What Every Business Owner Needs to Know Before Starting a Lawsuit
Even though my practice focuses mainly on business and real estate transactions, I have been involved with enough litigation work – and I still have to manage my clients’ expectations on litigation matters handled my colleagues – to know how litigation works from start to finish. One of the most difficult issues to deal with during a lawsuit is not whether to file a certain motion or what questions should be asked during a deposition. Rather, the most difficult task in handling business or real estate litigation is to manage the client’s expectations. Why do I say this? Because common sense and the civil litigation process and rules do not always mesh. This is why lawyers work hard to resolve disputes without litigation, and even after the lawsuit is commenced, why lawyers work hard to reach a mutually acceptable resolution.
Here are just a few “rules of the road” for business owners who find themselves in a dispute and want to proceed with a lawsuit against the other party:
1. There Are No “Sure Things” in Litigation. I am often asked “what do you think my chances are if I sue?” My response is always the same: I tell the client that I don’t predict outcomes of court cases. Even the best case has at best a 50% chance of success. I tell my clients this not because I lack confidence in my colleagues who handle litigation matters at our firm; rather, it is the external factors beyond our control; i.e., what judge handles the case, the personalities of the parties, etc., that can have a profound effect on the outcome of the case.
Case in point: I recently was involved in a foreclosure action on behalf of a bank client. When we proceed with a court action to foreclose, the plaintiff can obtain a money judgment against the defendant in addition to foreclosing on the property. In this case, the summons and complaint was served on the defendant who failed to answer within the required twenty (20) day period. The Minnesota Rules of Civil Procedure specifies that when a defendant fails to answer the complaint, there is no need for the plaintiff to serve that defendant with notice of the motion for default judgment since the defendant has not become “party to the lawsuit”. Thus, rather than make our client incur needless expense by serving the defaulting defendant, we simply filed our motion papers and scheduled the hearing.
What happened at the hearing? The judge refused to grant our motion without us having served the defendant with notice of the hearing. While acknowledging that the Rules did not require such notice, the judge determined unilaterally that because the amount of the judgment would be large, we should “go the extra step.” The judge who heard the second default judgment motion was puzzled why we had a do-over on our motion. Had we drawn that judge on the first motion, we would have had no need for the second hearing. In other words, the first judge’s personal opinion affected the outcome of our motion. You can argue the merits of such a result, but it is these types of unforeseen occurrences that make the outcome of even the most straightforward of motions (what could be easier than a default judgment against a defendant who does not answer the complaint?) in essence, a “jump ball.”
2. There is No Such Thing in the U.S. as Debtor’s Prison. For a businessman or businesswoman, having a party fail to pay what is owed on an invoice or a contract is akin to them being a thief. Nonetheless, when a party is owed money by another party, typically there is no criminal remedy; rather, one must initiate a collection action and must abide by the many rules which restrict how one can collect a debt from another (such as the Fair Debt Collection Practices Act). Collections take time and cost money, which again is why we as attorneys want to find a way to reach a cost effective resolution for our client (which might include a settlement with installment payments or acceptance of a reduced amount lump sum) rather than pursue a money judgment which will never be collected upon (usually because the debtor files bankruptcy and discharges the obligation). For some clients, however, you’d think that they want to reinstate debtor’s prison and jail anyone who is found to owe them money. Part of my job is to explain to my clients that things just don’t work that way.
3. What You Think Is Important in the Case Might Not Be All That Important. Over the years, I have represented many very intelligent individuals in matters good and bad. After all, you have to be a smart person in order to build a successful business. Unfortunately, the same smarts that businesspeople have used to build a successful business does not necessarily translate into litigation smarts when a dispute arises. That’s why I and others went to law school: to be trained to handle legal matters such as lawsuits for our clients. Nonetheless, sometimes my client becomes fixated on a particular fact or action of the other party that he or she believes is dispositive to the success of the case. For example, many years ago, I was involved in a business litigation matter where the owner of the opposing party provided written discovery responses which my client said he knew to be false. This led to a belief that the other party had perjured himself, and my client wanted to use this – and the threat that the other party could be prosecuted for perjury – to obtain a favorable settlement. Not surprisingly, eventually my client came to understand that each party has its own recollection of the facts of a dispute and what may seem like perjury to one party is not necessarily so. In the end, the case settled in mediation and no one was prosecuted for perjury.
4. In Most Cases, You’re Going to Be Paying Your Attorney’s Bills. Perhaps the most often overlooked aspect of the American legal system, whether it be in the course of drafting a contract or deciding to move forward with litigation against a party, is the fact that unless a contractual provision or statute provides otherwise, each party pays its own attorney fees. This rule can make a big difference in how we as attorneys proceed in the initial stages of a dispute and oftentimes it is the impetus to settlement. If a party is not entitled to recover attorney fees in a lawsuit, I as the attorney cannot threaten the other party to seek such fees. This rule is why I advise my clients to include an attorney fees clause in their leases, purchase invoices, consulting agreements and other business contracts.
5. Fraud Cases Are Difficult to Prove, and Rarely Successful. Almost weekly, I am contacted about taking a fraud lawsuit. That’s why I asked a colleague of mine, Brian Niemczyk, to write an article for our Firm’s e-newsletter awhile back about the difficulty in prevailing on a fraud claim.
Brian laid out the elements of proving fraud in Minnesota as follows:
Under long-standing Minnesota law, a party asserting a fraud claim must prove the following elements: a) there was a representation; b) which was false; c) which had to do with a past or present fact; d) it was material; e) it was susceptible of knowledge; f) the representer knew it to be false, or asserted it as his own knowledge without knowing it to be true or false; g) the representer intended the other person to be induced to act, or justified in so acting; h) the aggrieved person’s action was in reliance upon the representation; i) the aggrieved person must suffer damage; and j) the damage must be related to the representation. Davis v. Re-Trac Mfg., Corp., 276 Minn. 116, 117, 149 N.W.2d 37, 38-39 (Minn. 1967).
In short, fraud is often pled and rarely proved. Business owners who hang their hats on a claim of fraud against another party do so at their own peril.
What’s the point of these guidelines? What might seem to be the case to a business owner involved in a dispute is not necessarily the case. That is why a smart business owner should look to hire an equally smart business litigation attorney to help resolve the dispute in a cost-effective manner. If you’re a business owner reading this and don’t know where to find such an attorney, contact me, as I know a few people down the hall from me who fit that description!