Chapter 15

Determining Your Litigation Strategy

In This Chapter

Figuring out how strong your case is

Considering alternative dispute resolution

Forming a winning strategy for litigation

Getting your witnesses and documents ready for court

Understanding the statute of limitations

If you can’t get paid any other way, it’s time to consider collecting through a lawsuit. But before you jump straight into court, get things right by considering the following:

The strengths and weaknesses of your claim, and whether you need to settle for less than you want or write off the debt

Whether you should file a lawsuit or instead consider alternative dispute resolution (ADR)

Who you should name as a defendant in your collections case

What legal theories (causes of action) you should raise against the defendants

Your goal is to devise the best strategy, right from the start, to achieve the best possible result. In this chapter, we give you the help you need to create that strategy.

Assessing the Strength of Your Case

Every story has two sides. If you’re a parent, you know that to be a fact. Before you punish Johnny for hitting Susie, you have to hear from both kids so you can figure out exactly what happened. Even that may not be enough, but you’ll be closer to the truth than if you hear only one side of the story. Lawsuits (as well as alternative dispute resolution) work the same way — you state your side, the debtor states his side, and a judge or jury (or mediator or arbitrator) tries to sort out what really happened. So find out your debtor’s interpretation of the facts, and figure out your debtor’s theories as to why you shouldn’t be paid.

You also need to assess your own case and determine whether it’s strong enough to win in either ADR or in court (we discuss both options in this chapter). Your evaluation of the evidence should include

A review of any letters or other written communications exchanged with the debtor, and your notes on any comments made orally: It’s very important to keep notes of all discussions with a debtor.

An analysis of the debtor’s likely claims and defenses: Determine whether you have sufficient information, evidence, and documentation to counter what you expect the debtor to say. Don’t expect the judge or jury to simply take your word for what happened — you should be able to produce documents to support your position.

An objective evaluation of the data before you: It’s easy to take the position that you’re right, and therefore, you should win and the debtor should lose. Instead, step back and ask yourself whether the debtor may score some points with the judge or mediator based on your knowledge of or instinct about what the debtor’s going to say.

Sometimes it’s impossible to predict whether you’ll win a lawsuit. When you’re getting started, you’re more likely to choose to hire a lawyer or get a reality check from collections professionals you work with. Over time and with experience, your forecasting skills will sharpen, and you’ll become very good at assessing whether a particular case is strong enough to win. Just look at how accurate weather forecasting is, now that the weather folks have experience . . . okay, bad example. Fortunately, collections cases are less susceptible to chaos theory than weather predictions.

What if you don’t think you can win your lawsuit? What if you find problems with your documentation, or a key witness becomes unavailable or too risky (such as an ex-employee with a grudge), or the debtor has strong defenses to your claims? Then you need to consider options other than litigation, such as settling the case for whatever you can convince the debtor to pay or writing off the debt. Generally speaking, it’s not a good plan to try to win in court despite your awareness of serious problems with your case.

One of the first things you should consider when filing a lawsuit is whether the statute of limitations has run on your claim. If it has, your debtor can use that fact to absolutely shut down your lawsuit. Furthermore, you may violate consumer laws if you threaten to sue over an expired debt, or file a lawsuit after the statute of limitations has run out. Head to “The Statute of Limitations: Handling a Legally Expired Claim” later in this chapter for details on the statute of limitations.

A Fork in the Road: Considering Alternative Dispute Resolution Instead of a Lawsuit

After you determine that you have a strong case, you have an important decision to make: Should you go forward with a traditional lawsuit that’s tried in court, or instead opt for a more informal process called alternative dispute resolution (ADR)?

ADR provides for the resolution of disputes without going to trial. It’s very flexible, allowing for the parties to choose the level of formality they prefer and whether or not the outcome is binding or nonbinding (advisory). Its popularity has grown steadily over the years, with almost 90 percent of all cases resolved through ADR before trial. ADR requires the other side’s agreement if not ordered by a court. Although your debtor may agree to ADR at any time during the collection process, one way to keep the option open is to include a provision in your contract giving the parties the option of selecting ADR (but not requiring it, in case you decide to file a lawsuit instead).

For a quick comparison of taking a case to trial versus going into ADR, see Table 15-1. Although ADR can be as complex as a trial, in most cases ADR is structured to be far less formal and to bring about a resolution much more quickly than you can achieve in court. Dare we say that going to trial is like a fine dining experience compared to ADR’s fast food? If you’re really hungry and don’t want a lot of ceremony . . . well, perhaps it’s not the greatest comparison, but you get the idea.

Keep in mind that the comparisons made in Table 15-1 are rules of thumb, and sometimes ADR doesn’t pan out for you, either because the other party won’t agree or because you’re better off in court. Check out “Don’t count out a lawsuit just yet” for more on when a lawsuit may be your best option.

Table 15-1 Trial versus ADR
Trial	ADR
More formal (more intimidating)	Less formal (less intimidating)
Slower process	Quicker resolution
More expensive	Less expensive
Heard before a judge	Heard by an arbitrator or mediator
At the end you get a judgment	At the end, you get an opinion
Judgments are enforceable through the court system (See Chapter 19)	After binding ADR, the opinion can usually be filed with a court and turned into a judgment

The benefits of ADR

ADR offers some real advantages, such as the following:

Cost savings: ADR usually helps you avoid such expenses as court filing fees, deposition fees, and document production costs. But know that ADR isn’t always cheaper than litigation. For example, if your case can be resolved in small claims court, that’s likely a better option for you than ADR.

Less intimidating than court: Most likely you’re not an expert on evidence and hearsay rules, statutes, or case precedents that may impact your case. Therefore, ADR may be just right for you because representing yourself in informal ADR proceedings can be a lot less intimidating than representing yourself in court.

Time savings: Court cases proceed according to procedures and schedules prescribed by the court you’re in, or by the judge assigned to your case. In ADR you can schedule how your case proceeds and require the arbitrator to return a decision within a fixed number of days of the hearing.

Whether you can exploit these advantages depends on the ADR clause in your contract, or the agreement you and the other party reach for the ADR proceeding. You can agree to be bound by the results, and you can agree to a process that usually costs less than litigation. In a typical collections case, the issues are pretty clear, and you choose a form of ADR that’s less formal, less costly, and binding. Done right, ADR can be an effective, cost-efficient tool for resolving disputes.

Don’t count out a lawsuit just yet

At first blush, ADR may sound great, and it often is. But take a long second look. Sometimes the benefits of ADR may be marginal, or you may find that litigation is a better option. For example:

Simple forms of ADR usually provide a cost savings over litigation. But remember, you pay your decision-maker by the hour. Even if the cost is split with the other side, that cost can add up quickly. And for more formal ADR, you may still end up engaged in the type of protracted discovery and depositions that make litigation so costly. For a larger case, arbitration by American Arbitration Association rules may approximate the cost of standard litigation.

Mediators and arbitrators are usually free to decide cases without regard to case precedents, making the outcome of your case somewhat unpredictable. Even when they’re wrong, you’re usually unable to appeal.

In litigation, the rules of discovery allow you to get certain documents, testimony, and other evidence out of an unwilling opponent. Those rules don’t apply in ADR, so you may be giving up the opportunity to find out what’s hidden in your opponent’s files, and may not know what your opponent is going to offer as evidence until you actually get to the hearing.

If the debtor has a counterclaim, it may be possible for the debtor to force you to litigate that counterclaim in court even if you have a binding contractual provision for the arbitration of your own claims against the debtor. If you’re going to end up in court anyway, it’s usually cheaper to resolve all your claims in a single lawsuit (but you may also be able to convince the debtor to submit the counterclaim to ADR).

If you choose nonbinding ADR, the final award isn’t enforceable as a judgment, and if both sides don’t agree to the resolution, the entire process may turn out to be an expensive waste of time.

If your debtor hasn’t agreed to ADR by contract, and won’t agree to submit your dispute to ADR, you must proceed with a lawsuit. However, even during the lawsuit process, the court may order a form of case evaluation before a trial is scheduled.

Generally, you’re better off filing a lawsuit when

You have an adequate remedy through the court system. The debtor may have assets that you can take as part of the judgment enforcement process by a sheriff or through garnishment.

The chances of winning the case are good. The documentation is adequate and you have good witnesses, or the debtor has vanished and you anticipate getting a default judgment. You can’t mediate or arbitrate with somebody who isn’t going to show up for the ADR proceeding.

The cost of litigation is reasonable. You’re proceeding without a lawyer, through a do-it-yourself litigation (small claims court perhaps, as we discuss in Chapter 17), or you’ve hired professionals to take over the claim and any litigation, as we describe in Chapter 13.

If your contract with your debtor mandates that you resolve disputes through ADR, your debtor may refuse to participate. If that happens, you need to file a lawsuit. Your lawsuit may either ask the court to order that the matter be resolved through ADR or to give up your rights under the ADR clause and proceed with a regular lawsuit.

You are most likely to waive ADR f you’re concerned that the combined cost of the lawsuit to compel ADR and the subsequent ADR proceeding may turn out to be more expensive than proceeding with a regular lawsuit for the balance owed.

Sometimes your case may appear ripe for litigation, except the laws of your state require you to hire a lawyer to represent you in court. This often occurs with corporations, whose officers may only be able to appear without a lawyer in small claims court, or perhaps not at all. If you steer the case into ADR, those restrictions no longer apply.

Working Your Way through Alternative Dispute Resolution

So you’re pretty sure that you want to go the ADR route instead of filing a formal lawsuit in court. You’re all for saving time and money and getting paid quickly. That’s great, but now what? What exactly happens in ADR, and what do you need to do to get things moving? That’s what this section is all about.

Forms of ADR

Alternative dispute resolution comes in many forms. However, the two primary forms are

Mediation: A mediator helps the parties achieve a mutually agreeable resolution of their dispute.

Arbitration: An arbitrator (or panel of arbitrators) reviews evidence, listens to the parties argue their case, and then issues a ruling deciding the dispute.

You may also choose a hybrid form of ADR, moving from mediation into arbitration: First, you mediate your claims until you reach an impasse. Then all remaining issues are decided by arbitration.

Whichever form you choose, you must also decide whether you want the result of the dispute resolution proceeding to be binding or nonbinding:

Binding: You’re obligated to accept the outcome of the dispute resolution proceeding, and the final order takes the form of an enforceable contract. The final order may often be filed with a court and becomes enforceable as a court order or judgment.

Nonbinding: You may choose to accept or reject the mediator’s opinion. In other words, a mediator doesn’t come in and make a final ruling that is then entered with the court as a judgment.

Nonbinding ADR is a two-way street, and the other side also has the right to reject the result.

Most mediation proceedings aren’t binding. In contrast, arbitration proceedings usually are binding, and they’re usually structured so that the arbitrator’s order can be filed with a court and enforced as a judgment. (Chapter 18 describes the process of enforcing a judgment.)

The following sections describe mediation and arbitration in more detail.

Mediation

Mediation is the most traditional form of alternative dispute resolution, in which a neutral mediator helps the parties resolve their dispute. (Mediation is sometimes also called facilitation.) A good mediator will help the parties do the following:

Evaluate their positions: What do they hope to achieve through arbitration?

Evaluate their goals: Are their expectations reasonable? If not, what may they reasonably hope to achieve through the mediation process?

Communicate with each other meaningfully: The mediator can help the parties find ways to get past any anger and animosity and address the core facts and issues.

Lay out the facts for discussion: The mediator can peel away distractions and irrelevancies and hone in on the core facts.

Avoid an adversarial confrontation: The mediator can identify parties who may become belligerent and help take steps to defuse any emotional escalation or angry outbursts.

Although you can agree to make mediation as formal as you like, the mediation process is usually informal. The mediator doesn’t act like a judge, and the rules of evidence don’t apply. Instead, the mediator attempts to focus the parties on the key issues of the dispute and help the parties figure out why they don’t agree.

In mediations of business disputes, after all the facts are disclosed, the parties often agree as to the strengths and weaknesses of their respective positions. That understanding usually leads to a resolution that both parties find acceptable. In a collection case, the resolution is typically an amount of money the debtor is going to pay the creditor and the terms of those payments. The agreement is put into writing, usually by the mediator, and both parties sign it. (As with any agreement, you want to get the result in writing, as discussed in Chapter 10.)

Arbitration

Arbitration proceedings are usually binding. Many businesses favor arbitration and include mandatory arbitration clauses in their contracts requiring that arbitration be completed before formal litigation can be filed in court.

It’s not a coincidence that the words arbitrator and arbitrary are extremely similar. If you agree to a binding ADR proceeding, expect to have to live with that outcome, even if you decide it’s unfair or doesn’t follow the law. Courts are extremely deferential to the outcome of ADR, and in most cases the outcome you reach is the one you have to live with.

When arbitration isn’t binding, it starts to sound a lot like mediation. So why would parties choose nonbinding arbitration? Possible reasons include:

It’s a preview of trial. Both sides get a pretty good sense of each other’s evidence and arguments.

The outcome of an arbitration can serve as a reality check, waking up one or both parties to what’s likely to happen at trial and thus making them more amenable to settlement.

Whether binding or nonbinding, at the end of the arbitration the arbitrator issues a ruling, awarding the prevailing party an amount of money that the arbitrator concludes is fair.

Most states have arbitration acts — laws that restrict when the outcome of an arbitration may be entered as a court judgment. Some laws restrict the type of claims that can be made subject to mandatory arbitration. For example, laws may prevent employers from requiring that employees arbitrate claims for unpaid wages.

Restrictions may also relate to the parties’ agreement to arbitrate, and whether the agreement properly advises the parties of the rights they give up by arbitrating their claim. Your arbitrator should be able to provide a contract for arbitration that complies with state law.

The arbitrator may also be required to render a decision that complies with state law. That doesn’t necessarily mean that the arbitrator has to get the law right — he just has to make the effort.

How ADR is conducted

The manner in which ADR is conducted can be incredibly varied, from extremely informal to extremely formal. Possible approaches include:

A meeting of the parties: Everybody meets in the same room, probably at a large conference table, and all the facts and evidence are (perhaps literally) laid out on the table for everyone to see and hear.

Shuttle ADR: The parties to the dispute are in separate rooms, and the mediator or arbitrator goes from one room to the other. The parties don’t address each other, and the mediator or arbitrator tells them what happened in discussions with the other party. Sometimes a party makes concessions that wouldn’t occur in a group setting, such as, “If you get him to come down 20 percent in his demand, I’ll drop my FDCPA counterclaim.”

Formal trial: Arbitration proceedings may be very formal, and may include some or all the requirements of a trial, including enforcement of the rules of evidence, the taking of sworn testimony, and opening and closing statements from the parties’ lawyers.

Often you’ll agree to submit summaries of your cases, and perhaps also other evidence such as witness statements or documents, in advance of ADR. That helps you prepare for the other side’s case and helps the mediator or arbitrator understand the facts and issues to be decided.

You can be creative in designing or choosing a form of alternative dispute resolution. For example, sometimes the parties to a dispute engineer a “mini trial” at which each side argues before a “jury” that’s authorized to decide the dispute. The jurors may be any people the parties choose, perhaps college students recruited from a nearby university. The bottom line is, as long as both sides agree to the format, alternative dispute resolution can take pretty much any form you want.

Normal court proceedings are recorded, with transcripts available to the parties. ADR proceedings usually aren’t recorded, unless one of the parties makes arrangements for recording to occur.

Getting your case into ADR

You can get your case into ADR in one of three ways:

Contract: You have a valid and binding ADR clause in your contract with the debtor.

When you draft your contracts with your customers, you may choose to include a clause giving the option for any disputes to be resolved through ADR instead of litigation. You can actually include a clause mandating ADR, but that may cost you flexibility later if you would prefer to take the matter to court. You may describe how ADR is to be conducted, for example, with one arbitrator or three, or “subject to the rules of the American Arbitration Association.” You should have your business lawyer help you craft an ADR clause that satisfies your legal duties and serves your needs.

When you include a mandatory ADR clause in your contract, particularly if it’s a consumer contract, you have to be very careful to follow state and federal laws mandating proper notice to the consumer. The size, location, and wording of a mandatory ADR clause may also depend upon the nature of the goods or services you offer. An improper ADR clause won’t be enforceable and may also trigger a penalty under the governing consumer protection laws.

Agreement: You and the debtor both agree to resolve your dispute through ADR. This further involves your agreeing on the form of ADR to use and the selection process for arbitrators or mediators.

Court order: Some states require that the parties go through a form of ADR as part of the litigation process. Some judges also encourage the parties to voluntarily submit to ADR.

Choosing your arbitrator or mediator

A big step to getting a good outcome from ADR is your choice of decision-maker. You have a lot of people to choose from. Plenty of lawyers and other professionals are available for hire, as well as active and retired judges who you can hire to arbitrate or mediate your disputes.

The manner of selecting the arbitrator or mediator may be defined in your contract, or in rules adopted through your contract. For example, you may require an arbitrator selected according to the rules of the American Arbitration Association. If you haven’t defined rules for selecting an arbitrator, you and the other parties must find a way to agree to a selection. If you can’t agree, you have to choose the path of a lawsuit. If ADR is by court order, the judge may make the appointment.

To improve the chances of finding a good mediator or arbitrator, seek referrals from professionals you trust. Lawyers may be able to recommend mediators, as may other credit professionals in your industry or professional collection services you use. If another party suggests someone, investigate the suggested person before you say “yes”. You don’t want to hastily agree to somebody who you later discover has a reputation for always finding for the debtor.

However the selection is made, it’s crucial that a mediator or arbitrator be neutral, not have a stake in the claim, and not be overly friendly to one party or the other. You want somebody who’s going to be fair to both sides, has sufficient knowledge to understand your industry and any technical or scientific issues that may be raised, and has the necessary skills to help you resolve your case.

If you get a bad mediator or arbitrator assigned to your case, as sometimes happens, you’re generally stuck with that person and the decision she makes. Of course, the same problem can arise with judges in traditional litigation.

Preparing for your ADR (and deciding whether you’d like some help)

To prepare for your ADR:

Gather your evidence:

• Gather all documents that relate to the matter.

• Gather written statements from witnesses familiar with the matter. If your ADR permits or requires live witness testimony, see if your witnesses are available to testify.

Know your case:

• Prepare a summary of your case. Stress the three or four major points of your case. Don’t read the summary at a hearing. You should be prepared to discuss the issues extemporaneously.

• Know your case backward and forward. Even though you may not enjoy it, you should also know the other side’s case as well as your own. You should understand your debtor’s claims and defenses, itemize them, study them, and be prepared to discuss each and every one of them in detail.

Be professional:

• Keep emotions out of it. Be humble, calm, factual, and believable. That’s not to say you should come across as a robot. Take a look at your favorite legal drama and note some good examples of how to use emotion, voice, and dramatic technique to present your argument while remaining calm, rational, and professional. Maintain good eye contact with the mediator or arbitrator.

• Dress and behave professionally. That means both in your actions and your dress. Body language counts, and so do the clothes that you wear. You want to send the message that you take the proceeding seriously.

• Expect to be interrupted. You shouldn’t expect to be able to present a rehearsed speech. Sometimes a mediator or arbitrator takes a very active role, questioning you and interrupting you to require further facts or an explanation of your opinion. If you anticipate interruption, you’re less likely to become flustered and more likely to present a great answer that helps win your case.

• Anticipate technical questions. If your case involves technical issues, such as whether a product you sold was properly designed, be prepared to answer highly technical questions. You may need to bring along a witness who is totally versed on the technical side of the case.

Folks say that patience is a virtue, and that’s very true in ADR. Have a dollar figure in mind, but resist the temptation to get to the bottom line too quickly. Just like in settlement negotiations, you usually shoot higher than your bottom line at first so you have room to negotiate downward. ADR works best when both sides accept that there’s room for compromise. If you decide to hold fast to 100 percent recovery as your bottom line, with no negotiation at all, you’ll probably be disappointed.

You can handle your own case in ADR. To learn the ropes, it’s a good idea to start with a smaller, simpler case, where not too much money’s at stake and the issues are well-defined. Get your feet wet with a case where the stakes are low, and figure out your comfort level (or that of the employee you assign to handle ADR proceedings).

Although you can handle your own case, you certainly don’t always have to. At times you may decide that you want professional assistance. If you’re involved in a formal arbitration, just as if you were in court, you need a solid understanding of arbitration procedure and the rules of evidence. An attorney can provide assistance by

Drafting written versions of any agreements that result from the dispute resolution.

Helping to negotiate from the standpoint of a third party, reducing the effect of personal feelings or animosity that would interfere with negotiations or reaching an agreement.

Advising you, and suggesting to both sides, what a judge is likely to do based on the facts and issues raised by the parties.

Developing a Litigation Strategy Before Filing Your Lawsuit

Even in a simple collection case, you must develop a strategy for litigation. You must decide what parties to include, what causes of action to include, and how to word the complaint. You must also figure out what documents you need to file with the court. We discuss documentation in more detail in Chapter 16.

You should form your strategy before you file your lawsuit. Although you can amend your complaint, you’ll seem much more professional in court if you name all necessary parties and include all theories and documents right up front, when the litigation is filed.

We discuss the complaint — the document you file in court stating your claim against the defendants — in Chapter 16. We provide a collection of sample complaints on the CD that accompanies this book. You can customize the language of the complaints to fit the facts of your case.

Suing all the parties involved

When you file a lawsuit, include as defendants all people who may be responsible for paying the debt. Review your credit file for helpful information. It’s best to add all defendants at the beginning of a lawsuit, right when things get going, so that you can get them all served with copies of the lawsuit and reduce the chances for the litigation to drag out. Among those defendants that should be named are:

For all debtors:

• Guarantors: All personal guarantors or co-sureties liable as a matter of contract, as we discuss in Chapter 3.

• Successor companies: Companies that have taken over the operations of your debtor, with no significant changes in ownership, capitalization (investment), or other aspects of the business (such as location, phone number, or inventory). For example, your debtor is Sam’s Bike Shop, since renamed as Sam & Sally’s Bike Shop but remaining under the same ownership.

• Issuers of bad checks: Persons or companies that have written checks for payments to you that have failed to clear the bank. See Chapter 14.

• Individuals who are liable as a matter of law: For example, your state may have a law that holds individuals or companies responsible for certain types of building contract violations, such as taking money from homeowners but not paying suppliers and subcontractors with that money.

• The principal to a contract: Sometimes the person who signs the contract is an authorized agent or employee, and not the person who’s ultimately responsible for payment under the contract. If the principal is undisclosed, you should go ahead and name the agent.

• Beneficiaries of fraud: If the debtor has transferred property or other assets out of his own name to try to hide the assets from creditors, your state’s fraudulent conveyance laws may allow you to sue the recipient of the property.

For unincorporated debtors, such as individuals and partnerships:

• Owners: A proprietor of a business, as we outline in Chapter 2.

• Partners: All general partners of a partnership, as we discuss in Chapter 2.

• Persons who hold themselves out as owners: Anybody who claims to be an owner with you when completing credit applications or placing orders with your company, as we describe in Chapter 3.

For incorporated debtors, such as corporations and LLCs:

• Owners of startups: If a debt is owned by a new business, check to see if the corporation was formed at the time of your transaction. If not, for transactions that occur before incorporation, the business should be treated like a partnership.

• Owners of expired entities: If an incorporated business allows its corporate status to expire prior to the dates of your invoices (for example, your customer, Jones Company, Inc., allows its charter to expire in June of 2006 and your invoices are dated 2007 through 2009), you can treat the business like a partnership.

• Piercing the corporate veil: Under appropriate circumstances, which we describe later in this chapter, you can bring an action to “pierce the corporate veil” and have the owners of the corporation held personally responsible for corporate debts.

These are just suggestions, not a list of every possibility. Think creatively to make sure you include all potential defendants.

Don’t name people as defendants just for the sake of naming them. You need to act in good faith, and should only name the defendants for whom you have a valid theory of liability. For example, in most cases the owners and officers of a corporation have no personal liability for corporate debts, and you shouldn’t name them just because they have money or you hope you’ll eventually find a way to hold them liable. Naming the wrong parties can potentially result in a court assessing sanctions against you, such as a fine or an award of attorney fees to the wrongly named defendant. When in doubt, check with your lawyer.

Using the appropriate legal theories

After you figure out who you’re going to sue, you need to spend a bit of time thinking about your causes of action — the legal theories you’re going to present in your complaint for why the debtor owes you money.

Contract theories

The most common legal theories are based on principles of contract. Possible causes of action include:

Breach of contract: That is, you had a contract with the defendant, you fulfilled your side, she didn’t fulfill her obligations, and she owes you money.

Complaint on an account stated: In many states, you can file a special cause of action based on your final statement of account. You support your complaint with a copy of the statement of account and an affidavit attesting that the statement of account is accurate. This shifts the burden of proof to the defendant, and if the defendant doesn’t file a proper response disputing the debt, the court will issue a judgment in your favor.

Fraud

In simple terms, a claim of fraud alleges that the debtor made a false claim or representation to you, knowing that their claim was false and that you were acting in reliance upon that statement, and that as a result of your reliance you suffered an injury. Fraud involves more than a claim that the debtor said he was going to pay you but didn’t.

For example, fraud may be alleged where a customer presents you with false bank statements, or a fraudulent letter of credit, making you believe that the customer is financially strong when in fact he has no resources and no intention of paying you, and he gets you to ship goods to him based on his false representations.

Suing owners of corporations

Normally, the owners of an incorporated business are shielded from personal liability for corporate debts. However, corporate officers may be held personally liable to pay you under a number of different theories, including:

Undercapitalization: Not enough money was invested at the start to adequately finance the business, or the principals withdrew too much money from the business, resulting in its financial problems.

Commingling personal and corporate assets: No clear line exists between the personal assets of the owner and the assets of the business. For example, funds belonging to the business may be instead used for personal purposes, such as paying the college tuition of the owner’s children. Or the owner of a small corporation treats the corporate bank account as if it’s his private checking account, keeping his own money in the account and using it to pay household bills.

Piercing the corporate veil: Seeking to hold corporate officers personally liable as the result of extraordinary misconduct on the part of the officers. For example, you may allege:

• The corporate entity is a mere instrumentality of another entity or individual. The corporation isn’t treated as a separate entity, following the required protocols (holding board meetings, keeping corporate records, and so on), but is instead an alter ego for its principals, who want to avoid personal responsibility for their questionable conduct.

• The corporate entity was used to commit a fraud or a wrong. The primary purpose for the corporation’s creation was to further a wrongful act.

• The corporate entity created an unjust loss or injury to your company. Courts have had difficulty articulating the circumstances under which unjust or inequitable conduct can justify piercing the corporate veil. Suffice it to say, it’s extremely rare.

Most states don’t have a clear standard governing when a corporate entity may be disregarded and the officers sued personally. However, no state makes it easy to pierce the corporate veil.

It’s rare to be able to successfully allege undercapitalization or commingling, as in most cases you don’t have access to any information that would reveal undercapitalization or commingling of funds. Similarly, it’s very unusual to successfully pierce the corporate veil.

Foreclosure and recovery of property

If you’re foreclosing on a lien or mortgage, you may be able to choose between judicial and nonjudicial foreclosure. If your state’s laws require judicial foreclosure, or you believe you may benefit from judicial foreclosure, you file a foreclosure lawsuit. The procedures for filing a foreclosure suit are different in each state. Foreclosure lawsuits can be tricky, so consider getting help from a lawyer.

You may initiate litigation to recover items of property that are in the possession of the debtor. For example, if an invoice wasn’t paid, you may want to recover goods you have shipped to the debtor. Actions to recover physical property are sometimes called replevin actions when based on statute, or detinue actions when based on common law principles.

Bad check actions

If your debtor has paid you with a bad check, you probably have a statutory claim for a civil penalty in addition to recovering the face value of the check. Some states also permit you to recover attorney fees.

Preparing Your Case for Court

When you’ve made the decision to file a lawsuit, you need to think about how you’re going to prove your case in court. In most collections cases, your evidence comes in two basic forms: witnesses and documents. This section guides you through the process of figuring out what you need, and getting your witnesses and documentation ready for court.

You also prepare documents and, if required, witnesses for ADR proceedings. However, preparation for ADR is usually much less involved, and you usually have much greater latitude for submitting witness statements in writing as opposed to presenting live testimony, or you even agree to have your case decided solely on the basis of documents and written statements.

The other chapters in Part IV guide you through the litigation process. Chapter 16 details the process of a lawsuit, Chapter 17 instructs you on how to pick an appropriate court in which to file your lawsuit, and Chapter 18 explains how to try a case in court.

Finding and preparing witnesses

Whether you’re handling a court case through a lawyer or you’re doing it yourself, you should actively participate in locating and preparing witnesses for trial. Your participation can keep your costs down and help you determine the strengths and weaknesses of your own case.

For example, a collections dispute might involve miscommunication between your sales or service department and the debtor. If you find the people in your company who communicated with the debtor, even a few minutes of conversation may shed a great deal of light on the issues in your collection case. A sales person may have over-committed on delivery dates or the specifications of the product or service. It’s good to find that out early, and it’s really unpleasant to first find out about problems on your side of a transaction when your employee is testifying in court.

Knowledge of the transaction

At this point you’re on a fact-finding mission. You want to determine whether your witnesses can provide sufficient testimony to enable you to win your case.

The best witnesses have direct, personal knowledge. Judges and juries like to hear from witnesses who can testify that: “I went out myself and spoke with [the debtor] about the delinquent account and any issues concerning the balance owed . . . .” Compare that with: “According to our records, and I have no personal knowledge because I’ve only been working here for three weeks, the debtor never complained about the balance owed.” Which testimony is more compelling?

Communication skills

Talk to your witnesses face-to-face. A good witness talks not just through words, but through body language, communication skills, and a sense of confidence. If you sense that a witness is wishy-washy, unclear, or hesitant, or the witness fails to make eye contact with you while you’re discussing an important point, consider yourself forewarned of weaknesses in your case.

When you talk to a potential witness, put yourself in the position of a judge or a juror. After the discussion, ask yourself whether the witness was impressive. Be as objective as you can, and consider: Based on what you saw and heard, would you grant a judgment in your favor?

Preparation of a witness

Your preparation of a witness doesn’t have to be involved. You can let your witness know your theory of the case and what you hope to prove in court. You should also walk the witness through what happens in court — that they are called to the witness stand, sworn in, questioned by you (or your lawyer), then cross-examined by the other side. Sometimes you redirect, asking some follow-up questions based on the cross-examination, and then the other side can recross. Then, in all likelihood, the witness is excused with the instruction not to talk to other witnesses about the case before the litigation concludes.

The witness should always speak freely, based on her own knowledge of the facts and circumstances, without a great deal of influence from anyone else. You should never give your witness a prepared speech or words to say. Most lawyers know funny stories about witnesses who were caught reciting memorized statements in court, or reading speeches they concealed in their clothing. But those stories aren’t funny at all to the party that lost the case when it became clear to the jury that the witness was reading or reciting somebody else’s words.

Witnesses must be able to testify from their own recollection of what happened. That’s true even if the witness isn’t going to say exactly what you want to hear.

Availability of a witness

Sometimes when you’re preparing a case for litigation, you’ll discover that none of your employees were involved in the transaction underlying your claim. People move to different companies, they retire, they’re fired, or they leave for any number of other reasons:

Ex-employees: Sometimes you can find an ex-employee who would normally be a key witness but, due to a conflict between your company and the witness, could now put your case at risk. For example, if your potential star witness was just fired, he may not be anxious to testify for the company that just put him on the street. Or he may happily testify that everything you sell is junk and that nobody should ever have to pay for it.

Unreasonable distances: Sometimes witnesses are too far away from the court, and it’s not practical to have the witness appear for trial.

If you have problems with witness availability, be prepared to prove your case either with documentary evidence or through other witnesses.

When no one has personal knowledge, do the best you can to create a solid paper trail: a clear set of records and documents of your witness, so it appears that your company keeps clear and accurate records of transactions and events. With good preparation, a disorganized company can come across as highly organized. With poor preparation, even a scrupulous company can look like it doesn’t even know how to use a paper clip.

Sometimes you have to concede certain factual claims or issues because you don’t have a witness to testify in response to the defendant’s claims. If you discover that you have to concede issues that are very important to your case, it’s time to negotiate and to settle your case for the best amount you can get. The facts and circumstances are what they are, and it’s not always easy to make lemons into lemonade.

Sometimes when a witness can’t be physically present for trial, you can make arrangements to take her testimony in advance, or to have her testify electronically.

Prior sworn testimony: Sometimes a deposition or other form of sworn testimony can be preserved so that a witness doesn’t have to be physically in the courtroom or dispute resolution hearing to be heard. Generally speaking, you must make arrangements beforehand, based on the unavailability of the witness for a hearing, and give all parties the opportunity to participate in the examination and cross-examination of the witness.

Remote testimony: Under exceptional circumstances, it may be possible for a witness to testify at a hearing by remote communication such as by telephone or through videoconferencing.

Courts favor testimony that’s given live, in court. Other methods of presenting testimony are the exceptions to the standard rules, and may be available under only limited circumstances. Start with the expectation that the judge will insist that the witness appear in person. Don’t anticipate that you can present testimony by any other means unless you first confirm it with the court.

Finding and preparing documents

Assuming your lawsuit is a straightforward collections matter; your collection file should contain all of the documents you need for your case. Depending on the issues involved, or the defenses that are raised, you may need documents from other departments of your company, such as the sales department, or, if the dispute involves a product defect, perhaps your engineering or manufacturing department.

If the debtor’s refusal to pay is based on highly technical areas such as product liability or the failure of a product to perform, take a step back and seriously consider using a professional to negotiate a settlement or to represent your company in court. Product liability awards can involve huge amounts of money and may be devastating to a company.

The Statute of Limitations: Handling a Legally Expired Claim

One of the first considerations in deciding whether to file a lawsuit is whether the statute of limitations on your contract or cause of action has run (expired). After that happens, the defendant has an absolute defense to any case you file. But that doesn’t necessarily mean you can’t file a lawsuit, win a judgment, or find a way to restart the limitations period.

We talk about the statute of limitations as if there’s just one. In fact, many different statutes create limitations periods for filing lawsuits. Sometimes they can be very confusing. For example, a state’s statute of limitations for contract lawsuits may be six years. However, that same state’s Uniform Commercial Code imposes a four-year statute of limitations on certain types of contracts for the sale and leasing of goods and products. If a creditor doesn’t know about both laws and thinks the statute of limitations is always six years, he may inadvertently allow a claim to expire.

Sometimes it’s tricky to know which statute of limitations applies. When in doubt, always assume that the shorter limitations period will govern.

If you engage in more than one transaction with a customer, the statute of limitations may start to run at the time of each transaction. Using an example based on the four-year UCC statute of limitations, if you have unpaid invoices for goods you’ve sold, each of those invoices will expire after four years. If the invoices are spread out over time, by the time you bring your lawsuit some of your invoices may be more than four years old and thus have expired, while others may still be “alive” because they haven’t reached the four-year expiration date.

Some factors — such as a debtor’s absence from the state — can toll (extend) the statute of limitations. The circumstances under which tolling occurs vary significantly between states, so you need to check your state’s statutes.

If the statute of limitations is about to run, get moving. To preserve your claim, any lawsuit you anticipate must be filed with the court before the statute runs. In some states, even if you file before the deadline, you must also try to have the defendants served before the statute of limitations runs, or at least put the lawsuit into the hands of a process server for prompt service on the defendants.

Whether to sue on an expired claim

This is a short discussion: Don’t sue on an expired claim.

The statute of limitations is what’s called an affirmative defense. That means the defendant must raise the statute as a defense to your collections lawsuit and has the burden of proving that the statute of limitations has run. It’s thus possible to get a judgment on an expired claim where the debtor has overlooked the defense and the court doesn’t notice that the claim has expired.

But debtors tend to know about the statute of limitations, and it’s an easy defense to raise. Consequences of filing a lawsuit on an expired debt include

Dismissal and sanctions: When a judge realizes that a claim is beyond the statute of limitations, she may dismiss the claim on its own initiative or on the motion of the defendant, and she may even assess a fine or penalty for starting a suit that has no legal merit. Sometimes the defendant also receives an award of attorney fees.

Counterclaims: As a result of your filing litigation beyond the statute of limitations, the defendant may file a counterclaim for violation of the Fair Debt Collection Practices Act or similar state or local consumer protection acts.

A few states forbid collections lawsuits after the limitations period has run, so ignoring the limitations period can put you in front of an angry judge.

Calling for the money, even though the claim has expired

After the statute of limitations runs, the debt is still legally due. Therefore, even if you can’t realistically sue upon the debt, you can legally demand payments from the debtor without violating statutes such as the Fair Debt Collection Practices Act, or similar state consumer laws that protect debtors from harassment.

Just be careful not to threaten a debtor with litigation when you’re trying to collect an expired debt, because that will be perceived as a misrepresentation of your actual intentions. You won’t be filing suit on a debt you know is expired, so you can’t represent to the debtor that you’re considering suing.

How to renew the expired debt: A trick of the trade

It may be possible to renew a debt — that is, to prevent the statute of limitations from running on your claim, or to restart the clock. The easiest way to renew a debt is to obtain a partial payment on the account before the statute of limitations runs. Collection agencies often try to get a debtor to make a payment on the account (not on a specific invoice), no matter how small, before the statute of limitations runs. The legal term for an action that restarts the statute of limitations is a novation.

Under most state laws, a partial payment starts the statute all over again as of the date of payment. For example, if the statute of limitations is four years, and after three years and eleven months have passed, you convince a debtor to make a payment on the account, the payment starts the time to sue all over again. You have four more years to bring your lawsuit.