TSL TRENDING STORY
Meaningfully Predicting & Evaluating Litigation Risk
By Zachary G. Newman, Litigation Partner, Hahn & Hessen LLP
Corporate counsel criticize the litigation process citing the costs, delay, and unpredictability as difficult factors to measure, rely upon, and forecast. A recent informal survey of in-house counsel and credit officers at institutional lenders and private credit companies revealed that just about every stakeholder agrees that litigation is expensive and that their outside counsel – although reported as being effective and knowledgeable – cannot reasonably appreciate the expense pressures felt by in-house counsel and the frustration within the business units of what they perceive as a lack of proportionality and reasonableness.
Furthermore, prolonged litigation materially weighs on the resources of the lending units as witnesses are required to support and participate in the litigation, and participate in the extraordinarily expensive and invasive modes of discovery. This frustration is not entirely the fault of the litigation process, difficult adversaries, or the effectiveness of your own litigation counsel but, rather, a failure of lenders and their counsel in effectively managing pre-litigation disputes and active litigation matters. With interest rates on the rise, and the historical low default rates in commercial credit facilities, workout departments should be already dusting off and sharpening their workout tools in order to be fully prepared for the wave of oncoming troubled loans.
Accordingly, in that vein, this article challenges you to reconsider your evaluation of litigation matters, and to avoid falling into the trap of traditional risk analyses, and to engage processes that will better and more accurately account for the unpredictability, costs, and hazards of litigation. Lenders and their outside counsel need to dispel themselves of the notion that litigation is a single track and that the only way to evaluate to litigation is to consider how to complete that one-way journey. Therefore, we encourage you to re-evaluate how you have been approaching litigation, and to employ more dynamic, transparent, and novel evaluative and monitoring solutions.
Recognizing The “Problem”
Lenders must carefully monitor the risk profile of its client and, at the same time, constantly evaluate and refine the exit strategy with meaningful input from in-house and outside counsel. The prior economic cycles and increased regulatory regimes have yielded even more robust and intricate standards, thereby enhancing and strengthening underwriting, credit review, and loan administrative guidelines. Credit and risk officers in all financial institutions have been compelled and, in many instances, motivated to refine and redefine how risk and credit is evaluated, monitored, and managed at their respective credit institutions. At the same time, workout professionals have benefitted from the heightened scrutiny and the seemingly more unified critical analytics that are being employed on the front-end of the deal and throughout its administration.
The increased scrutiny, however, does not seem to be transferring over to the analysis and oversight employed for litigated matters. Thus, while credit and risk officers are tasked with meaningfully evaluating litigation risk prior to litigation, too often the litigation process dispenses with carefully constructed objectives, budgets, and outcomes, creating a palpable frustration and unsatisfied expectations for lender and outside counsel alike.
The problem is that when a credit is assigned or referred to litigation counsel there are no governing standards or analytical systems in place to uniformly and accurately predict and analyze litigation risk and progress, and the stakeholders likely have reached a point of no return with respect to a negotiated resolution. For example, when the call is made to the litigation lawyers to enforce the default, too often the message conveyed or interpreted is to resort to judicial intervention without further regard to alternative solutions.
Given this fact, the litigation assessments being done are tremendously subjective and independent of prior matters or the client’s true objectives. Litigation proceeds without having predetermined “review points” and objectives are not necessarily clearly and specifically defined. If a lender presented five outside counsel firms with a similar fact pattern and requested each law firm to provide a comprehensive analysis of the case and detailed budgeting and predictability models, lenders would likely receive a wide array of predictions, differing cost projections, and varying strategies. How can lenders reconcile these analyses? Does the fact that the law firms being consulted for litigation are inherently conflicted to provided non-litigation solutions? And, how can lenders reasonably ascertain whether the assumptions being used by the law firm have a minimum degree of reliability and certainty?
Building a Better Mouse-Trap
Lenders should utilize and rely upon the same criteria and standards to evaluate and justify litigation at the beginning of the matter and during critical benchmarks throughout the litigation. Litigation forecasting and strategy has to be addressed not only at the beginning of the relationship but consistently throughout the matter in order to be relied upon as an effective resource and modeling tool. Otherwise, the litigation is simply traveling down the train tracks without regard to how much energy is being consumed or the distance to the next station. Business units should not be encouraged to participate only in the discovery phases to help with testimony and document assembly but, rather, these units should be involved in consistent assessment, analytical, and cost-review measures.
Furthermore, this level of forecasting and strategy should not wait until the particular matter is in or nearly in litigation. Lenders should be inviting their outside counsel to advise as to enforcement strategies, court procedures and delays, and industry trends much earlier in the process and with respect to the applicable market segments. Traditionally, the litigation analysis is sought well after the commencement of the process to have a valuable or significant impact on decision-making and strategy.
Lenders and their outside firms must be committed to developing and relying upon reasonable and consistent metrics that analyze both the legal and business objectives in real time and with consideration of ongoing and projected costs, reasonable outcomes, and institutional investment. When approached, many lenders believe they already are engaging in this type of analysis, but further inquiry demonstrates that it is not being done with any degree of specificity, transparency, or legitimacy. Lenders and their outside counsel rarely conduct periodic reviews and post-mortems which can provide insight as to the effectiveness, costs, and impacts of certain strategies. It also can provide the opportunity during the representation to change direction, to abandon claims or defenses, or to attempt alternative resolutions. This level of self-awareness is rarely achieved out of concern about the process becoming too critical or by simply blaming the litigation spend on delay or other aspects of the process itself.
One prime example of where the litigation process regrettably and consistently overwhelms and, in many instances, obscures the goals and objectives is the discovery process. Discovery has become a ‘black-hole’ requiring an ever-increasing devotion of resources and time. Discovery disputes are rampant and typically commercial litigation parties spend more time involved in addressing discovery disputes than any other aspect of the litigation process. In a recent article, A Challenge to Corporate Counsel to Regain Control of the Discovery Process, this author wrote that
[t]he discovery phase of litigation dominates too many lawsuits, resulting in significant and unpredictable costs and little progress. As economic and business pressures intensify, the costs associated with and resources dedicated to discovery continue to attract scrutiny from clients and the courts.
Discovery is becoming so difficult to manage efficiently that effective corporate litigators should consider whether they actually are contributing to the problem. The costs associated with petty and unfruitful discovery disputes are complicated by the ever-growing availability of and disputes over electronically stored information (ESI). “ESI is now a common part and cost of business.” United States ex rel. Guardiola v. Renown Health, No. 3:12-cv-00295-LRH-VPC, 2015 WL 5056726, at *5 (D. Nev. Aug. 25, 2015). Furthermore, while “parties to litigation would be much better off if they did not have to disclose certain evidence under their control ... this is not the state of affairs intended by our adversarial system, nor is it amenable to [the] rules of discovery.” Huggins v. Fed. Express Corp., 250 F.R.D. 404, 405 (E.D. Mo. 2008) (negative history omitted).
Applying Consistent Reviews and Forecasting to Justify Litigation
Because traditional risk assessment in the litigation process has been fundamentally less defined and structured than the credit and underwriting assessments employed at the beginning, and during the administration, of the credit, lenders’ discontent and frustration with the litigation process is understandable and frankly expected. Lenders have to insist upon their outside counsel to analyze the litigation consistently and repeatedly using similar metrics relied upon in credit underwriting and risk assessment.
Outside counsel should be involved as early in the process in order to provide a real-time assessment of the court process, the sophistication of adversary counsel, and the identification of hurdles to an expeditious resolution. These and many other factors need to be provided to the lender in a comprehensive and analytical way to enable lenders to participate in and encourage receipt of reliable, adaptive metrics that can be evaluated at critical stages in the litigation.
There needs to be an exchange that marries the subjective perspectives of each of the stakeholders, as well as the financial, reputational, and business impacts of every litigation. This exchange needs to consistent and flexible enough to accommodate to the changing tides of litigation and shifting views of the stakeholders. Also, because the analysis of risk with respect to litigation is generally idiosyncratic, the identification of metrics and recommended course of action could vary from matter to matter.
The analysis needs to be multi-dimensional and adaptable, and address the goals and objectives for each of the primary stages of litigation, including, for example, pleading, document discovery, depositions, settlement, and trial. Suggestions for immediate implementation include the following:
- During the initial credit review include in-house and outside counsel to formulate and discuss available exit strategies using varied assumptions and cost analysis;
- Upon the violation of any material covenant, event of default, or credit policy, analyze the applicability and effectiveness of the available exit plans and the procurement of releases and acknowledgements,, and re-examine the cost estimates to place the litigation option into appropriate perspective;
- Consider engaging in alternative dispute opportunities during forbearance and pre-litigation phases; and
Implement periodic, substantive reviews of the litigation process encouraging litigation counsel to devise the most economic resolution; to expedite and avoid disputes in discovery; and to challenge the business units to play a material role in each phase and the analysis thereof.
- Without appropriately set boundaries and workflow plans, the litigation simply will meander to the detriment of the client’s goals and objectives. Cost and benefit analyses should be employed at each critical work phase so that the litigation process does not overwhelm the value in reaching the client’s objectives and goals. This can only work if both the client group and the outside firm approach litigation with a novel and nontraditional perspective aiming to reach that goal with as little resistance as possible.
Lenders and their outside counsel need to become more progressive and cooperative in their analysis and tactical planning. The historical approach of the litigators receiving the case and proceeding until the case is over or they are told to stop needs to be revamped or even replaced with a more collaborative and authentic analysis that will provide periodic open discussion and assessment that will prove valuable to each decision made in the litigation. A unified and informed approach will ensure fulfillment of objectives and goals for lenders and their law firms, and create more interactive, symbiotic, and coordinated relationships. This revamped and collaborative approach to litigation, when applied will encourage a discussion of potential disputes as early as during the initial underwriting phases, yield more dynamic and transparent strategy and exit plans, and ultimately reduce lenders’ legal spend and provide a informed, balanced, and justified litigation plan.
Zachary’s trial and appellate practice concentrates on Banking Litigation, Commercial and Corporate Litigation, Fiduciary Litigation and Collateral and Judgment Recovery. Zachary delivers practical, tactical, and experienced advice to the Firm’s corporate, lender, fi duciary, and hedgefund clients, and, though based in New York, he often is asked to serve as lead counsel elsewhere and he has done so in such jurisdictions as Arkansas, Connecticut, Delaware, Georgia, Indiana, Massachusetts, New Hampshire, New Jersey, Pennsylvania, and Texas.