One of the more shameful events in California financial history occurred as recently as 2009 and 2010 when the state hired consultants to meet with small businessmen who were owed money at the height of the Great Recession. Sort of like George Clooney in the movie “Up In the Air,” the job of these hired guns was to tell people who had performed services that California was just not going to pay what the state owed. California to its job-creating businessmen: “Drop Dead!”
The first-hand account I heard at the time was from the president of a professional firm that was owed a substantial amount. When they arrived in Sacramento to discuss why the bill wasn’t being paid, they were met by a paid consultant --- not a state employee. In a very short meeting, this representative simply said, “Gentlemen, don’t even open your briefcases. Just get back in your car and go back to San Francisco.” They could sue, of course, but that would have meant $200,000 in legal fees and three years of litigation over a $700,000 bill.
That was a few years ago. Just recently, I learned of a similar story where the state had refused to honor its IOU’s (remember those?) leaving another small business owner waiting for his $250,000 that was his working capital at the time. This job-creator had to close his San Leandro business that employed 100 people, and after struggling for several years he has reinvented his firm on a smaller scale --- with 6 people.
I’m just one person who has heard two of these stories. The odds are that our state effectively destroyed countless firms by its ham-handed, immoral behavior. We could have borrowed the money then and would have paid it back by now.
Business strategy for some people involves deliberately reneging on contracts and inviting the abused party to just sue. My lawyer once educated me on what that meant when he said, “Steve, you’re in the system now, and the system defies logical thinking.” He added, “It’s always dangerous when the client begins to think.” People who use the “Go ahead and sue me” strategy develop a reputation that costs them money sooner or later when people stop doing business with them. They pay a price for being jerks but not before making or saving a lot of money first. Apparently that has worked for our state, but it leaves a stain on all of us citizens.
In another illustration of the same mentality, a reader wrote to tell me about the failed bank that had arbitrarily added $1,000 per month as a service fee to his mortgage. The failed bank had then been taken over by one of our too-big-to-fail-tax-payer-supported institutions, and the outstanding balance of his mortgage to this day still includes the illegal charges plus accumulated interest on them. The new mortgage holder says that they are powerless to remove those charges because they were there when the mortgage transferred to the current bank --- a bank which made over $20 billion last year. Meanwhile, this mortgagee and his wife, both in their 70’s, stand to be evicted after an eight-year fight. How can that be right? They’re in the system.
In the middle of all this bad behavior on the part of big institutions --- both public and private --- comes the struggle over the right to sue instead of being herded into arbitration. Arbitration is the practice of using a mediator instead of the court system to settle disputes. Unfortunately, studies illustrated by a three-part New York Times expose show that the big companies are set up to win in arbitration. The new U.S. Consumer Financial Protection Bureau created by the Dodd Frank legislation will champion our right to conduct class action lawsuits --- against the forces of the U.S. Chamber of Commerce. That right, along with punitive damage awards, has proven to be the last bastion of protection when it comes to the “little guy” winning against giant institutions.