Dateline: December, 2002

Overview:

In any lawsuit, a question that is certain to arise is whether a party to the litigation is entitled to recover attorneys’ fees. In order to recover attorneys’ fees in the State of New York, a party must first demonstrate that an award of attorneys’ fees is authorized by statue, contract or court rule. The party must then demonstrate that it has prevailed in the action or proceeding.

Attorneys’ Fees May Not Be Recovered Unless Authorized by Statute, Contract or Court Rule:

It is well-settled law in the State of New York that “[u]nder the general rule, attorneys’ fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule.” A.G. Ship Maintenance Corp v. Lezak, 69 N.Y.2d 1, 511 N.Y.S.2d 216 (1986); Hooper Associates, Ltd. v. AGS Computers, Inc., 548 N.E.2d 903, 74 N.Y.2d 487, 549 N.Y.S.2d 365 (1989). This rule is sometimes referred to as the “American Rule” on attorneys’ fees. In the absence of statutory authority counsel fees “are merely incidents of litigation and thus are not compensable.” Green v. Potter, 51 N.Y.2d 628, 435 N.Y.S.2d 695, 696 (1980), and cases cited therein.

“An award of attorneys’ fees as a direct remedy must be based on contract or statute.” City of New York v. Zuckerman, 234 A.D.2d 160, 651 N.Y.S.2d 473, 474 (1st Dept. 1996). “[I]n the absence of any pertinent contractual authority or statutory provision with respect to the recovery of amounts expended in the successful prosecution or defense of an action, each party is responsible for its own legal fees.” Chapel v. Mitchell, 642 N.E.2d 1082, 84 N.Y.2d 345, 618 N.Y.S.2d 626 (1994); Hunt v. Sharp, 85 N.Y.2d 883, 649 N.E.2d 1201, 626 N.Y.S.2d 57 (1995). In the event that attorney’s fees and costs are not authorized by statute or court rule, the trial court is without authority to impose such attorneys’ fees and costs. Stanisic v. Soho Landmark Associates, 178 A.D.2d 268, 577 N.Y.S.2d 280 (1st Dep’t 1991). In fact, an award of fees, where not authorized by contract or statute, is contrary to New York law. Stewart Tabori & Chang v. Stewart, 282 A.D.2d 385, 723 N.Y.S.2d 492, 2001 Slip Op. 03470 (1st Dep’t 2001).

Attorneys’ Fees May Only Be Awarded to a Prevailing Party:

In the event that recovery of attorneys’ fees is authorized by statute, contract or court rule, a party must demonstrate that it has substantially prevailed in the action in order to succeed on a claim for attorneys’ fees. 25 East 83 Corp. v. 83rd Street Associates, 213 A.D.2d 269, 624 N.Y.S.2d 125 (1st Dept. 1995). In order to be considered a prevailing party, it is necessary for the action in question to have been actually litigated, resulting in a judgment in favor of one of the parties. In the event that the parties enter into a settlement agreement, neither party can be said to have “substantially prevailed.” In fact, courts have explicitly held that “private party settlements do not confer prevailing party status.” J.S. v. Ramapo Central School District, N.Y.L.J. October 9, 2001 (S.D.N.Y.).

Exceptions to the General Rule on Attorneys Fees:

A few exceptions to the general rule regarding recovery of attorneys’ fees have been recognized by the Courts of the State of New York. One of these is the implied reciprocal right of a residential tenant to recover attorneys’ fees where the apartment or proprietary lease provides that the Landlord may recover fees and costs in the event of the tenant’s default. This right is codified in Real Property Law § 234. However, it is important to note that Real Property Law §234 is inapplicable to commercial leases and there is no reciprocal right to attorneys’ fees in the context of a commercial lease. McKinney’s Real Property Law §234; 99 Realty Co. V. Wall St. Transcript Corp., 22 HCR 233A (Civ.Ct , N.Y.Co.1994); Gracie Tower Realty Associates v. Danos Floral Co., Inc., 142 Misc. 2d 920, 538 N.Y.S.2d 680 (Civ.Ct, N.Y.Co. 1989).

Uniform Trial Court Rule § 130-1.1 also authorizes the recovery of attorneys’ fees as an exception to the general rule. Section 130-1.1 provides that the Court may, in its discretion, award a party attorneys’ fees and costs incurred as a result of frivolous conduct on the part of the other party. The statute defines frivolous conduct as conduct which is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law, is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or asserts material factual statements that are false.

Another exception to the general rule on attorneys’ fees which is recognized by the State of New York is the so-called “bad faith” exception.

It is well-settled that in order to recover attorneys’ fees based on bad faith: [i]t must be shown that malice was the gravamen of the defendant’s actions and that there was an intentional effort to inflict economic injury upon the plaintiffs by forcing them to engage legal counsel. Those damages must be shown to “have been proximately related to the malicious acts and the acts themselves must have been entirely motivated by a disinterested malevolence on defendant’s part.”

Brook Shopping Centers, Inc. v. Bass, 107 A.D.2d 615, 483 N.Y.S.2d 1021 (1st Dep’t 1985) (emphasis added) (citing United Pickle v. Omanoff, 63 A.D.2d 892, 405 N.Y.S.2d 727 (1978); Green v. Fischbein Olivieri Rosenholc & Badillo 119 A.D.2d 345, 507 N.Y.S.2d 148 (1st Dep’t 1986). Moreover, “bad faith may not be lightly found, and the party charging it bears a considerable burden of persuasion.” Doyle v. Turner, 90 F. Supp.2d 311 (S.D.N.Y.2000). Absent a showing of malice, bad faith will not be found by the Courts, and a claim for attorneys’ fees will be denied.

A variation of the “bad faith” exception is the recovery of attorneys’ fees as a form of punitive damages. In the State of New York, it is well-settled that in a breach of contract action, defendant’s conduct must be directed at the public generally to substantiate an award of punitive damages. Sherry Associates v. Sherry-Netherland, Inc., 273 A.D.2d 14, 708 N.Y.S.2d 105 (1st Dep’t 2000). As articulated by the Court of Appeals in Garrity v. Lyle Stuart, 40 N.Y.2d 354, 386 N.Y.S.2d 831 (1976):

At law, on the civil side, in the absence of statute, punitive damages are available only in a limited number of instances...punitive or exemplary damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish defendant but to deter him, as well as others who might be so prompted, from indulging in similar conduct in the future. It is a social exemplary remedy, not a private compensatory remedy. It has always been held that punitive damages are not available for mere breach of contract, for in such a case only a private wrong, and not a public right is involved.

40 N.Y.2d at 358 (citing Walker v. Sheldon, 10 N.Y.2d 401,404 (1961) (emphasis added). Punitive damages are not available for breach of contract, “even where the breach is willful and without justification.” Hoyt v. Kingsford, 185 A.D.2d 770, 586 N.Y.S.2d 793 (1st Dep’t 1992). In fact, “punitive damages cannot be granted for failure to perform obligations of a private agreement, even if failure to perform was purposeful and in bad faith.” Morano v. Oral Research Laboratories, Inc., 191 A.D.2d 258, 594 N.Y.S.2d 260 (1st Dep’t 1993). To substantiate an award of punitive damages, the plaintiff must show bad faith on the part of the defendant, evidencing a disingenuous or dishonest failure to carry out the contract. Green v. Fischbein Olivieri Rosenholc & Badillo, 119 A.D.2d 345, 507 N.Y.S.2d 148 (1st Dep’t 1986). Absent a showing that the conduct of defendant is in violation of a public right rather than a private wrong, an award of attorneys’ fees as a form of punitive damages will be denied.

Summary:

In sum, absent statute, contract or court rule, the Courts of the State of New York generally will not award attorneys’ fees to a prevailing party. Although exceptions to the general rule on attorneys’ fees in the State of New York do exist, the task of establishing the applicability of one of these exceptions is quite difficult. Therefore, as a matter of practice, it is important to provide for the award of attorneys’ fees when drafting or negotiating any lease, mortgage or contract.

This Article is a service of the Creditors’ Rights Department and Litigation Department of Fein, Such, Kahn & Shepard, P.C., 7 Century Drive, Suite 201, Parsippany, NJ 07960. Phone: 973-538-4700. Website: www.feinsuch.com. It does not constitute legal advice nor create an attorney-client relationship. For more information contact Shareholder James E. Shepard, Esq. at jshepard@feinsuch.com.

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