Wisconsin’s Highest Court Holds that Attorneys’ Fees Are Recoverable in “Exceptional Cases”

As has been previously discussed, the “American rule” governs litigation expenses in the courts of Wisconsin. In contrast with the “English rule” wherein the losing party pays the prevailing party’s costs and fees, under the American rule each party to a lawsuit bears its own attorneys’ fees unless a statute or contract provides otherwise.
 
Wisconsin courts, however, have recently recognized significant exceptions to the American rule based in equity. As noted earlier this year, the Wisconsin Court of Appeals reaffirmed the “third-party litigation exception” in the case of Talmer Bank and Trust v. Jacobson, which held that attorneys’ fees may be assessed against a party whose fraudulent or otherwise wrongful acts cause a second party to incur legal expenses to protect its interests against a third party.
 
No sooner had the ink dried on the Talmer decision when the Wisconsin Supreme Court found another exception to the American rule in Nationstar Mortgage LLC v. Stafsholt. In Nationstar, the court held that attorneys’ fees may be awarded as an equitable remedy “in exceptional cases and for dominating reasons of justice.” Nationstar was a residential foreclosure action that presented egregious facts from which the court rendered its decision.
 
In Nationstar the loan servicer, Bank of America, made successive and indefensible errors. The mortgage required the borrower, Stafsholt, to provide proof of home insurance. Stafsholt repeatedly did so. The bank, however, failed to recognize Stafsholt’s compliance and ultimately purchased lender-placed insurance on the collateral and then charged Stafsholt for the premiums. To add insult to injury, when Stafsholt subsequently spoke to a bank representative about the insurance issue, the representative directed Stafsholt to “elevate” his complaint to “the next level of customer service” by skipping a mortgage payment. Stafsholt followed the bank’s “advice” and skipped his next two mortgage payments.
 
The result was not pretty. Rather than granting Stafsholt a higher level of customer service, the bank accelerated the loan. Stafsholt repeatedly contacted the bank to correct its errors and made various payment offers to reinstate the loan. The bank ignored Stafsholt’s curative efforts and, instead, initiated foreclosure proceedings.
 
The trial court was not amused by the bank’s conduct. The judge granted Stafsholt’s request to reinstate the mortgage before taking the unique step of ordering the bank to pay Stafsholt’s attorneys’ fees. The Wisconsin Court of Appeals overturned the fee award citing the American rule. The Supreme Court of Wisconsin, however, reinstated the trial court’s order.
 
In reaching its decision, Wisconsin’s highest court followed the United States Supreme Court precedent holding that attorneys’ fees may be available as an equitable remedy in exceptional cases. In evaluating the bank’s actions, Wisconsin’s Supreme Court concluded that the bank engaged in bad faith to such a degree that it met the “exceptional cases” standard. The court reasoned that the bank had improperly caused and perpetuated the dispute by charging Stafsholt for unnecessary lender-placed insurance, advising Stafsholt to default on his loan, and refusing to remediate its errors prior to the conclusion of the ill-advised foreclosure action.
 
The court’s decision in Nationstar continues the common-sense inroads into the American rule recognized in Talmer, namely, a party may be liable for attorneys’ fees where it unjustly forces another party into litigation. Nationstar serves as an added warning that businesses will be judged on how they communicate with their customers. In awarding attorneys’ fees, the court gave significant weight to the bank’s ineffective or otherwise nonexistent communications with the borrower. Nationstar teaches that the failure to exercise effective customer relations practices could have expensive consequences, not just at the cash register, but also in a court of law.
 
If you have any questions about litigation, appeals, or recent changes to Wisconsin law, please contact attorney Zach S. Whitney at (414) 962-5110 or zwhitney@kmksc.com.
 
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