1 June 2005

When Legal Action Doesnt Pay

It is counterintuitive, but the American legal system, at least as it involves civil (as opposed to criminal) suits really only allows for the successful prosecution of really small or really large causes of action. “Average”-sized lawsuits often can’t be prosecuted effectively due to the costs involved. What’s worse, many unscrupulous people and businesses recognize and take advantage of this circumstance.

Small lawsuits can be effectively prosecuted in the United States because of the existence of “small claims” courts in nearly all jurisdictions. These courts allow a lawsuit to be filed directly by the aggrieved party, without an attorney, for a nominal filing fee. Further, the requirements for filing, service of process and evidence are sufficiently relaxed as to allow an average lay person to file and successfully press a lawsuit without an attorney (assuming the merits support their claim). For example, last year a friend of mine had local shop damage the front spoiler on his Ferrari 348 Spyder when he brought it in for the New York state-mandated inspection. Of course, the shop claimed it “came in that way.” The damage was in the neighborhood of $2,200.

My friend filed a small claims action with guidance from the local courthouse clerk (but with no help from me). In the end, the shop was held liable (and did pay for) the damage in question, all within a few months and with less than $200 in total out-of-pocket expenses for court costs and the like. No better outcome could have been hoped for. The only catch is that the monetary jurisdiction of small claims courts (that is, the amount of damages they can award) is limited, and is usually no more than $3,000-$5,000. So there is an effective mechanism for prosecuting small lawsuits in the United States, but what of larger suits?

Larger lawsuits, by definition, can’t be heard in courts intended for small claims. As such, it becomes necessary to hire an attorney, strictly follow the rules of civil procedure and evidence, possibly pay expert witnesses and bear many other substantial costs. These costs can be as high for a $25,000 or $50,000 claim as they are for a $1,000,000 claim. In a major metropolitan area starting at $10,000-$15,000 to begin a lawsuit, with costs easily ranging to $50,000 or more to take the case through trial and even more if appeals or enforcement of judgments are required. Of course, none of this expense guarantees a victory, and in these more “serious” courts evidentiary and procedural issues make it more likely that a claimant whose case is strong “on the merits” may not be victorious. Further, the process can literally take years.

Now, when your lawsuit revolves around the million dollar Hemi ’Cuda convertible that turned out to be an engine-swapped 318, these costs are a rounding error in your damages and should be no impediment to filing suit. It’s when your damages are much less, but not low enough to be litigated in small claims courts, that the real problem arises. I once worked on a matter where a cut Ghibli was being sold as a legitimate Spyder, and if that matter were ever litigated – the delta in value being less than $50,000 – it would be a tough call whether to proceed with a lawsuit or simply write off the loss, all due to the high costs of litigation.

This isn’t to suggest that there’s no means of protecting yourself from this “caught in the middle” scenario. One option is, where possible (and should your credit limit allow), to pay for transactions in this range with a credit card, and then, should the transaction go bad, to pursue your claim through your credit card company’s dispute process. Another is to insist on an arbitration clause in the contract for any transaction in this range, as the arbitration process is much less costly (and faster) than traditional litigation. Most importantly, it’s necessary to conduct yourself with full knowledge of this “no man’s land” in the American legal system.

Alex Leventhal is an attorney and car collector living in New York City. His early practice experience included the representation of new-car dealers and dealer groups engaged in complex transactions, as well as other merger and acquisition business. Alex currently owns a Ferrari Berlinetta Boxer 365 GT4 and a Dino 308 GT4, along with an Aston Martin V-8 Vantage and other European collector cars. He's also director of the Aston Martin Club of North America.

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