• Expanding the Pie Creatively: Settlement in Challenging Economic Times
  • August 28, 2014 | Author: Hannah F.G. Singerman
  • Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Cleveland Office
  • The civil litigation system, especially in the state courts, is all about settlement. According to a 2005 study, only 2% of civil contract cases in state courts are disposed of at either a bench or jury trial.1 Judges push settlement, subtly or not so subtly. At times, settlement can be the best solution for both parties. Settlement is often a good way to guarantee payment and minimize expense in litigation.

    However, in commercial litigation, especially business to business litigation, in the current economy, a settlement agreement that is acceptable to a creditor and financially possible for a debtor can be almost impossible to reach. Moreover, the environment in certain states like Ohio favors limiting liability of principals of corporations as well as making it difficult to attach to assets of new corporations in the case of successor businesses.2 Thus, there is always a risk that an insolvent or nearly insolvent corporation may simply dissolve without paying its creditors in the face of litigation. Even in states with strict corporate formalities, the ability to secure payment from corporate owners and operators as well as successor companies hinges on additional, complex and time-consuming litigation.

    Often creditors will accept payment plans on debts when funds are short. However, payment plans can be very risky. The longer the plan, the less likely it is to be completed. Issues may arise. Often it is necessary to enter into a settlement agreement that is not secured by a judgment. Certain businesses and professionals cannot operate in their fields with a judgment against them. Thus, for said businesses and professionals to be able to meet their obligations in a settlement agreement, there can be no judgment.

    If a payment plan is not secured with a judgment, avenues of enforcement may be lost if there is a breach. For instance, after a certain amount of time, one is outside the range for reviving the case under Civil Rule 60(B).3 In Ohio, said time limit is generally two years.4 One could always bring a new suit under the settlement agreement, but of course, there are costs and risks associated with that as well. Additionally, if the agreement was for less than the original balance then the compromised portion is lost forever.

    Creditors in today's environment may want to think about expanding the pie for settlement purposes, i.e., what besides funds that the debtor has would be acceptable to satisfy the debt. Debtors have a surprising array of non-monetary assets which may be able to be part of a creative settlement for a portion of an outstanding balance. For example, some debtors have inventory which may be useful to a creditor or unencumbered equipment that could be titled to a creditor for a creditor to liquidate. Also, debtors may have certain intellectual property which might be useful like customer lists or industry pricing information. Provided that obtaining such information would not violate industry regulations or other agreements, such can be good, alternative sources of value.

    Creditors can also take a security interest in goods, inventory, or fixtures of the debtor. However, a savvy creditor needs to research whether or not another creditor has a security interest in said property and must take proper steps to perfect his security interest. Under the UCC, which has been adopted in some form by almost every state, a filed financing statement is not the only way to perfect a security interest and does not always take priority.5 Additionally, state laws regarding where to file financing statements vary greatly and many records are not easily accessible.6 Because of such rules, it is hard to independently verify priority in chattel. A settlement agreement with covenants regarding priority may alleviate some of the risk associated taking security interest to forebear upon a debt.

    Another option is assignment of claims. In Ohio, a creditor, under certain circumstances, may attach claims held by a debtor post-judgment under a creditor's bill.7 However, creditor's bills are not available in every state.8 A proper assignment of a claim, with both accurate and explicit assignment and chain of title documents along with a well-crafted agreement which requires the debtor to cooperate in any subsequent litigation can save a creditor the hassle and costs of filing a separate, post-judgment, creditor's bill action and open the door to such assets for parties in locations where creditor's bills are not available. Assignment as settlement does not even need to involve claims against parties. One can assign rights under a contract or a settlement agreement as well.

    Typically, a settlement for a lump sum of cash or a short-term payment plan is ideal. Nevertheless, in the current, slowly improving economy, such is not always possible. Creditors who are willing to be creative from the start regarding sources of payment may yield the greatest rewards in the end.

    2 See, e.g., Dana Partners, LLC v. Koivisto Constructors & Erectors, Inc. (December 31, 2012), Case No. 2011-T-0029, 2012 Ohio 6294 (Ohio App. 11th Dist.)
    3 See Fed. R. Civ. P. 60(B), adopted in some form by the states, individually.
    4 See, e.g. Blasco v. Mislik, 69 Ohio St. 2d 684 (1982); Kennedy Mint, Inc. v. Print Wave, Inc., 2011 Ohio 940 (Ohio App. 8th Dist.).
    5 See U.C.C. §9-312 and §9-324
    6 Contrast O.C.G.A § 11-9-501 (Georgia) (U.C.C. financing statements are to be filed, in certain circumstances with the clerk of any of the 159 Superior Courts in the State) with O.R.C. § 1309.501(Ohio)(U.C.C. financing statements are to be filed with the Secretary of State).
    7 See O.R.C. 2333.01
    8 See, i.e. Parsons v. Mumford, 1989 Del. Ch. LEXIS