Can a Demand Letter Cross the Line Into Defamation or Extortion?

Why a threat to sue is not extortion

Every demand letter contains a threat: pay or perform, or we go to court. That threat is the whole point of the letter, and the law permits it. A person with a good-faith claim is entitled to assert it and to say what will happen if it is not resolved. Texas has no crime called extortion; the conduct people mean by that word is covered by theft, and theft requires appropriating property without the owner's effective consent. Under Penal Code § 31.01(3), consent is not effective if it was induced by coercion.

Coercion is defined in Penal Code § 1.07(a)(9) as a threat, however communicated, to commit an offense, to inflict bodily injury, to accuse a person of any offense, to expose a person to hatred, contempt or ridicule, to harm the credit or business repute of any person, or to take or withhold action as a public servant or cause one to do so. A threat to file a civil lawsuit is not on that list. A letter that says "pay the $40,000 you owe under the contract or we will sue" is a demand, not coercion.

Where a demand letter can become coercion

The problem arises when the letter adds a threat from the statutory list to the civil demand. The common forms:

• "Pay or we report you to the police." A threat to accuse someone of a crime unless they pay a civil debt is the textbook case. It does not matter that the underlying conduct might in fact be criminal; using the accusation as a payment lever is the problem.
• "Pay or we tell your customers what you did." A threat to harm business reputation, or to expose someone to contempt, as the price of not paying.
• "Pay or we file a complaint with your licensing board or the IRS." A threat to cause a public servant to act.

Whether a prosecutor would treat a particular letter as theft by coercion depends on facts, including whether the sender believed in good faith that the money was owed. But the civil consequences do not wait for a prosecutor. A recipient who can show that the letter threatened criminal exposure to extract payment has a strong answer to the demand and may have claims of its own.

The rule for lawyers

Texas Disciplinary Rule of Professional Conduct 4.04(b)(1) states that a lawyer shall not present, participate in presenting, or threaten to present criminal or disciplinary charges solely to gain an advantage in a civil matter. The rule applies to the demand letter stage as much as to a filed case. A letter from a lawyer that says the client will pursue criminal charges unless the civil claim is paid invites a grievance, and a recipient's counsel will say so in the response.

The rule does not prevent a lawyer from describing the facts, from stating that conduct may violate a statute, or from advising a client that it is free to report a crime. It prevents using the threat of prosecution as a bargaining chip. Experienced litigators write demand letters about the civil claim and keep any decision about reporting conduct to authorities separate, both in the letter and in fact. Whether to report business fraud or sue is its own decision, covered in whether to report business fraud to the police or sue.

Why a demand letter is usually not defamation

Statements made in the course of a judicial proceeding are absolutely privileged in Texas, which means they cannot be the basis of a defamation claim even if false and even if made with ill will. In Shell Oil Co. v. Writt, decided in 2015, the Supreme Court of Texas confirmed that the privilege extends to communications made before suit, when they are made in serious contemplation of a judicial proceeding and bear some relation to it. A demand letter from one party to another, stating the claim the sender intends to file, is the usual example of such a communication.

The privilege has conditions. The proceeding must be contemplated in good faith and under serious consideration, not used as a pretext. The statement must relate to the contemplated proceeding. And the communication must be made to someone with an interest in it, which in the demand letter context means the opposing party, its lawyer or its insurer.

Where defamation exposure begins

The privilege follows the purpose. It protects a letter to the other side about a claim you intend to bring. It is much less likely to protect:

• Copies to the recipient's customers, vendors, lender or landlord. Those people are not parties to the contemplated suit. An accusation of fraud sent to a company's customer list is publication to third parties, and if the accusation is false, it is a defamation claim with damages that are easy to prove.
• Press releases and social media posts repeating the letter's accusations. The same analysis applies.
• A letter with no real litigation behind it. If the sender never intended to sue and used the letter as a vehicle to make accusations, the good-faith condition fails.
• Accusations unrelated to the claim. A contract demand that adds unrelated allegations about the recipient's personal conduct is outside the privilege's scope.

A business that is being disparaged outside the privileged channel, for example by a former employee online, has separate remedies, covered in what to do when a former employee disparages your company online.

Example

Suppose a Garland equipment lessor believes a customer returned a machine with hidden damage and owes $18,000 in repairs. Letter A, from the lessor's lawyer to the customer, describes the damage, cites the lease's return condition clause, demands payment within 30 days and states that the lessor will otherwise sue for the repair cost, interest and fees. Letter B, from the lessor's owner, says the customer "committed fraud and theft," that the lessor will "file a police report and make sure every dealer in North Texas knows" unless payment arrives in five days, and is copied to two of the customer's business partners. Letter A is a lawful, privileged demand. Letter B threatens criminal accusation and reputational harm as payment levers, meets the Penal Code's definition of coercion, and publishes a fraud accusation to third parties outside any privilege. The customer's lawyer answers Letter B by rejecting the demand, putting the lessor on notice of the coercion and defamation exposure, and demanding a retraction to the partners. The $18,000 claim, which may have been valid, is now the smaller problem.

How to write a hard letter that stays on the right side

• Address it to the other party and its lawyer only.
• State facts you can prove and the legal basis for the civil claim. Where the facts could also describe a crime, say what the conduct was, not what crime it is.
• Threaten what you will actually do in a civil forum: file suit, seek an injunction, pursue fees and interest.
• Leave out any reference to police, prosecutors, licensing boards, tax authorities, customers or the press.
• Keep the tone even. Firmness comes from the documents attached, not the adjectives.

What makes a demand letter effective, including tone and structure, is covered in what makes a demand letter effective.

If you received a letter that crosses the line

Do not pay in response to a threat of criminal exposure, and do not respond in kind. Preserve the letter, its envelope or email headers, and any copies you learn were sent to others. A response from a litigator can separate the legitimate claim, if any, from the improper pressure, address the civil dispute on its merits, and put the sender on notice of the consequences of the rest. Tina Wysk writes and answers demand letters for Dallas businesses on both sides of commercial disputes.