Business Litigation Settlement gavel in courtWays Filing a Lawsuit Can Help Secure a Prompt and Enforceable Settlement

While it’s true that litigation can be an extremely expensive means of dispute resolution, and that prompt, voluntary settlements are almost always preferable to extended litigation, it is also true, paradoxically, that filing a lawsuit can be the best way to settle a dispute promptly and effectively.  This is so for two reasons.   First, when you file and serve someone with a lawsuit, you get their attention, and you bring them under the jurisdiction of the Court; they cannot safely ignore you.  Rather, they must respond to your complaint, respond to discovery, etc., all of which will cost them time and money, with is itself an incentive to settle.  And If they DO ignore you, and fail to respond to the Complaint, you can take their default, “prove-up” damages, and get an enforceable judgment.  When the Court enters judgement, you can move to collect your money using all the procedures authorized by law for enforcement of judgments, including placing liens on real property, attaching bank accounts, garnishing wages, etc.   The judgment will be on their credit report for a number of years, a matter of public record, and will adversely affect their reputation.  Therefore, most people and businesses, if they have any assets, a good reputation, or a decent credit score to protect, will not ignore your lawsuit.  You will get your attention, and you will get them under the jurisdiction of the Court.

Second, even if you are dealing with someone who is NOT ignoring you, and has already expressed a willingness to discuss settlement, filing a lawsuit can help make a settlement enforceable, with the Court’s assistance. As our business litigation attorneys explain, this can be done in various ways including:

1) Specifying in a written settlement agreement that it will be enforceable by the Court pursuant to California Code of Civil Procedure Section 664.6, and then requesting the Court to maintain jurisdiction over the case until the settlement has been paid in full; or

2) Specifying in the Settlement Agreement that it is to be secured by a “Stipulation for Entry of Judgment”, and which by its terms will be filed with the Court and enforced only if the paying party defaults on his payment obligations under the Settlement; or

3) Entering a Stipulation for Entry of Judgment for immediate filing and enforcement, a so-called “Confession of Judgment”.

All of these methods result in settlements that are enforceable against the settling parties by a Court which already has jurisdiction over the parties.

In contrast, where no lawsuit has been filed, any unsecured settlement agreement is simply another “promise to pay”.  If the settling party does not pay as promised, you have to file a lawsuit, and serve the lawsuit, and then prove the case.  Even if it’s a “slam dunk”, and includes a provision authorizing attorney’s fees to the prevailing party, it is typically not as fast and effective as enforcing settlement where the Court already has jurisdiction.

A Real Life Scenario

The following example will help illustrate how a “stipulation for entry of judgment” can be used effectively.

Suppose Party A claims that Party B has breached a $75,000 contract for services by paying only a first installment of $10,000, after receiving the full promised services, and thereafter making no payments on the $65,000 balance due.  If Party A merely threatened to sue Party B, but reached an agreement to accept $65,000 in compromise settlement of the remaining $65,000 debt before filing a lawsuit, said settlement could be reduced to a writing, perhaps supported by a promissory note with party B promising to pay $65,000 by a date certain, plus interest, providing that if Party A is forced to file suit to collect on the settlement agreement/promissory note, Party A is entitled to collect attorney’s fees. In some cases, your business litigation lawyer may feel that this is a pretty good settlement structure. However, it still requires that, if Party B fails to voluntarily comply with the settlement, Party A file a lawsuit, and serve the lawsuit on Party B, to give the Court jurisdiction over the parties.  Party B could still delay the process further by evading service, or by filing pleadings challenging the complaint on some contrived grounds.  In short, Party B can delay and evade.  Party B may be well-hooked, but there is still wiggle room, still some “play in the line,” which can cause significant delays and drive up costs to Party A.

By contrast, if Party A had filed suit immediately, and served Party B with the Complaint, such that there was a lawsuit on file by which the Court had jurisdiction over the parties….then the same $65,000 settlement could be secured by a “Stipulation for Entry of Judgment”, providing that, in the event of any default in payment of the settlement, Party A could immediately file the Stipulation and ask the Court to enter judgment against Party B in the amount of $65,000 (for example), pursuant to the stipulation between the parties.  Since the Court would already have jurisdiction, entry of judgment would not require any participation by party B, and once the judgment was entered, Party A could immediately begin collection procedures, such as filing liens, attaching back accounts, garnishing wages, etc.—efforts that may be months or years off if Party A had not filed a lawsuit early on. The Stipulation For Judgment could include interest, and even reasonable attorney’s fees.

Experienced Business Litigation Attorneys can Help Secure a Prompt, Enforceable Settlement

An experienced business litigation lawyer can help you decide when a lawsuit should be filed, even where litigation is not likely, in order to secure a more prompt or enforceable settlement.  It is not always advisable to file a lawsuit at the outset of a dispute, of course. Likewise, the drafting of settlement documentation, whether pre-lawsuit or post-lawsuit, is tricky, and settlements sometimes turn out to be difficult or impossible to enforce, or subject to legal attack.  For example, the common technique of securing a settlement with a “stipulation for entry of judgment” that is much larger than the settlement amount, with the idea that this will encourage the settling party to comply with the settlement, is risky.  California Courts have invalidated such arrangements where it appears that the much larger amount of the stipulated judgment bears “no reasonable relationship” to the harm caused by the breach of the settlement agreement.  See, e.g. Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal. App.4th 495 (Cal.App., 2008).  If the Court finds that the stipulated judgment is an unfair “penalty”, it may refuse to enforce the judgment, and the settlement agreement will remain unsecured.

The business litigation lawyers at Gehres Law Library can help you achieve a prompt and enforceable settlement of your business dispute. Contact us for a free evaluation or browse our website for more information.