New Maryland Case on Attorney's Fee Awards - Fixed Percentage Fees in Promissory Notes & Post-Judgment Attorney Fee Awards

The Maryland Court of Special Appeals recently addressed an issue that affects lawyers and other contract and promissory note drafters. In Suntrust Bank v. Goldman, the Court ruled that actual reasonable attorneys' fees incurred are the proper measure of an attorney fee award even where the promissory note calls for a fixed percentage fee based on the amount of the obligation due.

In the case, Sunstrust's Credit Line agreement provided that Suntrust was entitled to an award of attorneys' fees equal to 15% of the principal due "or reasonable attorneys' fees allowed by law." Suntrust asked for an award of $60,206.00 (15% of the balance due) and the Circut Court for Baltimore County awarded actual attorneys' fees of only $3,094.00.

The Court of Special Appeals agreed with the Circuit Court. The Court's opinion is here. Specifically, the Court held: "Thus, Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount. The contract may provide that the amount of fees is determined by a percentage or some other method, but to comply with the indemnification requirement, the amount of fees paid pursuant to the agreement between the claimant and its attorneys must equal or exceed the amount provided for in the contract."

The Court also dealt with the issue of attorneys' fee awards for post-judgment collection efforts, and seemingly recommended that if a creditor wanted to be able to pursue reimbursement for post-judgment colection efforts, it could include clear language in its agreements providing that the parties intend that the attorneys' fee provision shall not merge into a judgment on the agreement.

Attorney's Fee Request Denied in Unusual Citizenship Case

On January 13, 2011, the United States Court of Appeals for the Fourth Circuit decided the case of Cody v. Caterisano. In this unusual case which deals with attorney’s fee awards, an Irish citizen enrolled at the United States Naval Academy. At the time, the Irish government was funding the cost of his attendance at the Academy. Once enrolled at the Academy, the Irish government indicated that it would not fund the cost of attendance. The student obtained alternative funding and continued to attend the Academy. Because the Irish government was not paying for his education, the student did not have any obligation to serve in the Irish military upon graduation from the Academy. The student decided that he wanted to serve in the United States Navy after graduation, and decided to apply for United States citizenship. His application for citizenship hinged upon whether or not attending the Naval Academy constituted serving honorably in an active-duty status during a period in which the Armed Forces of the United States were engaged in military operations involving armed conflict with a foreign force. The Naval Academy had initially completed a form indicating that the student’s attendance at the Academy constituted such “active-duty” status. Later, the Academy withdrew that form and reversed its position indicating that attending the Academy did not constitute active duty service. The USCIS, which decides immigration applications, failed to make a decision within the time allotted.

The student then sued to obtain a decision on his application. The United States District Court for the District of Maryland (Baltimore) found that the student qualified for naturalization and the United States government did not appeal.

The student then sought his attorney’s fees under the Equal Access to Justice Act (EAJA) and the District Court denied that request. Under the EAJA, a victorious party to litigation against the Government may be entitled to an award of counsel fees “unless the court finds that the position of the United States was substantially justified. . ..” The Fourth Circuit Court of Appeals affirmed, holding that the particular circumstances of the student’s case, the Government’s position in contesting naturalization, while ultimately unsuccessful, was “substantially justified.”

This is another example of courts being hesitant to award attorneys’ fees, and being restrictive in awards, whether the basis for the request for the attorneys’ fee award is statutory or contractual. The opinion is found here.

New Maryland Court of Appeals Case on Contractual Attorneys' Fees

In the recent Monmouth Meadows Homeowners Association v. Hamilton case, a copy of which can be found here, the Maryland Court of Appeals clarified the method by which trial courts can calculate attorneys’ fee awards in contractual fee-shifting cases (as distinguished from statutory fee-shifting cases). Specifically, the Court held that the “lodestar” method of calculating attorneys’ fees does not apply to contractual fee-shifting cases, and that, instead, courts must look to the standard for determining appropriate attorneys’ fees under Rule 1.5 of the Maryland Lawyers’ Rules of Professional Conduct. While the distinction may seem subtle, a fee award under lodestar can be quite different from a fee award under Rule 1.5. That is because a fee award under the lodestar method of calculation takes into account the “importance of the right vindicated.” This means that in an appropriate case with a statutory fee-shifting clause a $10,000.00 judgment for money damages can justify a much larger fee award. In the contractual fee-shifting situation, the courts in Maryland will be required to review the fee requested in the context of the principal amount in controversy in the litigation. Therefore, in a breach of contract case where $10,000.00 is at stake, it will be difficult for a court to justify a fee of $10,000.00.

New Maryland Court of Appeals Case on Attorney's Fees and Indemnification

On July 25, 2008, the Maryland Court of Appeals addressed an issue that often arises in commercial disputes: whether an indemnification clause in the parties’ contract which provides that one party is indemnifying and holding the party harmless for losses including attorney’s fees will allow for an award of attorney’s fees that were incurred in the dispute between the two parties to the contract.

In Nova Research, Inc. v. Penske Truck Leasing Co., L.P., 405 Md. 435, 952 A.2d 275 (2008), the Maryland Court of Appeals held that attorney’s fees are not recoverable in a first party action between parties who have such an indemnification clause in their agreement. Instead, the Court of Appeals reasoned, the American Rule on attorney’s fees (each party is responsible for its own fees) controls and each party is responsible for its own legal fees. By holding as it did, the Court of Appeals reversed the unpublished decision of the Maryland Court of Special Appeals in which that Court had held that attorney’s fees were recoverable. Three members of the Court of Appeals dissented.

What this means for businesses is that if they expect to have fee-shifting occur they must not only include such an indemnification clause, but also they must make sure that their agreements include an explicit clause that provides that the prevailing party in any dispute shall be awarded its attorney’s fees.

Appellate Victory - Real Estate Breach of Contract Case

The next post shows the importance of a fee-shifting clause. This time, in the context of a standard real estate sales contract.

Recently we were hired by a local home seller who was frustrated when the couple purchasing his home refused to go to closing. The purchasers contended that they had not received the Home Owners Association Disclosure Documents (“HOA Documents”) to which they were entitled under Maryland Law. After investigating the matter, we learned the purchasers’ real estate agent had previously told the seller’s real estate agent that he had in fact received the HOA Documents.

We demanded that the purchasers go to closing. The purchasers refused. After some time, the seller re-sold his home, but he suffered a loss due to a downturn in the real estate market. He also had incurred carrying-costs during the months that had passed between his original closing date and the date that he sold to the subsequent purchasers. The total of his damages was approximately $20,000.00.

Eventually, the case was tried before a jury in the Circuit Court for Montgomery County, Maryland. The jury found that the purchasers’ real estate agent had received the HOA Documents on behalf of the purchasers, and awarded our client just under $20,000.00 in damages. After trial, we submitted a petition for payment of our attorneys' fees, and the purchasers were found liable for approximately $17,000.00 in legal fees incurred by our client.

The purchasers then appealed the jury’s verdict to the Court of Special Appeals of Maryland. The Court of Special Appeals affirmed the jury verdict, finding that the purchasers had waived most of their appellate arguments, and also finding that a real estate agent’s receipt of documents constituted receipt of those documents by his clients.

Once the case returned to the Circuit Court, we claimed entitlement to reimbursement of our client's attorneys fees incurred during the course of the appeal. The Purchasers settled, paying out an additional $12,000.00 in legal fees. All tolled, our client collected all of his legal fees and all of the damages awarded by the jury. Without the fee-shifting clause, the case may not have been worth litigating.

A copy of the unreported opinion can be viewed as a PDF document here: Click Here for the PDF File

Business Law - Important Clauses for Small Business Contracts - Fee Shifting

I find myself explaining the “American Rule” on attorneys’ fees at least a couple of times per week, mostly to the owners of small businesses who need to bring collection claims against customers. Under the “American Rule,” each party to a dispute pays its own attorneys’ fees, whether that party wins or loses the case. This is in contrast to the “English Rule.” Under the English Rule, the loser in the dispute pays the winner’s legal fees.

In the United States the American Rule is the law, and you can only recover your legal fees in very limited situations: (1) where you have an agreement providing that the loser pay legal fees; (2) where a statute provides that the loser pays (for example: civil rights cases, consumer protection act cases); or (3) where a party acts in bad faith or without substantial justification.

Because we operate under the American Rule, one of the most important clauses that any business can have in its agreements is a clause mandating that the losing party in any dispute must also pay the winning party’s legal fees and costs. A sample “fee-shifting” clause is as follows: "The prevailing party in any dispute arising out of or related to this agreement shall be entitled to an award of its reasonable attorneys’ fees and costs."

This type of clause is so important because of the situation that occurs without it. If your business is owed $15,000.00 by one of its customers, and you bring your case to your lawyer to file suit, your lawyer is likely to tell you that the legal fees could be $5,000.00 to bring that matter through your local court system from filing through trial. As a result, immediately the value of your claim is arguably diminished by the cost of bringing the claim: reducing your best case scenario to $10,000.00.

By contrast, if you have a fee-shifting provision in your customer agreements, then the value of your claim is not automatically diminished by your expected legal fees. Instead, if you prevail in your case, then your best case scenario is a $15,000.00 award for your underlying collection claim, plus a possible $5,000.00 attorneys’ fee award.

It makes sense, particularly for the small business owner, to have a business lawyer review your standard contracts to make sure that those contracts include fee-shifting clauses. This is particularly so in those contracts that would form the basis for collecting your company’s revenues.