Lawsuits abound in our “sue happy” society, and businesses must necessarily be prepared should one be filed against them.
One major concern is the recovery of fees spent on litigation, which for some companies can reach into the millions of dollars. Most clients assume the losing party will have to pay for all of their fees, but this is a faulty assumption, says Kevin Stine, a partner with the law firm Gambrell & Stolz, LLP, in Atlanta.
Smart Business spoke with Stine about the misconceptions concerning the recovery of legal fees and what a business can do to make sure it’s compensated after a trial.
How does one go about recovering attorney’s fees and expenses in litigation?
When a client has a legal dispute and comes to me for advice, one of the first things I’m routinely asked is whether the other party will be required to pay their legal fees and expenses when they prevail in court. This is one of the most difficult issues to explain because most clients assume the losing party will automatically be required to pay all of their fees at the end of the case. We have what’s referred to as the ‘American Rule’ in this country. Whether in state or federal court, the American Rule provides that each party to a lawsuit, even the prevailing party, must pay its own fees and expenses. There are few exceptions to this rule.
What are the exceptions to the American Rule?
There must be specific authority for an award of attorney’s fees and expenses in a contract or statute. So, for example, if you sue another party for breaching a contract with you, the contract you’re enforcing must contain an express provision entitling you to recover your attorney’s fees and expenses in addition to any other damages.
What kinds of statutes authorize recovery of attorney’s fees?
There are two general types of statutes that authorize recovery of attorney’s fees. The first type creates the underlying basis for the lawsuit in addition to the basis for recovery of fees. Examples include the federal anti-discrimination laws and certain consumer protection statutes.
The second type is aimed specifically at bad faith conduct, prior to or during the lawsuit. One such law in Georgia permits the plaintiff to recover its legal fees where the other party, prior to the lawsuit, acted in bad faith, was stubbornly litigious or caused the plaintiff to incur unnecessary trouble and expense.
The other pertinent Georgia law is available to both plaintiffs and defendants, and concerns misconduct during the course of the lawsuit. This law is commonly referred to as the frivolous litigation statute and permits a party to recover its legal fees and expenses if the other party asserted a claim or defense that lacked any factual or legal support or unnecessarily expanded the proceeding solely for harassment.
Let’s say a client’s claim for legal fees fits within one of these exceptions to the American Rule. Are there any other restrictions the client needs to be aware of?
If you are enforcing a fee provision in a debt instrument, like a promissory note, Georgia law imposes two additional restrictions. First, you must serve a specific written demand on the debtor, which gives the debtor 10 days to pay the outstanding principal and interest, without the legal fees. Second, if a debt instrument permits recovery of ‘reasonable’ fees, your fee recovery is limited to 15 percent of the first $500 and 10 percent of the remainder of the outstanding principal and interest, regardless of your actual fees. If the debt instrument permits recovery of fees based on a specific percentage, the percentage is capped at 15 percent of outstanding principal and interest, again, even if your actual fees exceed this amount.
For other types of contracts with fee provisions and statutory claims, the court will award ‘reasonable’ fees. In practice, the judge or jury can often find only a portion of the actual fees incurred is reasonable.
Do you have any suggestions for improving the chances of recovering fees in legal disputes?
If the debt instrument will be governed by Georgia law, I advise creditors to make sure the attorney fee provision is based on the maximum percentage of principal and interest allowed in Georgia, or 15 percent. I also advise clients there are ways to plan ahead for bankruptcy. For instance, I advise creditors to require an express waiver of the 10-day demand in the debt instrument, because some bankruptcy courts have rejected claims for fees if the 10-day demand is not served before bankruptcy, or even if it is served beforehand but within 90 days of the bankruptcy. If a waiver is not practical, I encourage clients to get us involved early on, particularly if bankruptcy is a real possibility, so that we can make sure these laws are complied with and maximize the chance of a fee recovery.
KEVIN A. STINE is a partner in the Litigation Practice Section of Gambrell & Stolz, LLP, in Atlanta, concentrating in business litigation, creditor’s rights and bankruptcy. He can be reached at (404) 223-2207 or email@example.com.