Lenders expect that their borrower will be responsible to pay the lender’s legal fees in all matters arising out of the loan made or to be made to the borrower. However, under what is generally referred to as the American Rule, each party is obligated to pay its own legal costs unless there is an agreement for one party to pay the other party’s legal costs or if there is a statute that provides that the other party is to pay such expenses.
As a result, when they do not have an agreement to rely upon for reimbursement of legal costs, creative lawyers often attempt to recover under statutes such as the Racketeer Influenced and Corrupt Organizations Act (RICO) or similar statutes to shift the burden to pay (and better assure that they get paid) to deeper pockets.
Lenders have long included broad indemnity provisions in our loan documents making the borrower liable for the lender’s costs and expenses including its reasonable attorneys’ fees and costs. But are those provisions broad enough to allow the lender to recover its legal costs in all situations? Obviously not, or I would have nothing to write about today.
Courts have held that the written agreement must “evince an ‘unmistakably clear’ intention to waive the American Rule against prevailing parties’ recovery of attorneys’ fees…” (Wells Fargo Bank v Webster Business Credit). The Wells Fargo-Webster case began with a claim asserted by Wells Fargo and others regarding the conduct of the administrative agent and later developed into a claim by Webster, as the administrative agent, to recover its attorneys’ fees and costs.
On appeal, the court held that the contract
…. expressly contemplates third-party litigation against the lenders…without “clearly impl[ying]” that the parties intended the provision to provide for indemnification in litigation against each other …. This provision is fatal to defendant’s claim of inter-party indemnification for attorneys’ fees …..
I recently found myself confronting a community bank seeking to recover a substantial amount of attorney’s fees in connection with its efforts in a bankruptcy case. At the time of the commencement of the bankruptcy case, and at all times thereafter, no default had been declared on the mortgage loan and no action was commenced. The community bank appeared in connection with use of cash collateral and plan confirmation matters but did not assert any claim for attorneys’ fees until months after the debtor’s plan had been confirmed.
The attorney fee provision contained in the mortgage provided:
The Mortgagor will pay when due and payable all …, attorneys’ fees, … which have been incurred or which may hereafter be incurred by the Mortgagee in connection with the issuance of its commitment, the preparation and execution of loan documents and the funding of the loan to the Mortgagor secured hereby;
Of course, the problem faced by the community bank was that the attorneys’ fees incurred during the bankruptcy were not for the issuance of any commitment, the preparation of documents or the funding of the loan which occurred years earlier. In fact the attorney fee provision by its own terms would not have covered the community bank for its attorneys’ fees if it had to foreclose on the premises or sue the guarantor.
The provision did go on to provide that the borrower was obligated to
reimburse [lender] for ….., all claims, demands, liabilities, losses, damages, judgments, penalties, costs, and expenses (including, without limitation, attorneys’ fees) which may be imposed upon, asserted against, or incurred or paid by them by reason of, on account of or in connection with any bodily injury or property damage occurring in or upon or in the vicinity of the Mortgaged Property through any cause whatsoever or asserted against them on account of any act performed or omitted to be performed hereunder or on account of any transaction arising out of or in any way connected with the Mortgaged Property, or with the Mortgagee or any of the indebtedness evidenced by the Note, excepting for the gross negligence of the Mortgagee or its agents.
But it does not provide for attorneys’ fees incurred in negotiating a cash collateral order or even in foreclosing on the property.
The lesson here is to carefully review your attorney fee indemnification provisions contained in your agreements to assure that they are broad enough so that the legal fees you incur can be recovered from the other party.