Client Q & A

Answers to common client questions.
Posted: August 10, 2015

Client Q&A: The IRS is After Me. What Should I do?

The IRS is after me. What should I do?

By James C. Sherwood

The IRS contacts people in many ways, and for many reasons. Most of these contacts are routine inquiries; some are not. What follows are some considerations to help you understand the process. However, if the IRS contacts you, seek advice from a qualified tax attorney or accountant.

Is the IRS Really After Me?

Many people (including me) have recently received robocalls stating that the IRS is about to sue you, unless you call (and provide confidential data). These calls are phone fraud, a telephone version of phishing on the internet, and have nothing to do with the IRS. The IRS does not robocall and threaten. If you receive such a call, do not call back – ignore it.

How Does the IRS Contact Me?

Typically, the IRS makes initial contact by a letter in the mail, not email or social media. The IRS will write, for instance, if the income on your return doesn’t match your W-2s and 1099s in their data base; if they’ve found mathematical mistakes on your returns; if their account of your estimated tax or withholding tax payments doesn’t agree with yours; if they are going to send you a refund; if they have selected you for audit; or for a hundred other reasons. While an IRS contact is no reason to panic, do not ignore it.

If you ignore IRS letters, they will follow up with harsher letters or phone calls. Ignoring letters and live phone calls can make an easy matter worse. Check your records and your returns: if there is a substantial discrepancy, you should seek advice before responding to the IRS.

What Kind of Letter Should I Worry About?

Many people know or suspect that their tax returns have errors, some serious. Examples include (but are not limited to) unreported cash income, off-the-books employment, mixing personal and business expenses, overstating gifts to charity, false records created to support tax returns, etc. If the IRS sends an audit notice where these problems exist, or asks for returns you have not filed, these can be serious matters.

If you receive an IRS contact where a potentially serious problem exists, you should contact qualified criminal counsel for prompt advice before responding to the IRS.

Should I Call My Tax Preparer?

It depends. If you have a serious problem, the IRS will seek to identify the problem (for example, unreported income), and then to determine who was at fault: for example, did the taxpayer hide information from the preparer? Did the taxpayer tell the preparer about it, and the preparer missed it or said “It’s cash – don’t report it?” In either case, the preparer has a conflict of interest and you should certainly seek other representation.

Can I Have a Confidential Talk With My Accountant?

No. The IRS or a prosecutor can ask your accountant about all conversations with you, and she must answer unless she invokes the Fifth Amendment. Conversations with an attorney are generally protected by the attorney-client privilege.


If the IRS contacts you, seek advice from a qualified tax attorney or accountant. We are experienced in dealing with the IRS, including on criminal issues. We would be pleased to discuss the specifics of your situation with you.

Posted in Client Q & A, Taxation
Posted: July 27, 2015

Client Q&A: What’s a Ponzi scheme and how can I tell if I have gotten caught in one?

What’s a Ponzi scheme and how can I tell if I have gotten caught in one?

By John M. Lundin

A Ponzi scheme is a fraud where the victims entrust money to the perpetrator who, instead of investing the money, uses later investments to pay returns to earlier investors, keeping the rest of the money for itself. The scheme typically continues until the perpetrator cannot find enough new investors to pay off the earlier ones or it decides to disappear with the remaining money.

The name comes from Charles Ponzi, who operated such a scheme in the early 20th century. A famous modern-day perpetrator of a Ponzi scheme was Bernard Madoff, who is believed to have cheated investors out of tens of billions of dollars.

Sometimes, Ponzi schemes start off as legitimate businesses. The perpetrator may fail to earn the promised returns and then hide it, and start using new funds to pay promised returns to earlier investors so that it looks like it is achieving the promised returns. Other times, the perpetrator skims money from the investment pool for its personal use–to pay debts, support a lavish lifestyle, or to pay for a drug or gambling habit–with the intention of paying the money back. People sometimes start down this path thinking that they will make the money up later, but because they are spending new funds instead of investing them, they rarely succeed. Instead, they enter a spiral of needing a pipeline of new investors in order to pay off the earlier ones.

Other Ponzi schemes are frauds from their inception and the perpetrator never has any intention of doing anything other than cheat investors.

How Does it Work?

Ponzi schemes are so effective because they are hard to distinguish from legitimate investments. Imagine that the perpetrator gets five people to invest $100,000 each. After six months, it pays them a $20,000 dividend on their investment. This is a 40 percent annual return–a great investment! So each of the original five investors get a friend to invest $100,000. Now there are ten investors. After six more months, everyone gets another $20,000 dividend. What a great investment! Now each investor brings two friends in, each of whom invest $100,000. Another great six month dividend; and yet more investors come in. The problem is that the perpetrator is not investing any of the money. It used $100,000 of the $500,000 it took in from the first investors to pay the dividend, and got another five investors to come in. And it used just a fraction of their money to pay the next dividend. And on it goes, until one day the perpetrator simply vanishes with all the investors’ money and they are left to discover that there never were any investments.

How Can I Avoid Getting Caught in a Ponzi Scheme?

It can be hard to tell if something is a Ponzi scheme. Bernard Madoff cheated thousands of rich and highly sophisticated investors. There are ways to mitigate risk: for example, not investomg in private, unregulated, un-audited investments. But most such investments are legitimate and, for sophisticated investors, they present an opportunity to accept greater risk in hopes of greater returns.

One thing you can do is seek independent verification that the investments actually exist. A simple account statement or trade ticket does not suffice. Madoff had back office employees who created false trading records and account statements. Seek verification from an independent and legitimate auditor. And, when making investments, remember that if something is too good to be true, it probably is. Remember, however, that sophisticated fraudsters know this. We have seen Ponzi schemes where the hook for investors was not extraordinary returns, but rather good returns and a promise that the invested capital would not be at risk.

What Do I Do if I Discover That I Am the Victim of a Ponzi Scheme?

Get a lawyer. You need advice on what your legal options are, including whether law enforcement will be interested in investigating the scheme.

You need legal advice even if you manage to get your money out of the scheme before it collapses. As many of Madoff’s investors learned, because a Ponzi scheme works by fraudulently taking money from new investors to pay the earlier ones, courts may claw back profits paid to earlier investors on the theory that they did not earn a profit on their investment but rather they–completely innocently–received money belonging to the newer investors.


We are experienced in representing victims of Ponzi schemes. We have represented victims of the Madoff scheme and other domestic Ponzi schemes, as well as victims of international schemes. If you think you have been the victim of a Ponzi scheme, call us.

Posted: July 13, 2015

Client Q & A: One of my customers just went bankrupt. Does that mean it does not have to pay off its account?

One of my customers just went bankrupt. Does that mean it does not have to pay off its account?

By Bennette Deacy Kramer

Your customer does not have to pay off its account now, but depending on the amount of assets in the bankruptcy estate, you might receive payment up to 100% of the amount of the account during the bankruptcy case.

The Automatic Stay and Creation of the Bankruptcy Estate

Your customer does not have to pay off its account right away because, when a person files a bankruptcy petition, an “automatic stay” comes into effect immediately. Once the automatic stay is in effect, a creditor may not take any action to collect any debts that existed before the bankruptcy filing. Also, once a bankruptcy petition has been filed, all the debtor’s assets become part of a “bankruptcy estate” and no longer belong to, or are under the control of, the debtor – your customer. However, a bankruptcy filing does not mean that you will never receive all or part of the amount you are owed.


As a creditor, you should receive notice of the bankruptcy filing within a month or so. The notice will let you know about two events. First and most important, the notice will announce the bar date for submission of claims. This is the date that claims (i.e., your claim for any amount owed to you by this debtor) are due. This is a very important date. Unless you submit a claim prior to the bar date, you likely will lose all chance of collecting from the bankruptcy estate. The notice should include a Claim Form that has been filled in with the information pertinent to the bankruptcy case and information relating to the creditor.

It should be noted that certain kinds of claims against individual debtors are not dischargeable in bankruptcy, which means that the right to collect survives the end of the bankruptcy case. Some of the claims that fit into this category are tax claims, fraud claims, unscheduled claims where the creditor did not get notice of the bankruptcy, domestic support claims, fines and other payments owed to the government, most student loan claims, claims for death or personal injuries if the debtor was intoxicated, claims for payment of an order of restitution to the United States, post-petition coop or condominium fees, amounts owed to a pension plan and similar claims.

Second, the notice will tell you when the Creditors’ Meeting will take place. This meeting is the opportunity for creditors to question the debtor or its representative about its assets.

No Assets

In cases where the debtor has no assets, the notice will have a notation that it is a “No Asset Case” and no claim bar date. Because there are no assets, the likelihood of any creditor recovery is slim unless the bankruptcy trustee later finds assets. If that happens, another notice will be sent requesting submission of claim forms.

Getting Paid from the Bankruptcy Estate

The amount a creditor may expect to recover from a bankruptcy estate ranges from 0 to 100%, depending on the value of the assets compared to the amount of liabilities. Usually, the trustee appointed to oversee the case by the United States Trustee will have a good idea of the percentage of the payout per dollar about six to twelve months after the commencement of the bankruptcy case. In large business cases a trustee will not be appointed, instead the debtor’s employees will be in charge as Debtor in Possession or DIP.

There are also different classes of creditors with different priorities set forth in the Bankruptcy Code. Often, the first creditors paid are those who lend money to the debtor at the beginning of the case; these creditors receive a superpriority claim. Next, claimants with secured claims receive payment to the extent of their security. Unsecured claims are then paid in the order of priority set forth in the Bankruptcy Code as follows: domestic support obligations, allowed administrative expenses, wages up to a certain limit, contributions to an employee benefit plan, claims related to raising grain or fishermen, deposits for housing, tax claims, capital requirements for insured depository institutions, claims for death or personal injuries if the debtor was intoxicated, and allowed unsecured claims.


The bankruptcy process may seem confusing, but we have considerable experience representing creditors in bankruptcy proceedings. If you have a question or need advice, we would be happy to discuss your situation.

Posted: June 29, 2015

Client Q&A: I just got cheated out of a lot of money, but I hear that big New York law firms charge as much as $1,000 an hour. There is no way I can pay that! What can I do?

I just got cheated out of a lot of money, but I hear that big New York law firms charge as much as $1,000 an hour. There is no way I can pay that! What can I do?

By Erik S. Groothuis.

It is a common misconception that attorneys will only agree to take on matters where they are compensated at an hourly rate, an arrangement that can dissuade potential clients from seeking professional help if they don’t have the funds to pay for it. Today, there are many alternatives to the traditional hourly-fee structure. While many people are familiar with contingent-fee arrangements, that is by no means the only alternative to hourly fees. And regardless of the fee arrangement, there are ways for potential plaintiffs to get third-party litigation financing to pay for litigation costs along the way.

Alternative Fee Arrangements

The traditional alternative to hourly fees is a contingent fee, whereby the attorneys take a percentage of any recovery from the litigation (traditionally, one-third of the recovery, but the attorney’s share may be higher or lower), but receive no fees if there is no recovery. After negotiating the attorney’s share, a client and lawyer in a contingent-fee arrangement must reach a separate understanding about who initially pays the costs associated with prosecuting a case (filing and service costs, mailing and copying charges, court reporter fees, expert costs, etc.) and whether the lawyer’s share comes out of the gross recovery (i.e., without regard to litigation costs) or the net recovery (i.e., after deducting such costs from the recovery). These details, often overlooked, can make a significant difference at the end of a case.

Another way to structure the lawyer’s engagement is a flat-fee arrangement. This can be as simple as negotiating a single fee to cover all aspects of a lawsuit, or it can be more nuanced, such as by setting tiered fees to specific stages of litigation (i.e., separately-negotiated flat fees for drafting and filing a complaint, completing discovery, completing summary judgment, trial, and appeals).

A third way to structure the lawyer’s engagement is to cap the hourly fees. This arrangement too can be structured to cover the entire case (e.g., client will pay hourly rates but no more than $100,000 for the case) or by stages (e.g., client will pay hourly rates but no more than $25,000 to draft a complaint, then no more than $50,000 to complete discovery, and so on). When dealing with flat or capped fees, as is the case with contingent fees, the lawyer and client must reach a separate understanding regarding who pays litigation costs.

Elements of the foregoing arrangements can also be combined into hybrid-fee arrangements. For example, the client and attorney can combine hourly and contingency fees, such as where an attorney takes a lower hourly rate in return for a percentage of the recovery. Or the attorney can receive a bonus payment (computed either as a flat fee or as a percentage of the recovery) if the recovery is above a certain threshold.

In short, there are myriad ways to structure engagements beyond the traditional hourly-fee model, and clients and attorneys must be both creative and careful to ensure that each side is protected—and their incentives are aligned—to the extent possible. With respect to incentives, bear in mind that when an attorney’s compensation does not correlate directly with the amount of time invested in a matter, it can lead some attorneys to invest less time on your matter then they otherwise might on an hourly-fee arrangement. Your attorney is your fiduciary, and therefore has a duty to put your interests first. But incentives still matter, and you should keep them in mind when deciding among compensation models.

Also bear in mind that a law firm is a business just like yours. Whether a lawyer will agree to an alternative fee arrangement and what the terms of that arrangement will be depends on her assessment of whether there is a reasonable probability that she ultimately will be fairly paid for her work.

Litigation Funding

Litigation funding is another way for plaintiffs who do not have the means or will to finance their own lawsuit to unload some or all of the costs onto a third party. Litigation funding firms will assess the merits of your lawsuit, often by consulting with you and/or your attorneys, and decide whether, and how much, they wish to contribute to litigation costs.

There are a number of issues that should be considered in deciding whether to use litigation funding. First, and most important, is how much the third-party funder will contribute, on what terms, and what their share of the potential recovery will be. Any agreements should anticipate who pays what if the litigation costs exceed the parties’ estimates, as is often the case. Second, your agreement with the funder should spell out who gets to make the key litigation decisions, such as whether to settle a case, whether to make a jury demand, or what expert to use. Sophisticated litigation funders may want some say in strategic decisions, and this can lead to disputes or friction if not addressed up front. Third, some litigation funders will seek interest on the money they contribute, either in addition to or in lieu of their share of the recovery. Given that complex commercial litigation can drag on for years, potential plaintiffs must be wary of agreeing to give up both a share of their potential recovery while also incurring interest charges, as the combination of the two can swallow any potential recovery.


Our firm has a great deal of experience working on alternative fee arrangements. We would be happy to discuss your options with you if you are considering filing a lawsuit, but may not have the means to pay hourly rates. We have also worked with litigation funding firms and can discuss the pros and cons of that option with you.

Posted: June 16, 2015

Client Q&A: My insurer has refused to pay for my defense of a claim against me. What can I do?

My insurer has refused to pay for my defense of a claim against me. What can I do?

By Bradley J. Nash

Defending a lawsuit can be an expensive proposition—the costs may even exceed the defendant’s ultimate liability in the case. In some instances, the defendant’s insurance carrier may be obligated to provide a defense for the lawsuit or otherwise to fund all or part of the costs of the defense. Although such coverage can be a godsend for a defendant, disputes may arise between the policyholder and the insurance company on a host of issues ranging from whether (or to what extent) the carrier is obligated to fund the defense, to the choice of defense counsel, to strategic decisions, including whether or when to consider a possible settlement. Since the availability of insurance coverage to fund a defense can be a game-changer for the defendant, these issues need to be handled carefully, and can sometimes result in a separate coverage litigation with the insurance company.

Duty to Defend or to Pay for Defense Costs

An insurance policy is a contract, and the precise duties of the carrier (and the insured) in a given case will depend on the specific policy terms. Typically, however, a general liability policy provides that the insurer has both the right and the obligation to defend a suit seeking damages covered by the policy. This “duty to defend” is broader than the insurance company’s duty to indemnify the insured. In practice, this means that the insurance company must provide a defense if the complaint contains any facts or allegations that are even potentially within the scope of coverage. And even if the complaint does not clearly spell out a covered claim, the insurance carrier is required to look outside the complaint to the underlying facts to determine whether there is any possible covered claim.

Under a duty-to-defend policy, if there is any covered claim, the insurer must provide a defense to the entire lawsuit, including all non-covered claims. In one recent case, we successfully negotiated for our clients’ general commercial liability carrier to cover over $500,000 in defense costs for a complex lawsuit in which there was only one covered claim—and many non-covered claims. Until the court dismissed the covered claim, the insurance company paid for our defense of all the claims, including all the claims for which there was no underlying insurance coverage.

In many general liability policies, defense costs are payable “outside of” the policy’s indemnity coverage limits. If that is the case, the insurer must continue to fund the defense until it pays a judgment or settlement amount up to the coverage limit, even if the fees exceed the coverage limits.

Specialized liability policies (such as Directors and Officers and Errors and Omissions) often do not provide for a duty to defend, but rather require the carrier to indemnify the insured for “defense costs,” which are included within the policy’s definition of a “covered loss.” Courts have generally held that such a provision requires the insurance company to advance defense costs as they are incurred during the lawsuit, as opposed to reimbursing the insured after the fact, which would effectively leave many insureds without a defense. In these policies, coverage for defense expenses may be limited by the coverage amount.

Choice of Counsel

Generally, where the insurance company assumes the defense of a lawsuit under a duty-to-defend policy, the policy provides that it has the right to select counsel to handle the defense. This often becomes a bone of contention. The insured may want to hire an attorney with special expertise, or with whom he has a longstanding relationship to defend the case. But insurance companies often insist on retaining an “insurance defense” firm—a law firm that gets most or all of its business from the insurance company. Insureds may be concerned that such a firm will emphasize “efficiency” to keep costs down, rather than mounting the most aggressive defense.

What can the insured do? In some cases, it may be possible to negotiate with the insurance carrier to retain a law firm that is not on its official “panel,” provided that the attorney is willing to accept the rates the insurance company customarily pays and comply with its billing policies.

In other cases, the insured may have the right to select counsel, regardless of what the policy says, if the insurance company can be shown to have a conflict of interest. Such a conflict may arise if there are both covered and non-covered claims. Because the duty to defend is broader than the duty to indemnify, the insurance company is required to provide a defense for all the claims. But it has no economic interest in defeating the non-covered claims. In such a circumstance, the insured may be entitled to independent counsel of its own choosing. In other cases, the insurance company may assume the defense, but reserve the right to disclaim coverage—and even recoup the defense costs it has paid—if facts are established at trial that trigger an exclusion from coverage. Such a reservation of rights creates a conflict of interest, since the insurance company may be better off economically if the insured loses the case. Again, in such a scenario, the insured may be entitled to choose counsel, even if the policy provides otherwise.

Insurance Coverage Litigation

Often disputes relating to defense coverage and choice of counsel can be resolved by negotiation—particularly where the insured is represented by experienced coverage counsel. Sometimes, however, the insured (or less often the insurance company) brings a lawsuit asking a court to determine the insurance company’s duty to provide a defense. Generally, the underlying lawsuit will not stop while the coverage issues are resolved, so the insured needs to be aggressive in pushing the coverage lawsuit forward. Because the dispute often centers on the interpretation of policy language that can be construed by the court as a matter of law, it is often possible to get a relatively quick resolution by filing an early motion for summary judgment. In other cases, where there is a genuine emergency (for example an upcoming hearing or trial in the underlying lawsuit), it may be possible to get injunctive relief directing the insurance company to advance defense costs during the pendency of the coverage action.


Our firm has a great deal of experience representing policyholders in negotiating and litigating insurance coverage disputes. If you are named as a defendant in a lawsuit, we would be happy to assist you with evaluating your coverage options.

Posted in Client Q & A, Insurance
Posted: June 1, 2015

Client Q&A: My company just lost a lawsuit. Can we appeal?

My company just lost a lawsuit. Can we appeal?

By Vitali S. Rosenfeld

To err is human, and judges don’t always get it right. If your claims or defenses have been defeated in court, you may want to appeal. When and how? That depends on which court you are in and what kind of ruling you are planning to appeal.

Whether You Can Appeal Depends on the Type of Order and the Court You Are In

Court orders can be classified as either final or interlocutory. A final order disposes of the entire case, whereas an interlocutory one decides various issues in the litigation but allows it to proceed. For instance, an order granting a motion to dismiss will be final if the case is dismissed in its entirety, but an order denying a motion to dismiss will be interlocutory because it means that the case goes on. Likewise, an order granting summary judgment on all claims will normally be final, as it will result in a judgment (whether for the plaintiff or the defendant) – but an order denying summary judgment (or granting partial summary judgment) will not be final, as it will mean that the case proceeds to trial. And, of course, most orders dealing with discovery, provisional remedies, and other intermediate issues are interlocutory.

Final orders are almost always appealable immediately. As for interlocutory orders, it depends. In the state court system, most rulings by a trial court can be appealed to the Appellate Division immediately as well. Not so in federal court. There, most interlocutory orders are not appealable until the whole case comes to a final resolution (which of course may take years).

There are exceptions, however. For instance, orders concerning injunctions and appointing receivers are considered sufficiently important to warrant immediate appellate review in federal court. Another notable but more nebulous exception is the so-called collateral order doctrine, allowing immediate appeal from an order that presents an important legal issue distinct from the merits that will become effectively unreviewable at the end of the case. In addition, the federal district court may allow an immediate appeal from its order if it involves a controlling and potentially controversial legal issue.

Do You Have Grounds to Appeal?

But whether an appeal is possible is only the first question. Assuming that you can appeal, do you have good grounds to do so, and what will the appellate court consider? One common misconception is that every single aspect of the case may be challenged on appeal, and any “mistaken” view of the trial court will be addressed and “corrected” by the appellate court. The reality is very different.

One key notion in the appellate court system is the standard of review. Underlying this notion is the idea that some kinds of issues (such as questions of law and policy) are the primary domain of the appellate courts, while others (such as determination of specific facts based on the evidence presented) are within the trial court’s area of expertise, and others still (such as case schedule and many other procedural matters) are relegated to the trial court’s discretion. Accordingly, different issues are subject to a different level of scrutiny on appeal.

Questions of pure law (for instance, interpretation of statutes and the interplay between different laws) are generally reviewed “de novo” – which means that the appellate court will consider such questions from scratch and issue its opinion. If it agrees with the trial court, it will affirm; if it disagrees, it will reverse – but ultimately it is the appellate court’s opinion that matters. The trial court must follow it, in this particular case and in others.

Questions of fact, however, are generally reviewed for “clear error.” This standard implies a certain degree of deference to the trial court’s determination; since the trial court is more familiar with the parties and the record, and can see live witnesses to assess their credibility, the appellate court will not substitute its own view of the evidence for that of the trial court. Instead, where a factual determination could reasonably go either way, the appellate court will normally defer to the trial court’s decision and affirm it. It is only where the record clearly cannot support the decision that the appellate court will reverse.

As for discretionary matters, the standard of review is “abuse of discretion,” which is even more deferential. On such matters, the appellate court will not reverse unless it finds that the ruling was truly out of line or that the discretionary decision was based on a legal or factual error.

The Appeal Process

Procedurally, an appeal normally consists of all parties presenting their briefs to the appellate court, accompanied by a record on appeal (which contains all the materials that were before the trial court when it rendered its decision, and transcripts of any trial court hearings), usually followed by an oral argument. As a rule, the appellate court will not consider any evidence or arguments that were never presented to the court below, although it may take judicial notice of subsequent court filings and other public records. For this reason, a complete presentation to the trial court is essential—new evidence is almost never accepted on appeal.

Appealing the Appellate Court’s Decision

What if you don’t like the appellate court’s decision – can you appeal further? Sometimes you can, but more often the answer is no. In the New York state court system, a ruling of the Appellate Division can be further appealed to the Court of Appeals, the highest court of the state – but rarely as of right; most cases require the court’s permission, which is given only where the appeal concerns novel and important questions of law. From the federal Court of Appeals, the only further appeal lies to the Supreme Court of the United States, which chooses to consider only a small percentage of cases presented to it.

Things to Consider

In considering any appeal, it is important to weigh the costs and benefits. Appeals may take a long time and require significant resources – but in the meantime the litigation in the trial court may continue. Indeed, in complex cases in state court it is common to have several appeals from various interlocutory orders moving forward concurrently with ongoing proceedings at the trial level.

It is also important to realize that filing an appeal does not necessarily place the trial court’s decision on hold. For example, if the trial court orders property or funds turned over, or issues a money judgment in one party’s favor, the winning party can take the property or funds or attempt to collect the judgment even if an appeal is pending. To avoid such a result, a stay pending appeal must be obtained, which in most circumstances requires a motion and a separate ruling from either the trial court or the appellate court.


Appeals are an important part of the judicial system, and appellate practice requires special knowledge and expertise. Schlam Stone & Dolan has an excellent track record of successfully pursuing and defending appeals in state and federal appellate courts. If you have questions about an appeal, feel free to call us.

Posted in Client Q & A, Appeals
Posted: May 18, 2015

Client Q&A: What is Mediation?

My company has a dispute with a vendor, and our contract says we have to mediate before anyone files a lawsuit. What’s mediation?

By John M. Lundin

In a mediation, a neutral third party—a mediator—tries to help the parties reach a mutually-agreeable negotiated resolution to their dispute. The thing that distinguishes mediation from arbitration or litigation in court is that, while participation might be mandatory, any resolution is up to the parties; a mediator does not decide how the dispute is resolved. Rather, the mediator’s job is to help the parties reach a negotiated solution.

If It’s Voluntary, Do I Have to Go?

While mediation is non-binding, that does not mean that you do not have to participate if your contract requires it. Indeed, if you ignore a mandatory mediation provision of your contract and instead bring a lawsuit, your lawsuit could be dismissed for failing first to mediate. In some circumstances, this is no small thing. Not only is there the cost of re-initiating the lawsuit if the mediation fails, but if the lawsuit was filed near the end of the statute of limitations period, your claims may be time-barred by the time you file a new action.

Who are Mediators?

There are high-profile companies who employ full-time professional mediators—often retired judges—who often are hired to help resolve large, complex disputes. But there also are mediators who are sole practitioners or who also work as litigators or transactional lawyers. For example, many lawyers at Schlam Stone & Dolan are trained mediators. Some mediators—particularly in non-commercial disputes—are not lawyers at all. Most courts and bar or professional organizations have rosters of trained mediators, so there are plenty of resources available to you if you are seeking a mediator.

Because there is no state or national licensing or education requirement to be a mediator, there are no set qualifications to be a mediator as a general matter. However, many professional organizations have formal mediator training programs. Further, many court-operated mediation programs have mediator training standards and mediator codes of ethics.

What Happens at the Mediation?

There are no fixed rules to mediation. In general, unless the parties agree to do so, there is no obligation to exchange evidence before the mediation. Typically, the parties send the mediator a written statement of their position before the mediation begins so that the mediator knows what the dispute is about and what the parties’ positions are.

The mediation itself is typically held in a conference room. Usually, the mediation begins with the mediator, the parties and their lawyers meeting together so that the mediator and the parties all can hear each side’s story. At some point, the mediator usually begins to meet separately with the parties so that they can discuss issues that a party might not want an opponent to hear, such as the amount they are willing to pay or receive to settle the matter.

Very generally, the mediator’s job at the mediation is to try to bring the parties together. There are many ways of doing this, including trying to get each side to understand the other’s position, suggesting different ways of resolving a dispute and giving a party feedback on the strength and weaknesses of their position and the possible consequences of not settling. There are myriad techniques mediators use to bring the parties together, but the common theme in mediation is that the mediator is a neutral third-party who does not take sides and is only there to help the parties agree on a negotiated solution to their dispute.

What Are the Advantages and Disadvantages of Mediation?

Mediations typically are relatively quick and inexpensive. Sometimes the only way to get a dispute to the point where the parties will settle is to go through years of discovery and motions at the cost of hundreds of thousands of dollars—or more. A mediated settlement can sometimes get the parties to that same point in weeks at a tiny fraction of the cost.

Even more, mediation typically gives the parties a chance to meet face-to-face (with their counsel) and tell their story. Because most commercial lawsuits settle, this is something that many civil litigants never get. And for some disputes, this makes a big difference. Sometimes the disputes in civil litigation, while technically just about money, are taken very personally by the litigants, who want a chance to tell their side of the story. Mediation provides this chance, and that is part of the reason mediation can be so effective.

Something that is both an advantage and a disadvantage is that the parties in a mediation decide whether and how to settle. It is an advantage in that, unlike a court decision, which is restricted to the rights and remedies the law allows, the parties can craft a resolution that works for them and their particular circumstances. In court, there usually is a winner and a loser. In mediation, the parties can try to negotiate a settlement that can be a win for both.

Still, because the mediator cannot force the parties to settle, mediation does not work when one or both parties are recalcitrant litigants.

Further, because mediation has no (mandatory) process for the exchange of evidence, it can be difficult to reach a mediated resolution when one or both of the parties feel that they have not been provided adequate evidence—evidence to which they would be entitled in a lawsuit—to judge the strength of their opponent’s arguments. For this reason, in some cases, mediation works better after the parties have exchanged evidence as part of a lawsuit’s discovery process.

If a Pre-Litigation Mediation Fails, Can You Try Again Later?

Yes. This is not uncommon. Indeed, in many courts, there are programs where the court can order the parties to mediate after the lawsuit has begun. And parties can mediate without being told to do so. Still, whether the mediation is voluntary or court-ordered, whether it results in a settlement is up to the parties.


Whether it is through a mandatory pre-suit mediation provision, a court-ordered mediation program or at the choice of the parties, mediation is a common part of commercial litigation. Not only is it a standard part of our litigation practice, many of us are trained mediators, and so bring special experience and skills to mediations in which we represent our clients.

Posted: May 8, 2015

Client Q&A: What is FINRA and how can it help me?

I think my stockbroker cheated me. When I complained, they said something about FINRA. What is FINRA and how can it help me?

By Erik S. Groothuis.

What is FINRA?

When customers sign brokerage agreements, somewhere in the fine print they almost always agree to waive their rights to sue either the brokerage firm or its employees in court. Instead, investors must bring their claims in an arbitration forum provided by an entity called the Financial Industry Regulatory Authority, or FINRA. FINRA is an independent, not-for-profit organization authorized by Congress to help regulate the securities industry.

FINRA writes and enforces the rules governing securities broker-dealers, audits broker-dealers for compliance with those rules, licenses financial advisors (called “registered representatives” because they must be registered with FINRA), and brings disciplinary actions against both securities firms and individual representatives. It has arbitration and mediation procedures to help aggrieved investors resolve disputes against securities firms and their registered representatives.

Customers can file complaints directly with FINRA’s enforcement division. FINRA decides whether to bring enforcement action based on those complaints, which are not the subject of this Client Q&A.

How do I Bring a Claim Against a FINRA Member?

An investor who has previously agreed to arbitrate any disputes also can bring a claim directly against an industry participant. To do so, the investor must commence an arbitration through FINRA.

Arbitration begins when the investor (called the “claimant”) files a complaint (called a “statement of claim”) that alleges the facts and asks for relief from the arbitration panel. The industry participant (called the “respondent”) then answers the statement of claim, by responding to the claimant’s allegations and setting out any defenses.

FINRA Arbitration Panels

FINRA arbitration panels are composed of one or three arbitrators (depending on the size of the claim) who are selected by the parties. Prior to the hearing, the arbitrators and parties meet telephonically to schedule hearing dates and resolve preliminary issues.


Discovery in a FINRA arbitration is typically more limited than in federal or state court. For example, document requests are governed by FINRA’s Discovery Guide, which is more restrictive in terms of what documents may be requested from the other side than the requests usually exchanged in state or federal court. Further, there are usually no depositions (pretrial testimony under oath) in FINRA arbitrations. While parties to a FINRA arbitration can serve subpoenas seeking documents or testimony from non-parties, such subpoenas must first be authorized by the arbitration panel and are generally enforceable only in a court of law.


The parties and arbitrators meet in person to conduct the hearing in which the parties present arguments and evidence in support of their respective cases. The hearing is conducted in a conference room, not a courtroom, but otherwise proceeds much like a trial in front of the arbitrators. The rules of evidence, however, are relaxed (for example, hearsay evidence is admissible in a FINRA arbitration).

Decision & Award

After the hearing ends, the arbitrators deliberate on the facts of the case and render a written decision called an award. On a panel of three arbitrators, the award must be agreed upon by at least two of the panelists (in other words, unanimity is not required). The award is binding on all the parties, who must abide by it unless it is successfully challenged in court within the statutory time period. It is extremely difficult, and therefore very unusual, to get an award overturned in court. Courts will overturn arbitral awards only in limited circumstances, such as where the arbitration panel had an undisclosed conflict of interest or the panel exercised “manifest disregard” of the law.

Arbitration is generally confidential, and documents submitted in arbitration are not publicly-available, unlike court filings. However, if an award is issued at the conclusion of the case, FINRA posts it in its Arbitration Awards Online Database, which is publicly available.

Enforcing an Award

If a claimant is awarded damages, the respondent must pay within thirty days of receiving the written award, unless the respondent files a motion to vacate the award in court. Courts can either vacate (i.e., overturn), confirm, or modify the award. A confirmed award stands as issued by the arbitrators and results in a court judgment. An award vacated by the courts is voided.


Investors are not required to retain counsel to commence a FINRA arbitration. But unless the amount at issue is very small, they would be wise to do so. Securities brokerage firms and their registered representatives often hire sophisticated defense counsel to defend them in FINRA arbitrations. Schlam Stone & Dolan LLP has experience representing claimants in FINRA arbitrations and we are available to discuss potential FINRA matters with you.

Posted: April 21, 2015

Client Q&A: I just found out that a default judgment was entered against me in a lawsuit. What do I do?

I just found out that a default judgment was entered against me in a lawsuit. What do I do?

By Bradley J. Nash

In general, courts resolve disputes on the merits. However, when a defendant receives proper notice of a lawsuit and fails to appear to defend the action within the prescribed time limit, the court may enter a default judgment. The entry of a default judgment can have very serious consequences for the defendant: unless there is a basis to lift the default, the defendant will lose the opportunity to defend the case on the merits—no matter how strong its defenses may be. Having won the case by default, the plaintiff may proceed to enforce the judgment, including by seizing the defendant’s bank accounts and other assets.

What to Do?

The best way to avoid this mess is to act promptly upon receiving notice of a lawsuit by hiring competent counsel to defend the case. In some cases, however, a defendant may not find out about a lawsuit until it is too late, and a default judgment has already been entered. Fortunately, as discussed below, there are ways to obtain a court order lifting or “vacating” a default judgment, if certain criteria are met.

Improper Service of Summons and Complaint

One way to get a court to vacate a default judgment is to show that the plaintiff failed to give the defendant proper notice of the lawsuit. In New York, a lawsuit is commenced by filing a summons and complaint in Court. In order for the Court to exercise jurisdiction over the defendant, however, the plaintiff must deliver the summons and complaint to the defendant through one of several methods permitted by statute, known as “service of process.” The defendant has no obligation to respond to the complaint, and therefore no default can be entered, until the summons and complaint are properly served.

An individual defendant can be served by “personal service,” in which a process server hands the summons and complaint to the defendant in person. Where that is not possible, a process server can perform “substitute service” by personally delivering the summons and complaint to a person of “suitable age and discretion” at the defendant’s residence or place of business, and also mailing a copy of the papers to the defendant’s last known residence or actual place of business. In certain cases, where personal service or traditional substitute service cannot be accomplished, a method of service called “nail and mail” may be permitted in which the summons and complaint are affixed to the door of the defendant’s residence or place of business and subsequently mailed.

Different rules apply for performing service of process on business entities. For example, a corporation may be served by personal service on an officer, director, or “managing agent,” and a general partnership may be served by personal service on any of the partners. Business entities may also be served through the secretary of state in the state of incorporation. Finally, special rules apply to serving foreign defendants, whether individuals or corporate entities.

Vacating the Default Judgment for Improper Service

The courts require strict compliance with the rules for performing service. Defects in the method of service may be a basis to vacate a default judgment. In some cases, such defects may be readily apparent from the affidavit of service—a document completed by the process server, detailing how service was accomplished. For example, in a case of substitute service, the process server might have served the summons and complaint at the wrong address. Or perhaps the process server neglected to mail summons and complaint, or failed to do the mailing with the 20-day period required by the statute. In the case of a corporate defendant, the summons and complaint may have been served on an individual who was not an officer, director or managing agent, but only a low-level employee not authorized to accept service.

In other cases, the affidavit of service may appear proper on its face, but the defendant may dispute the facts alleged by the process server. For example, the process server may claim to have personally served the defendant, but the defendant may deny that ever occurred. In such a case, the court may hold a fact-finding hearing, known as a “traverse hearing,” to resolve the disputed facts.

The Traverse Hearing

A traverse hearing is, in effect, a mini-trial before a judge, or more commonly a court-appointed hearing officer, limited to the question of whether service was properly performed. The parties present witnesses—typically, the process server and the party that was allegedly served—for direct and cross-examination. They may also introduce relevant documents for the Court to consider.

In general, the party contesting service will need something more than a blanket denial of having received the summons and complaint to overcome the process server’s testimony. For example, the defendant might be able show that he was out of town when the process server claims to have served him at home.

There might also be other ways to cast doubt on the process server’s credibility. Professional process servers are required to be licensed and records may be available of any complaints made against them for improper practices in other cases. Process servers are also required to maintain a contemporaneous log book of their work, which could reveal discrepancies in the affidavit of service. Moreover, the process server’s failure to produce the log for the hearing may bear on his or her credibility, and according to some cases, may be sufficient to find a lack of proper service.

Excusable Default

In general, courts are reluctant to resolve cases on default. Therefore, even if service was properly performed, it may still be possible to have a default judgment vacated where the defendant can show a reasonable excuse for its failure to timely answer the complaint. Courts have accepted a variety of excuses, ranging from clerical errors, like accidentally misplacing the complaint, to mistakes by the defendant’s attorney. Whatever the excuse, it is critical for the defendant to show that any delay was inadvertent, and not a deliberate tactical move to prolong the case. Thus, acting promptly upon learning of the default judgment is critical. A motion based on excusable default must be brought within one year after the defendant is served with a copy of the default judgment, but a defendant would be ill-advised to wait that long. Finally, the defendant will also need to show that it has a meritorious defense to the claims.

A motion to vacate for excusable default is ultimately left to the court’s discretion, so no one can bank on prevailing automatically. It goes without saying that it is better to avoid a default in the first place by ensuring a timely answer to the complaint.


We have successfully assisted clients in obtaining court orders vacating improperly entered default judgments. If you discover that you or your business is subject to a default judgment, we would be happy to help you in devising a legal strategy.

Posted: April 6, 2015

Client Q&A: How can I get rid of a baseless lawsuit without going all the way to trial?

How can I get rid of a baseless lawsuit without going all the way to trial?

By Vitali S. Rosenfeld

To state the obvious, litigation is time-consuming and expensive. Litigating a business dispute all the way to trial is likely to take years and may cost thousands or even millions of dollars. If you have been sued, are you doomed to go down that path? Not necessarily.

What is a Motion to Dismiss?

The most common way to weed out improper claims is the motion to dismiss, which is often made as a first response to the complaint. The idea is that, instead of taking the trouble to admit or deny the factual allegations of the complaint, the defendant argues that plaintiff’s claims, even taken at face value, fail as a matter of law. Such failure may be based on a variety of grounds, some procedural and others substantive.

Motions Based on Jurisdiction

If you are not a New York resident, and the dispute does not arise from your contacts with this state, you can argue that the New York court lacks personal jurisdiction over you. One subset of this category is a motion based on improper service of process, because the court cannot acquire jurisdiction over a defendant unless that defendant has been validly served with a summons and complaint. Moreover, even if jurisdiction exists, a defendant can move to dismiss based on the doctrine of forum non conveniens (“inconvenient forum”) – that is, that the dispute properly belongs in the courts of a different jurisdiction.

Such motions can be very effective in defeating the lawsuit right at the outset. One problem, however, is that a claim dismissed on jurisdictional grounds may come back to bite you. Lack of proper service may be corrected by another attempt to serve, and an action dismissed for lack of New York connections may be re-filed in another state or country. Indeed, a forum non conveniens dismissal is often conditioned on the defendant’s consent to jurisdiction in an alternative forum. So the question to consider before bringing a jurisdictional motion is: would you rather litigate in New York or elsewhere?

Motions Based on Prior Litigation

If the same or similar dispute has already been litigated (whether in the same court or elsewhere), further litigation may be precluded. Where plaintiff attempts to restate (albeit in a different form) a claim that has already been resolved on the merits, the new action will likely be barred by the doctrine of res judicata, or “claim preclusion.” In another scenario, the claims are not entirely the same, but a specific issue (perhaps central to the dispute) has been decided in a prior action between the same parties, binding them to the result; such “issue preclusion” is often called collateral estoppel. If a prior action was settled, a release received in the settlement may serve as a conclusive defense to a new claim.

Motions Based on the Passage of Time

The so-called statutes of limitations prescribe the period of time in which a claim must be asserted. Although that period is vastly different for different kinds of claims, the bottom line is that almost any claim has an expiration date (see our post on statutes of limitations here). If the applicable statute of limitations had run before the action was filed, that is a clear ground for dismissal. In addition, a more nebulous concept of “laches” (plaintiff’s inexcusable delay) may occasionally defeat a claim regardless of the formal time period prescribed by statute, especially where the defendant can show prejudice caused by the delay (e.g., the documents or witnesses needed for the defense became unavailable).

Motions Going to Standing and Capacity

Generally, a claim may only be asserted by a person who was directly harmed by the misconduct alleged. Sometimes, an individual shareholder may try to sue for the harm caused to the corporation, or a company may try to sue under a contract of its affiliate, or an entity may try to collect on a claim that has been assigned to another entity. In such situations, the plaintiff may not have standing to sue – which is another ground for dismissal. Standing and capacity to sue are governed by specific rules that can get quite technical.

Motions Going to Pleading Requirements

The law requires the complaint to be sufficiently particular to give the parties and the court proper notice of the facts and events alleged. In addition, many kinds of claims are subject to heightened particularity requirements. For instance, a fraud claim requires specific details of the alleged fraud; a claim for sale of goods must list the items sold, their quantity and value; and a defamation claim must specify what was allegedly said or written, when, where and to whom. Failure to comply with the pleading requirements may be a ground for dismissal – but the plaintiff may be given another chance to restate the same claim. Indeed, it is common for a plaintiff to amend the complaint in order to remedy any pleading defects without waiting for the motion to dismiss to be decided.

Motions Going to the Merits

Sometimes, a claim suffers from a fatal legal defect so that, even if all the alleged facts were true, the plaintiff is not entitled to the relief the complaint seeks. This situation is commonly referred to as a “failure to state a cause of action.” For instance, the kind of claim the plaintiff is trying to assert might be prohibited by statute. Or the contract plaintiff is relying on could be invalid, or have been superseded by another contract. Or the facts alleged are simply insufficient because an indispensable element of the claim (such as damages or causation) is absent. Potential examples are endless. The key, however, is that the claim must fail “as a matter of law” – that is, even assuming the truth of the facts as plaintiff described them.

That being said, the plaintiff’s allegations do have to meet some minimal plausibility standards. A complaint that says the Earth is flat may well be dismissed, because the court can take judicial notice of generally known facts. Likewise, any factual allegations that clearly contradict documentary evidence do not have to be taken at face value. Suppose that the plaintiff alleges an oral agreement for sale of oranges at a price of $500 per ton – but you present a written contract describing the same deal and expressly setting the price at $250 per ton. If there is no question as to the authenticity and validity of the contract, a New York court may dismiss plaintiff’s claim based on “documentary evidence.”

One advantage of a merits-based motion is that, if successful, it typically results in dismissal with prejudice – which means that the plaintiff cannot simply restate and re-file the same claim, whether in the same court or elsewhere. But usually the defendant can only make one motion to dismiss combining all possible grounds, procedural and substantive. This means that which grounds to include and which ones to omit becomes an important strategic decision. Let’s say you have a simple and strong argument for lack of personal jurisdiction, as well as a more nuanced and complicated argument for dismissal on the merits. If you move on both grounds, the court is likely to take an easy way out and dismiss for lack of jurisdiction – which means that the plaintiff may re-file in another court. But if you move only on the merits and lose, you have waived your jurisdictional argument.


A motion to dismiss is a powerful litigation tool that should be used with care and precision. If you are facing a baseless lawsuit, be sure to consult with competent counsel regarding whether the complaint can be the subject of a motion to dismiss. In the complex commercial litigations that make up most of our work, motions to dismiss are common. We have an excellent track record both of successfully asserting and successfully defending motions to dismiss on behalf of our clients.