Revisiting the Recovery of Attorney Fees and Costs in Colorado

• Publication year: 2004
• Pages: 11

33 Colo.Law. 11 Colorado Lawyer 2004.

2004, April, Pg. 11. Revisiting the Recovery of Attorney Fees and Costs in Colorado

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Vol. 33, No. 4, Pg. 11

The Colorado Lawyer
April 2004
Vol. 33, No. 4 [Page 11]

Articles

Revisiting the Recovery of Attorney Fees and Costs in Colorado
by John R. Webb

John R. Webb

John R. Webb, Denver, was appointed to the Colorado Court of Appeals February 1, 2002. At that time, he was senior counsel to the Denver firm of Jacobs, Chase, Frick, Kleinkopf &amp Kelley

This article examines general principles and describes recent developments concerning the recovery of attorney fees and costs. It also discusses various statutes and court rules that afford some opportunity to shift attorney fees and costs

Civil litigation involves significant costs in attorney fees and other expenses. By shifting those costs to the opposing party, the successful party avoids erosion of its gross award. This article revisits general principles1 and examines recent developments concerning recovery of attorney fees and costs. It does not address recovery of either attorney fees characterized as damages, which is a discretionary and fact-intensive determination by the lower court,2 or attorney fees in class actions.3

RECOVERING
ATTORNEY FEES

Recovery of attorney fees requires an understanding of the limitations of the American Rule and its exceptions. Practitioners should be aware of the court rules and statutes that permit recovery of fees.

The American Rule

Citing concerns over uncertainty in litigation, access to the courts, and deference to the General Assembly, the Colorado Supreme Court continues its strong adherence to the so-called "American Rule," under which the prevailing party must nevertheless pay its own attorney fees, unless a court rule, statute, or contract provides otherwise.4 The Court recently invalidated on public policy grounds an insurance policy provision that required the insured to arbitrate the claim, but allowed the insurer to relitigate its liability in a civil action if the insured prevailed in arbitration.5 However, the Court declined to recognize a public policy exception to the American Rule whereby the successful insured could recover its attorney fees. Periodic legislative efforts to make attorney fees recoverable by the prevailing party in all civil actions have failed.

Shifting of Attorney
Fees by Contract

Freedom of contract includes the power to provide that the prevailing party recovers attorney fees and other specified expenses in litigation arising under the contract.6 In addition to avoiding the American Rule, such clauses can expand recoverable litigation expenses beyond those "costs" typically awarded to the prevailing party under Colorado Rule of Civil Procedure ("C.R.C.P." or "Rule") 54(d) and various Colorado statutes, as discussed below. No Colorado case requires that an attorney fees clause protect both parties equally, and many contracts, such as promissory notes and guarantees, do not. An attorney fees clause also will entitle the prevailing party to fees incurred on appeal.7

An attorney fees clause merits careful drafting because such fees "should not be awarded based on a contractual provision unless it plainly and unambiguously permits such an award."8 In one case, although the contract "entitled" the prevailing party to attorney fees, on remand the prevailing party was allowed to seek fees, but the lower court was not required to award them.9 Another case was remanded to determine whether a provision giving the prevailing party "legal expenses" included attorney fees.10 An attorney fees clause in a contract does not support a fee claim by a third-party beneficiary.11 However, fees were awarded in litigation over a promissory note, which represented the means of payment under a contract that included an attorney fees clause, although the note itself did not.12

Thus, the drafter should consider using stronger terms than the language at issue in these cases: "the prevailing party shall recover. . . ." The drafter also should consider language such as "together with all internal and out-of-pocket expenses of any kind relating to the litigation"; a mere reference to recovering "costs" may be interpreted more narrowly on the basis of precedent under statutes and court rules that address recovery of costs.

If the contract permits or requires alternative dispute resolution, the drafter should consider both application of the attorney fees clause to these proceedings and recoverability of unique expenses, such as arbitration fees.13 Application of the fees clause may be broadened beyond the typical action for breach of contract by a phrase such as "disputes arising under, or in any way relating to, rights created by this contract," although no Colorado case has addressed such language.

When applying attorney fees clauses, Colorado courts have also adopted differing approaches to determining the "prevailing party" where cases involve multiple parties, multiple claims, or both. In one case, the court looked at the judgments obtained by the various parties rather than the overall trial results.14 In another case, the court acknowledged, but did not mandate application of, the "net judgment rule," under which the party in whose favor the net final judgment is rendered recovers attorney fees, although judgments were entered on both claim and counterclaim.15 Thus, to reduce uncertainty, the drafter should define "prevailing party."

Where a party rescinds a contract, a fee award under the contract is not available.16 No Colorado case addresses whether a contract could expressly provide otherwise. As discussed below, numerous Colorado statutes provide for recovery of attorney fees by prevailing parties in various types of cases. Whether any of these provisions could be waived by contract has not been resolved in Colorado.17

Judicially-Created Exceptions To the American Rule

The Colorado Supreme Court has recognized four judicially-created exceptions to the American Rule.18 These are: (1) creation of a common fund, (2) breach of fiduciary duty or breach of trust, (3) bad faith, and (4) a wrongful act causing litigation.

The common fund exception rests on principles of unjust enrichment that require those who directly benefit from litigation to share in its costs.19 Implicit in the doctrine are requirements that the beneficiaries of the fund be similarly situated and that, but for the plaintiff's actions, they would have been forced to litigate themselves, as in most class actions.20 For example, the exception has been applied against subrogated insurance carriers who share in recovery from or settlement with a tortfeasor.21

The exception generally does not obligate a third party (who benefits from payment out of the fund created) to compensate the attorney of the party in whose name the fund was created, if the third party's right to be paid existed regardless of creation of the fund.22 Also, some court of appeals cases suggest that the party against whom fees can be recovered must have had a right to intervene in the litigation that produced the fund, but either chose not to do so or was not given the opportunity.23

Under the second exception, the court is authorized, but not required, to award attorney fees in a damages action resulting from breach of fiduciary duty.24 For example, in one case, fees were awarded against a father for imprudently investing his minor children's money.25 The exception is probably limited to actions involving both a breach of trust and funds of a beneficiary.26 Denial of attorney fees has been upheld where, to the beneficiary's knowledge, the trustee had begun remedial action before the beneficiary brought suit, and the trustee's prior actions were not fraudulent.27

Under the bad faith exception, sometimes called "obdurate behavior," attorney fees were awarded in one case for a bad faith denial of having been served with process that resulted in a sanction against the other party.28 The exception is limited to bad faith in litigation, not in the underlying transaction.29 A finding of bad faith represents an exercise of the lower court's discretion.30

CRS §§ 13-17-101 et seq., discussed below, permits fee awards based on groundless, frivolous, or vexatious claims or defenses. A finding of groundlessness and frivolousness does not alone constitute
either obdurate behavior or bad faith.31 Whether the statute preempts the bad faith exception has never been addressed in a published opinion.32 Also, the statute does not limit a claim for bad faith breach of insurance contract evidenced by the insurer's bad faith lawsuit against its insured.33

The wrongful act creating the litigation exception recognizes attorney fees as recoverable damages when a party's wrongful act causes another party's involvement in litigation with a third party. For example, attorney fees were awarded against a realtor for negligently failing to present a prospective tenant's offer to the landlord, which resulted in the landlord's seeking damages against a defaulting tenant.34 Fees may be awarded even if the underlying litigation settled, as long as the settlement terms were reasonable.35 However, the party seeking fees must have been without fault.36 It is doubtful whether an attorney fees award under any of these exceptions could be made against the state because of the absence of express statutory authority.37

Finally, certain types of cases probably continue to represent exceptions to the American Rule, such as slander of title,38 malicious prosecution,39 and, perhaps, vindication of strong public policy.40 Some of these cases involve attorney fees...