Have you heard of the plaintiff who sued a national bank for $1,000,000, claiming that the bank negligently failed to honor two of her mother's checks, thereby precipitating the woman's death?

When a U.S. district court judge ruled in favor of the bank, the plaintiff filed an appeal. After a appellate court affirmed the decision, the trial judge awarded the bank nearly $50,000 in attorneys fees and costs.

This true story illustrates some of the best and worst aspects of the administration of civil justice in the United States. Yet there are many other instances of frivolous litigation, and not all such cases result in an award of attorneys fees.

Applaud

Litigation, whether frivolous or not, involves societal costs both monetary and nonmonetary. Recognizing this, the Bush administration has proposed a package of substantial reforms to combat the delays, excessive costs, and abuses that have crept into the civil justice system over the last 30 years.

This reform package deserves our applause and support.

Last summer, Vice President Quayle appeared at the American Bar Association's annual meeting and gave a speech in which he sought the association's support for the administration's reform proposals. The association president responded aggressively to the vice president's remarks.

I suspect, however, that the caustic attempt at rebuttal was in reaction to the vice president's suggestion that the nation may be spending too much time and money on litigation. The association president's speech was not, however, a considered response to the suggestions for reform that were being made.

Most Lawyers Agree

Although some in the professional say the vice president's estimate that the United States spends $300 billion as an indirect cost of civil litigation is inaccurate, most lawyers with whom I speak recognize that the administration has focused on a real problem that needs to be addressed.

The administration's civil justice reform proposals were a product of the President's Council Competitiveness, which is chaired by the vice president.

The proposals were initially presented as a response to the high costs of litigation and the effect these expenses have on consumers and industry. Legal fees are, at bottom, transaction costs.

Most of these costs are passed through as increases in consumer prices. The proposals, however, necessarily paint with a broad brush and benefit all who use the nation's federal and state court systems, whether plaintiff or defendant, business or individual.

The focus of the reforms is to encourage the early resolution of disputes, speed the court process, reduce, costs, and correct some of the abuses that have developed in the system, notably discovery.

Early Settlement Best

The administration's proposals contain various incentives to encourage the early settlement of disputes.

For example, the proposals provide that as a condition to commencing a lawsuit the aggrieved party must give notice to the other side and make an effort to resolve and dispute.

If a settlement cannot be reached before a complaint is filed and a party subsequently rejects a pretrial settlement offer, the proposals would require the rejecting party to pay the additional costs of the trial unless the trial award exceeds the settlement offer.

This will encourage parties to evaluate their cases and make more reasonable efforts to resolve the dispute.

Other than Court Trials

The proposals would provide litigants with various options in resolving disputes.

The options other than trial, known by lawyers as method of "alternative dispute resolution," include arbitration and mediation. While reaching a resolution by mediation is a desired outcome, arbitration should be of particular interest to financial institutions if mediation is not possible.

Arbitration is similar to a trial without a jury except that it is generally much quicker and less expensive than a court or jury trial, which is apt to involve more discovery.

In addition, the arbitration will be before a single arbitrator, sometimes called a "neutral," or perhaps a panel of three arbitrators who will be selected because of their knowledge of the area of law and the business involved.

Letting an Expert Decide

As a result, the arbitrator will be familiar not only with the intricacies of negotiable instrument law or securities, if that is what is involved, but, more important, will be familiar with the business practices and procedures of the industry and the legitimate expectations of the parties involved.

Also, it is fair to say that arbitrators, because of their experience in the field, would be less inclined to award a judgment against an institution using a discredited theory of lender liability.

Better-Crafted Laws

Every year Congress passes laws that do not address certain issues and that may also be ambiguous, leading to court challenges and request for judicial interpretation. (Indeed sometimes the sought-after judicial interpretation may be squarely at odds with the legislative intent.)

Losers Pays Lawyer Fees

As a result, the administration, through an executive order, now requires all that all legislation it proposes must undergo a "litigation hazards" review to ensure that poor drafting of legislation does not result in unnecessary litigation.

Perhaps the most controversial aspect of the administration's proposals is its call for an experimental adoption of the English rule - the losing party must pay the legal expenses incurred by the prevailing party - for one category of cases filed in federal court.

While it cannot be disputed that the adoption of the English rule, which is the rule in most Western countries, would cause a party to thing twice before filing frivolous litigation, some contend that the rule would deter filing of otherwise meritorious litigation (on the cutting edge of the law, so to speak) and that it could work a hardship particularly on minorities and the poor.

Innovative features of the administration's proposal seem to reasonably address this concern. The rule would apply only to cases brought in federal court when the litigants are from different states and the amount in controversy exceeds $50,000.

Consequently, although in federal court the parties in such an action, a so-called diversity action, would be subject to the rule, they could still sue in state court under the traditional fee arrangements.

The rule would not apply to federal "question" cases, such as discrimination cases, civil rights actions and environmental disputes. As a result, it does not limit federal rights.

The possibility that the rule would work a hardship on those who file meritorious litigation but are unsuccessful is further addressed by a general provision that enables the court to limit or prevent any fee shifting if it is in the interests of justice and to prevent a hardship.

Finally, the administration's proposal also addresses the concern raised by some that the fees incurred by the prevailing party may be excessive. The administration's proposal provides that the loser can be required to pay no more in fees than the loser incurred.

With future modifications, this test of the English rule may present a real solution to the litigation problem.

Punitive Damages

Because the record has established that punitive damages have been awarded in amounts disproportionate to the injuries suffered, the administration has suggested a number of changes in the way punitive damages are awarded.

Any award would be made in a separate proceeding using a higher standard of proof - "clear and convincing evidence." And although a jury could determine whether punitive damages should be awarded, the trial judge would determine the amount of the award.

Finally, the amount of punitive damages would be capped so it could not exceed the amount of compensatory damages awarded.

Pretrial discovery can be one of the most expensive and time-consuming elements of any litigation.

To streamline the process and help prevent discovery abuses, the administrative has made a number of proposals, including requiring the immediate disclosure by both parties of "core" information such as the names and addresses of witnesses and the identification of defenses.

In addition, the administration's reforms call for:

* Adoption of quantitative discovery limits in the Federal Rules of Civil Procedure that could not be exceeded except for good cause.

* Making mandatory the imposition of sanctions for abusive discovery.

Excessive litigation can rip at the fabric of our diverse society. The administration's proposals address the problem and, therefore, deserve the vigorous support of financial institutions. Mr. Schaumber is counsel to the law firm of Wickwire Gavin, Washington. He is also a litigator and arbitrator.

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