Is the American Rule Dead in New Jersey?

by Hinshaw & Culbertson LLP

Ok, so maybe "dead" is a bit hyperbolic, but the New Jersey Supreme Court's decision in Innes v. Marzano-Lesnevich, No. 074291, ___ N.J. _____ (N.J. Apr. 26, 2016) has raised serious questions about just how far the New Jersey Court may be willing to bend the American Rule that litigants must bear the cost of their own attorneys' fees.  

New Jersey is already one of a handful of states that recognize an exception to the American Rule for legal malpractice because of the unique nature of the attorney-client relationship.  (See, Saffer v. Willoughby, 143 N.J. 256, 670 A.2d 527 (1996): "a client may recover for losses which are proximately caused by the attorney's negligence [and] attorneys' fees to a prevailing plaintiff in an attorney malpractice action [are appropriate] because such fees are consequential damages that are proximately related to the malpractice.") A decade later, the Innes Court answered the question of “whether the attorney-defendants can be liable for attorneys' fees as consequential damages to a non-client under Saffer . . .." 

The underlying facts are heart-wrenching.  Peter Innes and his wife, Maria Jose Carrascosa, were involved in a contentious divorce and custody battle over their daughter Victoria.  Ms. Carrascosa is Spanish and Victoria is a dual citizen of the United States and Spain.  During the 2004-2005 proceedings, the couple entered into an agreement under which Ms. Carrascosa's then counsel would hold Victoria's United States and Spanish passports in trust so as to restrict either parent from traveling with Victoria outside of the United States without the written permission of the other.  Ms. Carrascosa thereafter fired her attorney and hired law firm of Lesnevich & Marzano–Lesnevich (LML).  LML secured the file from Ms. Carrascosa's former counsel, including the passports.  Ms. Carrascosa then obtained Victoria's U.S. passport from LML, and arranged for Victoria to travel to Spain, where she remains today, over ten years later.  Despite New Jersey court rulings awarding sole custody to Mr. Innes and ordering Victoria's return, the Spanish courts have refused to comply.  Mr. Innes has had little contact with his daughter in the last ten years. 

In October 2007, Mr. Innes sued LML alleging that it improperly released Victoria's United States passport to Ms. Carrascosa and intentionally interfered with the Agreement.  Innes requested relief, including damages and attorneys' fees.  The attorneys fee issue made its way to the New Jersey Supreme Court, which analyzed its post-Saffer jurisprudence and "reaffirm[ed] that a prevailing beneficiary may be awarded counsel fees incurred to recover damages arising from an attorney's intentional violation of a fiduciary duty."  LML was holding Victoria's United States passport as trustees and escrow agents, and thus was a fiduciary "for the benefit" of both Ms. Carrascosa and Mr. Innes.  The Court moved away from the limitation recognized in Saffer and reaffirmed in Packard–Bamberger & Co. v. Collier, 167 N.J. 427 (2001) that, in order for the exception to apply, the alleged conduct must arise from the attorney-client relationship.  It found justification for this departure in In re Niles Trust, 176 N.J. 282, 294, 823 (2003), in which a mother and son, both non-attorneys, conned an elderly, wealthy heiress to name the son as executor of her will and trustee of her trust, and they then proceeded to loot her estate.  Understandably, the Court permitted an award of fees under these egregious circumstances.  To get there, the Court relied on the son's fiduciary role, analogizing it to the attorney-client relationship in Saffer, but assured its holding would not "open the floodgates" in other, superficially similar cases. 

Justice Jaynee LaVecchia criticized the majority justices for doing just that, accusing them of "paying lip service" to the American Rule.  "Although the majority's holding describes the fee-shifting expansion in terms of the case's factual context—attorneys acting as a fiduciary in an escrow setting—the analysis blurs two distinct analytic lines of case law": either the majority is expanding Saffer to non-client relationships or no longer limiting fiduciary fee-shifting to undue influence claims.  If the latter, Justice LaVecchia warned that it "could portend future fee-shift requests from others injured by anyone who was charged with acting in a fiduciary capacity. And that risks a much broader exception to the American Rule, one that would expose a host of actors to new, expanded liability."  She listed a "sampling" of fiduciary relationships at risk: "doctors to their patients; agents to their principals; partners to their other partners; corporate officers to their shareholders; brokers, including insurance, real estate, and securities brokers, to their clients; and public officials to their constituents."  In other words, she cautioned that the floodgates are now indeed open to plaintiffs and their counsel to test the waters of this new fee-shifting frontier.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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