The thrill of winning a multimillion-dollar jury verdict fades into oblivion if, in the end, the judgment you obtain is uncollectible. In these tumultuous economic times, a litigation triumph may be no more than a hollow victory.
The risk that a losing party will file bankruptcy to avoid paying a judgment looms ever more real as our economy takes a nosedive and the judgment your lawyer obtains may not be worth the paper it is printed on. One solution may be a structured settlement, which can often achieve concrete results not otherwise available through a court-ordered legal remedy.
As a wise judge recently told my clients, your lawyer is going to get you a piece of paper that awards you lots of money, but that may not be as valuable as the collateral you can secure through a settlement. Today, many defendants lack the cash to satisfy a large judgment, and other assets may be difficult to reach through execution procedures. Consequently, you may recover more in settlement than you could collect if you force a lawsuit to a final judgment.
Take, for example, a case involving developers and contractors in the residential or commercial building community. Although they were once moving forward to the next deal at lightning-speed, with the recent real estate market collapse, the credit crunch and mortgage crisis, many are now teetering on the edge of insolvency. While they strive to maintain their image and avoid bankruptcy, a substantial judgment against one of their corporate entities can push that corporation or limited liability company to file for bankruptcy protection, leaving you with the possibility of never fully collecting on your judgment, or having to chase assets through the chain of various corporate entities, at great expense and often with no better collection result.
In contrast, a structured compromise, over time, with adequate collateral and personal guarantees, may pencil out better than a forced liquidation of the defendant’s assets, even if it represents a substantial discount of your claim.
Developers and contractors often own interests in a variety of properties, but have little cash flow in the current market. Betting that the economy will eventually recover and taking a promise to pay over time, with trust deeds on the real property a defendant owns, can often result in a greater ultimate recovery than would otherwise be available with a court award.
Using the defendant’s sources of revenue or property interests to secure their promise to pay can be achieved through various legal instruments. You can use trust deeds to secure a promissory note with real estate. Trust deeds provide the right to take possession of property, either directly upon a default or through a judicial foreclosure.
Requiring that an individual personally guarantee the debt provides further flexibility for ultimate recovery. Personal guarantees give you the option of going after a person, in addition to the corporation that was the original defendant in the case.
The defendant may also control other businesses you have not sued that may participate in structuring a settlement. You can also use a pledge of other property, such as stocks or bonds, to protect your right to recover the debt. Even the assignment of rents or a percentage of the business’ future receivables can assure payment in the future.
Always be sure to have your attorney perfect your security interest in the collateral obtained. Although there is still a risk of bankruptcy, you will have more options and leverage to potentially avoid that result.
Bankruptcy can add layers of additional expense to your collection efforts. It may require that you obtain new counsel with bankruptcy expertise. On the other hand, sometimes bankruptcy can work to your benefit, especially when dealing with a defendant who is seeking to hide assets. Having a bankruptcy judge or court-appointed bankruptcy trustee overseeing and marshalling a defendant’s assets can aid your collection efforts. But more often than not, it will result in less money to you in the end.
It is important to think about potential sources for payment from the beginning, before filing your lawsuit, to ensure that you name the proper defendants that are most likely to have the capacity to satisfy a judgment. To the extent possible, you should also monitor the financial health of those defendants as your case progresses.
When your fierce litigator is poised to achieve total victory at trial, remember that a compromise settlement involving payment over time secured by guarantees and adequate collateral can often translate to more money, with less risk, than winning a hard-fought court battle that achieves a larger, but potentially uncollectible judgment.
A condensed version of this article appeared in the Portland Business Journal on March 27, 2009.
Related Practice Areas:
Business and Commercial Litigation
