A UBS Promissory Note Arbitration Discloses The Hidden Costs Of Litigation

April 29, 2013

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in August 2011, Claimant UBS asserted breach of contract; common count for money lent; and common count for account stated, in connection with the firm's effort to compel repayment of five promissory notes executed with former-employee Respondent, around April 30, August 9, and October 29, 2010; and January 13, and April 30, 2011.  Claimant sought the principal balance due on the notes of $1,503,120.22 plus interest, costs, and fees.  In the Matter of the FINRA Arbitration Between UBS Financial Services, Inc., Claimant/Counter-Respondent, vs. REDACTED, Respondent/Counter-Claimant (FINRA Arbitration 11-03133, April 25, 2013). [Ed: Respondent's name redacted at the sole discretion of the BrokeAndBroker.com Blog]

Respondent generally denied the allegations, asserted various affirmative defenses; and Counterclaimed on the basis of breach of contract; fraud; violation of the California Labor Code; and defamation and tortious interference with his client relationships. Respondent sought $2,000,000 in compensatory damages, punitive damages, interest, costs, and fees. At the close of the hearing, Respondent requested $5,068,323.32 in compensatory damages.


The FINRA Arbitration Panel found Respondent liable and ordered him to pay to UBS:
  • $1,503,120.22 plus post-judgment interest at 10% per annum from April 4, 2013 until paid; 
  • $83,949.96 in accrued interest; 
  • $302,374 in attorneys fees; and
  • $12,722.08 in costs.
Also, the FINRA Arbitration Panel found Counter-Respondent UBS liable and ordered it to pay $79,200.00 in compensatory damages to Respodnent.

Bill Singer's Comment

For those registered respondents contemplating a defense in a promissory note case that would take the dispute to the mat in the hopes of achieving a favorable FINRA Arbitration Panel's Decision, this may prove to be an instructive arbitration. Assuming that Respondent was on the hook for the $1.5 million in principal and some $84,000 in accrued interest, his additional litigation costs were the roughly $302,000 in UBS' attorneys' fee and $13,000 in costs (about $315,000). Taking the $315,000 in lit costs and deducting the off-setting $79,000 in damages that Respondent was awarded, the principle involved in fighting over the principal cost Respondent about $236,000 net.  Also, keep in mind that Respondent likely ran up a considerable legal bill of his own.

The rule of thumb is that good-faith settlement offers from employers in promissory note / Employee Forgivable Loan disputes should provide for something like a 20% discount off the principal in dispute -- admittedly, that's a very, very rough estimate and one easily influenced higher or lower by the facts and circumstances of each case; however, a rule of thumb is what it is. Consequently, if Respondent could have settled this dispute for 80% of the principal due, let's just call that $1.2 million. On top of getting a $300,000 principal discount (and possibly the forgiveness of interest), Respondent may well have been able to save nearly $315,000 in avoided fees and costs..  Of course, that's all mere speculation and the parties in this case may never, ever have approached any offer close to an 80% discount; and even if that were on the table, Respondent may have sincerely believed that he did not owe a single cent. Given that Respondent's Counterclaim sought $5 million in damages, it's pretty obvious that there was more than enough bad blood to go around in this case.

Nonetheless, for those of you planning on donning the armor and going into battle, make sure to add up all the costs.  If you save $20,000 in repaid principal and interest by going to a hearing but your lawyer's bill is for $50,000, that hardly makes sense. Similarly, if there is an 80% of principal offer on the table from your former employer, put a spreadsheet together and figure out the likely future costs and fees involved in rejecting that offer.  Sometimes the math is less favorable than you think -- other times, you may have your eyes opened to the hidden costs and net, net value of a supposed victory.

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