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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 13, 2020

Court Enforces Contract Provision Granting Prevailing Party Double its Attorneys’ Fees

On September 30, 2020, the Second Department issued a decision in Loughlin v. Meghji, 2020 NY Slip Op. 05196, enforcing a contract provision granting a prevailing party double its attorneys’ fees, explaining:

We disagree with the Supreme Court’s sua sponte determination that the provision of the PSA, which, in the event of litigation, allows for a recovery of double the amount of attorneys’ fees expended by the substantially prevailing party, is an unenforceable penalty. When parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms. Paragraph 10.11 of the PSA clearly sets forth the intent of the parties, two sophisticated businesspeople with the benefit of counsel, that, should litigation arise out of the PSA, the “substantially prevailing party” is entitled to two times reasonable attorneys’ fees. Where, as here, there is no deception or overreaching in the making of such agreement, the agreement should be enforced as written. Moreover, while each party asserted in the Supreme Court, and asserts on appeal, that he should prevail and be treated as the prevailing party for the purpose of paragraph 10.11, neither party contended in the Supreme Court that the double attorneys’ fees provision of paragraph 10.11 should not be enforced.

After holding that the plaintiff was not entitled to an award of compensatory damages, the Second Department went on to hold that:

Nevertheless, because the plaintiff has established the defendant’s liability by demonstrating that the defendant breached the covenant not to compete, the plaintiff is entitled to nominal compensatory damages. Since the plaintiff established the defendant’s liability and the plaintiff is entitled to nominal damages, we conclude that is it appropriate to characterize the plaintiff as the substantially prevailing party for the purpose of paragraph 10.11 of the PSA. Therefore, the plaintiff is entitled recover the costs and expenses of this litigation, including two times reasonable attorneys’ fees as provided in the PSA. The requirement that the party seeking fees be the party who substantially prevailed does not mean that the party’s monetary recovery must be substantial. A party may be considered to have substantially prevailed where the party prevailed on the merits of the case even though the party could not prove compensatory damages.

We respectfully disagree with our dissenting colleague’s assertion that the plaintiff is not the substantially prevailing party in connection with paragraph 10.11 of the PSA, and submit that the cited case law is distinguishable as to the facts presented on these appeals and cross appeals. Nestor v McDowell (81 NY2d 410, 416) involved an ejectment proceeding concerning a rent-stabilized apartment, and held that attorneys’ fees were not warranted “under the facts and circumstances of this case,” wherein the plaintiff had failed to obtain a possessory judgment. O’Donnell v JEF Golf Corp. (173 AD3d 1528, 1532) is similarly inapposite, and involved a golf course’s failure to provide a groundskeeper with a wage statement notice pursuant to Labor Law ยง 195(3). In Village of Hempstead v Taliercio (8 AD3d 476, 476), an award of attorneys’ fees to the plaintiff was held to be unwarranted because the subject house alleged to be operating as an illegal rooming house had been sold, rendering the action for permanent injunctive relief academic. Here, notwithstanding the plaintiff’s inability to establish a nonspeculative basis for the imposition of significant compensatory damages, it is our view that the plaintiff substantially prevailed by establishing that the defendant breached the PSA.

(Internal citations omitted).

We frequently litigate issues relating to the advancement or indemnification of litigation expenses such as attorneys’ fees to corporate officers, directors and employees as well as to contractual counter-parties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding indemnification and advancement claims.

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