Recovery of Legal Fees – Exceptions to the Rule: Part II
Under the American Rule, each party bears its own legal fees in a commercial litigation in New York, absent some contractual or statutory provision to the contrary. As a result, the cost of prosecuting or defending a commercial litigation in New York state court, even when a party is confident in its position on the merits, becomes an important factor in assessing settlement. Aside from potential exposure to liability, management distraction, and reputational injury, the continued incurrence of legal fees is a critical component of any settlement analysis during the mediation of a business dispute in New York.
A previous post addressed one limited exception to the American Rule; namely, the potential assertion by the prevailing party in a commercial litigation, of a claim under § 487 of the New York Judiciary Law. However, it is the rare case in which the requisite “intent to deceive” can be proven, and New York courts have shown no inclination to expand § 487’s reach. This is equally true in New York county, every other county in New York City, and Westchester, Nassau, and Suffolk counties. The other exception to the American Rule in New York for frivolous litigation practices is also narrow in scope. The New York Court of Appeals, in A.G. Ship Maintenance Corp. v. Lezak, 69 N.Y.2d 1, 511 N.Y.S.2d 216 (1986), held that absent a statute or court rule, New York state courts lacked any inherent judicial power to impose monetary sanctions for frivolous litigation. After that decision was rendered, Part 130 of the Rules of the Chief Administrator was adopted. Part 130 expanded the potential recovery of costs and sanctions to all civil cases, with costs being defined to include actual expenses and reasonable attorney fees. Recovery may be had against a party or its counsel. Frivolous conduct is defined as follows:
1) It is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law.
2) It is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or
3) It asserts material factual statements that are false.
In determining whether conduct was frivolous, the Court will consider:
1) Circumstances under which the conduct took place, including the time available for investigating the legal or factual basis of the conduct; and
2) Whether or not the conduct was continued when its lace of legal or factual basis was apparent, should have been apparent, or was brought to the attention of counsel or the
Despite this broad language, the courts have proven reluctant to invoke Part 130 in business disputes, and except in truly egregious circumstances, recovery will be denied. Once again, this is true no matter where the case is pending, including New York, Westchester, Nassau, Suffolk, and every other county in New York.
In short, unless the business dispute being mediated is a true outlier, a litigant in a commercial litigation pending in New York state court should have no expectation of recovering its legal fees even if it is ultimately successful in winning on the merits. Prospective legal fees thus remain a critical part of any settlement analysis of commercial litigation pending in New York.