Talmer Bank & Trust v. Jacobsen

Citations: 908 N.W.2d 495; 2018 WI App 15; 380 Wis. 2d 171Docket: Appeal No. 2017AP752-FT

Court: Court of Appeals of Wisconsin; January 9, 2018; Wisconsin; State Appellate Court

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The third-party litigation exception to the American Rule allows plaintiffs to recover attorney fees incurred due to a defendant's wrongful act. The court determined that a breach of contract can constitute a wrongful act under this exception. In this case, the Gomezes entered into a land contract with the Jacobsens, who failed to make mortgage payments, leading to a foreclosure initiated by Talmer Bank. The Gomezes, unaware of the Jacobsens' delinquency, defended against the foreclosure and filed a cross-claim against the Jacobsens for breach of contract, seeking attorney fees as damages.

The circuit court initially ruled against the Gomezes, relying on precedent that did not recognize a breach of contract as a wrongful act under the exception to the American Rule. The Gomezes argued that their situation warranted an award of attorney fees under the third-party litigation exception. However, the circuit court sided with the Jacobsens, concluding that the breach did not qualify as a wrongful act. The Gomezes appealed the decision, which effectively ended their litigation due to the absence of additional damages beyond attorney fees.

The Jacobsens breached a land contract with the Gomezes, resulting in the Gomezes incurring attorneys' fees while defending against a foreclosure action. The key legal question is whether this breach qualifies as a wrongful act under the third-party litigation exception, which could entitle the Gomezes to recover those fees. The Jacobsens argue that wrongful acts are limited to fraud or breach of fiduciary duty, asserting that a mere breach of contract does not suffice. Wisconsin follows the American Rule regarding attorney fees, where parties generally bear their own costs unless a statute or contract states otherwise. However, the third-party litigation exception allows recovery of fees incurred due to wrongful acts that compel a party into litigation with others. This exception requires two conditions: 1) the wrongful act by the defendant against the party seeking fees, and 2) that this act forced the plaintiff into litigation or incurred expenses to protect their interests. The analysis focuses on the first condition, establishing that the exception is not restricted to fraud or fiduciary breaches; a breach of contract can also qualify. The Wisconsin Supreme Court confirmed in Cedarburg that if a breach of contract causes litigation involving third parties, the plaintiff may recover reasonable litigation expenses, provided the breach was foreseeable at the time of the contract.

The court affirmed that a plaintiff can recover litigation expenses as damages resulting from a defendant's breach of contract, provided the plaintiff can demonstrate that such expenses were reasonable and unavoidable. This principle is supported by Wisconsin case law, which establishes that a breach of contract leading to third-party litigation warrants the recovery of attorney fees. Notably, the court clarified that claims of mere negligence do not suffice to invoke this exception; wrongful acts must exhibit a higher degree of misconduct akin to fraud or breach of fiduciary duty. 

Concerns raised by the Jacobsens about the potential for unlimited attorney fee recovery in breach of contract cases were addressed by emphasizing that the exception is narrowly tailored. It only applies when a breach forces a party into litigation with a third party, not in every breach scenario. The court reversed the circuit court's summary judgment in favor of the Jacobsens, indicating that the Gomezes were indeed compelled to defend against a lawsuit from Talmer Bank due to the Jacobsens' failure to pay the mortgage. The court highlighted the necessity for defendants to have reasonable notice of third-party actions and the ability to join such actions, aligning with the Restatement, Second, of Contracts. The Jacobsens did not challenge this requirement. The court’s ruling reinforces the notion that both breaches of contract and torts can justify the awarding of attorney fees, consistent with established Wisconsin legal precedents.