Under the American Rule, each party bears its own legal fees in a commercial litigation absent some contractual or statutory provision to the contrary. In short, in the typical business dispute, a prevailing party cannot recover its legal fees. This is true whether the business dispute involves contract or tort claims or whether a case goes through mediation or civil trial. As a result, the cost of prosecuting or defending a commercial litigation in New York, even when a party is confident in its position on the merits, becomes an important factor in assessing settlement, especially where the case cannot be disposed of by motion, and requires a trial. It is a factor that merits serious consideration by both the client decision maker and the mediator.
In New York, one – although limited – exception to the American Rule is the potential assertion by the prevailing party of a claim under § 487 of the New York Judiciary Law, which provides:
“[a]n attorney or counselor who:… [I]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party. [i]s guiltily of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.”
In Amalfitano v. Rosenberg, 12 N.Y.3d 8, 903 874 N.Y.S.2d 868 (2009), the New York Court of Appeals held that an attorney may be liable under this statute even when the attempt to deceive the Court was unsuccessful. The Court concluded:
“When a party commences an action grounded in a material misrepresentation of fact, the opposing party is obligated to defend or default and necessarily incurs legal expenses. Because, in such a case, the lawsuit could not have gone forward in the absence of the material misrepresentation, that party’s legal expenses in defending the lawsuit may be treated as the proximate result of the misrepresentation.” Id.
The Court specifically held that “deceit” within the meaning of § 487 was not comparable to the tort of common law fraud. Instead, § 487 was based on the special relationship of trust between counsel and the Court, and requires only an intent to deceive the Court or a party, whether successful or not.
To be sure, § 487 has no application to an attorney in a typical business dispute, who simply advances an untenable legal theory. Instead, it requires an intent to deceive, such as when an attorney knowingly files a complaint containing materially false factual representations. But it may also apply where counsel discovers the misrepresentation only as the case progresses, unless the attorney took steps to amend or abandon his pleading. If counsel continues to press the claim without taking steps to correct the misrepresentation, at some point that conduct may cross the line. New York courts have not sought to expand liability under § 487 since Amalfitano was decided, but the risk of a claim under the statute exists , and the consequences of a violation are severe – the attorney can be liable for treble the amount of the legal fees incurred by the prevailing party.
Part II of this summary will address the 1998 amendments to the New York Uniform Civil Rules for the Supreme Court and County Court.