Crypto today.]
Is the Crypto now stored on an exchange such as Gemini.com or Coinbase.com? If yes, ask for the specific exchange and the login and password information. Is the Crypto stored on a third-party storage site such as Xapo? What is the present estimated value of any and all Crypto now owned?
Be wary of the fact that many of the more well-known exchanges now utilized 2 Factor Authentication protocols - so merely having the login and password, without a software-based 2nd factor authenticator (often housed on the mobile phone of the judgment debtor), logging into the account of the judgment debtor on the exchange may be impossible. These 2nd factor authenticator tools include apps like Authy and Google Authenticator. For instance, Gemini.com requires 2 Factor Authentication (2FA) for logging in (i.e., it is not a choice; it's mandatory).
Consider bringing a laptop computer with you to the ORAP and asking the judgment debtor to log into the exchange account, if he/she/it testifies to its existence and to the fact that the Crypto presently resides on such an account. (One benefit to doing so is that you can watch the login and inquire about 2FA issues while you have the judgment debtor under oath.)
If the judgment debtor or opposing counsel objects, you should immediately seek judicial intervention to coerce cooperation and explain to the judge that this is necessary and appropriate and failure to coerce cooperation right then and there could result in assets going missing later. In such a scenario, it probably also makes sense to move the court (right then and there) to issue a temporary restraining order prohibiting the judgment debtor from buying, selling, transferring or withdrawing any Crypto from the exchange that he/she/it has testified is holding the Crypto on the date of the ORAP.
In the past X years, have you utilized Paypal, Square Cash, and/or Venmo to do any transactions? If so, when was the last time you utilized any of those and what deposit accounts are those services linked to?
Services like PayPal, Square Cash and Venmo (among many other similar services) are intermediary services (collectively, Payment Intermediary Services) that act like an escrow between buyers and sellers, usually -- but not always -- as a means of facilitating internet-based peer-to-peer transactions (e.g., buying and selling of goods on eBay or Craig's List. These services are almost always tethered to an existing deposit account at a financial institution (or to a credit card). While Payment Intermediary Services are not Crypto per se (and, despite some similarities are quite different than Crypto), they are nevertheless a new vector for commerce that deserves to be explored and investigated.
For example, one can maintain funds on one's account with a Payment Intermediary Service without immediately withdrawing those funds. If the creditor's attorney asks the right questions, he or she may successfully identify sums held at one or more Payment Intermediary Services. This line of questioning may also identify as-yet undisclosed deposit accounts tethered to these services. Again, it is wise to have a laptop computer and an internet connection ready to go at the ORAP so as to require the judgment debtor to log-in (either voluntarily or by order of the court, if necessary), allowing the creditor's attorney to confirm the dollar amounts held thereat and obtain information concerning tethered outside deposit accounts. As before, the creditor's attorney should also inquire about 2FA issues for Payment Intermediary Services as well. Finally, it is wise to take screen shots as the judgment debtor is walking you through the service and his or her account thereon, which screen shots may serve as valuable evidence in furtherance of seeking issuance of a restraining order or a turnover order from the court.
Note that even if these assets are identified, the collections attorney will likely face an uphill battle in gaining the cooperation of the judgment debtor (i.e., to transfer the Crypto to judgment creditor) and/or obtaining necessary court orders in furtherance of liquidating same (or the FIAT currency found on any Payment Intermediary Services). Many judges, especially senior judges with less computer and Crypto experience, may be reluctant to order the judgment debtor to deliver the Crypto (or FIAT) to a levying officer or the judgment creditor because of a general lack of understanding concerning how Crypto and electronic money works. These sorts of challenges are even more pronounced when the assets are stored on a third-person's server (e.g., Gemini, CoinBase, Xapo and/or Payment Intermediary Service) because of geographic and personal jurisdiction issues, etc. That said, one never knows until one tries.
One thing that is for certain is that the more educated and knowledgeable the creditor's attorney is and the better he or she can articulate these systems, issues and problems to the court, the more likely it will be that the court will appreciate the issues and grant appropriate orders in furtherance of the collection of Crypto and related electronic currencies.