Knowing the Collateral Litigation Exception to the American Rule
Attorneys are always learning new things. Something I recently discovered relates to an exception to the normal attorney’s fees practices. It came up when an opposing counsel made a claim for attorney’s fees based on Maryland’s collateral litigation doctrine.
I won’t bore you with the details of the case. The short version is that my clients are alleged to have interfered with an unrecorded easement. Then they sold their home. When the people claiming an easement realized that their alleged easement had been destroyed, they sued the new owners. During the course of litigation against the new owners, the plaintiff came to believe that my clients had destroyed the easement prior to the sale. The plaintiff amended the complaint to include them. As part of the amended complaint, the plaintiff sought to recover the attorney’s fees incurred against the improperly named new owners under the collateral litigation doctrine.
I first thought that this could not be correct. After researching the issue, I found that while Maryland follows the American Rule, with each side paying its own attorneys, there are exceptions:
(1) where a statute allows for the recovery of attorney’s fees;
(2) where the parties to a contract have an agreement regarding attorney’s fees;
(3) where the wrongful conduct of a defendant forces a plaintiff into litigation with a third party; or
(4) where a plaintiff in a malicious prosecution action can recover damages from the defense of the criminal charge.[1]
Exception No. 3 is the collateral litigation doctrine, which dates back to the 1909 case of McGaw v. Acker.[2] In McGaw, the Court awarded attorney’s fees in a separate litigation, where the wrongful act of the defendant forced the plaintiff into litigation with a third party. Thus, the collateral litigation doctrine was born by judicial decree.
Since McGaw, the collateral litigation doctrine has received little attention by the Court of Appeals. The issue was most recently addressed in Ochse, which was decided in 2016. The Ochse Court elucidated several required elements for the collateral litigation doctrine to be successful. First, the attorney’s fees must have been accrued in a “separate litigation against another party.”[3]
The Court reviewed this requirement in Freedman v. Seidler[4], in which a plaintiff mistakenly sued the wrong party due to the actions of a tortfeasor. After discovering the true tortfeasor, the plaintiff amended its complaint to add the tortfeasor to the same litigation as a third party. The trial court determined that attorney’s fees were proper based on the collateral litigation doctrine.
However, the Court of Appeals disagreed. In the Court’s view, McGaw only allowed for attorney’s fees in a separate litigation. The Court noted that the fees awarded in Freedman were awarded in the same litigation, and goes on to state that the plaintiff was not “require[d] . . . to join [the tortfeasor] as a third party defendant.”[5] The implication is that the collateral litigation doctrine may have applied to the initial suit if the plaintiff initiated a new suit against the tortfeasor. In Ochse, the Court determined that the fees in question were generated in separate litigation.
The Ochse Court further stated a successful claim under the collateral litigation doctrine requires a plaintiff to demonstrate “that such expenses were the natural and proximate consequence of the injury complained of, were incurred necessarily and in good faith, and were a reasonable amount.”[6] The Court determined that the fees incurred by the plaintiff were proximately caused by the actions of the defendant, and were incurred necessarily and in good faith.
Although the Osche Court determined that the collateral litigation doctrine applied, the Court did not award attorney’s fees to the plaintiff. The Court held that the final required element to succeed under the collateral litigation doctrine was not met as the doctrine “only permits the recovery of attorney’s fees actually incurred.”[7] In that case, the fees in the separate litigation were paid earlier. Therefore, there were no damages.
In my recent case, a settlement was reached before a decision was made, but I learned about the American Rule exceptions. While claims for attorney’s fees based on the collateral litigation doctrine are uncommon, anyone researching the collateral litigation doctrine should first read E. Shore Title Co. v. Ochse, 453 Md. 303 (2016). Plaintiffs may be relieved to learn that attorney’s fees incurred against an incorrect party may not be lost. Similarly, defendants should find comfort in knowing that valid defenses are available to a claim for attorney’s fees under the collateral litigation doctrine.
Anderson & Quinn, LLC is a law firm based in Rockville, Maryland, providing individuals, businesses, corporations, and healthcare institutions with the legal and litigation support they need to protect revenues. Mr. Jason Anderson is an associate at Anderson & Quinn, LLC, 25 Wood Lane, Rockville, MD, 20850. Tel: 301-762-3303. Email janderson@andersonquinn.com.
[1] E. Shore Title Co. v. Ochse, 453 Md. 303, 330 (2016).
[2] 111 Md. 153 (1909).
[3] Ochse, 453 Md. at 330 (citing Freedman v. Seidler, 233 Md. 39, 47 (1963)).
[4] 233 Md. 39 (1963).
[5] Freedman, 233 Md. at 47.
[6] Ochse, 453 Md. at 331 (citing Fowler v. Benton, 245 Md. 540, 550 (1967)).
[7] Osche, 453 Md. at 343.
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