Lender Must Pay Borrower’s Attorney Fees as Equitable Remedy for its Bad Faith

March 28, 2018

In a 6-0 decision, the Wisconsin Supreme Court has decided that circuit courts have the power to award attorney fees as part of an equitable remedy “in exceptional cases and for dominating reasons of justice.” Nationstar Mortgage LLC v. Stafsholt, 2018 WI 21.  The Court acknowledged that it had never before decided whether attorney fees may be awarded as an equity remedy in Wisconsin.  However, in the case before the Court where the lender “doubled down” on its bad faith and used the Wisconsin courts in an attempt to unjustly extort payments from its borrower, the Supreme Court decided that the circuit court was within its discretion in awarding attorneys’ fees to the borrower.

The case started as a foreclosure action that resulted from the lender’s impenetrable bureaucracy.  In July 2010, the lender sent a letter to the borrower asking for proof of insurance and indicating that the lender would force-place insurance if proof was not timely provided.  The letter also advised that the force-placed insurance would be cancelled at no charge to the borrower if proof of insurance was provided.

By September 2010, the borrower had a homeowner’s policy in place; however, the lender denied being provided proof of insurance.  After receiving another letter from the lender advising that insurance had been force-placed on the property, the borrower called the lender to ask what would need to be done to remove the force-placed insurance charge.  The borrower was advised that the charge could not be removed without discussions with the “next elevated level of customer service.”  The borrower was further advised that “the only way the [he] could get to the next level of customer service would be if he skipped a mortgage payment and became delinquent on the mortgage.”

The Borrower skipped loan payments as instructed which resulted in a default.  However, instead of being elevated to the next level of customer service, the borrower was told that the loan would be accelerated.  The Borrower asked for an opportunity to meet with a lender representative in person to get to the next level of customer service but the lender evidently would not cooperate with the request.

The lender cancelled the force-placed insurance in April 2011.  However, the loan remained in payment default and the lender was unresponsive to the borrower’s attempts to reinstate the loan.  Eventually, the lender sued the borrower to foreclose.

The case went to trial.  The circuit court concluded that the charges for forced-placed insurance were improper because the lender had proof of insurance from the borrower in May or June of 2010.  The circuit court further concluded that the lender caused the borrower’s payment default and that the borrower justifiably relied on the lender’s advice given during the September 2010 telephone call to stop payments.  The circuit court determined that the lender’s foreclosure action, therefore, was improperly brought in bad faith and that the borrower was entitled to a judgment that the lender breached the note and loan and to dismissal of the foreclosure action.  Although the circuit court initially denied the borrower’s request for an award of attorney fees, upon reconsideration, the circuit court concluded that an award of attorney fees was required to make the borrower whole and applied a $64,764.71 credit against the loan balance.

The Court of Appeals affirmed the circuit court’s conclusions that the lender breached its implied covenant of good faith and fair dealing and that the lender’s foreclosure action should be dismissed.  However, the Court of Appeals concluded that the circuit court did not have the authority to award attorney fees to the borrower.  The Court of Appeals reached its conclusion based on the American Rule which dictates that each party to litigation ordinarily pays its own attorney fees.

The Supreme Court disagreed and affirmed the circuit court award of attorney fees.  The Supreme Court was quick to add that this new power of circuit courts “is not unlimited—nor should it be, given the traditionally narrow character of exceptions to the American Rule.”  However, the Supreme Court was clearly perturbed by the lender’s behavior.  The Lender “intentionally caused this dispute” and “then proceeded to file a foreclosure action when [borrower] followed its directions.”  The lender then “doubled down on its bad faith by refusing [borrower’s] offers to reinstate the loan . . .”  The Supreme Court concluded that the lender’s “conduct was an attempt to use Wisconsin courts to extort” inappropriate fees from the borrower.  “We will not allow Wisconsin courts to be used for this purpose.”

The Supreme Court remanded the case to the circuit court for a determination of attorney fees incurred by the borrower not only in the circuit court but also in the Court of Appeals and Supreme Court.  The Supreme Court recognized that the additional fees might result in a negative loan balance when credited against the loan, in which case the lender will be required to refund the overpayment.

This is the second time this year that a Wisconsin appellate court has found an exception to the American Rule and permitted the award of attorney fees in a situation where fees were not believed to be available.  See our recent article for more information. The effect of the Supreme Court’s decision remains to be seen.  Without an award of attorney fees, the borrower in this case would have been in a significantly worse position than if the borrower had simply paid the fees demanded by the lender.  The availability of attorney fees might encourage other borrowers to litigate if they think they have been treated badly by their lenders.  However, even if the equitable award of attorney fees is an available remedy, the Supreme Court has clearly instructed that it should be uncommon.


If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.com or (608) 257-2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.