SBA Shuts Down EDF Resource Capital: Important Lessons for Guarantors

By Michael A. Hackard
January 17, 2013

Hackard Law attorneys regularly represent borrowers and guarantors in negotiating with and litigating against lenders. By the time that our law firm is engaged, it’s not unusual that “the wolf is at our client’s front door”, and there can be precious little time to be deliberative. A recent case illustrates that an entire wolf pack might also be at the lender’s door.Bella Institute Pic

Lenders are worthy adversaries. They generally have financial strength, a strong body of favorable federal and state law supporting lender-initiated actions, and professional, skilled and experienced lawyers. They are also highly regulated. Understanding how state and federal regulatory oversight and processes impact lenders is an important part of representing borrowers and guarantors against lenders.

Lenders have been cautioned by regulators to “Know Your Customer: It’s Not Just a Good Idea, It’s the Law.” We counsel our clients to “Know Your Lender: It’s Not Just a Good Idea, It’s Essential.”

EDF Resource Capital, Inc. (“EDF”) v. United States Small Business Administration (“SBA”) et al. brings the need for lender knowledge to life.  EDF was an SBA-authorized Certified Development Company (CDC). As such it was allowed to arrange, close, service and when necessary collect on SBA 504 Loans. EDF, on behalf of the SBA, received processing and closing fees for both originating as well as servicing 504 Loans. Since 2006, EDF has received over $49 million in fees from its participation in the 504 Loan Program.

The SBA 504 Loan Program provides long-term financing not otherwise available to small business concerns for the acquisition, construction, conversion or expansion of fixed assets, including real estate and heavy machinery and equipment. The SBA does not make loans directly to small businesses under the 504 Loan Program. CDCs deliver SBA 504 Loans on behalf of the SBA. CDCs do not use their own funds to make any 504 Loans. All 504 Loans are guaranteed by the SBA. 504 Loans from CDCs on behalf of the SBA are funded through the CDC’s issuance of a 100% SBA-guaranteed debenture secured by a junior or subordinate lien covering up to 40% of the project cost. Such projects require equity contributions from the small business borrower at a minimum of 10% of the project cost. If a 504 Loan defaults and the borrower does not resume regular payments within a certain time period, the SBA is obligated under the terms of its guarantee to purchase the full amount (principal and accrued interest) of the SBA-guaranteed CDC debenture from the investor holding the debenture.

EDF also had additional authority under SBA’s Premier Certified Lender Program (“PCLP”) to make SBA determinations of credit worthiness for the 504 Loans they arrange on the SBA’s behalf. PCLP CDCs, like EDF, are statutorily required to bear a share of losses suffered by the SBA on PCLP loans. EDF has had PCLP CDC status since 1997.

All CDCs are required to calculate, fund as needed, and maintain a Loan Loss Reserve Fund. The purpose of the reserve fund is to ensure that there are sufficient funds available, in reserve, for the PCLP CDC to pay its PCLP CDC share of 504 Loan losses. A PCLP CDC’s Loan Loss Reserve Fund must be a deposit on account with a federally insured depository institution.

The Standard Loan Loss Reserve is 1% of the original PCLP Loan balance. EDF opted to use an Alternative Loan Loss Reserve that allowed it to use a risk-based approach instead of the 1% approach. The risk-based approach turned into a time bomb when economic conditions spawned by the “Great Recession” devastated real estate values in California. EDF became responsible for funding loan loss reserves equal to 15% of the SBA’s losses on defaulted PCLP loans. By the time that EDF shut down, the SBA had already invoiced EDF over $11 million for SBA’s charge off of over $99 million. SBA was in the process of invoicing EDF another $3.6 million for additional SBA losses. EDF’s loan loss reserve accounts totaled a little less than $2 million. In addition the SBA estimated that “EDF’s potential PCLP loss reimbursement exposure on the 334 other non-performing PCLP loans totals approximately $29 million.”

The EDF v SBA court case was argued in late December, and the opinion was reported on December 21, 2012. The case was filed in Washington D.C. by EDF and sought to secure a temporary restraining order (“TRO”) and preliminary injunction against the SBA. The action sought to enjoin the SBA from enforcing their December 17, 2012 Final Agency Decision Revoking (EDF’s) Authority To Participate in SBA’s 504 Loan Program and Permanently Transferring (EDF’s) 504 Loan Portfolio (“Final Agency Decision”) to an agent for the SBA. The U.S. District Court Judge denied the TRO. EDF closed its doors the same day as the denial of the TRO.

EDF, at the time of its December closing, had 2,381 loans in its portfolio with a total outstanding balance of about $1.3 billion. It had the “second largest SBA 504 Loan portfolio of the CDCs currently participating in the 504 Loan Program. Its obligations to the SBA were enormous and dwarfed its available resources to meet its SBA obligations. Defaulted borrowers negotiating with EDF had little knowledge that their lender was facing a cataclysmic melt down – one that ultimately resulted in its closure.

The SBA’s 82-page Final Agency Decision indicates that EDF refused to pay its payment and loss share obligations.  The decision recites that “the nature, extent and severity of EDF’s breaches and violations, including the dollar magnitude of the risk, EDF’s insolvency, the unwillingness of EDF’s management and board to correct identified problems, and program integrity considerations, all warrant the permanent revocation of EDF’s 504 program authority and require the permanent transfer of EDF’s SBA 504 Loan portfolio.”

We practice law in Northern California. EDF’s “Area of Operations” was located in our general geographic area. EDF’s closure was covered by the local press.

We have negotiated with a large number of lenders, EDF among them. Knowledge that the SBA had identified “significant problems in EDF’s systems or controls, deceptive action, substantial law violation, serious compliance problems, and serious reporting failures” would surely have been helpful in explaining EDF’s unusual negotiating techniques. The public record and governmental order detailing some of this wrongdoing was followed days later by EDF’s closure. That said, it is still better late than never to “Know Your Lender.”

EDF as a lender in its final months or years of operation was in a precarious position. The SBA record reveals that it was insolvent and was not paying the millions that it owed on its SBA reimbursement obligations. The record also indicates that EDF was maintaining two sets of accounting books and records, one disclosed to the SBA and one not. When these facts are considered it is evident that EDF had a financial disincentive to fully resolve or compromise claims against borrowers and guarantors whose loans were in default. A real compromise between borrowers, guarantors and lenders brings both certainty of settlement and certainty of loss. Such loss certainty would trigger loss share provisions that EDF was contractually and statutorily bound to pay. It is little wonder that the SBA acted to protect the integrity of the SBA 504 Loan Program from EDF’s concealment from the “SBA the status of hundreds of defaulted loans, thus knowingly painting a materially incomplete, misleading and falsely positive picture of its Loan Loss Reserve Fund and of the Fund’s ability to protect SBA from the risk of loss.”

© Copyright Michael A. Hackard, 2013.  All rights reserved.

PONZI SCHEMES AND CLAWBACKS

PONZI SCHEMES AND CLAWBACKS

Defending the Victims, Not the Perpetrators

By Michael A. Hackard

Something’s been proliferating across America – something that has at times shaken investor confidence and at others made financial investors feel like there is a war against them. That which has been proliferating – Ponzi schemes – is of course well exemplified by the Bernie Madoff matter. Madoff is the largest Ponzi scheme in history with an estimated $20 billion “invested” into the scheme over a period of years by over 15,000 “investors.”

While Madoff makes front page news, there are hundreds of other Ponzi schemes that might only draw local attention. A 2011 study did an overview of Ponzi schemes that included 329 major investment fraud cases.[1] A judicial tongue-in-cheek observation is that the “essence of a Ponzi scheme is to use newly invested money to pay off old investors and convince them that they are earning profits rather than losing their shirts.” (Citation omitted). Tens of thousands of investors throughout the land have been duped into “investing” into Ponzi schemes fully believing that they were earning profits. This colossal misunderstanding is often not clarified until some judicial action has been pursued against the perpetrators – whether criminal prosecution, bankruptcy or state court litigation.

In Spring, 2012 the United States Court of Appeals for the Fifth Circuit had occasion to help define a Ponzi scheme.

[A] Ponzi scheme is a ‘fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger ‘investments.’ The American Cancer Society v. Cook, 2012 WL 919674 (5th Cir. 3/20/12) (Jones, Ch. J.).

Ponzi scheme victims often learn that disengaging from the investment can be very painful, surprisingly protracted and expensive. It is well settled law that when a debtor in bankruptcy has operated a Ponzi scheme, the court appointed bankruptcy trustee may institute actions seeking to avoid and recover payments made to the scheme’s investors.  This is often referred to as a “clawback” claim, which essentially is an adversarial claim pursued by the trustee to seize illicit profits from knowledgeable investors.

Receiving a letter from a bankruptcy trustee demanding the repayment of any funds returned to the investor can create a pretty scary atmosphere. With their investment gone, the Ponzi defendant in jail, bankrupt and/or missing, the investor is left with a problem that at times can seem insolvable.

Ponzi victims often ask their attorneys how it is possible that the victim can be sued by the bankruptcy trustee. Without addressing all the legal theories that make up the right of recovery as well as defenses to recovery, it is more economical to reference some general rules.

The general rule in several jurisdictions that has been evolving judicially is that a defrauded Ponzi investor is recognized as having given “value” to the extent of his or her principal invested. This “value” supports a section 548(c) affirmative defense to a clawback claim.

The theory behind the rule is that the investor has a right of action for fraud against the Ponzi perpetrator equal to the amount invested. Repayment of principal is essentially payment on the antecedent debt that accrued from the fraud. That said, the amount in excess of principal that was repaid to the investor is deemed not to have been given for value and may be recovered by the bankruptcy trustee.

The Ponzi investor who is subject to an adversary claim needs to know that such clams are normal and often required by a bankruptcy trustee to satisfy his or her fiduciary obligations. While normal, so are the defenses that apply to such claims. Investor’s complaints that the claims strike at the jugular and are not calibrated to ferret out the innocent must be tempered by the reality that bankruptcy trustees often have little in the way of records and must rely upon bits and pieces of data that may not be accurate.  In these cases the ultimate resolution of the claim can be accomplished by “showing the proof.”  An effective defense to avoidance or “clawback” claims requires this showing of proof.


[1] Christopher T. Marquet, The Marquet Report on Ponzi Schemes, A White Collar Fraud Study of Major Ponzi-Type Investment Fraud Cases Revealed from 2002-2011, June 2, 2011. Available at http://www.marquetinternational.com/pdf/marquet_report_on_ponzi_schemes.pdf .

© Copyright Michael A. Hackard, 2012. All rights reserved

The $5 Million-Dollar Year

By Michael A. Hackard

                We have surely experienced years that were great and others not so great. The Dixie Chicks put lyrics to the notion that each year has its own character in their hit “Favorite Year.” Babe Ruth’s “better year” explanation as to why he made more money than the President has become iconic. Queen Elizabeth’s “annus horribilis” description of her families’ 1992 troubles is still remembered some 20 years later.

2012 is the last year that a $5 million estate and gift tax exclusion[1] (twice that for married couples) can be utilized for $5 million tax-free wealth transfers. In this sense it might well come to be a “Favorite Year” for estate planners and their clients. In comparison, 2013 allowing for only a $1 million gift tax exemption ($2 million for married couples), is a substantially “lesser year” to make large tax-free gifts. Moreover, the 2012 top estate/gift tax rate of 35% on amounts over $5,000,000 will be increased to 55% on amounts over $1 million for 2013.

The 2012 $5 million gift-tax threshold is surely a strong incentive for outright gifting. It is a threshold that will soon be gone.  For those who desire to make sizable wealth transfers in the next twelve months, a few days at the end of this calendar year and the beginning of 2013 can spell the difference in millions of dollars of gift taxes.

President Obama’s 2013 Revenue Proposal contains its own “annus horribilis” elements. Included among the proposed elements is a provision that would eliminate valuation discounts for gift and estate tax purposes (essentially not recognizing lack of control and lack of marketability discounts). There are a number of unfavorable elements in the Revenue Proposal – all making 2012 wealth transfers a “Favorite Year.”

Many law firms and accounting firms are encouraging their clients to contact them by June 1, 2012 to allow sufficient time to engage in immediate planning under the current favorable estate and gift laws. We agree with those firms. Good planning can certainly help make 2012 a better year for the preservation of family wealth.

© Copyright Michael A. Hackard, 2012. All rights reserved.  Hackard Law, 10630 Mather Boulevard, Mather, California 95655


[1] Indexed to inflation;  $5,120,000 in 2012.

Removing a Trustee – DON’T GO AWAY MAD (JUST GO AWAY)

(This article was originally posted at the California Trust Estate and Probate Litigation website - http://www.californiatrustestateandprobatelitigation.com/)

By Michael A. Hackard and Quinn Chevalier

The emotional and financial costs spawned by a trustee removal fight can be overwhelming. Beneficiaries often feel much maligned or even cheated. In these broken and volatile relationships, beneficiaries don’t want a trustee to go away mad, they just want them to go away. Often feeling chosen, duty bound or privileged by their appointed status, trustees do not easily surrender their reins of power. However inept, embedded trustees often threaten the rapid dissipation of trust assets by burgeoning legal bills.

The Costs of Trustee Removal: a zero sum game

We have seen the trust dissipation threat in action. Attorneys who litigate trust disputes enjoy the challenges and intricacies of trust law. This enthusiasm is understandable. Ethical rules provide guideposts for aggressive and fair representation. Threatening to ravage trust assets to pay for the defense of an errant trustee does not fit well within these guideposts.

While trustees are entitled to defend charges of alleged wrongdoing, the payment for the defense should be fairly allocated to the trust or to the trustee. The trustee and his/her attorneys should initially and periodically assess whether the asserted defenses are meant for the trust’s advantage versus those meant for the personal benefit of the trustee. However inconvenient and frustrating to often bereaved beneficiaries, it can take years before a court determines whether trust payments for attorney’s fees were spent to protect the interests of a flawed trustee or the interests of the trust.

Affronted beneficiaries willing to litigate a trustee removal action should be ready for the time delays and legal expenses common to the wrangling over the peculiarities of trust law and administration. California courts have experienced severe budget cuts and have responded accordingly by closing courtrooms and terminating employees. The time lags from the filing of a petition for removal to an evidentiary hearing can easily be a year or more. Petitions for appointment of interim trustees face higher legal hurdles. Courts are reluctant to appoint interim trustees absent clear wrongdoing that puts the trust or its beneficiaries in great peril.

Attorneys hired to pursue or defend trust litigation have obligations to the court as well as to their clients. Professionalism can often support a call to be “above the fray,” yet the realities of exhausting litigation can affect the most stable of constituents, and particularly the trustees. It is not unusual for trustees to be totally unprepared for the tasks required after the death of a settlor. Affected beneficiaries, while not knowing the specific tasks required for trust settlements, can still readily observe that the trustee’s actions or inactions epitomize “amateur hour.”

The Nuclear Option: destroying both victor and vanquished

Trust litigation contains the risk of “catastrophic victory.” Such victory can evolve from multiparty litigation that includes trustees, co-trustees, successor trustees, proposed independent trustees, beneficiaries, spouses of beneficiaries and their respective counsel. Litigators on their own initiative or that of their clients can engage in “scorched earth” tactics designed to enrage and exhaust their opponents. Such tactics often have the same effects as short range nuclear weapons, destroying both the victors and the vanquished.

Catastrophic victory aside, the removal of a trustee by its nature involves a good deal of energy. Trust provisions, statutes and case law provide a laundry list of reasons for the removal of a trustee. Clients can look at the list and mentally check the appropriate boxes. Believing, knowing, and proving, however, are three different things. The belief of trustee wrongdoing can be followed by informal and formal discovery that translates belief into knowledge. Transferring knowledge into judicial proof is a different process – one protected by rights of due process and time constrained by discovery processes, court schedules and statutory mandates.

The Undue Burden of Due Process of Law

In trust litigation, just like any litigation, writing a letter to a local court detailing what you know does not meet the demands of judicial due process. This is something not always understood by clients. In other aspects of their lives, changes can often be more timely and directly influenced by vigor and clarity of purpose. Such is not always (or ever) the case in litigation. We have all heard a variant of “the wheels of justice grind slowly.” There is truth behind the aphorism. This truth particularly tests the patience of wronged beneficiaries. Trustee fights can mimic civil war with all of its emotions and tragedies. Trust litigators are best when they can fairly and wisely advance their clients’ interests while at the same time exercise vigilance for opportunities of fair compromise or settlement. Litigation should not be a mindless and hardened exercise in wealth dissipation. As litigation battle lines are fixed and change, the end game should always be kept in mind. Catastrophic victory is no victory at all.

© Copyright Michael A. Hackard and Quinn Chevalier, 2012. All rights reserved. Hackard Law, 10630 Mather Boulevard, Mather, California 95655

Nicknames

By Michael A. Hackard

Most of us have and enjoy nicknames. At their best they are a sign of affection, familiarity and humor. At their worst they are name calling. They sometimes follow us throughout our lives and at other times are long lost to passing youth or changing circumstances.

Nicknames are best when positive or at least acknowledged to be acceptably humorous. Name calling, on the other hand, can be mean and harmful. Name calling does nothing positive for the name caller or the name caller’s victim.

Nicknaming is best when it brings some comfort to the named – not embarrassment. That said, nicknames can have a funny edge to them. My dad’s best friend called him “Heavy.” My dad wasn’t that heavy, but the name stuck and became part of a special language between friends.

I’ve had a number of nicknames. The nicknames bring back happy memories of the author: “Mick” (my dad), “Kid” (a judge who encouraged me to become a lawyer and hired me in my last two years of law school), “The Hack is back” (a friend and co-worker in the legislature, now a judge, who often coupled the sobriquet with a brief dance when first seeing me arrive at the office), “Bo” (my cousin, Gary) and “Mickey” (my grandmother Muzz and my wife Lisa).

While Muzz has been gone for some forty years, Lisa has kept my nickname “Mickey” alive. Gary still calls me “Bo” or when in a special complimentary mood “Kingfish.” Lisa (“Matisse”) and Gary (also “Bo”) have their own nicknames. Changing times bring changing names. I am now called “Boompa” by my grandchildren – a nickname that is easy to cherish.

We have a wall in our law offices with pictures of sports heroes centered on a large motivational poster. The poster depicts our law firm logo between two mantras, “Top of the Game” and “Committed to Excellence.” Anyone coming into our office must pass the wall, our legal team included. The wall is part of our landscape – sometimes actually looked at but also easily overlooked.

Our wall’s sports heroes performed at a level that we admire and aspire to accomplish. Five of the wall’s sports heroes particularly exemplify the “Top of the Game” performance level. Joe Montana is “Joe Cool.” “Cool” not as in Elvis, but cool as unflappable under pressure. His book’s title, “Joe Montana’s Art and Magic of Quarterbacking” captures Montana’s mystique – “art” and “science.” Montana’s art included being “cool” under pressure. It is an art worthy of emulation.

Running a law firm includes many pressures. Pressures of daily practice include pressing time-related tasks, engagements in adversarial relationships and the coupling of commitment to excellence with our clients’ ability or desire to pay for that commitment. There is a need to be “cool.” Emotional swings, while understandable and at times unavoidable, assist little in the art or science of lawyering. Like Montana we are often called upon to “read defenses.” The defenses to be read might include motivation, probable endurance of our adversaries as well as perceiving opportunities for settlement. Mixed with the art of law is the science of legal precedence. Accomplishing the effective mix of art and science is part of our firm’s promise that we are “Committed to Excellence.”

Bill Walsh is also on our wall. Walsh was known as the “Genius.” I once had the privilege of being the Genius’s lawyer. I’ll never forget having lunch with Walsh and talking legal strategy with one of the sports world’s greatest strategists. It was humbling. Walsh wanted to know how we were going to win, he made his comments, we executed and we won.

Jack Nicklaus, the “Golden Bear,” is also on our wall. It is said that he acquired his nickname because of his blonde hair, size, and aggressive play. It has been written that early in Nicklaus’s career his bulky physique had earned him the sobriquets of “Whale Boy” and “Fat Jack.” His sheer excellence in golf earned him the more positive and evocative “Golden Bear” moniker. We admire the Nicklaus brand of aggressiveness. There are few better sports figures “Committed to Excellence.”

We also have Muhammad Ali, the “Greatest,” on our wall. Ali is pictured towering over the vanquished Sonny Liston – floored by Ali with one punch in the first round of their 1965 heavyweight championship fight. Ali is gesturing to the stricken Liston to get up and fight.

The Ali-Liston photo was on the cover of Sports Illustrated issue of “The Century’s Greatest Sports Photos,” an honor well deserved. I remember the fight – a fight that pitted the speed and talent of Ali against the mean, powerful and threatening Liston. It was great to see the good guy win – and win so decisively. We often fight for the “good guy” against an adversary that is as mean, powerful and threatening as Liston. Our client’s adversary may be only economic, but the price of failure can be a knockout punch. The Ali victory photo is inspiring to us: Keep up the fight no matter the strength or threats of the adversary.

One of our wall’s most inspirational photos is that of Lou Gehrig, just 36 years old, giving his farewell speech, “The Luckiest Man on the Face of the Earth,” to a packed Yankee Stadium. Gehrig, dying of ALS (now commonly known as “Lou Gehrig’s Disease”), exemplified the grace and perseverance that inspired a country. Gehrig was honest and humble. It is said that his only vices were chewing gum and an occasional cigarette. Gehrig’s speech and all that it represents is truly “Top of the Game.” Gehrig’s gracious optimism and gratitude are worthy of emulation during the best of times and the seemingly worst of times. For us, Gehrig, more than all of the wall’s sports heroes, serves as an inspiration in everyday life. The irony that the “Ironman” would have his life and career cut short by a tragic disease, is eclipsed by Gehrig’s self-described nickname “The Luckiest Man on the Face of the Earth.” Gehrig’s grace, humility, honesty and perseverance give life and dignity to adversity – virtues that should not be overlooked on life’s journey.

© Copyright Michael A. Hackard, 2012. All rights reserved.

The Lawyer as Storyteller

By Michael A. Hackard

Abraham Lincoln was a great lawyer – and a great storyteller. I feel a particular kinship with him for a host of reasons – among them the fact that my ancestor, a Mississippi River steamboat pilot, was a catalyst of an event that helped to propel Lincoln onto the national scene.

My 2nd great grandfather, James Gifford, a steamboat captain of the Effie Afton, lost control of his boat, careened into a pier supporting the Rock Island Railroad Bridge, and started a process that pitted two of our young nation’s greatest economic interests against each other in litigation.

The Rock Island Railroad Bridge connected the states of Iowa and Illinois. The Effie Afton’s collision with the railroad pier destroyed the steamboat, its cargo and a portion of the bridge burned down. Nearby vessels blew their boat whistles in delight at the partial destruction of the bridge – a structure that symbolized the burgeoning conflict between the nation’s young railroads and the more established steamship transportation companies.

Gifford’s employer, the owner of the Effie Afton, sued the Rock Island Railroad Company for building a bridge hazardous to river navigation. Lincoln defended the railroad in court. His closing argument was so persuasive that the jury deadlocked and the judge dismissed the case. The case went a long way toward establishing the right of railroads to bridge rivers.

My great grandmother was born twelve years later and christened with the name of Effie Afton, her father’s now long-sunk steamboat.

Family histories aside, I love to tell stories. They can spark my imagination and that of others. There are a number of stories that I like to tell to my clients and colleagues. I didn’t really design a storytelling approach – it’s just something that I enjoy doing, and it helps me to convey my thoughts, however colloquial, to my clients. My stories speak to common experience. They are also a way to make a point that is otherwise difficult to convey.

If I were a doctor I’d be an emergency room physician. My clients do not come to me for a regular legal checkup or to report that “all is well.” While many of my clients are friends or inevitably become friends, I am still hired to do a job – usually a job to reduce legal risks, defend against pending legal dangers or to recover compensable losses caused by third parties.

I listen to my clients. I often remind myself of the adage that God gave us two ears and one mouth. We should listen twice as much as we talk. When I listen to my clients I can focus on the facts as they are conveyed and the issues that arise from those facts. If my client is in trouble I’ll often talk about the “wolf.” We all have childhood memories of wolf folk tales such as Little Red Riding Hood and the Three Little Pigs.  I’ll sometimes talk about whether “the wolf is at the door” or just “in the neighborhood.” I like to use the wolf reference a lot – I know that we are facing a big legal problem if after hearing my client’s story it is apparent that the “the wolf is at the kitchen table and looking for dinner.”

Is my client involved in a legal “meltdown?” Is this a case that I like to take or a client that I like to serve? “Firemen like big fires” and I like big challenges – however fatiguing and troubling that they become. While firemen might like big fires they don’t like arson and they don’t like people adding to the fires either through intention or inadvertence. I’ve found that “big fires” require big team efforts – efforts that include the client and other important team members for the tasks at hand.

Meltdowns aside, it often seems to me that new clients are experiencing a “runaway train.” Once retained my first task is to engineer a stop, a slowdown or a safer route. It does take a while to get on the train and to figure out who or what is causing the runaway and then to implement some solution to stop or slow the train.

For clients who need time I often talk in pilot terms. My father was a pilot, I love airplanes and I like flying analogies. Pilots often talk of trading altitude for airspeed. An old aviation saying is “When in doubt, hold your altitude. No one has ever collided with the sky.” My translation to legal problems is that it is often best to slow down, stay in the air, stay alive, and work for some alternative to a hard landing.

One of my favorite sayings in these days of financial crisis – a financial crisis visited throughout the business, real estate and professional communities – is the need to “ride the tiger.” The analogy is apt – clients are often in a situation where so much is threatening that a resolution does not seem at all apparent. When there is no quick or easy solution evident, an essential commitment to ultimate resolution is often endurance.   Enduring pain while seeking a solution to problems is like “riding a tiger” – dangerous but survivable. The “tiger ride” often starts without a clue as to the ultimate safe dismount. While neither the client nor I might have an initial dismount plan, we know that a premature dismount results in a tiger’s meal – at the client’s expense – a result that we want to avoid. I often share this story at the beginning of a matter and repeat it throughout a matter’s long or stressful life. The point, a point often reiterated – “You’re still on the tiger. It’s not safe to get off. Persevere. Endure. Somehow, someway your problem will be solved.”

Not all my analogies involve wolves, tigers, firemen, airplanes or trains. Some are born of my own personal faith. “The truth shall set you free.” This is the starting point of any relationship. What is the truth of the matter at hand? Truth can be painful but at least it is by nature “true.” Deception has no place in the attorney-client relationship, no place in understanding, and no place in representation. We do need to know what is true – whether in litigation or in any other type of problem solving. I won’t represent to others as true that which is false. We start with the truth and then apply the law – a law that allows for ingenuity, skill and hopefully wisdom. Still it is the law – law best based on mercy, justice and truth.

Some lawyers might well think that sharing faith has no place in their law practice. I respect their choice, but as to me faith is intrinsic to my practice. I bring some thirty-six years of lawyerly experience to the practice of law but sixty-two years of life. My life – like that of my clients – has been mixed by tragedy and triumph, sadness and joy, confusion and clarity, strife and serenity and pain and mercy. The strength that I have gained from my faith, my family, friends and experiences I readily share. I think that most clients appreciate the openness and honesty – traits that support solidarity – we are fellow travelers on life’s path.

I often quote directly or indirectly Proverbs 29:18 – “Where there is no vision, the people perish.” We all can be overwhelmed by problems or circumstances. My job as a lawyer is to help – this includes providing a vision of resolution – a vision of assistance. I regularly pray for the wisdom, energy and discernment to provide this vision.

Storytelling can be a way of seeking help, sharing humor or making a point. Storytelling is best when it addresses the human condition. I like to hear my clients’ stories. These stories enlighten and energize me. Knowing their stories, I can then do my best in helping them – whether they’re threatened by wolves, a hungry tiger or just seeking time and distance from an as yet unresolved problem.

© Copyright Michael A. Hackard, 2012. All rights reserved

Advice to a Weary Litigant

 

ADVICE TO A WEARY LITIGANT

THE ROLE OF SPECIAL SETTLEMENT COUNSEL

By Michael A. Hackard

                You’re at loggerheads. You’ve spent countless time and money on a matter that you once naively expected to see quick and economic resolution. You’re emotionally drained. You’ve become skeptical of lawyers and of the law in general. Is this really the way the system works? You’re a litigant – a civil litigant – and you seem caught in a whirlpool – a drain rapidly depleting your economic and emotional reserves. You need help. Do you really need another lawyer or law firm? “I’m already paying one – isn’t that enough?” Maybe – maybe not. Have you ever heard about special settlement counsel?

                It would be the exceptional civil litigant who at some point in the litigation process does not weary of the expenses, strife, time and failed expectations of litigation. This observation equally applies to companies as well as to individuals. Litigation at its most elementary level is simply a claim – “I claim that you did this or failed to do that.” The response generally – also elementary is – “No I didn’t” or “I did it because you didn’t do that” or maybe “So what if I did – I had every right to.” It would be flippant to condense centuries of constitutional, common and statutory law into a few sentences – still a few words well identify common observations of civil litigation – “emotional, exasperating and expensive.” Few would use words like “good, great, or gratifying.”

                I’m a lawyer – 35 years a lawyer. I’ve been a litigator as well as an occasional litigant. Being a litigator is far more pleasant than being a litigant. This is an observation worthy of note. Litigation lawyers like litigation. It is challenging, exciting and often profitable. They’re like emergency room physicians – they want to be great at their jobs – they like challenges – problems energize them – and they know that most rational human beings do not want to be their patients except in the direst of circumstances. 

                Litigation at times can be somewhat genteel – following some well trod procedural paths ending in an evenhanded trial before a judge and jury. It can also be chaotic – a series of claims and counter-claims – a growing rancor between the litigants’ well paid advocates – and a declining commitment to the early on stated purpose for the litigation – “It’s the principle of the thing.” Emotions can be laid raw – accusations become rampant – with calls to “our better nature” left unheeded.

                Sage advice to litigants and to litigators alike is age old. There is a time for everything – “A time to tear down, and a time to build up. . . A time to tear apart and a time to sew together. . . (And)  A time for war, and a time for peace.”[1] For litigants and their attorneys the litigation process itself has often torn so much down and apart that the time for peacemaking seems long gone.  It is often at the time of frustration – maybe near despair – that the role of special settlement counsel becomes timely.

                The role of special settlement counsel can take a variety of forms. It can be the role of the diplomat – the wordsmith who lowers tension – who creates trust a step at a time and who is respected for his or her integrity. Like diplomats, special settlement counsel represents interests. They are not unbiased arbiters, but they work to be unbiased. They are not mediators, but they work to bridge differences rubbed raw by litigation.  They are surely not judges, but it is their judgment that is valued – is sought – to end a seemingly interminable conflict.

                The role of special settlement counsel by near necessity falls on those who have not been in the fight – the war – and whose willingness to engage in peacemaking is not seized upon by adversaries as a sign of weakness.  Special settlement counsel can take to heart Abraham Lincoln’s oft-quoted admonition to “Discourage litigation.” This advice was given by a great litigator – one whom also advised “Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser – - in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.”

                I have been retained by parties in litigation as their special settlement counsel.  I’ve also been the primary litigator tasked with negotiating with my opponent’s settlement counsel. The benefits of settlement counsel in either case are noteworthy.

                As special settlement counsel the emotions of litigation’s hard fought battle are more remote. You can be accommodating – gracious – truthfully observant – yet still credible and strong. You usually haven’t been hired to negotiate the terms of surrender – you’ve been hired to negotiate peace – a peace that in Lincoln’s words might prevent the nominal winner from becoming the real loser.  That said there are times when special settlement counsel is just hired to stop the bleeding.

                Several years ago I was hired to end what had become an enormously expensive and destructive litigation. I first saw my former client in a restaurant. It had been years since I worked for him. He looked like he was going to die. He asked whether he could come to my office and see me. He told me a story about litigation gone wild. His fortune was at stake. He had hired well respected litigators and they had fought hard – so hard that his opponents had also hired well respected litigators – some of the most expensive in the country. They too had fought hard. The litigation battle had grown in importance and expense. It grew – as it grew more and more of my client’s net worth was becoming imperiled – and his liquidity was dwindling with the burgeoning expenses of all out war.  Someone was going to lose the fight that he was in – and lose it big – and it looked like it was going to be him. He hired me in a special role with special instructions – settle this case! Stop the bleeding!

                I was engaged and I immediately began to work.  My client’s litigators had little to benefit by settlement. They had done what they were asked to do – go to battle. The lawyers from both sides could no longer effectively talk –especially about settlement. My client wanted to settle so badly that he even wanted to call his opponent’s lawyers and plead for settlement – a call that they couldn’t ethically accept. It was clear that I had to do what I could to settle the case –and yet not convey the near desperate situation that my client faced. This was not an easy task. I determined that the first step after I gained an understanding of the litigation, its history and its likely outcome, was a personal meeting in Los Angeles with the other party’s litigator, a “Big Law” senior litigation partner.  I’ll never forget opposing counsel’s opening line – “I’m General MacArthur – I’m returning – tell me why I would accept anything except a full and complete unconditional surrender.”

                I knew that I was not going to accept MacArthur’s proffered “full and complete surrender.” I had neither been hired as Marshal Petain to confirm abject defeat nor Colonel Custer to execute a heroic but futile last stand. My client wanted peace but he also wanted solvency – and hope. He got all three. MacArthur wasn’t fully satisfied with the settlement outcome and neither was my client. MacArthur was probably a little more satisfied – an earlier intervention would have balanced out the pain and profit a little better. Still the bleeding stopped and my client went on with his business.

                I haven’t always been counsel engaging the soon to be victorious MacArthur. I have also been in the MacArthur role. I’ve negotiated with special settlement counsel hired to bring an end to unproductive litigation. Whether negotiating as the victor or vanquished, once again some words of Abraham Lincoln have meaning – “With malice toward none, with charity for all . . . let us strive to finish the work we are in.” When litigation is ending and ending peaceably it is important to be gracious. There have been enough accusations and enough bitterness. There really is a time for peace.

                When the time comes I make an effort to recognize the special role of counsel – that of peacemaker. I often tell stories of how I have been on the other side – there are times when no matter a lawyer’s skill, experience or persistence the likely success of a case is simply unarmed by the facts or by the law. It is often in the role of peacemaker that lawyers have, again in Lincoln’s words, “the superior opportunity of being a good man (or woman).”

                Peacemaking in litigation can often be accomplished with the role of a mediator or of a trial judge. For those who may want to advance the process but still have an advocate on their side – rather than a non-affiliated neutral, the utilization of special settlement counsel can be of vital assistance in positively resolving seemingly intractable litigation.

© Copyright Michael A. Hackard, 2012. All rights reserved


[1] Ecclesiastes 3:3,8

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