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The Lawsuit Threat

The Lawsuit Threat
The availability of information about your financial matters creates potential dangers from a variety of sources. The actual degree of threat to you may be high or low depending upon your business and personal circumstances.

We can see that the threshold issue of every lawsuit—can this defendant pay up—is now resolved quickly and inexpensively. Real estate and bank accounts scattered around the country are easily located in an asset search. Before, a lawyer had to do a lot of digging and ask plenty of questions to make sure the potential defendant had enough money to make the case worthwhile. If there was any uncertainty about collecting the judgment, the lawsuit usually did not go forward. A lawyer would tell his prospective client, “Bring me some evidence that he has money, then I’ll file the case.” The process of gathering accurate information often took months or years, and the lawyer or the client might lose interest and move on to other things. A lack of reliable information slowed the speed of the litigation freight train.

But now the attorney can make a call to the investigator or can contact the look-up service directly to produce a comprehensive asset report on real estate holdings, financial accounts, and business ownership. Questions about whether a potential defendant can pay are now resolved quickly and efficiently.

Case Example
A wealthy client, Allen, invested $10,000 in a software development business owned by a college acquaintance, Mark. Allen received two percent of the stock in the company, put away the certificates, and didn’t think about it again for several years until one day he was served with the lawsuit. The suit alleged that the company had breached a contract to develop a particular program for a customer. The failure to deliver the program on time had cost the customer millions of dollars; it was now suing for $25 million. Allen was named as a defendant, together with the company which was primarily a service business with no substantial assets. It was clear that the real target in the case was Allen and not the company. Allen had $3 million of stocks and bonds in several brokerage accounts and this was the prize the plaintiff was after.

The case was disturbing. From a legal standpoint, Allen, as a minority shareholder—not even an officer or director—had no liability for any obligations of the company. Even if the damages were caused as alleged, Allen had no input or responsibility for the operations of the business.

The case had been filed solely because the other side had run an asset search on all of the shareholders—looking for a “shakedown” target—and they hit the jackpot when they found Allen’s accounts. The attorney for the other side later admitted to us that if they hadn’t found Allen’s money, they wouldn’t have filed the case. They had nobody else to go after. But now they had a perfect setup. Although Allen had no real liability, what happens in court is often different than what we think should happen.

As a named defendant in the case and the only one with money, Allen faced a difficult choice—fight or settle. If he fought, there was a risk that he could lose the lawsuit with damages of several million dollars plus attorney fees. That would probably wipe him out financially. If he won the case, it would still cost $100,000–$150,000 in legal fees and expenses and would absorb much of his time and emotions for at least the next few years. The lawyer for the other side knew how to play the game.

After several months of painful negotiations, Allen settled the case for $450,000. It was difficult for him to pay the money—mostly from an emotional standpoint—because he had done nothing wrong. But he was trapped and outmaneuvered, and he had no choice. By holding his money in an unprotected form, easily discovered and reachable, he was a vulnerable target. The proper strategy, and the one Allen now uses, is to limit access to personal financial information and shield assets from potential claims. That will minimize the threat from these types of cases.

Case Example: Ex-Spouses
Even after the divorce has been finalized and the marital property divided, one spouse often has an incentive to keep financial tabs on the other. Alimony payments, and even property settlement agreements, can be modified years after the divorce, based upon a change in the financial circumstances of one of the parties or upon newly discovered information. A friend, Alex, was divorced and his wife, Liz, was awarded alimony of $400 per month for ten years. They had only modest assets at the time.

Starting immediately after the divorce, Liz had a private investigation firm perform annual financial “checkups” on Alex. Despite the divorce, she had confidence in his ability to make money—and she wanted to know about it when he did. Three years later, the investigator reported that Alex had indeed become successful. He had built his computer software business into a promising enterprise—worth more than $3 million.

Liz’s faith in Alex had paid off. She consulted with her attorney, and they filed a petition to modify the divorce decree. She argued that based upon Alex’s new wealth the amount of the alimony award should be increased. Also, she claimed that Alex’s idea for his business had been developed during their marriage—the company stock was marital property and she was entitled to half.

Although it wasn’t clear which argument he relied upon, the judge increased the alimony from $400 to $9,000 per month. He also awarded her $1.2 million in cash for a retroactive increase in prior alimony payments, her marital interest in the company stock, and attorneys’ fees and court cost.

A client of ours, Dennis, was awarded custody of his two-year-old son Michael, following a divorce from his alcoholic and abusive wife, Marie. After the divorce Marie never contacted Dennis or visited with Michael. Luckily, Dennis was a good father and Michael developed into a smart and happy young boy. Dennis was a high school science teacher and over the years managed to save about $100,000 for Michael’s college education.

One day, ten years after the divorce, Dennis received an unpleasant surprise—a telephone call from Marie. She said that she was getting her life together and wanted to contest custody of Michael. She also said that she had run an asset check on Dennis through a local investigation firm and had discovered the college savings account. Getting directly to the point of the call, she offered to give up her custody claim in exchange for a payment of the $100,000.

Unfortunately, the cat was out of the bag at that point, and there was nothing we could do (other than advise Dennis to call the police). So he paid her the money because he couldn’t risk jeopardizing his life with his son. It is a cliché by now to say that “information is power.” But we can see that those who are skillful in acquiring the right information can successfully achieve objectives otherwise impossible to accomplish. Bargaining is about knowing the strengths and weaknesses of your opponent. A lawyer, business competitor, spouse, or ex-spouse with information about what you own can exploit this knowledge to attack your most vulnerable points. In the next chapter, we will look at the lawsuit process to show you what really happens if you get sued.

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