Are In-House Counsel Fees Recoverable Under a Contractual Provision Allowing Lenders’ Recovery of Counsel Fees?

October 25, 2017
Posted in Litigation
Are In-House Counsel Fees Recoverable Under a Contractual Provision Allowing Lenders’ Recovery of Counsel Fees?

“But you must first realize
I’m not another man for hire…”

Someone’s Got A Hold Of My Heart, Bob Dylan

In Enterprise Bank v. Frazier Family L.P., 2017 WL 3392875, 2017 PA Super 256, (2017) the Pennsylvania Superior Court held that contractual provisions which allow for a lender’s recovery of counsel fees were ambiguous as to whether this encompassed the work of its in-house counsel. Therefore, these provisions would be construed against the lender as the drafter of the documents, and the lender would be precluded from recovering its in-house counsel fees in this scenario.

In December 2012, the borrower, Frazier Family L.P. (“Frazier”) executed three loan documents in favor of the lender, Enterprise Bank (“Enterprise”) in connection with a loan of $421,000.  In January 2014, Enterprise brought an action in mortgage foreclosure against Frazier in which Enterprise sought to recover, inter alia, fees for the time incurred by its in-house counsel in connection with the enforcement proceedings.  Enterprise relied on the provisions for recovery of attorneys’ fees contained in the three loan documents at issue.  First, the Business Loan Agreement provided in pertinent part:

Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement…

Next, the Promissory Note provided:

Lender may hire or pay someone else to help collect this Note if Borrower does not pay.  Borrower will pay Lender that amount.  This includes, subject to any limits under applicable law, Lender’s reasonable attorney’ fees and Lender’s legal expenses, whether or not there is a lawsuit…

Finally, the Open-End Mortgage and Security Agreement provided:

If Lender institutes any suit or action to enforce any of the terms of this Mortgage, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys’ fees at trial and upon any appeal. Whether or not any court action is involved, and to the extent not prohibited by law, all reasonable expenses Lender incurs that in Lender’s opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the Indebtedness… Expenses covered by this paragraph include, without limitation, however subject to any limits under applicable law, Lender’s reasonable attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit…

After entering a consent order directing the distribution of the funds received from the sale of the mortgaged premises, the trial court directed the parties to submit proposed findings of fact and conclusions of law with regard to Enterprise’s request for counsel fees.  The primary clause at issue was the language providing that Enterprise may “hire or pay someone else” and recover those costs from Frazier, as found in both the Business Loan Agreement and Promissory Note, supra.  Enterprise argued that it “hired” its in-house counsel to collect the debt and was entitled to recover for in-house counsel’s time.  Conversely, Frazier argued that because its in-house counsel was already employed by Enterprise, Enterprise did not “hire” or pay “someone else” to enforce the contract.  At the very least, Frazier argued, the language was ambiguous.

The trial court agreed with Frazier’s interpretation, and denied Enterprise’s request for counsel fees.  On appeal to the Pennsylvania Superior Court, the Superior Court first took note that Pennsylvania follows the “American rule”, which precludes a party from recovering its counsel fees from the adverse party, absent a clear agreement, statutory authorization or other established exception. The Superior Court further noted the well-established principles which provide that where contract language is clear and unambiguous, the parties’ intent must be gleaned from the express language of the contract; however, where there is an ambiguity, the ambiguity is to be construed against the drafter of the contract.

In this case, the Superior Court ultimately determined that the phrase “hire or pay someone else” was at best ambiguous. While the Court appeared to find substantial merit in Frazier’s argument that “someone else” would not encompass someone already employed by Frazier, it nonetheless also found that the phrase “hire or pay someone else”, when read in conjunction with the broad authorization providing for recovery of “Lender’s reasonable attorneys’ fees”, could arguably encompass in-house counsel fees.  Given this ambiguity, the Court held that such language must be construed against Enterprise as the drafter of the agreements. Accordingly, the Superior Court upheld the trial court’s denial of Enterprise’s request for counsel fees.

In sum, it is important to note that the Court’s decision turned on a finding of an ambiguity as to the scope of the counsel fees provision.  It can therefore be hypothesized that if the contract language had specifically included the fees of its in-house counsel, Enterprise quite possibly might have been permitted to recover those fees.  Indeed, as reflected in its footnotes, the Court specifically stopped short of determining whether a lender could recover for its in-house counsel fees under appropriate circumstances but, citing to holdings of other jurisdictions, seemed to suggest in dictum that such fees might be recoverable where the contract language so provides.  Therefore, the practitioner should be guided accordingly when called upon to draft and/or analyze contract language allowing for recovery of attorneys’ fees.

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