September 2015 Vol. 4 No. 9

 

 

 

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Goodrich & Associates
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Thanks to many years of experience, both in business and in winding up companies in or out of bankruptcy, I have dealt with lots of litigation. In one year alone, I spent $6MM in legal fees - half to pay off old, incompetent attorneys and the other half for their replacements. Fortunately, and thanks to the wonders of GAAP accounting, all their fees went to the balance sheet, resulting in big income gains several years later.

Needless to say, when it comes to attorneys and litigation, I have learned a lot along the way, some of which I share with you now:

• Get to the heart of the legal issues and facts as quickly as possible.
  
  Time is money, particularly when dealing with lawyers that bill by the hour. But don't underestimate the value of your own time and that of your organization. Companies often expend considerable resources gathering information and debating what to do, without first knowing what is needed from a legal perspective. Typically, you need relevant legal advice to make such an assessment.
  
  Several years ago, I was liquidating a factor (a finance company that buys accounts receivables from small businesses). We were owed a considerable sum by the account debtor (the company that owes money to our customer whose receivable we bought). When I arrived on the scene, a contingency law firm had been litigating the case to no effect and litigation was on hold in Phoenix. So I hired an attorney in Wichita (where the account debtor was based) and filed suit in Federal Court there.
  
  As my attorney explained, the process would be worth it if we won but costly if we lost. So I told her to file a motion for summary judgment, which forced everyone to focus on the law and the facts. It soon became clear that the facts were murkier than we thought and the summary judgment was denied. We dropped the case, cutting our losses and minimizing legal expense.
  
  Always seek to get good counsel that is well versed in the relevant law and that practices in the Courts where you might litigate. Local laws vary quite a bit by State and local court practices vary by Court. It helps to hire someone who knows the ins and outs.

• Make sure you understand the economics of lawyers.
  
  Attorneys fall into two camps: Those that charge an hourly fee and those that charge a percent of the winnings (contingency). The key to success for contingency lawyers is finding good cases that can be won for big dollars. They cast a wide net (some advertise on TV), only spending time on the winners. This means that if you are the defendant and headed to trial, it's because the plaintiff's attorney thinks he can win (otherwise, he wouldn't spend the time and money required). So if you think you are right, objectively rethink your position.
  
  When I was in the car rental business, for example, when we were going to trial on high stakes cases against contingency attorneys, I always insisted on holding mock trials before the real thing. Most of the time we learned our case was not going to play well in front of the jury and so we settled - for less than the worst case scenario and without more legal fees.
  
  On the other side, if you are the plaintiff, understand that the contingency model can backfire if your case conflicts with a better case. In one bankruptcy case, I came in as the CEO and Director to get an administratively insolvent case to a liquidating plan, so the plan trustee could sue the auditor for their misdeeds. We had a very strong case and Counsel for the Unsecured Creditors Committee found an experienced litigator that would take the case on contingency and front $60K of his own money for an expert witness. In the end, unfortunately, our trial date conflicted with the trial dates of an even juicier case for the attorney, so his associate went to trial instead. His lack of experience killed us and we lost the case.
  
  Attorneys that charge an hourly rate have a different incentive: the more hours, the more money. More fundamentally, that means their economics are not aligned with yours. And, because they work on many matters for many clients, they tend to focus only on the next step. As the client, therefore, you need to push them to assess the merits of the case, to ensure that the work itself is worth doing.
  
  Remember as well that rates vary widely, a fact that can shape the decision to litigate or not. In the factoring example, I would not have pursued the case at legal rates charged in Boston, New York or Los Angeles. But the rate for an experienced litigator from a top firm in Wichita was only $250 an hour.

• Take it in-house when exposed to repetitive litigation.
  
  When, I was in the rent a car business, our cars were in lots of accidents - too many in fact. We were self-insured and our effective deductible was $100MM. CIGNA was our TPA; for $350 an accident, they took care of everything (except, of course, we paid all expenses and settlements). CIGNA gave me a list early on of all cases in litigation and it was short: only 20 to 35 cases. But I sensed something was wrong and sent a team out to one of the offices that handled our cases. There, they found 3,000 cases in litigation. CIGNA had collected their fee and had no incentive to manage litigation differently. And that was costing us big money. So we hired our own claims team and did everything ourselves.
  
  What we learned is that like most things in business, handling accident claims is a process; our inside staff set a process up and was vested in the outcome. We set firm guidelines and budgets for what we expected from our attorneys and we hired good ones in the relevant jurisdictions. And, because we hired just a handful in any jurisdiction and had a lot of cases, we got volume discounts and our cases always got their full attention. One thing we learned is not to "abandon the case to counsel." We never let the attorney drive the process. We did.
  
  Bringing cases in-house also allowed us to spot and fight fraud. When you see it, drop the urge to just settle and move on or you will be quickly known as an easy mark. In the rent a car example, we found lots of what seemed to be staged accidents in Providence: accidents involving lots of family members in both cars, with the same law firms and body shops at work. So we took a stand and spent more money on a few cases, well beyond what the economics of the individual cases justified. Once these fraudsters learned we would fight, they moved on - to our competitors.
  
  If the economics don't warrant bringing claims in-house, find ways to align your TPA's interests with yours.

• When pursing money in some form in litigation, make sure the other side has the resources to pay.
  
  In cases with hefty legal fees, it is always worth the small up front expense to see if there are assets to pay you (and that you can get to those assets). Be creative in your search for sources of payment.
  
  When I was in the foodservice business, for example, a small chain went out of business. We had a personal guaranty from the President, who we later learned was not the owner and who had no significant assets. However, by pursuing the personal guaranty, we forced the owner to pay because he was obligated to indemnify the President. Don't overlook Directors & Officers, and errors and omissions insurance policies, as a source to get paid.

All in all, litigation can be a huge waste of time, money and resources for your business. Keep these guidelines in mind as you address any and all legal challenges and the expenses won't get out of hand.

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Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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