An ounce of prevention . . .

Maybe it’s the economy. Or maybe it’s the latest negotiation tactic. Lately, I have conducted several mediations in which one party claims that it will file for bankruptcy if it does not prevail in the pending litigation. Collectibility is frequently an issue in mediation, but the spectre of bankruptcy raises it to a higher level. If a settlement is reached and the party who pays money then files for bankruptcy protection, will the recipient have to pay it back to the trustee to be distributed equitably to all creditors? In one case, the plaintiff alleged its business losses were due to conversion by a business partner — an intentional tort that could not be discharged in bankruptcy.

Of course, many business disputes, especially between partners, can be avoided with carefully worded contracts, partnership agreements or corporate documents. Unfortunately, in the recent cases I have mediated, the contracts and other documents were not carefully worded. In some instances, they were non-existent or, at best, inartfully drafted. Maybe the parties did not feel the need for written agreements, or maybe they were too cheap to pay attorneys to draft them. But I suspect that well-drafted legal documents would have come in handy when it came time to end the relationships or resolve disputes. In the absence of such documentation, the litigation became a he said/she said affair. And the mediation boiled down to “give me what I want” or “accept what I am offering” or else I’ll file for bankruptcy.

A transactional or business attorney’s best marketing tool is to tell a client to “pay me now or pay the litigators later.” In the cases I have seen, parties who scrimped on business planning and documentation have gotten what they paid for. Trouble.

Litigate? Arbitrate? Pick one & stick with it!

Jerry Seinfeld once commented on Oprah Winfrey’s fluctuating weight by saying “She’s fat, she’s thin, she’s fat again. Why doesn’t she pick one weight and stick with it?”  That seems to be the approach the 5th Circuit Court of Appeals took in Nicholas v. KBR Inc, No. 08-20140 (5th. Cir. 4/15/2009). 

After her husband died in 2006 as a result of mesothelioma, a widow discovered that her husband’s employer had promised to continue to pay for her husband’s life insurance policy after he could no longer work, but failed to do so.  The widow sued the employer and the parties conducted some discovery.   After the court conducted a scheduling conference, the widow discovered that the employer’s agreement contained an arbitration provision and she filed a motion to compel arbitration.  The employer argued that the widow waived her right to arbtrate by filing the lawsuit.  Also, the employer claimed it had been prejudiced by having to litigate the matter for more than 10 months.  The district court agreed and denied the motion.  On appeal, the 5^th Circuit also agreed and remanded for further proceedings in the district court.  Apparently, we are legally required to know not only what is in contracts that we sign, but also what is in contracts that our spouses sign.