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In re Estate of Lash

July 02, 2001

IN THE MATTER OF THE ESTATE OF HERBERT P. LASH, DECEASED.
FIREMAN'S FUND INSURANCE COMPANY, PLAINTIFF-RESPONDENT AND CROSS-APPELLANT,
v.
MANUEL LOPEZ, JR.; CHERYL S. LOPEZ, HIS WIFE; DONALD J. MELIADO; PRUDENTIAL-BACHE SECURITIES, INCORPORATED; L&L ASSOCIATES; LOPEZ, LOPEZ & CRINGOLI; LOUIS H. MILLER; AND WILLIAM R. DENI, DEFENDANTS, AND THE ESTATE OF HILDEGARD LASH, DEFENDANT-APPELLANT AND CROSS-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 329 N.J. Super. 249 (2000).

The opinion of the court was delivered by: Zazzali, J.

Argued November 28, 2000

In this case, the administrator of an estate misappropriated the estate's funds. We must decide whether the estate can recover counsel fees incurred in the proceeding to recover the misappropriated amounts from the surety on the bond, or whether the estate is responsible for those fees. We also must determine the appropriate interest rate on the surcharged amount and the date on which the interest should commence.

The Appellate Division found that the surety was not liable for attorneys' fees on the bond. In re Estate of Lash, 329 N.J. Super. 249, 252 (App. Div. 2000). Because we conclude that the estate is entitled to recover those fees as damages caused by the administrator's wrongful conduct, we reverse that determination and remand for entry of an order requiring the surety to pay the attorneys' fees incurred in the bond litigation. The panel also determined that the trial court did not abuse its discretion in awarding simple interest from the date that the complaint was filed. Ibid. We affirm that conclusion.

I.

Herbert P. Lash died intestate in April of 1987. His sole heir at law was his mother, Hildegard Lash, a citizen of Florida. Later that month, Mrs. Lash executed a power of attorney to defendant Manuel Lopez, Jr., a stockbroker known to both Mrs. Lash and her son. In May 1987, Mrs. Lash renounced her right to administration of her son's estate and requested the appointment of Lopez as administrator. The following month the Passaic County Surrogate's Court appointed Lopez as administrator of the estate, conditioned upon a surety bond in the amount of $800,000. Defendant Fireman's Fund Insurance Company (Fireman's Fund) provided the bond. At the time of Herbert Lash's death, his assets amounted to $751,786.39.

During the course of his service as administrator, Lopez misappropriated funds from Herbert Lash's estate. Because of those defalcations, in June 1992 Mrs. Lash revoked the power of attorney granted to Lopez and filed suit in Florida against Lopez, his wife, Cheryl, and Fireman's Fund alleging that Lopez breached his fiduciary duty "by failing to faithfully administer, account for and distribute to [Fireman's Fund] or other intended beneficiaries the assets or the proceeds of the assets of [Herbert's] estate."

In December 1992, the Florida circuit court granted Fireman's Fund's motion to dismiss based on lack of personal jurisdiction. The estate obtained a default judgment against defendants Lopez and his wife, Cheryl, in the amount of $800,000. However, the estate was unable to recover that amount from Lopez and his wife, who had both disappeared.

In January 1993, Fireman's Fund filed a complaint in Passaic County Surrogate's Court against Lopez, Cheryl, Lopez's attorney, Donald J. Meliado, and Mrs. Lash, among others. Fireman's Fund's complaint named Mrs. Lash in order to compel her to present all of her claims against Lopez, Cheryl, and Fireman's Fund. The complaint alleged that Lopez breached his fiduciary duty by failing "to account for, administer, liquidate, and distribute the assets and the proceeds" from the estate of Herbert Lash. By amended answer and counterclaim, the estate asserted that Fireman's Fund, as surety under the bond, was liable to the estate for the full amount of the bond, $800,000, together with interest, counsel fees, and cost of suit. The parties resolved, by stipulation, all issues except counsel fees and interest. The bond is silent on the issue of counsel fees. The estate contended that the counsel fees incurred in the proceeding should be charged to the bond. The Chancery Division rejected that contention, instead charging the fees against the corpus of the estate. The estate also requested "investment market rate" interest from the date of Lopez's defalcations. The Chancery Division awarded interest, but, contrary to the estate's request, awarded simple interest at the rates provided in Rule 4:42-11 from the date the complaint was filed.

On appeal, the Appellate Division affirmed the order of the Chancery Division requiring the payment of counsel fees by the estate and directing that simple interest be awarded, but modified the portion of the "order allowing the calculation of interest from January 1993 to provide that simple interest be calculated on the applicable amount from the date each improper use of the funds was made by the administrator." Lash, supra, 329 N.J. Super. at 264. The Appellate Division remanded "for further proceedings to determine the commencement date for calculation of simple interest on each defalcation that forms the basis for the amounts surcharged against the bond." Ibid.

The estate petitioned this Court for certification on the issue of attorneys' fees, and Fireman's Fund petitioned on the award of interest. We granted both petitions. 165 N.J. 136 (2000). We now reverse the determination that the estate, rather than the surety, is liable for the attorneys' fees, affirm the award of interest, and remand for further proceedings consistent with this opinion.

II.

In this case, we first address whether an administrator is liable to the estate for attorneys' fees incurred by the estate in the proceeding on the surety bond. If the administrator is liable for those fees, we must then determine whether the administrator's surety also should be held liable for those fees. Finally, we consider whether the American Rule that disallows recovery of attorneys' fees incurred in litigation from an adversary in that litigation prohibits the award of fees against the surety in this case. We address each question in turn.

A.

"One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for . . . attorney fees . . . thereby suffered or incurred . . . ." Restatement (Second) of Torts § 914 (2); accord Satellite Gateway Communications, Inc. v. Musi Dining Car Co., Inc., 110 N.J. 280, 285 n.2 (1988); Dep't of Envtl. Prot. v. Ventron, 94 N.J. 473, 504-05 (1983); see generally Pressler, Current N.J. Court Rules, comment 2.10 on R. 4:42-9 (2000) (discussing awards of counsel fees as damages); 22 Am. Jur. 2d Damages § 618 (1988) (same). Thus, if a plaintiff has been forced because of the wrongful conduct of a tortfeasor to institute litigation against a third party, the plaintiff can recover the fees incurred in that litigation from the tortfeasor. Those fees are merely a portion of the damages the plaintiff suffered at the hands of the tortfeasor. See, e.g., Donovan v. Bachstadt, 91 N.J. 434, 448 (1982) (breach of contract action); Penwag Property Co., Inc. v. Landau, 76 N.J. 595, 598 (1978) (malicious prosecution action); Gerhardt v. Continental Ins. Cos., 48 N.J. 291, 300 (1966) (action on insurance policy); Feldmesser v. Lemberger, 101 N.J.L. 184, 186-88 (E. & A. 1925) (fraud action); Katz v. Schacter, 251 N.J. Super. 467, 473-74 (App. Div. 1991) (fraud action), certif. denied, 130 N.J. 6 (1992); Enright v. Lubow, 202 N.J. Super. 58, 85 (App. Div. 1985) (action on title policy); Dorofee v. Pennsauken Township Planning Bd., 187 N.J. Super. 141, 144 (App. Div. 1982); Hagen v. Gallerano, 66 N.J. Super. 319, 332-33 (App. Div. 1961) (same); Lovett v. Estate of Lovett, 250 N.J. Super. 79, 94 (Ch. Div. 1991) (legal malpractice); McMinn v. Damurjian, 105 N.J. Super. 132, 142 (Ch. Div. 1969) (same). Breach of fiduciary duty is a tort theory, such that attorneys' fees incurred as a result of that breach may be recoverable as a portion of the plaintiff's damages. Wolfson v. Bonello, 270 N.J. Super. 274, 291 n.12 (App. Div. 1994) (describing breach of fiduciary duty as a tort); Paris of Wayne, Inc. v. Richard A. Hajjar Agency, 174 N.J. Super. 310, 318 (App. Div. 1980) (same); Sullivan v. Jefferson, Jefferson & Vaida, 167 N.J. Super. 282, 287 (App. Div. 1979) (same); Rodriguez v. Cardona Travel Bureau, 216 N.J. Super. 226, 230 (Law Div. 1986); Restatement (Second) of Torts § 874 ("One standing in a fiduciary relation with another is subject to liability to the other for harm resulting from a breach of duty imposed by the relation.").

In this case, Lopez's tortious breach of fiduciary duty caused the estate to file suit against the surety on the bond. As a direct and proximate result of Lopez's breach of duty, the estate incurred attorneys' fees to litigate its claim against Fireman's Fund, a third party, in order to demonstrate that Fireman's Fund was financially responsible for Lopez's defalcation. Those fees were a foreseeable consequence of Lopez's actions because all parties were aware of the bond, the express purpose of which was to provide the estate redress from Fireman's Fund for Lopez's improper conduct. Just as a defendant who fraudulently conveys property to avoid a judgment causes the plaintiff to have to file suit against the transferees, Jugan v. Friedman, 275 N.J. Super. 556 (App. Div.), cert. denied, 138 N.J. 271 (1994), Lopez's defalcation caused the estate to file suit against Fireman's Fund. Lopez is responsible for the estate's counsel fees incurred in the litigation against Fireman's Fund.

B.

The next question is whether Fireman's Fund can be held liable as surety for those fees. "Administrators' bonds are given to secure the creditors and next of kin of the deceased from loss through the default or fraud of the administrator, and amount to indemnity to the estate. Indemnity is that which is given to a person to prevent his suffering damage." Ordinary v. Connolly, 75 N.J. Eq. 521, 524 (Prerog. Ct. 1909) (awarding attorneys' fees incurred by estate in proceeding to establish surety's liability on bond from the bond itself); accord 34 C.J.S. Executors and Administrators § 900 (1998). On breach of an administration bond, "[t]he surety is required to bear any injurious consequences arising from loss to the estate." 31 Am. Jur. 2d Executors and Administrators § 350 (1989) (footnotes omitted) (emphasis added). "[T]he principal and sureties are equally and primarily liable in case of a breach of [the bond's] conditions and the liability of the sureties is, within the terms of the contract and controlling statues, coextensive with that of the principal." 34 C.J.S. Executors and Administrators § 900 (1998) (footnotes omitted) (emphasis added); accord 31 Am. Jur. 2d Executors and Administrators § 349 (1989) ("[T]he liability of a surety on a personal representative's bond is coextensive with that of the representative for losses occasioned by official acts and defaults.") (emphasis added). Thus, the liability of a surety is coextensive with the liability of the administrator. Those precepts also suggest that the estate should be made whole for any harm or "injurious consequences" caused by a defalcating administrator.

As discussed, Lopez caused the estate to expend attorneys' fees in the proceeding on the bond. Fireman's Fund, under principles of suretyship, is liable for the full extent of the damages caused by Lopez. Therefore, Fireman's Fund should be liable for those damages caused by Lopez, including the attorneys' fees incurred in the proceeding on the bond.

The thoughtful dissent concludes that although Lopez proximately caused the estate to incur fees in the bond litigation and is responsible for those fees as damages, Fireman's Fund should not have to pay those damages because the surety bond does not explicitly state that Fireman's Fund must do so. We recognize that the surety's liability is limited by the terms of the surety bond. Supra at ___ (slip op. at 10) ("[T]he principal and sureties are equally and primarily liable in case of a breach of [the bond's] conditions and the liability of the sureties is, within the terms of the contract and controlling statues, coextensive with that of the principal.") (quoting 34 C.J.S. Executors and Administrators § 900 (1998) (footnotes omitted) (emphasis added)). However, unless there is a bond provision to the contrary, the surety's liability is coextensive with the principal's liability. 31 Am. Jur. 2d Executors and Administrators § 349 (1989) ("Absent a statute or bond provision to the contrary, the liability of a surety on a personal representative's bond is coextensive with that of the representative for losses occasioned by official acts and defaults.") (emphasis added) (footnotes omitted). In this case, the surety bond is silent on whether damages consisting of attorneys' fees incurred as a result of the principal's wrongful conduct are recoverable against the surety. Thus, there is no bond language precluding an award of such damages, and the surety's and principal's liabilities are coextensive. Moreover, the surety bond here merely states that the surety and principal bind themselves in the amount of $800,000 and that the principal will perform several enumerated conditions. The language of the bond makes no mention of the scope of the surety's liability. If we were to accept the dissent's premise and take it to its logical conclusion, the estate would not be able to recover any damages for Lopez's defalcation because the surety bond does not explicitly say that the surety is liable for those damages.

As there is no contractual basis to prohibit damages that consist of attorneys' fees, we are left with the fundamental precept of suretyship law that the surety's liability is coextensive with the liability of the principal. Further, the overriding purpose of the surety bond is to make the estate whole for a fiduciary's misconduct. Based on those guiding principles, we conclude that the surety is liable for fees proximately caused by the principal's misconduct. The dissent's reliance on cases involving performance, payment, and labor and materials bonds does not persuade us otherwise in the context of this case, which involves fraudulent conduct of a fiduciary and a bond silent on the scope of the surety's liability.

C.

New Jersey generally follows the American Rule, which prohibits a litigant from recovering counsel fees from a defendant when the fees were incurred in an action to establish that defendant's liability. Jugan, supra, 275 N.J. Super. at 573. The surety suggests that the award of fees sought by the estate conflicts with both the American Rule and with Rule 4:42- 9, which sets forth the limited circumstances in which counsel fees may be awarded. We therefore must address that claim of conflict, and determine whether that rule limits the obligation of the surety to protect the estate from theft by the administrator.

The American Rule generally precludes a party from recovering counsel fees from his or her adversary in that litigation. North Bergen Rex Transp., Inc. v. Trailer Leasing Co., 158 N.J. 561, 569 (1999); Rendine v. Pantzer, 141 N.J. 292, 322 (1995); Right to Choose v. Byrne, 91 N.J. 287, 316 (1982); Gerhardt v. Cont'l Ins. Cos., supra, 48 N.J. at 301; Janovsky v. American Motorists Ins. Co., 11 N.J. 1, 7 (1952); see R. 4:42- 9(a) (prohibiting, with exceptions, counsel fee awards); Oliviero v. Porter Hayden Co., 241 N.J. Super. 381, 386 (App. Div. 1990); Restatement (Second) of Torts § 914(1). "[W]e accept, as do most other courts, the premise of the American Rule that ordinarily society is best served when the parties to litigation each bear their own legal expenses." Coleman v. Fiore Bros., Inc., 113 N.J. 594, 596 (1989) (citations omitted); accord Community Realty Management, Inc. v. Harris, 155 N.J. 212, 235 (1998). However, the American Rule "does not preclude an allowance of reasonable counsel fees where the incurring thereof is a traditional element of damages in a particular cause of action." Pressler, supra, comment 2.10 on R. 4:42-9. "A plaintiff has the ...


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