Companies work with experts to obtain favorable judgments in litigation only to deal with obstacles to enforcement. By learning to “think like a bad debtor,” creditors can work with specialists to secure multimillion-dollar judgments and uncollected damages.
Businesses often focus on getting judgment, but don’t put enough thought into how to actually collect the money or anticipate unwanted obstacles in the way of enforcement and collection. When the losing party simply refuses to pay or hides its assets offshore, these “bad debtors” lead to large-scale loss of value. Unpaid court debts represent millions of dollars in unrealized redemption value globally. Indeed, in 2020, a majority of corporate lawyers said their companies had outstanding awards worth $20 million or more.1
Having already spent money in lengthy and often highly contested litigation to reach judgment or award, creditors can often rightly find continued enforcement too costly. A legal finance partner with a dedicated team of business intelligence and asset recovery specialists can help corporations and law firms overcome factual and legal obstacles to recovering favorable legal judgments and transform the “paper legal” in cash. A financier like Burford can also fund this application and recovery work. To understand how these professionals trace and recover assets, companies and law firms will have to think like a “bad debtor”. Below are the most common payment evasion tactics we see.
1. Dodging service and lack of a fair hearing
Debtors create barriers to enforcement by dodging service and moving to jurisdictions that make enforcement more expensive, complex and time-consuming. For example, we often see judgment debtors in the UAE attempt to further delay proceedings by referring cases to the Joint Judicial Committee (JJC). The JJC was established by Dubai Decree No. 19 of 2016 to arbitrate conflicting decisions between the Dubai International Financial Center (DIFC) and local onshore courts. By creating litigation in the opposing legal system, bad debtors can derail the progress of a case by sending it back to the JJC for resolution, a procedure which can then take several months to determine which regime should apply.
2. Delay, stay, won’t pay
Cash is king. Judgment creditors who experience litigation fatigue are often reluctant to throw good after bad over a likely long period of time without immediate signs of recovery. Thus, bad debtors take advantage of any opportunity to prolong the enforcement process, with the aim of racking up litigation costs and delaying collection until creditors eventually give up. Often the debtor will challenge or appeal the original issue that gave rise to the judgment, either in its home jurisdiction or in a jurisdiction more favorable to the debtor. Some jurisdictions offer multiple avenues of appeal, which inevitably leads to additional delays and increased costs. In jurisdictions where costs are transferred, recalcitrant debtors can add costs to the process by asking for sums of money to be paid to the court as security for the costs.
3. Plea of poverty and cannibalism or dispersal of assets
The first line of defense for bad debtors is often a poverty plea. This may be legitimate – the debtor may genuinely have no assets. Quite frequently, however, a poverty plea turns out to be a strategic lie intended to scare off creditors. As an example of a poverty plea, a debtor might claim to be a beneficiary of a discretionary trust, in which the debtor has no right to the assets of the trust. Pursuing these assets requires proving the trust to be a sham, which often involves a costly and time-consuming fight. Further, when a creditor identifies an enforceable asset, the debtor may then attempt to reduce the equity of the asset by relying on it. We frequently come across debtors who claim they can no longer pay their legal teams and must secure legal fees against the asset in question, thereby cannibalizing the asset so that it is no longer available for collection.
Another classic effort to thwart enforcement is to distribute assets to third parties, often family members. Often these transfers will be made for no or nominal consideration and will occur at the crucial moment when the debtor learns that he is vulnerable to lawsuits.
4. Bankruptcy and champerty
Debtors may try to claim bankruptcy as an outright defense, forcing judgment creditors to line up behind whatever the debtor owes and deal with the delays inherent in the bankruptcy process.
A common tactic in funded enforcement actions is for debtors to make claims of champerty, in other words, claiming that a legal financial partner is improperly profiting from the funding arrangement. This usually generates press attention and adds frenzy and delay around the disclosure of the underlying funding agreements. Bad actors hope to drive a wedge between the judgment creditor and their legal financing provider in the hope that the financier will wither away from public coverage and potential disclosure obligations and leave the judgment creditor without a line of financing. Despite the continued use of champerty as a means of causing delay, this common law doctrine has diminishing relevance in modern legal practice and is therefore primarily a delaying tactic. Champerty has been completely abolished in many jurisdictions, and in the few where it still exists, is not an impediment provided funding adheres to public order.
5. Side Disputes and Friends in Low Places
By filing counterclaims or competing claims without merit, judgment debtors can create additional hassle for creditors and lower the price of settlement. A common tactic is to fabricate a dispute between the company whose money or assets are frozen against the judgment debt and a company that the judgment debtor also controls. The judgment debtor would then allow its fictitious plaintiff to win a separate judgment with the same underlying assets and take no action to prevent enforcement, allowing the fictitious company to claim the assets through that fictitious litigation and divert these assets from the real creditors.
We also often find friends of the judgment debtor coming out of the woodwork to fund debtors’ litigation or to claim that they are also owed money, thereby diverting capital from available enforceable assets.
6. The forgotten, the lost, the destroyed and the created
In response to interim orders, debtors will destroy or manipulate evidence, withhold assets, “lose” assets, or create self-serving evidence. Judgment debtors tend to forget their most prized possessions when disclosing them in court, and localized fires, floods and accidents are common occurrences that seem to occur in key documents.
Alternatively, the debtor sometimes produces a purely exculpatory document. It is often clear that the appearance of the document is not inexplicably coincidental, but rather that the document was created to prove a particular narrative. This is frustrating for creditors because either the scheme works or they have to spend more time and money proving the document to be fake. Documents don’t need to be particularly compelling to cause additional delays. We have seen debtors produce documents purporting to date from a particular decade only to find that the paper they were printed on was not in circulation or that the font used had not even been invented at the time the document was supposedly created.
7. The Freezing Flu
Finally, debtors or key witnesses conveniently fall ill when payment is due or action is taken against them. It is common for creditors and their attorneys to encounter sick notices intended to delay hearings when debtors are hit with an interlocutory injunction.
Funded asset recovery expertise can help claimants successfully pursue enforcement
As judgment debtors become more creative in using and combining the above tactics, pursuing enforcement strategies becomes longer, riskier and more expensive. This presents an utterly unattractive prospect for judgment creditors who have already been burned twice – first, by the original litigation, and second, by the judgment debtor’s failure to pay the award or settlement.
Businesses come to Burford to reduce risk in their judgment enforcement efforts. They do this not because they don’t have valid judgments and decisions with strong underlying claims, but because they want to focus on their core business and not spend more capital looking for assets in other jurisdictions. Working with a legal funding provider like Burford, with its own in-house business dedicated to business intelligence and asset recovery, and with capital to fund law enforcement efforts, provides an all-in-one solution. in-one to businesses suing ill-judged debtors. Combining capital and investment expertise with world-class judgment enforcement allows creditors to avoid additional costs and turn unexecuted judgments or uncollected awards into “legal paper” cash.