Small Business Litigation
As business attorneys, we make it our business to keep small business owners out of court and business litigation. However, sometimes it cannot be avoided. We can help you enforce your rights in New York or defend any case brought against you. Before we begin any business litigation on your behalf, we will always make sure that any litigation makes sound business sense and won’t be a waste of your time and money.
WHAT CAN YOU EXPECT IN SMALL BUSINESS LITIGATION?
Business litigation has many phases and rules, many of which remain somewhat opaque to the small business client. In general, you can expect to see the following:
Summons and Complaint
In most cases, a lawsuit gets started with legal papers detailing the person suing (plaintiff), the person being sued (defendant), the facts that – allegedly – give the plaintiff a right to something from the defendant and a demand for money or other remedies from the defendant. The whole thing is called a complaint.
Complaints can be surprisingly short, as long as they state everything that is necessary to support the plaintiff’s claim and the remedy being asked for (more often than not the demand is for money).
Complaints then get filed in the right courthouse and must be served on the defendant.
The defendant will file an answer and possibly counterclaims which then have to be answered by the plaintiff.
Request for Judicial Intervention
Without actually requesting it, a court case, even though officially filed, will not see a judge or get the court to do anything. A lawsuit can be sitting there for years until one party requests “judicial intervention” via a Request for Judicial Intervention form, or RJI.
Once the case gets rolling because somebody requested a judicial intervention, there will be many conferences. A preliminary conference, compliance and/or status conferences, and finally pre-trial conferences. In most cases, the client will not have to appear for conferences. The lawyers will usually not even meet with the actual judge, but with the judge’s clerk or court attorney. The purpose of a conference is to set dates for the completion of tasks related to the litigation, to settle discovery issues, and in general move the case along to trial.
A motion is an application for an order by the judge. You want the judge to do something in your case. For example, there is a motion to dismiss which is a motion to determine that the complaint is not sufficient to make a legal case and should be dismissed; in other words, even if everything the plaintiff says in the complaint is true, there is just not enough to grant the case based on the legal theory offered by the plaintiff. This is a motion that can bring an early end to a case.
Plaintiff and defendant can ask each other for discovery. Discovery is the process of finding out facts from the other side before the actual trial. The law gives you several ways to conduct this fact-finding process; interrogatories, depositions, and document requests.
There are interrogatories, in which you send written questions to the other side they are required to answer under oath.
In a deposition, a witness under oath is questioned by the attorney for the other side, and everything is transcribed by a court reporter. No judge is present at a deposition; it is usually held in the lawyer’s office; a deposition serves the purpose of allowing a party to pin down the other party’s account of events. Under certain circumstances, the transcript can then be introduced at trial, for example, if a witness does not appear, or contradicts her prior testimony.
A document request asks the other party for all documents relating to the case. If the requesting party can argue that certain documents are relevant to the case, the opposing party has to produce such documents. Documents include electronic records of any kind and all other material that can possibly be produced.
Discovery can be very expensive, because even in a small case the parties may have to produce a large number of electronic documents which all have to be reviewed by the attorneys.
At any time while a lawsuit is going on, the parties may engage in settlement negotiations, or the judge might refer the parties to mediation, also known as “alternative dispute resolution”.
A trial may either be before a jury or before the judge (a “bench” trial). A complicated thought process is involved in deciding which to request. Depending on the underlying facts, many cases can be tried before a judge in one to three days. Jury trials usually take longer, so a jury trial of that same case might take a week or longer, due to the time it takes to select the jury and make opening and closing statements to them, among other factors. In general, lawyers demand juries when they want to play to sympathy or emotion, and pick judge trials when they want to save money and a case involves a fairly straightforward and emotionless legal determination, or, to the contrary, is so technical that a judge will likely understand it better.
At a trial, each party presents live testimony and witness testimony and has the chance to object to the other’s submissions and to cross-examine witnesses. In the end, the controversy is submitted for a decision to the “trier of fact”, judge or jury. A verdict or decision results in a judgment for or against the plaintiff.
WHAT ARE TYPICAL CLAIMS IN A SMALL BUSINESS LAWSUIT?
Business litigation can be justified for any number of reasons. Take the following examples of common business claims brought by business attorneys on behalf of their clients:
Breach of Contract Disputes
Someone does not comply with the rules set forth in a contract between the two of you;
Tortious Interference with Contracts and Prospective Business
Someone maliciously interferes with your performance under a contract, prevents you from entering into a contract, or helps somebody to breach a contract.
Fraud and Misrepresentation
Someone (1) represented a material fact, (2) the facts were untrue, (3) that somebody knew it was untrue, (4) the representation was made with the intent to deceive and to induce you to act upon it, (5) you relied on it and (6) you suffered damages by acting on the misrepresentation.
Unfair Competition – Trade Secret Misappropriation
Someone steals your brand, business reputation, customer list, or similar property or trade secret for his own business advantage and causes your business damages by doing so.
Someone takes your property and uses it without your authorization and thus makes it impossible for you to enjoy the rights that come with ownership of that property.
Claims based on another partner’s misconduct towards the business or the other business partners.
To be successful in obtaining a preliminary injunction, you have to establish that you would most likely win the lawsuit in the end, that there is a danger of irreparable harm if an injunction is not granted, and that the balance of the equities is in your favor. Courts will only grant you an injunction if you have evidence that is “clear and convincing”.
Dissolution of LLCs
A member of an LLC can bring a lawsuit to dissolve an LLC whenever it is “not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement”, see Section 702 Limited Liability Company Law. This is a difficult lawsuit to win. In most cases, it is not sufficient to base such a lawsuit on deadlock among the members or other internal upheaval or breaches of fiduciary duties. You must show that the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or that continuing the entity is financially unfeasible. If the business is run just fine, but the members are in never-ending fights, that is not enough.
Dissolution of Corporations in cases of Deadlock or Oppression
A 50% shareholder of a corporation can bring an action under Section 1104 Business Corporation Law asking the court to dissolve the corporation because there is a deadlock among the directors or shareholders.
A 20% shareholder of a corporation can bring an action under Section 1104-a Business Corporation Law alleging illegal, fraudulent or oppressive actions or that the property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation. Faced with such a lawsuit, the other members can force the 20% shareholder to sell its shares under Section 1118 Business Corporation Law.
Forced LLC Buy-Out
Many disgruntled business partners wish to be bought out by their fellow business partners or buy out those partners. Unfortunately, there are very few ways of forcing a buyout. Unless the governing contract has any special provisions dealing with partners’ exit opportunities, the possibilities are slim. There is the possibility of having a judge grant an equitable buyout in the context of dissolution, but the road to such an outcome is long and uncertain. “Equitable” means there is no specific law that grants the right, but a judge, after the dissolution of an LLC, finds buyout by one partner of the other a better solution.
LLC Merger Fallout Situations
In New York, majority members can force out minority members by merging the LLC into a new LLC which then excludes the minority member. The laws provide some protections for minority members to make sure that they end up with the fair value of their membership interests. If there is any breach by the majority members of the required procedures, minority members can bring a lawsuit complaining of the breach of their rights. See also “Cash Out Merger – the totally legal way to get rid of a minority LLC member“
HOW TO PREPARE FOR SMALL BUSINESS LITIGATION
Talk to us for starters. Then it helps to have all your documents organized. But do not delete any documents because as soon as you know there may be litigation you are under an obligation to preserve any information that could be relevant to the lawsuit.