The Answer is Almost Always No
January 18, 2022
Following up on the question posed in a post from a few years ago: when clients ask whether they can “sue for legal fees,” the courts continue to reiterate that the answer is almost always no; that the American Rule still controls. Recent decisions in the contexts of trusts and estates litigation and guardianship litigation speak to fee shifting and exceptions to the American Rule.
Article 81 Guardianship Proceeding
In Matter of Milton R., the Appellate Division, Second Department, reversed the Nassau County Supreme Court’s (Daniel R. Palmieri, J.S.C.) orders and judgments awarding the petitioner legal fees under a fee shifting agreement on the law and the facts. The case was decided in the context of a Mental Hygiene Law Article 81 Guardianship application where the petitioner sought twice to remove his brother as his father’s attorney-in-fact and health care agent, and twice failed in achieving this goal.
The initial guardianship proceeding settled by way of an agreement, whereby the respondent’s role as attorney-in-fact and health care agent was undisturbed. The agreement contained a mandatory mediation provision, and also provided that the “prevailing party” in any litigation arising out of the agreement would be entitled to recover attorney’s fees from the defaulting party. It was not long before the petitioner took his next shot to remove the respondent as his father’s attorney-in-fact and health care agent, alleging that the respondent breached the settlement agreement by, among other things, failing to provide home health care aides for his father as required under the agreement, and refusing to mediate under the settlement agreement’s alternative dispute resolution provisions. Petitioner sought an award of attorney’s fees pursuant to the settlement agreement’s fee shifting provisions.
The court denied the petitioner’s request to remove respondent as his father’s attorney-in-fact and health care agent. This was no surprise, because the courts ought to afford respect and deference to a person’s advance directives in the absence of any genuine and material defalcation. However, the court ruled that the respondent breached the settlement agreement by refusing to mediate in accordance with the terms of the settlement agreement, and as a remedy for this breach, awarded attorney’s fees to petitioner pursuant to the settlement agreement’s fee shifting provision. Thereafter, the court conducted an inquest to determine the amount of attorney’s fees to be awarded. Following the inquest, the court, inter alia, issued money judgments to the tune of approximately $175,000.
Without much discussion, the Appellant Division, Second Department corrected the motion court’s stark deviation from applicable law. It applied the familiar rule that where an agreement provides for fee-shifting to a prevailing party, a party will only be determined a prevailing party if it is successful with respect to the central relief sought. This determination requires consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope. The Appellate Division Second Department determined that the petitioner achieved nothing, or at least nothing that could warrant shifting his investment of $175,000 into the litigation. While the case is generally unremarkable, the takeaway might be that the Appellate Division did not find anything inherent in Article 81 guardianship proceedings that can justify deviation from the American Rule absent the explicit statutory exceptions in the Mental Hygiene Law or contract. The wide discretion granted to the trial courts in Article 81 Guardianship proceedings has its limits.
Trusts and Estates Litigation
Surrogate’s Court litigation often presents exceptions to the American Rule, and the Nassau County Surrogate’s recent order in the tortured estate of Oleg Cassini illustrates as much. The exceptions to the American Rule in estate litigation arise naturally because many claims against estate fiduciaries are derivative of the beneficiaries’ interests in the estate.
In Cassini, the Nassau County Surrogate cited the American Rule, but explained that in trusts and estates litigation there are circumstances where fees incurred by a beneficiary will be paid as an estate expense (as opposed to being borne by the beneficiary alone). In certain cases, an attorney litigating on behalf of a beneficiary who has benefitted the entire estate through his or her services may be compensated from estate assets by order of the Surrogate. This is by virtue of statutory authority, namely, Surrogate’s Court Procedure Act § 2110, which provides in subparagraphs (1) and (2), in relevant part:
At any time during the administration of an estate and irrespective of the pendency of a particular proceeding, the court is authorized to fix and determine the compensation of an attorney for services rendered to a fiduciary or to a devisee, legatee, distributee or any person interested … The court may direct payment therefor from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee, distributee or person interested.
In Cassini, the Court allocated legal fees incurred by counsel on behalf of estate beneficiaries against the general estate on the grounds that it benefited the estate as a whole. The Surrogate’s Courts have consistently followed this approach (and sniffed out and denied reimbursement of legal fees to beneficiaries who were acting for their own benefit), which can be considered an exception to the American Rule.
Further, as previously discussed by my colleagues, the Court of Appeals decision in Matter of Hyde has made it clear that the courts have great discretion to allocate legal fees in Surrogate’s Court litigation, as Surrogate’s Court Procedure Act § 2110 can be used as a fee shifting mechanism among warring parties to an estate litigation. The Surrogate’s Courts have not been shy about exercising that discretion as illustrated by decisions that have issued since Hyde.