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The mantra of many defendants is “I don’t have any money,” “you can’t squeeze blood from a stone” or “I’m judgment proof.”  Sometimes they are right but sometimes they are just not looking hard enough. 

Many defendants have fallen on hard times because of the actions of a third party.  Someone refuses to pay the defendant and now the defendant can’t pay you.  “Not my problem,” you say.  The defendant should sue the third-party so he can pay me my money.  But defendant doesn’t have any money to sue the third-party. 

A depressing reality in litigation?  Bad luck stacked on bad luck? Maybe not. We encourage our clients to view legal claim as assets.  And just like any other asset, a claim can be bought, sold or traded.  If a defendant cannot pay but has a lawsuit against a third party, the defendant can offer the claim in lieu of or in addition to a cash payment to the plaintiff.

 Defendant transfers claim against third-party to plaintiff as settlement of plaintiff’s claim against defendant.

After a defendant conveys the claim against the third-party to the plaintiff, plaintiff steps into the shoes of defendant for the purposes of asserting the claim against the third party.  This may be very appealing if the third party has the financial wherewithal to pay a judgment.

Before accepting a claim against a third-party to satisfy a judgment, there are some big questions to answer.  How strong a claim does defendant have?  Am I going to need defendant to cooperate in the litigation on an ongoing basis?  Does the third party have any money to pay?  Getting the answers to these questions requires detailed legal analysis and due diligence on the financial status of the target company.

“Oh that’s cool, I could build an entire business around buying and selling litigation” you say.  Probably not.  Champerty (pronounced CHampərtē) – scrabble players, your welcome – is the common law doctrine that prohibits a person with no previous interest in litigation from financing it and sharing in the proceeds.  For a transaction to be champertous – scrabble players, again, your welcome – and, therefore, illegal, the party taking assignment of the claim must have no previous interest in the claim, must expend its own money to prosecute the claim and must be entitled to the proceeds of the claim.  Courts have held a plaintiff in the position described above has an interest in a claim and does not present a champerty problem.

What’s the take away?  Legal claims, whether for breach of contract, fraud, civil RICO or anything else, are assets that may have value.  They are often overlooked and may present opportunities for you to exchange claims against judgment-proof defendants for claims against “deep pocket” parties.

We have had a number of inquiries from clients and friends about becoming a benefit corporation or “B-Corp.”  Can we do it?  Does it make any sense to convert?  Should we convert to benefit corporation or just try to get certified by B-Labs? 

Our colleague Regina Robson is an expert in benefit corporation law and has published a number of articles on the subject.  But talk is cheap.  There is no better way to advise clients than to make ourselves the proverbial guinea pig and become a benefit corporation ourselves. 

Becoming is benefit corporation is relatively simple as a legal matter but successfully integrating the sustainability and community value generating goals into an organization is a more holistic endeavor. Enter our friends at the Erivan K. Haub School of Business at Saint Joseph’s University, in particular, friend of the firm and all around good guy Professor Ron Dufresne, Ph.D.  Dr. Dufresne focuses his teaching and research on applied sustainable leadership and has been generous enough to use our firm as the subject of his capstone Applied Leadership and Sustainability course.  As part of the course, a group SJU business students will evaluate the firm’s practices and advise us on what we need to do to make the successful transition to B-Corporation land.

This will be the first in a series of posts mapping out the experience from beginning to end.  Our goal is to set out a soup to nuts road map for other small and mid-sized organizations to make the transition to a benefit corporation. 

Do we really need a warning to “consider the environment before printing this email” in our signature lines to become a B-corp?  We will find out.

Everyone loves a bargain and businesses and individuals that deal in distressed assets really love cheap stuff.  But if it looks too good to be true, it might turn out to be very expensive. If you are considering purchasing the assets of a distressed business, you need to consider the implications of the Pennsylvania Uniform Fraudulent Transfer Act.

The typical situation involves a business with significant debts.  Some creditors have initiated collection actions, others have threatened.  The owners have decided to throw in the towel and want to salvage what value they can by selling the assets at “fire sale” prices to third parties.  The purchaser completes the purchase only to be sued by creditors of the defunct company. The creditors claim that sale violated the Pennsylvania Uniform Fraudulent Transfer Act and want the purchaser to pay them the full value of the assets.

The Pennsylvania Uniform Fraudulent Transfer Act prohibits three types of transfers.  First, it prohibits debtor from transferring assets “with actual intent to hinder, delay or defraud any creditor of the debtor.”  In determining whether a debtor had such “actual intent,” courts look to a variety of factors and there is no bright line test for making such a determination.  The factors include: (1) whether the transfer was made to an insider; (2) whether the debtor retained possession or control of the possession property after the transfer; (3) whether the transfer was concealed; (4) whether the debtor had been sued or threatened with a lawsuit at the time the transfer was made; (5) whether the transfer was of substantially all of the debtors assets; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value received for the assets was reasonably equivalent to the value of the assets; (9) whether the debtor was insolvent; (10) whether the transfer occurred shortly before or after a substantial debt was incurred; and (11) whether the purchaser of the assets subsequently transferred the assets to an insider of the debtor.

Second, the act prohibits a debtor from transferring assets [when] “without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (1) was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) intended to incur, or believed or reasonably should have believed the debtor would have incurred, debts beyond the debtors ability to pay as they became due.”  This provision, known as the “constructive fraud” prohibition, is somewhat better defined then the actual “actual intent” provision, in that receipt of “reasonably equivalent value” renders the debtor in compliance with the provision. 

Third, “a transfer made [] by a debtor is fraudulent to a creditor whose claim arose before the transfer was made [] if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer [] and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer.”

Notice that a purchaser need not know that the seller is insolvent or engaging in duplicitous behavior to be liable for the seller’s debts.  So what is a purchaser to do?  If a deal seems too good to be true, some due diligence is in order.  Why are the assets being sold? Do the public records indicate that the seller has judgments against it?  Are all or substantially all of the assets of a company for sale?  Are the assets encumbered by security interests?

If a transaction raises red flags, there are a number of strategies to reduce the risk but you cannot address unknown risk. 

Some matters may require emergency action by a Court to prevent immediate harm. This is generally sought in the form of an injunction.   

What is a preliminary injunction?

A preliminary injunction is a court order to do or not do something issued at the outset of litigation to prevent irreparable harm.  It can take a number of forms and courts have broad discretion as to their scope.  A party that violates a preliminary injunction may be subject to contempt of court and subject to the criminal and civil penalties that go along with it.

How do we obtain a preliminary injunction?

A request for a preliminary injunction will only be granted to prevent immediate and irreparable harm to a party.  It is available when a party would be seriously harmed by waiting for the conclusion of litigation.  For example, a party seeking to stop a company from dumping toxic waste in a river, would be likely to receive a preliminary injunction ordering the company to stop discharging waste during the pendency of litigation.   If harm can be reversed by paying money, a preliminary injunction is not appropriate. 

Although the party seeking an injunction must show a probability of success that they will prevail on their claims, the purpose of a preliminary injunction is not to determine who will ultimately win.  It is meant to maintain the status quo during the pendency of litigation.

The party seeing an injunction is sometimes required to deposit money into the court or post a bond to cover any damage that may arise from the wrongful imposition of the injunction.

When can we get a preliminary injunction?

As the name suggests, a preliminary injunction can be obtained early in the litigation.  Depending upon the nature of the injunction, a motion for an injunction may be made simultaneously with the filing of the claim and the court will often hold a hearing within several days.  In some rare circumstances, a court may grant a preliminary injunction before the opposing party has any opportunity to respond.

After the initial stages of filing a lawsuit, the pleading stage, is complete, the parties will have an opportunity to obtain information to each other regarding factual and legal basis for their respective claims and defenses.  This is known as the discovery phase of litigation.  

What is the discovery phase?

During the discovery phase, each party has an opportunity to use the various discovery “tools” to obtain information regarding the other party’s claims or defenses.  The most common discovery tools are:

“Rule 26” Disclosures

In federal court, the parties are required to exchange “Rule 26” disclosures with one another.  These disclosures require that each party provide basic information on what discoverable information it possesses.  For example, “Rule 26” disclosures require that a party identify individuals that may have knowledge regarding the facts of a case and requires parties to identify relevant documents in their possession.  The purpose of the “Rule 26” disclosures is to streamline the discovery process for all parties involved.

There is no state court equivalent for “Rule 26” disclosures.  Instead, parties typically utilize other discovery tools to obtain the same information. 

Requests for Production of Documents and Things

A request for production of documents and things is precisely what the name implies.  Such a request is made in writing to an opposing party which must respond in the time period provided under the rules.  Requests for production now typically include request for electronic records, such as e-mails, text messages and information from social media.

Interrogatories

Interrogatories are written questions which are directed from one party to another.  The receiving party is required to respond with written answers within the period of time provided under the rules. Typically, counsel is heavily involved in providing the responses to interrogatories and rarely yields “smoking gun” information. 

Depositions

Depositions are the center piece of the discovery process and involve a real time interchange between individuals and counsel.  During a deposition, counsel asks a series of questions and the deponent provides a series of answers.

Depositions typically takes place in a law firm conference room but are sometimes held at a court house or other location.  The interchange between counsel and deponent is recorded verbatim by a stenographer who produces a written transcript that can be used at trial or in the context of a motion.

Because of the preparation time required to conduct a deposition or defend a client who is being deposed, a deposition is typically the most expensive discovery tool available.  Moreover, stenographers charge by the page and their rates range from four to ten dollars per page depending on the speed in which the transcript is needed.

Notwithstanding the costs, a deposition is often the most effective discovery tool as it requires the deponent to provide information without the softening effect of counsel.  The deposition also allows a preview of how a witness may behave at trial.

Subpoenas

A subpoena is a device used to compel information from individuals or entities that are not parties to litigation.  A subpoena is used in combination with some other discovery tool.  For example, you may send a subpoena to a third party in order to compel them to produce documents or appear for a deposition.

How long does the discovery phase last?

The length of the discovery phase depends primarily on the jurisdiction and venue where the case is being litigated.  The discovery phase in federal court is typically much shorter than in state court.  The discovery phase in federal court is typically less than one year. 

The discovery phase in state court can be extremely long as judges in state court do not set deadlines for propounding discovery.   Many parties use delays in discovery as a tactic to exhaust the opposing party.

Although state courts typically have long discovery phases, the Court of common pleas in Philadelphia has a sophisticated case management system that significantly reduces that time. The discovery phase of the majority of cases in Philadelphia is completed in less than eighteen months.

What will I need to disclose in discovery?

Although the specific documents and information that you will need to produce depend heavily on the particular circumstances of your case, the scope of discovery is generally quite broad.  A party may obtain discovery regarding any matter, that it not privileged, which is relevant to the subject matter in the pending litigation.  Moreover, even irrelevant information is subject to disclosure if the information appears reasonably calculated to lead to the discovery of “appears reasonably calculated to lead to the discovery of [admissible] evidence.”