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Posts Categorized: Litigation

A Litigant’s Ability to Recover Attorney’s Fees

Posted & filed under Litigation.

columnsA common question we receive from clients considering filing a lawsuit (or who have been sued) is if they can recover their attorney’s fees and costs when they win. Generally, under Georgia law, the answer to this question is ‘no.” There are, however, certain instances when attorney’s fees may be awarded.

The most successful attorney’s fees claims are those based on contractual attorney’s fees. Some contracts contain “prevailing party attorney fees” provisions. Under these provisions, if there is a dispute over the contract at issue, the party that wins may be entitled to his attorney’s fees. Thus, if your lawsuit involves a breach of contract, the first place to look is the contract.

Litigants often see a separate count for attorney’s fees asserted in a lawsuit under O.C.G. A.§ 13-6-11. A plaintiff in Georgia can recoup their attorney’s fees under this code section when a defendant has acted in bad faith, has been stubbornly litigious, or has caused the plaintiff unnecessary trouble or expense. To have a strong claim for 13-6-11 fees based on bad faith, any such bad faith conduct must arise out of the transaction that caused the lawsuit (not a defendant’s conduct in defending a lawsuit). If there is any legitimate controversy present in the lawsuit (i.e., if the defendant can come up with some reasonable argument or defense), courts are unlikely to find a defendant stubbornly litigious. While these fees are not usually easy to get, this is a potential source of fees in extreme cases.

Another Georgia statute, O.C.G.A. § 9-15-14, may provide litigants an ability to recover their attorney’s fees if a court finds that the opposing attorney or party brought or defended a lawsuit that lacked any “substantial justification” whatsoever or if such attorney or party unnecessarily expanded the litigation by improper conduct (i.e., abusing the discovery procedures). A lawsuit lacks “substantial justification” when it is substantially frivolous, groundless, or vexatious. In such cases, courts may award reasonable attorney’s fees.

At the end of the day, in business disputes, absent an attorney’s fees provision in a contract, litigants should not expect to recover the cost of their attorney. While both O.C.G.A. §§ 13-6-11 and 9-15-14 sound like promising ways to shift the burden of litigation to the opposing party, both statutes are intended to apply to the limited circumstances of bad faith and improper conduct.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Delaware Courts Allowing Shareholder Derivative Dilution Claims as Direct Claims

Posted & filed under Corporation, Limited Liability Company (or LLC), Litigation, Ownership Interest.

home-imageGenerally, derivative claims, which require a shareholder to make a demand before bringing a claim, are claims that are based on harm to the business and/or claims that hurt all owners of the business. On the other hand, direct claims, which can be directly brought by a shareholder, are claims that are intended to harm one particular shareholder and/or are unique to one particular business owner.

A dilution claim is a shareholder’s claim that other shareholders (usually the majority shareholder(s)) took some action to decrease their ownership interest percentage, which in turn decreases (or “dilutes”) their voting power. While dilution claims would appear to be derivative when they are brought by multiple shareholders whose interests have been diluted, a recent Delaware decision found otherwise.

In In re Nine Systems Shareholders Litigation, shareholders of Nine Systems Corporation filed a lawsuit in the Delaware Court of Chancery alleging that their shares in the company had been diluted by the three largest shareholders during a recapitalization planned by these majority shareholders. Under the defendant shareholders’ plan, new series of stock were issued, which reduced the plaintiff shareholders’ proportionate interests in the corporation. Although defendants argued that not all three majority shareholders benefited from the recapitalization, the court found that the focus is on the control group, not its individual members. The Delaware court found that derivative dilution claims can proceed as direct claims in instances where controlling shareholders benefited from the dilution of the plaintiffs’ shares.

In sum, while shareholders usually have to make a demand before they can bring a derivative claim, Delaware courts allow a direct claim when control group members (the ones controlling the corporation) benefit at the expense of the minority shareholders.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

What to do About a Misbehaving Court Appointed Receiver

Posted & filed under Litigation.

SJP_1423v1If you are a business owner in litigation with another business partner, the idea of having a Receiver appointed to manage the business while the lawsuit is pending may have crossed your mind. While a Receiver could be helpful in maintaining the status quo, there are some other issues.  For example, Receivers are expensive and can bankrupt the business, and you may not have any recourse against the Receiver for the Receiver’s wrongdoing.  The doctrine of official immunity may insulate them entirely.     

Receivers appointed by the Court (and oftentimes, even Receivers mutually selected by the parties but governed by a Court order) are considered officers of the Court and generally protected by official immunity.  Thus, in order to hold a Receiver liable for his or her acts as a Receiver, you would have to establish that he negligently performed “ministerial” acts or performed “discretionary” acts with “malice” or “an intent to injure.”  While this standard appears to be full of complicated legal jargon, what it really comes down to is whether the Receiver acted with a deliberate intention to do wrong.  Because a Receiver’s duties usually call for the exercise of personal deliberation and judgment, examining facts, and reaching their own conclusions, the majority of the Receiver’s acts are “discretionary.”  It is a very high standard to hold a Receiver liable for his or her discretionary acts.  A recent Georgia case, Considine v. Murphy, 755 S.E.2d 556, 559 (Ga. Ct. App. 2014), reconsideration denied (Apr. 10, 2014), dismissed a lawsuit against a Receiver alleging that the Receiver committed multiple acts of gross negligence, willful misconduct, corruption, theft, and malfeasance when the plaintiff did not point to any evidence in the record that the Receiver’s actions were done with actual malice (i.e., a deliberate intention to do wrong). 

The bottom line is that business owners seeking to hold a court-appointed Receiver liable for his or her acts as a Receiver must overcome a very high standard.  Litigants should select a Receiver wisely and be aware from the outset that they may have a difficult, if not impossible, time recovering for any wrongdoing by the Receiver.  

Written by: Heather Wagner

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Who is the “client” for purposes of the attorney-client privilege?

Posted & filed under Corporation, Limited Liability Company (or LLC), Litigation.

home-imageAlthough the attorney-client privilege protects your communications with your attorney when your attorney represents you individually, if an attorney is engaged to represent your corporation (for which you are an officer or director), your communications with “your” attorney are unlikely to be protected from the corporation’s other officers and directors. This concept is illustrated by a recent Delaware case which found that a corporate defendant could not invoke the attorney-client privilege to block an individual director from obtaining allegedly privileged attorney-client materials.  Thus, it is important that you determine at the outset of your representation whether you want “your” attorney to represent you, individually, or your corporation.  If the client is the corporation, even if legal advice is rendered to the corporation through you, you and the corporation’s other directors and officers are likely to be considered a “joint client,” and your communications with the attorney (subject to certain exceptions) may be disclosed to the other “joint client” directors and officers.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Is it a Trend?

Posted & filed under Corporation, Litigation.

columnsFor the second time in less than a month, Delaware courts have allowed shareholder derivative dilution claims to proceed as direct claims.  In Carsanaro v. Bloodhound Technologies, the Delaware Court of Chancery allowed a direct action, even though defendants argued that there was no controlling shareholder before the sale at issue.  The court ruled that the plaintiff shareholders did not need to identify the control group, but needed to allege that the interests of certain defendants were not aligned with the interests of the common shareholders.  Because the directors favored themselves, and their interests were not aligned with that of the shareholders’, plaintiffs’ allegations stated a direct claim.  If this is a pattern in Delaware, it may soon become a trend elsewhere, as Delaware is a trend-setter for corporate law. So the question remains— Is this a pattern?

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Delaware Courts Allowing Shareholder Derivative Dilution Claims as Direct Claims

Posted & filed under Litigation, Ownership Interest.

SJP_1423v1

Generally, derivative claims, which require a shareholder to make a demand before bringing a claim, are claims that are based on harm to the business and/or claims that hurt all owners of the business.  On the other hand, direct claims, which can be directly brought by a shareholder, are claims that are intended to harm one particular shareholder and/or are unique to one particular business owner. 

A dilution claim is a shareholder’s claim that other shareholders (usually the majority shareholder(s)) took some action to decrease their ownership interest percentage, which in turn decreases (or “dilutes”) their voting power.  While dilution claims would appear to be derivative when they are brought by multiple shareholders whose interests have been diluted, a recent Delaware decision found otherwise.

In In re Nine Systems Shareholders Litigation, shareholders of Nine Systems Corporation filed a lawsuit in the Delaware Court of Chancery alleging that their shares in the company had been diluted by the three largest shareholders during a recapitalization planned by these majority shareholders.  Under the defendant shareholders’ plan, new series of stock were issued, which reduced the plaintiff shareholders’ proportionate interests in the corporation.  Although defendants argued that not all three majority shareholders benefited from the recapitalization, the court found that the focus is on the control group, not its individual members.  The Delaware court found that derivative dilution claims can proceed as direct claims in instances where controlling shareholders benefited from the dilution of the plaintiffs’ shares. 

In sum, while shareholders usually have to make a demand before they can bring a derivative claim, Delaware courts allow a direct claim when control group members (the ones controlling the corporation) benefit at the expense of the minority shareholders.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

I’m a Shareholder, so Let Me See the Records!

Posted & filed under Corporation, Litigation, Ownership Interest.

Corporate shareholders’ problems with their fellow shareholders often arise from a lack of information.  Fortunately for these shareholders, Georgia law provides procedures for shareholders to inspect and review their corporation’s records. However, the type of information a shareholder desires to inspect dictates the procedure for obtaining access to such information.

Georgia law divides corporate records into two “categories” of documents.  The first category consists of (a) the corporation’s articles of incorporation (and all amendments thereto); (b) the corporation’s bylaws (and all amendments in effect); (c) resolutions adopted by the shareholders or board of directors increasing or decreasing the number of directors, changing the classification of directors, and identifying the names and addresses of all members of the board of directors; (d) resolutions adopted by the board of directors creating one or more classes and series of shares and fixing their relative rights, preferences, and limitations; (e) minutes of shareholder meetings, waivers of notice of meetings, consents in lieu of meetings; (f) written communications to shareholders (generally within the past three years), including financial statements furnished for the past three years; (g) a list of the names and business addresses of the corporation’s current directors and officers; and (h) the corporation’s most recent annual registration delivered to the Secretary of State.  This first category of records is easier for shareholders to access than the second category (discussed below), as these records are available for review, without condition, to any shareholder who provides a written request giving at least five business days notice to inspect the records.

The second category of records that shareholders can view include (a) excerpts from minutes of board of director meetings, records of any action of a committee of the board of directors while acting in place of the board of directors on behalf of the corporation, minutes from shareholders’ meetings, and records of action taken by the shareholders or board of directors without a meeting; (b) the corporation’s accounting records; and (c) the record of shareholders. Unlike the first category of records, shareholders do not have an absolute right to review these records.  Rather, to review and inspect these records, in addition to providing the corporation with at least five business days written notice of their demand to inspect and copy these records, shareholders must comply with four additional requirements: (a) the shareholder’s demand must be made in good faith and for a proper purpose that is reasonably relevant to his legitimate interest as a shareholder; (b) the shareholder describes with reasonable particularity his purpose and the records he desires to inspect; (c) the records must be directly related to the shareholder’s purpose; and (d) the records are only to be used for the stated purpose.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

 

Suing One of Your Business Partners—Be Careful not to Misstep

Posted & filed under Litigation, Ownership Interest.

One of your business partners hurt the company, maybe he has embezzled money from the company, shifted customers to his “other” company, and you are ready to exercise your rights to put an end to this behavior.  You want to file suit quickly.  But your lawyer says you can’t—you have to wait 90 days.  And your lawyer is right.

There are steps that must be taken before a lawsuit against one of your business partners can be filed.  One such step requires you to send a demand letter to the members or managers of the company with the authority to cause the company to sue in its own right.  This letter must ask that the members/managers take action against your wrongdoer business partner.

However, oftentimes, the member/manager with authority to sue on behalf of the company is the wrongdoer himself.  While asking the wrongdoer to sue himself may seem illogical, it is a necessary prerequisite to filing this type of lawsuit in Georgia.  Once you make this demand, if the company does not take your requested action (which it usually does not because a wrongdoer usually will not want to sue himself), you must wait 90 days. Only then can you sue your wrongdoer business partner.

It is important that you follow these statutory prerequisites to file suit, as the consequences of noncompliance can be harsh—your lawsuit can be dismissed.  Additionally, you cannot “cure” this type of procedural defect by sending a demand letter after you filed suit, as 90 days must expire between the time your demand is made and the time you sue your wrongdoer business partner.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

 

The Business “Divorce”

Posted & filed under Litigation, Ownership Interest.

While many people only think of the breakup of marriage when they hear the word “divorce,” business owners in disputes with their fellow business owners face a different kind of divorce—a “business divorce.”  Like marital divorces, business divorces stem from a wide array of causes—your business partner is stealing from the business, your business partner is not performing his share of the work, your business partner locked you out of the business, the business is deadlocked, you and your business partner have different strategic plans for the business, or merely that you and your business partner no longer wish to work together.

Like a marital divorce, business divorces can be stressful and emotionally draining. However, a few simple steps can help you tackle your business divorce.  First, you need to determine what is most important to you and what your goals in the divorce are.  Next, you need to obtain a copy of your business’ governing document (depending on what type of business you have, this may be an operating agreement, shareholder agreement, or partnership agreement). These documents dictate what you can and cannot do to get out of business with your business partner.  If you do not have a written agreement, Georgia law has default rules that govern your business divorce.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Professional Courtesies – They Help Our Clients

Posted & filed under Litigation.

Attorneys representing their clients in litigation often grant professional courtesies to opposing counsel.  Examples include allowing the opposing parties additional time to meet a deadline, and cooperating during the discovery period.  While clients might think “playing nice” is not in their best interest and may even believe that their attorney, who is supposed to be zealously representing them, is actually helping the other side, this is not the case.  In fact, quite the opposite is true.  Professional courtesies actually help advance the client’s interests, as they often save the client money, enhance the client’s position with the court, and result in reciprocating professional courtesies from opposing counsel.

Most clients agree that during litigation saving money is better than spending it. During the  discovery period (which is the phase of litigation when the parties have to share information), being cooperative in scheduling depositions and in producing documents (as opposed to asserting every objection possible and providing non-substantive responses) saves the client the costs of needless communications among counsel, motions to compel, motions for protective order, and hearings in front of the judge, especially when the court is likely to order the client to produce the information anyway. Discovery is oftentimes the most expensive part of litigation. Professional courtesies can serve to lessen the burden on our client’s wallet.

Professional courtesies also help to enhance the client’s position in front of the court and opposing counsel. Being cooperative and reasonable (while still acting in the client’s best interest) goes a long way in the eyes of the judge, who often feel like they are refereeing.

Over the course of the average lawsuit, which spans multiple years, it is likely that the client will need an extension of time for one reason or another.  By granting requested extensions of time to the other side, which typically do not affect the client in any way, it makes it more likely that opposing counsel will consent when the client requests a reasonable extension.

All of this is why it is our firm’s policy to extend professional courtesies when appropriate.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.