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Can You Begin New York Debt Collection Litigation and Ignore the Mediation Clause?

26 August, 2014

Can You Begin New York Debt Collection Litigation and Ignore the Mediation Clause?It has become apparent that your customer will not pay you. Your signed contract with the customer requires all fee disputes to be submitted to mediation. At this point, you are exhausted from all the efforts trying to collect the claim. You are ready to begin New York debt collection litigation and ignore the mediation clause.

Ignoring the mediation clause in the contract is risky and here’s why:

Let’s assume that you ignore the clause in your contract that requires mediation and file suit instead to begin New York debt collection litigation. Sometimes the mere service of a summons and complaint served on a non-paying customer may spark a settlement.

Other times, a summons and complaint may be served and the case defended. The non-paying customer doesn’t come to the table to play “let’s make a deal,” but rather files an answer and counterclaim(s). If that is the case, there will be discovery, at which time you will need to produce all relevant documents that you will produce at trial, including the contract. Even if there is no discovery, which is highly unlikely, you will need to prove your case. Whether you try to win on papers by making a motion for summary judgment (papers where you tell the Judge that the facts are not disputed) at or before trial, you will need to produce a copy of the contract.

Once the defendant’s attorney reads the contract they may, at any time, make a motion to dismiss your New York debt collection litigation case. The motion can be made on the eve of trial. Even if counsel misses the mediation clause, the Court, on its own may rule that the creditor failed to follow its own condition “precedent” by filing for mediation. The Court may dismiss the case. The resulting dismissal of the case may include an award of sanctions, an award to the defendant for legal fees and costs incurred. The result, a judgment may be entered against the creditor for ignoring their own mediation clause as well as substantial delay in prosecuting the action and getting paid. The time spent litigating (in addition to the cost and fee outlay) will be lost. If your non-paying customer was in financial distress months (or years ago) when New York debt collection litigation was started, you risk that their financial position has worsened, thus affecting your ability to get paid.

There is a third scenario. Ignoring the mediation clause, your New York attorney files the summons and complaint and it is served on the defendant/debtor. The debtor fails to make an offer of settlement, fails to retain counsel deciding to ignore the summons. The next step is to submit proof of your case to the Judgment Clerk to obtain a default judgment. Generally the Judgment Clerk requires a copy of the underlying contract before entering the judgment. The Clerk will review the contract and will most probably refuse to enter the judgment because of the mediation clause.

Even if the Judgment Clerk misses the clause and enters a default judgment, there is always a chance that the debtor can make a motion to vacate the judgment. The application to vacate the judgment would include the fact that the creditor failed to follow the terms of the contract since they failed to mediate. The judgment would, most probably, be vacated and the case dismissed.

There are many factors to consider when deciding whether to mediate or pursue New York debt collection litigation. If you have a debt collection dispute that requires mediation in New York or New York debt collection litigation, we can help you decide the best way to proceed. For assistance, contact us at (212) 686-0100 or email Jocelyn directly at jnager@ffgnesqs.com.

 
 

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