Attorneys’ Fees Improper Where Neither Contract, Statute, Court Rule, Nor the Equities Supported a Fee Award

Tarta Luna Properties, LLC v. Harvest Restaurants Group, LLC, ___ N.J. Super. ___ (App. Div. 2021). In summary, the parties entered into a long-term lease of a restaurant space, to which defendants (the tenant) intended to make substantial renovations. The parties fought over various issues, including complaints by the plaintiff property owners about the construction in which defendant was engaging. Eventually, this case was filed in Chancery by the property owners, who sought to enjoin the renovation, declare that defendant had forfeited the property, obtain damages for breach of the lease, and recalculate the rent. Defendants filed a counterclaim, which was later dismissed.

Ultimately, after a trial, the Chancery Division determined that defendants’ renovations had violated the municipal building code. But the court denied plaintiffs’ demand for forfeiture because defendants had relied on the advice of engineering and architectural professionals, as well as on the municipal construction official, who had issued a certificate of occupancy. Besides, defendants had paid the rent for the entire period, so that plaintiffs would have been unjustly enriched if the court ordered forfeiture of the lease. The court also denied plaintiffs’ demand for increased rent.

But the Chancery Division did award over $930,000 in attorneys’ fees (reduced from a higher figure sought) to plaintiffs. That court recognized that it could not “find any statute, court rule, or contract provision that supports the granting of legal and expert fees.” But because “‘the renovations, as originally constituted were dangerous to people[,]’ ‘severe damage could have been done to the building[,]’ and ‘[t]o bring this action before the court it was necessary [for plaintiffs] to incur approximately $1,000,000 in attorneys’ fees[,]'” the judge perceived that an equitable remedy, a fee award, was required.

Defendants appealed the fee award, and plaintiffs cross-appealed the amount of the award and the denial of forfeiture. Today, in an opinion by Judge Currier, the Appellate Division upheld the denial of forfeiture and reversed the fee award, applying the abuse of discretion standard.

Judge Currier noted that “New Jersey is an “American Rule” jurisdiction, reflecting a “strong public policy against shifting counsel fees from one party to another.” She agreed with the Chancery Division that there was no basis in any statute, court rule, or in the lease between the parties, for a fee award.

Nor did the equities support such an award. Unlike in Red Devil Tools v. Tip Top Brush Co., 50 N.J. 563 (1967), on which plaintiffs relied, there was no “willful and calculated misconduct” by defendants. Rather, “the Chancery court here specifically concluded that defendants had not engaged in any intentional misconduct,” but had reasonably relied on the advice of their professionals. Nor were defendants unjustly enriched. Accordingly, ” the Chancery court’s award of attorneys’ and expert fees was a mistaken exercise of discretion as it departed from well-established precedent and was not founded on any statute, court rule, or contract provision. Nor was the award supported by equitable principles in the absence of any willful misconduct.” Accordingly, the panel reversed the fee award.

Judge Currier had little difficulty affirming the denial of the forfeiture that plaintiffs sought. Plaintiff had relied on Dunkin’ Donuts of Am., Inc. v. Middletown Donut Corp., 100 N.J. 166 (1985), but Judge Currier found that case inapplicable. There, “[t]he Court noted forfeiture was an extreme remedy but imposed it because there were ‘insufficient countervailing equities’ where the defendant ‘was guilty of unconscionable cheating[]’ in the form of a ‘substantial, intentional, and long-continued underreporting of gross sales[]’ to underpay franchise fees.” Nothing like that had occurred here since, again, defendant had relied in good faith on its professionals and on approval from a government official. Moreover, a forfeiture would unjustly enrich plaintiff. Denying for forfeiture was not, therefore, an abuse of discretion.