Are Exceptions Starting To Swallow The “American Rule” In New Jersey?

Constitution (pd)The answer to that question would appear to be: it depends who you ask. In a pair of decisions released on April 26, 2016, Innes v. Marzano-Lesnevich and In Re Estate of Folcher, the New Jersey Supreme Court addressed the “American Rule” — the idea that each party to a lawsuit is responsible for its own attorney’s fees — and specifically whether to narrow or expand certain common-law exceptions to that rule. At the center of the two decisions was Justice LaVecchia, who authored the majority opinion in Folcher and the dissent in Innes. These decisions leave little doubt that this is not the last we have heard from the Supreme Court on the parameters of the American Rule.

First, a brief history of the American Rule in New Jersey. In 1948, New Jersey adopted a new Constitution and re-organized its court system. As part of this re-organization, and as it relates to the awarding of prevailing party attorney’s fees, New Jersey could have adopted either the English Rule, which allows for the liberal awarding of such fees, or the American Rule, which does not. New Jersey chose the latter. This decision is currently embodied in Rule 4:42-9, which only allows for eight exceptions to the general rule.

Over the years, however, New Jersey courts have created common law exceptions to the American Rule. These cases have followed two, independent tracks, one arising in the context of the attorney-client relationship and one arising in the context of estate administration.


First, the attorney-client track. In a 1996 decision, Saffer v. Willoughby, the Supreme Court held that fees were appropriate in legal malpractice cases because the fees were “consequential damages that [were] proximately related to the malpractice.” In a 2001 decision, Packard-Bamberger & Co. v. Collier, the Supreme Court extended this holding to situations involving intentional attorney misconduct, even where no malpractice was alleged or established. The Supreme Court reasoned that it was inconsistent to award fees where an attorney acted negligently, as in a malpractice case, but not when the attorney acted intentionally.

Second, the estate administration track. In a 2003 decision, In re Niles Trust, the Supreme Court held that an award of fees was appropriate when an executor or trustee “commits the pernicious tort of undue influence,” and this undue influence results in the “development or modification of estate documents that create or expand the fiduciary’s beneficial interest in the estate.”

Both of these tracks would be the subject of much debate in the Supreme Court’s decisions in Innes and Folcher.

In Innes, the question before the Supreme Court was whether an attorney-defendant could be liable for fees as consequential damages to a non-client. In that case, a husband and wife were involved in a contentious divorce. During the divorce proceedings, they agreed that the wife’s lawyer would hold the husband and wife’s daughter’s passport in escrow to restrict travel outside the United States with their daughter by one of them without the other’s permission. Notwithstanding this agreement, the wife obtained the passport from counsel, took her daughter to Spain, and refused to return to the United States, even in the face of an order from a New Jersey court requiring her to do so. The husband sued, among others, the wife’s counsel for, among other things, negligence in releasing his daughter’s passport to his wife. The jury found in his favor and awarded damages. Following the verdict, the husband filed a motion to amend the judgment to add costs and attorney’s fees, and the trial court granted the motion. The Appellate Division affirmed and the Supreme Court granted certification.

In a divided, 3-2 decision, the Supreme Court held that the defendant-lawyer was holding the passport as trustee and escrow agent and therefore owed fiduciary duties to both the husband and wife. These duties were breached when the wife obtained the passport without the husband’s consent. If the breach was intentional, then the husband would be entitled to an award of attorney’s fees. The majority explained that this was simply an extension of the line of cases holding that “a prevailing beneficiary may be awarded counsel fees incurred to recover damages arising from an attorney’s intentional violation of a fiduciary duty.” However, because the jury in Innes did not consider whether the defendant-attorney’s breach was intentional, the Supreme Court remanded the matter to the trial court for further proceedings on that issue.

Justice LaVecchia authored a dissent, which was joined by Judge Cuff. In it, she criticized the majority for purporting to follow precedent but in fact straying far beyond that precedent. She noted that Saffer and Packard-Bamberger both relied on the attorney-client relationship as a condition to recovering fees. She further noted that Niles explicitly held that breach of fiduciary duty alone was not enough to justify an award of fees, and that such an award was only appropriate when an executor or trustee used undue influence, that most “pernicious” of torts. Innes did not fit either of these scenarios — there was no attorney-client relationship between the husband and the wife’s counsel, and there was no claim of undue influence. Therefore, she concluded:

Either the majority is expanding the Saffer and Packard-Bamberger precedent by allowing fee-shifting against attorney defendants to extend now to non-client relationships, or the majority is no longer limiting fiduciary fee-shifting to the singular context of undue influence claims.  

Justice LaVecchia was opposed to creating new exceptions to the American Rule, but she acknowledged that the Supreme Court could modify the court rules to do so, even through a judicial decision like Innes. However, the majority suggested that it was just following precedent, not modifying the rules. Justice LaVecchia called the majority out on this claim, noting that the Supreme Court “should abandon any pretense that today’s result flows naturally from our prior cases, when it clearly does not.”

In Folcher, Justice LaVecchia was on the side that won, authoring the majority opinion over Justice Albin’s dissent. In that case, decedent’s wife and her daughter from a prior marriage engaged in a pernicious scheme (the word “pernicious” is popular in cases involving the American Rule) to make herself, instead of her husband’s daughter, the beneficiary of his estate. Among other things, they forged documents, looted his bank account within hours of his death, and, while his health was rapidly deteriorating,  used undue influence to convince him to enter into two will codicils. The trial court concluded that the wife engaged in fraud, forgery, and undue influence and awarded decedent’s daughter damages and attorney’s fees. The trial court acknowledged that the wife was neither a trustee nor an executor but nonetheless awarded attorney’s fees because of her confidential relationship with decedent and proof of undue influence.

The Supreme Court reversed, holding, in a straightforward decision, that Niles and related case law made a fiduciary relationship a prerequisite to an estate’s recovery of attorney’s fees in a will contest involving undue influence. In Folcher, the wife only had a confidential relationship with her husband, not the estate, therefore this prerequisite was not satisfied and an award of attorney’s fees was not justified. The majority acknowledged the severity of the misconduct (perhaps, the perniciousness of it), and held that the trial court could have awarded punitive damages as a result, which may have implicitly  accomplished the same goal of reimbursing the estate for its legal fees, but that it could not explicitly award attorney’s fees absent a fiduciary relationship between decedent’s wife and the estate.

In his dissent, Justice Albin criticized the majority for raising form over substance. He noted that the American Rule was not a “sacred creed,” and chided the majority for claiming “that the general rule against fee shifting — the American Rule — commands the defeat of equity.” He argued for a more liberal approach to exceptions to the American Rule, which consider the specific facts of a case, along with changing social values and the “evolving ethos of our common law.” Finally, Justice Albin noted that awarding fees in Folcher would be a “natural extension of this Court’s fee-shifting decision, including [Innes], issued today.”

Although Justice LaVecchia’s cautious approach to creating new exceptions to the American Rule seems to be the better course, it is hard to disagree with Justice Albin’s implicit observation that the decision in Folcher appears to be incompatible with the decision in Innes. While they do not directly contradict each other, there is a disconnect between the two, with the Supreme Court stretching, at least a bit, to allow an award of fees in Innes, but being far less flexible in Folcher. Regardless, one thing is certain, the debate over the American Rules, and exceptions to it, is sure to continue.

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