Owed Money? When NOT to File a Lawsuit for It

“Our local newspaper wrote a nice article about me obtaining my license as an architect. This led to being contacted by ‘Diane,’ who wanted to do a remodel and expansion of her law office. She was my first client,” “Ed’s” email began.

“Before being paid for my work, at her request, I gave her the plans along with my bill of $22,000. She promised to immediately deliver a check, but it has been six months and nothing! She refuses to take my calls. I confess to being very trusting and a bit naive. We had no written contract.

“Every lawyer I have spoken to refuses to take my case, telling me that Diane is a known deadbeat. Also, the amount is too small to go to court over as it would be far too expensive. Mr. Beaver, this is now a matter of principle, and I don’t care about the money. Why can’t I get anyone to take my case?”

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Cost-Benefit Analysis: Does It Make Sense to File a Lawsuit?

I ran architect Ed’s situation by San Francisco-based attorney Matthew S. Kenefick, whose practice includes creditors’ rights.

“As attorney fees run hundreds of dollars an hour,” he notes, “ethical lawyers have a duty of not taking advantage of a client’s anger. Because the legal process is expensive, you’ve got to answer this question: ‘Does it make sense to prosecute this lawsuit on a cost-benefit analysis?’

“Given the relatively small amount that Ed is owed, plus the reality of dealing with a known deadbeat, he can’t justify paying a lawyer on an hourly basis to sue Diane, and I doubt that any lawyer would take this on a contingency fee basis. So his better remedy is just to turn the account over to a collection agency.”

I asked Kenefick what he tells clients, like Ed, who say, “This is a matter of principle?”

“Your anger will subside; my bill will remain. You are not going to erase the memory of racking up a big legal bill, especially if you win and then are unable to collect on the judgment.”

Cost Factors to Weigh: How Expensive Will This Be for You?

Kenefick describes these cost factors to consider before filing a lawsuit:

1. Where and how is this dispute going to be decided? Will it be through arbitration or mediation, both of which are costly? The different forums – federal or state court – can have very different, and often costly, procedures to follow.

2. Is there a clause in the contract dictating where in the country the matter must be heard? In many states, cases are more likely drag on for years, adding to the expense.

3. Will this case be decided by a jury or a judge? In general, a “bench” trial (trial by a judge alone) is much more rapidly conducted than a jury trial, saving attorney time and the hourly rate the client might be paying. However, judges are generally far less sympathetic than juries.

4. Does this controversy have a high enough dollar amount to make an alternative fee agreement attractive to a lawyer, such as half the fee on an hourly basis and half on a contingency? Or, perhaps entirely on a contingency, so that only if the case is won the lawyer receives attorney fees? Can you agree on a fee cap so that you will not pay beyond a certain dollar amount?

5. Are you subject to a counterclaim or a setoff? If a plaintiff initiates a lawsuit and a defendant responds to the lawsuit with claims of his or her own against the plaintiff, the defendant’s claims are “counterclaims.” Those that relate to the subject matter of the suit are compulsory and if not raised in that lawsuit, could be forever barred.

A setoff is an amount that the defendant claims the plaintiff owes him/her, which should be subtracted from any damages claimed by the plaintiff. So, if a contractor sues a homeowner for non-payment, if that contractor caused damage to the property, the cost of repair would be a set-off against what the homeowner would owe the contractor.

6. Every lawsuit costs time and often has a huge emotional toll. Judges and juries do not always get things right. If you lose your case — even though you are in the right — how well could you live with that?

Benefit Factors to Consider: Can You Collect?

Kenefick lists these factors concerning your ability to collect on a judgment, which must also be part of your decision to file suit:

• Is the party you are suing a going concern that has receivables, or are they out of business with little chance of paying?
• Are there going to be assets that you can enforce against, such as personal property? Are there guarantors or other parties contractually liable?
• Is this a claim that could have insurance coverage?
• Are there competing creditors who may be secured?
• Does the contract have a limitation of liability clause?
• Is the recovery taxable? Is it compensatory versus income?
• Is there a clause in the contract stating that the winning party’s attorney fees are added to the amount of the judgment?
• Can you deduct this as a business, tax loss or theft claim?

And When Money Is Not the Issue?

Kenefick concluded our chat explaining why there can be reasons to file a suit when actually collecting on a judgment is not the issue:

“Combating reputational harm and clearing your name can justify a lawsuit. Also, you may need to create a precedent to not be seen as a paper tiger, and are unafraid to file suit if you are not paid.”

The Bottom Line

In my experience, so often the filing of a lawsuit is the very definition of failure, a failure of one or both attorneys and parties to be honest, reasonable and fair. Some insanely high verdicts — for example, over $2 million in the McDonald’s spilled hot coffee case years ago — are the result of corporate arrogance in failing to remedy a known danger they have created.

In commercial matters, my advice has always been to explore some kind of a tax saving or business loss instead of marching off to court where only the lawyers profit from the dispute. I have seen what in reality should have been a small claims court case — a dispute over $2,000 — balloon into a lawsuit costing the owner of an auto repair shop close to $50,000 in attorney fees.

The saddest, most frustrating and scary building in any town is the courthouse. It is, in fact, a haunted house.