Venue Issues and Arbitration vs Litigation

It is far less expensive (as much as 90%) to litigate in the courts than to go to arbitration.  And it is less expensive (as much as 80%) and faster to litigate or arbitrate where the debtor is located compared to the Creditor’s home state.  We find that Creditors whose own contract requires arbitration in their home state typically end up closing claims because the extra cost caused by this provision is too much to justify.  This causes Creditors to lose money that most likely would have been recovered if they had been able to use our contingency attorney network to sue in the debtor’s state. In some cases, Creditors will choose to sue where the debtor is located, even if they have these arbitration/venue issues in their contract, but there are risks to that approach as described further below. 

The solution going forward is very simple.  Modify your contract to indicate that the Creditor has the sole discretion to choose litigation or arbitration and also to choose whether venue will be in the Creditor’s home state or where their customer is located.  This is discussed further below in detail, and we will discuss the various costs and alternatives available to Creditors even if their contract requires arbitration in their home state.

The tables below provide an average cost comparison for claims under $75,000 and claims over $300,00.

Average Costs For Claims Under $75,000

	Litigation In Debtor’s State	Arbitration In Debtor’s State	Litigation In Creditor’s State	Arbitration In Creditor’s State
Filing Fees	$800	$1,725	$800	$1,725
Paying Judge/Arbitrator Hourly*	–	$3,000	–	$3,000
Non-contingent Fee	$250	$1,000	$2,000	$4,000
Domestication Fees			$500	$500
Total Cost	$1,050	$5,725	$3,300	$9,225

Average Costs for Claim Size $300,000 – $500,000

	Litigation In Debtor’s State	Arbitration In Debtor’s State	Litigation In Creditor’s State	Arbitration In Creditor’s State
Filing Fees	$800	$8,250	$1,000	$8,250
Paying Judge/Arbitrator Hourly*	–	$5,000	–	$5,000
Non-contingent Fee	$250	$1,000	$2,000	$4,000
Domestication Fees	–	–	$500	$500
Total Cost	$1,050	$14,250	$3,500	$17,750

Venue Choice – Impact On Costs and Timing

If litigation or arbitration takes place in the state where the debtor is located, the attorney who gets the judgment can then proceed with court ordered judgment collection efforts in that state.  Thus, they are generally willing to work primarily on a contingency basis, with the client only having to pay the out-of-pocket costs. 

But, if litigation or arbitration takes place in the state where the Creditor is located, once the judgment is obtained, if the debtor does not voluntarily pay, then

• the judgment has to be domesticated to the state where the debtor is located;
• the domestication process typically costs a few hundred dollars and takes a few months;
• a new attorney must be hired in the debtor’s state, typically on a contingency basis, for court ordered judgment collection efforts.

In this scenario, the attorney who files the lawsuit or arbitration in the Creditor’s state is going to want a large non-contingent fee or charge hourly.   That’s because if the debtor doesn’t voluntarily pay, the attorney will not be able to do the court ordered judgment collection efforts in the debtor’s state and won’t make any money from the contingency fee they charge on the amount collected.

The typical arrangement is a non-contingent fee of $1,500 to $2,500 for an undefended case (i.e., seeking a default judgment), and hourly on top of the initial fee if the debtor defends the case and requires a trial. This is the only way the attorney can get compensated for their effort since they can’t earn a contingency fee if the debtor doesn’t pay voluntarily.  There will still be a contingency fee quoted in the event of voluntary payment, and the non-contingent and hourly fees paid may or may not be credited towards the contingency fee earned.

Arbitration Costs Compared to Litigation

The filing fees for arbitration are much higher than for litigation, as shown in the table below:

Claim Size	Under $75,000	$75k – $150k	$150-$300k	$300-$500k
Litigation Filing Fees	$800	$800	$800	$800
Arbitration Filing Fees	$1,725	$3,300	$5,100	$8,250

In addition to the filing fees, arbitration has other costs that are significantly higher compared to litigation. If litigation is filed in state or federal court, there is no charge for the judge’s time.  But arbitrators charge hourly, typically in the $350 to $600 per hour range.  There is a 4-hour minimum, but this can increase substantially, especially if the case is vigorously defended by the debtor.  If the contract requires 3 arbitrators, then each is paid hourly, and the cost is triple what it would be with 1 arbitrator.

Even if the debtor does not defend the case, the arbitrator may spend more than the 4-hour minimum on the case.  In the courtroom, a judge will typically issue a default judgment without an intensive, through review, so long as simple, appropriate documentation of the debt is provided along with an affidavit executed by the Creditor.  But, in arbitration, the arbitrator has the right to insist that the Creditor’s attorney present a full presentation in-person as if the debtor were defending the case, which will cause the attorney to charge hourly for this extra effort plus increase the amount the arbitrator charges.

Litigating in Debtor’s State Even When Contract Requires Arbitration or Venue in Creditor’s State

In many cases, because the cost is so much less, Creditors will choose to litigate in the debtor’s state even if their contract requires arbitration and/or venue in Creditor’s state.  If the debtor does not object, then a judge may agree to issue a default judgment.  Or, the debtor may consent, because they may want to defend in their state, which is easier for them, or they may not want to be responsible for arbitration costs that could be awarded in a judgment or required to be split per the Creditor’s contract.

However, if the debtor objects, it is extremely likely that the judge will dismiss the lawsuit AND also award attorney fees to the debtor for their cost to have an attorney fight to dismiss the case.  An attorney fee award can be $2,000 to $5,000 (or more).  If the case is dismissed, the Creditor still has the right to file as required by the contract, so they can still pursue the debt.  But they will be out the costs associated with this initial filing.

We cannot guarantee that we can get an attorney to file litigation when the contract requires arbitration, or to file in the Debtor’s state when the contract requires the Creditor’s state.  Or, they may charge a non-contingent fee of $1,000 or more because of the risk the case will be dismissed.

In cases where the debtor was aggressively defending their position during the collection process, disputing the quality of services, it probably is not a good idea to try the case differently than what is in the contract.  If the debtor never responded, or simply claimed financial hardship, then there is less chance they will fight the case and a default judgment would then be awarded.  Ultimately, the decision is up to the Creditor based on the quotes The Kaplan Group can provide and understanding the risks involved in this approach to save money in getting a judgment.

Why Is Arbitration And Creditor Venue So Common In Contracts?

Typically, all filings in litigation are public record.  Most companies prefer that any conflict with customers be in private, without the rest of the world knowing about the situation, the claims, the defenses, etc.  Arbitration is private.  In many types of cases, it may also be less expensive than litigation.  But as described above, that is not true for most collection matters.

If there is a big dispute between a Creditor and their customer, it will be easier for the Creditor and harder for the customer if the case is tried where the Creditor is located.  This is a good reason for Creditor’s to choose local venue if they have the option.  But, as described above, this provision will also make it more expensive to pursue an unpaid invoice.  In many cases, it is prohibitively expensive.