A successful verdict after litigation, although better than the alternative, can still be a Pyrrhic victory if one has spent too much in attorney’s fees. In the American system where each side pays its own legal costs, attorney’s fees can greatly diminish the amount of money a successful plaintiff will actually see. However, for particularly egregious behavior or when suits are brought in order to harass or foist costs, Minnesota law allows courts to shift legal costs to the opposition. The following is a brief overview of a few cost-shifting statutes that come up in the corporate or LLC setting.
The general rule in Minnesota is that attorney fees are not recoverable in litigation unless there is “a specific contract permitting or a statute authorizing such recovery.” Dunn v. Nat’l Beverage Corp., 745 N.W.2d 549, 554 (Minn. 2008). The Minnesota Business Corporation Act (MBCA) and the Minnesota Limited Liability Company Act (MLLCA) each provide two sources of authority under which courts can award attorney’s fees.
302A.467 (MBCA) and 322B.38 (MLLCA)
Section 302A.467 allows courts to grant equitable relief to shareholders of a corporation:
If a corporation or an officer or director of the corporation violates a provision of this chapter, a court in this state may, in an action brought by a shareholder of the corporation, grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements, to the shareholder.
Section 322B.38 gives the same protections to members of LLCs.
As the language suggests, plaintiffs must identify the specific provisions of the chapter that have been violated in order to find relief under the statute. In fact, courts have gone so far as to dismiss claims under 302A.467 when plaintiffs have failed to do so, although plaintiff was allowed to seek equitable relief under 302A.751. See Isaacs v. Amer. Iron & Steel Co., 690 N.W.2d 373, 379 (Minn. App. 2004).
According to the Reporter’s Notes, these sections recognize that situations in which equitable relief may be appropriate are not easily defined in advance, as they often present novel fact situations. As a result, they adopt a broad rule which gives the court complete discretion in ordering whatever relief it deems just and reasonable under the circumstances. The awarding of attorney’s fees, then, is far from guaranteed by a defendant’s violation of section 302A; the statute permits but does not mandate attorney’s fees, and the court awards them at its discretion.
302A.751, subd. 4 (MBCA) and 322B.833, subd. 7 (MLLCA)
Section 302A.751 gives courts the ability to grant any type of equitable relief when certain conditions are met. Unlike the 302A.467, violations not strictly tied to terms of the statute. Instead, 302A.751 allows equitable solutions when parties are deadlocked in managing the corporation, when directors have acted in a manner unfairly prejudicial towards each other, or even when the corporation’s assets are being misapplied or wasted. Subdivision 4 focuses specifically on the awarding of attorney’s fees:
If the court finds that a party to a proceeding brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties.
“Good faith” is statutorily defined as honesty in fact in the conduct of the act or transaction concerned. Other than this definition, the statute provides no explanation as to the meaning of subdivision 4. Again, the language is permissive rather than mandatory, and courts have the discretion to weigh the circumstances of the situation then decide whether attorney’s fees are deserved.
The Reporter’s Notes explain that this provision aims at preventing “strike suits”—lawsuits that, though likely meritless, force defendants to either settle or pay the cost of litigation. “Subdivision 4 empowers the court to award expenses where a suit has been instituted in bad faith or has been conducted in a harassing manner by any party.” Although this focuses on court proceedings, Minnesota courts have held that actions prior to any court proceedings can be the basis for attorney’s fees as well. This is discussed in Swanson v. Upper Midwest Indus., an unpublished Minnesota Court of Appeals case from 2002.
Minn. Stat. § 549.211 (2008)
Minn. Stat. § 549.211 gives defendants more protection from strike suits. It states that by presenting to the court, the attorney or unrepresented party certifies that the action is not intended to harass or foist costs upon the opposition, features claims warranted by law, and has evidentiary support or is likely to find it after investigation. If the action does not meet these standards, the court can issue sanctions in the form of reasonable attorney’s fees. While not particular to the corporate/LLC setting, this statute often comes up when relationships deteriorate between business partners, and frivolous claims or counter-claims are brought.
Again, attorney’s fees can be awarded for actions prior to legal proceedings as well as for bad faith in bringing or during proceedings. The first few cases deal with parties’ bad behavior before any claims were brought.
Pedro v. Pedro, 489 N.W.2d 798 (Minn. App., 1992)
In Pedro, the court granted Alfred Pedro over $200,000 in attorney’s fees (overall damages approached $2 million) based on the breach of fiduciary duties by his two brothers. The three were equal owners of a closely held corporation, and each worked for the business. Alfred discovered a discrepancy in the financial records, and his subsequent investigation of the matter divided the brothers. The brothers pressured Alfred to resign, firing him and cutting off his benefits when he refused. The court found that the brothers had interfered with Alfred’s responsibilities in the company, had wrongfully accused him of neglect, malfeasance, and health issues (they told employees that he had to leave the business because of a nervous breakdown), and were “acting in a manner unfairly prejudicial” towards him under 302A.751.
These actions led the district court to find that defendants had acted “arbitrarily, vexatiously, and otherwise not in good faith”. It awarded attorney’s fees under 302A.751, subd. 4, which the appellate court succinctly upheld.
Swanson v. Upper Midwest Indus., (Minn. App., 2002)
Swanson also involved the mistreatment of minority shareholder/employee. Here, Swanson had worked with defendant Carlson for a long time, and the two had gotten along well. When a dispute arose between the two, Swanson had the choice of fighting a legal battle over the contested issue (the valuation of a buyout) or acquiescing for the sake of the business relationship. Swanson was inclined to do the latter, and contacted Carlson to make sure the relationship was fine. Carlson told him it was, and gave Swanson assurances that his employment was not in jeopardy. In the subsequent year, Carlson undercut Swanson at every opportunity, eventually attempting to force Swanson’s resignation. When Swanson refused, Carlson terminated his employment and bought out his ownership interest.
The district court found that Carlsen defrauded respondent by making misrepresentations and omissions that respondent relied on in forfeiting his legal rights, and also that Carlsen had breached his fiduciary duties and acted in an unfairly prejudicial manner towards Swanson. The court concluded that “Carlsen’s conduct meets the statutory requirement that [appellants] ‘acted arbitrarily, vexatiously, or otherwise not in good faith’”, and awarded him attorney’s fees under 302A.751, subd. 4.
The second flavor of attorney’s fees cases pertains to parties’ actions in connection with legal proceedings.
DeMartini v. Fonss, No. A09-1902 (Minn. App. 6/1/2010) (Minn. App., 2010)
In DeMartini, the litigants disputed Fonss’s running of “Entirely Seamless”, the two’s corporation business, in DeMartini’s absence. DeMartini, the president of the corporation, was incarcerated for theft charges, leaving the operations of the business to vice president Fonss. Upon DeMartini’s departure, Fonss discovered that Entirely Seamless was severely in debt, and she worked somewhat successfully to reduce that debt.
DeMartini sued Fonss and two non-officers who had been helping her run the company, “alleging that they breached their fiduciary duties to the company and misappropriated corporate assets. [DeMartini] repeatedly sent requests for interrogatories, and when he considered the answers insufficient, he moved for sanctions.” DeMartini also sent employees to search for information in Fonss’s computer, which was subsequently damaged.
The district court awarded $5,137.38 in attorney fees plus costs and disbursements to Rachel Fonss under Minn. Stat. § 549.211 (2008) as a sanction for appellant’s bad-faith conduct during the case, which was “intended only to add to the cost and complexity of this litigation.” On appeal, the appeals court upheld the district court’s decision even though DeMartini was a pro se litigant. Courts are “normally reluctant to grant attorney’s fees against a pro se party, but will do so in a case of “extreme” conduct.
Even when attorney’s fees are awarded, the court uses its judgment to determine what amount is reasonable.
Bolander v. Bolander, 703 N.W.2d 529 (Minn. App., 2005)
When determining the amount of attorney’s fees, courts consider the “time and effort required, novelty or difficulty of the issues, skill and standing of the attorney, value of the interest involved, results secured at trial, loss of opportunity for other employment, taxed party’s ability to pay, customary charges for similar services, and certainty of payment.” Jadwin v. Kasal, 318 N.W.2d 844, 848 (Minn.1982). Its determination is a finding of fact, only to be overturned if clearly erroneous.
In Bolander, the district court concluded that CB&S had a contractual right to an award of its costs of collection, including reasonable attorney fees relating to the promissory note, and instructed CB&S to submit a petition for an award of such fees. CB&S asked for $115,000 in fees, which the district court refused to give:
The Corporation seeks an award of fees and expenses of $115,000. I conclude that this amount is not reasonable in light of the limited nature of the dispute involving the notes. Based on my 22 years of experience as a lawyer involved in commercial litigation on behalf of creditors and my 13 years as a trial court judge, I find that the fees and expenses for the collection of the notes through litigation conducted by similarly experienced and talented counsel could not reasonably exceed $40,000.
On appeal, the court held that the district court had not abused its discretion, and that $40,000 was not unreasonable.
Awarding attorney’s fees enables the courts another equitable tool to bring about a just result. When a party’s behavior has been in bad faith, such an award may be appropriate. Granting attorney’s fees also protects against frivolous lawsuits brought only to harass or foist costs. While such an award is far from guaranteed, it is worth pursuing when the other side’s behavior is particularly egregious.