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Settling Small Business Claims in Small Claims Court

Business disputes are expensive and time-consuming parts of any small-business owner's routine. Even when owners have good contracts and negotiate with their suppliers and customers, they may be the target of a lawsuit.

Whether you need to file a lawsuit or have a summons handed to you by a process server, what should your next steps be when you head for small claims court? It depends on the type of case, but you can get through it without spending too much time or money.

Plaintiffs and Defendants

In a small claims case, the plaintiff, the person suing the other party, sets the pace. The defendant is the individual or entity that responds to the plaintiff's claim.

If you are the defendant, you will receive a summons, giving you the court date, location, and complaint. This tells you what the plaintiff is suing for. Common business lawsuits in small claims courts include:

In civil cases, including small claims, plaintiffs have the burden of proof. This means they must provide all evidence showing that the defendant did everything they claim. The defendant must provide evidence disproving or refuting the plaintiff's claim. The party with the most persuasive evidence wins.

Dollar Limits for Small Business Claims

Every state sets its own maximum limit for small claims disputes. It may be as low as $2,500 (Kentucky) or as high as $25,000 (Tennessee). The average is about $10,000. The judge cannot award a money judgment for an amount higher than the state's maximum. If the plaintiff wants an award for a larger sum, the case must go to civil court.

The defendant can file a counterclaim against the plaintiff. A counterclaim is the defendant's claim against the plaintiff, which may or may not arise from the same cause of action. In most states, the clerk transfers the entire case to civil court if the counterclaim is for an amount of money larger than the statutory maximum.

If each claim's total is below the maximum amount, the case can stay in small claims court.

Counterclaims — Permissive and Compulsory

When you have a claim against the person who sued you, you can bring it during the same hearing. A compulsory counterclaim arises from the same dispute. For instance, if a contractor sues you for nonpayment, you may counterclaim that the job was improperly done. Defendants must make compulsory counterclaims at the time of the lawsuit or waive the right to bring them.

A permissive counterclaim is one unrelated to the case at issue. Courts may allow you to bring a claim against the other party to save the court time. If the contractor sues you for nonpayment and you counterclaim for a car accident when the contractor rear-ended you in a parking lot, that would be a permissive counterclaim. If you cannot file the counterclaim, you can still sue the contractor later for the accident.

Small Claims Timelines

Business disputes, like any civil claim, are subject to statutes of limitation. Plaintiffs must file claims by the deadline set by state and federal law. Depending on your state and the type of case, statutes for different claims vary. For instance, the average statute of limitations on a personal injury claim is two years but can range from one to seven years. Breach of contract cases can range from two to 10 years.

Once a defendant receives the complaint or plaintiff's affidavit, the defendant has less time to respond. States have a limit of about 30-45 days for defendants to file their answer. Most states require the plaintiff to include an answer form with the complaint.

The court sets trial dates. They are usually set within 30-40 days in most states, but it depends on the number of cases ahead of yours. If either party cannot make the trial date, they can request a continuance. Courts are usually willing to grant the first request, but after that, it may be more difficult.

Where To File Your Small Business Claims

If a plaintiff sues a business rather than a person, they may file the case:

  • In the county where the cause of action accrued (meaning wherever the incident happened)
  • In the county where the company has its principal place of business
  • In the county where the company's corporate headquarters is located

In most business-related disputes in small claims courts, the plaintiff and the defendant are small-business owners. You probably won't be suing someone in another state unless you live close to another state's border. But it is always possible.

How To File Small Business Claims

When you are ready to file, here's an overview of the process:

  • If you are suing a business entity, the name of the business must appear on the complaint. Even if you're suing "Ted Jones Plumbing LLC," and Ted is the only plumber, and you know Ted is the owner, you must name the entity, not Ted Jones. Otherwise, Ted Jones, the individual, will file an answer saying he is not "Ted Jones Plumbing LLC" and the judge will dismiss the case.
  • Service of process must be made on the entity, not the individual. Most LLCs and corporations have a registered agent who can receive service of legal documents. It may be the same person and location as their business office, but not always. Imperfect service can be grounds for dismissing the case, so be sure you do this properly.
  • In some states, plaintiffs do not serve defendants. The small claims court clerk will send a notice directly to the defendant. The plaintiff is still responsible for putting the correct name and service address on the paperwork.
  • Plaintiffs pay filing fees and court costs. In some states you can get the fees refunded as part of your judgment. In others, parties bear their own costs. Plaintiffs should keep that in mind when filing their case.

A Day in Small Claims Court

Small claims business cases look the same whether you are the plaintiff or the defendant. You may want legal advice when preparing your case. Most small claims courts do not allow attorney representation in court cases, but you can have an attorney's advice beforehand. Corporate entities can have an attorney represent their interests if having the CEO is inefficient (for instance, if a small-business owner needs to sue a major corporate supplier). In those cases, the judge will not allow the attorney to argue the case.

The court hearings begin when the bailiff opens the door. Never enter the courtroom before the bailiff calls the parties in. Both parties must check in with the bailiff. Do not approach the clerk unless told to do so.

Plan to wait. Most courts call small claims cases in a specific order:

  • Cases where neither party showed up. The judge dismisses these cases.
  • Cases where one party showed up. The judge will order a default judgment if the plaintiff arrives and dismiss the case if the defendant comes.
  • Cases where both parties came prepared. These cases will receive a hearing and court judgment.

The plaintiff presents their case first. Have your arguments written in a logical narrative format. Think of it as a story. You need the judge to know:

  • What happened
  • When it happened
  • Why the defendant should pay you
  • How much the defendant should pay you
  • What evidence you have to support your claims (contracts, invoices, canceled checks, receipts)

Keep your opinions and emotions out of your argument. Do not bring in claims from other neighbors about this tradesperson's honesty or trustworthiness unless they relate to your case. When you finish, wait for the judge to ask you questions.

You should make three copies of any evidence you intend to present: one for the judge, one for the other party, and one for yourself. The judge may give you time before the hearing to exchange evidence.

The judge asks the defendant their version of events, and tries to resolve any differences in the courtroom. For instance, if you agree you have not paid the contractor because of shoddy work, the judge may ask if you would let the contractor repair the bad work at no charge. If the contractor agrees, the judge will ask the parties to arrange a time for the new job and set a hearing for a later date to ensure the defendant satisfied the agreement.

If the parties cannot agree on an alternative resolution, the judge will rule. If it is in the plaintiff's favor, the plaintiff has the right to collect on the judgment. If the ruling goes against the plaintiff, the defendant only "wins" if they filed a counterclaim. Otherwise, the judge dismisses the case in favor of the defendant.

After Small Claims Court

Collecting a judgment against a business is more difficult than collecting against an individual. Some options for collecting against a person, such as wage garnishment or real estate liens, may not be readily available against a business.

Seizing the business's property or equipment may be your best action. Other options may be seizing or garnishing the bank account or business receipts (known as a "till tap"). If you decide to use this method, you should contact a debt collection attorney. The legal logistics require professional assistance.

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