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Unconscionable Attorneys’ Fees Provisions

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  • Posted on: Nov 16 2018

If there is one thing people like less than attorneys, it is paying attorneys’ fees.  Accordingly, great effort is made in contracts to shift to another party, the obligation for the payment of attorneys’ fees in the event of dispute.

“Under the general rule [often referred to as the “American Rule”] attorneys’ fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule.”  A.G. Ship Maintenance Corp. v. Lezak, 69 N.Y.2d 1, 5 (1986) (citations omitted); see also, Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (1989).  According to the Court of Appeals, “[t]he rule is based upon the high priority accorded free access to the courts and a desire to avoid placing barriers in the way of those desiring judicial redress of wrongs. The preferred remedy for deterring malicious or vexatious litigation has been the use of separate, plenary actions after the challenged proceedings have concluded.”  A.G. Ship, 69 N.Y.2d at 5 (citations omitted).

Notwithstanding the general rule, however, “[i]t is not uncommon…for parties to a contract to include a promise by one party to hold the other harmless for a particular loss or damage and counsel fees are but another form of damage which may be indemnified in this way.”  Hooper, 74 N.Y.2d at 491 (citations omitted).  “A promise assuming the obligation to pay the attorney’s fees of another should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances.”  214 Wall Street Associates, LLC v. Medical Arts-Huntington Realty, 99 A.D.3d 988 (2nd Dep’t 2012) (citations and internal quotation marks omitted).

The propriety of an attorneys’ fee shifting provision in a lease that provided for the reimbursement of “attorneys’ fees to a lessor even if the lessor is in default” was the subject of the First Department’s decision in Matter of Krodel v. Amalgamated Dwellings Inc., decided on November 8, 2018.  The Krodel Court found such a provision to be “unconscionable and unenforceable as a penalty.”

The tenant in Krodel owned shares in a cooperative apartment.  The operative proprietary lease contained the following attorneys’ fees provision:

If the Lessor [respondent] shall incur any cost, fee or expense . . . including reasonable legal fees . . . in connection with any action or proceeding brought by the Lessee [petitioner] against the Lessor . . . which is based on an alleged default of the Lessor hereunder or which is based on any other matter or thing relating to this lease, or to any alleged failure by the Lessor to perform any act which the Lessor is required to perform . . . or to the shares of the Lessor issued to the Lessee, or to the Lessor’s Bylaws, . . . such cost or expense shall be paid by the Lessee to the Lessor, on demand, as additional rent.

(the “Attorneys’ Fees Provision”)

The petitioner in Krodel was the transferee of shares in her cooperative apartment.  Although she paid the transfer fees, the lessor/respondent refused to transfer the shares to her.  As a result, petitioner sued the respondent/lessor for default under the lease and for statutory violations.  The respondent counterclaimed for attorneys’ fees under the Attorneys’ Fees Provision. Thereafter, respondent moved for summary judgment on its counterclaim and petitioner cross-moved for summary judgment dismissing the counterclaim.  The motion court granted petitioner’s cross-motion and denied respondent’s motion.

The First Department found that the motion court “properly declined to enforce [the Attorneys’ Fees Provision] because it is unconscionable and unenforceable as a penalty.”  In so doing, the Court recognized the accepted notion that “[p]arties to a lease may contract for attorneys’ fees provided they are reasonable and not in the nature of penalty or forfeiture.”  (Citation, internal quotation marks and brackets omitted.)

The determination of whether a provision is “an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances” (quoting, 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc., 24 N.Y.3d 528, 536 (2014)).  The Court, relying on Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 10 (1988), stated that “[a] finding of unconscionability requires some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”  (Internal quotation marks omitted.)

After recognizing that the question decided was one of first impression in the First Department, the Court held that:

In the present case, we find that an attorneys’ fees provision which provides that the tenant must pay attorneys’ fees if it commences an action against the landlord based upon the default of the landlord is unconscionable and unenforceable as a penalty. [The Attorneys’ Fees Provision] of the proprietary lease permits the landlord to recover attorneys’ fees when the tenant brings an action against the landlord even when the landlord is in default. 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.

TAKEAWAY 

While contractual provisions for shifting attorneys’ fees are widely utilized, their import may be eviscerated by overreaching.

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