Jan. 16, 2018 – Generally, parties in litigation are responsible for their own attorney’s fees, under the so-called “American Rule” that applies in Wisconsin. However, there’s an exception when a party is “wrongfully drawn into the litigation with a third party.”
Recently, in Talmer Bank v. Jacobsen, 2017AP752 (Jan. 10, 2018), a three-judge panel for the District II Court of Appeals ruled that Felimon and Teresa Gomez (Gomez) are entitled to attorney’s fees because they were drawn into litigation with Talmer Bank.
Talmer Bank held a mortgage on real property that Thomas and Deborah Jacobsen (Jacobsen) owned in the Town of Lyons. Gomez leased the property from Jacobsen to run their business. The land contract required Jacobsen to pay the mortgage.
Gomez paid rent to Jacobsen but was unaware that Jacobsen failed to make 15 mortgage payments to Talmer Bank, which initiated a foreclosure action. Jacobsen failed to answer, and the circuit court awarded a default judgment of foreclosure.
Gomez answered, and filed a cross-claim against Jacobsen, alleging that Jacobsen breached the land contract by failing to make mortgage payments and forced Gomez to hire counsel to protect their interests. Ultimately, Gomez retained title to the property.
But it pursued the cross-claim against Jacobsen, seeking attorney’s fees. Jacobsen conceded the breach but argued that the American Rule barred Gomez from receiving attorney’s fees. Gomez argued such fees were proper under a third-party litigation exception. The circuit court ruled in favor of Jacobsen, but the appeals court reversed.
The three-judge panel noted that the “third-party litigation exception” applied in favor of Gomez because the breach of contract was a “wrongful act.”
“Contrary to the circuit court’s holding, the third-party litigation exception is not limited to fraud, breach of fiduciary duty, or something similar,” wrote Judge Joel Hagedorn. “Our supreme court has unequivocally declared that ‘a breach of contract' as well as tort may be a basis for allowing [a] plaintiff to recover reasonable third-party litigation expenses.”
The panel rejected Jacobsen’s assertion that allowing attorney’s fees for breach of contract would “allow the exception to swallow the rule.”
“[A]pplying the exception to breach of contract will not allow attorney fees to be recovered in every breach of contract action, only in cases where a party’s breach of contract forced another party into litigation with a third party,” Hagedorn wrote.
“This is a limited exception narrowly tailored to those situations where, as here, attorney fees are rightly considered part of the damages flowing from the defendant’s breach of contract.”