Client Q & A

Answers to common client questions.
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).


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.


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.


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.


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.


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.

Posted: April 21, 2016

Client Q&A: My Business Just Got A Notice Saying That The Landlord Will Terminate Its Lease!

Help! My Business Just Got A Notice Saying That The Landlord Will Terminate Its Lease!

By Niall D. O’Murchadha

Conflict with a landlord is a common problem faced by businesses both large and small. The standard New York commercial lease follows this pattern: (1) if the landlord claims that the tenant has breached the lease, either by failing to pay rent or by other means, he can send a “notice to cure” or a “notice of default;” (2) the notice will say, in effect, that if the alleged breach is not cured within a short time (usually ranging between 7 and 30 days), the lease will terminate automatically; (3) if the problem is not fixed within the set time, the lease terminates; and (4) the landlord can then file an action in Civil Court to have the tenant evicted.

The Duty to Cure.

The most important issue here is point (3); if the problem is not fixed within the allotted time, the lease terminates automatically, and any subsequent attempts to cure cannot restore it. This means that, if you get a “notice to cure” or some similar document from your landlord, time is of the essence. If you don’t take legal action before the allotted time runs out, it may be too late.

The automatic termination rules put you as a commercial tenant at a serious disadvantage, which can manifest in two ways. First, if you want to contest the alleged violation—if you want to argue that, say, the failure to repair the elevator, or to fix a leak is the landlord’s responsibility, not yours—you can do so in court, but by the time the case has been decided, the time to cure will inevitably have expired. This leaves you with a dilemma: either you can try to cure the violation, or you can deny that a violation ever took place, but not both. Second, many violations, like the aforementioned repair problems, or loss of necessary permits or insurance, can be cured, just not in the short time permitted by the lease. Getting the Department of Buildings to issue a new permit in 7 days (or even 30 days) is a tall order.

The Yellowstone Injunction.

Fortunately, the New York courts have recognized this problem and have created a mechanism to protect commercial tenants from losing their leases, known as the “Yellowstone injunction.” Named after the Court of Appeals case that first acknowledged the existence of a problem, the Yellowstone injunction allows a commercial tenant to go—run!—to Supreme Court and get an order extending the cure period until the entire dispute can be worked out in court. This allows the tenant to contest the existence of a violation and then, if the court rules the other way, to try to cure it later. Practically, applying for a Yellowstone injunction also gives tenants a great deal more time to cure any known violations, because they can work on a cure while the lawsuit is pending, which will inevitably last far longer than 7 to 30 days.

Yellowstone injunctions are much easier to get than just about any other kind of injunction—you only have to show that (1) you have a commercial lease; (2) you received a notice of default or termination, or a similar threat to terminate your lease; (3) the cure period has not expired; (4) you are willing and able to cure any alleged violation of the court rules against you.
As before, point (3) is the most important by far. The Yellowstone injunction only extends the time to cure, so if the time to cure has already run out, you are too late. Accordingly, if you get a notice to cure or a notice of default, time is still of the essence. You must take immediate legal action before the allotted time runs out.

There are other circumstances in which a Yellowstone injunction is not available, but those are more technical—they sometimes don’t apply in non-payment of rent cases, and sometimes, the violation is so severe that it could never be cured—and should be discussed with your lawyer. Your response to any notice of default or notice to cure a commercial lease should still be to consult a lawyer immediately.

Yellowstone Injunctions In Residential Cases.

Yellowstone injunctions are usually issued in commercial cases, but they can be gotten in residential cases as well. The New York Legislature passed a law granting residential tenants in New York City an automatic 10-day time to cure any violations of their lease even after they lose in court, so residential tenants can contest the existence of a violation in court and then try to cure it if they lose their lawsuit. However, if (1) you do not live in New York City, or (2) your alleged violation will take more than 10 days to cure (for example, if you’ve sublet your apartment, or have started running a business out of your apartment, or made unauthorized alterations, or will need more than 10 days to re-home your dogs) you can still apply for a Yellowstone injunction. But again—time is of the essence. You must apply for the injunction before your time to cure runs out.


Schlam Stone & Dolan has a great deal of experience with getting Yellowstone injunctions (and with commercial real estate disputes in general) including success in complex, highly-contested cases where landlords have gone all-out to prevent a Yellowstone injunction from being issued. If you get a notice to cure or a notice of default, or a similar threat to terminate your lease, contact us immediately—your time to act will run out very quickly.

Posted: April 12, 2016

Client Q&A: I have a legal emergency! What can you do right now?

I have a legal emergency! What can you do right now?

By John M. Lundin

The wheels of justice can move slowly. Complex commercial cases can take years to resolve, even if the court and the parties do not delay. Sometimes, “justice delayed is justice denied,” and you need a court’s help immediately to prevent imminent (or already occurring) serious harm. Is there anything that can be done?

There are things a court will do immediately, before it makes a final decision, to stop continuing harm and maintain the status quo. In appropriate circumstances, it will order a party not to do (or, in limited circumstances, to do) a particular act. This is called an injunction. A court also can take control of property (attachment) or appoint a neutral third party (a receiver) to take control of a business or property. We discuss each remedy below.

The key thing these remedies have in common is that, in order to be entitled to one, you have to show that you are being harmed in a way that an award of damages at the end of the case will not adequately remedy. Thus, they are not always available. But when the criteria for obtaining these remedies are met, they can protect your rights–right now–in effective ways.


When it grants an injunction, a court orders a party not to take (or to take) a particular action. For example, a court might enjoin employees who are alleged to have breached non-compete agreements or are alleged to have stolen trade secrets from opening a competing business.

The criteria a court will consider in deciding your application for an injunction include whether you are likely to succeed on the merits of your claim; whether, if the injunction is not granted, you will suffer harm that cannot adequately be remedied by an award of money; and whether the balance of the equities is in your favor.

The first criterion is straightforward. You do not have to prove at the beginning of the case that you will certainly win; if you could do that, the case would be over. But you have to show that you have a valid claim based on the facts you allege, supported by some evidence, even if it is just an affidavit from you.

Whether the harm you will suffer cannot be remedied by a money award at the end of the lawsuit (called “irreparable harm”) can, unfortunately, be a vague concept. In theory, almost anything can be compensated for by a monetary award. But courts recognize that some harms are particularly difficult to fix by an award of damages. For example, if your employees take your customer lists, open a competing business and drive you out of business, there is no practical way, at the end of the case, for the court to put you back in business. On the other hand, if you are suing a customer for not paying for goods you sold to them (or services you provided to them), a court generally will not see that harm as irreparable, even if you could show that the lack of payment is hurting your business, because it ultimately is only about the recovery of a calculable sum of money.

The balance of the equities criterion rarely becomes decisive. It basically means that the court will consider the fairness of issuing the injunction. If you can show that you are likely to succeed on the merits and will suffer irreparable harm, likely the balance of the equities is in your favor as well. However, there could be situations where, for example, you meet those criteria but it would inflict significant harm on the defendant to be enjoined. Or, conversely, if your claim is not strong, but the unfairness of a situation to you is palpable, the balance of the equities criterion might tip things in your favor.

Courts are very reluctant to grant injunctions that order your opponent to take affirmative action, rather than refrain from taking action (thus maintaining the status quo). To obtain such an injunction–called a mandatory injunction–a court will require stronger proof of your likelihood of success on your claim.

Obtaining an Injunction

To obtain an injunction at the beginning of a lawsuit (a “preliminary injunction”), you have to make a request to the court (a “motion”) with notice to your opponent. The motion will have to include factual affidavits and legal argument showing why you are entitled to the injunction. Your opponent will have an opportunity to respond. If necessary, the court will hold an evidentiary hearing, including taking testimony from witnesses, before deciding the motion.

Importantly, if a court grants an injunction, it must order the moving party to provide an “undertaking” to compensate the enjoined party from any damages it suffers as a result of the injunction if it ultimately is determined that it was not entitled to it. Normally, the undertaking is a bond that you have to purchase from a bonding company. The amount of the bond is often the subject of sharp dispute. For tactical reasons, your opponent may seek a very high undertaking; if the amount of the undertaking is high enough, you might not be able to pay for the bond. In our experience, courts are often sensitive to this issue and order undertakings that are not prohibitively expensive.

If you need an immediate court order even before the hearing an a preliminary injunction can take place, you can seek a “temporary restraining order” (TRO), which may be granted or denied based upon the judge’s brief review of the motion papers and a very short argument.  Sometimes, there is good reason to worry that, if you give your opponent advance notice that you are seeking a TRO, it will take preemptive action making the TRO moot when it is granted. In these situations, you can seek a TRO “ex parte” (that is, without notice to the other side) – but you need a good reason to offer the court as to why such notice was not given. In any event, a TRO is, as the name implies, temporary. Once it is granted, you have to give your opponent notice of the order, and then the regular preliminary injunction process will play out.


When a court orders the attachment of a defendant’s property, it seizes and holds the asset pending the decision of a case. An attachment can be directed at any property, including bank accounts. An attachment is a drastic remedy, but courts can order it in cases where you are seeking money damages, the defendant is out of state (or is in the state but you cannot find it to serve it despite diligent efforts) or you can show that the defendant is moving assets out of the state to hide the property, defraud creditors or otherwise make it hard for you to collect.


In extraordinary situations, you can seek to have a temporary receiver appointed to take control of property or a business during the pendency of litigation. A receivership requires the same proof as an injunction, plus a showing that “there is danger that the property will be removed from the state, or lost, materially injured or destroyed.” Put differently, a court will not take control of property or a business just because there is a dispute over it. But, if you can show, for example, that your opponent is looting a business, driving it out of business, a court might appoint a neutral third party–a receiver–to run the business while it hears the dispute.

Notice of Pendency

A notice of pendency–which relates to real property–is different from the other remedies discussed above. It is simple to obtain: you simply file a notice with the court in which a lawsuit relating to the ownership, possession, use or enjoyment of real property is pending. The scope of the notice is limited. It serves merely to put the public on notice of the dispute. However, it can be a powerful tool in litigation relating to real estate because it makes it difficult for someone to sell or encumber the property.


Making and defending motions for preliminary remedies is a regular part of our business. If you face a situation where you need immediate, temporary relief such as discussed above, please feel free to contact us to discuss it.

Posted: March 21, 2016

Client Q&A: My friends and I jointly own a corporation and an LLC, but disagree about everything lately. How can I get out of the business?

My friends and I jointly own a corporation and an LLC, but disagree about everything lately. How can I get out of the business?

By Vitali S. Rosenfeld

Separating from one’s business partners in a closely held entity—commonly known as business divorce—is a distinct area of modern commercial law generating a lot of litigation. Like any other dispute, it may be possible and preferable to negotiate the terms of such separation without involving the court system. But sometimes the majority owners resist dividing the business, or the parties may be unable to agree on company valuation and mutual accounting. This often gives rise to a dissolution proceeding.

For dissolution purposes, each entity (such as a corporation, an LLC, a partnership, etc.) should be considered separately, because different kinds of entities are governed by different rules. We previously touched upon the topic of dissolution of corporations. To recap, in New York there are three different sets of standards depending on your level of ownership.

Dissolution of a Corporation

If you (alone or together with other aligned shareholders) own at least 50% of the corporation, the Business Corporation Law (BCL) allows you to petition for dissolution based on a deadlock, i.e., constant disagreement between shareholder factions that prevents effective decision-making. In this scenario, it is not necessary to prove anyone’s wrongdoing—just irreconcilable differences. This is no-fault divorce, so to speak.

If you (and others aligned with you) own less than 50% but at least 20% of the corporation, then you can seek dissolution under a different provision of the BCL, based on various types of wrongful conduct by the majority in control. That includes fraudulent, illegal or oppressive conduct, as well as waste or mismanagement of corporate assets. Notably, petitioning for dissolution under this provision triggers the majority’s right to buy out the petitioners’ shares at fair value.

Finally, if you own less than 20% of the company, then you cannot base your dissolution petition on any particular provision of the BCL, but you can still make a claim for “common law dissolution” on the ground that the majority owners engage in systematic and egregious breaches of their fiduciary duties—for instance, looting the corporation by diverting its funds, resources and opportunities for personal use. Courts have held that these grounds for dissolution largely parallel the statutory grounds available to 20% shareholders. Likewise, common law dissolution claims often result in a buyout of the petitioners’ shares by the majority.

Dissolution of an LLC

As for LLCs, they are governed by an entirely different statute—the Limited Liability Company Law (LLCL). Under that statute, a member may petition the court for dissolution if it is no longer “reasonably practicable” to continue operating the business in conformity with its articles of incorporation or operating agreement. Naturally, such analysis begins with the contractual language of these foundational documents. The operating agreement may itself contemplate dissolution and set specific terms for it. Or at least it could otherwise shed light on what is or isn’t “reasonably practicable” with regard to this particular company.

But the contractual analysis may lead to a dead end where the operating agreement does not exist or where it provides no explanation of the company’s business goals. In such situations, the court may use other evidence as to the company’s intended purpose. In any event, that intended purpose often becomes the focal point of the court’s analysis. The court is likely to look beyond the members’ respective ownership interest shares and examine each member’s specific role in the business.

If the petitioning members establish that the company’s intended purpose is defeated by the controlling members’ conduct, the court will likely grant dissolution. Simple disagreement between member factions, however—or even some wrongdoing by the majority—will not necessarily be enough to meet the stringent LLCL dissolution standard. On the other hand, that standard will probably be met where the majority’s management makes the company insolvent or brings it close to insolvency: New York courts have held that it is by definition “not reasonably practicable” to continue carrying on a financially failing business.

Withdrawal from an LLC

What if the court decides that the LLC dissolution standard has not been met—does that mean you are stuck in an unhappy “business marriage”? Not necessarily. Another possible option is a member’s “withdrawal.” While conceptually different from dissolution (one member may withdraw while the company as a whole continues to exist), the practical result may be the same, especially where the LLC consists of only two members.

The previous version of the LLC Law (which may still be applicable to LLCs created before 1999) allowed withdrawal by any member on six months’ notice to the other members. The current version of the LLCL, however, is much less liberal: it provides that withdrawal is not allowed unless the company’s operating agreement contemplates it. This makes withdrawal difficult (or impossible) where the operating agreement lacks a clear withdrawal provision or makes withdrawal subject to various limitations.

Just as with corporations, petitioning for dissolution of an LLC or for withdrawal from an LLC may in practice lead to a buyout of one member’s interest by other members. Even though the LLCL has no express buyout provision, courts have held that buyout may be ordered as an equitable alternative to dissolution of the entire business. If so, the remainder of the proceeding would focus on fair valuation of the company and of the outgoing member’s ownership interest. Such valuations often become the focus of the litigation and the subject of expert analysis.

Dissolution lawsuits are most commonly commenced as “special proceedings” subject to a particular set of procedural rules. While the procedural requirements for a lawsuit seeking dissolution of a corporation and one seeking dissolution of an LLC are somewhat different, it is usually possible to combine both claims in the same proceeding. It is also often possible to add other claims related to the same business – for instance, for breach of the operating agreement, breach of fiduciary duty, mismanagement of corporate assets, and other misconduct in connection with the same companies.


If you are in conflict with your business partners and would like to get out of the business, to buy them out, or otherwise to resolve your differences, make sure you consult with competent counsel and carefully consider your options. Schlam Stone has significant and wide-ranging experience in litigating corporate governance disputes and dissolution of corporations, LLCs, partnerships and other business entities.

Posted: March 7, 2016

Client Q&A: My old boss’s lawyers are sending threatening letters to my new boss. What can I do?

My old boss’s lawyers are sending threatening letters to my new boss. What can I do?

By Niall D. O’Murchadha

The “threatening attorney letter” is a common feature of many of the business-related disputes discussed in these Client Q&As. If you suspect that a former (or current) employee or business partner is about to breach a non-compete agreement with you, or about to provide your confidential information to someone else, or take some other injurious action in concert with a third party, it is common practice to ask your lawyer to send a “cease-and-desist” letter saying “if you do X I will sue you.” It is also common to send such a letter not only to the individual, but to their counterparty as well. Putting Party A on notice that the deal they are being offered by Party B would violate Party C’s enforceable rights, and might lead to a lawsuit, is a good way to get Party A to reconsider.

But what if you are Party B? What if you are the person who is trying to get a new job, or make a new deal, but your old employers, or your old business partners, are sending threatening letters to prospective new employers or new business partners in an attempt to sabotage your efforts? Is there anything you can do?

First, you should assess whether the letter writer has a basis for their claims. Are you in danger of breaching a non-competition agreement, confidentiality agreement or other obligation? If you are in the right, depending on your particular situation, you might have several options:

An Action For Defamation

An action for defamation would be the most desirable remedy, because (unlike the other options listed below) it does not require that you actually be sued, or that you can show a particularized injury (such as losing a particular job or a particular deal falling through)—someone making false statements about you can be enough. Defamation actions can be brought against the lawyer sending the threatening letter, against their client, or both.

The main obstacle to a defamation action is the so-called “litigation privilege.” This privilege protects pre-litigation statements—even false statements—asserting legal rights in a dispute, so long as they are “pertinent to a good-faith anticipated litigation.” Statements that fit within this privilege cannot be used as the basis for a defamation lawsuit. So for example, a letter threatening to enforce a non-compete agreement that does not exist, or a letter that also includes unrelated false statements (“X is breaching a non-compete agreement with me and also has a drinking problem,” e.g.) could open up the possibility of a counter-suit, but a letter making false statements about the facts surrounding a real non-compete agreement, or exaggerating the damages that might be available if a lawsuit is filed, might not.

An Action For Tortious Interference With Contract

Threatening to bring a sham or frivolous lawsuit can give rise to an action for tortious interference with contract, but the breach or loss of an existing contract or prospective contractual relationship is also required—you won’t be able to bring this action unless you can point to a specific existing or proposed deal that fell through because of the letter. But if you do lose that new job, or the new business opportunity, as a result of that letter, you might be able to bring a tortious interference action.

Malicious Prosecution and Statutory Remedies

An action for malicious prosecution can be brought only if you are actually sued, win the lawsuit, and can show that no probable cause existed to bring the lawsuit. There are also statutory remedies available against attorneys and parties that file harassing or frivolous lawsuits or make false statements in pleadings, but these too require that a lawsuit actually be filed, and statutory damages usually only cover your attorneys’ fees and costs incurred in that lawsuit. These remedies should be kept in mind if you are actually sued.


If you are being subjected to harassing attorney letters—addressed either to you or to others—you will need good advice on how to proceed, including advice on the question of whether any of the statements in the letters are actionable. Schlam Stone & Dolan has significant experience in dealing with these issues, and we would be happy to answer any of your specific questions.

Posted: February 29, 2016

Client Q&A: I have a contract with a foreign government-owned company that has refused to pay me. Can I sue it in the United States?

I have a contract with a foreign government-owned company that has refused to pay me. Can I sue it in the United States?

By Vitali S. Rosenfeld

As discussed in a prior post, dealing with foreign parties adds a level of complexity to any litigation. But suing a company owned by a foreign state is a unique endeavor governed by a particular federal statute—the Foreign Sovereign Immunities Act (FSIA). Most business owners may never hear about this piece of legislation—but once it comes into play, it often becomes the centerpiece of the dispute.

History of the FSIA

Historically, foreign states and their agencies used to enjoy absolute immunity from suit in American courts; disputes involving foreign sovereigns were considered to be a matter of international relations, a traditional domain of the executive branch. In the middle of the twentieth century, this doctrine gave way to the theory of restrictive immunity, distinguishing between public acts of foreign sovereigns (which could not be challenged in court) and their private commercial acts (which could be the subject of litigation). The distinction, however, still needed to be made in each particular case. For decades, the Department of State used to make such determinations, leaving them susceptible to political influences.

Eventually, in 1976, Congress enacted the FSIA, making the United States the first nation to codify the law of foreign sovereign immunity by statute and to place the responsibility for immunity determinations entirely into the hands of the judiciary. Many countries have since enacted similar statutes. The FSIA is a comprehensive code governing litigation against foreign states and their instrumentalities in U.S. courts.

FSIA Litigation

Most FSIA litigation takes place in federal courts. While it is possible to file an action in state court, the foreign sovereign defendant will normally have a good ground to remove it to federal court, because the FSIA is a federal statute and thus raises questions of federal law. Notably, the FSIA also prescribes very particular rules of service of process, which have to be meticulously followed in any case against a foreign sovereign.

Who is a Foreign Sovereign?

Of course, the threshold question is, who is a foreign sovereign? The FSIA definition of a “foreign state” includes its “political subdivision” and its “agency or instrumentality.” The latter is, in turn, defined to include an “organ” of a foreign state or its subdivision as well as any other “separate legal person” majority-owned by a foreign state or its subdivision. Such legal persons include corporations and other organizations involved in international business. It is not always readily apparent to foreign counterparties that they are dealing with a government-owned entity. Moreover, the ownership situation may change over time: companies occasionally get nationalized or privatized. But if a company is majority-owned by a foreign government at the time the lawsuit is filed, it is likely to be considered an “agency or instrumentality” of a foreign state, making the FSIA applicable.

FSIA Immunity

Under the FSIA, foreign states (including their agencies and instrumentalities) are presumptively immune from suit unless one of the enumerated exceptions applies. Once the defendant shows that it falls within the FSIA definition of a foreign state, the burden shifts to the plaintiff to demonstrate that one of the exceptions is applicable.

One such exception provides that a foreign sovereign will no longer be immune from suit to the extent that it has waived its immunity “either explicitly or by implication.” The waiver exception is most likely to apply in a contractual setting; it provides an excellent mechanism for a sophisticated counterparty to ensure in advance that it can sue if the contract is breached. As with any contractual provision, however, the specific scope of the waiver will be subject to judicial interpretation. Preferably, the language of the waiver should be carefully crafted by counsel familiar with the intricacies of the FSIA.

Another exception is an agreement to arbitrate the dispute. It is similar in the sense that it also usually arises in the context of a contract with a dispute resolution clause. However, unlike a direct waiver of jurisdictional immunity, an arbitration clause by definition would prescribe that the parties seek resolution in an arbitration forum rather than in court. The plaintiff would thus usually have to proceed to arbitration as the agreement prescribes—and only having obtained an arbitration award, can attempt to enforce it in court.

The Commercial Activity Exception

But what if there is no dispute resolution clause? The commercial activity exception provides that there is no immunity where the claim is based upon commercial activity in the United States, or an act performed in the United States in connection with commercial activity elsewhere, or even an act in connection with commercial activity elsewhere that causes a “direct effect” in the United States. This provision leaves plenty of room for interpretation—including whether certain activity is “commercial” in nature, whether a certain act took place in the United States, whether a certain effect is “direct,” and whether the plaintiff’s claim is “based upon” (rather than incidentally related to) such an act or activity. The commercial activity exception, therefore, gives rise to a lot of judicial analysis.

Other FSIA Exceptions

Other notable exceptions to jurisdictional immunity include the expropriation exception, the real property exception, the tortious act exception, the admiralty exception, the counterclaims exception, and the most recently enacted terrorism exception. Each of these has its own complexities, and navigating them is beyond the scope of this posting.

Judgment Collection

But overcoming the jurisdictional immunity and even winning the case against a foreign sovereign on the merits is not the end of the story. Often, it is just the beginning. How do you enforce the judgment? Granted, enforcing the judgment against any defendant may sometimes be challenging—but the FSIA provides for a whole other layer of immunity known as execution immunity. Here as well, the presumption is that any property of a foreign sovereign is immune from attachment or execution, and the plaintiff must rely on one of the enumerated exceptions.

These exceptions are somewhat broader for property of an “agency or instrumentality” of a foreign state than for property of the foreign state per se. In any event, the subject property must be in the United States. But the property of a foreign state must also itself be “used for a commercial activity in the United States”—whereas any property of an agency or instrumentality in the United States may potentially be subject to execution as long as the entity is engaged in commercial activity in the United States. There are additional requirements. There are also exceptions to the exceptions: for instance, property of a foreign central bank or monetary authority, and property used in connection with military activity, are in all events immune from execution.


Sovereign immunity is a complex and specialized area of the law. Whether you already have a dispute, or are only considering entering into a business relationship, with an entity wholly or partially owned by a foreign government, it is important to consult competent counsel. We have significant experience in FSIA litigation and will be happy to advise you.

Posted in Client Q & A