By Joshua Stein | Forbes
Litigation between disgruntled partners or disgruntled members of a limited liability company often turns very nasty—and very expensive—very fast. Once the litigation is resolved, the victor has probably spent far more on legal fees than it ever expected to. Regardless, it will typically want to recover those fees from the loser.
That’s not always so easy, as demonstrated in a recent case decided by the New York Court of Appeals, the highest court in New York State.
As a starting point, American courts have traditionally denied the victor in litigation any right to recover legal fees, unless an underlying contract or a statute provides for that recovery. Thus, in most cases, the victor often isn’t much of a victor at all after taking into account the legal fees incurred to achieve the victory. Many contracts do, however, allow the winner in litigation to recover its legal fees from the loser with a simple statement to that effect.
In the New York case mentioned above, though, the partnership agreement wasn’t that simple. It handled the legal fees issue in a way that is, actually, quite common in partnership agreements and limited liability company agreements. The agreement required each partner to “indemnify” the other against any “costs” and “expenses” incurred because a partner does something in “bad faith.”
One partner sued to dissolve the partnership. The other partner won. The winner then argued that the dissolution action was undertaken in “bad faith,” so the loser had to reimburse the winner’s legal fees. The trial court agreed. The loser appealed, and the appellate court agreed with the trial court.
“Business divorces can be expensive propositions. Emotions can run high when business partners feel wronged but pushing the litigation button before exploring the ramifications can be a costly oversight. A careful examination of the business agreements in place can highlight the risks of proceeding and may dictate a different approach. As noted, an indemnity provision can be a poor substitute for a specific attorneys’ fee recovery provision and may leave a party with a big legal bill and no other source to pay it.”
Tony Freeman, Rose Law Group senior counsel and litigator