Providing for the Recovery of Legal “Fees on Fees”

The ability of a party to recover the legal fees and expenses that they incur in connection with a lawsuit can often dramatically change settlement negotiations, the legal strategies a party takes prosecuting a lawsuit, the amount of resources that a party is willing to invest in a lawsuit, and – ultimately – the outcome of a case.

While it is customary for many parties and practitioners to include legal fee provisions in their contracts, many of these contracts fail to include provisions for the recovery of what is known as “fees on fees,” or the legal fees incurred recovering a party’s legal fees.

Legal fees are only recoverable in a lawsuit where they are based on a statute or a contractual provision.

However, in New York, contractual legal fee provisions are strictly construed. Parties to a contract are often surprised that their legal fee provisions cannot make them whole; and that they will have to forego recovering thousands of dollars (or considerably more) proving their entitlement to legal fees as well as the reasonable amount of such fees.

In some contexts, a breach may be cured or rendered moot only after a party incurs legal expenses commencing a lawsuit, leaving only the issue of legal fees to be litigated. In such instances, a party must still prove their entire case in order to recover legal fees, the cost of which will be deemed “fees on fees” – and will not be recoverable unless the party’s contract (or by-laws) contains a “fees on fees” provision.

Recently, more courts are awarding “fees on fees” in connection with legal fee awards that are based on statutory law, such as New York State law providing for sanctions in the form of legal fees based on frivolous conduct. These decisions are reminders that “fees on fees” can and will be awarded, but only in very limited contexts.

Make sure there is clear and unmistakable language in your legal fee provisions.

Since legal fee provisions are strictly construed, contractual legal fee provisions will not be sufficient to support an award of “fees on fees” unless:

  • The contract expressly provides for fees on fees; and
  • Such language is “unmistakably clear.”

While there is no requirement that legal fee provisions use the term “fees on fees,” there must be explicit language providing for the recovery of legal fees and expenses, as well as the legal fees and expenses incurred recovering such fees and expenses.

To avoid surprises when invoking a legal fee provision during a lawsuit, parties should not assume they will be able to recover all of the legal fees incurred enforcing their contracts (as well as by-laws) without ensuring, among other things, that there is clear and unmistakable language in their legal fee provisions providing for the recovery of “fees on fees.”

New York’s New Flood Insurance Notice Requirements For Co-ops and Other Landlords.

New York State has passed new Real Property Law Section 231-b, requiring landlords to notify tenants of flood insurance risks for their buildings. Co-op corporations, and individual owners who lease or sublease their units, have been swept into the mix.

Flood Hazard Lease Notice

All residential leases must now specify whether the leased premises is located in a (a) designated floodplain; (b) Special Flood Hazard Area (“SFHA”) 100-year floodplain; or (c) Moderate Risk Flood Hazard Area (“500-year floodplain”). These are FEMA [Federal Emergency Management Agency} designations shown on their flood maps.

In addition, the lease must now disclose “any prior flood damage to the leased premises” due to a “natural flood event” that the lessor knows or should have known has occurred, and the nature of the damage.

Finally, leases must include a Notice that a tenant can obtain flood insurance, and that a standard renter’s insurance policy does not cover flood damage.

Does this Apply to Condos? Since Condos are not “landlords,” they are not subject to these requirements. However, if you are leasing or subleasing your apartment, this law will apply to you, even if your apartment is on the 7th floor of a midtown high-rise.

What about HOA’s? Although HOA’s are not subject to this statute, New York State modified the Property Disclosure Statement Law to require homeowners to provide the same information to prospective buyers. (The State also eliminated the option of giving a $500 credit in lieu of disclosure.)

Getting the Info: You can determine whether you are located in an area with any flood risk by going to FEMA’s website, msc.fema.gov/portal/home. Buildings in designations starting with an “A” or a “V” are generally required to obtain flood insurance.  Of course, if you live in a high-rise building, the Co-op or Condo association should be getting the flood insurance for the building, but your tenant (or you) can still get flood insurance covering your personal property and improvements to the unit if you wish.

Problems with the law:

  • What is the “leased premises”? Is it limited to the apartment, or the entire building? What if the basement flooded but the 7th floor did not? Does the  Co-op issue different notices for different floors?
  • What is a “flood”? The law includes “heavy rainfall” as an example of flood damage. Last month’s storms resulted in leaks into many apartments due to overflows from the roof or balconies, or infiltration through walls and around windows. Is that a “flood”? FEMA Flood insurance policies would say no, because a flood is limited to “surface water.” Surprisingly, most property damage policies also exclude wind-driven or storm-related water damage, unless the storm damaged a portion of the building envelope and water came in through the gap. (That’s the subject of another e-blast.)

Related questions: Is a sewage backup due to inadequate capacity of the storm drainage system a “flood”? Is a burst pipe? Associations and homeowners should both check their policies to see what coverage they have for these types of damage.

  • How far back does flood history go? Two years (Hurricane Ida)? Ten years (Hurricane Sandy)? Fifteen years (Hurricane Irene)? What if the Co-op installed a comprehensive sump pump system after it suffered flood damage, and the system seems to have worked since then? Should that be noted as well?

Initial Recommendations.  Initially, we suggest that the Co-op or Condo provide the flood-plain information as a separate Notice to all owners. Co-ops need to put the notice into proper statutory form. The notice should disclose all “flooding events” that could have been (or were) covered by flood insurance. The flood history should go back (say) 20 years or whenever the Co-op’s current Board or Managing Agent would reasonably know. Although nothing more is required by statute, the Association might wish to disclose to its owners whether it carries flood insurance or that it has installed an enhanced drainage system if it thinks a tenant or subtenant might benefit from that knowledge.

If you are acting as a landlord and leasing or subleasing your own unit, this notice is mandatory. Initially we would treat your unit as the “leased premises” for purposes of the notice since a tenant would be more interested in whether your unit has flooded than other parts of the building. You still have to announce whether the building is located in a flood hazard zone, but depending on the location of the unit, that may be irrelevant to a prospective tenant.

Shareholders who receive the Flood Hazard Notice should insert it in their Proprietary Leases, next to the Sprinkler Disclosure notice, the Smoke and CO2 Detector notice, the Stove Handle notice, the Lead Paint notice and the Window Guard notice.

Certain specific language is required. The wording that could be used in one form of Notice that we have developed is available HERE (You will need to decide on the alternative language and fill in the blanks.)

Residential Alterations: Don’t Sign That Contract!

Recently, we have seen numerous residential alterations projects go awry because co-op and condo owners are signing bare-bones agreements without any attorney’s review. It is a grave mistake for property owners to focus only on the planning of their renovation, while ignoring the importance of retaining a competent construction law attorney to review their contractor’s or architect’s agreements.

You never need a lawyer until you realize that you needed one.

This mistake is only discovered when the project is months delayed with no end in sight, its costs have doubled without clear explanation, the owner is threatened with mechanic’s liens, or the workmen do not show up to complete the job. By the time these calamities occur, an owner’s options are limited to expensive and time-consuming litigation or the difficulty of finding other professionals to replace the defaulting contractor and take over the job.

Retain counsel before writing that first renovation check.

Cooperative and condominium counsel and managing agents are wise to advise their shareholders and unit owners to retain competent counsel prior to writing the first renovation check. In a recent case, our client, a condominium unit owner, signed three different agreements without consulting an attorney: one for architectural services, one with a contractor for a $1.3 million renovation and a third with an owner’s representative to protect his interests. Unfortunately, the principal of each company he signed with was the same individual – purportedly acting in three different capacities which contradicted one another and contained conflicting duties and obligations. The project is now substantially over budget and delayed by over a year.

The architect, owner’s representative and contractor must all cooperate to ensure that the project moves smoothly to completion. However, each also serves as a check and balance to guard against potential problems that may arise. It is critical that the contracts spell out the respective role, duties and obligations of each party clearly before the project begins. A skilled attorney is the often forgotten professional who will assure that the contract terms are consistent and agree, and that the property owner’s interests are properly protected.

The Architect’s Agreement

A well-drafted architect’s agreement is critical to provide substantial protections for the co-op or condominium owner. Architects commonly present clients with their own, abbreviated form of agreement which omits many of the protections set forth in the Standard Form Agreement Between Owner and Architect (AIA Document B101-2017). An attorney would ensure that the architect’s form agreement contains a clear description of services, not only with respect to drafting the plans and specifications for the project, but also overseeing bidding by contractors and the administration of the job. Is the architect acting only as a designer, or is he/she familiar with local Code requirements? Will the architect ensure that the plans are properly filed and approved by the NYC Department of Buildings, The NYC Landmarks Preservation Commission and all other relevant agencies? If not, does the fee include the costs of an expeditor to undertake this work?

During construction, what duties does the architect have to inspect the work and oversee the construction? Most agreements do not require the architect to perform daily oversight, but should state that the professional will visit the site at appropriate intervals and certify the progress of construction. Most importantly, the architect should review applications by the contractor for progress payments and review the work to certify to the owner that the payment requests are accurate and the work conforms to the requirements of the contract documents. The architect should require that the contractor and any subcontractors provide partial lien waivers certifying receipt of funds and waiving their claims to sue the owner, up to the amount of  payments made.

The architect is obligated to alert the owner to evidence of shoddy workmanship or substantial deviation from the plans. The architect is also typically the initial decision-maker in the event of a dispute between owner and contractor regarding interpretation of the contract documents.

The Construction Contract

All too often, clients sign a document for very expensive alterations that is nothing more than a contractor’s proposal. This proposal typically gives an abbreviated list of items to be completed, with a price and payment terms, and very little else. There is no provision for insurance, the time of completion of the job, warranties, sign-offs or any other protections contained in the Standard Form of Agreement Between Owner and Contractor (AIA Document 104-2017) or similar agreement. Under a General Contractor’s form, the contractor company hires outside subcontractors for the various trades. More extensive projects require a Construction Management agreement.

An good attorney’s review ensures that the construction contract sets forth the essential elements necessary to protect a property owner:

  1. A detailed description of the scope of the work, with references to all architect’s drawings and contract documents;
  2. a fixed price or method of determining the price of the project;
  3. the time of completion (with penalties for contractor’s delays);
  4. representations that the contractor will perform in a good and workmanlike manner, in compliance with all governmental law;
  5. contractor’s warranties;
  6. liability for paying subcontractors and obtaining lien waivers from all subs;
  7. the submission of periodic requests for payment, with a retainage of at least ten percent (10%) on all partial contract payments;
  8. adequate insurance to protect the owner and indemnification language that is necessary to trigger such insurance coverages;
  9. submission of all necessary documents to obtain governmental inspections and property sign-offs of all work;
  10. a termination clause, in the event the contractor delays or defaults in his obligations; and
  11. a method of resolving disputes, either by arbitration or litigation, with a legal fee recovery provision.

Last fall, a client of ours signed a simple agreement for a complete home renovation with a contractor who was simultaneously working on two other large projects. The client never asked us to review the agreement and the contract had no insurance provisions. As the workmen were called away to the other jobs, completion of the client’s project was delayed into the cold weather. Plumbing was installed and water connected before the heating plant was finished. During a cold snap in January, the pipes all burst, flooding the entire home, damaging the newly installed sheetrock and buckling the wooden floors.

The contractor blamed his subcontractors for not installing temporary heating, but neither had adequate insurance coverage. The owner’s insurance carrier disclaimed coverage and the homeowner was faced with a substantial loss. Our client was left to complete the work with a new contractor at substantial expense. He had little recourse against the defaulting contractor, because the company declared bankruptcy to avoid liability. The contract our client negotiated without our assistance left him with few protections and limited options.

Construction projects in New York are complex and expensive, even in residential cooperative and condominium apartments. It is critical that property owners seek the advice of counsel before they sign the agreements that may spell the difference between a beautiful, newly renovated unit – or substantial cost overruns that wind up in court.

 

New York’s New Law Restricting Employer Access to Employee Social Media Accounts

In response to a trend of employers mandating login credentials for their employees’ social media accounts for the purpose of, among other things, evaluating employees for promotions and investigations of alleged employee misconduct, New York has a new law, effective March 12, 2024, that restricts employers’ access to current and prospective employee social media accounts.

Under the new law employers cannot (a) require employees to disclose usernames, passwords, or any login information relating to personal accounts; (b) access an employee’s personal account in the presence of the employer; or (c) reproduce photos, videos, or other information contained in employee’s personal accounts.

The new law does not bar employers from accessing company accounts that employees use in their jobs as long as the employer notifies the employees of the employer’s right to do so. Employers also maintain the right to access publicly available social media posts. In addition, the new law does not bar employers from limiting employee use of certain websites while on the employer’s network or device as long as the employer notifies employees of any such policy.

As is commonly the case with employment laws, the new law prohibits retaliation against an employee who refuses to provide access to a personal social media account in accordance with the law.

Employers should closely assess their social media policies, devise practices that comply with the new law, and obtain written employee acknowledgments where possible to prove compliance in the event an employee alleges a violation of the law.

Trust Transfers: Considerations for Cooperative Boards

It is becoming increasingly common for shareholders to seek the transfer of their cooperative shares into Trust as part of their estate planning. This allows the shareholder to avoid probate in the future and provides them flexibility in managing their assets.

Although a Trust transfer can be very similar to standard share transfers, there are some additional considerations a Cooperative Board should take into account before moving forward with any Trust transfer.

Prior to Board Approval
Before any Trust transfer is approved, the Board should have their legal counsel review the Trust agreement and provide any necessary edits or revisions to the Trust attorney to incorporate into the agreement. Of specific importance is the inclusion of any “Spendthrift” provision.

These provisions are included in trust agreements to shield the assets of the Trust from potential creditors or beneficiaries. When the attorney is reviewing the proposed trust agreement, they should provide language to be included in the Trust that shields the Cooperative from the Spendthrift provision, thereby allowing the Cooperative to access Trust assets in case of default.

What Should the Cooperative Require?
Outside of requiring Board approval, there are other steps a Cooperative Board can take to protect itself and the Cooperative in these situations. In particular, the Board should require additional documentation from the Shareholder, Grantor, and Trustees. These documents include: (1) an Occupancy Agreement; (2) Guaranty; (3) Trust Affidavit; and (4) Trust Acknowledgement.

The first two documents are most relevant to the Board’s interest in a Trust transfer:

  • Occupancy Agreement: This agreement ensures that the Trust, as an entity, is bound by the same rules in the Proprietary Lease as an individual shareholder would be. It will control who can occupy the Unit, how the shares can be transferred, and which transfers from the Trust will require Board approval. Each Occupancy Agreement can be tailored to the individual needs of the Board and the specific shareholder seeking to transfer their unit into Trust.
  • Guaranty: A Guaranty ensures that there is an individual with fiscal responsibility for all maintenance payments, special assessments, and any defaults by the Trust. The Guarantor is typically the current shareholder who is making the Trust, but the Board may decide to accept a Trustee as the Guarantor if they can prove they are financially responsible.

Moving Forward
A shareholder’s decision to transfer their cooperative shares into Trust is a common estate planning technique that Cooperative Boards should be aware of. When confronted with a possible Trust transfer, a Board should ensure that the proposed Trust is properly reviewed for any provision that could negatively impact the Cooperative, and the Shareholder and future Trustees must be required to execute an Occupancy Agreement and Guaranty to protect the interests of the Cooperative.

Co-op Board Options for Collecting Arrears in Estate Defaults

A shareholder dies and no one comes forward to claim their apartment. Before long, outstanding monthly rent has accrued and the apartment is now in significant arrears.

What are the Board’s options for collecting arrears when a situation like this occurs?

When a shareholder dies, the proprietary lease does not die with him/her.
In fact, a proprietary lease survives death. Anyone who is looking to inherit the shares of stock from the deceased must do so with a proper transfer.

When seeking past rent due, especially from an Estate, it is important for the Board to gather all records connected to the apartment, including the stock certificate and the proprietary lease. In addition, and equally as important, is collecting all information from any past visitors or family members listed as tenants or otherwise. An Estate that has not been administered will likely result in an investigation of executors, heirs, and beneficiaries in the future, so you want to make sure you have all the information necessary to collect from the proper debtor beforehand.

Reviewing the stock certificate and proprietary lease
Once all relevant records are gathered, the Coop Board should begin by evaluating the stock certificate and proprietary lease and identifying who is named as the official shareholder. If there are multiple names listed on the stock and lease, you may be able to collect from the remaining shareholder(s).

The Board should consult with their attorney to determine how to proceed based on the parties’ relationship to the shareholder. For example, a spouse listed on a stock certificate issued in 1996 or later is entitled to a transfer of all shares connected to the apartment, while a friend who is listed on the stock certificate may not be.

Bringing a petition in Surrogates Court
If there is only one person listed on both the stock certificate and lease, and no one has come forward to represent the Estate, the Board will likely have to move forward with bringing a petition in Surrogates Court.

To collect the shareholder’s outstanding debt, someone must be officially appointed by the Surrogates Court to administer the Estate. Letters Testamentary or Letters of Administration must be issued in Surrogates Court to an individual for him/her to have the legal authority to manage, control, sell, and access the decedent’s assets. This process can be a lengthy one, but it helps expedite the proper transfer of stock – and ensure that the Co-op gets paid in full before the Estate can distribute the property. (Transfer to another does not relieve debt, and all outstanding debt must be satisfied before the transfer (NY BSC Ch. 4, Art. 6, Sect. 629)).

Smith, Buss, and Jacobs LLP maintains a full-service default department to streamline collection of arrears. If your Co-op Board needs guidance or assistance with collecting arrears as the result of an Estate Default, we are here to help.

A Primer on the Attorney General’s Power to Enjoin Persistent Fraud

Judge Arthur Engoron’s September 26, 2023, decision in the Letitia James v. Donald J. Trump case is certainly worth a read, and not just for its references to the classic comedies “Groundhog Day” and “Duck Soup.” It provides a useful primer on the powers of the Office of the Attorney General of New York State (OAG) to enjoin persistent fraud or illegality under New York Executive Law 63(12) – including, as was ordered here, by ordering disgorgement and dissolving LLCs used for that purpose.

The decision arises out of a years-long investigation that the OAG conducted into certain of defendants’ business practices from 2011 through 2021. And it is a reminder that the OAG is not toothless, and an OAG investigation is nothing to sweep aside. We will be hearing more about this soon – trial opened October 2, 2023, and here is a link to the OAG’s opening presentation.

This decision is not just of interest to those involved in OAG investigations, though.

It is worth a read for all litigators as a compelling reminder of the danger of caving to client instructions to advance arguments without a basis in law or fact – to put in everything including the kitchen sink! Here, the Court attached a $7,500 price tag for each of the five attorneys it found had advanced frivolous arguments. The Court reminds us that, “Counsel should be the first line of defense against frivolous litigation.”

Smith Buss & Jacobs has extensive experience with the OAG, including requesting, supporting, and defending investigations under the Martin Act and Executive Law 63. If you have questions about an OAG investigation or subpoena, please feel free to give us a call.

Habitat Magazine: “Shareholders Must Replace Leaky Jacuzzi with Standard Tub”

What Happened: Ram Avrahami and Andrea Gural purchased a cooperative apartment containing a jacuzzi and used it for several years with no complaints. In 2017, though, the building superintendent (who lived below them) noticed that the tub was sinking; a little later, she also notified them that their toilet was leaking into her apartment. The shareholders made arrangements to fix the two conditions, the tub and toilet were duly removed, and the repair work performed. However, before the tub could be reinstalled the board of directors notified them that since the building’s rules prohibited whirlpool tubs, the shareholders had to replace the jacuzzi with a standard tub.

Click Here To Read The Full Article In Habitat Magazine

Second Circuit Decision Clarifies “Essential Function” Requirement for Employees Seeking Disability Accommodations

Participants in the HR/employment law world are readily familiar with the concept that an employee’s request for a reasonable disability accommodation will only be viable if the employee can perform the “essential functions” of his/her job with the accommodation.

An August 18, 2023 decision issued by the Second Circuit in Tafolla v. County of Suffolk, et al provided clarity on the “essential function” requirement.

The case involved a former clerk/typist of the Suffolk County District Attorney’s Office who alleged a disability discrimination claim against the county. Her job responsibilities included a task called “archiving,” which typically involved entering information from court files into a database when a prosecutor closed a criminal case.

After suffering a spine injury in a car accident, the clerk submitted a doctor’s note to the county stating that she could not pick up heavy files due to the injury. She requested an accommodation of another employee temporarily taking over her archiving responsibilities, which was denied. She went on medical leave and was eventually terminated.

The clerk commenced an action in the district court alleging, among other things, disability discrimination based on the county’s alleged failure to accommodate the disability. The district court granted the county’s summary judgment motion, thereby dismissing the clerk’s lawsuit. The clerk appealed the decision.

In its decision, the Second Circuit held that the term “essential functions” is defined as the fundamental duties to be performed in the job, not functions that are merely marginal.

The Court emphasized that courts analyzing an essential functions question must give considerable deference to the employer’s judgment as to what functions are essential, but conduct a fact-specific inquiry into both the employer’s description of a job and how the job is actually performed in practice. Factors to be considered include:

  • Written job descriptions
  • Amount of time spent on the job performing the function
  • Work experience of past employees in the position
  • Work experience of current employees in similar positions

In Tafolla, the clerk’s supervisor testified that he didn’t know whether archiving was essential and that it was a minimal part of the clerk’s job. An assistant district attorney testified that clerks have a lot of pressing work to get done and that archiving was the “last thing” clerks need to do. The clerk’s supervisor acknowledged that clerks were permitted to divide up the various tasks among themselves, and that if the clerk was given the accommodation, her colleagues could have done the necessary archiving work.

The Second Circuit found there was no deadline for archiving any particular file and that the clerk’s official job description did not provide any detail as to what archiving work is comprised of, although other aspects of her job were described with some detail. Based on these and other factors, the Second Circuit determined that archiving was not an essential function of the clerk’s job – and reversed the district court’s decision.

What’s the takeaway? To minimize the risk of a bad court outcome, employers need to:

  • Craft detailed job descriptions that identify the essential functions
  • Periodically evaluate job duties, which may evolve over time
  • Amend job descriptions to document any changes

Dogs, Dope and Noise

Beginning in 2018, the board of the The Charleston Condominium, a 191-unit, 21-story building at 225 East 34th St., began com-municating (through counsel) with apart-ment owner Judith Zarucki about bylaw and house rule violations. Specifically, the board alleged that Zarucki had been causing offensive odors by smoking marijuana, keeping too many pets and allowing them to roam off-leash in the building and causing excessive noise. For a period of time the nuisances and viola-tions stopped, but they started up again in June 2019, with the board receiving 50 complaints over a six-month period about noise and marijuana odor. The complaints continued and Zarucki was fined $13,600 for the bylaw and house rules violations. Finally, in 2020 the condo filed suit.

Click here to learn what happened next.