Compass Newsletter - Articles

Sweating the Small Stuff: Correct Strategy Can
Make Recovering Small Debts Economical

By Daniel J. Rice
(Summer 2009)

Whether a business or individual, a creditor that does not receive payment for an amount owed eventually must decide whether to take legal action to collect the debt. When owed a relatively small amount, the decision takes on an added cost-benefit dimension. “Will I have to pay my lawyer more than my potential recovery?” the individual or business might ask.

A creditor facing this dilemma should pay special attention to several Oregon laws that apply in small-debt situations. With the correct strategy, a creditor can minimize legal costs or increase the chances of recouping attorney fees.

The $10,000 or Less Statute

Unless the debt stems from a contract or agreement that provides for attorney fees in the event of a lawsuit, ORS 20.082 often gives the creditor the best basis for recovering legal expenses. The statute requires the court to award reasonable attorney fees to the prevailing party in a contract or other debt recovery action for $10,000 or less.

This statute applies to everything from the unpaid invoice of a business to a personal loan between two individuals. To qualify for attorney fees under this statute, a creditor must send the debtor a written demand for payment of the amount at least 20 days before filing a lawsuit.

One caveat: the attorney fee provision in the statute runs both ways. That is, the statute entitles the defendant to attorney fees if the defendant, instead of the plaintiff, prevails at trial. The defendant could be considered the prevailing party if the judgment does not award the plaintiff any money. A creditor must weigh this risk before deciding to file a lawsuit for $10,000 or less.

Another important consideration is how the case will proceed. All lawsuits seeking only money damages equal to or less than $50,000 are subject to court-annexed arbitration. That means another lawyer acting as a third-party arbitrator, rather than a judge or jury, decides the case. An arbitration hearing is generally less formal than a trial.

The arbitrator’s decision becomes a final judgment unless either side appeals within 20 days. An appeal transfers the case back into the circuit court system to proceed toward trial. However, an appeal involves significant risk: if the party who appeals fails to improve its position at trial, that party loses any rights to recoup attorney fees and is responsible for the other side’s attorney fees incurred after the arbitration award is filed.

Small Claims Court

For creditors who feel comfortable handling the collection action on their own, filing in a small claims complaint is a viable option. The most a creditor can seek in a small claims complaint is $7,500. Small claims hearings are informal, and each side must succinctly present its evidence.

Filing in small claims court generally alleviates concerns about attorney fees, as lawyers cannot appear on behalf of the parties. However, a creditor must still consider the possibility that the case will return to the regular circuit court docket, in which event attorney fee considerations could once again enter the picture.

The Oregon Constitution grants every party in an action for $750 or more the right to a jury trial. If a defendant in a small claims action exercises this right, the case will transfer to the regular circuit court docket and attorneys could appear on behalf of the parties. If a defendant loses after transferring the case from small claims court, the plaintiff is entitled to attorney fees. The amount of the attorney fees award, however, is limited to $1,000, unless another contract provision or statute authorizes attorney fees.

That is where the $10,000 or less statute (ORS 20.082) again becomes important. If the defendant transfers the case to the regular circuit court docket and loses, the plaintiff could rely on the statute as the additional basis for recouping the full amount of attorney fees, which may run higher than $1,000. But the same caveat about that statute applies: if the defendant instead prevails, the plaintiff would have to pay attorney fees.

Thinking about Attorney Fees from the Start

Minimizing legal costs or increasing the chances of recouping attorney fees in small debt collections involves several strategic choices. Even the right strategy, however, offers no guarantees.

With that cautionary thought in mind, the best time to consider attorney fees arises long before the point of contemplated legal action. At the outset of any transaction creating a debt, the parties should give serious thought to the apportionment of attorney fees in the event of a collection lawsuit. Expressly defining the parties’ rights and obligations with respect to attorney fees in a contract or debt instrument can help eliminate some of the uncertainty that otherwise exists.