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The Bankruptcy Code aims to achieve equality of distribution to creditors who are owed money while giving an honest debtor a fresh start. It is no surprise then, that pre-bankruptcy transfers of an insolvent debtor’s assets that favor one creditor over another, called preferences, are the subject of regulation and scrutiny by a trustee and other parties in interest once bankruptcy is filed.

What are preferential transfers? Preferential transfers are transfers made by an insolvent debtor within 90 days of bankruptcy. This 90-day period is known as the preference period, during which a trustee or bankruptcy judge analyzes a debtor’s transfer of assets to one preferred creditor while others are not paid. Section 547 of the Bankruptcy Code empowers a trustee or debtor to reverse these preferential transfers and bring the assets back into the bankruptcy estate. Unsecured creditors and secured creditors who failed to properly or timely perfect their security interests in collateral, or whose collateral decreased in value during the preference period, are most vulnerable to a preference attack. However, as a creditor, it is possible to challenge a party’s preference attacks.

The purposes of preference avoidance in bankruptcy are tied to the bankruptcy policy of equality of distribution for similarly situated creditors. Preference avoidance discourages creditors from racing to collect from a debtor as they file for bankruptcy. Preference avoidance also maximizes the value of the debtor’s estate which in turn, maximizes value to creditors.

A transfer of a debtor’s interest in property can be either voluntary or involuntary; for example, the granting of a security interest in its property is voluntary, while a judicial lien placed on property following a court order or judgment is involuntary. A transfer made by any entity other than the debtor is not considered a preference. Only a transfer made by an entity preparing for bankruptcy, and that actually files for bankruptcy, can be characterized as a preference. Say for example a related entity, such as an individual guarantor, repays the debtor’s creditor - the repayment is not a preference because it was not made by the debtor. The analysis becomes a bit trickier when a third party provides funds to the debtor to repay the debtor’s pre-existing debt. Courts will generally not treat this as a preference so long as the funds were “earmarked” for that specific purpose. In addition, a bit trickier for the untrained eye is identifying when a preference is an indirect (as opposed to a direct) payment to a debtor’s creditor. The classic example is that of a guarantor who is a creditor of the debtor because the guarantor has a claim against the debtor for any amounts the guarantor pays on a guaranty. If a debtor makes a payment on a guaranteed debt, the guarantor indirectly benefits because the payment reduces the guarantor’s liability.

As mentioned, even when a debtor launches a successful preference attack, a creditor can assert that an exception applies and circumvent the preference avoidance altogether. Exceptions to preference actions are the subject of another article. In this article, we provide a few of the more important exceptions available to a corporate debtor, including a transfer that was intended by a creditor and the debtor to be a contemporaneous exchange for new value given to the debtor, and not on account of an antecedent debt, or payments made to creditors in the ordinary course of the debtor’s business, which do not reflect any effort by the debtor to prefer one creditor over another.

There are several strategies a creditor can employ to preserve its rights, and several considerations exist for an insolvent company contemplating bankruptcy or in bankruptcy regarding preferences. Knowledge is power, so contact KI Legal’s Bankruptcy and Restructuring team for more information by calling (212) 404-8644 or emailing info@kilegal.com.

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This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

_____________________________________________________________________________________________

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.

New York is an “at-will” employment state. This means that, absent an employment agreement for a fixed duration, an employment relationship can be terminated by the employer at any time and for any or no reason, provided that the reason is not the result of discrimination or retaliation. An employer and employee may enter into an agreement that modifies the at-will relationship by, for example, allowing the termination of the employment only “for cause.”

Wrongful Termination

New York courts do not recognize a legal claim for “wrongful termination” of an at-will employee if the termination was simply unfair or misguided. An at-will employee must claim either that (i) the employer breached an express or implied contract of employment, or that (ii) the termination was the result of unlawful discrimination, retaliation, interference with a protected right (such as statutory medical leave), or another unlawful reason. This is surprising to many employees who could easily prove that their at-will termination was extremely unfair. However, unfairness by itself without a discriminatory or retaliatory reason, or other unlawful reason, does not constitute a “wrongful termination.” At the same time, however, the “at will” doctrine does not absolve employers from treating their employees fairly. Employees may seek legal help even if the “at will” termination was unfair but completely legal. The best practice for employers in terminating an “at will” employee is to document any performance issues – such as poor performance, repeated absenteeism, tardiness, or violation of company policies – consistently and well before the termination decision.

“For Cause” Termination

“For cause” provisions are generally in employment contracts which provide some benefit, such as severance pay, if the termination is not “for cause.” In other words, if the employer terminates the contract early for its own convenience instead of “for cause,” it would need to confer some benefit on the terminated employee. This could be a payout until the end of the contract, continued medical benefits, or severance pay. What constitutes a termination “for cause” is decided by the parties who enter into the employment agreement. Employers generally like to make these clauses broad to give them leeway to terminate an employee “for cause” in a variety of situations including repeated poor performance or underperformance. Employees generally like to make these clauses narrow to include only serious offenses such as:

1. Embezzlement, theft, or dishonesty;
2. Breach of employment contract;
3. Conviction of a crime;
4. Violation of sexual harassment or other company policies;
5. Code of conduct violation; or
6. Acts of moral turpitude which cast a negative light on the employer.

Since what constitutes “for cause” in any particular situation is a fact-sensitive inquiry, there is a risk that a dispute between the employee and the employer will arise if an employee is terminated “for cause” and thus denied their contracted-for benefits. Employers need to be very careful to document the reasons for the “for cause” termination. Many employees, especially highly compensated ones, may seek legal help if they feel their termination was not “for cause” but simply a way for their employer to avoid paying severance.

Developments in New York City

New York City recently passed legislation that upends the presumption of at-will employment for certain fast-food employees. The law prevents fast-food workers from being discharged except for just cause or a legitimate economic reason. The law defines just cause as “failure to satisfactorily perform job duties or misconduct that is demonstrably and materially harmful to the fast-food employer’s legitimate business interests” and includes factors to determine if the just cause requirement was satisfied.[1]

Furthermore, the law requires that before discharging an employee for just cause, the employer use progressive discipline based on such employer’s written policy provided to the employee. Employers must also provide terminated employees with a written explanation of the “precise reason for their discharge” within five days of such discharge.[2] Violations of this legislation can result in the city forcing the employer to reinstate a wrongfully discharged employee, monetary penalties, backpay, and “any other appropriate equitable relief.”[3]

It is vitally important that employers know the relationship they have with each of their employees. It is also crucial for employers to be guided by a legal team that specializes in employment law. At KI Legal, we have the knowledge and expertise to ensure that any business, regardless of its size and type, is within the bounds of the vast body of federal, state, and local law that governs employer-employee relationships. Operating outside those bounds, even if unintentional, can have disastrous effects on the operation of one’s business.

For help navigating labor and employment considerations, or to discuss your particular employment issue, contact KI Legal’s knowledgeable labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com.

What is a Fiduciary Duty?

A business owner has a legal obligation to act in the best interests of the company and its stakeholders. This legal obligation is known as a fiduciary duty, and it applies to all individuals who hold positions of trust and responsibility within a company. When a business owner fails to meet their fiduciary duty, they can be held liable for breach of fiduciary duty. A fiduciary duty is a legal concept that applies in various contexts. For example, directors of a corporation owe a fiduciary duty to the corporation and its shareholders, officers of a corporation owe a fiduciary duty to the corporation, partners owe a fiduciary duty to the partnership, and trustees owe a fiduciary duty to the trust beneficiaries. In each case, the fiduciary is expected to act with the utmost good faith, loyalty, and care towards the beneficiaries of the fiduciary relationship.

Types of Breach of Fiduciary Duty

Breaches of fiduciary duty can take many forms, including self-dealing, misuse of company assets, conflicts of interest, and mismanagement of company funds. When a fiduciary engages in any of these actions, they are not only putting their own interests ahead of the beneficiaries’, but are also potentially causing harm to the beneficiaries. In addition to the civil liability that can result from a breach of fiduciary duty, there may also be criminal penalties in some cases. For example, if a fiduciary embezzles funds or engages in fraud, they may be subject to criminal prosecution.

Remedies for Breach of Fiduciary Duty

The legal remedies for breach of fiduciary duty vary depending on the circumstances of the case and the applicable law. In some cases, the remedy may be monetary damages, such as restitution or disgorgement of profits. In other cases, the remedy may be injunctive relief, such as an order requiring the fiduciary to stop engaging in the wrongful conduct. In some jurisdictions, punitive damages may also be available in cases of egregious misconduct.

It is important for business owners to understand their fiduciary duties and take proactive steps to fulfill those duties. This includes ensuring that all transactions involving the company are conducted at arm's length and in the best interests of the company or its beneficiaries. Business owners must also be transparent about any potential conflicts of interest and must take steps to avoid any actions that could be perceived as self-dealing.

If you believe that a fiduciary has breached their duty, it is important to act quickly. Failure to act promptly could result in additional harm to the beneficiaries and could limit your ability to seek legal remedies. A skilled corporate attorney can help you navigate the legal complexities of a breach of fiduciary duty case and can provide you with guidance on the best course of action. At KI Legal, we understand the importance of protecting your business and its stakeholders. Our experienced attorneys have extensive experience in handling breach of fiduciary duty cases, and we are dedicated to helping our clients achieve the best possible outcomes. Contact us today by calling (212) 404-8644 or emailing info@kilegal.com to schedule a consultation so we can discuss how we can help you protect your business.

*ATTORNEY ADVERTISING*

*PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME*

This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

_____________________________________________________________________________________________

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.

Elements

What is tortious interference? Tortious interference is a common law tort that most often arises in commercial litigation when one party damages another party’s contractual or business relationship with others. Most jurisdictions recognize separate claims for tortious interference with contract and tortious interference with business relationships.

In New York State the standard for tortious interference with contract is fairly straight forward. The following four elements must be met in order for a court to find that there was tortious interference with contract:

1. the existence of a valid contract between plaintiff and a third party;
2. the defendant's knowledge of that contract;
3. the defendant's intentional procuring of the breach, and
4. damages.”[1]

The Existence of a Valid Contract Between Plaintiff and a Third Party

The first element, being the simplest, is the existence of a valid contract between the plaintiff and a third party. In this case, a third party is any party that is neither the plaintiff nor defendant. Contrary to what you may believe, a valid contract does not need to be written out and could be an oral agreement between parties. For purposes of this example, a contract can be a written employment contract between employer and employee outlining things such as payment, but also includes a valid restrictive covenant, prohibiting the employee from working for a competitor after the termination of her employment.

The Defendant's Knowledge of that Contract

The second element, being the defendant’s knowledge of that contract, is also fairly straightforward. In such a case, for a defendant to have tortiously interfered with a contract, they must have knowledge that the contract actually exists. Whether it be oral or written, the defendant must have actual knowledge of the contract, they cannot merely interfere with the contract by mistake. Continuing with our example, here the defendant is a competitor of the employer, aware of the employment contract between the employer and the employee.

The Defendant's Intentional Procuring of the Breach

The third element, being the defendant’s intentional procuring of the breach, is generally the hardest element to prove in a court of law. This means that the defendant committed some act, purposely, to force a party to breach the contract. Following our growing example, in this case, the defendant/competitor told the employee that they will be given more favorable working conditions and pay, and convincing the employee that if they work for the them, they will not face any legal action from the former employer.[2] In this case, the defendant induced and encouraged the employee to breach the contract and specifically the restrictive covenant. New York Courts have found that a plaintiff may recover for tortious interference with contract in cases where a new employer induces an employee to breach a contract.[3] The standard here is the “but for” test, meaning that, but for the competitor’s interference and inducement, the employee would likely have not breached the restrictive covenant.[4] One other way Breach can be induced is by making performance of a contract impossible.[5]

Damages

The fourth and final element needed is damages. Damages are the award that a plaintiff requests from the court in order to satisfy the harm or injury done to them. For tortious interference with contract, generally, the damages would be the just compensation the plaintiff would earn, so long as he performed the contract without interference from the plaintiff. In our example, the damages awarded to the plaintiff would likely be value lost from the employee leaving to work for the direct competitor.

Defenses

Perhaps the strongest defense against tortious interference with a contract is the defense that the actions of the defense were justified. For an action to be justified, the defendant must show that their actions were taken in their own legitimate economic self-interest.[6] The New York Court of Appeals found that,

The existence of competition may often be relevant, since it provides an obvious motive for defendant's interference other than a desire to injure the plaintiff; competition, by definition, interferes with someone else's economic relations. Where the parties are not competitors, there may be a stronger case that the defendant's interference with the plaintiff's relationships was motivated by spite. But as long as the defendant is motivated by legitimate economic self-interest, it should not matter if the parties are or are not competitors in the same marketplace.[7]

This can be distinguished from our example above (based on a real New York State case) as, in our example, the breach was induced with a specific promise to protect against litigation. In Carvel Corp. there was no promise of anything, and the employee was merely lured away from the original employer due to favorable working conditions and pay. In order for there to be tortious interference, there must be “direct[ed] activities towards the third party.”[8] If no such directed activities existed, the defendant may have a valid defense against the plaintiffs’ claims.

Other ways to defeat the claim of tortious interference with contract is to challenge the remaining three elements of the claim. This would likely be much more difficult, as a claim for tortious interference is more often than not brought forward if such elements could not be satisfied.

For help navigating restrictive covenants and drafting employment agreements, contact KI Legal’s knowledgeable labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com. We are here to help protect your business and interests.

For help navigating restrictive covenants and drafting employment agreements, contact KI Legal’s knowledgeable labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com.

[1] Foster v. Churchill, 87 N.Y.2d 744, 749–50, 665 N.E.2d 153, 156 (1996).

One of the major concerns a developing company has when leasing space is that they may outgrow the space. As a company grows, they will likely need more employees, inventory, and storage space. A space that once looked big can quickly become not big enough. Unfortunately for these companies, landlords don’t usually grant a tenant a blanket right to terminate their lease just because the company is growing. With that said, there are a few ways for growing tenants to (somewhat) protect themselves so that, when the time comes and they need more space, they can hopefully lease space within the same building in which they are located in. These protections often come in the form of negotiating certain options in a lease.

Right of First Refusal:

What is a right of first refusal? A right of first refusal, or “ROFR,” is one way in which a tenant can ensure that, if there is open space in the building in which they currently have a lease, the landlord will need to offer the tenant that open space before the landlord signs a lease with a new tenant. The mechanics of the ROFR are as follows:

1. The landlord works out a deal for open space with a potential tenant.
2. Once the terms are finalized, the landlord must go to the tenant that has a ROFR in its lease and offer the tenant the same exact terms for the open space as was negotiated with the potential tenant.
3. If the current tenant is in need of space, then the current tenant can accept the terms and expand.

This ROFR ensures that the tenant will at least have the opportunity to lease more space in the building that it's in, saving the tenant various costs – such as needing to break its lease as well as move to a new space.

Right of First Offer:

What is a right of first offer? A right of first offer, or “ROFO,” is another way in which a growing tenant can protect itself – to a certain degree. Like a ROFR, a ROFO ensures that the existing tenant is offered open space in a building before a landlord can move forward and sign a lease with a new tenant. Unlike a ROFR, where the landlord only brings lease terms to an existing tenant after the terms have already been negotiated, the landlord has to negotiate in good faith with the existing tenant prior to the landlord approaching a potential new tenant for the open space with a ROFO; this can be very advantageous for an existing tenant because, unlike a ROFR where the existing tenant may be stuck with some unfavorable terms, the existing tenant has some sort of power in negotiating terms that work for it with a ROFO.

Many landlords are reluctant to grant tenants ROFRs and/or ROFOs because it will impede the landlord's ability to lease out space in the future. However, if a growing tenant is enticing enough, it may very well be in the landlord’s best interest to grant one of these two options to ensure that the landlord has a strong tenant in its property for years to come.

These are just a few examples that demonstrate the importance of properly negotiating for a tenant’s future needs. As can be clearly seen from the above, it is important to make sure to have proper representation when negotiating your lease. For more information, or for help on your next real estate deal, reach out to the knowledgeable real estate attorneys at KI Legal by calling (212) 404-8644 or emailing info@kilegal.com.

*ATTORNEY ADVERTISING*

*PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME*

This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

_____________________________________________________________________________________________

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.

What is a receivership? A receivership is recourse available to secured creditors or lenders who seek the appointment of a court authorized neutral party to receive, preserve, or liquidate collateral pending the court’s resolution of the creditor’s claims. A receivership is an involuntary proceeding initiated by secured creditors. For example, a mortgage lender may choose to seek the appointment of a receivership to maintain the value of a cooperative building in New York City that has fallen into foreclosure.

Each of the 50 states and the federal government have statutory laws that provide their respective courts with the equitable power to establish a receivership estate. While the statutory schemes for receiverships are not as comprehensive as the Bankruptcy Code, several aspects are quite similar to a bankruptcy case. These aspects include the consolidation of control over the debtor’s assets, injunction against asserting claims against the receivership estate – much like the automatic stay in bankruptcy, though the injunction is not automatic, the exercise of asset sales and dispositions that are subject to creditors’ claims, and the bringing of avoidance actions for fraudulent transactions.

Receiverships are often a prelude to bankruptcy. Corporate debtors can file bankruptcy during an ongoing receivership, though the authority to file is based on applicable state corporate law. Therefore, the right to file bankruptcy and manage day-to-day operations of a corporate debtor remains vested in corporate management. However, receivership orders present challenges because they include modifications to management rights that may conflict with state law.

What happens to the receiver when a bankruptcy petition is filed? Once a bankruptcy case is filed, the receiver must cease active administration of the estate, except as necessary to preserve the property. The receiver must also deliver the property to the bankruptcy estate representative and, if required to turn over the property, file an accounting with the court. A court may decide to appoint the receiver as the bankruptcy trustee or custodian if it is in the best interest of creditors, and if the debtor is not insolvent and equity security holders are better served. When a case is filed during a receivership, a party in interest may request that the court abstain under section 305 of the Bankruptcy Code from taking jurisdiction or dismiss the bankruptcy case. Courts evaluate several factors when faced with an abstention request, including whether the receivership can achieve an equitable distribution of assets, and the efficiency of the receivership’s administration and avoiding duplicative efforts to achieve a similar result. A bankruptcy court may abstain when a receivership is operating properly and moving toward a sale. Also, a bankruptcy court’s decision to abstain is not appealable so it is viewed as an extraordinary remedy.

Finally, a receiver is entitled to receive from the estate reimbursement for expenses and compensation for services rendered which benefit the estate. Compensation is treated as an administrative priority claim. The receiver may also be entitled to compensation of its professionals.

If you are a secured creditor whose rights are in jeopardy, contact KI Legal’s Bankruptcy and Restructuring attorneys to find out how your interests can be protected. Call us at (212) 404-8644 or email info@kilegal.com to discuss.

*ATTORNEY ADVERTISING*

*PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME*

This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

_____________________________________________________________________________________________

KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum. KI Legal’s services generally fall under three broad-based practice group areas: Transactions, Litigation and General Counsel. Its extensive client base is primarily made up of real estate developers, managers, owners and operators, lending institutions, restaurant and hospitality groups, construction companies, investment funds, and asset management firms. KI Legal’s unwavering reputation for diligent and thoughtful representation has been established and sustained by its strong team of reputable attorneys and staff. For the latest updates, follow KI Legal on LinkedIn, Facebook, and Instagram. For more information, visit kilegal.com.

New York State courts have found that multiple factors must be considered when determining whether an employer-employee relationship exists. Generally, these factors are used to determine the degree to which one person (or business) supervises, directs, and controls the other. The more control a person (or business) has over another, the more likely an employer-employee relationship exists. New York State law also distinguishes between employees and independent contractors. At the outset of any employment relationship, the employer must decide to hire someone as one or the other. There are important differences between the two, which will be highlighted below.

Employees

What is an employee in New York? New York Labor Law defines an employee as a “mechanic, workingman, or laborer working for another for hire.”[1] New York is an “employment-at-will” state. In other words, the employer may terminate the employment relationship at any time for any reason, as long as the termination was not the result of unlawful discrimination, retaliation, interference with a protected right (such as statutory medical leave), or another unlawful reason. By the same token, the employee can quit at any time for any reason. An at-will employment status is presumed if there is no other agreement in place, such as an employment agreement or collective bargaining agreement. It is best practice for an employer who wants to maintain the at-will relationship to ensure that any employment-related documents (such as handbooks, offer letters, and contracts) reaffirm the at-will relationship.

Employment contracts are typically reserved for professionals, executives, and employees with special skills. These agreements set out the details of the employment relationship, generally covering things like salary, benefits, the length of the agreement, and how or why the relationship may be terminated. Employment contracts can also place certain legal restrictions on employees after the employment relationship has ended. For example, very typical are confidentiality, non-disclosures, or non-competition restrictions.

Employers may employ employees for a definite term or an indefinite term. Employment contracts for a definite term “lock in” employees for a pre-determined length of time and rate of pay. Generally, employers may only terminate employees under contract for a definite term “for cause.” Conduct constituting “cause,” if not spelled out in the contract, has been defined as “some substantial shortcoming [of the employee that is] detrimental to the employer’s interest that the law and sound public opinion recognize as grounds for dismissal.”[2] A termination outside these bounds may subject the employer to liability. A more thorough explanation of “for cause” terminations will be provided in a future article.

Employees, unlike independent contractors, are paid wages which are subject to normal payroll taxes. There are a host of laws, regulations, and rules which apply specifically to employees, including wage and hour laws, worker safety regulations, and labor laws for unionized employees, among many others. Many of these laws do not pertain to independent contractors.

Independent Contractors

What is an independent contractor? An independent contractor is a person who agrees, most often by contract, “to achieve a certain result” but is not bound by the orders of the employer on exactly how that result is achieved.[3] Businesses can avoid significant tax and other liabilities every year by classifying certain workers as independent contractors rather than employees. However, the improper classification of workers can result in steep penalties. In determining whether an individual is an independent contractor, New York courts look at a seemingly ever-changing list of factors. Such factors include the degree to which the employer controls, directs, or supervises the contractor, the company’s method of paying the contractor, and the independence of the contractor to do business with other companies.[4]

An independent contractor typically:

1. Charges fees for service;
2. Is engaged only for the term required to perform an identified task or service;
3. Retains control over the method and manner of work;
4. Retains economic independence;
5. Is responsible for paying their income, social security, and Medicare taxes; and
6. Is not protected by most federal, state, or local laws intended to protect employees.

These factors allow a business to avoid many of the financial obligations owed to traditional employees.

These benefits, however, come with risks. A business that misclassifies employees as independent contractors may be liable for back pay, employee benefits, disability payments, workers’ compensation, tax and insurance obligations, and civil monetary penalties. Federal and New York State agencies aggressively enforce rules regarding worker misclassification because of its tax implications. Classification lawsuits are costly and can seriously disrupt and even destroy a business. Additionally, as part of the U.S. Department of Labor’s Misclassification Initiative, it has entered into an agreement with the IRS under which the agencies have agreed to work together to reduce worker misclassification.

To avoid problems that can cause massive disruptions to a business, business owners must think carefully about how they classify those who work for them. Precautionary measures such as employee handbooks, employment contracts, policies and procedures manuals, and offer letters must be carefully drafted to minimize liabilities. At KI Legal, we specialize in creating cost-effective legal compliance strategies regardless of the size or type of business. Our strategies are constantly being developed and refined by attorneys who have decades of experience in Labor and Employment Law and are customized specifically to each client’s needs. Our goal is to help protect and preserve our clients’ businesses.

Delaware is widely considered to be the corporate capital of the United States. It is home to over a million corporations, including over 60% of Fortune 500 companies.[1] This is largely due to Delaware's business-friendly legal system, which includes a well-developed body of corporate law that provides corporations with flexibility and predictability in their operations.[2]

One key aspect of Delaware's corporate law is the availability of shareholder derivative lawsuits. A derivative action is a lawsuit brought by a stockholder, on behalf of the corporation, to enforce a claim belonging to the corporation.[3] Generally, injuries to the corporation which hurt the value of the corporation’s stock or assets give rise to claims belonging to the corporation. These lawsuits allow shareholders to sue on behalf of the corporation when the corporation's management or board of directors have failed to act in the best interests of the company.[4] Shareholder derivative lawsuits have become an important tool for corporate governance, providing a mechanism for shareholders to hold corporate management accountable.[5]

A derivative action typically involves claims against a director or officer of the corporation for mismanagement or breach of fiduciary duty but can also include claims against others such as outside accountants or advisors.[6] Directors (or other fiduciaries) of corporations or associations have duties to the investors and the corporation to act in good faith and with loyalty, due care, and complete candor. A unit holder or limited partner in a limited partnership may also bring a derivative action on the partnership’s behalf.[7]

Delaware's corporate law provides a well-developed body of law for shareholder derivative lawsuits, with clear standards for bringing such lawsuits and for the duties of directors and officers. [8] Furthermore, Delaware law requires that a shareholder bringing a derivative lawsuit must have standing to do so.[9] To have standing, the shareholder must have owned stock in the corporation at the time of the alleged wrongdoing and must continue to hold the stock throughout the litigation.[10] The shareholder must also show that they have made a demand on the board of directors to take action and that the board has refused to act, or that making a demand would be futile. Delaware law also requires that the shareholder must allege with particularity the actions of the directors or officers that constitute a breach of their fiduciary duty.[11] This means that the shareholder must provide specific facts that support their claim, rather than making vague allegations.[12]

In Delaware, shareholder derivative lawsuits serve as an important check on corporate management and board of directors.[13] They provide a mechanism for shareholders to hold these parties accountable when they have breached their fiduciary duty to the corporation. By doing so, shareholder derivative lawsuits help to promote good corporate governance.[14] When corporate management or board of directors act in their own interests, rather than in the best interests of the corporation, they can cause harm to the corporation and its shareholders. Shareholder derivative lawsuits provide a way for shareholders to address this harm, and to seek a remedy that benefits the corporation as a whole.[15]

In conclusion, Delaware's well-developed body of corporate law provides clear standards for bringing shareholder derivative lawsuits, ensuring that they are brought in a fair and consistent manner. As the corporate capital of the United States, Delaware plays a crucial role in promoting good corporate governance through its support of shareholder derivative lawsuits. It is important to be wary of all the benefits and risks if bringing a shareholder derivative suit in Delaware. For more information on the topics covered here today, or for services related to your specific situation, contact our knowledgeable corporate governance attorneys at (212) 404-8644 or email info@kilegal.com to get the help you need.  

     I. Remedies for Violations

Generally, restrictive covenants are contract provisions or stand-alone agreements made between an employer and an employee which prohibit the employee from taking certain post-employment actions, such as working for a competitor, disclosing trade secrets, or soliciting co-workers or clients.¹ Because there are no specific statutes governing restrictive covenants in New York, the courts have shaped the extent to which they can be enforced.

Whether it be employer or employee, when a party violates a restrictive covenant or any contractual provision for that matter, there are consequences to which a court will enforce so long as the restrictive covenants are deemed to be reasonable. Throughout all contracts, the two major means by which a remedy is achieved is through either injunctive relief or the paying of damages.

      A. Injunctive Relief

If you own a business and wish to enforce the restrictive covenant between you and a former employee, you can appear before the court and sue for injunctive relief in the form of a temporary restraining order.[1] If relief is granted, the court will stop the former employee from working for a direct competitor or somehow releasing valuable trade secrets to said competitor.[2] Simply put, the court will ensure that the restrictive covenant is enforced as it was written and intended to be used. A former employee may also seek injunctive relief, however, if the former employee asks the court to enjoin (or stop) the enforcement of the restrictive covenant by you and, if successful, ultimately render it null and void.[3]

For example, if a former employer wishes for a former employee to stop searching for jobs that may be prohibited by the restrictive covenant, they can sue the employee in court and legally stop them from continuing the job search. Conversely, the former employee may also sue to halt the enforcement of the covenant if they believe or find it to be unenforceable under the law.

            1. Preliminary Injunctions

A preliminary injunction is an injunction granted usually at the beginning or during the course of litigation. A party can seek a preliminary injunction if they can show a likelihood of success on the merits, irreparable injury without the injunctive relief, and that the balance of equities is in the party who sought relief’s favor.

           2. Permanent Injunctions

A permanent injunction is granted towards the end of litigation as a final judgment is rendered. It should be noted however that a permanent injunction does not mean the restrictive covenant may be enforced forever; it simply means that it will be enforced for the time as prescribed by the contractual language of the covenant.[4] The court will never expand the meaning of the covenant as courts have historically attempted to limit the power of restrictive covenants.

      B. Damages

Damages are the measurement of monetary loss that either party suffers when a restrictive covenant is violated. For a former employer, it may be the financial loss attributed by the former employee working for a competitor and putting the former employer at a significant disadvantage. On the other hand, for a former employee, it could be the loss of pay because the covenant so narrowly restricts the former employee’s ability to earn a living at a competitor.

Many employment contracts that include restrictive covenants also include “liquidated damages clauses.”[5] These clauses establish an amount that would be owed in damages if one party were to breach the contract. Courts have consistently found that such clauses are only enforceable if the amount is deemed reasonable and proportionate to the actual losses and damages.[6]

      C. Partial Enforcement

Recently, courts have reserved the ability and power to enforce portions of a restrictive covenant. Courts have severed the parts of restrictive covenants found to be unreasonable in certain areas.[7] For example, if a restrictive covenant is found unreasonable in terms of duration but not geographic scope, the court will choose to sever the duration portion of the covenant but enforce it with respect to its geographic area. If a restrictive covenant prohibits a former employee from working for a competitor within the same neighborhood as the former employer, but for a period of over 50 years, then a court may choose to alter enforcement of the covenant to remain effective in the same neighborhood but for a period of only one year.

    II. Defenses to Enforcement

As with any cause of action, there are defenses to breach of a restrictive covenant. Both the former employer and employee may raise the following:

     A. Statute of Limitations and Jurisdictional Issues

As for any cause of action, there is generally a statute of limitations which governs how long after an incident occurs an action can be brought before the court. Any breach of contract action in New York must be commenced within six (6) years from the date of the breach.[8] If a party brings a claim after the six years from the time the breach occurred, the breaching party may move to dismiss the action at the onset based on untimely commencement.

     B. Waiver

In cases where a former employer waives his right to enforce a restrictive covenant via certain actions, a court will not enforce the covenant if the employer changes their mind. In cases where a former employer chooses to help out a former employee by helping in their job search, the covenant will be considered waived.[9] Furthermore, if a former employer consistently does not historically enforce restrictive covenants, and the former employee knows and relies on such a fact, then the covenant may also be considered waived by the court.[10] Both of these examples are critically important for employers to be aware of. If you’re not going to enforce it, there is little value in having one at all.

     C. Lack of Consideration

In most cases, consideration - promise or performance - must be provided for a non-compete agreement to be deemed enforceable.[11] The fact that the employee is still employed by the employer, however, can be sufficient consideration for the court.[12] This issue can become complicated when an at-will employee is terminated without cause. While the termination of at-will employee without cause is permissible, so long as it is not done for illegal reasons (i.e., discriminatory reasons), the issue will be whether the restrictive covenant is no longer effective.

     D. Unconscionability

Contract clauses may be deemed unconscionable by the courts by of two ways. The first way is known as procedural unconscionability. What is procedural unconscionability? Procedural unconscionability occurs when a party was effectively forced into signing, and the party had no “meaningful choice.”[13] This occurs in cases where an employer creates contract terms that are unreasonably favorable to themself, knowing that the employee cannot reasonably walk away from the contract.[14]

The second way a covenant can be unconscionable is in its terms. Here, the analysis is tightly intertwined with the reasonableness standards. If a restrictive covenant is not reasonable in its geographic scope, duration, and burden to the employee then it can also be seen as unconscionable, and thus can be raised as a defense to the enforceability of a restrictive covenant.[15]

For help navigating restrictive covenants and drafting employment agreements, contact KI Legal’s knowledgeable labor & employment attorneys by calling (212) 404-8644 or emailing info@kilegal.com. We are here to help protect your business and interests.