Litigation Lessons-How To Win And Collect In Full

Litigation has become expensive both in dollars and time consumption, and is only worth it if the dollars are sizable, and you can devote the time to managing the litigators and the process. I have just won a major lawsuit against Stan Thomas, a major national developer based in Atlanta, and there are some lessons to be learned. We were able to collect the full amount of the judgment plus interest, plus a portion of our legal fees. It was summary order in federal district court in Southern District of New York in Manhattan and the Second Circuit on appeal decided by summary judgment. The case is called Ross et al vs Stanley Thomas –Southern District of New York in Manhattan. 09 CIV 5631 (SAS)

In short, my partners and I were the winners of the RFP to acquire and develop the UP Railyards in Sacramento, CA in 2002. We brought Stan Thomas in as our money partner. In July 2004 he proposed to buy 100% of our ownership interest. In writing the operating agreement and terms of payment, I adhered to a cardinal rule of mine-KISS. The whole deal was wrapped in a single sentence which in essence said: if you refinance the property and the proceeds are more than your costs of development to date, then you must fully pay the seller as of date of closing on the refinancing. It is essential to make the operative clause in plain English, using simple well defined words that are common in everyday usage, and no formulas, nothing for misinterpretation, nothing that has any dual meaning, no legalese, and very clear payment dates and time. Thomas lawyers tried to argue that the word refinancing is ambiguous. They even rolled in an “expert” to say so. Both the lower court and the appeal court summarily rejected that argument. Do not assume judges are smart or understand anything about business. Some are, and they do get it. The judge in our case was a very astute and experienced federal judge who understood the case very quickly and tolerated no nonsense. Who you get as a judge matters. Try to go federal. The judges are much better than state judges in general, although some state judges are very good. It is essential to get your argument down to the basics that a non business person can easily grasp, and not get bogged down in superfluous issues. You may end up in front of a jury, and that means in front of the uninformed and often ignorant. Try to stay away from juries.

Make certain your contract provides for pre-judgment interest at a specific percentage. This was a major portion of our proceeds and covered our legal fees plus some. Post judgment interest is now pegged to one year Treasuries so make sure you mandate the pre-judgment interest amount.

Instead of paying us in April 2007, Thomas ignored the obligation to pay. We sued in 2009 and won summary judgment in 2010, then he appealed. We have now been fully paid. He had to pay interest on the full amount from April 2007 to date of payment last week. That increased his obligation to us by almost 40%, plus he had substantial legal fees.

When we won in the lower court, we immediately got a restraining order prohibiting Thomas from doing anything with any asset he owned or controlled. We immediately began to seize assets. He shortly thereafter violated that order by hypothecating an asset in the Caymans in order to get cash to post as part of his Chapter 11 Plan in his RIM Mall bankruptcy case in TX. We then got the court to find him in contempt, and this was the key event. The judge issued an order requiring Thomas to either unwind the hypothecation or pay $10,000 a day and if not unwound and out of contempt by January 20, 2011 he would go to federal jail. On January 18 he posted cash collateral for a supersedes surety bond for the full amount owed to us plus two years additional interest. The cash was posted by a Thomas owned entity in the Caymans, even though a few weeks before in December, he had testified at his deposition to us that he had no assets, a negative net worth, no bank accounts, no securities and no credit cards, all of which was meant to show he had no ability to pay us. At the bond finalization hearing on February 8, 2011, the IRS suddenly appeared with liens on Thomas for purported failure to pay payroll taxes to the government. This was for $5 million. The judge had not been prior informed, so told the government that she would not seize the collateral being posted for the surety bond and give it to the IRS until the appeal of my case had been heard, which appeal Thomas was pursuing. The surety bond was issued in favor of me and my partners for the full amount owed to us plus interest. The contempt was thereby purged and the appeal of our case by Thomas proceeded. The restraining order was then lifted, but our award was now in the form of a surety bond. For the period a defendant is in contempt, the plaintiff can get the court to order the defendant to pay plaintiffs legal fees.

The appeal was finally heard and we got summary judgment. We then demanded the bonding company to pay. We had to wait 10 days for the IRS to be formally noticed by the bond company. The IRS showed up at 5:15 on the last day demanding to be paid their $5 million.

Along the way Thomas made various low ball offers to settle. Lesson, the game by defendants is always to try to force you to spend a lot on legal fees and to drag it out until you give up and settle for half. I refused to settle because I was certain we would win the case and the appeal. The difference between the offers to settle and the amount owed was substantial enough to justify that approach. Lesson, you need to be sure your agreement is clear and sound as stated above and that you have the financial and psychological stamina to go for three years. It is always a cost benefit analysis. In our case it was well worth it, but you need to be really tough, persistent and in control of your lawyers. You are trying to collect your money and the other guy is trying to play games to get you to take just a portion of what is owed to you.

Lesson. Do not think your litigator understands the business transaction. Likely he does not. You must be deeply involved in teaching him the case and in editing the briefs. Litigators go from case to case, and they are not businessmen. They are litigators. They are caught up in process and often miss the business nuances. Good litigators work collaboratively with their clients. However, they sometimes like to settle cases and move on. Courts like cases settled. Defendants count on that to cram you. It takes a lot of toughness to withstand the pressures. If you think you are really right, you can afford it, and the contract is very clear, and if the dollars are big enough, then fight. Otherwise settle.

Surety bond lesson, and the IRS. The IRS has had a lien on all of Thomas assets since 2009 for alleged failure to turn over payroll taxes, but has basically done nothing to collect. Instead they showed up at our hearing for the issuance of the bond in February 2011, and tried to seize the money which the receiver was about to deposit as collateral for the surety bond. The judge prevented that, stating that the appeal had not been heard so the case was not “ripe” yet. The IRS has a right to step in and seize your money that you just won in court unless it is protected. Yes –if the defendant owes money to the IRS, then the IRS can take your winnings before you get them. You spend 3 years and huge legal fees to collect, and the IRS just walks into court and says hand it over, and thanks for all your hard work. This is key. Once the cash was deposited by the receiver with the surety, it became collateral held by the surety to allow then to recover any money they paid to us. Here is the key. The surety obligation to pay the beneficiary of a bond is not property of the person subject to the IRS lien. The collateral is. Even though it is held by the surety as escrowed collateral, it is the property of the defendant until surety pays the beneficiary and seizes the collateral. The obligation to pay the beneficiary is completely apart from the collateral, and is an obligation of the surety to pay no matter what is happening to the collateral, and no matter what liens the IRS has on the defendant. The IRS cannot touch the payment from the surety to the beneficiary. The surety had no defense to paying us in full. Now it is between the surety and the IRS and the defendant as to who gets the cash collateral. We are completely out of that fight. My lawyers are Smith Gambrell & Russell.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.