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Commercial Mediation: The “Collectability” Issue, Its Use and Proof

June 18, 2012

Those who practice litigation primarily in commercial law, particularly where insurance plays no role in paying either damages or fees and costs, know well the issue of collectability and its critical impact upon any dispute.

If you cannot collect a judgment should you prevail, plaintiff or defendant, what is the real value of any future  judgment?  And, just how much money is your client really willing to spend, if any, to obtain a judgment they cannot collect?

And, notice that this issue is just as applicable to the Defendant who is certain they will prevail at trial.  If the Plaintiff has nothing, then punishing him by continuing on to a defense judgment is equally futile.

In short, if your opposition is and/or will be  unable to pay, a  number of related, but collateral, issues immediately begin to rear their ugly head.

Some of these issues are problems for your client.  However, some, could become yours if you have not planned ahead;  including, making certain that your client knows of this collectability potential, and well in advance.

In mediation in the commercial field where usually no insurer is available for relative ease of full judgment collection,  the collectability issue also becomes the proverbial “800 pound gorilla in the room”.  And, particularly where one or both parties are coming to the full realization that the issue might become applicable at trial.

The issue has nothing to do with the merits of any claim or defense.  But,  it usually has more to do with the route for mediation resolution than the merits of the claim or defense!

Clients on both sides of any commercial issue are seeking what they believe is justice and usually are paying  attorneys significant hourly fees and advanced litigation costs to find that justice .  And, that is precisely where some of the problems begin.  Justice usually means enforcing your claim and being made whole.  But, if the prevailing party cannot recoup all or at least most of his legal costs of litigation, then why be in, much less, continue litigation?   And, for sure, why go to trial?

And, of course, most commercial plaintiffs are seeking far more than simply covering their legal expenses.  (For the purposes of this discussion, I will lay aside those very, very few occasions upon which “money is REALLY not the object”.)

Accordingly, every commercial mediation resolution usually hinges upon this issue of collectability, regardless of who may prevail on the merits.

Presumptively, this collectability  issue is always addressed by any competent attorney with any potential claimant-plaintiff well prior to entering litigation.  And, also presumptively, this issue is then investigated, as fully possible, either prior to or very early in any litigation.

But, sometimes, despite best efforts, collectability is simply not that easily determined.  And, “looks” alone, can often be deceiving, both ways.

Accordingly, mediation is likely the last opportunity prior to trial  for one side or the other to explore,  discover and/or if necessary, use this critical issue prior to moving on to what could become an uncollectable  judgment.

But, you should also know, the two most commonly heard and used mediation “defenses” by any party, plaintiff or defendant, who is potentially close to this issue in commercial mediations are:  “I have nothing (to collect upon or to offer to pay with)” and 2)  “If you proceed without resolution, I am going to take bankruptcy (and start over again)”

And, therefore, by some litigators (and some clients), these are also the first two defenses most always immediately ignored!  At least until this issue becomes of interest and is properly proven.

Knowing this, how then do you prepare for and then use the collectability issue?

First, during pre-mediation hopefully the side that believes collectability may become an issue for them should they prevail will have begun at least rudimentary party-asset investigation.  And, they will have raised the issue, at least privately, with their mediator.  (You know how much I believe your mediator needs to know EVERY potential issue prior to mediation. )

At mediation, it then behooves any participant who knows he/she/it is one who cannot pay a judgment, to be able to PROVE it.  And, as likely the most powerful weapon a “have-not” has in mediation, a lot of careful thought need be given to just how!

An additional factor to be considered about such proof at mediation is the confidentiality of mediation.  Matters shared in mediation, should they be “less than candid” would still have less negatives than sworn testimony.  (But, of course, many opponents will require sworn proof once the issue is accepted for consideration toward resolution..)

On the other hand, if it is your opponent who first raises the issue at mediation, then immediately also demand they prove it at mediation.

But, have you ever considered how difficult it is to prove a negative?  Both sides need to be aware of this flaw in any proof issue.

I can likely prove you are an alcoholic (or anything else used for an example).  But just how do I (or you!) prove you are not one?

Proving you cannot pay a future judgment is exactly the same.  It is extremely difficult.

Yet, if you could reasonably show, at mediation, your total inability to pay either now or in the future, what a powerful weapon it would be in bringing your dispute to a grinding halt, for that reason alone.

And, the more reasonable the proof you tender to your opponent, the more weight any reasonable opponent must give the issue in first considering the issue and then applying it to the wisdom of an immediate resolution.

And, of course, the same with the ultimate threat:  bankruptcy.

Even with recent federal law changes  “stiffening” the ability to seek bankruptcy to clear debt, any valid likelihood of  your client taking such a legal step into the process must also be very, very carefully considered by your opposition.  Bankruptcy, of course, can totally prevent some debts from ever becoming collectible.

Accordingly, should you find your client, plaintiff or defendant, facing a likely judgment against them, I submit that one of your most powerful mediation tools will be to come prepared (or even such issues and proof shared in advance) to convince your opposition of the non-collectability of your client.   And/or, that even should your opponent prevail, your client will only be forced into taking bankruptcy to start over.

Accordingly then, what are some easy mediation tools/proof to use this important weapon to assist in mediation resolution?

As with many issues at mediation, it is all about credibility.  Your opposition must believe your protestations.  Don’t just suggest poverty and/or desperation, prove it!

For one, why not supply to your opposition selected demonstrative items that show a LACK of ability to pay?  Some particularly helpful items might include financial statements given recently to a financial institution and preferably unrelated to or even prior to the litigation.

Although financial documents already provided to third-parties prior to the controversy would have the best credibility (doesn’t everyone “overstate” their finances to others/), at the least consider creating a current financial disclosure that you now supply.  And, in as much detail as possible.

And, depending upon the complexity of your clients finances, consider sharing similar statements of any related person that your opposition believe would permit your client access to monies upon which they would hope to pursue.  Your client’s spouse, for sure.  Closely held corporations, for another example.   Or even corporations held by any substantial stock ownership by your client.

Another tactic would be to supply the last two or more years of personal income tax records filed with the federal government!   And, those of your spouse.  And, any closely held corporation.  Lying to the feds is not usually done.  (And, isn’t this one of the first things that is going to be requested, anyway?)

Consider bringing your client’s most recent checking account records.  Seeing that your client’s daily living checks are already barely clearing is a hard thing to ignore.

Show the opposition the lack of equity in you clients home, i.e. asssessment v. mortgage balance.  Or, even bills of everyday living they haven’t been able to pay, dunning letters from credit card companies, or anything similar to show that your client really is in present financial distress.

If applicable, consider letting your opposition know that even you are not being fully paid!  (Or, if you are, explain that “it is only a matter of time until you are not. )  Let the opponent worry that maybe you will either work for free, so strong is your conviction for your client, or that alternatively, your client may soon become “pro se”!

Another suggestion might be to bring with you an attorney qualified in bankruptcy with whom your client has already consulted and is just waiting to begin!  Such a “witness” makes a valuable and credible resource in suggesting the ease (and success) of bankruptcy, if forced upon the non-prevailing party.

At the least, consider completing  and sharing the usual pre-bankruptcy qualification forms that one would have to complete to pass the “means test”;  the first current step in determining even the ability to obtain any bankruptcy protection.

Admittedly, some would say that providing such financial information in advance of a judgment might become helpful after the judgment is entered.  True.

But, what signal does any refusal to volunteer such clearly discoverable  information that is easily obtainable after judgment have?  Any reluctance merely screams that you actually have something you are seeking to protect.

And, of course, if you do (have assets, etc.), don’t take this approach.   Please.  Don’t waste your time or the time of your mediator.

As soon as you start to “poor mouth”, you must naturally expect your opposition to ask for proof.  Then, if you are unwilling to provide such, you have just lost your collection war before you have even begun.

And, by “crying wolf”, you have also now damaged your credibility on every other issue critical to resolution.

Most attorneys come fully prepared to discuss the merits of their claim or defense and spend most of their time trying to convince their opposition they will prevail on the merits.

I suggest that one or both sides, should collectability be a real issue, should spend an EQUAL amount of  preparation for the effort (and proof) of this very powerful incentive to resolution that has nothing to do with merit.

If you are a commercial litigator and there appears there  is no deep pocket available, the collectability issue is critical part of your tool-bag.

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