Recovering Attorneys’ Fees: Exception to the American Rule for ‘Wrongful Act’ of Breaching Contract

February 1, 2018

The Wisconsin Court of Appeals recently held that land contract purchasers who were brought into a foreclosure action by a bank against the land contract sellers could recover certain attorneys’ fees from the sellers.  The case is significant because the land contract purchasers had no contractual or statutory right to recover fees.  Instead, the Court of Appeals determined that the purchasers could recover under the narrow ‘Third-Party Litigation Exception’ to the ‘American Rule.’

Generally, under the American Rule, all parties in lawsuits are responsible to pay their own attorneys’ fees.  The winner usually cannot recover its attorneys’ fees from the losing party unless a contract or statute expressly permits recovery of fees.  However, the Third-Party Litigation Exception previously recognized by the Wisconsin Supreme Court permits aggrieved parties to recover fees when they are dragged into a lawsuit because of someone else’s wrongful acts.  The Supreme Court was clear in the context of a tort action that more than mere negligence was required to deem an act wrongful; only fraud, breach of a fiduciary duty, or “something similar” could invoke the Third-Party Litigation Exception.

In Talmer Bank and Trust v. Jacobsen, the land contract purchasers had made monthly payments to the sellers who, instead of making required mortgage payments to the bank, pocketed the money.  The sellers were required by the land contract to make the mortgage payments.  After the bank and the purchasers settled, the purchasers went after the sellers to recover their attorneys’ fees incurred litigating with the bank.

The purchasers claimed, and the Court of Appeals agreed, that they incurred attorneys’ fees because the sellers committed a wrongful act – the sellers breached the land contract by failing to make mortgage payments to the bank.  The sellers countered, unsuccessfully, that a simple breach of contract cannot be considered a ‘wrongful act’ (i.e., something akin to fraud or breach of a fiduciary duty) under the Third-Party Litigation Exception.  While clarifying that a breach of contract indeed constitutes the wrongful act necessary to trigger the Third-Party Litigation Exception, the Court of Appeals stressed that its holding was not an extension of Wisconsin law.

There are limits to the Third-Party Litigation Exception.  The Court of Appeals pointed out that fees are available only in cases where a party’s breach of contract forced another party into litigation with a third party.  The fees incurred in the action with the third party are “damages” that can be recovered under the exception.  Nonetheless, the Court of Appeals’ decision clearly allows a party to a contract to recover attorneys’ fees paid in third-party litigation from a breaching party.  Before Talmer, the American Rule might have caused some to doubt that such recovery would be permitted.

If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at or Doug Scriver at 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.