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Awarding of Attorneys'
Fees
An April 2007 ruling
by the Arizona Court of Appeals provides a useful primer on the circumstances
under which attorneys’ fees may be awarded … and a word of caution about the
misuse of third-party complaints
Fulton Homes
Corporation, et al., v. BBP Concrete and Trojan Concrete, Inc.
In October 2003, a group
of homeowners in a Fulton Homes subdivision sued Fulton because, they claimed,
their homes were improperly “designed and/or constructed.” They further claimed
that the problems with their homes were due, in part, to Fulton’s decision to
build the homes on unreinforced slabs, instead of on heavily reinforced slabs as
recommended by a civil engineer.
In anticipation of having
to defend against claims of poor concrete work, Fulton Homes filed a third-party
complaint against the two concrete subcontractors, BPP Concrete and Trojan
Concrete, that had poured the slabs. The legal action against the subs was based
on what Fulton considered the subs’ contractual duty to indemnify Fulton in case
the court awarded damages arising from BBP’s or Trojan’s work.
In January 2005, in their
response to interrogatories from BPP, the homeowners stated that they were
seeking damages resulting from design defects, not from poor workmanship. As
this appeared to relieve BPP and Trojan of liability, the subcontractors sought
to be dismissed from the suit, and Fulton Homes ultimately agreed.
By that time, the
subcontractors had incurred legal expenses, and they asked the trial court to
order Fulton Homes to pay their attorneys’ fees (about $6,000 for each
subcontractor), pursuant to A.R.S. § 12-341.01. Fulton objected to the request,
arguing that BPP and Trojan were proper third-party defendants (under Rule 14 of
the Arizona Rules of Civil Procedure). The trial court rejected Fulton’s
argument and awarded the requested attorneys’ fees to the two subcontractors.
Fulton appealed the awarding of attorneys’ fees.
Factors. Fulton
Homes’ arguments on appeal, and the court’s responses to them, offer a useful
refresher course on the circumstances under attorneys’ fees may be awarded in
Arizona.
First, A.R.S. §
12-341.01(A) provides for the awarding of attorneys’ fees, at the trial court’s
discretion, to the “successful party” in a “contested action arising out of a
contract” (emphasis added).
Second, to justify such
an award, the parties must actually be “adverse,” and it is up to the trial
court to determine which party is successful.
Finally, in exercising
its discretion, the trial court should consider certain factors set forth in a
1985 ruling, Associated Indem. Corp. v. Warner. These factors include the
following:
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the merits of the
unsuccessful party’s claim;
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whether the claim could
have been avoided or settled (this factor proved to be significant in the
Fulton Homes decision);
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whether the successful
party’s efforts were completely superfluous in achieving the result;
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whether assessing
attorneys’ fees against the unsuccessful party would cause an extreme
hardship;
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whether the successful
party did not prevail with respect to all of the relief sought; and
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whether an award to the
successful party would discourage other parties with valid claims from
litigating a contract dispute for fear of having to pay the other parties’
attorneys’ fees.
Successful parties.
On the question of whether the subcontractors were “successful” parties, Fulton
Homes had contended in its appeal that they were not, since the court never
ruled in their favor. Fulton further argued that the subs were successful in
avoiding indemnity only because the homeowners chose not to seek damages for
faulty workmanship, not because Fulton’s claim against the subs lacked merit.
The Court of Appeals
rejected both arguments, ruling that, first, “adjudication on the merits is not
a prerequisite to recovering attorneys’ fees”; second, a party may be deemed
“successful” when a plaintiff (in this case, the group of homeowners) decides
not to sue that party; and, finally, calling a party “successful” is within the
trial court’s discretion.
Adverse parties.
As part of its argument against the awarding of attorneys’ fees, Fulton Homes
contended that the subcontractors and Fulton were not adverse parties in this
case. (You read that correctly.) Fulton based its contention on the fact that it
had “asserted only contingent claims” (emphasis added) – that is,
the subcontractors would have been liable to Fulton only if the homeowners had
shown that the subs had performed faulty workmanship. Predictably, the Court of
Appeals did not buy into Fulton’s position. The Court noted its 1986 ruling in
Pioneer Roofing Co. v. Mardian Constr. Co., in which it determined that
“adversity is not determined solely from the parties’ alignment in pleadings,
but rather must be ascertained from the opposing positions or interests of the
parties.” In short, Fulton and the subs became adverse parties the moment Fulton
filed its third-party complaint against them.
Merits. Regarding
the merits of Fulton Homes’ claim against the subs and whether it could have
been avoided or settled, the Court of Appeals stood by the trial court’s finding
that, since the homeowners did not allege faulty workmanship, Fulton should not
have taken legal action against the subs. The Court of Appeals acknowledged that
“the homeowners’ initial complaint might reasonably have supported Fulton’s
filing” of the complaint against the subcontractors but deferred to the trial
court’s conclusion that “Fulton should have known very quickly that the
homeowners were not asserting faulty concrete workmanship claims.” Thus, Fulton
bore responsibility for the legal costs that the subcontractors incurred from
that point forward.
Ruling. Fulton
challenged the awarding of attorneys’ fees on a variety of other grounds, none
of which proved persuasive to the Court of Appeals. In its ruling, the Court
found as follows:
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Fulton Homes could have
protected its rights against BBP and Trojan by methods other than, to use the
Court’s term, “dragging” them into a lawsuit;
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Fulton should not have
filed the third-party complaint against the subs;
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Fulton should have
dismissed the complaint much sooner than it did;
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the subcontractors’
legal efforts to defend themselves against Fulton’s complaint were
appropriate;
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Fulton provided no
evidence that paying a little more than $12,000 to the subcontractors would
create a financial hardship; and
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ordering Fulton to pay
the $12,000 would not have a chilling effect on future potential third-party
plaintiffs.
Be careful. The
bottom line for companies that may find themselves in Fulton Homes’ position: If
you don’t want to be on the hook for another company’s legal fees, don’t drag
them into a lawsuit unless you are on solid legal ground and you have no
alternative remedies.
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