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Bar Association of San Francisco Member Benefits: Publications

Ten Tips for Transactional Lawyers to Help Their Small Business Client Survive Litigation/ Part Two of Three

 

By David B. Newdorf and Vicki F. Van Fleet, Newdorf Legal

 

In the first installment of this series, we introduced several important concepts for the transactional lawyer who finds him/herself advising a small business client facing litigation. We continue our list of the top ten tips for the transactional attorney with three specific aspects of litigation: litigating the small business claim, the potential risk to lawyers from writing demand letters, and the possibility of obtaining pre-judgment security or attachment for your client’s claim.

4. Litigating the Small Business Claim Without Breaking the Bank

First, the definition of a small claim. We are not necessarily talking about Small Claims Court (but more on that in a moment). Whether the client itself is small or giant, any commercial claim less than $50,000 in hard damages is a “small” claim in the world of commercial disputes. In evaluating a claim, keep in mind that not all damages are created equal. A claim of lost profit is inherently more speculative and difficult to prove than a claim for out-of-pocket expenditures. The cost of pursuing a commercial dispute is often driven up by cross-complaints and offsets, with each side alleging breach or liability against the other. Even when damages are provable and not speculative, at the $50,000 level, litigation fees and costs will quickly surpass the value of the claim. Of course, for clients using larger or more expensive firms, the minimum value of a viable litigation claim would be higher.

If your client has a small commercial claim (or has been sued on small claim), it is often worth approaching the other party and suggesting a pre-litigation mediation. Alternative Dispute Resolution can save time and money for everyone, since it will avoid the cost of pleading, motions and discovery. Most lawsuits are ultimately resolved through voluntary settlement. Why not bypass the expense of litigation and go directly to an ADR process?

There is a new option in California as of January 1, 2011 that provides a judicial alternative to ADR for resolving business claims efficiently. The Expedited Jury Trial (which is not limited to small claims, but makes sense for these matters) reduces trial costs through one-day trials, smaller juries, and other streamlined procedures. If the parties agree to limit discovery, the Expedited Jury Trial may resolve small business claim without running up legal bills exceeding the amount in controversy.

Then there is Small Claims Court itself. For smaller cases, the claimant can end up with more in his pocket foregoing Superior Court and opting for the “People’s Court.” The math is irrefutable. A plaintiff who spends $20,000 in legal fees and costs to obtain a $25,000 judgment would have been better off skipping the lawyer and going to Small Claims Court, where the jurisdictional limit is $7,500.

5. The Hidden Risk of Lawyer Demand Letters

When a business gets nowhere on its own with a demand for money owed, the next step is the lawyer demand letter. Often, the client has no intention of incurring costs beyond a demand letter. All he or she wants is a sternly worded letter on a lawyer’s letterhead. Lawyers beware. You are “debt collectors” under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692. When the underlying debt is under the purview of this act, your demand letter must include specific mandatory disclosures or you could be liable for a $1,000 penalty plus attorney’s fees. This statute comes into play when the obligation was incurred for “personal, family or household purposes.” When in doubt, refer the matter to a collections lawyer who understands the minefield created by the Fair Debt Collection Practices Act.

6. Pre-judgment Security

Litigation can take years. Your client should want to know that a valid claim will get paid at the end of the day. How do you respond to the client’s concern and evaluate the credit risk of litigation? It’s good to know at the outset whether the other side has assets, and real estate is the easiest to find. But by the time your client obtains a judgment, the client may be standing in a long line of creditors going after limited assets. The question is: How do you get to the head of the line?

In certain situations, a litigant can convert an unsecured claim to a secured claim. Consider whether any of the following procedures apply to your client’s claim:

  • Pre-judgment Writ of Attachment – available only for contract claims.
  • Lis pendens – notice of pendency of action recorded against real property so that a change in ownership does not change a claimant’s interest in the property.
  • Mechanic’s Lien – for suppliers of materials and labor for improvement of real property.
  • Contractual Liens/UCC Financing Statement/Attorney’s Fee Liens. These are additional forms of statutory and common law liens that may be enforceable and create security interests in real or personal property.

The April column will focus on tips seven through ten: avoiding common litigation mistakes that business’s make and the appropriate role for the transactional lawyer in the litigation.


David B. Newdorf is a litigator representing businesses and government entities. He is a frequent writer and teacher on litigation skills and sits on the Executive Committee of the Litigation Section of the California State Bar. Vicki Van Fleet is a Senior Associate. She is a graduate of the New York University School of Law, was Vice President and Senior Corporate Counsel with Charles Schwab & Co., Inc. in San Francisco, and has also practiced law firm civil litigation in both New York and Boston.


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