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Category: American Rule

Judge Rejects $5.2M Fee Request in Poultry Farm Loan Suit

February 21, 2024

A recent Law 360 story by David Minsky, “Judge Rejects $5.2.M Atty Fee Bid In Poultry Farm Loan Suit”, reports that a New York federal judge rebuffed attorneys' attempt to collect a nearly $5.2 million fee for representing an affiliate of two billionaire brothers that accused an investment adviser of fraudulently inducing the affiliate to provide a loan for a Russian poultry operation, saying the adviser wasn't improperly defending himself.

In the order, U.S. District Judge Victor Marrero denied an attorney fee motion by Reed Smith LLP lawyers representing Bloomfield Investment Resources Corp., which accused adviser Elliot Daniloff of needlessly stretching out the firm's lawsuit against him over the course of several years before he was ultimately ordered to pay millions in compensatory and punitive damages.

Bloomfield — a British Virgin Islands company and affiliate of billionaire brothers David and Simon Reuben — sued Daniloff in 2017 and a judgment of more than $34 million was entered against him in 2023, a year after a bench trial was held, court records show.

"To prevail on a motion to shift fees, the moving party must provide 'clear evidence' that the losing party's claims were (1) 'entirely without color,' and (2) 'were made in bad faith,'" Judge Marrero said in his order.  "The court finds that Bloomfield has not established that Daniloff engaged in the sort of dilatory and vexatious litigation tactics that satisfy the standard for the 'bad faith' exception in this circuit."

In the 2017 case, the plaintiff accused Daniloff of misdirecting $25 million intended as a loan into a bank account opened for the Russian poultry farm and failing to return the money.

Following the judgment, in June 2023, Reed Smith attorney Steve Cooper filed a motion seeking attorney fees from Daniloff.  In the accompanying memo, Cooper said Daniloff failed to show credible evidence of his theory, which is that "Bloomfield made an investment in the Synergy Hybrid Fund as an investor and that the $25 million did not represent a loan."

"Daniloff's actions led to prolonged and expensive litigation," Cooper stated in his motion.  "He caused the collection, review and/or production of almost 150,000 pages of documents, and the taking or defending of 13 depositions.  He made numerous frivolous motions and appealed the dismissals of his first action to the Second Circuit twice."

Opposing the attorney fee motion, Daniloff said that the plaintiff couldn't show that his defense wasn't "colorable" and used for an "improper purpose."

"Efforts to delay proceedings are not sufficient to establish that the litigant is acting with an 'improper purpose' as required for the 'bad faith' exception," Daniloff said in his July opposition filing.  "Moreover, any assertion that Mr. Daniloff was defending against Bloomfield's claims to give himself leverage in resolving the dispute would be insufficient to establish that Mr. Daniloff litigated this dispute with an improper purpose."

The court found Daniloff's arguments "legally and factually baseless," according to Judge Marrero, who also noted that the "court found that Daniloff persisted in making baseless arguments without support and in conflict with the clear evidence showing that he (and Bloomfield) always understood the $25 million would be a loan and not an equity investment."

While Judge Marrero acknowledged Bloomfield's arguments that Daniloff convinced the parties to engage in lengthy negotiations that delayed the case and ultimately failed, he added the court wasn't persuaded that these tactics amounted to bad faith dealings.

Judge Marrero cited the "American rule" in which parties pay their own attorney fees, "absent statutory authority or by contract," but recognized that these costs can be shifted in limited circumstances.  One deviation from the rule is the "bad faith exception," the judge said, in which the non-prevailing party's actions are conducted "vexatiously, wantonly or for oppressive reasons."

The judge, however, found that Bloomfield hadn't established the required "high degree of specificity" in showing Daniloff litigated with the intent to harass or delay, saying that it has never been held in his circuit that a "frivolous position may be equated with an improper purpose."

"Without such evidence, the court cannot conclude that Daniloff's actions were taken with an improper motive," Judge Marrero said.  "Courts in this circuit have consistently declined to award attorneys' fees simply on the basis that the defendant improperly delayed the proceedings, even when the delay was accompanied (or even caused) by meritless legal positions."

Delaware High Court Clarifies Fee-Shifting in Public Interest Cases

January 31, 2024

A recent Law 360 story by Rose Krebs, “Del. Justices Clarify Fee-Shifting in Public Interest Cases”, reports that, in a decision offering guidance on attorney fee-shifting in public interest cases, Delaware's Supreme Court reversed a decision that awarded fees to nonprofit organizations that successfully challenged the use of outdated tax assessments in determining funding for the state's public schools.

In a 49-page ruling, the state's high court undid a Chancery Court order from last year that awarded roughly $1.5 million in fees to Delawareans for Educational Opportunity and the NAACP Delaware State Conference of Branches.  Left in place was the award of roughly $73,000 in legal expenses to the two groups, which hadn't been contested by the litigation parties.  "The parties in this appeal raise important questions regarding fee-shifting in the public interest litigation context," Justice Karen L. Valihura wrote for the court.

At issue were legal fees awarded after the two nonprofit organizations brought several lawsuits "that sought increased funding for Delaware's public schools," the Supreme Court said.  "The suits were brought against multiple Delaware public officials in their official capacities, some of whom were responsible for tax collection in Delaware's three counties," Justice Valihura wrote.

In a May 2020 opinion, Vice Chancellor J. Travis Laster ruled in favor of the two organizations, agreeing that the counties' tax assessment methods, which had relied on values from as far back as 46 years ago, treated owners of similar properties unequally.  "Appellees filed suit against the defendants because they believed that Delaware public schools were not providing an adequate education to disadvantaged students," the Supreme Court ruling said. "Appellees pointed to a broken system for funding public schools as one of the reasons why Delaware's public schools have fallen short."  The Supreme Court decision explained that in the state, "approximately one-third of funding for public schools is derived from local taxes levied by individual school districts."

"When school districts in Delaware levy local taxes, they use the county assessment rolls prepared by New Castle County, Kent County, and Sussex County," the ruling said.  "If there are deficiencies or problems with the counties' tax assessment rolls, those deficiencies or problems will affect the school districts' ability to levy taxes."  In his ruling, Vice Chancellor Laster said that "owners whose properties have appreciated more pay a lower effective rate than owners whose properties have appreciated less."

"The counties' outdated assessments conceal a reality of non-uniformity beneath a cloak of uniformity," the vice chancellor said.  His ruling came after the Chancery Court had bifurcated the litigation into a "County Track" to handle claims against county defendants, and a "State Track" to adjudicate claims against state officials, according to the Supreme Court opinion.

The "County Track" litigation was further divided, the Supreme Court said, including a "merits" phase that went to trial in 2019, leading to the vice chancellor's post-trial decision.  As proceedings continued following Vice Chancellor's Laster's ruling, an agreement was reached by the parties "pursuant to which each county agreed to conduct a general tax reassessment," according to the Supreme Court's decision.  The two nonprofit organizations sought an award of attorney fees and expenses in May 2021, and in two separate decisions, the Chancery Court first determined that the groups were entitled to the costs and then subsequently awarded the amounts to be paid by the defendants, the Supreme Court said.

In its ruling, the Supreme Court relied on two of its prior decisions, in Dover Historical Society v. Dover Planning Commission, in 2006, and Korn v. New Castle County, in 2007. In the Dover decision, the Supreme Court "rejected fee-shifting in a non-taxpayer, public interest suit that ultimately caused a government entity to 'perform properly,'" the opinion said.  "In Korn, fees were awarded under the 'common benefit exception' to the American Rule because the plaintiffs created for all taxpayers a tangible benefit that was both 'substantial' and 'quantifiable,'" the Supreme Court said.

The American Rule, which originated in the U.S. Supreme Court's 1796 decision in Arcambel v. Wiseman, provides that "litigants are generally responsible for paying their own legal fees absent certain limited exceptions," the Supreme Court said.  Exceptions for which fees can be shifted include cases in which a litigation party has acted in bad faith or the litigation "creates a common benefit," the high court's opinion said.

The two nonprofit organizations had argued in a filing that the Chancery Court had correctly determined they were entitled to fees and expenses for obtaining benefits "beyond the social good of making the government comply with the law."  Among those benefits were increasing annual tax benefits for school districts due to the agreement to perform updated tax reassessments, as well as "fixing deficiencies in the state equalization funding system," the groups asserted.

In an opening brief, the public officials argued that the Chancery Court had "ignored" Dover and incorrectly applied Korn, and that the court had ordered "defendants to pay fees for benefitting parties with whom those defendants have no identity of interest, which is both unprecedented and unwarranted."  The Chancery Court's "expansion of fee-shifting in public interest litigation should be curtailed," they argued.

In an amicus brief, the Delaware League of Local Governments urged the Supreme Court to reverse the Chancery Court's decision, arguing that it "improperly created a newfound common law exception to the American Rule by allowing fee-shifting ... for 'public benefit' litigation," the Supreme Court said.  On its website, the league describes itself as "a non-partisan, non-profit organization comprised of local government leaders."

The league had argued that a "mere social benefit does not justify an exception to the American Rule and it is up to the legislature, not the courts, to determine whether fee-shifting is appropriate in public interest litigation," the Supreme Court's decision said.  In its ruling, the justices agreed with the public officials and the league, saying the Chancery Court's decision exceeded "the bounds of Dover."  The Chancery Court's decision "omits any discussion of the guidance we offered in Dover as to the narrow parameters of the exception in the public interest context," the court ruled.

"Viewing this litigation through the prism of Dover's guidance, we conclude that the benefits achieved fall within Dover's 'perform properly' bounds," the Supreme Court said.  "Accordingly, we hold that the trial court erred in determining that the common benefit doctrine applied."  The high court said it was "not persuaded that the other benefits identified" warranted an award of fees and called some of the purported benefits "speculative."

The Chancery Court also erred by determining that the Korn decision "was not limited to taxpayer suits, but rather, it applied more broadly to public interest suits," the Supreme Court's ruling said.  "We decline to extend Korn beyond taxpayer suits that confer a quantifiable, non-speculative benefit to all taxpayers," the justices said.

New Castle County Executive Matt Meyer said in a statement: "We are proud that we just saved taxpayers $1.48 million, a substantial portion of which would have been paid to out of state New York lawyers.  This decision, from Delaware's highest court, means countless public funds will be at considerably less risk in future lawsuits against towns, cities, counties and local governments across Delaware."

Article: Understanding Attorney Fee-Shifting to Mitigate Risk

December 5, 2023

A recent Business Insurance article by Iran Valentin and Allison Scott, “Perspectives: Understanding Attorney Fee Shifting to Mitigate Exposures”, reports on the importance of understanding attorney fee-shifting in litigation to mitigate risk.  This article was posted with permission.  The article reads:

The availability of attorneys fees is a significant concern to policyholders.  Without the potential to recover the fees, most dubious claims and suits related to employment law and consumer protection, for example, would not be pursued.  The potential of a fee recovery also drives up the cost of resultant litigation, settlements and awards.  Thus, a double-headed monster emerges: an increase in the number of claims and an increase in exposure, which can eventually drive up the costs of insurance.

An existential threat that exists for corporations is a “nuclear verdict,” or a runaway jury award.  These huge verdicts grew in the face of incessant legal advertising by plaintiffs attorneys and the resultant slanted narrative effectively desensitized potential jurors to the value of money and preemptively taints prospective jury pools.

Within this context, it is more important than ever for insurance professionals and defense counsel to understand the significance of attorney-fee shifting.  When crafting a defense strategy, many factors are considered, including the nature of the alleged loss, the profiles of the litigants, the reputation of the claimants’ counsel, recent jury verdicts and the jurisdiction.  Equally as important should be considering the effect of fee-shifting, to develop strategies to mitigate that exposure.

Remedial legislation

Basically, fee-shifting requires a losing party in litigation to pay a prevailing party’s attorneys fees.  It represents a departure from the “American Rule,” which generally provides that each party to a litigation will bear their own fees.  However, fee-shifting statutes have continued to grow, especially in the areas of employment and consumer protection, or so-called remedial legislation.

One of the purposes of remedial legislation is to introduce policies intended to benefit the public good, including anti-discrimination, anti-retaliation and consumer protection.  The policies enable fee-shifting provisions so alleged victims have access to competent legal representation.  It is not always the alleged victims who seek vindication, but rather lawyers who make a market in an area where attorneys fees are available.

Fee-shifting is sometimes a misnomer, as the availability of fees under enabling law is often limited to a prevailing plaintiff, as opposed to a prevailing defendant.  Under those laws, legislators seek to avoid the creation of a “chilling effect,” in dissuading potential plaintiffs and their lawyers from pursuing a claim.

Some laws allow for more traditional fee-shifting, by allowing prevailing defendants to recover defense fees for claims that lack merit or are brought in bad faith.  While a prevailing party may be awarded fees under a fee-shifting law, there is often attendant litigation over who constitutes a “prevailing party.”  Generally, a prevailing party is one who achieves a substantial proportion of the relief sought, whether or not that party actually obtains a verdict.  Courts have held that parties may not only prevail by judgment but also by compromise or settlement. 

In at least one jurisdiction, fee-shifting has also been made available in the professional liability context.  In New Jersey, the precedential 1996 case of Saffer v. Willoughby allowed a successful plaintiff to recover attorneys fees in prosecuting a legal malpractice action.  The New Jersey Supreme Court held that a negligent attorney is responsible for resulting legal fees and costs.  Interestingly, those fees were not considered fee-shifting, but “consequential damages” flowing from the attorney’s negligence.  New Jersey courts also allow recovery of fees by a third-party if the attorney intentionally breaches a recognized duty owed to a non-client, such as when serving as a fiduciary. 

The “common fund” and “substantial benefit” doctrines are also court-created fee-shifting mechanisms.  The common fund doctrine applies where litigation has created or preserved a common fund for the benefit of a group of people — such as a class action — and, accordingly, an attorney may be awarded attorneys fees out of that fund.  The substantial benefit doctrine applies if a judgment confers a substantial benefit on a defendant, such as in a corporate derivative action, which could lead to the payment by the defendant of the attorneys fees incurred by the plaintiff. 

Outside of the statutory and court-created fee-shifting framework, parties to a contract may agree to fee-shifting provisions.  Commercial contracts quite commonly contain default provisions that call for the payment of attorneys fees to a prevailing party in a dispute to enforce the terms of the agreement.

In most jurisdictions, attorneys fees that are awarded pursuant to a fee-shifting statute are calculated by setting a “lodestar,” which is the number of hours reasonably expended by an attorney multiplied by a reasonable hourly rate in the jurisdiction. Courts have the flexibility to adjust the lodestar considering certain factors, such as the results obtained by the attorney; the time and labor required to obtain that result; the attorney’s skill; the attorney’s customary fee; the amount of money involved in the claim; and awards in similar cases.

If the prevailing party has only achieved partial or limited success, the requested lodestar may be considered excessive and reduced.  Moreover, the attorney’s presentation of time billed must be set forth with sufficient detail, based on appropriate rates and in compliance with the jurisdiction’s ethical requirements.

Determining exposure

When a claim arises, insurance professionals and defense counsel should determine whether the policyholder is exposed to any court rule, statute, regulation or case law that allows fee-shifting or an award of attorneys fees.  They should also conduct an early assessment of liability and damages and consider early avenues to resolution to mitigate the exposure to fee-shifting.  Depending on the jurisdiction, defense counsel may be able to craft strategies designed to cabin the availability of attorneys fees, helping to drive resolution.  These are good faith strategies and methods employed during a case to drive resolution and also mitigate the exposure to attorneys fees. 

Often, a reasonable settlement curbing increased fees and costs is the second-best result outside of obtaining an early dismissal.  However, it is important to take care during settlement negotiations and the drafting of settlement agreements, releases and stipulations resolving litigation to account for attorneys fees and costs.  Lack of attention or poor drafting could result in unintended consequences, including the imposition of a fee award. 

When an adverse judgment calls for the imposition of an award of attorneys fees, strategies can still be employed to curb a disproportionately excessive fee claim, by relying on mitigation strategies employed at the outset designed to limit the recovery of fees; exposing the limited success of a claimant; exposing an adversary’s wastefulness during the dispute; questioning the proofs submitted in support of the fee claim; and otherwise contesting the reasonableness of the fee claim.

Iram Valentin is co-chair of the professional liability practice group in the Hackensack, New Jersey, office of Kaufman Dolowich LLP.   Allison Scott is an associate at the firm.

Article: Exploring the American Rule on Attorney Fees

November 27, 2023

A recent Law.com article, “’Exploring the American Rule on Attorney Fees”, reports on the American Rule doctrine and the limits of the offer of judgment rule in New Jersey.  The article reads:

In the recent J.P. Electric, Inc. v. LPMG Construction Management, LLC case, approved for publication on Nov. 2, a trial judge granted defendant’s motion for involuntary dismissal at the conclusion of plaintiff’s proofs.  Prior to trial, defendant had made an offer for judgment to be taken against it under the offer of judgment rule, R.4:58.  After dismissal of plaintiff’s case, defendant filed a motion to have plaintiff pay its fees and costs.  The trial judge denied the motion, holding that where a plaintiff’s claim is dismissed, without plaintiff having secured a favorable verdict and money judgment, as required by the rule, defendant had no right to collect its fees from the plaintiff. Defendant appealed the court’s denial of its fee application.

The Appellate Division opinion, affirming the trial judge, held that for a defendant who has invoked R.4:58 by offering to have judgment taken, it would be necessary for plaintiff to have recovered a money judgment to compare the amount of the judgment with the monetary offer made by defendant.  That comparison requirement is specifically set forth in R.4:58-2 and R.4:58-3 but, of course, there was no money judgment because of the dismissal as a matter of law.

The Appellate Division’s two-page opinion affirming the trial court contained emphatic language: “Lest there be any doubt, a mid-trial involuntary dismissal does not entitle a defendant offeror to fee-shifting under the Rule.”  No doubt the reason for a two-page opinion to be published.  A forceful reminder to trial courts and trial bar of the specific limitations of the offer of judgment rule.

The appellate court held that the policy reasons inherent in the rule’s language would be undermined if such fee shifting were permitted, because the rule is not one designed to transform an offer of judgment into a general fee-shifting rule.  Further, R.4:58-3(c) also provides that no allowances shall be granted if a plaintiff’s claim is dismissed or if a no-cause verdict is returned.

Of course the Supreme Court by rule or the Legislature by statute could provide that in an offer-of-judgment context, dismissal of plaintiff’s case after an offer of judgment is made might also allow defendant to recover fees and costs on post-trial application to the trial judge by creating a new exception to the American Rule of fee payment.

Under the American Rule, the prevailing party is ordinarily not entitled to collect fees from the adversary.  This is based upon the policy that, “Sound judicial administration will be best advanced if litigant’s bear their own counsel fees.” See, Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604, 609-610 (App. Div. 1987), which furnishes a concise history of the rule and its application.  There are some exceptions to the ordinary application of the American Rule, as when it is permitted by court rule or statute; or pursuant to the terms of a contract; or when counsel fees are a traditional element of damages in the action; or where an insured has incurred counsel fees in defending an action under a disclaimed liability or indemnity policy.

The first reported case in which counsel for plaintiff made application for fees from the insurer after plaintiff’s success in requiring the insurer to defend and indemnify a workers’ compensation claim against its insured because of convoluted policy language was Gerhardt v. Continental Ins. Co., 48 N.J. 291 (1966).

In Gerhardt, Justice Jacobs, writing for a unanimous court, rejected arguments that Ms. Gerhardt should qualify for reimbursement of her fees in the successful coverage action under the inherent equitable power of the court and by analogy to fee payments where a coverage claim on a liability policy had been successful.  Justice Jacobs pointed out that exceptions to the American Rule, that each party bear its own fees, generally rests on statutory provisions which have no counterpart in New Jersey law.  He wrote that when the New Jersey rules were originally adopted, they embraced the view that sound judicial administration would be best advanced by having each litigant bear counsel fees incurred, except in a few specially designated instances.

The American Rule and its exceptions have been argued to the court over the years.  The argument for awarding fees to a successful plaintiff is based on equitable considerations, i.e., to give the successful party full benefit of the sums to which it was found entitled. Sears Mortgage Corp. v. Rase, 134 N.J. 326, 3540356 (1993); Shore Orthopedic Group v. Equitable Life Assur. Soc., 199 N.J. 310 (2009); In re Estate of Vayda, 184 N.J. 115 (2005).  “The American Rule prohibits recovery of counsel fees by the prevailing party against the losing party … The purposes behind the American Rule are threefold: (1) unrestricted access to the courts for all persons; (2) ensuring equity by not penalizing persons for exercising their right to litigate a dispute, even if they lose; and (3) administrative convenience.” Occhifinto v. Olivo Constr. Co., 221 N.J. 443, 449 (2015).

On through the years and to present, the courts as indicated have expressed their support of the American Rule.  If there are proceedings in J.P. Electric seeking relief from the Supreme Court, chances for success are indeed bleak based on the judicial history of New Jersey.