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Client Q & A

Answers to common client questions.
Posted: March 27, 2017

Client Q&A: I think I have an insurance claim, but I can’t make heads or tails of the policy. Help!

I think I have an insurance claim, but I can’t make heads or tails of the policy. I don’t know what is and is not covered. Help!

By Bradley J. Nash

A Guide to Reading an Insurance Policy

If you suffer a loss or destruction of your property, or if someone threatens to bring a legal claim against you, among your first questions may be whether you have insurance coverage to compensate you or to pay for your defense. Like any legal document, an insurance policy can be baffling to the uninitiated reader. If the insurance carrier tells you that coverage is limited in some way, or perhaps not available at all, how do you know if they are treating you fairly? Having a basic understanding of the structure of an insurance policy can help you to protect your rights. (It is also usually a good idea to consult with a qualified attorney in any contested insurance coverage matter.)

Broadly-speaking, insurance policies fall into two categories: “first-party” policies (which cover against damage to or loss of the insured’s property), and “third-party” policies (which cover the insured for liability to others). Some insurance policies, such as a typical homeowners policy, may provide both first-party and third-party coverage. Future posts will explore the types of insurance in more detail, but the basic structure of most insurance policies is the same.

Reading an insurance policy is a bit like assembling a jig-saw puzzle. This is because policies are typically cobbled together from standard forms that are customized by “endorsements” appended at the end. Thus, to figure out precisely who and what is—and is not—covered requires carefully reading and cross-referencing the different parts of the policy. The three principal sections of a typical policy—the Declarations, Policy Forms, and Endorsements—are discussed below.

Declarations

The first part of an insurance policy—and usually the only part that is customized for a specific policyholder—is the “Declarations.” The Declarations provide a summary of the essential terms of the policy, including the identity of the insureds, the time period covered by the policy, the amount of insurance provided and of any deductibles that must be satisfied before coverage kicks in. The Policy Forms (discussed below) will frequently reference the Declarations. For example, a provision of a liability policy might say:

We will pay on behalf of the Named Insured, Loss from Claims made against the Named Insured during the Policy Period.

To identify the “Named Insured” and the “Policy Period,” you would have to look back to the Declarations.

The Declarations provide a high-level overview of the coverage, but the devil is in the details—and those are spelled out in the Policy Forms, as modified by any Endorsements.

Policy Forms

The heart of an insurance policy is the Policy Forms. These are standard industry or company documents that set forth in detail the rights and obligations of the insurance company and the insured. The three principal components are (1) the Insuring Agreement and related Definitions; (2) the Exclusions; and (3) the Conditions.

  • Insuring Agreement and Definitions
  • The Insuring Agreement spells out the type of risk that the policy covers. For example, a first-party policy will cover a loss of property resulting from a particular risk or risks. A third-party policy will cover the insured’s liability to others, and may also obligate the insurance carrier to hire a lawyer to defend the insured in a lawsuit, or to reimburse the insured for legal fees and costs.

    The Insuring Agreement must be read in conjunction with the Definitions section, which defines the key terms (sometimes by cross-referencing the Declarations). For example, a property policy might state:

    We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

    This provision can only be understood by looking at the Definitions to see what constitutes a Covered Cause of Loss. It could be defined broadly to cover “all risks,” or more narrowly to cover only a specific risk, such as fire or flooding.

  • Exclusions
  • Although the scope of coverage under the Insuring Agreement may appear broad, it will be narrowed by the Exclusions section. Thus, once you determine what coverage the Insuring Agreement and its associated Definitions provide, you need to assess what the Exclusions take away. In a general liability policy, for example, there may be an exclusion for harms that are “expected or intended” by the Policyholder, or claims arising from a breach of contract. Other types of insurance that provide defense coverage may exclude claims arising from fraudulent conduct, but typically only where there is a “final adjudication” that the insured committed the alleged fraud. These are only a few examples. It is important to read the policy Exclusions carefully to understand what is not covered.

  • Conditions
  • In addition to defining the obligations of the insurer, the policy also places certain obligations on the insured, which are spelled out in the Conditions section of the policy. Often the most important Condition is the requirement to give the insurance company prompt notice of a claim. You can’t get coverage if you don’t ask for it, and in some circumstances, the insurance company can seize on a delay in notice as a ground to disclaim coverage. Policies also typically condition coverage on the insured providing reasonable cooperation to the insurance carrier in its investigation of the claim, and in the case of a policy with a duty to defend, cooperating in the defense.

Endorsements

Just when you thought you were done, there is another critical component of any insurance policy that you must consult: the Endorsements. Rather than tailoring its standard forms to the policyholder, insurance companies modify the forms—often in very significant ways—by appending Endorsements to the policy. The Endorsements may expand or reduce the scope of coverage by changing policy Definitions, modifying the terms of Insuring Agreement, or adding, eliminating or changing the Exclusions.

Conclusions

Interpreting an insurance policy can be a daunting task. Knowing what to look for is the first step in protecting your rights. An experienced attorney can also be helpful in guiding you through the process. We have a great deal of experience advising policyholders in negotiating with, and when necessary, pursuing coverage lawsuits against, insurance carriers. If you have a question about your insurance policy, we would be happy to assist you.

Posted: March 7, 2017

Client Q&A: My Opponent Gets Evidence From My E-Mail? It Would Take Me Weeks to Read Through My E-mail!

My Opponent Gets Evidence From My E-mail? It Would Take Me Weeks to Read Through My E-mail!

By John M. Lundin

As we have discussed in a prior post, in modern complex commercial litigation, one of the biggest costs relates to discovery–the exchange of evidence between the parties. And electronic discovery is one of the biggest components of discovery–collecting e-mail and documents from computer systems, reviewing it to see if it is relevant to the case, providing it to your opponent, and then dealing with all the electronic documents you receive from your opponent. Even in a modestly-sized dispute, parties can end up exchanging tens of thousands of electronic documents. In large, complex cases, we routinely produce and/or receive millions of documents.

How can you deal with all these documents; both collecting your own and reviewing your opponent’s documents to see if they are important to your case? The short answer is that you mostly do not have to do anything. We will do it for you. And we have tools and techniques, some of which I discuss below, to stop the cost from becoming overwhelming.

Preserving Electronic Evidence

There is one critical thing you have to do: once you became aware of a dispute that might turn into a lawsuit, you need to preserve all of the evidence relating to it. This is key. Litigants have had their lawsuits thrown out (or worse, have had their defenses stricken) for failing to preserve and produce relevant evidence. When in doubt, preserve all evidence relating to a dispute, including electronic documents. This means making sure that you and your employees do not delete e-mails or other electronic documents on your computer systems. In particular (and something that sometimes trips people up), remember that some e-mail systems are set up to delete some or all old e-mails automatically. If you leave the relevant e-mails on your server, make sure you disable automatic deletion features for people likely to have relevant evidence.

The good news is that we can advise you on how make sure that your electronic evidence is preserved.

Collecting Electronic Documents

For a host of reasons, the easiest and least expensive way to search for and produce electronic evidence in all but the smallest of cases is to let your lawyers handle it. We have tools and techniques that will make sure things are done right (the only thing worse than doing something unpleasant is doing it twice because it was done wrong the first time). For example, in producing electronic documents, it is important to preserve the original file. If you forward, print or save electronic documents as new files, you lose the information (the metadata) that identified when the original file was created, modified, printed, sent or received. This might cause us to have to collect all your documents again to get the right information.

So, what should you do? We will work with you to determine what is best in your particular circumstances, but in general, it is fastest and best if we just create an archive of your e-mail account and any other collections of responsive documents and then winnow that collection down to what is relevant to the case using litigation support software made for the task.

Figuring Out What You Have to Give Your Opponent

If we have collected your electronic documents, there are different types of software systems that we use, depending on your needs and the size of the case, that allow us to search your documents in a variety of ways to figure out what we are obligated to produce to your opponent. There are search and analysis techniques we can use to winnow down the electronic documents we collect from you to limit the amount of time we spend looking at individual documents.

One concern in many cases is that you have communicated with us or some other lawyer about the dispute. You do not have to provide your opponent confidential communications with counsel reflecting legal advice. The good news is that we can do most of the work in locating such documents and making sure they are not produced to your opponent electronically.

Dealing With Your Opponent’s Electronic Documents

Not only will you likely have to worry about giving electronic discovery to your opponent, you likely will have to deal with your opponent’s production. Here, it is a good news, bad news situation. The good news is that a lot of evidence usually means that the chances of finding evidence good for your case has increased. The bad news is that it takes time to go through all that evidence. Whether we go through each page of your opponent’s production or use the electronic tools and techniques available to us to identify the documents most likely to be useful to you depends on a variety of factors, such as the evidence we are looking for, how many documents we have to review and how much is at stake in your lawsuit. We can work with you to find a solution that is best for you.

Conclusion

Electronic discovery presents the danger of increased costs and disruption of your business. Handled properly, however, the dangers are more than offset by the opportunities to reduce cost and increase the quality of the proof available at trial. If you are facing a lawsuit and have concerns regarding how electronic discovery will affect you, give us a call.

Posted: February 14, 2017

Client Q&A: A Customer That Went Bankrupt Is Suing to Recover Payments It Made to Me; What Can I Do?

A customer that went bankrupt is suing to recover payments it made to me. What can I do?

By John M. Lundin

When a business goes bankrupt, it very often happens that everyone to which the company paid money in the 90 days before the bankruptcy petition was filed gets sued to recover those payments in what is called a “preference” action. It does not matter whether the payments were for goods actually received or services actually rendered. It does not matter that you did nothing wrong. If you got the payments just before the bankruptcy, the bankruptcy estate can sue to get them back.

What is a Preference Action?

This sounds crazy, until it happens to you (and maybe even after it happens to you).

Before I discuss what can be done, here’s what is happening. The logic of a preference action is that it is unfair that some creditors get paid for goods or services they provide just before a bankruptcy and others do not. So, the answer is to claw back the money every creditor got from the debtor for the 90 days before the bankruptcy filing, so the money can be shared on an equal basis among all affected creditors. For example, if the bankruptcy estate succeeds in recovering $500,000 from you in a preference action, you now have a $500,000 claim against the estate and the $500,000 you paid gets thrown into the pot of money used to pay all creditors. Of course, if the bankruptcy estate ends up paying only 10 percent on claims, the $500,000 that was taken from you gets paid back as only $50,000. Maybe it is fair in general, but it can represent a serious loss to you.

Even worse, if you are a corporate insider, the preference period is one year, not 90 days.

What Can You Do?

Generally speaking, all the bankruptcy estate has to show is that you received the payments in the 90-day preference period. However, there may be defenses that, if you can prove them, will stop the bankruptcy estate from clawing-back the money.

The bankruptcy code contains a number of defenses. Here are the ones we encounter the most:

You can avoid having to return the payments during the preference period if you can show that the payment was for a debt incurred in the ordinary course of business and that the payment was made in the ordinary course of business or according to ordinary terms.

A typical situation where this defense applies is where the debtor was a regular customer of yours, you were providing it goods or services before the bankruptcy and in the 90 days before the bankruptcy, it paid you on the same terms it always did.

What does this mean? Imagine that you bill your clients with payment due 30 days after invoicing and the debtor routinely paid its bills on day 30. If, during the preference period, it kept paying on day 30, you may have a ordinary course of business defense. Of course, life is often messy and it would be unusual for a customer always to pay exactly on time. So, litigating an ordinary course of business defense usually involves statistical analysis of the billing and payment history to determine whether the payments during the preference period were similar to the ones before the preference period.

One issue that comes up in proving whether the payments were in the ordinary course is whether you pressured the debtor to pay during the preference period in a way you would not otherwise have done.

Another common defense is the subsequent new value defense. There, you have to show that you gave “new value”–typically, goods or services–to the debtor after the date of the challenged payment, and that you were not paid for that value or if you were, the payment was not avoidable. An example of this would be that you provided goods or services during the preference period for which you were not paid. If those payments came after the preference payments, they qualify as new value and will offset the preference payments.

There is a related defense called the contemporaneous new value defense. This defense applies when the payment is received at the same time you provide the good or services. For example, if a transaction was COD.

Conclusion

There are other defenses, and the application of the three common defenses I discuss above is more complicated than the short examples I have given show. So, if you are sued in a preference action, you should get experienced counsel to advise you.

There is one piece of good news, though. It would cost a bankruptcy trustee a lot of money to litigate a preference action against every vendor. And, the amounts involved can often be small. So, it is generally–although by no means always–the case that the trustee is willing to negotiate. The bad news is that since people usually settle, a trustee will not just go away unless you can present a strong defense. On the other hand, this means that a typical preference action does not involve the same costs as a full-blown litigation. Rather, there is initial fact gathering and then, hopefully, negotiation and settlement.

If you are a defendant in a preference action, we likely can help you. Give us a call.

Posted: January 31, 2017

Client Q&A: A Vendor Keeps Sending Me Invoices I Don’t Owe; Can Just Ignore Them?

A vendor keeps sending me invoices; I’ve been ignoring them because I think they are wrong. Is this OK?

By John M. Lundin

It seems logical that if you do not owe someone money, you should be able to ignore any bills they send you. Not so.

Under certain circumstances, a New York court can find that you are liable for a bill that you ignored, without even considering the question of whether you got what you were charged for. This is known as the “account stated” doctrine.

A court can find that an account stated exists when circumstances show that two parties have agreed to an amount owed, based upon prior transactions between them. What does this mean? Imagine that you have a business relationship with a vendor, and every month they provide you services and send you a bill. And every month, you either pay the bill promptly or you dispute the amount owed. Under these circumstances, if you get another bill and don’t contest it, a court can infer from your silence that you have agreed to pay the full amount.

If an account stated is found, you will be liable for the entire bill–you are deemed to have waived your right to contest the specific charges. Luckily, there are exceptions to this rule, such as if you can show that the bill was an attempt to defraud you.

How much time can you take to dispute a bill? Often this is covered by the contract, invoice, or purchase order. If it is not, the answer, unsatisfyingly, is that your delay in disputing the bill should not be unreasonable. Whether a delay is reasonable is based on the context. For example, is there a common practice in your industry? Or, in the past, how long did you take either to pay or dispute a bill?

Even though there are defenses, the key point here is that if you receive an invoice that you think is incorrect, say something promptly.

If someone has made a claim against you for an account stated, or if you have a customer that has not complained about its bills, but has not paid them either, give us a call. We are experienced in both prosecuting and defending actions for account stated.

Posted: October 3, 2016

Client Q&A: Someone made a posting on a website that is not just untrue, it also is hurting my business. Is there anything I can do?

Someone made a posting on a website that is not just untrue, it also is hurting my business. Is there anything I can do?

By John M. Lundin

As the internet has grown, so, too, has the problem of people writing things that are false about businesses or other people. Most of us know to take some of the things we read on the internet with a grain of salt, but even so, the basic rules of defamation law apply to the internet. If someone writes something defamatory about you on the internet, they can be held liable.

Very generally, for a claim to be defamatory, it has to be false, be made to a third party (that is, it cannot be just between you and the person who writes or says it) and it has to damage you. And if you sue someone for it, you have to plead specifically what was said and when it was said. If it is written on the internet, most of these elements are easy to satisfy. So, if the poster gives his or her identity, and you can show how you were damaged, you can sue them for defamation.

With the internet, there can be big challenges associated with determining who made the defamatory statement, and thus who to sue.

Who Made the Statement?

One of the biggest challenges in doing something about on-line defamation is that it can be difficult to figure out who made the statement. On the internet, posts, comments and similar statements often are anonymous or made under pseudonyms. So, you may know exactly what was said and when it was said, but not who said it. And if you do not know who made the statement, it is hard to do anything about it.

You may have to subpoena the website or internet service provider to discover the poster’s identity. This can take some time, but if the website or internet service provider from which you are seeking information is in the United States, and if you can show that you have a valid claim, a court usually will order the disclosure of the poster’s identity.

If the website is hosted outside the United States, it probably will not be possible to get any information from it. As a last resort, there are private investigators who sometimes are successful in discovering a poster’s identity.

Even if you learn the poster’s identity, if they are outside the United States, it may be hard to sue them here. That is, even if you have a claim against them in, for example, New York, it may be difficult to have them served with court papers outside the United States. And if you obtain a judgment against them, it may also be difficult to enforce it.

Suing the Website

If the internet service provider gives you the information it has about the poster, it may be that the poster has disguised his or her identity and location, so that even the internet service provider cannot find them.

If you cannot find the poster, why not just sue the internet service provider that hosts the defamatory comment? As discussed above, with a little work, you can learn who the internet service provider is. While there are exceptions, the general rule is that federal law protects internet service providers from being sued for things other people post on websites that the providers provide.

Conclusion

After reading this, you might think that there is nothing to be done if someone defames you on the internet. Not so! Sometimes, it is no different than–indeed easier than–defamation has always been. It is just that the anonymity and ubiquity of the internet can sometimes make it challenging to bring a claim. If you have been defamed by someone on the internet, you need to know that these complications exist. They often can be overcome. We have experience in this area and perhaps we can help you, too.

Posted: August 30, 2016

Client Q&A: If I win, will they pay my attorney’s fees?

If I win, will they pay my attorney’s fees?

By Vitali S. Rosenfeld

This question is one of the recurring themes in litigation. Indeed, one of the first questions that arise when you are being sued – or contemplating suing someone – is who will be paying the legal fees. And if you have to pay them, the next question is whether there is a chance of reimbursement down the road – because, without such reimbursement, winning a lawsuit may turn out to be a pyrrhic victory.

It would be wrong to assume that the party that loses the dispute on the merits is necessarily required to pay the winner’s attorney’s fees. While that classic common law principle, known as the English Rule, still applies in some countries, it does not normally apply in the United States. Instead, under the American Rule, each party normally pays its own attorney’s fees, regardless of how the substantive dispute is resolved. The American Rule has two important exceptions, however: a different fee regime may be imposed by contract or by statute.

Contractual Fee-Shifting

Many commercial contracts include some variety of a standard fee-shifting provision, stating in essence that, if the contract generates a legal dispute, the losing party will pay the winning party’s costs, including reasonable attorney’s fees. Such clauses are normally enforceable, and their existence may affect the parties’ litigation strategies. In some contexts (for instance, employment and consumer contracts, and landlord-tenant agreements), the purported fee-shifting may be unilateral, i.e. making only one party potentially liable to the other for attorney’s fees, but not the other way around. Such provisions are sometimes not enforced as written—some jurisdictions refuse to enforce contract provisions requiring a consumer or an employee to pay the manufacturer’s or employer’s attorney’s fees, and other jurisdictions expand unilateral clauses to cover both sides, i.e. if the contract says a losing employee has to pay the employer’s attorney’s fees, then a losing employer will have to pay the employee’s attorney’s fees too. Caution should be exercised with regard to such one-sided clauses, even if their enforceable effect is in doubt. On the other hand, a lot of contracts do not have any fee-shifting provisions – which means that the default American Rule will govern, and each of the parties will likely pay its own legal fees in a related dispute.

Statutory Fee-Shifting

Many statutes provide for some form of fee-shifting in litigation generated by that statute. One illustrative example is the federal civil rights statutes which provide that the prevailing party in certain kinds of lawsuits is entitled to have its costs, including reasonable attorney’s fees, paid by the losing party. The policy behind these statutory provisions is to encourage meritorious civil rights claims, including by plaintiffs who otherwise could not afford them. Interestingly, determining who is the “prevailing party” turns out to be not as simple as it sounds, and has itself given rise to a lot of judicial interpretation. Lawsuits often involve numerous claims and counterclaims; some may succeed while others fail; and it is not always easy to determine the overall winner. Notably, however, the amount of damages does not usually affect the winner’s status as the “prevailing party.” It is not uncommon in civil rights lawsuits for the amount of legal fees the successful plaintiff recovers to exceed the award of actual damages.

Indemnification for Plaintiff in a Derivative Suit

In the business context, one of the most common examples of statutory fee-shifting arises in the context of derivative actions – lawsuits brought by a shareholder (or a group of shareholders) on behalf of a corporation or another business entity. The governing statutes usually provide that, if the derivative suit proves to be successful – in other words, once it becomes clear that it was genuinely brought for the benefit of the corporation and actually does benefit the corporation – the plaintiff’s costs, including legal fees, are reimbursed by the company.

Indemnification for Corporate Officers and Directors

Another common examples of fee-shifting in the corporate context is indemnification by a company of its officers and directors’ legal expenses incurred by reason of their present or former positions in the company. The New York Business Corporations Law (BCL) contemplates such indemnification for officers and directors who acted in good faith for the benefit of a corporation. Such officers or directors may be entitled to indemnification of their defense costs, including attorney’s fees, in any litigation related to their job, regardless of whether claims against them have been asserted by third parties or by the company itself. If the individual officer or director successfully defends the lawsuit, the BCL makes such indemnification mandatory. In addition, a company’s by-laws or operating agreements often contain provisions concerning potential indemnification of costs for directors, officers and employees. Sometimes such contractual provisions simply reiterate the protections set forth in the BCL, but often the contractual protections are broader than those provided by statute.

Indemnification v. Advances

Importantly, the potential right to indemnification does not by itself mean that the company will be covering the legal costs on an ongoing basis. To demonstrate entitlement to indemnification, the director, officer or employee usually needs to prove that he or she had acted in good faith or otherwise meets the statutory or contractual criteria for indemnification. That normally happens only at the end of the case – and litigation may take years. In order to facilitate an individual’s defense during the case, the relevant statutes and by-laws often contain separate provisions for advancement of legal fees. For instance, under the BCL, a director or officer is normally entitled to advances to cover the ongoing legal costs (including attorney’s fees) in a proceeding incurred by reason of his or her current or former position. On the other hand, if at the end of the day the officer or director loses his case, the company may be entitled to reimbursement of its advances.

Procedural Fee-Shifting Devices

In addition to the substantive statutes with fee-shifting provisions, there are some additional tools contemplated by the applicable procedural rules potentially enabling a party to shift the litigation costs to the other side, or at least limit its own exposure to paying the other side’s fees. For instance, both the Federal Rules of Civil Procedure and the New York Civil Practice Law and Rules contain provisions allowing a party to make an offer of judgment to the other side during the litigation. If such an offer is rejected, and the rejecting side fails to ultimately obtain a more favorable judgment, it may be liable for the offering party’s costs from the time of the offer. Of course, the specific terms of such provisions are different under the federal and state rules, and their interpretation contains many nuances, including the meaning of “costs” (which may or may not include attorney’s fees).

Conclusion

Who pays the legal fees, and who is potentially liable for their reimbursement, is one of the critical points to consider in litigation strategy. Schlam Stone attorneys have significant experience in litigating issues of indemnification, advances, and other fee-shifting devices, and will be happy to advise you.

Posted: July 25, 2016

Client Q&A: I just got sued. Do I have to hire a lawyer?

I just got sued. Do I have to hire a lawyer?

By John M. Lundin

Do you really need a lawyer? With a few exceptions discussed below, the question really should be: Is it worth it to hire a lawyer? Navigating the legal system can be time-consuming and confusing. You are almost always better off with a trained guide.

Do You Have a Choice?

If you are an individual, you can appear without a lawyer. But that means you will be forced to navigate the court system on your own, which can be difficult and intimidating. Before you consider that path, you should evaluate how much money is at stake and what the consequences will be of an adverse judgment against you.

If you have been charged with a crime, the government will appoint a lawyer to represent you if you cannot afford to hire one. It is hard to conceive of a situation where you would want to appear without a lawyer in a criminal matter, so the choice is use the appointed lawyer (if you qualify) or hire one.

If the lawsuit is against your company, then the company has to have a lawyer; a non-lawyer cannot represent a business in court in New York even if he or she is the owner.

Evaluating the Cost of Hiring a Lawyer

Lawyers, particularly good, experienced lawyers, are not cheap. And they are particularly expensive in New York City, where we are located. Is it worth all that money to hire a lawyer? And what kind? Is it worth the extra money to hire a firm that specializes in business disputes?

As with all things, it depends. Here are some considerations:

How much is at stake? It makes little sense to spend more on a lawyer than a case is worth, unless you are concerned about setting a bad precedent that will cost you more later. Sometimes the question of setting a bad precedent can be very important. Something new lawyers at our firm used to do was represent a large corporate client in small claims court because the client wanted to enforce particular provisions in its service contracts. Even though we did many things to keep costs low, it almost always cost the client more to have us defend a suit than was at stake in the suit. But it was worth it to the client because it wanted to avoid setting a bad precedent regarding its contracts.

How complicated is the case? Sometimes (but less often than you would expect) business disputes are simple and straightforward and they do not require a firm like ours defend. More often, in our experience, it is false economy to hire a lawyer without the necessary experience to handle a complicated case.

Does the case involve an area involving special skills? Sometimes you need a lawyer with special skills or experience. I do not do matrimonial litigation. If people ask me about such representations, I refer them to lawyers I trust who specialize in matrimonial law. Better to not hire a lawyer who will learn on the job on your case (unless another issue, such as cost, leads you to this conclusion).

Of course, not every case involves specialized skills. For example, we typically do not represent debtors in consumer bankruptcy: that is a niche practice. On the other hand, we routinely represent creditors in bankruptcy proceedings, particularly those involving businesses, because the issues are not that different from those we encounter in regular commercial litigation. Similarly, we do not prosecute patents (that is, prepare applications to the US Patent Office to obtain a patent); that is a specialized practice. However, we litigate intellectual property licensing disputes, because those are, at their essence, contract disputes, a matter with which we have extensive experience.

Conclusion

Deciding whether to hire a lawyer and which lawyer to hire are hard decisions to make. We have extensive experience advising clients on this question, including, when appropriate, referring them to lawyers who can more suitably represent them.

Posted: June 27, 2016

Client Q&A: A Competitor Is Cheating The Government, Which Hurts Me And Taxpayers Too. What Can I Do?

A Competitor Is Cheating The Government, Which Hurts Me And Taxpayers Too. What Can I Do?

By Niall D. O’Murchadha

If you discover that someone—perhaps your employer or a competitor—is cheating the federal government, there are several things you can do.

One option is provided by a statute called the False Claims Act (“FCA”). If you become aware of fraud that falls within the FCA, you can file a lawsuit in the government’s name against the person or entity engaging in the fraud, known as a qui tam action. The FCA applies to any fraudulent claims for money that are submitted to the federal government, as well as any actions that falsely reduce the amount of money a person owes to the federal government. There also is a New York version of the False Claims Act.

Qui Tam Actions

An FCA qui tam action can be very lucrative to the person filing it (known as the “relator” rather than the “plaintiff”) because the FCA provides for triple damages as well as a civil penalty of up to $11,000 for each instance of fraud. These are calculated on the damages the government suffered, not the individual relator, so a large fraudulent scheme can give rise many millions of dollars in damages. Although the government keeps most of the recovery, the relator is entitled to a share of the recovery, which can go as high as 30%. Relators also get protection in the form of anonymity rights and anti-retaliation protections.

The downside of qui tam suits is that they are very complicated—the issues described in this document are just the tip of the iceberg:

First, although the relator brings the action, the government is the party in interest, so it has great influence over the proceedings. A qui tam case must be filed with the court under seal (in secret) and a copy must be sent to the applicable United States Attorney’s Office so that they can decide whether to pursue the case themselves. Having the government take over the case is very helpful to a relator, as it communicates to the judge (and the defendant) that the government thinks that the case has merit. However, the relator’s recovery is reduced if the government intervenes. Regardless of whether the government intervenes, it retains veto power over any settlement, and it decides—within statutory ranges—what final award a relator is entitled to. And although the government is supposed to decide whether to intervene within 60 days, as a practical matter that deadline is generally, and repeatedly, extended by the courts. Sometimes, the government can spend a year or more deciding whether to intervene, and the action cannot proceed until a decision has been made.

Second, a well-drafted qui tam complaint is very different from the usual complaint in a private action. Because securing government intervention is very helpful to the relator, the complaint should include not just allegations, but also all of the evidence available to the relator.

Third, not all frauds can give rise to a qui tam action. If the essential facts of the alleged violation are already public knowledge, if the government has already commenced an action against the defendant arising from the same conduct, if another qui tam action concerning the same conduct has been filed, or if the relator was convicted of a crime arising from their role in the fraud, the action cannot proceed. There are also bars against using evidence obtained by a breach of trust. For example, if the relator is an attorney, and learned of the fraud while representing the defendant, or the relator’s proof depends upon privileged documents, the entire action can be dismissed or the privileged evidence can be declared inadmissible.

Fourth, qui tam actions can last a long time and be expensive to prosecute. To be worth filing, these actions usually involve an entity that has submitted many false claims, and each one of these claims must be documented carefully. A demanding standard of proof also applies. It is not enough that the claim be inaccurate—the relator must show knowledge of falsity, or willful blindness or reckless indifference to the truth (applicable to say, a company that forwards false claims prepared by a rogue employee).

Fifth, the FCA does not apply to tax fraud or securities fraud, so qui tam suits cannot be brought in such instances. The IRS, SEC, and CFTC all have their own whistleblower programs that replace the qui tam remedy. They are similar in some ways, except that no action is filed—the whistleblower files a complaint with the relevant agency, and the agency then decides whether or not to investigate further or to begin an action. If money is recovered in excess of $1,000,000, the whistleblower is (usually) entitled to an award. As with qui tam actions, some people cannot receive awards—depending on the particular agency, these can include some attorneys, corporate executives, and persons who participated in the alleged fraud. The “public knowledge” bar also applies. There are also state-law False Claims laws, which cover fraud against state and local governments, and these vary from state to state.

Conclusion

In short, a successful qui tam or whistleblower action requires the relator to (a) marshal all the admissible evidence of fraud it can discover, (b) file a complaint that alleges as many specific fraudulent claims as possible, (c) if at all possible, persuade the United States Attorney to intervene in the action, (d) protect their anonymity for as long as possible, (e) litigate the action to a successful conclusion, and (f) persuade the government to award the highest amount possible. Furthermore, although retaliation against whistleblowers is prohibited by law, a relator may have to (g) enforce their rights if they are retaliated against.

Although a successful qui tam action can be very lucrative for the relator, an experienced lawyer is essential to achieving these goals and avoiding the many pitfalls outlined above. Schlam Stone & Dolan has significant experience in litigating qui tam actions and submitting whistleblower complaints, and we’d be happy to answer any of your specific questions.

Posted: June 2, 2016

Client Q&A: I Bought a Business and the Seller’s Representations Have Turned Out to be False

My company acquired another company. The seller made representations regarding the company’s finances that turned out not to be true. What can we do?

By John M. Lundin

Something that is litigated with surprising frequency is the situation where the seller of a company makes representations regarding something–typically the financial condition and assets of the company–and, after the sale, those representations turn out to be false.

Under New York law, a representation is part of the contract containing it, and if the representation is false, you can make a claim for breach of contract. All that you need to prove is that the representation was made and that it was false.

In particular, a purchaser may sue for breach of an express representation that the financial statements provided by the seller are in accordance with certain requirements when in fact they did not comply with those requirements.

How Long Do You Have to Bring Suit?

You have a limited time after the deal closes to bring a claim for breach of representations. Generally, a claim for breach of representations accrues–that is, it comes into existence–when the contract containing the representations is signed. This is true even if the effective date of the contract is earlier than the date the contract is signed.

It is very common for purchase agreements to limit the time a purchaser has to bring a claim to a much shorter period than the six-year New York statute of limitations. Such terms are, in general, binding, so it is important that you promptly ensure that the representations that have been made to you were true.

What if There Was Not a Specific Representation?

If you relied on representations from a seller that were not contained in the purchase agreement, you might still have a claim, but you could face significant obstacles.

First, if, as is very common, your purchase agreement provides that it constitutes the entire agreement between the parties and disclaims any representations other than those written in the agreement, it is likely that a court will enforce those terms and prevent you from bringing an action based on representations that were not in the agreement. However, a disclaimer of representations does not preclude a fraud claim if it does not specifically disclaim the representations. In other words, it must be specific.

Second, if you are buying a business, a court may find that you are a sophisticated investor, and as a sophisticated investor, you have a duty to exercise due diligence in investigating your purchase. That is, if you could have, through reasonable efforts, determined the truth of a fact, you cannot claim that you were defrauded because the seller misrepresented that fact to you. Or, as a recent appellate court decision puts it: “if the facts represented are not matters peculiarly within the defendant’s knowledge, and the plaintiff has the means available to it of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, the plaintiff must make use of those means, or it will not be heard to complain that it was induced to enter into the transaction by misrepresentations.” (Emphasis added).

A simple example can illustrate the general rule. When buying a small factory, you considered in setting the purchase price that the seller told you that there was $5 million worth of inventory in a warehouse located next to the factory. Later, you discovered that the warehouse was empty. A court likely will not entertain a fraud claim for the missing inventory because you failed to exercise reasonable due diligence when you did not look in the warehouse to confirm the presence and value of the inventory.

Conclusion

If a seller has breached a written representation in a purchase contract, you likely can sue the seller for breach of contract. But be sure you know how long you have to bring a claim because that time may be limited by the contract.

If the representation was not written in the contract, you may have a claim for fraud, but there are hurdles you may have to overcome.

Most important, if you are buying a business and you are relying on representations that the seller has made, make sure that you get them in writing. And use reasonable due diligence in checking facts material to the deal to which the seller will not make a representation.

We have extensive experience in litigating disputes regarding representations–written and unwritten–made in connection with the sale of a business. If you face such a dispute, feel free to contact us and we can advise you, too.

Posted: May 17, 2016

Client Q&A: The Person Who Cheated Me Just Filed For Bankruptcy. Is This Legal? What Can I Do?

The Person Who Cheated Me Just Filed For Bankruptcy. Is This Legal? What Can I Do?

By Niall D. O’Murchadha

Nothing adds insult to injury like getting the news that someone who cheated you in a business transaction, or otherwise did you wrong, has filed for bankruptcy in order to get out of paying you your money back.

The Automatic Stay

As an initial matter, an “automatic stay” goes into effect immediately upon a bankruptcy filing, with the effect that the filing prevents you from suing the person who filed (known in bankruptcy law as the “debtor”), continuing an existing lawsuit against them, settling any claims against them, continuing any judgment collection efforts against them, or really doing anything at all to get your money back. The automatic stay is intended to simplify and rationalize the debtor’s affairs by forcing all creditors into one court so that the debtor’s assets can be collected, pooled, and divided fairly among legitimate creditors. This system works fairly well when the debtor is a legitimate business with transparent financial records and realizable assets and accounts receivable that can be collected by the creditors, or when the debtor is an “honest but unfortunate” individual who has been overwhelmed by medical expenses or loss of a job and can simply no longer pay all of their bills in full. But sometimes, the debtor is not “honest but unfortunate” but instead has either been playing fast and loose, or even engaging in outright fraud or other wrongdoing. And unfortunately, dishonest debtors can use the ordinary bankruptcy court procedures to obtain significant advantages over their creditors.

So what is a creditor to do?

The first step is to try and persuade the Bankruptcy Trustee, if one is appointed, to act. The Trustee is an officer appointed by the Bankruptcy Court to supervise the process of identifying and notifying creditors, collecting assets, and paying creditors out of the assets. One of the first things a Trustee does is to convene a Creditor’s Meeting, and a creditor can attend this meeting, explain the circumstances, and ask the Trustee to take further action by investigating the debtor’s assets and prior actions. In theory, if the Trustee finds that the debtor has lied in the Bankruptcy Petition, has hidden assets, or has destroyed or falsified financial records, the Trustee can apply to the Court for a denial of discharge. If the application is approved by the Court, the entire bankruptcy proceeding ends, the bankruptcy petition is thrown out, and all of the debtor’s creditors can go back to suing, or settling, or pursuing any judgment enforcement remedies that might be available to them. (An individual creditor may also pursue this remedy, but an application by the Trustee is far more likely to succeed.) However, this is an extreme remedy, and a Trustee will inevitably demand strong evidence of fraud against creditors generally—rather than just against one creditor—to object to discharge. Trustees also tend to be unwilling to do much in no-asset bankruptcies—Trustees often have many cases pending, and may not put much effort into a small case where the debtor, regardless of how sleazy their behavior, does not appear to have any money to pay creditors regardless of what happens in the bankruptcy proceeding.

The second option requires creditors to take action on their own. In every bankruptcy proceeding, the Trustee sets a date by which Objections to Discharge must be filed. Up to that date, creditors can object to the discharge of a particular debt owed to them. The kinds of particular debt that can be denied discharge are set forth in section 523 of the Bankruptcy Code (11 U.S.C. § 523), and they include:

  1. Debts for money, services etc. obtained by fraud;
  2. Consumer debts incurred within 90 days of the bankruptcy filing;
  3. Debts arising from fraud by a fiduciary, or from embezzlement or larceny;
  4. Debts for domestic support obligations;
  5. ebts for willful and malicious injury to another person or entity or to their property;
  6. Debts for violation of federal or state securities laws.

If creditors believe that a debt they are owed (which includes an unliquidated claim, an unpaid settlement, or a judgment) can fit into one of these categories, they can commence an Adversary Proceeding, which is a separate lawsuit within the bankruptcy proceeding. An adversary proceeding goes through all the phases of a standard lawsuit: complaint, answer, motions to dismiss, discovery, motions for summary judgment, trial, etc. If the creditor can show clear and convincing evidence (a higher standard than the “more likely than not” standard applicable in most civil actions) that their debt fits into one of the § 523 categories, that particular debt will be denied discharge. This means that, although the remainder of the debtor’s debts will be discharged, the particular debt that was the subject of the adversary proceeding will not be, so the creditor can continue its collection efforts.

It is no easy matter to begin and prosecute a § 523 adversary proceeding. For example, the default position of the Bankruptcy Courts is that discharge should be granted, so the Bankruptcy Court’s instinct will be to deny the objection and grant discharge. The general language of the statute—terms like “willful and malicious injury,” “embezzlement or larceny,” “obtained by fraud,” etc.—may seem simple, but have been interpreted and refined over the years by countless judicial rulings, up to and including Supreme Court decisions. And the type of dishonest debtor that might be the subject of a § 523 objection is not likely to cooperate by complying fully with their discovery obligations. The services of a competent and experienced lawyer are therefore essential, and creditors proceeding pro se are wasting their time.

Conclusion

Schlam Stone & Dolan has substantial experience in litigating objection to discharge cases, both in § 523 proceedings and also in the less frequent creditor applications to prohibit a general discharge. For example, Schlam Stone & Dolan lawyers had a bankruptcy filing made by the World Boxing Council dismissed in its entirety, allowing collection of a client’s $28 million judgment to proceed. We also have a great deal of experience with § 523 actions. If you are faced with a dishonest debtor trying to avoid paying you by filing bankruptcy, you should contact the firm and ask our advice.