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Just yesterday, Seth wrote a great post outlining ways to structure a litigation policy and determine when the expense and time of litigation may be worth pursuing. As an attorney myself, I completely agree with his determination that some claims just aren’t worth pursuing, as a practical matter. The same goes for the conclusion that litigation “as a matter of principle” is generally a poor business plan. Setting up a litigation policy and then sticking to what is decided is important – spending a lot to make a little is not wise. While it’s true that some determinations are probably better made on a case-by-case basis, having an overarching policy and procedure to fall back on can make borderline determinations easier, and streamline the process – saving your company time and money. For example, using amounts from Seth’s post, perhaps your litigation policy is formulated such that every claim over $20,000 is litigated is necessary, and no claims under $5000 ever see a courtroom.

Setting up a litigation policy and then sticking to what is decided is important
With a structure of this type in place, the only claims requiring a decision are claims from $5001 to $19,999. In that spectrum, factors such as the solvency of the debtor, the security underlying the claim, the jurisdiction, and whether attorney fees and costs may be recovered can be considered when making the decision. As is generally the case, good foresight and a comprehensive credit policy can substantially help in making sound litigation decisions.

Lien Policy (or Other Security) Can Help Litigation Policy

A thorough lien policy, or for folks not in the construction industry a thorough policy of obtaining other security interests, is hugely beneficial to the formulation of an effective and manageable litigation policy. There are a number of reasons for this.

Liens Allow Recovery From Parties Against Whom There Would Otherwise be No Right of Action

In general when a party is unpaid on a contract, an action to recover the debt owed is limited to the contracting party. This is also true for people in the construction industry. If a proper lien has been filed on the property, however, new rules apply. Once a proper lien exists on a property the lien claimant is no longer bound by the general rule that he can only file suit against the contracting party. With a lien claim, the lien claimant may file suit against all parties “up-the-chain”. For example, a supplier to a subcontractor without a lien may file suit against the subcontractor who hired him. If the same supplier has a lien, however, he would be able to file suit against the subcontractor, the general, and the property owner. A lien claimant can even foreclose on the property and recover the amount owed from the sale of the property itself. Having more options like this can be a huge factor in determining whether it is worth litigating the claim, since it increases the chances of recovering.

Mechanics Lien Laws May Provide Attorney’s Fees to the Prevailing Party

attorney’s fees may be provided to the prevailing party [in a mechanics lien action]
Another huge benefit to making a determination on whether or not pursue a debt secured by a mechanics lien through litigation is that attorney’s fees may be provided to the prevailing party. This is sometimes left to the discretion of the court, sometimes not allowed, and occasionally mandated to be provided to the prevailing party. As Seth pointed out, the general American rule regarding attorney’s fees is that they are not awarded unless specifically authorized by statute. In this case, however, many states specifically provide for the award of attorney’s fees to the prevailing party.

The ability to recover attorney’s fees is a huge factor in litigation strategy, and in crafting your business’s litigation policy. If you know that you will not have to pay attorney’s fees on successful claims secured by a mechanics lien in your state, and you have a comprehensive notice and lien policy that ensures a valid and proper mechanics lien on every project, you have much less to worry about in determining your litigation strategy. While it still may not be worth pursuing every claim, from a time management and practicality standpoint, the threshold for pursuing debts may be substantially lowered. This can result in more money for your business, and less lost profits due to non-paying customers.

Secured Debt Facilitates Settlement

Finally, (in terms of this post, at least) being a secured creditor gives important leverage in terms of settlement. It’s a fact that most lawsuits settle before (or during) trial. If a party is a secured creditor there is a strong incentive for the debtor to pay, or if they are in financial trouble to at least come up with some settlement offer, in an attempt to avoid foreclosure. The strength of a secured claim is much more conducive to encouraging payment than an unsecured claim, for that exact reason. If it can be avoided, no debtor wants to lose their property securing the debt.

Crafting a sound litigation policy is important for businesses. Supporting the litigation policy with a comprehensive credit and security policy will dramatically help.