Attorney’s Fees Provision Found Unconscionable
Print Article- Posted on: Jan 31 2025
As discussed in prior BLOG articles, potential clients frequently inquire about the ability to recoup legal fees in the event of litigation.[1] Certainly, a litigant’s ability to recoup legal fees and/or be forced to pay an adversary’s legal fees might be a significant factor in deciding whether to commence a lawsuit. Generally, the answer is explained by the “American Rule,” which provides that “the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.” Alyeska Pipeline Services Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21-22 (1979). The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.” Mighty Midgets, 47 N.Y.2d at 22 (citations omitted).
Exceptions to the “American Rule” exist, for example, where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.” Hooper Assoc., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487 (1989) (citations omitted); Giannakopoulos v. Figame Realty Mgt., 219 A.D.3d 803, 805-06 (2nd Dep’t 2023) (quoting Hooper); New York City Housing Authority v. Harleysville Worcester Ins. Co., 226 A.D.3d 804, 809 (2nd Dep’t 2024); Wolf v. Vestra SPV3, LLC, 223 N.Y.S.3d 686, 687 (2nd Dep’t 2024). Indeed, it is not uncommon for contracts to contain language permitting a party to collect its reasonable legal fees in the event of litigation.
Further, “[i]n general, only a prevailing party is entitled to recover an attorney’s fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.” Village of Hempstead v. Taliercio, 8 A.D.3d 476 (2nd Dep’t 2004) (citations, internal quotation marks and brackets omitted); see also Kefalas v. Valiotis, 197 A.D.3d 698, 703 (2nd Dep’t 2021). “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.” DKR Mortgage Asset Trust 1 v. Rivera, 130 A.D.3d 774 (2nd Dep’t 2015) (citations and brackets omitted).
Today’s article is about Kasowitz, Benson, Torres & Friedman, LLP v. JPMorgan Chase Bank, N.A., decided on January 28, 2025, by the Appellate Division, First Department. Kasowitz is a case in which the Court found the subject attorney’s fees provision to be “unconscionable”. For the purpose of this article, the complicated facts and procedural posture are abridged for editorial purposes. The proprietary lease for the subject unit in The Dakota states that The Dakota is entitled to recoup its attorney’s fees “if the Lessee shall at any time be in default hereunder, and the Lessor shall take any action against the Lessee based upon such default, or if the Lessor shall defend any action or proceeding (or claim therein) commenced by the Lessee.” (Internal quotation marks and brackets omitted.) The Court noted that the “provision makes clear that attorneys’ fees are to be awarded under two circumstances: first, when the lessee is in default; second, whenever a lessee sues The Dakota, even if The Dakota is in default.” The Court found the provision to be “unenforceable as unconscionable” because The Dakota would be entitled its attorney’s fees “regardless of default or merit, in a dispute between a residential co-op and a shareholder tenant.” The explicit provision providing for recoupment of legal fees by The Dakota whenever it is sued by a tenant (as opposed to the proprietary lease merely being silent on the issue) was a significant factor considered by the Court in rendering its decision. Nor was the fate of the provision changed using the word “reasonable”.
The Court, in its decision, relied on Matter of Krodel v Amalgamated Dwellings Inc., 166 A.D.3d 412, 413-414 (1st Dep’t 2018), a case with similar facts (a proprietary lease in a cooperative apartment).[2] However, the Court compared Krodel to Glaze Teriyaki LLC v MacArthur Props. I LLC, 206 A.D.3d 513, 513 (1st Dep’t 2022), where a similar provision in a commercial lease was found to be enforceable because “parties to the lease are sophisticated entities that negotiated the lease terms through counsel.”
In conclusion, the Court stated that:
Bearing in mind that agreements providing for payment of attorneys’ fees should be construed strictly, we will not rewrite the parties’ agreement simply because The Dakota prevailed in the underlying litigation. To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default. [Citations and internal quotation marks omitted.]
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.This article is for informational purposes and is not intended to be and should not be taken as legal advice.
[1]Eds. Note: this BLOG has written numerous articles addressing a litigant’s entitlement to legal fees. To find BLOG articles related to the recoupment of legal fees in litigation, visit the “BLOG” tile on our website and enter “attorney fees” (or any related topic of interest) in the “search” box.
[2] Eds. Note: this BLOG wrote about Krodel [here] when that case was decided.