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When to Take On An Unwinnable Case
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When to Take On An Unwinnable Case

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A bank served our client, a business owner with several bad loan problems, with an $800,000 deficiency lawsuit on a shopping center the client lost to foreclosure. The center’s occupancy dropped from 100% to 60%, and the client had used up most of his cash feeding the loan after the center’s rents could no longer cover the payments.

When the loan matured, the bank showed their appreciation to the client for feeding the loan with personal cash for 2 years by refusing an extension and foreclosing as soon as the loan matured. The bank had the client in a vise: his business was also a tenant at the foreclosed shopping center, and thanks to a subordination agreement that didn’t include a non-disturbance provision [oh, the legal malpractice stories we can tell….] they could put him out of business by eviction, which because of his additional loan problems would mean bankruptcy.

Restructuring and bankruptcy consultants have a saying (well, I have a saying): “it’s not whether you win or lose, it’s whether you know what game you’re playing.”

Corporate lawyers and business litigators will typically evaluate a legal case and negotiate a settlement based on their opinion as to whether the client will win or lose in court.  Meanwhile, the plaintiff hammers away at your client: “You signed a contract.  You didn’t perform. You will lose.  You will pay.”  In most cases, both sides consider the outcome of the case on the merits a fait accompli. You might as well just settle and save all the time and stress. Right?

The bank’s proposal to stop the litigation, although cringeworthy, wasn’t unusual. If the defendant would make a $50,000 lump sum payment and sign a consent judgment for the $750,000 balance, the bank ‘would consider’ a payment plan for the balance and postpone collection efforts. After looking at the documents, the response was ‘see you in court.’

Let’s examine the parties in this dispute: a creditor and a business owner. The banks, finance companies, tax collectors, etc. have a bureaucratic structure and follow a set playbook.   The “process” is what it’s all about.

Any large bureaucracy lives on process. Bureaucracies grind on slowly and are in a constant state of both internal and external conflict and disagreement. Nobody really wants to be responsible for making a decision [a trait bankers and lawyers share!]. All decisions are made by committee, and a bad outcome is preferable to a better outcome that doesn’t follow “the process.”

Entrepreneurs are about substance.   Entrepreneurs always have a sense of urgency but are surprisingly conflict averse.  A sense of urgency (“I just want this to go away”) and conflict aversion (“why won’t they take/make a settlement offer”) costs much more money in the end.

The most effective option in disputes with any size bureaucracy is working through the “process,” while at the same time not hesitating to forcefully assert your rights when necessary.  Typically, “fighting” simply means

(1) making the other side prove its case in court, or

(2) making the other side play by the rules.

Actually, most attorneys are reluctant to do either of these things.

The client’s family’s lawyer sent him to a restructuring consultant, who told the client he would have to hire a lawyer with expertise in foreclosure confirmation cases to defend the lawsuit. The client was despondent. “The bank made the loan, and we didn’t pay it back. Why should I pay an attorney when we have no defense?” After somehow convincing him, the client reluctantly scraped together a retainer for an attorney, and the consultant got to work analyzing the loan history, the loan documents and how this liability fit in with the larger financial picture.

Understand the attorney’s role in “the process.” Regardless of the facts at your disposal as the defendant, make the other side prove their case. Make the adversaries do their discovery, present proper evidence, prevail on summary judgment, etc., even if you believe the adversary will prevail on the merits. Why? Doing so keeps two options open:

(1) During the time of the pending litigation, something good might happen. Collateral value may recover; the borrower may come into some cash to fund a settlement; a sought-after witness might be found; the plaintiff might run into financial trouble of its own; a bank might fail!

(2) Maybe you are wrong. Perhaps the plaintiff can’t actually prove its case; documents can’t be produced; the plaintiff’s attorney may make a mistake fatal to the case; it turns out that you didn’t have all the facts; or you simply get the right judge on the right day!

If the client has no money to fund litigation, then they don’t have money to pay a judgment. In that case, educate the plaintiffs about your client’s financial reality. If the client could fight a lawsuit but doesn’t want to incur the cost, explain the very good reasons to move forward despite the odds.

Why are most lawyers unwilling to do this? “Many attorneys see ‘a big picture’ but simply don’t see the right big picture,” says Clay Cheshire, managing partner at J. Clayton Cheshire & Associates in Atlanta, Georgia. Cheshire has defended dozens of debtor/creditor and firearms regulation actions and believes many attorneys “see an unwinnable case and conclude that spending money defending the case isn’t in their client’s best interest. This advice is reasonable, but sometimes the lawyer needs to give better advice.”

“The plaintiff has the burden of proof to prove the elements of a basic breach of contract case.  When cases do not require expensive expert consultants or witnesses, a defendant can put up a basic defense for a relatively small cost, possibly win, and create leverage to negotiate a better outcome.  I think that is the right big picture. Many lawyers simply don’t see this.”

At the hearing, the client’s lawyer dropped the bomb: the bank’s law firm had foreclosed using the wrong legal description. The judge voided the foreclosure and requested briefs from the parties on whether he should permit the bank to re-advertise with the correct description. Shortly thereafter, the parties settled on terms that the client could perform.

Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment — that which they cannot anticipate.” –Sun Tzu

Most attorneys take a two-dimensional approach to their analysis, facts and law, giving little thought to more important dimensions, people, math, and time.  One must obey the rules, but all conflicts have odds to be played, risks to evaluate, mistakes to be exploited or recovered from, and understanding your opponent in context is as important as the facts. One must be nimble and flexible in the face of change.

By painting the accurate financial picture for the creditors, the client settled his various problem loans. When the other side understood the limited cash flow of the client’s business and the lack of unencumbered assets of the guarantor (i.e.., our client), the creditors’ attorneys became the ones advising their client that the cost of litigation wasn’t justified. A judgment would be uncollectible and only lead to yet more expense in bankruptcy court.

The legal merits of the case are important, but the legal merits are nowhere near as important as the client’s ability to pay.

Understand that your client will accept a settlement offer even if they could never perform. An attorney is unwise to recommend agreeing to a settlement without thoroughly understanding the financial picture of the client’s business and their personal financial situation:

  • accurate financial statements (a balance sheet and income statement) both year-to-date and historical
  • reliable income projections going forward
  • an accurate picture of asset values and liabilities, secured and unsecured
  • a complete understanding of the likely outcomes in each type of bankruptcy situation

The accuracy of this information and a clear presentation of this picture to the other side is essential. All civil disputes are about money, not law; the merits of the legal case are but one front in a complicated battle involving business, finance, communication, law, history and psychology.

The attorney does the client a disservice by allowing the client to agree to a bad settlement offer (one in which the client can’t reasonably expect to fulfill) simply to avoid or end a lawsuit. Even when convinced that a case can’t be won, the better advice is to fight on rather than kick the can down the road with an impossible settlement (whether your client wants it or not). A judgment against the client doesn’t put another dime in the client’s pocket.

As legal counsel, you are duty bound to explain all of the possible outcomes, including the worst case scenario, and Lord knows no lawyer wants to talk about the likelihood of different outcomes for fear of malpractice liability. But in many instances, maintaining these professional and ethical standards helps the other side win and hurts your client in more ways than just the legal case. How so? And what can be done about it? This is the topic of next month’s column.

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Clay Westbrook
Clay Westbrook
Clay is a business restructuring and litigation consultant, former attorney, and author of Debt & Circuses: Protecting Business Owners from their Enemies, their Allies, and Themselves, which teaches how negotiation works in the new economy, shows how to manage the stress of financial problems, and chronicles many restructuring adventures. His consulting firm, Ascent, helps attorneys, CPAs and other professionals protect and defend clients in financial distress, contentious litigation, and complex negotiation.

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