Parties that foreclose commercial mortgages, and collect debts based upon promissory notes or guaranties, almost always seek to recover their attorney’s fees. Today’s post sets out why such a claim can be made and how the fees should be calculated.
American rule – contract needed. Indiana follows the so-called “American Rule,” which provides that, in the absence of statutory authority or an agreement between the parties to the contrary, a prevailing party has no right to recover attorney’s fees from the opposition. (Under the “English Rule,” the losing party pays the fees to the winning.) Loparex v. MPI Release, 964 N.E.2d 806 (Ind. 2011). Indiana’s foreclosure and commercial collection statutes generally do not authorize the recovery of attorney’s fees. That’s why virtually every loan document I’ve seen contains an attorney fee clause.
40% flat fee. Corvee, Inc. v. Mark French, 934 N.E.2d 844 (Ind. Ct. App. 2011) teaches litigants about the amount of attorney’s fees a trial court may award to the plaintiff in a successful collection action in Indiana. Corvee did not involve a promissory note but a similar written agreement between the parties related to the collection of reasonable attorney’s fees in a suit to recover a debt. The provision in Corvee stated that the defendant was responsible “for reasonable interest, collection fees, attorney fees of the greater of a) forty percent (40%) or b) $300 of the outstanding balance, and/or court costs incurred in connection with any attempt to collect amounts I may owe.” There was no dispute that the contract unambiguously required the defendant to pay the 40% amount. The question was whether such provision was enforceable.
Liquidated damages. The Court in Corvee concluded that the attorney fee provision in the contract was in the nature of a liquidated damages clause, which means that the contract provided for the forfeiture of a stated sum of money without proof of damages. In Indiana, courts will not enforce a liquidated damages provision that operates as a penalty. Liquidated damages clauses generally are valid only if the nature of the contract is such that damages resulting from a breach “would be uncertain and difficult to ascertain.” The calculation of attorney’s fees incurred in litigation is not difficult to ascertain. The Court said: “it strikes us as unnecessary to transform a standard attorney fee provision in a contract into, effectively, a liquidated damages provision that may or may not have any correlation to actually incurred attorney’s fees.”
The right way. In Indiana, even with specific contract language, “an award of attorney’s fees must be reasonable.” Citing to a case involving promissory notes, the Court stated that provisions “for the payment of attorney’s fees ‘should not extend beyond reimbursing the holder of the note for the necessary attorney’s fees reasonably and actually incurred in vindicating the holder’s collection rights by obtaining judgment on the note.’” In Corvee, there was no evidence of the amount of attorney’s fees that the plaintiff actually incurred in attempting to collect the debt. Thus the 40% recovery could have given rise to a windfall at the defendant’s expense. “Collection actions should permit creditors to recover that to which they are rightfully entitled to make themselves whole, and no more.” As such, Corvee held the 40% attorney fee provision to be unenforceable.
Assuming the existence of an attorney fee provision, lenders in loan enforcement actions may recover fees that are reasonable and actually incurred. According to Corvee, flat-fee or percentage-based attorney fee clauses may be difficult to enforce in Indiana.