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To Collect Punitive Damages Award, Attorneys Can Charge Opponent for Cost of Appeals

Traditionally, reasonable attorney fees can be recovered from the losing party in a lawsuit when punitive damages are awarded. The ability to recover these fees can extend to the attorney fees incurred when the losing party unsuccessfully appeals the case, the Supreme Court of Ohio ruled today.

In a 5-2 decision, the Supreme Court reversed an Eighth District Court of Appeals decision that found attorney fees expended during an appeal cannot be recovered from the other party unless a state statute specifically permits it.

In the case of Cruz v. English Nanny & Governess School, attorneys representing a former student are entitled to collect the $463,000 in attorney fees awarded by the trial court, which includes hours billed for representing their client on appeal.

Writing for the Court majority, Justice Melody Stewart noted the traditional “American Rule” requires each party to pay its own attorney fees. However, there are three exceptions, including allowing the winning party to collect fees from the opponent when a jury awards punitive damages. In this case, punitive damages were assessed against executives and affiliated businesses connected to the Chagrin Falls-based nanny school.

Justice Stewart stated that “prevailing parties who were awarded reasonable attorney fees along with a punitive damages award may also recover attorney fees that they incur in successfully defending their judgments on appeal.”

Chief Justice Maureen O’Connor and Justices Patrick F. Fischer, Michael P. Donnelly, and Jennifer Brunner joined Justice Stewart’s opinion.

In a dissenting opinion, Justice Sharon L. Kennedy maintained the majority overturned more than 150 years of precedent by expanding the American Rule to include recovery of appellate attorney fees. She stated that the Eighth District correctly found appellate attorney fees could be recovered only when a statute permits it. She warned that today’s decision will have a “chilling effect” on those defendants who appeal an unfavorable decision out of fear they will incur even more attorney fees.

Justice R. Patrick DeWine joined Justice Kennedy’s opinion.

Bitter Dispute Leads to Legal Battle
Sheilagh Roth founded the English Nanny & Governess School in 1985 to train certified professional nannies and governesses. The nanny school also operated English Nannies, a placement agency that placed graduates of the school with families requesting a nanny or governess.

In 2011, Christina Cruz graduated from the nanny school. Bradford Gaylord, director of the placement agency, arranged for Cruz to interview for a nanny position. Cruz was directed to spend a weekend with a single father of two young daughters. During the weekend, Cruz witnessed what she believed was the father engaging in sexual activity with one of the daughters.

Cruz called Heidi Kaiser, a coordinator with the placement agency, to report what she witnessed and discussed whether to report the alleged abuse to social services. Kaiser relayed the conversation to Gaylord. Gaylord and Roth directed staff members to tell Cruz not to report the incident, and Gaylord allegedly stated that if Cruz reported the suspected abuse, he would make sure she never worked as a nanny.

Cruz reported the suspected abuse. Kaiser was fired a week after the incident, and the placement agency stopped arranging job interviews for Cruz. In a letter about two months after the incident, Gaylord told Cruz the reason he was unable to place her in a job was because of the “current economy” and business being “extremely slow.”

Cruz and Kaiser sued the nanny school, the placement agency, Roth, and Gaylord in Cuyahoga County Common Pleas Court. After a 26-day trial in 2015, the jury found in favor of the two women and awarded both compensatory and punitive damages. Because punitive damages were part of the verdict, the jury allowed the trial judge to award the women’s attorney fees to be paid by the nanny school parties.

The attorneys requested about $540,000 in attorney fees, and the trial judge ultimately granted about $125,000. The judge also lowered the amount of damages the jury awarded to the women.

School Appeals Judgment
The nanny school appealed the judgment against them. The women also appealed, arguing the trial judge wrongly reduced their damages awards and attorney fees. The Eighth District upheld the verdict against the nanny school and found the trial court incorrectly reduced the damages and fees.

When the case returned to trial court, the women’s attorneys asked the trial judge to not only calculate the fees they should have received for the trial work, but also pay them for the time they worked on the appeal. The trial judge agreed and awarded $463,000 in attorney fees.

The nanny school appealed the attorney fee award to the Eighth District. In 2020, the Eighth District ruled the fees for the appeal could not be added. The court stated that appellate attorney fees can only be added by a trial court if a state statute permits the award of those fees for a particular type of lawsuit. Since the women’s lawsuit was not related to a statute allowing appellate attorney fees, they could not be added, the court ruled.

The women’s attorneys appealed the decision to the Supreme Court, which agreed to hear the case.

Supreme Court Examined Fee Rules
The Eighth District relied on the Supreme Court’s 2008 Klein v. Moutz decision, and two subsequent appellate court rulings that followed Klein. Today’s opinion explained that the issue in Klein was a couple’s lawsuit against a landlord who failed to return a security deposit as required by state law.

“In Klein, as well as cases involving other remedial statutes, we did not explicitly limit recovery of appellate-attorney fees to cases in which a remedial statute was involved,” Justice Stewart wrote.

While the Klein decision did not prevent the women’s attorneys from collecting fees for the appeal, the Court examined the traditional rules of attorney fees to determine what authorized the award. The Court explained that under centuries of common law, courts use the American Rule, in which each party pays its own attorney fees.

The American Rule contains three exceptions that require the losing party to pay attorney fees. The exceptions are when a statute creates a duty to pay the winning party’s fees; a losing party acted in bad faith; or when the parties agreed through a contract that the loser would pay.

The opinion noted that an award of punitive damages fits the exception in this case that a party acted in bad faith and must pay the opposing party’s fees. The nanny school argued the rule only applies to fees incurred during a trial but does not apply to fees for appeals. The Court disagreed.

“Moreover, there is nothing at common law prohibiting prevailing parties who were awarded punitive damages at trial from recovering reasonable attorney fees that they incurred defending their judgment on appeal,” the Court stated.

The opinion noted that for the other two exceptions – a law or contract requiring payment – there is no indication that the fee recovery is limited to just trial fees. The Court noted that the rule would be undermined if the party found acting in bad faith faced no consequences for continuing to increase the legal costs of the winning party and delay payment of the judgment through appeals.

The Court remanded the case to the Cuyahoga County Common Pleas Court to reinstate the trial court’s determination of the attorney fees.

Fee Rule Improperly Expanded, Dissent Asserted
In her dissent, Justice Kennedy stated that the majority has upended a “bedrock principle” of law that requires parties to pay their own attorney fees unless the legislature  specifies circumstances where appellate attorney fees must be paid by the losing parties. She noted that the General Assembly has enacted laws to guarantee the losing party has a right to a first appeal of a trial court’s decision.

The dissent stated that lawmakers have expressed certain instances when appellate attorney fees can be awarded, including R.C. 2323.51(A)(2)(a), which allows for recovery when a court finds a party filed a frivolous appeal.

“The General Assembly, which created the substantive right to appeal, has not authorized attorney fees as punishment for the legitimate appeal of a judgment but instead allows them only for the abuse of the right to appeal,” the dissent stated.

The dissent also disagreed with the majority’s assessment that the trial court had the right to include the fees for the appeal when it revised its award to the attorneys. The Eighth District’s “mandate” to the trial court was to recalculate the original trial court fees, but it did not direct the trial court to add fees, the dissent asserted.

Additionally, the dissent maintained the exceptions to the American Rule historically have been applied only to trial court attorney fee awards. Justice Kennedy wrote that the Ohio Supreme Court has only recognized appellate attorney fees in cases in which it was determining whether a statute allowed those fees. This case is different, the dissent stated.

“Today, for the first time, however, this court is not basing an award of appellate-attorney fees on the interpretation and application of a statute. The majority is basing this award on its own expansion of the common law,” Justice Kennedy wrote.

The dissent concluded,  “Now, in every case in which attorney fees are awarded at the trial court level, upon an award of punitive damages, an award of appellate-attorney fees will necessarily follow. And it is easy to predict the outcome – a chilling effect on a litigant's substantive right of first appeal.”

2020-1247.Cruz v. English Nanny & Governess School, Slip Opinion No. 2022-Ohio-3586.

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