Fee Shifting Order Violated “American Rule”

Matter of Estate of Ryan, No. A-2252-21, 2023 WL 6799134 (N.J. Super. Ct. App. Div. Oct. 16, 2023)

This case addressed fee shifting and the application of the American Rule in estate litigation.  In particular, the parties were seeking reconsideration of the trial court’s order which shifted to them the obligation to pay their adversaries’ attorney fees in violation of the American Rule.  Defendant appealed, arguing that the trial court erred by shifting the payment of plaintiffs’ attorney fees to her under exceptions to the American Rule created by the New Jersey Supreme Court, and plaintiffs cross-appealed, asserting that the trial court erred by ordering them to pay defendants’ counsel fees under R. 4:58 (Offer of Judgment), a Court Rule exception to the American Rule.  The Appellate Division vacated the trial court’s order for the reasons as articulated below.

First, the Appellate Division reviewed the American Rule, which provides that litigants ordinarily must bear the cost of their own attorneys’ fees.  The court noted “[t]he purposes behind the American Rule are threefold: (1) unrestricted access to the courts for all persons; (2) ensuring equity by not penalizing persons for exercising their right to litigate a dispute, even if they should lose; and (3) administrative convenience.”    Id. at *3 (citing Innes v. Marzano-Lesnevich, 224 N.J. 584, 592 (2016)).

The Appellate Division then reviewed the exceptions to the American Rule, two of which played a role in this case: (1) the fiduciary malfeasance exception; and (2) the third-party litigation exception.

As to the fiduciary malfeasance exception, the Appellate Division noted that in these cases, New Jersey courts have held that: (1) a negligent attorney is responsible for the reasonable legal expenses and attorneys’ fees incurred by a former client in prosecuting a legal malfeasance action; (2) a successful claimant in an attorney misconduct case may recover reasonable counsel fees incurred in prosecuting that action; (3) a prevailing beneficiary may be awarded counsel fees incurred to recover damages arising from an attorney’s intentional violation of a fiduciary duty; and (4) counsel fees may be awarded against the non-attorney fiduciary where an executor or trustee commits the pernicious tort of undue influence.  Id. at *5.

However, the Appellate Division noted that the fiduciary malfeasance exception has been limited to those circumstances involving attorney fiduciaries and where the claimant can establish the tort of undue influence.  The court noted that neither of these circumstances are present in this matter.  For instance, defendant is not an attorney, and the wrongful conduct must arise out of an attorney-client relationship.  Therefore, the Appellate Division found that since defendant is not an attorney, the trial court’s decision was not supported by New Jersey law.

While counsel fees may be awarded against a non-attorney fiduciary when they commit undue influence, in the instant matter there was no such finding.  Thus, the Appellate Division found that the trial court’s factual finding failed to reveal that plaintiffs established undue influence or any of the intentional or fraudulent misconduct that was concerning to the Supreme Court when it created the undue influence exception to the American Rule in In re Niles, 176 N.J. 282, 300 (2003).