www.stoneandtilework.com Last year, in Saul v. Cahan, 2016 NY Slip Op 50295(U) (Kings County 2016), Justice Demarest held that a party who makes an offer of judgment under CPLR Rule 3220 is entitled to recover the expenses it incurs litigating the case if the claimant is ultimately awarded a judgment that is less favorable than the sum specified in the Rule 3220 offer. That decision was argued on appeal before the New York Second Department on February 2, 2017, and a decision is expected within the next several weeks.
Judge Demarest’s opinion was noteworthy in two respects. It found that: (1) the term “expenses” includes legal fees; and 2) Rule 3220 applies not only when the offeror prevails at trial, but also when the “less favorable” judgment is rendered upon a motion to dismiss under CPLR Rule 3211.
To place these issues into proper prospective, one needs to parse the language of Rule 3220 itself. It provides:
At any time not later than ten days before trial, any party against whom a cause of action based upon contract, express or implied, is asserted may serve upon the claimant a written offer to allow judgment to be taken against him for a sum there in specified, with costs then accrued, if the party against whom the claim is asserted fails in his defense. If within ten days thereafter the claimant serves a written notice that he accepts the offer, and damages are awarded to him on the trial, they shall be assessed in the sum specified in the offer. If the offer is not so accepted and the claimant fails to obtain a more favorable judgment, he shall pay the expenses necessarily incurred by the party against whom the claim is asserted, for trying the issue of damages from the time of the offer. The expenses shall be ascertained by the judge or referee before whom the case is tried. An offer under this rule shall not be made known to the jury.
A literal reading of Rule 3220 suggests that it applies only when the claimant fails to obtain a more favorable judgment after an actual trial. (See, e.g., such language as “on the trial”, “trying the issue of damages”, and “before whom the case is tried”). But as the defendant in Saul pointed out, a) both appellate opinions and treatises routinely refer to lower courts as “trial courts” and “trial judges,” even when the underlying case was disposed of prior to any trial, and b) motions under CPLR Rule 3211 and Section 3212 are the procedural and substantive equivalents of a trial.
Two prior cases have also held that recovery under Rule 3220 is not dependent on completion of a trial. In Morgan v. Kunker, 268 A.D.2d 749, 751 (3d Dept. 2000), after summary judgment was granted to the defendant sua sponte on appeal, the Third Department remanded the case for determination of the offeror’s expenses (although it is unclear from the decision whether those expenses were to include legal fees). And in Abreu v. Barkin & Associates Realty Inc., 115 A.D.3d 624 (1st Dept. 2014), the First Department held that the offeror was entitled to recover its legal fees when the case against it was dismissed pursuant to stipulation after a trial was commenced, but before it was concluded (i.e., the issue of damages was not “tried” as the Rule 3220’s language literally suggests).
Saul is also significant because although Rule 3220 permits recovery for the expenses of “trying the issue of damages,” it awarded attorney fees that were incurred for litigating the defendant’s motion to dismiss under CPLR Rule 3211. It is unclear whether the Court regarded the issues of liability and damages to be inextricably intertwined in that case, or whether it believed the term “damages” subsumed the threshold issue of liability.
Rule 3220 has not been frequently litigated, so case law on its scope is sparse. The implications of Judge Demarest’s opinion are sweeping. If upheld, it will become standard practice for every defendant in a contract case to serve a Rule 3220 offer for a de minimus amount (say $1,000). Because the likelihood of the claimant accepting such a low offer is virtually nil, there is no downside in doing so. But on the upside, making such an offer sets up the following dynamic: If plaintiff loses on a motion to dismiss or for summary judgment (and not just after trial), the defendant-offeror would be entitled to recover legal fees and other defense costs from the plaintiff-claimant. This would be a radical change since under the traditional American Rule, absent special circumstances, a prevailing party is unable to recover legal fees from its adversary. Moreover, when fee shifting is permitted, statistics suggest it inhibits settlement, as discussed in a prior blog on this website.
Parenthetically, in contrast to Rule 3220 (which permits an offeror to recover its “expenses”, including legal fees), a party who improperly rejects a Rule 3219 tender of payment may not recover interest and costs from the date of the tender, and becomes liable for the offeror’s costs as well. Similarly, under Rule 3221, the party who rejects an offer to compromise and then fails to recover more, is precluded from recovering costs, and becomes liable for costs from the date of the offer. However, CPLR Article 82 limits “costs” to a few hundred dollars, depending on the stage of the proceeding. Thus, the potential consequences of a Rule 3220 offer are far more serious – and game changing – than tenders or offers to compromise under Rules 3219 and 3221.
How the Second Department ultimately rules in Saul will further define the outer parameters of Rule 3220, and if it reverses the lower court, these issues may well be en route to the New York Court of Appeals.
Joe DiBenedetto recently retired from Winston & Strawn LLP, after spending 46 years in its Manhattan office as a capital partner specializing in commercial litigation. He formed JDB Mediation LLC to further develop his mediation and arbitration practice, which is centered in Manhattan and its surrounding counties (including Westchester, Nassau and Suffolk). Joe DiBenedetto’s experience, training, and other credentials are more fully described at www.JDBMediation.com