Please try to stay out of court

This article is cross-posted from my other blog, Nonprofit Update.  It is posted here as well because it might also be helpful for your business clients. The article is focused on charities, but the same ideas apply to for-profit businesses:  please try to stay out of court.

In my journeys as a CPA serving the nonprofit community, I’ve been able to observe one (or more) charity/charities that have been in court because of their involvement in civil litigation. The time and costs involved can be substantial if you find yourself in civil court.

I can’t talk about those situation(s) because of confidentiality rules.

There are several things an auditor would routinely do in such situations.  The auditor would see the costs incurred from looking at the general ledger. Because of the possible financial impact, the auditor would have discussed the status of the case and possible outcomes with management, looked at legal invoices, and read the legal confirmation letter received from outside counsel. I can’t tell you what steps I took in any particular situation.

What I can say after seeing one/some specific situation(s) is that you should try really, really hard to stay out of court.

The costs can be high. The distraction for your leadership (and membership if you have members of some sort) can be significant.

One situation I can talk about

What I can do is discuss another situation where I have no confidentiality restrictions and can get information that is in the public realm. I’ve been wanting to talk about this idea for a long time, but did not have any reference point I could us as the focus for the discussion.

The other situation is Food for the Hungry. My analysis of the costs they have incurred for a situation are discussed in a previous post.

Now, I realize their situation is quite different what other NPOs will encounter. How?

They are in a dispute with the IRS. This is a tax audit, not civil litigation. To over summarize in one sentence, the dispute is about valuation of gifts-in-kind. As a completely wild guess, this may be some sort of a test case, which changes the dynamics completely. If the case goes a certain way, I’m guessing there are other NPOs that will likely get an audit. Hints in the air suggest there is still substantial interest in this issue by various regulators.

All that to say you will not likely get this type of attention from the IRS.

However, in spite of all the different circumstances, I would like to suggest for your consideration that the costs incurred by FH give some vague, general, indirect hint at the costs involved in defending a substantive civil claim against an organization.

I think we can use this as a rough proxy for what a major situation of civil litigation might look like.

Costs incurred in one particular major IRS audit

Previous post indicates that I concluded FH incurred about $207,000 of accounting and legal costs during 2011 and 2012 for dealing with the audit and disputing the resulting IRS assertions. The dispute continued into 2013. Costs incurred in ’13 are not visible because the 990 has not yet been filed. There are no public comments that the audit has been resolved, so I’m guessing the costs continue to accumulate in ’14.

In addition to the dollars, ponder what amount of management time has been allocated to this issue and the amount of internal disruption that has taken place. If I’m reading this correctly, the time and effort started in ’11, continued in ’12, was still ongoing in ’13, and is not finished even in ’14.

Since there is no other public information I’m aware of about the cost involved for any other major civil dispute, I would like to use this situation as a rough indicator.

The lesson I’m trying to draw?

Try to stay out of court.

Quite some time back, an attorney told me that the costs involved in a civil dispute that works its way through the court system are often 30% of the disputed amount. That would be for each side, so the total costs could run up to 60% of the amount being fought over. A fight over a hundred grand contract dispute could cost each side $30K.

Keep in mind there’s also time involved in depositions and the time to pull all the relevant documents.

In addition, there is a lot of emotional distraction. Since getting out of college I saw a situation somewhere (how’s that for a really vague description?) where one or more senior level managers were distracted for a very long time by litigation. Can your ministry afford to have one or several of the senior staff spend much of their emotional energy over the course of a few years dealing with litigation instead of furthering the mission?

Try to stay out of court

The best approach is to do things right.

Treating your employees fairly, dealing fair and square with vendors, treating customers with honesty and integrity, and obeying the laws of the land as best you can is God-pleasing. That’s something Christians ought to be doing as a matter of course.

As a side benefit to pleasing God, those behaviors will reduce your chances of getting into a mess that leads to court. Won’t reduce the risk to zero, but your odds are a lot better.

If doing things right doesn’t work and you get into a dispute, I urge to you try hard to keep the dispute out of court.

If you are in rapidly deteriorating situation, you might want to think about working out some sort of settlement.

And if you are already in court, it might be time to think really, really hard about a settlement.

Remember the costs incurred by Food for the Hungry. Remember the comments from that attorney that your costs might run up to 30% of the disputed amount, even if you win.

Sometimes there are serious principles at stake. Sometimes you can’t do anything to avert a disaster. Sometimes a fiasco hits you. If you are in one of those situations, well, that changes things.

In other situations, I urge you to try to stay out of court. Keep the FH costs in mind as a vague warning of how badly it could go.

As Romans 12:18 says, “If it is possible, as far as it depends on you, live at peace with everyone” (NIV).

Update: Abraham Lincoln made the same point.

Leave a Comment

Your email address will not be published. Required fields are marked *