Companies work with experts to secure litigation favorable judgments only to face obstacles to enforcement. By learning how to “think like a bad debtor,” creditors can work with specialists to pursue multimillion judgments and uncollected awards.
Companies often focus on securing a judgment but don’t put enough thought into how to actually recover the money or anticipate the unwelcome hurdles along the road to enforcement and recovery. When the losing side simply refuses to pay or hides its assets offshore, these “bad debtors” cause lost value on a massive scale. Unpaid judgment debt represents millions of dollars in unrealized cash value globally. Indeed, in 2020, a majority of in-house lawyers said their companies had unenforced awards valued at $20 million or more.1
Having already spent money on lengthy, often hotly contested litigation to reach the judgment or award, creditors often may understandably find further pursuing the enforcement too expensive. A legal finance partner with a dedicated team of specialists in corporate intelligence and asset recovery can help companies and law firms surmount the factual and legal obstacles to recovering favorable legal judgments and turn “legal paper” into cash. A financier like Burford can also fund that enforcement and recovery work. To understand how these professionals trace and recover assets, companies and law firms will find it advantageous to think like a “bad debtor”. Below are the most common bad debtor payment evasion tactics we see.
1. Dodging service and lack of fair hearing
Debtors create obstacles to enforcement by dodging service and moving to jurisdictions that make enforcement more costly, complex and time-consuming. For example, we commonly see judgment debtors in the UAE attempt to further delay proceedings by sending matters to the Joint Judicial Committee (JJC). The JJC was created by the Dubai Decree No. 19 of 2016 to mediate conflicting decisions between the Dubai International Financial Centre (DIFC) and the local onshore courts. By creating litigation in the opposing court system, bad debtors can derail progress on a matter by having it referred to the JJC to be resolved, a proceeding that can then take several months to determine which regime should apply.
2. Delay, stay, won’t pay
Cash is king. Judgment creditors experiencing litigation fatigue are frequently reluctant to throw good money after bad over a likely lengthy duration, without immediate signs of recovery. So bad debtors use any opportunity to draw out the enforcement process, aiming to rack up pursuit costs and delay collection until creditors eventually give up. Often, the debtor will relitigate or appeal the original issue that gave rise to the judgment either in their home territory or in a more debtor-friendly jurisdiction. Some jurisdictions offer multiple routes for appeal, which inevitably leads to further delays and increased costs. In cost-shifting jurisdictions, recalcitrant debtors can add cost to the process by making applications for money to be paid into the court as security for costs.
3. Poverty plea and asset cannibalism or dispersal
The first line of defense for bad debtors is often a poverty plea. This can be legitimate—the debtor may genuinely have no assets. Quite frequently, however, a poverty plea turns out to be a strategic falsehood intended to scare creditors. As one example of a poverty plea, a debtor could claim to be a beneficiary of a discretionary trust, in which the debtor has no entitlement to trust assets. Pursuing those assets requires proving that the trust is a sham, which often entails an expensive and time-consuming fight. Further, when a creditor identifies an enforceable asset, the debtor may then try to reduce the asset’s equity by leveraging against it. We commonly encounter debtors who claim that they can no longer afford their legal teams and need to secure legal expenses against the asset in question—effectively cannibalizing the asset so that it is no longer available for collection.
Another classic effort to thwart enforcement involves dispersing assets to third parties, often family members. Often, these transfers will be made for zero or nominal consideration and occur around the crucial time that the debtor learns it is vulnerable to proceedings.
4. Bankruptcy and champerty
Debtors may try to claim bankruptcy as an outright defense, which forces judgment creditors to get in line behind everyone else that the debtor owes and confront the inherent delays in the bankruptcy process.
A common tactic in funded enforcement actions is for debtors to make allegations of champerty, in other words, claiming that a legal finance partner is inappropriately benefiting from the funding arrangement. This usually generates press attention and adds frolic and delay around disclosure of the underlying funding agreements. Bad actors hope to drive a wedge between the judgment creditor and their legal finance provider in the hope that the financier will wither in the face of 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 to cause delay, this common law doctrine has decreasing relevance in modern legal practice and is thus primarily a delaying tactic. Champerty has been completely abolished in many jurisdictions, and in those few where it still exists, is not a barrier provided the financing adheres to public policy.
5. Lateral litigation and friends in low places
By filing meritless counter or competing claims, judgment debtors can create further hassle for creditors and drive down the settlement price. A common tactic is to manufacture 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 dummy claimant to win a separate judgment with the same underlying assets and take no steps to frustrate the enforcement, allowing the dummy company to claim the assets through this fictitious dispute and divert those assets away from the true creditors.
We often also find friends of the judgment debtor emerge out of the woodwork to either fund the debtors’ litigation or to claim that they are also owed money—diverting capital away from the available enforceable assets.
6. The forgotten, lost, destroyed and the created
In response to interim orders, debtors will destroy or manipulate evidence, fail to disclose assets, “lose” assets or create self-serving evidence. Judgment debtors tend to forget their most valuable assets when disclosing to the court, and localized fires, floods and accidents are common mishaps that seem to befall key documents.
Alternatively, the debtor will sometimes produce a purely exculpatory document. It’s often clear that the document’s appearance is not inexplicably fortuitous, rather the document has been created to prove a particular narrative. This is frustrating for creditors because either the ploy works or they must spend more time and money to prove the document is false. The documents don’t have to be particularly convincing to cause additional delay. We have seen debtors produce documents that purport to be from a particular decade only to find out the paper they are printed on wasn’t in circulation or the font used was not even invented at the time the document was purportedly created.
7. The freezing order flu
Finally, debtors or core witnesses conveniently become ill when payment is due or action is taken against them. It is common for creditors and their counsel to encounter medical sick notes intended to delay hearings when debtors are hit with an interlocutory injunction.
Financed asset recovery expertise can help claimants pursue successful enforcement
As judgment debtors grow more creative in using and combining the above tactics, pursuing enforcement strategies becomes lengthier, riskier and more expensive. This presents an entirely unappealing prospect to judgment creditors that have already been burned twice—first, by the initial litigation, and second, by the failure of the judgment debtor to pay the award or settlement.
Companies come to Burford to de-risk their judgment enforcement efforts. They do so not because they don’t have valid judgments and awards with strong underlying claims but because they want to concentrate on their core business—and not spend more capital chasing assets across jurisdictions. Working with a legal finance provider like Burford, with its own dedicated in-house corporate intelligence and asset recovery business, and with the capital to fund enforcement efforts, provides an all-in-one solution to companies pursuing bad judgment debtors. Combining capital and investment expertise with top-level global judgment enforcement allows creditors to avoid additional costs and to transform unenforced judgments or uncollected awards from “legal paper” into cash.
Salina Brindle is a Vice President in Burford’s asset recovery and commercial litigation business and is based in London. She was previously an associate at Moon Beever Solicitors (now Wedlake Bell), where her practice was in contentious insolvency with an emphasis on recalcitrant debtors, judgment enforcement and injunctive relief.
[1] Burford Capital. 2020 Legal Finance Report: A survey of in-house and law firm lawyers. https://www.burfordcapital.com/insights/insights-container/2020-legal-finance-report/