Simon PLC Attorneys & Counselors – June 2024 Special Memorandum Analyzing your Litigation Risk

Simon PLC Attorneys & Counselors – June 2024 Special Memorandum

Analyzing your Litigation Risk

Troy, Michigan – At many times in its history, our Firm has been honored to employ current and former in-house counsel from financial institutions as Senior Attorneys at the Firm. Our clients, and the Firm alike, have always benefitted from their insights and experience to make sure we deliver efficient and value-added legal advice which recognizes the customer, budget and cost center demands of our clients. Kenneth L. Urwiller II, Esq is one such valued member of our Team. With an outstanding career working for local Michigan and ultimately National Bank Associations, Ken brings his particular knowledge to the daily matters encountered by our clients. We are proud to share, and republish with Ken’s permission, his excellent memorandum:

Analyzing Your Litigation Risk

Banks and credit unions, regardless of size, are in the business of risk. Every loan an institution makes, every deposit it accepts, every withdrawal it facilitates, every interest rate it sets, every operational software it employs, every door to the internet it opens, every employee interaction that occurs and every policy and procedure it implements presents some risk to the institution.

While institutional risk has always been an emphasis for banks and credit unions, its significance has been elevated since the financial crisis of 2007-2008. Litigation risk is only one part of a bank or credit union’s overall risk portfolio; however, it can be a significant portion. Losing a lawsuit can result in significant financial loss, damage an institution’s reputation and require substantial operational resources to mitigate. It might also lead to a costly government regulatory investigation and enforcement penalty. Appreciating these risks is the first step towards proactively and effectively managing litigation risk.

Every financial institution (again, regardless of size) should institute a regularly monitored litigation assessment and response process. This is true even if the institution does not currently have any ongoing, significant litigation. In fact, the best time to examine the institution’s litigation assessment and mitigation process is prior to a significant loss. An effective litigation analysis program allows the financial institution’s executive team to keep abreast of its ongoing lawsuits and quickly respond to mitigate its risk.

Some financial institutions measure their litigation risk solely by monitoring their significant litigation. This process typically sets a dollar amount threshold for which any lawsuit posing a potential risk above that threshold is required to be reported to executive management. Other institutions employ a more comprehensive approach that includes assessing significant litigation risk cases and the aggregation of smaller lawsuits. Both approaches require periodic updates relevant to a significant event in the lawsuit, or simply on a regularly scheduled basis. The practice that considers only large dollar cases in the process is simpler and quicker; but it underrepresents (and thus under reports) the institution’s actual litigation risk. Defining, reporting and monitoring all types of cases provide a financial institution with a better understanding of its actual litigation risk. However, it requires that risk values be assigned to every lawsuit.

Early Analysis

Regardless of which approach is selected, identifying a lawsuit’s initial litigation risk should be performed as early in the case analysis as practical. This is not an easy task because not all of the facts are yet known or applicable law well-defined. Each lawsuit’s risk must be assessed on its own and then tested against its susceptibility to the whims of a judge or jury. There is an art to this process. This is why retaining appropriately experienced legal experts to represent and counsel the institution is imperative. Experienced and qualified litigators are a great resource because they understand litigation. They understand its unique procedures, its rules of evidence and its subtleties, and appreciate the potential perspectives of a judge or a jury.  Further, risk values are dynamic.  Therefore, re-analysis of the risk during the life of the case is required.

The best practice is to examine each lawsuit from at least two perspectives:

  • The case’s potential risk. Potential risk attempts to quantify the upper limits of risk for each case, and assumes the judge or jury is not persuaded by your version of the facts or legal arguments. This perspective is important because it helps executive management understand the institution’s litigation risk ceiling.
  • The lawsuit’s probable risk. Probable risk endeavors to calculate the most plausible result of the case. This perspective is important because it provides executive management with the more practical risk to the institution.

Defining a case’s potential risk (i.e., its upper limits) is difficult because, too often, lawsuits do not demand a specific dollar amount of damages, or they include some unrealistically ludicrous amount. For example, a plaintiff might simply request damages in an amount greater than the court’s jurisdictional floor or request damages generically in any amount the court deems “just and reasonable,” or it could demand $1,000,000 for a $200 withdrawal dispute. Thus, it forces the individual analyzing the case to decide an upper limit.

Honest And Objective Analysis

Deciding a case’s probable risk is also difficult because it requires an honest and objective analysis of the facts and applicable law. Practically every party to a lawsuit believes its case is a winner. No one wants to admit they did anything wrong. For this perspective to be helpful, you must be brutally honest and perform a sound initial investigation of the facts and applicable law. Define the disputed facts of the case. Do not merely accept the institution’s version. Examine the strength/weakness of the legal arguments.

The institution must demand that legal counsel fully explain the strengths and weaknesses of the case. Determine if the institution’s facts can be accurately and convincingly placed into evidence. For example, is the evidence documented and available? Determine if the institution’s witnesses have the capability to communicate the facts in a strong, coherent and believable fashion. These are just a few of the questions that must be analyzed before probable risk can be determined.

Finally, presenting the institution’s less significant cases in an aggregated format to executive management requires meaningful consideration. This typically depends on the size of the institution and the desired goals to be achieved. For a smaller bank or credit union that does not have the volume of smaller cases, it may choose to simply combine the smaller cases into one amount. If the institution has enough smaller cases, it may elect to break down the cases into categories of liability. Categories might include such groupings as: (a) deposit side issues such as account opening disputes, check deposit issues and fraud issues; (b) lending issues such as lien disputes, foreclosures and debt collections issues; and (c) federal or state regulatory issues. If cases are broken down into categories, executive management can draw more focused conclusions regarding the effectiveness of its policies, procedures, operations and institution leaders.

Effectively managing litigation risks is an ongoing process that requires a combination of proactive actions and deliberate planning. Each bank or credit union, depending on its size, products and services, will have its own unique challenges managing its litigation risk.  Therefore, serious consideration to implementing an appropriate litigation risk assessment process is recommended. For many banks or credit unions, implementing an appropriate litigation risk assessment program can help it achieve sustained long-term stability and protect its operations and reputation.

The information contained herein is not meant to be an exhaustive discussion of all aspects of the subject matter.   It is meant only to be an introductory dialogue to assist institutions that desire to establish an approach to manage litigation risk. 

N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.