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.
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.