Recovery Of Attorney´s Fees In Civil Cases In Virginia: "The American Rule" And Its Exceptions

1. The "American Rule" Defined.

1. Federal Case Law: Generally, "the American Rule" governs the awarding of attorney's fees in federal courts. The "American Rule" provides that each party should bear the cost of its litigation and, ordinarily, the prevailing litigant is not entitled to collect reasonable attorney's fees from the loser. Congressional authorization by statute may except to the American Rule and permit a court to require one party to pay attorney's fees to the other. A court's authority to enforce its own orders by assessing attorney's fees for the willful violation of a court order, and a court's empowerment to award fees against a losing party who has acted in bad faith, vexatiously, wantonly, or for oppressive reasons, are other exceptions to the American Rule. Cherry v. Arendall, 247 B.R. 176 (Bankruptcy E.D.Va. 2000).

1. The American Rule Stated: ". . . In the United States, each party in a lawsuit bears its own attorneys' fees 'unless there is express statutory authorization to the contrary.' " Kreischer, et al. v. The Kerrison Dry Goods Company, 229 F.3d 1143 (4th Cir., S.C.)(2000), citing Hensley v. Eckerhart, 461 U.S. 424, 429, 76 L. Ed. 2d 40, 103 S. Ct. 1933 (1983).
2. No analysis of the "American Rule" is complete without an understanding of its origins, its rationale, and its exceptions:

Although the traditional American rule ordinarily disfavors the allowance of attorney’s fees in the absence of statutory or contractual authorization, federal courts, in the exercise of their equitable powers, may award attorney’s fees when the interests of justice so require. Indeed, the power to award such fees "is part of the original authority of the chancellor to do equity in a particular situation," . . . and federal courts do not hesitate to exercise this inherent equitable power whenever "overriding considerations indicate the need for such recovery."

Hall v. Cole, 412 U.S. 1, 4-5 (1973).

Instead of limiting the equity court’s power to create exceptions, the United States Supreme Court in Sprague v. Ticonic Nat’l Bank, 307 U.S. 161, 164 (1939) stated that "'[a]s in much else that pertains to equitable jurisdiction, individualization in the exercise of a discretionary power will alone retain equity as a living system and save it from sterility . . . . In any event such allowances are appropriate only in exceptional cases and for dominating reasons of justice.'" The exceptions to the American rule generally arise: (1) from conduct that is found to be in bad faith, fraudulent, wanton, willful, vexatious, harassing or oppressive; or (2) where the legal fees confer a substantial benefit on an ascertainable class of people. "The variety of factual circumstances in which this principle [of judicial exception] has been applied indicates that 'dominating reasons of justice' has been the guide to its application." Local No. 149 International Union, United Automobile, Aircraft and Agricultural Implement Manufacturers of America v. American Brake Shoe Co., 298 F.2d 212, 214 (4th Cir. 1962), cert. denied, 369 U.S. 873 (1962).

3. Recognized Exceptions: Notwithstanding the American Rule, a federal court may award attorney's fees through inherent power. At least four exceptions have been recognized (three by the United States Supreme Court and one by the Fourth Circuit):

1. The "Common Fund" Exception: Where a party's litigation efforts directly benefit others. Kreischer, et al. v. The Kerrison Dry Goods Company, 229 F.3d 1143 (4th Cir., S.C.)(2000).
2. Where a party willfully disobeyed a court order. Kreischer, et al. v. The Kerrison Dry Goods Company, 229 F.3d 1143 (4th Cir., S.C.)(2000).
3. The "Bad Faith" Exception: Where a party acts in bad faith, vexatiously, or for oppressive reasons. See Chambers v. NASCO, Inc., 501 U.S. 32, 45-46, 115 L. Ed. 2d 27, 111 S. Ct. 2123 (1991). Kreischer, et al. v. The Kerrison Dry Goods Company, 229 F.3d 1143 (4th Cir., S.C.)(2000).
4. The "Essential to Equity" Exception: The Fourth Circuit also has recognized an "essential to equity" exception that may apply in exceptional circumstances. See Rolax v. Atlantic Coast Line R.R. Co., 186 F.2d 473 (4th Cir. 1951).

4. Federal Exceptions: An exception has been recognized where a party has to defend his title to certain property against baseless and vexatious litigation. See Guardian Trust Co. v. Kansas City Southern Ry. Co., 28 F.2d 233 (8th Cir. 1928), rev’d on other grounds, 281 U.S. 1 (1930). Relief may be necessary where an equitable damage award is premised on a finding that "the wrongdoers’s actions were unconscionable, fraudulent, willful, in bad faith, vexatious, or exceptional." Taussing v. Wellington Fund, Inc., 187 F.Supp. 179 (D.Del. 1960), aff’d, 313 F.2d 472 (3d Cir. 1963). The United States Supreme Court in Vaughn v. Atkinson, 369 U.S. 527 (1962) created an exception where the defendant’s consistent refusal to discuss the plaintiff’s claim or admit liability forced the plaintiff to hire a lawyer to obtain what was clearly owed to him under laws that were centuries old. In Mills v. Electric Auto-Lite Co., 396 U.S. 375, 392-94 (1970), the United States Supreme Court held that the common fund doctrine may apply where no class action has been brought and no particular monetary fund is created, as long as the litigation confers a substantial benefit on an ascertainable class. Exceptions have also been applied in the context of litigation involving union members who have sought equitable relief to correct abuses by a solvent union, although not creating a fund or conferring a benefit upon all the members and with little expectation of receiving a substantial monetary award from which to pay attorneys fees since the primary relief is equitable. Cutler v. American Federation of Musicians, 231 F.Supp. 845 (S.D.N.Y. 1964), aff’d, 366 F.2d 779 (2d Cir. 1966), cert. denied, 386 U.S. 993 (1967). See also Local No. 149 International Union, United Automobile, Aircraft and Agricultural Implement Manufacturers of America v. American Brake Shoe Co., 298 F.2d 212, 215 (4th Cir. 1962), cert. denied, 369 U.S. 873 (1962) (holding that "[i]n actions for unfair competition attorney’s fees are assessed as an element of damages where the wrongdoer’s action is unconscionable, fraudulent, willful, in bad faith, vexatious or exceptional.") and cases cited therein; Carter Products, Inc. v. Colgate-Palmolive Co., 214 F.Supp. 383, 414 (D.Md. 1963).
5. Although these exceptions exist, their status as exceptions must not be forgotten. The Supreme Court cautioned that "because of their very potency, inherent powers must be exercised with restraint and discretion." Chambers, 501 U.S. at 44.

2. Virginia Case Law:

1. The American Rule in Virginia stated:

"The general rule in this Commonwealth is that in the absence of a statute or contract to the contrary, a court may not award attorney's fees to the prevailing party." Prospect Development Co. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291, 300 (1999); Gilmore v. Basic Industries, Inc., 233 Va. 485, 490, 357 S.E.2d 514, 517 (1987). The American Rule forbids an award of attorney's fees absent a contractual, statutory, or equitable basis for it:

"We have repeatedly stated that the 'general rule in this Commonwealth is that in the absence of a statute or contract to the contrary, a court may not award attorney's fees to the prevailing party." Arthur, et al. v. Warner, (Va. Cir. 2000), citing Russell Co. Dept. of Social Services, v. O'Quinn, 259 Va. 139, 142, 523 S.E.2d 492, 493 (2000), (quoting Prospect Development Co. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291, 300 (1999)); see also Gilmore v. Basic Industries, Inc. 233 Va. 485, 490, 357 S.E.2d 514, 517 (1987).

2. Recognized Exceptions in Virginia to the American Rule:

1. Prevailing party prosecuting a cause of action for malicious prosecution or false imprisonment may recover attorney's fees -- Burrus v. Hines, 94 Va. 413, 420, 26 S.E. 875, 878 (1897); Bolton v. Vellines, 94 Va. 393, 404, 26 S.E. 847, 850 (1897).
2. Where a breach of contract has forced plaintiff to maintain or defend a suit with a third person, he may recover counsel fees incurred by him in the former suit provided they are reasonable in amount and reasonably incurred -- Owen v. Shelton, 221 Va. 1051, 1055-56, 277 S.E.2d 189, 192 (1981); accord Fidelity Nat. Title Ins. Co. v. Southern Heritage Title Ins. Agency, Inc., 257 Va. 246, 253-54, 512 S.E.2d 553, 557-58 (1999); Hiss v. Friedberg, 201 Va. 572, 577-78, 112 S.E.2d 871, 875-76 (1960).
3. A Trustee defending a Trust in good faith may recover attorney's fees from the estate. Cooper v. Brodie, 253 Va. 38, 44, 480 S.E.2d 101, 104 (1997).
4. Common Fund Exception -- where plaintiff brings a law suit that creates a fund which enures to the common benefit of others. Norris v. Barbour, 188 Va. 723, 741-42, 51 S.E.2d 334, 342 (1949).
5. Bad Faith Exception -- exception recognized based upon bad faith or vexatious, willful or wanton behavior and to do justice between the parties. The Supreme Court has recognized this exception to the American Rule where injury is wanton or malicious and exemplary damages are recoverable. Kemp v. Miller, 166 Va. 661, 680, 186 S.E. 99, 106 (1936).
6. Attorney's fees have been upheld in certain cases involving alimony and support disputes even though such awards of attorney's fees were neither authorized by statute nor by contract. See Carswell v. Masterson, 224 Va. 329, 331-32, 295 S.E.2d 899, 900-01 (1982); Alig v. Alig, 220 Va. 80, 86, 255 S.E. 2d 494, 498 (1979); McKeel v. McKeel, 185 Va. 108, 116-17, 37 S.E.2d 746, 750-51 (1946); McClaugherty v. McClaugherty, 180 Va. 51, 69, 21 S.E.2d 761, 768 (1942); Heflin v. Heflin, 177 Va. 385, 399-400, 14 S.E.2d 317, 322 (1941).
7. Fraud Exception: In a fraud suit, a chancellor, in the exercise of his discretion, may award attorney's fees to a defrauded party. When deciding whether to award attorney's fees, the chancellor must consider the circumstances surrounding the fraudulent acts and the nature of the relief granted to the defrauded party. Prospect Development Co. v. Bershader, 258 Va. 75, 92, 515 S.E.2d 291, 300 (1999).

3. Other Recent 4th Circuit And Virginia Cases Citing The American Rule.

2. Selected Virginia Statutory Authority For Recovery Of Attorney's Fees

1 At least one reported lower court, sitting in equity, has awarded compensatory damages for fraud, including plaintiff's reasonable attorney's fees in order to afford complete relief. "The Court's equitable powers permit an award of attorney's fees in a fraud case. 'Equity deals with the substance and not the form, and will grant such relief as far as possible by allowing compensation for the damages sustained by reason of the fraud.' Miller Co. v. Augusta Corp., 140 Va. 409, 421 (1924) (emphasis added)." Anderson v. Sharma, 38 Va. Cir. 22 (1995) (Chief Judge Jamborsky, presiding).

2 Prospect Development v. Bershader, supra. See Miller Co. v. Augusta Corp., 140 Va. 409, 421 (1924); Anderson v. Sharma, 38 Va. Cir. 22 (1995)