My client (“Wolfgang”) ran a small construction business in the summer of 2007. He hired an attorney (“Attorney David”) to help him foreclose on mechanics’ liens he had recorded, because one of his customers didn’t pay him $50,000 for a construction job. The attorney helped him, but the litigation turned very ugly: the customer countersued for $250,000 in completion damages.

The legal bills mounted. From May 2007 to November 2007, Attorney David charged more than $100,000 in attorney fees. Wolfgang settled the countersuit by paying $40,000. He never expected that result: he had hoped to collect $50,000, not pay $40,000.

The recession hit too. Construction started to tank in the San Gabriel Valley in the spring of 2007; by the summer of 2007, Wolfgang had no new jobs, and realized he needed to sell his house and take other financially-protective actions. The bills that Attorney David was piling up? Wolfgang couldn’t keep up with them, but kept promising he’d pay Attorney David.

He and his wife discussed the situation over the fall. If we’re going to sell the house and move, his wife said, I want to go back to Luxembourg (where she came from) with the children.

His wife moved back to Europe in January 2008. Wolfgang sold his house the next month. He had also invested in a Pollo Loco franchise, and he tried to keep that going. He moved in with his mother in Calabasas for five months, then moved to Luxembourg to be with his wife and children.

Attorney David felt betrayed. Stiffed. Resentful. He sued Wolfgang for the fees and interest, now more than $150,000. Not finding Wolfgang in the US, Attorney David found an attorney and process server in Luxembourg. Wolfgang didn’t answer the lawsuit, and Attorney David figured out how to garnish Wolfgang’s Luxembourgish wages.

Somehow Wolfgang found me. I filed a bankruptcy case for him, and got him discharged of his debts. Even though Wolfgang lived in Luxembourg, there was enough reason to have the case administered in Southern California. The discharge would extend to the debt to Attorney David.

But Attorney David had other ideas: he sued Wolfgang in the bankruptcy court for nondischargeability of the debt, now more than $200,000. Specifically, he claimed that Wolfgang had defrauded him; he alleged that Wolfgang had misrepresented himself and case at the time he hired Attorney David, and had never intended to pay the attorney’s fees. A debt for services procured by fraud is not dischargeable under 11 USC Sec. 523(a)(2).

Attorney David’s case was weak. Wolfgang clearly breached the contract, but contract breach isn’t fraud. Fraud requires elements of knowledge (Attorney David would need to prove that Wolfgang knew he couldn’t or wouldn’t pay at the time he hired the attorney) and reliance (Attorney David would need to prove that he justifiably relied on Wolfgang’s promises). Nonpayment of fees is an occupational hazard for attorneys; we guard against this hazard by asking for fee deposits and making it clear that nonpayment is grounds to withdraw. Jay Foonberg, a coach for attorneys, memorably holds that it’s better to not work and not get paid than it is to work and not get paid, so don’t get stuck in the latter; he calls this “Foonberg’s Rule.”

Wolfgang was going to win, but the process could take months if not years. To try to settle the case, we went to mediation.

In mediation, a neutral party – here, another bankruptcy attorney – meets with both sides and tries to see if there is any ground on which to resolve the case. The case only settles if both sides agree to the terms of the settlement; otherwise, they leave the mediation and continue on to trial.

Attorney David made the first presentation in mediation: he reiterated the same settlement demand he had made six months earlier – payment of $5,000 a month for 20 months, a total of $100,000. My client rejected it out of hand because he could not commit to the payment schedule. I pointed out to the mediator that he had a tough job: Attorney David didn’t have a fraud case, and Wolfgang didn’t have assets. Wolfgang had little incentive to find a lot of money to pay for settlement, because he expected to win; and even if he lost, then Attorney David would be left with a piece of paper saying he was owed $200,000 or more, but no way to collect more than a fraction of that money.

Wolfgang did not display a compromising mindset. He found it unjust to pay one red cent to end the litigation: the truth was that he had not defrauded Attorney David.

Many people think that the justice system exists to find the truth, and then to act on it. Not so. The justice system exists to resolve disputes; it is a beautiful thing when our system of justice reaches a just and true result, but it’s entirely unnecessary that it do so.

If the justice system exists to resolve disputes, someone who is in a legal bind should recognize that he needs to think strategically and not expect the judge to find truth and vindicate him. Strategic thinking is as useful, if not more so, in a legal setting as in any other life interaction.

Wolfgang had a difficult situation: he had few assets to fight with. He had me, but my willingness to team up with him would evaporate when I had used up the $12,000 retainer I held in my trust account. His opponent was a retired attorney who showed himself willing – like Javert in Les Miserables – to follow Wolfgang back to the Old World. “Justice” doesn’t enter into the equation.

While he was dogged, Attorney David also showed himself to be a poor negotiator. After his presentation, he said that he was busy, and really wanted to settle this case because he had more important work to do than prepare for this trial. Not a good idea to back himself into a corner.

The parties ultimately settled for a payment of $20,000 by Wolfgang: half on signing the settlement agreement, and two payments of $5,000 each in 12 and 24 months.

Had the case gone to trial, it could have cost Wolfgang at least $20,000. He really faced the question of whom to pay: his attorney to defend him, or his former attorney turned tormentor. I have worked for clients who lived by the motto “millions for defense, not a cent in tribute.” However, when you are bankrupt, that motto is generally unhelpful.

Attorney David will need to question whether his effort was worth it. He spent untold hours attempting to get paid, drove Wolfgang into bankruptcy, and ended up with less than 10 cents on the dollar. That doesn’t look like a win to me.

On the other hand, Wolfgang had to pay up to get out of an almost frivolous lawsuit after filing bankruptcy. That does not look like much of a win to me, either.