What Goes Around
Business owners who feel aggrieved often believe the courthouse is their first, best option. But business lawyers say that cool heads must prevail in such situations, and parties must always be aware of the potential for a counterclaim.
The deal with Interstate Litho Corp. was going to be the biggest of Marc Brown’s career.
Brown, a broker of new and used printing equipment, had entered an agreement with Brentwood, N.Y.-based Interstate to secure and recondition two used presses. The agreed-upon sale price was $2.6 million, which would earn Brown, who did business as Integra Technical Services, a tidy $200,000 in sales commissions and profits.
But Interstate Litho backed out of the deal at the 11th hour and eventually purchased a new press from a third party. Brown was frustrated, but essentially accepted his fate.
That might well have been the end of the story, but Interstate President Henry Becker decided to aggressively pursue the $75,000 deposit he put on the two machines Brown was going to sell his company. When Brown refused to return it, claiming the deposit was non-refundable, Becker took him to court over the money. In the course of finding the paperwork substantiating his claim that the deposit was non-refundable, Brown and his attorneys also came across a written agreement for the purchase of the two presses, a document that would become the cornerstone of a counterclaim against Interstate charging the company with breach of contract.
When the dust settled, a federal court jury in Boston awarded Brown a judgment totaling $227,029.
There is a moral to this story, said Keith Minnoff, a litigator with Springfield-based Robinson Donovan, who represented Brown: always beware the counterclaim!
"There are lessons here for both sides from this case," Minnoff told Business-West. "First, for companies filing claims, always think several moves ahead. And for the defendant, don’t be on the defensive; go on the offensive — as long as you have a case."
Minnoff and other lawyers we spoke with say they have dozens of examples where a defendant in one court action eventually became a plaintiff in another, and the party that originally brought suit wound up paying far more than it was originally seeking in damages.
"Companies have to think twice before they fire the first shot," said Minnoff, who told BusinessWest that many business owners who feel aggrieved are often quick to pull the trigger, especially when they don’t get paid in a timely fashion for services they provide.
Bob Murphy, a litigator with Spring-field-based Bacon & Wilson, concurred. He told BusinessWest that many business owners take a ’let’s sue the bastards’ attitude, especially when their products, services, or reputations are called into question or a customer is very late in paying a bill.
"That’s exactly when cooler heads need to prevail," he said. "When you go into the litigation process, you have to go in with your eyes open; you can’t — or shouldn’t — just run to the courthouse."
He said there is often a very good reason why a customer doesn’t pay when the bill comes due, and business owners must examine such situations with diligence and full honesty before telling their lawyer to file a claim. If they don’t, they’ll put their lawyer in a hole, and, much worse, they could endanger the company they’ve built.
That’s why it is incumbent upon business owners and their attorneys to weigh possible litigation as a business decision, one with possibly damaging repercussions.
"Sometimes, you just have to walk away, or even run away, from a suit," said Lisa Brodeur-McGan, a litigator with Springfield-based Cooley-Shrair. "You have to be smart and examine all the possible costs of a suit before going forward."
BusinessWest looks this month at a few intriguing counterclaims involving local companies, and the lessons they provide for all business owners.
Back at You
Minoff told BusinessWest that, while it might seem obvious to consider counterclaims before taking a case to court, area law firms have file drawers full of cases where a party failed to look before it leaped — or look hard enough.
The reason is obvious, he said — it is a logical reaction to seek redress when someone believes they’ve been wronged, and in this increasingly litigious society, the courtroom is considered the first, best option.
Brodeur-McGan agreed, and said that business owners should understand that there are some attractive alternatives — including a decision to simply walk away from a fight, especially when the many costs of taking up that fight haven’t been properly calculated.
Indeed, Brodeur-McGan said the first thing she does with a client or prospective client is look at what a case may cost that individual — in terms of legal fees, time spent away from their company while in court, and possible damage to the reputation of the person, the business, or both. This is all part of the process of determining whether it’s worth it to pursue a claim in court.
Part of this equation is consideration of possible counterclaims, she said, adding that, in some cases, prudent business owners are better off letting sleeping dogs lie or pursuing a more amicable method of seeking relief, such as mediation.
When a business or individual wants to bring a case to court, a good lawyer will urge his client to look at the matter rationally, said Murphy. "Both the business owners and the lawyers have a responsibility to step aside from the emotions of the situation and look at things objectively and go into any litigation process with their eyes open, because it is so consuming in terms of time, money, and emotion."
Brodeur-McGan said lawyers must play devil’s advocate and ask their client or potential client the right questions needed to keep that individual out of harm’s way. Often, this means asking that individual to be brutally honest when assessing why a customer hasn’t paid for goods or services or has failed to honor the terms of a contract.
"Often, there’s a very good reason," she said, "and the business owner has to look and find it. Sometimes, it’s not obvious; it may have nothing to do with the shipment that was just received, but the shipment from five months before."
In any event, a business or individual should always expect a countersuit and fully gauge the ramifications of such an action when pondering a suit, said Murphy.
He cited as a good case in point the example of a local business that sued a leasing company and manufacturer over allegedly faulty equipment.
"This company did two things that turned out to improvident," he said. "They stopped paying on the lease, and they pre-emptively filed suit against both the leasing company and the manufacturer, claiming defects.
"As a result of that action, counterclaims were filed, and the eventual outcome was that this local company sought bankruptcy protection because the leasing company prevailed on its claim that money was owed on the lease," he continued. The company could never really get into its arguments about the performance of the machine because what took precedence were documents it signed that spelled out the terms for inspecting equipment and accepting delivery — terms it violated.
"Did they have a valid claim against the manufacturer? Perhaps, but they still had an obligation to pay under the lease provisions," said Murphy. "So this was a situation where they either got some bad advice, or they thought the aggressive pursuit of this claim was the best route. What, in fact, it got them was a ticket to bankruptcy court, which was obviously not the intended result."
The leasing company wound up winning a settlement for the amount owed on the lease, about $80,000, said Murphy, but also its attorneys fees, as dictated in the lease agreement. Such attorneys fees are often a "big stick" in counterclaims, he told BusinessWest, and they are a factor that must clearly be weighed when contemplating a suit.
"This appears to be case where someone just didn’t consider the worst-case scenario; if they had, they probably wouldn’t have taken such an aggressive action," he said. "That’s one example where taking the most provocative stand and actually pre-emptively filing suit can come back and hurt a company. Any business person out there needs to know that counterclaims can and will be filed against them."
Brodeur-McGan said there are a number of factors she and her clients consider when they weigh potential suits. These include the strength of the claim, obviously, the hard costs of pursuing it (everything from filing fees to attorneys fees), and the ability to recover damages. "You have to add it all up and decide if it’s worth your time and trouble."
Another factor that goes into that decision is what she called "the risk of adverse action by the person you’re suing," or counterclaims. And that’s why parties should look at all their options, including less-aggressive methods of seeking redress.
These include mediation and binding arbitration, which are almost always less costly and less stressful than court cases. "If you resolve something without a lawsuit, that can often tone down the emotions," she said.
Minnoff agreed, and said that often, it isn’t until a party becomes a defendant in one action that it decides to become a plaintiff in another. He cited a case involving a parcel of land on Riverdale Road in West Springfield as a good example.
In the case, Sunoco Inc. (R&M) v. Makol Family Limited Partnership, Sunoco brought suit against Makol for not honoring an option agreement signed when Sunoco entered into a long-term lease with Makol in 1993 to operate a gas station, car wash, and convenience store on the commercial property. That option allowed Sunoco to purchase the property in 2000 for $1.75 million.
Makol claimed it refused to honor the option because Sunoco subleased the car wash operation to F. L. Roberts, a step not allowed in the lease agreement.
When Sunoco filed suit seeking a declaratory judgment that its option had not been terminated and an order requiring Makol to sell the property at the option price, Makol quickly counterclaimed, seeking 50% of the rents collected by Sunoco from Roberts under the improper sublease.
Sunoco and F. L. Roberts representatives tried to prove that Makol knew of the arrangement between those companies from the outset and never objected until just before the option period. Meanwhile, Sunoco argued that it never would have agreed to split the sublease rents with Makol and, if necessary, would have operated the car wash itself.
But a jury saw things differently and, following a four-day trial, awarded Makol $231,000 — about half the rents received by Sunoco from Roberts between 1993 and 2002 — and the court added $124,000 in pre-judgment interest and $86,604 in attorneys fees, for a total award of $440,630.
Minoff, who represented Makol, said he couldn’t say with any certainty whether his client would have pursued his claim if Sunoco hadn’t forced the matter of the option agreement, but it’s very possible that Makol would have not have pressed its claim if not provoked.
"You don’t want to nudge an angry snake," said Minoff. "That’s how many counterclaims get started."
And while the sum eventually paid in the Makol case might have been worth the risk for a large corporation trying to acquire valuable property on Riverdale Road, most smaller companies can’t easily afford the costs of a successful counterclaim, said Minoff. And that’s why business owners and their lawyers must think possible legal action through before rushing to the courthouse.
Business owners should never easily forfeit their rights, he continued, but they should put possible court action in a business context. Henry Becker took a gamble and lost, he said — all for a $75,000 deposit. That’s not an insignificant amount of money for most businesses, but Becker’s actions wound up being penny-wise and pound-foolish.
Murphy told BusinessWest that many counterclaims that are filed turn out to be meritless — actions taken by defendants in an effort to cut their losses or make gains when they are not entitled to any.
But a good number of such suits do have merit, and they can change the fortunes of the parties in a legal action in a hurry, he said.
That’s why companies and individuals need to think several moves ahead in whatever legal chess game they’re playing, and always consider the worst-case scenario.
In the case of Marc Brown and Interstate Litho Corp., the company’s greed and its haste in filing suit wound up costing it three times the amount it had originally sought — a $300,000 swing — giving Brown an even bigger payday than he had imagined.