Take-away:  Look at your leases, loan documents, settlement agreements and promissory notes.  Your standard language may no longer protect you.

Percentage Calculations

Ordinarily, the American system of justice does not permit a party who wins a lawsuit to recover the attorneys’ fees it incurred in pursuing the action.  However, parties may agree otherwise in a contract, and courts will enforce those provisions.  As a result, fee-shifting provisions have become commonplace in American contracts, particularly in leases, loans, settlement agreements, and promissory notes.

Typically, rather than get into a fight over how much the actual legal fees were, the terms provide for the prevailing party to recover a certain percentage, usually 15%, of the principal amount owed as reasonable attorneys’ fees and costs of collection. A recent decision from the Maryland Court of Special Appeals, however, significantly calls into question the prudence of providing a percentage as the basis for calculating the amount of attorneys’ fees owed and how and when the prevailing party’s fees are determined.    

Despite the Court’s statement that contractual agreements calculating attorneys’ fees based on a percentage are not unenforceable per se, the Court’s recent decision in SunTrust Bank v. Goldman, 201 Md. App. 390 (2011) signals that percentage based fee calculations will not be enforced unless the amount of attorneys’ fees actually incurred by the prevailing party exceed the amount calculated in accordance with the percentage formula.  The Court reasoned that fee-shifting provisions are indemnification obligations, and thus, a party should not be permitted to obtain a judgment for an amount greater than the amount the party owes its lawyers. 

Attorneys’ fee provisions have always been subject to the requirement that the amount of fees be reasonable.  Over the years, many courts have found a contract providing for 15% of the award was reasonable.  After the decision in SunTrust, however, regardless of the percentage set forth in the contract, attorneys should submit their billing statements (redacted for privileged communications) to the court whenever seeking an award of attorneys’ fees and should not rely solely on the percentage set forth in the contract. 

Given the Court’s statement that a prevailing party may only recover the attorneys’ fees and costs actually incurred, percentages will likely only be used to cap the amount of attorneys’ fees that are recoverable.  Contract drafters should consider removing all references to percentages in their boilerplate fee-shifting provisions when the contract is to be governed by Maryland law.   

Merger Doctrine and Post-Judgment Legal Expenses

In addition, the SunTrust case also addressed the effect of the doctrine of merger on attorneys’ fee awards.  Under the doctrine of merger, when a judgment is entered on a contract, the contract and any rights afforded by the contract, including the right to recover attorneys’ fees and collection costs, are “merged” with the judgment.  Thus, when a judgment is entered, the contract is extinguished, as are all rights and obligations arising from it except to the extent set forth in the judgment.  Accordingly, under the doctrine of merger, a prevailing party cannot recover any costs and attorneys’ fees incurred in trying to collect the judgment (e.g. filing liens, garnishing wages and bank accounts, foreclosing on real and personal property, etc.) because the contract no longer exists and the judgment disposes of the rights and obligations of the parties  In SunTrust, even though the Court agreed that the language in the contract at issue was sufficiently broad to cover post-judgment collection costs, the Court held that the plaintiff was only permitted to obtain a judgment for its attorneys’ fees and collection costs incurred through the date of judgment. 

To avoid the doctrine of merger, the Court suggested that parties include non-merger clauses in their contracts.  Non-merger clauses are often included in separation agreements in divorce cases and provide that even though the court grants a decree of divorce, the terms of the separation agreement remain in effect.  In addition, some form promissory notes contained boilerplate non-merger clauses -- clauses that have been given new importance in light of the Court’s holding.  While the Court stated that it was not aware of any case in which merger had been avoided by contract outside of the divorce context, the Court intimated that such clauses would be enforceable.  To date, no Maryland court has applied a non-merger clause outside of the divorce context. 

It is unlikely that a standard attorneys’ fee provision stating that a prevailing party can recover its attorneys’ fees and costs will be sufficient to avoid merger.  Contract drafters should consider adding a non-merger clause to their attorneys’ fees provisions.  The language must be clear that the parties mutually intend that the contract not be merged with the judgment with respect to post-judgment collection costs and attorneys’ fees.  For example, consider adding the following: “Notwithstanding any judgment related to this contract, this fee-shifting provision shall not be merged into such judgment but shall survive the same and shall be binding and conclusive on the parties for all time.  Post-judgment attorneys’ fees and costs incurred related to the enforcement of such judgment related to this contract shall be recoverable hereunder in the same or separate actions.”