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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: October 21, 2020

Provision in Contract Awarding Double Attorneys’ Fees to Prevailing Party is Enforceable

On September 30, 2020, the Second Department issued a decision in Loughlin v. Meghji, 2020 NY Slip Op. 05196, addressing whether a provision in a contract granting a prevailing party in litigation double its attorneys’ fees was valid.  In overturning the trial court’s ruling that such a provision was an unenforceable penalty, the Court confirmed longstanding doctrine that a contract entered into by parties with similar bargaining power should be enforced.

In Loughlin, the plaintiff and defendant each held a 50% interest in a consulting firm, Loughlin Meghji & Co. Associates, Inc., as well as an investment company.  In October 2011, the parties entered into an Agreement of Purchase and Sale of Stock (the “PSA”) through which the plaintiff purchased ownership interests in the two entities.

Section 9.1.1. of the PSA contained a two-year non-competition provision stating that the defendant was restricted from “engag[ing] in the business of providing consulting services in connection with corporate restructurings for his own account or otherwise engag[ing] in business activities that directly or indirectly compete[d] with the business of the Corporation as of May 10, 2011.”

The PSA also contained a non-solicitation clause in Section 9.2 stating that, for the same two-year period, the defendant was restrained from “contact[ing] any customer . . . of the Corporation for the purpose of soliciting or diverting any such customer . . . or any of their respective business, from the Corporation.”

Section 10.11 of the PSA provided that in the event the parties were engaged in a litigation arising out of the PSA, “the substantially prevailing party shall be entitled to an award of the costs and expenses of such litigation, including two times reasonable attorneys’ fees.”

In January 2012, Springleaf Finance, Inc. (“Springleaf”) a company that was in the business of issuing subprime loans to consumers, hired the defendant as an executive vice president and head of strategy and corporate development.  In December 2014, the plaintiff commenced a lawsuit against the defendant arguing that his employment with Springleaf violated the non-competition and non-solicitation provisions in Sections 9.1.1 and 9.2 of the PSA, respectively.  In addition, the plaintiff sought to recover double his attorneys’ fees under Section 10.11 of the PSA.

In October 2016, the trial-level court, sua sponte, ruled that Section 10.11 was unenforceable because allowing one party to recover double its attorneys’ fees was an unenforceable penalty.

After a non-jury trial, the court issued a decision finding that the defendant’s work with Springleaf did violate the non-competition provision of the PSA and that the plaintiff was entitled to $825,000 for lost profits.  In a separate decision, the court ruled that the plaintiff was entitled to $755,160 in attorneys’ fees, without applying the double recovery of attorneys’ fees provision of the PSA. The plaintiff appealed the decision seeking, among other things, to enforce Section 10.11 to recover double the attorneys’ fees.

In overturning the trial court’s decision that Section 10.11 was unenforceable, the Court stated:

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.

In its ruling the Court noted that, ”[w]here, as here, ‘there is no deception or overreaching’ in the making of such agreement, the agreement should be enforced as written.” Lawrence v. Miller, 11 N.Y.3d 588, 596, n. 4 (N.Y. Ct. App. 2008); White Plains Plaza Realty, LLC v. Town Sports Int’l., LLC, 79 A.D.3d 1025, 1027 (2d Dep’t 2010) (“[W]hen parties set down their agreement in a clear, complete document, their writing should … be enforced according to its terms”).

A significant part of our practice involves counseling clients on and litigating employment law issues. Schlam Stone & Dolan attorney Chris Dyess litigates and counsels clients regarding employment law issues including issues regarding the enforceability of restrictive covenants and provisions for attorneys’ fees. Contact Schlam Stone & Dolan attorney Chris Dyess at cdyess@schlamstone.com if you or a client have questions regarding a contract dispute.

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