The American Rule In New Jersey

The New Jersey Supreme Court has held  in a matter summarized in its headnotes

The issue in this appeal is whether, in prosecuting a fiduciary malfeasance action against an attorney who intentionally violates an escrow agreement, the prevailing beneficiary may recover attorneys’ fees.

 Plaintiff Peter Innes and his wife, Maria Jose Carrascosa, were involved in a contentious divorce and custody battle over their daughter Victoria. Innes is a citizen of the United States and a resident of New Jersey. Carrascosa is a Spanish national and a permanent resident of New Jersey. They were married in Spain in 1999, and Victoria, their only child, was born in New Jersey in 2000. Victoria is a dual citizen of the United States and Spain. During the course of their domestic relations litigation, the parties entered into an agreement whereby Carrascosa’s attorneys would hold Victoria’s United States and Spanish passports in trust to restrict travel outside of the United States with Victoria without written permission of the other party (the Agreement).

Carrascosa’s attorney at the time the Agreement was entered into was Mitchell A. Liebowitz, Esq. Innes was represented by third-party defendant Peter Van Aulen. Carrascosa discharged Liebowitz and retained defendants Madeline Marzano-Lesnevich, Esq., and Lesnevich & Marzano Lesnevich, Attorneys at Law. Defendant Marzano-Lesnevich received Carrascosa’s file from Liebowitz, including the Agreement and Victoria’s United States passport. In December 2004, Carrascosa obtained Victoria’s United States passport from defendants, and used the passport to remove Victoria from the United States to Spain on January 13, 2005.

Innes filed a petition under the Hague Convention on the Civil Aspects of International Child Abduction for Victoria’s return to the United States and traveled to Spain for a hearing on the petition. The Spanish court denied the petition and ordered Victoria to remain in Spain until age eighteen. Meanwhile, the parties’ domestic relations litigation continued in New Jersey. The Family Part judge entered a judgment of divorce and granted Innes sole legal and residential custody of Victoria. The judgment gave Carrascosa ten days to bring Victoria back to the United States, but Carrascosa failed to comply with the order.

In October 2007, Innes filed a complaint in the Law Division against defendants, Van Aulen, and Liebowitz. Innes alleged, in part, that they improperly released Victoria’s United States passport to Carrascosa and intentionally interfered with the Agreement. Innes requested relief, including damages and attorneys’ fees. Before trial, the court granted Van Aulen and Liebowitz’s motions for summary judgment and sua sponte severed the thirdparty complaint against Carrascosa. However, the trial court denied defendants’ motion for summary judgment, concluding that defendants owed a duty to Innes, and also denied defendants’ motion to exclude any claim for counsel fees.

At the conclusion of trial, the only issue submitted to the jury was whether defendants were negligent in releasing Victoria’s United States passport to Carrascosa. The jury determined that defendants were negligent and awarded damages to Innes and Victoria. The trial court denied defendants’ motion for a new trial and their motion for judgment notwithstanding the verdict, but granted Innes’ motion to amend the judgment for counsel fees and costs. The judge explained that an award of attorneys’ fees was appropriate because “the jury decided . . . that the defendants deviated from the standard of care and thereby breached a duty owed to Peter and Victoria Innes when they gave Ms. Carrascosa Victoria’s passport[]. As such, the traditional rule that warrants an award of fees in legal malpractice cases extends to the matter at bar.”

Following defendants’ appeal, the Appellate Division concluded that awarding Innes attorneys’ fees was appropriate even though no attorney-client relationship existed between Innes and defendants. In doing so, the panel concluded that defendants intentionally violated the Agreement.

The Supreme Court granted defendants’ petition for certification, limited to the issue of “whether the attorney-defendants can be liable for attorneys’ fees as consequential damages to a non-client under Saffer v. Willoughby, 143 N.J. 256 (1996).” 220 N.J. 37 (2014). 

Held

Defendant attorneys can be held liable for counsel fees if, as trustees and escrow agents for both Innes and Carrascosa, they intentionally breached their fiduciary obligation to Innes by releasing Victoria’s United States passport to Carrascosa without Innes’ permission…

Departures from the “American Rule” are the exception and the Court has never held that a non-client is entitled to a fee-shifting award for an attorney’s negligence. Packard-Bamberger, Lash, and Niles Trust involved fiduciaries who, by their intentional misconduct, violated their fiduciary duties and inflicted damage upon the beneficiaries. Consistent with that case law, a prevailing beneficiary may be awarded counsel fees incurred to recover damages arising from an attorney’s intentional violation of a fiduciary duty. Here, defendants were holding Victoria’s United States passport as trustees and escrow agents and were thus fiduciaries for the benefit of both Carrascosa and Innes. Defendants, however, breached their fiduciary obligation to Innes and released Victoria’s United States passport to Carrascosa without Innes’ written permission. Accordingly, consistent with post-Saffer jurisprudence, Innes would be entitled to counsel fees if there had been a finding that defendants, as attorneys, intentionally breached their fiduciary responsibility to Innes, regardless of the existence of an attorney-client relationship. The jury, however, did not make a specific finding that defendants intentionally breached the Agreement. As the Appellate Division concluded, there is substantial support in the record from which to conclude that defendants’ misconduct was intentional. Nevertheless, the Court must remand the case to the trial court for it to decide whether defendants intentionally violated their fiduciary duty to Innes when they breached the Agreement. (pp. 19-22)

Justice LeVechechia, joined by Judge Cuff, dissent

express[ing] the view that what started as a limited, common law exception to the American Rule has been altered through a series of cases, which now culminates with today’s majority decision, dealing the American Rule yet another blow by expanding awards of attorneys’ fees to non-clients of attorneys in escrow settings.

(Mike Frisch)