People Love To Threaten Bankruptcy During Litigation

// Parties often need to consider not only the strength of their litigation claims but whether they will be able to collect on a judgment if they win in court. Sometimes, defendants simply do not have the assets to pay for a judgment or settlement, and this means that it might not be worth pursuing claims against that party even if someone has viable causes of action. One of the main ways a party can avoid paying a judgment and avoid collection is through bankruptcy. During bankruptcy, a party’s creditors need to fight over the remaining assets of a debtor, and it is usually unlikely that all creditors will be made whole. However, in my experience, although people love threatening bankruptcy during litigation, this does not mean that a party will actually declare bankruptcy.

One of the first lawsuits I filed after starting my own practice over four years ago was a commercial matter against a few individuals. The case seemed relatively simply, and a quick search seemingly revealed that the defendants would be able to pay for any judgment that would be entered against them. Indeed, the defendants seemed quite wealthy. They lived in a really nice neighborhood, had good jobs, and seemed like they did not have money issues.

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When the parties first began resolution talks, my adversary related that his clients were not as well off as might be thought. In fact, this lawyer said that his clients were considering bankruptcy as a strategy to avoid paying various debts, including the money that was at the center of this lawsuit. I thought it was somewhat unlikely that defendants would declare bankruptcy, but I still took the prospect seriously. I knew if defendants declared bankruptcy, my client would likely be paid pennies on the dollar since we were not a preferred creditor and would have to duke it out over assets just like everyone else.

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Of course, the defendants did not end of declaring bankruptcy, and the case dragged on for another two years. The entire time, my adversary kept threatening that his clients would declare bankruptcy. The case eventually resolved years after it was initiated, and defendants never declared bankruptcy. I am not sure if my adversary had any serious discussions with his clients about declaring bankruptcy, but the threat of declaring bankruptcy was definitely being used as a litigation tactic to scare us into a resolution.

There was another situation I was involved in years ago in which parties claimed that they were undergoing some serious financial issues and could not pay much of a settlement to resolve a matter. My client really wanted to put the matter to rest and agreed that if the other side really had issues, my client would be willing to consider a lower than optimal amount. Accordingly, my client asked that the other party to the case produce some kind of proof in the form of tax returns or financial records to show that the party was actually having economic issues.

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Of course, the other side never produced the documents. One the one hand, I understand that a party would not want to disclose confidential financial documents to litigants since the figures in such documents can be proprietary in certain instances and embarrassing in others. However, the other side might also not wanted to show financial records since this would have shown that the party did not have as much of a financial exigency as they related, and this could have impacted settlement talks.

Sometimes clients themselves think that threatening bankruptcy will have a huge impact on a case. I once had a client who kept mentioning how he had no gripes declaring bankruptcy and that people in his family had declared bankruptcy in the past. He almost wanted me to convey to the other side that he was a wild man who couldn’t be predicted and who might be pushed over the edge to declare bankruptcy and throw a wrench into everything that was going on in our case.

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However, in reality, the threat of bankruptcy does not have too much of an impact on many litigation matters in my experience. Most people understand that bankruptcy threats might be nothing more than hot air. Unless a party can provide firm proof that they have financial issues which limit them from paying for a typical resolution, the threat of a bankruptcy is likely not going to have an impact on litigation.

Jordan Rothman is a partner of The Rothman Law Firm, a full-service New York and New Jersey law firm. He is also the founder of Student Debt Diaries, a website discussing how he paid off his student loans. You can reach Jordan through email at [email protected].

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Bankruptcy, Clients, Jordan Rothman, Small Law Firms