Under a common-law doctrine successful litigants love to hate – the “American Rule” – a party to litigation cannot recover its legal fees unless a contract, statute, or court rule expressly authorizes fee-shifting to the prevailing party.

For many clients, it’s a bitter pill to swallow to learn they cannot recover their legal fees from the other side, even if they win. But in business divorce litigation, as we’ve previously written, there are many exceptions.

A pair of brand-new Manhattan appeals court decisions highlight two exceptions to the general rule against fee-shifting, and some key differences between them.

In O’Mahony v Whiston (224 AD3d 609 [1st Dept Feb. 27, 2024]), the Court considered the propriety of a $1.8 million post-trial attorneys’ fee award to a successful plaintiff under the shareholder derivative statute, Section 626 of the Business Corporation Law (the “BCL”).

Under BCL § 626 (e), where a shareholder derivative plaintiff is “successful, in whole or in part, or if anything was received by the plaintiff” on behalf of the entity, “the court may award the plaintiff . . . including reasonable attorney’s fees . . . .”

In Seibel v Ramsay (___ AD3d ___, 2024 NY Slip Op 01617 [1st Dept Mar. 21, 2024]), the Court considered the propriety of a $4 million post-trial attorneys’ fee award to celebrity chef Gordon Ramsay under a contractual indemnification provision. As we shall see, though, Ramsay was not even a party to the contract.

I wrote about both of these exceptionally interesting cases previously (you can read my articles about the events preceding the recent appeals here and here).

I’m pleased to write about the two cases again at the finale of their ten-year-long merits litigation odysseys (except in the unlikely event one or more losing defendant obtains leave to reargue or leave to appeal to the New York State Court of Appeals).

The message of both these cases is clear. Where fee-shifting is on the table because of a statute or contract, do not underestimate the awesome (for plaintiff) and terrifying (for defendant) potential for a massive fee award if the case goes the distance to a final adjudication on the merits. In fact, as we shall see below, the Appellate Division made clear that there is nothing inherently reversible about an attorneys’ fee award far exceeding the amount of the actual damages award.

But whether the fee award is collectible, however, is an entirely different question. We’ll consider that problem at the end of this article.

O’Mahony: Statutory Fee-Shifting

In O’Mahony, O’Mahony and her romantic partner / co-owner sued the majority owners of a corporation that operated an Irish bar after they sold the bar’s lease, made off with the proceeds, transferred the bar’s physical assets to a new location in the same Manhattan neighborhood, then formed a new corporation without O’Mahony to operating a competing bar with the same name as the original.

Manhattan Commercial Division Justice Jennifer G. Schecter held in a scathing post-trial decision that defendants engaged in egregious misappropriation of corporate opportunity and failure to account. In the final judgment, Justice Schecter awarded money damages exceeding $5 million derivatively to the original Irish bar, Dubcork.

In her fee decision, Justice Schecter held that plaintiffs individually were entitled to an award of fees under BCL § 626 (e) “because they created a substantial corporate benefit by securing a judgment in excess of $5 million.” “In the end,” wrote the Court, “plaintiffs performed a tremendous amount of work in a case that took nearly a year to litigate. In light of the resounding outcome, a substantial fee award is warranted.” The Court entered a second judgment in favor of O’Mahony and her partner for $1.8 million in fees.

Defendants appealed, with attorneys’ fees and the “American Rule” the lead point of their appellants’ brief (you can read all the briefs here, here, and here).

The Appellate Division rendered several holdings:

• The Court has broad discretion when awarding fees: “An award of attorneys’ fees is within the sound discretion of the trial court.”

• The fee award was proportional to the overall recovery: “We find the fee award to be reasonable when compared to the overall recovery.”

• Defendants’ disclosure misconduct justified a hefty fee award: “plaintiff[s] incurred a substantial portion of the legal fees in trying to address and overcome defendants’ repeated failures to comply with their discovery obligations and other deceptive litigation tactics.”

• Plaintiffs were not disentitled to recover fees merely because a portion of their claims were direct, not derivative. The individual claim was for a “relatively trivial amount of the entire time expended on the entire lawsuit,” and in any event, “all claims were closely related and arose from the same set of facts and legal theories.”

Unfortunately for O’Mahony and her partner, the thrill of their appellate win was short lived: the main corporate defendant – the competing entity their former business partners formed – quickly filed for bankruptcy.

Seibel: Contractual Fee-Shifting

In Seibel, Seibel and Ramsay sued one another over a failed steakhouse venture in Los Angeles, The Fat Cow. Several contracts applied, including a Limited Partnership Agreement of FCLA, LP (the “LP Agreement”). Section 24 of the LP Agreement provided for indemnification between the parties for legal fees in disputes over “breach of this Agreement,” satisfying the Court of Appeals’ recent Sage Systems “unmistakably clear” standard for applicability of contractual fee-shifting provisions to “intra-party” disputes. But Ramsay was not a party to this contract.

Ramsay was a party to a separate Indemnification Agreement containing another, much more limited fee-shifting provision entitling Ramsay to recover just “one-half (1/2)” of any “loss” arising out of his execution of the “Lease” for The Fat Cow’s space.

Following a bench trial, Manhattan Commercial Division Justice Melissa A. Crane ruled in a post-trial decision that Ramsay was entitled to judgment on his counterclaim under the Indemnification Agreement, including for attorneys’ fees.

But in the resulting fee award decision, the Court made clear that it awarded Ramsay attorneys’ fees under Section 24 of the LP Agreement – not the Indemnification Agreement.

The Court entered two judgments, the first for money damages of $1.5 million, the second for attorneys’ fees of $4 million.

Although the fee award far eclipsed damages, Seibel on appeal treated it like an afterthought, relegating his fee challenge to the very end of his brief (you can read all the briefs here, here, and here).

In the ensuing decision, the Appellate Division ruled that Ramsay’s counterclaim for indemnification under the Indemnification Agreement “should have been dismissed” because there was no evidence that “Ramsay personally” incurred any pecuniary losses in connection with the Lease, his related entities apparently funding those costs. The Court wrote, “There is insufficient evidence in the record regarding the ownership structure of these entities to essentially pierce the corporate veil and allow Ramsay to recover for their losses.”

But then, the Court ruled, “Attorneys’ fees were appropriately awarded under the LP agreement to Ramsay as the prevailing party notwithstanding our dismissal of Ramsay’s indemnification counterclaim.”

The Court found that Ramsay was the prevailing party, even though the Court dismissed his indemnification claim, because “the unsuccessful claims involved a common core of facts or were based on related legal theories” to the other counterclaims on which Ramsay did succeed, “so that much of counsel’s time was devoted generally to the litigation as a whole, making it difficult to divide the hours expended on a claim-by-claim basis”(quotations omitted).

Lastly, ruled the Court:

Although the amount of attorneys’ fees exceeds the amount of the ultimate judgment, it does not exceed the amount of attorneys’ fees claimed. Moreover, there is no per se rule against awarding fees in excess of damages recovered, and fees may be appropriate even where a party recovers only nominal damages.

Thoughts on O’Mahony and Seibel

The title of this article posed a question. The genesis of that question is a vital distinction between fee-shifting under BCL § 626 (e) and fee-shifting under a commercial contract.

Under the former, in Glenn v Hoteltron Sys., Inc. (74 NY2d 386 [1989]), New York’s highest court held that a fee award to a successful derivate plaintiff is a liability of the entity on behalf of whom the plaintiff sued, not the defendant(s) the plaintiff actually sued.

That was exactly what the Court did in O’Mahony, entering the $1.8 million attorneys’ fee judgment against Dubcork, the entity on behalf of whom O’Mahony sued, not the tortfeasors who committed the wrong.

This poses a serious collectability problem. If the entity on behalf of whom the plaintiff sued lacks financial resources, like Dubcork, the plaintiff may not recover a penny of legal fees unless the entity first recovers its money judgment from the tortfeasors. Where the entity is unlikely to recover meaningful damages, it can render a fee award illusory.

In contrast, where a fee award derives from contract, the resulting fee award is a liability of the breaching party personally, against whom the court enters judgment personally. In that scenario, the successful plaintiff may potential elect to enforce its attorneys’ fee judgment first, increasing the potential for recovery of fees.

One aspect of Seibel I find mystifying. How was Ramsay personally entitled to indemnification of his legal fees under an LP Agreement to which he was not a party?

The Court’s reference to the doctrine of veil piercing to forbid Ramsay from recovering on behalf of separate entities under the Indemnification Agreement seems ironic because the Court, in effect, did exactly what it forbade, allowing Ramsay to “essentially pierce the corporate veil” to recover indemnity personally under the LP Agreement to which only a separate entity of which he was principal was party.

“Of course, it is fundamental that individuals, corporations, and partnerships are each recognized as separate legal entities,” (Franklin St. Realty Corp. v NYC Envtl. Control Bd., 164 AD3d 19 [1st Dept 2018], affd 34 NY3d 600 [2019]).

And, of course, contractual fee-shifting agreements “must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed” (Hooper Assoc., Ltd. v AGS Computers, Inc., 74 NY2d 487 [1989]).

The Appellate Division’s award of attorneys’ fees to Ramsay personally under a contract to which he was not personally a party seems to run counter to these rules.

In any event, O’Mahony and Seibel are striking reminders that in business divorce litigation, more so than in some other areas of commercial disputes, fee-shifting can comprise an outsized share of the overall monetary outcome. At least on paper.

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