Thinking of Filing a Lawsuit to Collect Long Over-Due Fees? Some Considerations Before Suing ...

There is no dearth of advice from business pundits on what business owners should be doing during this economic downturn to shore up the bottom line. A recent Business Week article seemed to tout going for a bike ride. Another suggested canning long-term goals. In such desperate times thoughts may naturally turn to those clients, customers and patrons that owe money to your business. If we could just collect some of this bad debt, the thinking goes, everything would be fine.

At the risk of oversimplifying a fairly complex analysis, here are some considerations savvy business owners must take into account when analyzing the various legal options:

1. Start at the end. That is, consider the likelihood of collecting if you win. This may depend on a combination of factors such as the potential defendant’s ability to pay, the length of time required to obtain a final judgment, and whether an insurance policy is available. If you do not know the defendant’s ability to pay, inquiring about assets through mutual acquaintances or obtaining an asset check may be considered. Next, determine how the assets of the delinquent are owned. For instance, is the potential defendant’s only asset a personal residence owned with a spouse as tenants by the entireties? Or, does the potential defendant have many assets, but few or none in the LLC that your business signed the contract with? Is bankruptcy a factor? Such factors greatly impact your business’s ability to collect any judgment obtained in court, and thus, warrant careful thought at the outset.

2. Equally important is the cost of pursuing the action. In truth, most lawsuits end in settlement where the parties, after having exhausted their resources or their wherewithal to fight, or both, finally determine that it is in their mutual best interests to resolve the lawsuit before a judge or jury has an opportunity to fully examine the case. Given this reality, it is best to weigh the cost to the business to pursue the litigation in earnest against what you may reasonably expect the defendant to offer to rid itself of the matter. Obviously, the availability of an insurance policy, or a written contract that states that the winner of a dispute between the parties is entitled to recover their attorneys’ fees, or anything that may mitigate your costs is very positive. As my partner Daniel P. Dozier discusses more fully in his ADR Law blog, it makes sense to explore mediation and other, less expensive options for collecting the debt. In any event, as the cliché goes, do not fail to count the costs. If it costs $20K to obtain a $25K judgment—have you won? Maybe, but the point is, you need to have a base line to measure against.

3. Finally — and this is the only point some litigants wish to consider — do you have a good case? I do not place whether the business has a viable case as the preeminent factor because if the potential defendant has no assets from which to collect, or the business does not have the means to pursue the action to a satisfactory conclusion, the merits of the case may be immaterial (aside from the bluff value). But having determined it is worth it to the business to file the lawsuit or to pursue mediation before or after filing suit, the merits of your case must be fully analyzed. Doing so has several benefits:

a.) It will likely give you the upper hand in settlement negotiations because you will have already determined the strengths and weaknesses of the case;

b.)It will force the decision makers in your business to take a sober look before committing company assets to the litigation; and

c.)You will be prepared to deal with technical considerations such as the timeliness of the lawsuit, the availability of proof to support your contentions, the defendant’s ability to effectively assert a defense (such as counterclaims), and the like.

Although this blog shares some of the analyses we go through with our clients, this blog is not intended to substitute for obtaining legal counsel. Each case must be evaluated independently with the help of a professional.

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