SHIFTING THE COST OF LITIGATION
By: John B. Newman
New Jersey lawsuits follow the American Rule, requiring each party to bear its own legal fees absent a court rule or statute which provides a basis for shifting the attorney’s fees to another party. One major exception occurs when a contract provides for one party to pay another’s legal fees. This includes most bank litigation involving promissory notes or security agreements and suits on leases, guarantees and similar documents, which have specific provisions generally providing that either the creditor or the prevailing party can recover legal fees.
Another exception exists when there is a “fund in court,” a generic term describing a sum of money or an asset which is the subject of a court proceeding. In estate or trust litigation, in many instances, the costs of litigation are paid by the estate or trust and thus, ultimately, by all of the beneficiaries pro rata. The New Jersey Supreme Court has recently made it clear that even where a fiduciary steals money from a trust, the beneficiaries who sue that fiduciary can only recover their attorneys’ fees from the trust fund and not from the fiduciary personally, who remains liable for the damages he causes the trust but not for the attorneys’ fees incurred forcing him to pay.
Another large exception falls under the category of statutes which permit successful parties to recover counsel fees. There are hundreds if not thousands of such statutes, including the Law on Discrimination, the Lemon Law, the Consumer Fraud Act, the Anti-Trust Statutes, the Federal and State Securities Laws, Environmental Protections Laws, etc. If you file a claim under such a statute and are successful, then the court will add reasonable attorney’s fees to your recovery.
Despite all of the above exceptions, in most cases, each party must bear its own counsel fees regardless of the merit of the parties’ positions. To soften the harshness of the American Rule, New Jersey provides two additional vehicles for fee-shifting. The first is the Frivolous Litigation Rule. If one party sues for an improper purpose such as unnecessary delay or increasing costs or for a reason not warranted by existing law or for unsupported factual allegations, then the other party may demand that the pleading be withdrawn because it appears to violate the rule. If the first party does not withdraw the pleading within 28 days and the second party prevails, the prevailing party may then make a motion for sanctions. The sanction ultimately awarded deters repetition of such conduct by either requiring a penalty to be paid to the court or attorney’s fees to be paid to the prevailing party.
The second vehicle for general fee shifting is the offer of judgment rule. Under the rule, any party may file with the court and the opposing party an offer to take judgment in the offeror’s favor or to allow judgment to be taken against the offeror for a stated sum. If the claimant’s offer is not accepted and the claimant obtains a verdict at least as favorable as the rejected offer, then the claimant is awarded reasonable attorney’s fees and litigation expenses incurred after the non-acceptance. In an action for unliquidated damages such as a personal injury case, there are no allowances under this rule unless the amount of the recovery is in excess of 120% or less than 80% of the offer.
While the American Rule is actively followed in New Jersey, the exceptions and interpretations create many opportunities. Using them to your advantage can change your bargaining positions in litigation, whether or not you ever ask a judge to “pull the trigger” and award counsel fees.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
New Jersey lawsuits follow the American Rule, requiring each party to bear its own legal fees absent a court rule or statute which provides a basis for shifting the attorney’s fees to another party. One major exception occurs when a contract provides for one party to pay another’s legal fees. This includes most bank litigation involving promissory notes or security agreements and suits on leases, guarantees and similar documents, which have specific provisions generally providing that either the creditor or the prevailing party can recover legal fees.
Another exception exists when there is a “fund in court,” a generic term describing a sum of money or an asset which is the subject of a court proceeding. In estate or trust litigation, in many instances, the costs of litigation are paid by the estate or trust and thus, ultimately, by all of the beneficiaries pro rata. The New Jersey Supreme Court has recently made it clear that even where a fiduciary steals money from a trust, the beneficiaries who sue that fiduciary can only recover their attorneys’ fees from the trust fund and not from the fiduciary personally, who remains liable for the damages he causes the trust but not for the attorneys’ fees incurred forcing him to pay.
Another large exception falls under the category of statutes which permit successful parties to recover counsel fees. There are hundreds if not thousands of such statutes, including the Law on Discrimination, the Lemon Law, the Consumer Fraud Act, the Anti-Trust Statutes, the Federal and State Securities Laws, Environmental Protections Laws, etc. If you file a claim under such a statute and are successful, then the court will add reasonable attorney’s fees to your recovery.
Despite all of the above exceptions, in most cases, each party must bear its own counsel fees regardless of the merit of the parties’ positions. To soften the harshness of the American Rule, New Jersey provides two additional vehicles for fee-shifting. The first is the Frivolous Litigation Rule. If one party sues for an improper purpose such as unnecessary delay or increasing costs or for a reason not warranted by existing law or for unsupported factual allegations, then the other party may demand that the pleading be withdrawn because it appears to violate the rule. If the first party does not withdraw the pleading within 28 days and the second party prevails, the prevailing party may then make a motion for sanctions. The sanction ultimately awarded deters repetition of such conduct by either requiring a penalty to be paid to the court or attorney’s fees to be paid to the prevailing party.
The second vehicle for general fee shifting is the offer of judgment rule. Under the rule, any party may file with the court and the opposing party an offer to take judgment in the offeror’s favor or to allow judgment to be taken against the offeror for a stated sum. If the claimant’s offer is not accepted and the claimant obtains a verdict at least as favorable as the rejected offer, then the claimant is awarded reasonable attorney’s fees and litigation expenses incurred after the non-acceptance. In an action for unliquidated damages such as a personal injury case, there are no allowances under this rule unless the amount of the recovery is in excess of 120% or less than 80% of the offer.
While the American Rule is actively followed in New Jersey, the exceptions and interpretations create many opportunities. Using them to your advantage can change your bargaining positions in litigation, whether or not you ever ask a judge to “pull the trigger” and award counsel fees.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
