“If a party has a colorable defense that a contract is even formed in a settlement agreement shouldn’t they be able to defend that without the fear they are going to incur legal fees absent bad faith?”
Justice Donnelly, to counsel for the Law Firms
On August 18, 2020, the Supreme Court of Ohio heard oral argument in Rayco Manufacturing, Inc. v. Murphy, Rogers, Sloss, & Gambel, a Professional Law Corporation, et al., 2019-1498. At issue in this case is whether attorney fees incurred from a motion to enforce a settlement agreement are recoverable as compensatory damages. Justice Stewart has recused herself from this case, and Judge John W. Wise from the Fifth District Court of Appeals sat for her.
Case Background
On October 21, 2013, Rayco Manufacturing (“Rayco”) filed a legal malpractice suit against its former attorneys Murphy, Rogers, Sloss, & Gambel (“Murphy”) of Louisiana, Murphy’s local counsel, the Cleveland firm of Cavitch, Familio and Durkin “(Cavitch”) (collectively, “The Law Firms”) and a number of individually named lawyers, who had represented Rayco in a prior lawsuit.
After participating in mediations, Rayco’s attorney sent a letter stating Rayco’s willingness to settle the malpractice claim for $3,050,000, which Rayco had repeatedly insisted throughout the mediations was the amount necessary to settle the case. The Law Firms’ lawyers accepted this settlement demand and subsequently sent a draft settlement agreement to Rayco for review and execution. After several back and forth communications about the agreement, Rayco refused to sign the draft settlement agreement.
On June 16, 2017, the Law Firms moved to enforce the alleged settlement agreement. The Law Firms also requested an award of attorney fees, alleging that Rayco’s failure to sign the alleged settlement agreement constituted frivolous, bad faith conduct that justified the recovery of attorney fees. Rayco argued that the agreement could not be enforced because the parties had never reached a settlement.
The trial court held an evidentiary hearing before an advisory jury which was asked to determine whether the parties had entered into a contract to settle the lawsuit. The advisory jury found that the parties had entered into a settlement agreement. Based on the evidence presented and the jury verdict, the trial court found that there was an enforceable settlement agreement; however, the court declined to award the Law Firms any attorney fees.
Rayco appealed the trial court’s decision enforcing the alleged settlement agreement. The Law Firms cross-appealed the trial court’s decision denying the award of attorney fees.
The Appeal
Because of a conflict among panel decisions on this issue, the Eighth District heard this case en banc. In a 7-5 decision, the Eighth District affirmed the trial court’s decision to enforce the settlement agreement between Rayco and the Law Firms but reversed the trial court’s denial of attorney fees to the Law Firms. In so holding, the majority found that attorney fees can be awarded as compensatory damages to a prevailing party on a motion to enforce a settlement agreement when the attorney fees are incurred as a direct result of a breach of the settlement agreement. The Eighth District remanded the case to determine the amount of reasonable attorney fees that the Law Firms had incurred to enforce the settlement agreement.
The Eighth District majority noted that compensatory damages are awarded to fully compensate a party for a loss caused by the other party. When parties agree to settle a case, the end of litigation is an essential part of the consideration that is exchanged as part of the agreement. By breaching a settlement agreement, the breaching party deprives the other party of the essential benefit of its bargain. Therefore, the Eighth District held that the nonbreaching party should recover reasonable attorney fees as compensatory damages, not “costs of litigation.” Because attorney fees are recoverable as compensatory damages, the American Rule did not preclude recovery in this case, even though none of the exceptions to the American Rule applied. The majority also noted that it does not matter if the nonbreaching party sought enforcement of the settlement agreement in a separate action or by filing a motion.
The dissent viewed the majority’s decision as deviating from the American Rule, noting that this “fourth exception” recognized by the majority had been carved out by lower courts, without any guidance from the Supreme Court of Ohio or the legislature. Because no exception to the American Rule applied in this case, and because simply calling attorney fees compensatory damages does not change their nature as fees, the dissent would deny any award of attorney fees to the Law Firms.
Rayco appealed the majority’s finding that the Law Firms could recover attorney fees for enforcing the agreement.
Rayco’s Propositions of Law Accepted for Review
No. 1
The American Rule requires that each party pay its own attorney fees unless the parties agreed otherwise by contract, a statute provides for fee shifting, or a party acted in bad faith.
No. 2
Compensatory damages for breach of contract do not include attorney fees.
No. 3
Attorney fees incurred to prosecute a motion to enforce a settlement agreement constitute litigation expenses rather than damages.
No. 4
Where a party seeks attorney fees as a form of compensatory damages, such damages must be determined by the fact finder based upon the evidence presented at trial.
Key Precedent
State ex rel. Michaels v. Morse, 165 Ohio St. 599 (1956) (Attorney fees constitute litigation costs, not damages.)
Spercel v. Sterling Industries, Inc., 31 Ohio St.2d 36 (1972) (“The law favors the resolution of controversies and uncertainties through compromise and settlement rather than through litigation. The resolution of controversies by means of compromise and settlement results in a saving of time of the parties, the lawyers, and the courts, and it is thus advantageous to judicial administration, and, in turn, to government as a whole.”)
Alyeska Pipeline Serv. Co. v. Wilderness Soc., 42 U.S. 240 (1975) (in holding that the prevailing party could not recover attorney fees, the Court declined to create a far-reaching exception to the American Rule without legislative input.)
Sorin v. Board of Education, 46 Ohio St. 2d 177 (1976) (New exceptions to the American Rule are a legislative issue, not a judicial one.)
S & D Mechanical Contrs., Inc. v. Enting Water Conditioning Sys., Inc., 71 Ohio App.3d 228 (2d Dist. 1991) (holding that a plaintiff may recover attorney fees expended in an action brought by a third party as compensatory damages where the defendant’s breach of contract caused the plaintiff to engage in the litigation with the third party.)
*Mayfran Internatl v. May Conveyor, Inc., 8th Dist. Cuyahoga No. 62913 (July 15, 1993) (holding that a prevailing party on a motion to enforce a settlement agreement was not entitled to recover the attorney fees it incurred to enforce the agreement as compensatory damages because there had been no finding that the other party had acted in bad faith.)
Johnson v. Weiss Furs, 8th Dist. Cuyahoga No. 76680 (Feb. 24, 2000) (“[T]he purpose of monetary compensatory damages is to put the injured party in the position that he or she would have been in, had the wrong complained of not occurred.”)
*R.C.H. Co. v. Classic Car Auto Body & Frame, Inc., 2004-Ohio-6852 (8th Dist.) (holding that no attorney fees may be awarded absent a contractual or statutory basis for an award of attorney fees, or a finding of bad faith by the non-prevailing party.)
Tejada-Hercules v. State Automobile Insurance Co., 2008-Ohio-5066 (10th Dist.) (permitting parties to recover attorney fees incurred to enforce a settlement agreement as compensatory damages “encourages parties to comply with the terms of their settlement agreements, lest they put themselves at risk of paying the nonbreaching parties’ attorney fees” incurred from enforcing the settlement agreement.)
Wilborn v. Bank One Corp., 2009-Ohio-306 (The “American Rule” provides that a prevailing party in a civil action usually cannot recover its attorney fees as “costs of litigation” unless a statute provides for attorney fees, the losing party acts in bad faith, or an enforceable contract “specifically provides for the losing party to pay the prevailing party’s attorney fees.”)
Berry v. Lupica, 2011-Ohio-5381 (8th Dist.) (holding that, notwithstanding the American Rule, a party is entitled to recover its attorney fees as compensatory damages when the fees are incurred as a direct result of the breach of a settlement agreement.)
Brown v. Spitzer Chevrolet Co., 2012-Ohio-5623 (5th Dist) (“[A]ttorney fees are allowed as compensatory damages when the fees are incurred as a direct result of the breach of a settlement agreement.”)
Rohrer Corp. v. Dane Elec. Corp. USA, 482 F. App’x 113 (6th Cir. 2012) (“Ohio law allows a court to award attorney’s fees as compensatory damages when a party’s breach of a settlement agreement makes litigation necessary, even where none of the exceptions to the American Rule have been shown.”)
Wilson v. Prime Source Healthcare of Ohio, N.D. Ohio No.1:16-CV-1298 (Mar. 2, 2018) (“Attorney’s fees as compensatory damages are available whether a party files a separate breach of contract suit or a motion to enforce settlement before the original trial court.”)
Phoenix Lighting Group, L.L.C. v. Genlyte Thomas Group, L.L.C., 2020-Ohio-1056 (reaffirming that Ohio courts generally follow the “American Rule.”)
*To the extent that these cases are inconsistent with the Eighth District’s en banc opinion in this case, these cases are overruled.
At Oral Argument
Arguing Counsel
Andrew P. Lykins, Critchfield Critchfield & Johnston, Wooster, for Appellant Rayco Manufacturing Co.
Ernest E. Vargo, Baker & Hostetler LLP, Cleveland, for Appellees Murphy, Rogers, Sloss & Gambel, A Professional Law Corporation, Robert H. Murphy, Peter B. Sloss, Gary J. Gambel, and Donald R. Wing, and also arguing on behalf of Appellees Cavitch, Familo & Durkin Co., L.P.A., Douglas A. DiPalma, Michael C. Cohan, and Eric J. Weiss
Rayco’s Argument
The only thing decided by the advisory jury in this case was that a settlement contract had been formed, and not even on the basis the Law Firms had argued. The Law Firms filed a motion in limine stating this was not a trial on the merits and asked the trial court to bar any testimony on any issue other than whether a contract had been formed and what the terms of that contract were. The argument that this was really a determination that the contract was breached is something that the Law Firms expressly stated below was not the purpose of the litigation.
The trial court never found that the contract was breached and there was no evidence presented that the Law Firms had performed or had been damaged. Fees cannot be awarded just because a party insists that a disputed issue be determined. Getting fees for enforcing a contract is not part of the benefit of the bargain unless the parties specifically agree to that.
The trial court correctly refused to award fees because it determined that the American Rule applied, and that no exceptions to that rule had been established. In doing so, it specifically held there was insufficient evidence of bad faith. The appeals court essentially held that it was unnecessary to show bad faith because they were going to award fees as damages rather than as separate sanctions. It’s a matter of semantics.
The Eighth District awarded fees to punish Rayco for seeking a ruling as to whether or not a contract was formed. Without finding that the trial court had abused its discretion, the Eighth District nevertheless reversed the decision not to award fees. In doing so, the appeals court mischaracterized the lower court’s finding as a determination that the contract had been breached and also found that labeling attorney fees as damages took the case outside the American rule. The appeals court awarded fees even though none of the other exceptions to the American Rule applied, including any evidence of bad faith, thus implicitly conceding it was creating a new exception to the American Rule. The only reason to create a new exception in this case would be if existing exceptions were inadequate. And new exceptions to the American Rule are matters of legislative, not judicial concern.
The Eighth District’s decision would open a pandora’s box of policy issues. Its decision encourages litigation because it rewards a party with attorney fees for proving even a technical breach, without imposing consequences for failing to establish a breach. It allows recovery for compensatory damages with a motion for reasons not raised in the pleadings. It allows recovery for breach of contract even without proving all the elements of breach of contract. It allows for specific enforcement of a contract while also allowing for the recovery of damages for the same breach of contract. And it overrides freedom of contract by not honoring the parties’ decision not to adopt a loser-pays approach. This settlement agreement did not contain a loser-pays provision.
This Court has consistently held that courts cannot award attorney fees for breach of contract. What the Law Firms are trying to do in this case is to imply a fee-shifting provision into every settlement contract because the contract they drafted does not provide for fee shifting. However, this Court has stated that it will not read a fee-shifting provision the parties did not agree to into every contract. That is consistent with this Court’s general line of cases that says a court will not rewrite a contract for the parties. The Law Firms have not cited a single case where fees were awarded just to make a party whole for breach of contract. The American Rule often means a party will not be made whole. Instead the Law Firms rely on cases where one party contractually agrees to pay the fees of another.
The Eighth District’s approach is also procedurally flawed as it allowed the Law Firms to seek breach of contract damages by filing a motion. A motion fails to invoke the court’s jurisdiction to award damages. Further a breach of contract involves proving four elements- that a contract was formed, that the movant performed under the contract, that the opposing party breached the contract and that the movant suffered damages as a result. A motion to enforce requires a movant only to prove the first element, as if this were a declaratory judgment or specific performance action. In the end the Eighth District allowed breach of contract damages without the Law Firms showing all the elements of breach.
The second procedural issue with the Eighth District’s decision is that Rayco demanded a jury trial in the case for any triable issues. Breach of contract and the resulting damages are both jury issues. If attorney fees are awarded as damages, they must be determined by the jury. But the Eighth District remanded the matter for a damages hearing only. Rayco is entitled to a jury trial on both the issue of breach of contract and damages. The Law Firms didn’t inform the trial court they were seeking compensatory damages until after that trial. That is too late to prove breach and too late to preserve Rayco’s right to a jury trial.
Law Firms’ Argument
This case presents the question of whether parties to a settlement contract are entitled to their expectancy interests and the benefit of the bargain they expressly negotiated for. Rayco wants to deny the Law Firms the benefit of their bargain. One of the core benefits of this settlement contract was to eliminate legal fees; another was to manage the risk of the litigation. To buy peace, as the appellate court described it. When a party breaches such a contract, and forces additional legal fees to be spent, the nonbreaching party has lost the expectancy of that contract; the benefit of that bargain.
The very benefit of the bargain here was the avoidance of legal fees. To impose a burden on the contracting parties to prove bad faith simply to be entitled to its expectancy interests or its benefit of the bargain would be inconsistent with how all other contracts are treated. The essence of a settlement contract is not having to pay legal fees anymore. This is a matter of contract law, not a matter of good faith or bad faith.
As for the mutual release language here, that language applied only to a release of all liabilities and claims including attorney fees incurred in the underlying malpractice action, which is why Rayco did not make that argument below. No party contemplated that if either side breached the settlement agreement this language would be used to release a claim for attorney fees. Rayco took the position that there was no settlement contract and therefore there was no applicable release language in there. Only when the Law Firms proved there was a settlement contract were the Law Firms then entitled to their expectancy interests or the benefit of their bargain, meaning the legal fees incurred to enforce that contract.
This is a very distinguishable situation from other types of contracts. For example, in a contract for the sale of goods, a core benefit of that bargain is the delivery of the goods at the agreed upon price. Any subsequent legal fees spent to enforce the contract in the event of a breach are merely incidental to the core benefit of the delivery of the goods at the agreed price. The distinction between the expenditure of legal fees as core to the benefit of the bargain or merely incidental to it is crucial. In this case it is the former.
The Law Firms’ position is consistent with the American Rule. It does not violate it; it does not require an exception to it. The American Rule would not apply any time the benefit of the bargain is the avoidance of legal fees. The American Rule would preclude the recovery of attorney fees in the sale of goods kinds of cases. But it does not prevent the recovery of fees when the provision is the express benefit of the bargain. It is Rayco which is misapplying the American Rule to deprive a party of the express benefit of its bargain, its expectancy interest.
There is no basis in contract law that says a party who has an expectancy damage or a benefit of the bargain interest based on legal fees should be deprived of them simply because they happen to be legal fees, just as this Court has long allowed for the recovery of legal fees in a suit against an insurance company for breach of the duty to defend because that is the expectancy interest in that situation.
No separate fee-shifting provision was necessary in this case because the parties sat down and expressly contracted not to have to pay legal fees. It is an express expectancy interest. In no other contract are parties required to set forth their expectancy interest before they are entitled to recovery. To require another separate fee shifting clause is unnecessary. Both parties here knew they would be liable for the expectancy interest of the other party. Both parties knew that expectancy interest was to stay out of court and to avoid legal fees.
What Was On Their Minds
The American Rule
Why isn’t the bad faith exception that exists to the American rule sufficient to protect these types of issues, asked Justice Donnelly, adding that he imagined that most motions to enforce settlements would not involve the protracted litigation that this particular case did, including an advisory jury. Why wouldn’t the filing of a motion and perhaps a short hearing to determine whether there was a contract or not and bad faith existed be sufficient?
Are the Law Firms asking the Court to outlaw the American rule in Ohio, asked Justice Fischer? He added that as an example, in an oral contract in Ohio, a party is allowed to breach the contract as long as that party is willing to pay the damages, but there is no basis for the nonbreaching party suing under the oral contract to get attorney fees. Wouldn’t the American Rule preclude the recovery of attorney fees in those cases today?
General Release Language in Underlying Suit
When I look at this agreement, it says the Law Firms will agree to release Rayco from all claims for attorneys’ fees and related expenses incurred in connection with the agreement, noted Justice DeWine. Isn’t that language pretty broad? Why not just argue that attorneys’ fees were barred by the terms of the release? Why didn’t Rayco argue that below?
Bad Faith
There was no finding of bad faith here by the trial court, was there, asked Chief Justice O’Connor? How did the appeals court deal with that issue? Was it just semantics that allowed them to recharacterize the fees?
General Contract Law
I’m having a hard time understanding how damages here are different than in any other contract, commented Justice DeWine. If you really wanted to make someone whole, you’d have to compensate them for the legal fees they incurred to get the benefit of the bargain. Why is this any different? Where’s the line here? People enter into agreements all the time because they would like to avoid litigation. Do we draw the line any time there is an agreement where litigation is a possibility? Does it have to be after litigation is commenced? There are all sorts of other contracts where there may not be a lawsuit filed. I may sell my house, there may be a defect that’s not disclosed, I may settle with the buyer because I don’t want to get sued. Am I entitled to attorney fees in that case if there was a breach of that agreement?
If a party has a colorable defense that a contract is even formed in a settlement agreement shouldn’t they be able to defend that without the fear they are going to incur legal fees absent bad faith, asked Justice Donnelly?
Attorney Fees as the Benefit of the Bargain
Isn’t the avoidance of paying attorney fees the benefit of all kinds of bargains, asked Justice DeWine? Is the rule any time an agreement includes a release of a potential claim you are entitled to attorney fees? The American rule doesn’t apply? Attorney fees are the benefit of the bargain pretty much any time when there is something that could be a tort that could be settled? What if two businesses have a dispute, they both think they are right, one ultimately says it is cheaper just to settle this, are they entitled to attorney’s fees in that instance if there is a breach?
Contractual Fee Shifting Provisions
Couldn’t this all be avoided with a settlement agreement provision that if the settlement agreement is breached or argued, the loser pays the fees, asked Judge Wise? Or the parties could agree otherwise? Why should we leave this open to question like this when within the American Rule parties with good lawyers already have a way to protect against that?
How it Looks From the Bleachers
To Professor Emerita Marianna Bettman
Like a win for Rayco, notwithstanding Mr. Lykins dry, wooden argument. I don’t think appellate advocacy is his thing, as he pretty much just read his entire argument from a piece of paper, full of often unintelligible case citations. He might just have well have read Rayco’s brief to the Court. He did come more alive in his rebuttal. He got almost no questions, which made his argument feel unusually long.
For the Law Firms, I couldn’t count the number of times Mr. Vargo used the terms “benefit of the bargain” or “expectancy interest” but I don’t think he persuaded any of the justices about his distinction between an incidental benefit and the benefit of the bargain here. And to offset the limited questions received by Rayco’s lawyer, Mr. Vargo was bombarded with them, included one of those characteristic relentless spin of hypotheticals from Justice DeWine which seemed to further and further underscore the untenability and overbreadth of the Law Firms’ position.
I think the justices are going to stick to the American Rule and not find any exception to it in this case. Justice Donnelly pretty well nailed it when he asked why, in the absence of bad faith, a party with a colorable defense as to whether a contract had even been formed shouldn’t be able to defend that position without worrying about having to pay legal fees.
There is a certain irony that Rayco put itself in the position of potentially having to fork over attorney fees to lawyers they had just settled a legal malpractice case with.
To Student Contributor Maria Ruwe
I think the Court will find for Rayco. The Justices did not ask many questions during Rayco’s argument, but I am not sure if that was because they had none, or because they were bored into silence. Rayco’s attorney seemed to read from a piece of paper, and listed off numerous cases to support his argument, which was not conducive to a meaningful exchange between himself and the justices.
The Law Firms’ attorney emphasized that Rayco deprived the Law Firms of their essential benefit of their bargain—to avoid future attorney fees. However, Justice DeWine questioned where one would draw the line for this argument. Namely, Justice DeWine noted that avoiding legal fees is the benefit of all types of bargains and agreements. Because I think that the Justices would view finding for the Law Firms as a very broad extension of the current law in Ohio, I think the Court will find for Rayco.