Pre-litigation Bad Faith Conduct Leaves Losing Party Fronting the Bill

From the Desk of Kyle Riley:

The American rule has long held that each party must bear its own litigation fees and costs. This rule was instituted so that no party would be dissuaded to pursue or defend a claim for fear of being penalized in the event of a loss. The American rule has an equitable exception for bad faith. In this case, the Court awarded fees under the bad faith exception despite the fact that the prevailing party never requested attorney fees.

Claims Pointer:

In this recent decision, Washington Appellate Court, Division Three, awarded attorney fees under the equitable exception to the American rule when the plaintiff hadn’t even requested such fees. The Washington Appellate Court considered these unrequested fees and after a long analysis of pre-litigation bad faith case law and the American rule, held that the plaintiff could recover fees incurred because of the defendant’s pre-litigation bad faith. This decision will potentially have significant repercussions and should be watched closely in the coming months.

Dalton M, LLC v. N. Cascade Tr. Servs., Inc., No. 37448-3-III, 2022 Wash. App. LEXIS 353 (Ct. App. Feb. 17, 2022)

Facts:

The defendant U.S. Bank foreclosed on a parcel of land owned by plaintiff Dalton M, LLC, despite knowing that Dalton M was the owner of the land, and that the bank’s deed of trust no longer encumbered the property. For over a year, Dalton M requested U.S. Bank to remove its cloud on the title. While U.S. Bank did not dispute that the foreclosure was wrongful, it still ignored Dalton M’s plea. This inaction forced Dalton M to file suit.

The superior court held in Dalton M’s favor on his slander of title and quiet of title causes of actions. The court also awarded Dalton M reasonable attorney fees as the only damages on the successful slander of title action. Dalton M’s complaint did not seek recovery of reasonable attorney fees and costs on equitable grounds. On appeal, The Court of Appeals, Division Three, reversed the judgment in favor of Dalton M on the slander of title claim but still affirmed the attorney fees award under the equitable exception to the American rule.

Law:                                                                                                                                                  

The Washington State Rules of Appellate Procedure state that the Court has authority to waive or alter the rules of appellate procedure “in order to serve the ends of justice”. RAP 1.2(c). Additionally, RAP 12.1(b) gives the appellate court the authority to raise an issue which was not set forth in the briefs; in other words, the Court may raise issues sua sponte.

The American rule requires that each party bear its own litigation costs and fees. This rule recognizes that the uncertainty of litigation should not result in penalizing one for prosecuting or defending a lawsuit. This rule does have exceptions. Under Washington law, a court may award fees as part of the costs of litigation on a contractual, statutory, or recognized equitable basis. The four equitable grounds are: bad faith conduct of the losing party, preservation of a common fund, protection of constitutional principles, and private attorney general actions.

Analysis:

The Court addressed whether it should award reasonable attorney fees under the equity exception of the American rule even though Dalton M never requested these fees and costs. In short, the Court stated that in order to secure justice this court could raise this issue sua sponte. The Court held that due to the bad faith conduct of U.S. Bank, in the interest of securing justice, it should explore other grounds on which Dalton M might secure an award of reasonable attorney fees and costs other than its slander of title cause of action.

The Court then addressed whether it should award Dalton M reasonable attorney fees and costs on equitable grounds. To answer this, the Court first noted that both the U.S. Supreme Court and Washington Supreme Court recognize that a court’s inherent equitable powers authorize the award of attorney fees in cases of bad faith. The Court then looked to marital dissolution cases which confirm the availability of reasonable attorney fees for both pre-litigation and litigation bad faith conduct and noted that this exception applies in cases other than slander of title.

The Court then turned to the question of when pre-litigation bad faith merits an award of reasonable attorney fees. The Court embarked on a long analysis that entailed examining other jurisdictions as well as relevant Washington case law. The Court spent a lot of time examining two Washington appellate decisions: Maytown Sand & Gravel, LLC v. Thurston County, 191 Wn.2d 392, 438 (2018) and Greenbank Beach & Boat Club, Inc. v. Bunney, 168 Wn. App. 517 (2012). The Court followed the decision in Maytown because it was a Supreme Court decision. The Court’s narrow reading of Maytown resulted in a holding where a plaintiff cannot recover reasonable attorney fees for pre-litigation bad faith if the bad faith occurred during the administrative process. From this holding, the Court found that the pre-litigation bad faith could merit an award as the bad faith didn’t occur during the administrative process.

The Court then looked at the American rule’s goal of promoting “the cause of the poor” who might be discouraged from suing for fear of penalty for losing. The Court stated that this rationale does not apply when the fee-shifting rule operates against the side of the bank and in this case, the cause of the poor is advanced, not hindered by a ruling in favor of Dalton M.

After reviewing the Washington case law and the American rule, the Court concluded that the Washington Supreme Court would hold that a plaintiff may recover fees incurred because of the defendant’s pre-litigation bad faith refusal to recognize the plaintiff’s indisputable claim and forcing the plaintiff to file suit. Dalton M had an undisputable right to clear title and U.S. Bank forced Dalton to come to court to clear title.

The Big Picture:

Division Three of the Washington Court of Appeals awarded the plaintiff attorney fees that were never even requested. This is quite alarming for any defendant who may now be vulnerable to attorney fees that were never requested under the equitable exception to the American rule. We will keep an eye out for the potential appeal to the Supreme Court and report back with any developments. Often the bad faith exception appears to be utilized mostly in property disputes, where one party’s conduct appears to be in bad faith and in contravention to established property filings. While there is the potential for this area of the law to expand to other types of claims, the use of the bad faith exception up to this point has been relatively narrow.