()

In a ruling that could cause litigants to think twice before rejecting an offer to liquidate damages in breach of contract cases, the Appellate Division, First Department, has held that plaintiffs who receive a less favorable judgment at trial are liable for the other side’s costs and attorney fees.

The March 27 decision in Elissa Abreu v. Barkin and Associates Realty, 603992/2006, clarifies an ambiguous provision of the New York Civil Practice Law & Rules and marks a significant shift away from the American system where each side pays its own legal fees.

The ruling unanimously modified a lower court decision that rejected the defendant’s application for attorney fees under CPLR 3220, one of a series of clauses designed to encourage settlements by shifting cost burdens onto plaintiffs.

Under CPLR 3220, a defendant facing a breach of contract claim is entitled to make an offer to liquidate damages at least 10 days before trial. If the plaintiff rejects the offer but fails to receive a more favorable judgment at trial, 3220 says the plaintiff “shall pay the expenses necessarily incurred by [defendant], for trying the issue of damages from the time of the offer.”

Until recently, it was unclear if “expenses” encompassed costs and disbursements only or also included attorney fees. Litigators who have turned to this device assumed the former, given the specific “pay costs” language in the related provisions.

But there has been a lack of case law or discussion in the commentaries around this issue, noted Jonathan Lupkin, of Rakower Lupkin, who was not involved in the case.

“There was a dearth of authority on the interpretation of 3220,” Lupkin told Commercial Litigation Insider. “This ruling is a clear articulation in my view that among the expenses one can recover are attorney fees. That’s a big deal.”

The five-judge panel, consisting of Justices Karla Moskowitz, Rosalyn Richter, Sallie Manzanet-Daniels, Darcel Clark and Barbara Kapnick, remanded the case to the trial court for a hearing on the issue of attorney fees incurred by the defendant, Susan Barkin.

“Defendant made an offer to liquidate,” the panel wrote. “Plaintiff then withdrew her claims against Barkin, in a stipulation on the record at trial. Having failed to obtain a more favorable judgment than the offer, plaintiff became liable for costs and fees.”

“I believe this is the first decision to clarify that 3220 applies not just to costs but also to attorney fees,” said Jonathan Mazer, a partner at Schlam Stone & Dolan who represents the defendants. “I think [3220] is underutilized and this decision paves the way to make it a more important device because it has the potential to alter the American rule on attorney fees, at least to a limited extent.”

Underlying Action

The underlying action dates back eight years and previously has gone to the appeals court and back on the merits, traveling through two Commercial Division parts: that of retired Justice Herman Cahn and now, Justice Charles Ramos.

The dispute involves a real estate brokerage firm and a former agent, Elissa Abreu, who was terminated for cause. She later sued the firm for $130,000 for breach of oral contract for its failure to pay her 50 percent of commissions earned on eight real estate transactions.

Named in the lawsuit were both the agency, Barkin and Associates Realty (BAR), and its principal Susan Barkin. The defendants, represented by Schlam Stone, argued that there was no oral contract and asserted a faithless servant affirmative defense based on Abreu’s alleged failure to disclose her husband’s competing business prior to her termination.

In November 2011, BAR and Barkin, individually, extended separate offers to Abreu to liquidate damages under CPLR 3220: $65,000 from BAR and $10 from Barkin.

“We didn’t believe there was any valid case against Susan Barkin individually and we believed [our opponent] wouldn’t be able to win damages in excess of even that modest amount,” Mazer said.

Abreu rejected both offers. Ramos held a bench trial Jan. 3-5 and May 29-31, 2012. On the second day of trial, Susan Barkin was dismissed as a defendant by stipulation.

In October 2012, in his post-trial findings of fact, Ramos found there was an oral agreement entitling Abreu to 50 percent of commissions and no grounds for the affirmative defense. His final judgment, entered Aug. 13, 2013, ordered BAR to pay Abreu $194,764.60.

Yet, in the wake of Susan Barkin’s dismissal from the suit, which rendered her liability on damages to zero dollars, Schlam Stone moved for attorney fees under 3220, arguing that since its earlier offer of $10 was tendered, but rejected, it was entitled to fees for the period between when it made the offer to time of dismissal.

Ramos denied the request. The issue was included in defense counsel’s appeal.

In their response brief to the First Department, Abreu’s attorneys at Morris Duffy Alonso & Faley, an insurance defense firm, argued that Barkin’s request for attorney fees was “patently frivolous” and pushed for sanctions.

The attorneys argued, “a judicial determination was never made on the claims asserted against defendant Barkin since she agreed to have those claims dismissed.”

They also argued that granting such a request would produce “an inequitable windfall to BAR” since “the claims asserted against Ms. Barkin and BAR are exactly the same” and that the “legal work performed in preparation of defending the damages portion of trial is exactly the same whether both Ms. Barkin and BAR are being defended or just one of them is defended.”

In its reply brief, Schlam Stone countered that it was “frivolous” to name Susan Barkin as a defendant in the first place all the way through the second day of trial and that she was removed only after Ramos “brow beat” plaintiff’s counsel to withdraw its claim against her early in the trial.

The defense attorneys further argued that Abreu’s failure to “receive a more favorable judgment than the amount specified in Barkin’s offer should not impede Barkin from vindicating her statutory right to fees.”

“Susan Barkin is different from Susan Barkin the corporation,” Mazer said. “She has different rights from the corporation.”

Aftermath

In its brief March 27 decision, the First Department affirmed all of Ramos’ order except his denial on the attorney fees under 3220.

Barry Viuker, a partner at Morris Duffy and Abreu’s counsel, said subpoenas have been served on opposing counsel for billing records.

“They [defense attorneys] don’t get any fees for work they did for Barkin Associates. What they can recoup is any work they did in preparing Susan Barkin for the case,” Viuker said, adding that distinguishing those efforts will be the challenge.

“They also had to prepare Susan Barkin in her corporate capacity. I can’t see any distinction between the two,” he said.

Regardless, Viuker said the significance of the First Department’s clarification on the costs and fees question in 3220 cannot be downplayed.

“I think it could have a significant ramification in terms of having some leverage towards some settlement,” he said.

Down the road, Ramos will hold an evidentiary hearing on the issue of attorney fees for Susan Barkin following discovery into billing records for both the corporation and the individual.

Meanwhile, the panel’s holding will likely resonate with other parties similarly engaged in such breach of contract disputes.

“The big significance of this decision is this puts teeth in 3220,” said David Katz, a former partner at Schlam Stone who was involved in the case. “It will start allowing defendants to use this to perhaps force plaintiffs to settle on terms they otherwise wouldn’t settle on because plaintiffs face the prospect of reimbursing the other side’s fees if they don’t prevail at trial.”