CHAPTER 4

ATTORNEY FEES

Mark R. Melrose
Melrose, Seago & Lay, P.A.
Sylva, North Carolina 28779

INTRODUCTION

This paper addresses many of the central issues associated with the potential recovery of attorney’s fees in personal injury and related cases. There are certainly many other avenues judicially available for the recovery of attorney’s fees that are not described in this paper. This manuscript attempts to focus on the most practical cases in which there may be a claim made for the recovery of attorney’s fees by either the Plaintiff or the Defendant. It also includes some practical considerations of how that might affect the daily practice of personal injury law.

Currently, the law allows for the recovery of attorney’s fees for several basic reasons. These include the public policy of leveling the playing field between parties of unequal bargaining power, permitting people with meritorious but small claims the ability to employ competent counsel, punishing litigants for abusive or improper behavior, and punishing attorneys for neglect and/or abusive litigation tactics. In addition, in our free market economy private parties may shift the risks of business through the allocation of attorney’s fees by agreement before any disputes arise. Issues involving contractual recovery of attorney’s fees are necessarily outside the scope of this paper. Finally, this manuscript will be limited to North Carolina law although there are certainly avenues for the recovery of attorney’s fees in Federal Court.

I. THE COMMON LAW

The general rule is that each party involved in a lawsuit must bear his or her own attorney’s fees, unless there is express statutory or contractual authorization for recovery of those fees from the opposing party. This is known as the American Rule. Both Congress and the North Carolina General Assembly have, however, on numerous occasions been willing to modify the Rule by permitting the recovery of fees in a wide variety of circumstances. It is still a true statement, however, that unless there is express authority for the recovery of attorney’s fees, they may not be reimbursed. Arcambel v. Wiseman, 3 U.S. (3 Dall.) 306 (1796)

II. SANCTIONS

The most widely used statutory exceptions to the general rule requiring each side to bear their own attorney’s fees are the availability of sanctions set forth in the Rules of Civil Procedure. Sanctions are typically sought in three major categories: Pleadings, Discovery and Summary Judgment violations.

A. Rule 11

The remedy for sanctions against an opponent who signs factually or legally insufficient pleadings or pleadings done for an improper purpose is N.C.G.S. § 1A-1, Rule 11 entitled “Signing and Verification of Pleadings”. Rule 11 states as follows:

Signing by Attorney.--Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in his individual name, whose address shall be stated. A party who is not represented by an attorney shall sign his pleading, motion, or other paper and state his address. Except when otherwise specifically provided by rule or statute, pleadings need not be verified or accompanied by affidavit. The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. If a pleading, motion, or other paper is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the pleader or movant. If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the pleading, motion, or other paper, including a reasonable attorney's fee.

North Carolina's Rule 11 is similar in intent, but not identical in construction, to the Federal Rule. It was instituted to prevent abuse of the legal system and permits the courts to impose appropriate sanctions, including an order to pay attorney's fees to the opposing party if pleading or motion has no basis in law or fact or is interposed for improper purpose such as harassment or delay. Overcash v. Blue Cross and Blue Shield of North Carolina, 94 N.C. App. 602 (1989)

The Rule 11 analysis contains three parts: (1) factual sufficiency, (2) legal sufficiency, and (3) improper purpose. A violation of any one of these requirements mandates the imposition of sanctions, and the punishment is not left to the discretion of the trial judge. Sanctions may be imposed under Rule 11 against the offending attorney, her client, or both.

1. Read Before You Sign

Rule 11 places an affirmative duty upon the attorney to actually read and sign the pleading, motion, or “other paper.” Before signing the document, the attorney is required to make a reasonable inquiry into the facts and law applicable to that particular case. A reasonable inquiry intimates that some investigation is necessary. The appellate courts have decided that an inquiry is reasonable if, given the knowledge and information which can be imputed to a party, a reasonable person under the same or similar circumstances would have terminated his or her inquiry and formed the belief that the claim was warranted under existing law. If so, then the party's inquiry will be deemed objectively reasonable. Page v. Roscoe, LLC, 129 N.C. App. 678 (1998) The reasonableness of the belief that the pleading was warranted by existing law is calculated at the time the document was actually signed. Bryson v. Sullivan, 330 N.C. 644 (1992) (Compare to N.C.G.S. § 6-21.1, discussed herein, which proscribes ongoing frivolous action in a lawsuit even though the initial pleadings may have satisfied Rule 11)

2. Reliance On Advice Of Counsel

Reliance on advice of counsel by a nonlawyer as to issues of law is relevant, but not conclusive evidence on the issue of "reasonable inquiry" for purposes of Rule 11. The relevant inquiry is not whether a reasonable person in the client's position would have been aware of the legal deficiencies, but whether the client made a reasonable inquiry to determine the legal sufficiency of the document. It is appropriate, however, to consider in evaluating reasonableness of inquiry that nonlawyers are not expected to appreciate nuances of subtle legal issues. Bryson v. Sullivan, 330 N.C. 644 (1992) Parties, as well as attorneys, may be subject to sanctions for violations of the improper purpose prong of Rule 11. Both are subject to an objective standard to determine the existence of such an improper purpose. Id.

3. Factual Sufficiency

The reasonable inquiry the attorney is expected to make is into the factual and legal sufficiency of the claim. To determine whether a complaint is factually sufficient, for purposes of Rule 11, the court must determine: (1) whether the attorney or pro se party undertook a reasonable inquiry into the facts and (2) whether, after reviewing the results of his inquiry, he reasonably believed that his position was well grounded in fact. Golds v. Central Express, Inc., 142 N.C. App. (2001)

4. Legal Sufficiency

To determine whether a pleading is legally sufficient, for purposes of Rule 11, the trial court should look first to the facial plausibility of the pleading and only then, if the pleading is implausible under existing law, to the issue of whether to the best of the signer's knowledge, information, and belief formed after reasonable inquiry, the complaint was warranted by the existing law. Therefore, even though the pleading is frivolous on its face, the drafter may still escape sanctions by demonstrating the level of his legal research and investigation into the matter. This investigation would demonstrate the signer’s belief that the pleading was warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.

The movant seeking sanctions bears burden of persuasion in showing the paper does not state a plausible legal theory under existing law or good-faith argument for a change in law, as well as the burden of proof and of persuasion on the issue of actual conduct of signer in researching or otherwise gathering the law. In deciding Rule 11 sanctions, reference should be made to the document itself. Reasonableness of belief that it is warranted by existing law should be judged at the time the document was signed, and responsive pleadings should not be considered. A further hurdle for the movant is that the issue of Rule 11 sanctions is subject to de novo review upon appeal. Turner v. Duke University, 325 N.C. 152 (1989)

In its de novo review of the trial court's decision to impose or not to impose mandatory sanctions under Rule 11, the appellate court will determine (1) whether the trial court's conclusions of law support its judgment or determination, (2) whether the trial court's conclusions of law are supported by its findings of fact, and (3) whether the findings of fact are supported by sufficient evidence. If the appellate court makes these three determinations in the affirmative, it must uphold the trial court's decision to impose or deny the imposition of mandatory sanctions. Polygenex Intern., Inc. v. Polyzen, Inc., 133 N.C. App. 245 (1999)

5. Improper Purpose

Even if the court has ruled favorably regarding the drafter’s legal and factual basis for the pleading, the court must still determine whether the pleading was interposed for any improper purpose such as to harass the opponent, cause unnecessary delay in the proceedings, or cause a needless increase in the cost of litigation.

For example, a pleading has been drafted with an improper purpose under Rule 11 when its purpose is any purpose other than one to vindicate rights or to put claims of rights to a proper test. This may be inferred from the alleged offender's objective behavior with the burden on the movant to prove such improper purpose. Brown v. Hurley, 124 N.C. App. 377 (1996) It is not necessary to show subjective bad faith or malicious conduct. In Turner, the North Carolina Supreme Court remanded the case for mandatory sanctions for several violations including defense counsel’s scheduling depositions in a medical malpractice case in California and Florida in the week prior to trial. The Court noted that these were done with an objectively improper purpose and would have required the Plaintiff’s attorney to be gone from his office 4 out of the 5 business days prior to the start of the trial. The opinion states that although the decision to impose sanctions is mandatory, the type of sanction actually imposed by the trial judge will be reviewed under an “abuse of discretion” standard.

Although good faith reliance on attorney's advice under the objective standard described above may preclude sanctions against the client for filing pleadings under the legal and factual sufficiency prongs, it does not preclude sanctions for filing of pleading for improper purpose. Brooks v. Giesey, 334 N.C. 303 (1993)

6. Scope

By its terms, Rule 11 applies only to signed pleadings, motions or other papers, and Rule 11 is not panacea intended to remedy all manners of attorney misconduct. Ward v. Lyall, 125 N.C. App. 732 (1997) (attorney failed to properly serve summons and complaint)

7. Findings Of Fact

For the trial court to assess sanctions, findings of fact and conclusions at law are required. The trial court's failure to enter findings of fact and conclusions of law on issue of whether to impose Rule 11 sanctions is an error which generally requires remand in order for the judge to resolve any disputed factual issues. Remand, however, is not necessary when there is no evidence in the record, considered in light most favorable to movant, which could support legal conclusion that sanctions are proper. McClerin v. R-M Industries, Inc., 118 N.C. App. 640 (1995)

8. Timing Of Motion For Sanctions

Although Rule 11 does not specify a time limit for filing a sanctions motion, a party should make a Rule 11 motion within a reasonable time after he discovers an alleged impropriety. Griffin v. Sweet, 136 N.C. App. 762 (2000) (no relief when movant waited over 13 months after opponents final appeal was denied)

B. Discovery Violations

The wide variety of discovery violations that can give rise to sanctions, including attorney’s fees, is outside the scope of this paper, and could certainly be the subject of an entire book. Instead, a brief description of various misconduct will be listed. From a practical standpoint, it is well known that most judges hate discovery disputes. The purpose of discovery in civil actions is to allow a fair and full exchange of information between the litigants which should prevent unfair surprise, and allow the court to narrow the issues in controversy. Furthermore, even though some litigants and their attorneys fragrantly and repeatedly engage in conduct which violates the discovery rules, their conduct is rarely sanctioned. In fact, some attorneys routinely object to virtually all written discovery with the comfortable knowledge that the judge will almost always give them one free frivolous set of objections or conduct. Regardless, a careful presentation of the existing law may persuade a judge to order the recovery of attorney’s fees in appropriate cases. The cases that truly capture the courts attention seem to be those in which there are multiple violations of the rules, or blatant disregard for court discovery orders.

1. Rule 26(G)---Improper Certification

Rule 26(g) is very similar to Rule 11 but not identical in that it applies to the signing of discovery papers. By signing the discovery request, response or objection, the attorney certifies that (1) it is based upon good law; (2) done for a proper purpose; and (3) not unreasonable or unduly burdensome. When an attorney signs discovery papers in violation of this rule, the motion for sanctions, including attorney’s fees, must be made with specific reference to Rule 26(g), and should not be filed with sole reference to Rule 11. Brooks v. Giesey, 334 N.C. 303 (1993) Brooks held that Rule 11 does not apply to “discovery responses” since Rule 26(g) specifically covers that issue. According to the rule, once a violation is established, sanctions are mandatory. The type of sanction, however, is in the discretion of the court. The Court may include an order to pay the amount of the reasonable expenses incurred because of the violation, including a reasonable attorney's fee.

2. Rule 30(G)---Failure To Attend Or Serve Subpoena

This Rule allows the recovery of attorney’s fees if:

Unlike Rule 26(g) and Rule 11, the sanctions under this provision are not mandatory. The Court may order the offending party to pay to the movant the reasonable expenses incurred by him and his attorney in attending, including reasonable attorney's fees

3. Rule 37 Sanctions

Rule 37 describes the relief available for most discovery violations, including attorney’s fees. Below are the provisions for which fees may be recovered:

4. Failure Of A Party To Obey Discovery Order

The amount of the fees is calculated based upon the expenses incurred by the opposing party’s failure to follow the rules.

III. SUMMARY JUDGMENT VIOLATIONS AND ATTORNEY’S FEES

Rule 56(g) allows the recovery of attorney’s fees if during the summary judgment process the opposing party presents affidavits in bad faith or solely for the purpose of delay. This is a mandatory provision requiring the Court to order fees upon proof that such a violation occurred.

IV. N.C.G.S. § 6-21.1

A. Purpose Of The Statute

It is possible that more members of the public are affected by efforts to obtain attorney’s fees from the Defendant, particularly in automobile collision cases, pursuant to N.C.G.S. § 6-21.1. This statute was enacted by the North Carolina General Assembly in 1959 which provided for an award of attorney’s fees as part of the costs in personal injury and property damage cases if the damage award was $1,000 or less. (now $10,000.00 or less) Washington v. Horton, 132 N.C. App 347 (1999) The purpose of the statute was to provide relief for a person who has suffered a personal injury or property damage in an amount so small that if the person were required to pay an attorney out of the recovery, it would not be economically feasible to bring suit on that claim. In such a situation, the Defendant, though at fault, would have an unjustly superior bargaining power in settlement negotiations. This is true since the vast majority of such claims arise out of automobile accidents in which the alleged wrongdoer is insured and the wrongdoer’s insurance company is in control of the litigation. This remedial statute has been construed liberally so as to accomplish the purpose of the legislature and to bring within it all cases fairly falling within its intended scope. Hicks v. Albertson, 284 N.C. 236 (1973)

Trial judges, however, were not given unbridled discretion in awarding attorney’s fees and to that end, the North Carolina Court of Appeals stated: “While the statute is aimed at encouraging injured parties to press their meritorious but pecuniary small claims, we do not believe that it was intended to encourage parties to refuse reasonable settlement offers and give rise to needless litigation by guaranteeing that counsel will, in all cases, be compensated.” Harrison v. Herbin, 35 N.C. App. 259 (1978)

The statute has been amended since its inception to increase the damage award amount for which attorney’s fees from the opponent are available, and to include an insurance bad faith provision for actions directly against a carrier. It now reads:

In any personal injury or property damage suit, or suit against an insurance company under a policy issued by the Defendant insurance company and in which the insured or beneficiary is the Plaintiff, upon a finding by the court that there was an unwarranted refusal by the Defendant insurance company to pay the claim which constitutes the basis of such suit, instituted in a court of record, where the judgment for recovery of damages is ten thousand dollars ($10,000) or less, the presiding judge may, in his discretion, allow a reasonable attorney’s fee to the duly licensed attorney representing the litigant obtaining a judgment for damages in said suit, said attorney's fee to be taxed as a part of the court costs. N.C.G.S. § 6-21.1

B. Factors The Court Must Consider

When the suit was actually brought to trial, the judge who presided over the trial would determine whether a fee for the attorney of the party recovering damages should be allowed and, if so, in what amount. The Legislature contemplated that the trial judge would be in a better position than any other to make that determination, and correspondingly extended a large degree of autonomy to the trial judge. Hicks at 239. By the express language of the statute, the allowance of counsel fees is in the discretion of the presiding judge. Blackmon v. Bumgardner, 135 N.C. App. 125 (1999) However, the text of the statute contemplates some inquiry by the presiding judge before the court can exercise its discretion in awarding attorney’s fees and therefore the judge’s discretion is not unbridled. Thorpe v. Perry-Riddick, 144 N.C. App. 567 (2001)

When determining whether to award attorney’s fees under this statute, the trial court is to consider the entire record in properly exercising its discretion, including, but not limited to, the following factors: (1) settlement offers made prior to the institution of the action; (2) offers of judgment made and whether the judgment finally obtained was more favorable than such offers; (3) whether Defendant unjustly exercised superior bargaining power; (4) in the case of an unwarranted refusal by an insurance company, the context in which the dispute arose; (5) the timing of settlement offers; and (6) the amounts of the settlement offers as compared to the jury verdict. Washington at 334. These factors are commonly known as the Washington factors.

C. Amount And Timing Of Settlement Offers

Many of the Washington factors required to be considered by the trial court are self-explanatory and others require more analysis. In considering the first factor, the court must consider whether an offer was made by the Defendant prior to the institution of the lawsuit. No offer or a low offer would, of course, favor the Plaintiff in obtaining an award of attorney’s fees pursuant to N.C.G.S. § 6-21.1, while a reasonable offer from the Defendant would cut in favor of the defense. In a 2001 automobile accident case in which the Plaintiff was awarded attorney’s fees pursuant to N.C.G.S. § 6-21.1, the trial court was found to have properly considered the first factor when it included a finding that prior to the filing of the action, the Defendant made a settlement offer of $500 and the Plaintiff counter-offered with $1,400. Davis v. Kelly, 147 N.C. App. 102 (2001)

On the other hand, in an unpublished decision the Court of Appeals expressed its displeasure in a 2002 case in which no findings were entered concerning the precise timing and amounts of Plaintiff’s pretrial settlement demands or Defendant’s pretrial offers, although the court received uncontested evidence that the Defendants made multiple settlement offers of up to $2,500 prior to trial, which was higher than the jury award of $2,200. The Court of Appeals reversed the award of attorney’s fees for this and similar reasons and remanded the issue for further review and fact finding in accordance with the Washington factors. Although unpublished, the opinion does suggest how the court might rule in a similar case. Mejia v. Patel, 148 N.C. App. 406 (2002) (unpublished)

D. Rule 68 Offers Of Judgment

The second factor, “offers of judgment” pursuant to Rule 68, and whether the ‘judgment finally obtained’ was more favorable than such offers”, has been the subject of much debate, centering on the definition of the phrase, “judgment finally obtained.” N.C.G.S. § 1A-1, Rule 68 provides in pertinent part:

“At any time more than 10 days before the trial begins, a party defending against a claim may serve upon the adverse party an offer to allow judgment to be taken against him for the money or property or to the effect specified in his offer, with costs then accrued…An offer not accepted within 10 days after its service shall be deemed withdrawn and evidence of the offer is not admissible except in a proceeding to determine costs. If the judgment finally obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer.”

Blackmon at 339. The purpose of Rule 68 is to encourage settlements and avoid protracted litigation. The Rule 68 offer is intended to save the Defendant the costs from the time of that offer forward if the “judgment finally obtained” by the Plaintiff is less than the sum offered by the Defendant. Id.

E. Judgment Finally Obtained

A judgment is the final decision of the court resolving the dispute and determining the rights and obligations of the parties. Robinson v. Shue, 145 N.C. App. 60 (2001) The North Carolina Supreme Court has decided that, within the confines of Rule 68, “judgment finally obtained” means the amount ultimately entered, as representing the final judgment. This includes the jury’s verdict as modified by any applicable adjustments, by the respective court in any particular controversy, not simply the amount of the jury’s verdict. Davis at 406. Since N.C.G.S. § 6-21.1 allows for attorney’s fees to be awarded as costs, such fees would be included in the definition of the “judgment finally obtained”.

This creates an interesting dilemma for the Defendant. Not only must the Defendant evaluate the case to determine the amount the Plaintiff may recover from a jury, but must also include an amount for costs and attorney’s fees that have been incurred and may be incurred from the time of the offer to the entry of the jury’s verdict when evaluating the amount of his or her Rule 68 offer. Roberts v. Swain , 353 N.C. 246 (2000); Poole v. Miller, 342 N.C. 349 (1995)

For example, in a case decided last year, the Defendant made a Rule 68 offer of judgment for $500. Davis v. Kelly, 147 N.C. App. 102 (2001) The Plaintiff did not accept the offer and counter-offered $1,400. The jury returned with a verdict of $204.10. The Defendant argued that her offer of judgment was more than twice the amount of the jury’s verdict and therefore the award of attorney’s fees was an abuse of discretion. Just as the Court had held in 2000 that post Rule 68 offer costs should be included in calculating the final judgment, the Davis court held that the attorney’s fees for work done both before and after the Defendant’s offer of judgment ($2,775.00) should be added to the jury verdict ($204.10) in order to determine the final judgment ($2,979.10). Since the final judgment obtained of $2,929.10 was greater than the $500 Rule 68 offer of judgment, the court properly considered this factor in favor of the Plaintiff.

F. “Costs Then Accrued”

If a Defendant makes a Rule 68 offer of judgment it must by the very language of the statute include the amount “with costs then accrued.” Since the recovery of applicable attorney’s fees pursuant to N.C.G.S. § 6-21.1 are part of costs in those actions, a Plaintiff may logically accept a Rule 68 offer of judgment in an amount less than $10,000.00 and then petition the court for attorney’s fees if there is no mention of attorney’s fees in the offer. Hicks v. Albertson, 284 N.C. 236 (1973) She must, of course, still meet the Washington factors, because the recovery of these fees is not automatic. Common practice for Defendants to include “attorney’s fees taxable as costs” in their total Rule 68 offer is questionable, but was approved by the Court of Appeals. Aikens v. Ludlum, 113 N.C. App. 823 (1994) The Aikens opinion arose out of a Rule 68 offer of judgment for $10,001.00, and it will be quite interesting to see if a contrary result will occur with an offer of less than $10,000.00 using the same inclusive language about attorney’s fees.

In one older case when N.C.G.S. § 6-21.1 applied to claims of less than $5,000.00, the Defendant made a Rule 68 offer of $5,001.00 with costs accrued except any attorney’s fees. Purdy v. Brown, 307 N.C. 93 (1982) (emphasis added) Normally, a Defendant can not exclude any costs accrued. The North Carolina Supreme Court held, however, that since the offer exceeded the $5,000.00 threshold it was still a valid offer since no attorney’s fees could be recovered if the verdict exceeded that amount. Purdy is a unique case because it predated the case law regarding “judgment finally obtained,” but it is still good law on the recovery of costs with a Rule 68 offer. The interesting case will be when and if the appellate courts reconcile the Aikens and Purdy opinions.

G. Superior Bargaining Power

The third factor, whether the Defendant unjustly exercised superior bargaining power, is quite vague. Although “unjustly superior bargaining power” is one of the purposes of N.C.G.S. § 6-21.1, a usable definition other than a common sense interpretation in order to apply this factor has not really been provided by the courts. Hicks at 42. We are left to deduce a workable definition from the few cases that discuss the factor. The most recent case to discuss this factor was an unpublished decision, but it offers some guidance, since it found an unjust exercise of superior bargaining power. In its findings, the trial court noted the Defendant’s insurance company’s reduction in settlement position from $4,500 to $4,005 upon Plaintiff's filing of her complaint. It further cited the Defendant’s insurance company’s attempt to unilaterally reduce a settlement offer from $6,000 to $5,875 after Plaintiff's acceptance and its "refus[al] to make any further offers or to comply with the terms of settlement as agreed upon by counsel." McKinney v. Stafford, 563 S.E.2d 309, 311 (N.C. App. 2002) (unpublished) Also, in a case decided last year, a trial court found that the Defendant and her insurance company unjustly exercised superior bargaining power by refusing to budge through and including trial from its initial and full valuation of the Plaintiff’s claims. Stillwell v. Gust, 148 N.C. App. 128 (2001)

On the other hand, the trial court did not find an exercise of unjustly superior bargaining power in a case where the Defendant had offered $200.00 to Plaintiff prior to trial, and the jury returned a verdict of $250.00 for Plaintiff. Harrison v. Herbin, 35 N.C. App. 259 (1978) The trial court perceived no exercise of any unjustly superior bargaining power on the part of the Defendant based on those facts. The Court further stated that while the statute is aimed at encouraging injured parties to press their meritorious but pecuniarily small claims, they did not believe that it was intended to encourage parties to refuse reasonable settlement offers and give rise to needless litigation by guaranteeing that counsel will, in all cases, be compensated. Harrison.

H. Unwarranted Refusal To Pay Claim By Insurance Company

In 1967, N.C.G.S. § 6-21.1 was amended to apply to actions brought by a named insured or beneficiary under a policy issued by the Defendant insurance company. In order to recover against an insurance company, the trial court was required to find an unwarranted refusal by the Defendant insurance company to pay the claim which constitutes the basis of the suit. Washington at 334. This is the fourth Washington factor the courts are required to consider in deciding to award attorney’s fees. The appellate courts in North Carolina have uniformly held that an unwarranted refusal to pay a claim only applies in cases brought by an insured or a beneficiary against an insurance company Defendant. Rogers v. Rogers, 2 N.C. App. 668 (1968); Yates Motor Company v. Simmons, 51 N.C. App. 339 (1981) In any other case involving personal injury or property damage brought between private individuals, there is no requirement to prove an unwarranted refusal, and attorney’s fees are recoverable in those cases even when there is no insurance coverage. In a small claim against an insurance company, the trial judge must consider the “context in which the dispute arose.” Washington at 334.

I. Timing Of Settlement Offers

In evaluating the timing of settlement offers (factor five), the trial courts have provided little insight into their decision making process. Generally, the courts recite the facts relating to the timing of settlement offers with no discussion as to their considerations. In a case decided last year, the trial court discussed the timing of the Defendant’s settlement offer as evidenced by the court’s findings that the Defendant offered to settle the case for $1,650.00 on December 3, 1997 and that the Defendant tendered an offer of judgment on April 22, 1998 for $1,718.00. The jury returned a verdict of $1,600.00. Robinson at 834. When attorney’s fees and costs were included to determine the “judgment finally obtained,” the Court affirmed the award of attorney’s fees to the Plaintiff.

The concern raised by the Defendant in Robinson was that he should avoid paying attorney’s fees, since he had made several early, and arguably reasonable, offers. He argued it was unfair to allow the Plaintiffs to just run up the bill on attorney’s fees when the jury ultimately gave them an amount very similar to the offers. Nevertheless, the offers made by the Defendant failed to include any consideration for the attorney’s fees likely to have accrued at that point plus other costs already incurred at the time of the offer. It would appear that for a Defendant to get the benefit of this factor he should make an offer very early in the case that gives some consideration to the inclusion of attorney’s fees and costs generated to date.

J. Settlement Offers V. Jury Verdict

The final factor, the amounts of the settlement offers as compared to the jury verdict, is relatively straightforward. If the jury verdict is higher than the amount offered by the Defendant, it would strengthen the Plaintiff’s case for attorney’s fees, however, a jury verdict lower than the settlement offer made by the Defendant, would support a denial of attorney’s fees to the Plaintiff. When viewed in conjunction with the second factor which instructs the court to consider the judgment finally obtained, it is unclear that this factor has any real significance.

K. Discretion Of The Trial Judge And Findings Of Fact

In reviewing the decision of the trial court to award attorney’s fees under N.C.G.S. § 6-21.1, by express language of the statute, the decision is in the discretion of the presiding judge and is reversible only for an abuse of discretion. In order to prove an abuse of discretion, the appellant must show that the trial court’s ruling was manifestly unsupported by reason or is so arbitrary that it could not have been the result of a reasoned decision. Robinson at 833. In reviewing an assignment of error, the scope of appellate review is limited to determining whether the trial judge’s underlying findings of fact are supported by competent evidence, in which event they are conclusively binding on appeal, and whether those factual findings in turn support the judge’s ultimate conclusions of law. Id.

The discretion of the trial judge is not unbridled, however, and the Washington factors discussed above must be considered after examining the entire record and findings of fact must be entered into the court record to allow for review of the consideration of the above factors. Mere recitation that the trial court has considered the Washington factors without additional findings of fact would be inadequate and would not allow meaningful appellate review. Detailed findings of fact are not required for each factor, and the absence of a finding on one factor does not require reversal if the trial judge made adequate findings on the whole record to support its decision on attorney’s fees. Robinson at 836; House v. Stone, 564 S.E.2d 319, 322 (N.C. App. 2002) (UNPUBLISHED)

There is a recent unpublished decision, decided on June 4, 2002, which brings into question the former proposition that detailed findings of fact are not required for each factor. The North Carolina Court of Appeals ruled that upon a request of findings of fact and conclusions of law pursuant to Rule 52, which states that “findings of fact and conclusions of law are necessary on decisions of any motion…only when requested by a party.” In that case, the Plaintiff made a Rule 52 request for the trial court to make specific findings of fact and conclusions of law with respect to the Plaintiff’s motion to tax reasonable attorney’s fees pursuant to N.C.G.S. § 6-21.1. The appeals court ruled that pursuant to the Rule 52 request, the trial court failed to properly assess the second Washington factor and remanded the case for sufficient findings for review by the Court of Appeals. House at 323.

L. Reasonableness Of Fee Awarded

In determining whether an award of counsel fees by the trial court is reasonable, it must also conclude that given the nature and complexity of the case, the time expended by counsel is reasonable and is consistent with that which may have been expected by an attorney of similar experience and expertise in the geographic area. Stillwell at 630. This requirement has also recently been stated as, “the court record must further contain findings of fact as to the time and labor expended, the skill required, the customary fee for like work, and the experience or ability of the attorney, based on competent evidence.” Robinson at 834. The attorney moving for fees has the responsibility to provide this evidence to the court and it is acceptable to provide this evidence by testimony or affidavit. Blackmon at 338. The safest practice is to provide documentary evidence such as the fee agreement with the client and the attorney’s time sheets reflecting the number of hours expended on the case. In a case where the trial judge may consider the fee higher than is reasonable, it may be wise to provide the court affidavits from area attorneys, with like experience, skill and ability. The attorney opposing such fees would be wise to provide evidence to the court that the hours or rates were excessive given the experience, skill or ability of the opposing attorney.

If the trial judge makes sufficient findings to support the award pursuant to the Washington factors, and the factors in assessing the reasonableness of the attorney’s fee amount, the amount is truly in the discretion of the trial court. Parties who have had fees assessed against them have appealed to make an equity argument. Regardless, an attorney’s fee seven times the amount of the jury verdict has been upheld. Hardesty v. Alridge, 147 N.C. App 776 (2001) The “reasonable fee” provided for in the statute should be based upon the actual work performed by the attorney, even if the attorney was retained under a contingency fee arrangement.

M. Attorney’s Fees On Appeal

Attorney’s fees from the Defendant are also available for work performed in an appeal if the personal injury or property damage case is appealed. The North Carolina Court of Appeals has simply stated: “This court has held that the trial court has the authority under N.C.G.S. § 6-21.1 to award additional attorney’s fees for an appeal.” Davis at 407. They then remanded the case for the limited purpose of allowing the District Court, in its discretion and upon Plaintiff’s motion, to make findings of fact relevant to the determination of reasonable attorney’s fees for services rendered on appeal and to enter an award consistent with those findings.

It is unclear what findings are required to support an award of attorney’s fees for appellate work, but certainly the factors supporting the reasonableness of the award in the first place should still apply. Those same factors include the nature and complexity of the case, and that the time expended by counsel is reasonable and is consistent with that which may have been expected by an attorney of similar experience and expertise in the geographic area. Stillwell at 630. It seems that if a party is awarded attorney’s fees for the underlying trial work performed, and that party is successful in the appeal, attorney’s fees for the appeal would almost be awarded as a matter of course so long as they are requested by motion, the reasonableness factors are considered, and findings are entered. This would appear to be the case so long as the Plaintiff was the appellee, and she successfully defended her recovery on appeal. Theoretically, a Plaintiff who received a recovery at trial, perhaps smaller than expected, and then unsuccessfully appealed may not be entitled to recover fees for appellate work. (See Appendix D for an Order allowing fees after an appeal)

N. Cases Involving Multiple Defendants

Another issue in which the trial court has properly exercised its discretion is assessing attorney’s fees against only one party when there are multiple Defendants or a party is brought into the action as a third party Defendant. In Stillwell v. Gust, supra, the Plaintiff, a passenger, was injured in an automobile accident and sued the driver of the other vehicle. The other driver filed a third-party counterclaim against the driver of the vehicle in which the Plaintiff was traveling and sought contribution. The trial court ordered the Defendant to pay the costs and attorney’s fees, which totaled over $10,000, and decided that the attorney’s fees and costs were not subject to contribution by the third party Defendant. This decision was reviewed for an abuse of discretion and the court of appeals found no such abuse. Stillwell at 631. The existence of multiple Defendants does not mean that an attorney’s fee award will be divided among the Defendants, again requiring a defense attorney to carefully evaluate the case and their Rule 68 settlement offers against the probable grand total of the Plaintiff’s attorney’s fees and costs.

O. No Interest On Attorney’s Fees

There is one bright spot for a party against whom counsel fees have been assessed. Interest is not assessed for attorney’s fees. Attorney’s fees awarded pursuant to N.C.G.S. § 6-21.1 are taxed as part of the court costs pursuant to the express provisions of N.C.G.S. § 6-20 and there is no provision for interest on court costs. Washington at 335.

P. Attorney’s Fees After Settlement

Although the text of N.C.G.S. § 6-21.1 seems to indicate that the award of attorney’s fees applies to litigation in court, attorney’s fees have been awarded in cases that were settled or went to arbitration. Where a suit is actually brought to trial, it is clear that the legislature contemplated that the judge who presided at the trial would determine whether a fee for the attorney of the party recovering damages should be allowed and, if so, the amount. The judge would be in a better position than any other to make this determination. It has been argued that the use of the adjective 'presiding' shows the legislature intended that no fee should be allowed in a case settled without actual trial. This reading would require the claimant to insist that the case be carried to trial, thereby enlarging the reasonable attorney's fee, in order that his net recovery equal his actual loss.

In a 1973 case, the Defendant made a Rule 68 offer of judgment for “$150 plus costs accrued to the date of the offer”. The Plaintiff then served a notice of acceptance “for the sum of $150 plus the costs accrued to the date of said offer to include as a portion of said cost attorney’s fees to be taxed against the Defendant pursuant to N.C.G.S. § 6-21.1 accrued to said date in the discretion of the court”. The Plaintiff moved the court in which the action was filed to tax a reasonable attorney's fee as a portion of the costs and after a hearing, the trial judge awarded attorney’s fees to the Plaintiff. In reviewing the decision of the court, the North Carolina Supreme Court decided that the term 'presiding judge' means the judge presiding over the court in which the action is instituted and such judge can, without danger of injustice, fix a reasonable fee for the attorney of the party recovering damages by settlement prior to trial. The fee allowed was awarded by the trial judge and the Defendant did not contend that the amount of the attorney’s fee was unreasonable and was therefore affirmed. Hicks v. Albertson, 284 N.C. 236 (1973)

Although this decision to award attorney’s fees in a settled case seems very significant at first glance, it enjoys little practical application. Every carefully drafted Rule 68 offer of judgment or settlement agreement should expressly address and include the issue of attorney’s fees. (But see the discussion concerning “costs then accrued,” supra) That is the most probable reason the court has not dealt with this issue since 1973 and in the face of the development of the Washington factors promulgated in 1999, it is questionable that attorney’s fees for settled cases would support an award for fees.

V. N.C.G.S. § 6-21.5 ATTORNEY’S FEES IN NONJUSTICIABLE CASES

Unlike N.C.G.S. § 6-21.1, attorney’s fees in nonjusticiable cases are not only recoverable in personal injury cases, but in any civil action or special proceeding. The text of the statute reads:

In any civil action or special proceeding the court, upon motion of the prevailing party, may award a reasonable attorney's fee to the prevailing party if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading. The filing of a general denial or the granting of any preliminary motion, such as a motion for judgment on the pleadings pursuant to G.S. 1A-1, Rule 12, a motion to dismiss pursuant to G.S. 1A-1, Rule 12(b)(6), a motion for a directed verdict pursuant to G.S. 1A-1, Rule 50, or a motion for summary judgment pursuant to G.S. 1A-1, Rule 56, is not in itself a sufficient reason for the court to award attorney's fees, but may be evidence to support the court's decision to make such an award. A party who advances a claim or defense supported by a good faith argument for an extension, modification, or reversal of law may not be required under this section to pay attorney's fees. The court shall make findings of fact and conclusions of law to support its award of attorney's fees under this section.

A justiciable issue is an issue that is real and present as opposed to imagined or fanciful and for the court to find a complete absence of a justiciable issue, it must conclusively appear that such issues are absent even giving the pleadings the indulgent treatment they receive on motions for summary judgment or to dismiss. Sunamerica v. Bonham, 328 N.C. 254 (1991)

A. Purpose And Contrast With Rule 11

The legislative purpose of the statute is to discourage frivolous legal actions. Short v. Bryant, 97 N.C. App. 327 (1990) There are other mechanisms by which to move for attorney’s fees from the other side for frivolous claims, most notably Rule 11. The major difference between Rule 11 sanctions and N.C.G.S. § 6-21.5 award of attorney’s fees is that the Rule 11 inquiry is directed only at the pleadings. By signing the pleadings the attorney merely certifies that the pleadings are proper. Frivolous action in a lawsuit can occur at any stage of the proceeding, and it is banned whenever it occurs. Short at 206. Unlike Rule 11, under N.C.G.S. § 6-21.5, the parties have a continuing duty to review the appropriateness of persisting in litigation. A claim alleged to lack a justiciable issue thereby requires the review of all relevant pleadings and documents to determine whether attorney’s fees should be awarded. Bryson v. Sullivan, 330 N.C. 644 (1992)

Upon a finding that a case contains no justiciable issue of law or fact, the trial court must then determine whether the litigant should have been reasonably aware at the time the complaint was filed that the pleading contained no justiciable issues of fact or law, or that the party persisted in litigating the case after point where the party should have reasonably become aware that the pleadings filed no longer contained a justiciable issue. Brooks v. Geisey, 334 N.C. 303 (1993)

A pleading when read alone may set forth a justiciable controversy, but when read with the responsive pleading no longer presents a justiciable controversy. Two important cases that establish this principal are Sunamerica v. Bonham and Winston-Salem Wrecker v. Barker. In Sunamerica, the Defendant answered raising the affirmative defense of the statute of limitations and the court found in awarding attorney’s fees that it should have become apparent to the Plaintiff that, barring circumstances tolling the statute of limitations, the complaint no longer contained a justiciable issue. Sunamerica at 438.

In Winston-Salem Wrecker, the court considered the affirmative defense of sovereign immunity with the court reaching the conclusion that the insurmountable defenses raised by the Defendants foreclosed any reasonable expectation of an affirmative recovery by the Plaintiffs. Winston-Salem Wrecker at 619. Instead of acknowledging that the Defendant’s answer in these cases raised a virtually unassailable defense which foreclosed any reasonable expectation of an affirmative recovery by the Plaintiff, the Plaintiff forged on frivolously attempting to create a controversy. The continuation of frivolous litigation as found in these cases, constitutes a reckless waste of judicial resources as well as the time and money of the prevailing litigant. Sunamerica at 439. Therefore, when deciding whether a party is entitled to attorney’s fees under N.C.G.S. § 6-21.5, the trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should have reasonably become aware that the pleading he filed no longer contained a justiciable issue.

It is important to note again that the mere filing of an affirmative defense without more is insufficient to establish the absence of a justiciable issue, nor is granting the Defendant's motion for summary judgment "in itself a sufficient reason for the court's decision to award attorney's fees" under N.C.G.S. § 6-21.5. The statute also provides, in part, that the entry of judgment pursuant to Rule 50 or Rule 56 may be some evidence that an attorney's fee may be warranted. Sunamerica at 438. Additionally, action by the losing party which perpetuated litigation in the face of events substantially establishing that the pleadings no longer presented a justiciable controversy is also persuasive evidence for purposes of N.C.G.S. § 6-21.5. These events are only evidence of the absence of a justiciable issue to support the court's decision to make such an award. Whether such evidence would be sufficient without more is determinable on a case-by-case basis.

Additionally, the courts have found that the existence of bad faith supports the trial court’s decision to award attorney’s fees. In Winston-Salem Wrecker, the trial court took judicial notice of the fact that the Plaintiff’s lawsuit was commenced on the eve of the primary election for Sheriff, in which the Defendant Sheriff was a candidate and the court specifically stated that the Plaintiff’s bad faith supported the award of attorney’s fees. Alternatively, a party’s good faith in not continuing a nonjusticiable case should forestall an award of attorney’s fees as demonstrated in Bryson.

In Bryson, after a consent decree was signed, rendering nonjusticiable all of the claims alleged in the Plaintiffs’ complaint, the Plaintiffs filed a voluntary dismissal with prejudice. There was no indication in the record that the Plaintiffs took any further affirmative action in regard to the lawsuit between the time they received the Defendant’s answer and the time of the hearing on Defendant's summary judgment motion. The court concluded that because the Brysons dismissed their case seven weeks after the defenses were asserted and did not pursue the litigation further during those intervening weeks, the Brysons did not persist in litigating the case after a point where they should reasonably have become aware that the pleading [they] filed no longer contained a justiciable issue. Bryson at 665.

B. Jurisdiction After Dismissal

Note that jurisdiction remains with the court even after a dismissal to decide post-dismissal motions, regardless of whether the dismissal was with prejudice or not. Bryson at 664.

C. Findings Required For Fees Pursuant To 6-21.5

Under N.C.G.S. § 6-21.5, the trial court is required to make findings of fact and conclusions of law to support its award of attorney's fees. Specifically, in deciding a motion brought under N.C.G.S. § 6-21.5, the trial court is required to evaluate whether the losing party persisted in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue. Brooks at 310 & 343. It is unclear how specific the findings must be to uphold the award of fees, but the court should make a specific finding that the Plaintiff should reasonably have been aware of the deficiencies in their claims. Although there was no specific finding on that issue in Brooks, the Court of Appeals found the trial court's findings and conclusions to be sufficient to uphold the award.

D. Reliance Upon Legal Advice

One important question is whether clients who rely on legal advice can be sanctioned for factual and legal deficiencies, and additionally whether a court may assess the awarded attorney’s fees against the losing party’s attorney. Under Rule 11, a represented party may rely on an attorney’s advice as to the legal sufficiency of his claims and will only be held responsible if his evident purpose is to harass, persecute, vex his opponents, or cause them unnecessary cost or delay. Brooks at 308. N.C.G.S. § 6-21.5 does not contain the same limitations and therefore clients who presumably know nothing about the law can be sanctioned for factual and legal deficiencies. Id. Thus, sanctions under N.C.G.S. § 6-21.5 may be appropriate despite the layperson's reliance on legal advice if the layperson persists in litigating the case after a point where he should reasonably have become aware that the pleading he filed no longer contained a justiciable issue. Id. This is an objective standard, and not based upon the litigant’s subjective belief of the appropriateness of his litigation.

It appears that allowing attorney’s fees pursuant to N.C.G.S. § 6-21.5 may only be imposed against a party, and not her attorney. Statutes awarding an attorney's fee to the prevailing party are in derogation of the common law, N.C.G.S. § 6-21.5 must be strictly construed. Under the statute and the cases interpreting it there have never historically been an instance in which an attorney has been ordered to pay the prevailing party's attorneys' fees. Additionally, the language of the statute refers in every instance to the "party" without any hint of including counsel in that term. This particular issue, however, has never been addressed squarely by the appellate courts.

VI. ATTORNEY’S FEES IN ARBITRATION

A. Court-Ordered Nonbinding Arbitration

In 1989, the North Carolina General Assembly authorized statewide, court-ordered nonbinding arbitration and further authorized the North Carolina Supreme Court to adopt rules governing this procedure. The Supreme Court subsequently implemented the Rules for Court-Ordered Arbitration, which requires court-ordered arbitration in all civil actions in which the claims for monetary relief do not exceed $15,000.00, exclusive of interest, costs and attorney's fees. Rules for Court-Ordered Arbitration in North Carolina, Rule 1(a)(1998). The purpose of this program is to "create an efficient, economical alternative to traditional litigation for prompt resolution of disputes involving money damage claims up to $15,000.00." Id. at Commentary Rule 1.

Consistent with the overall purpose of the Rules for Court-Ordered Arbitration, several provisions of the Rules deal specifically with the arbitrator's authority and that effect. Rule 3(g) states: "arbitrators shall have the authority of a trial judge to govern the conduct of hearings, except for the power to punish for contempt...." Id. at Rule 3(g). Rule 4(c) states that "[t]he award must resolve all issues raised by the pleadings...." Id. at Rule 4(c)(emphasis added). Rule 7(a) states that "[t]he arbitrator may include in an award court costs accruing through the arbitration proceedings in favor of the prevailing party." Id. at Rule 7(a).

From a practical standpoint, the only personal injury claims that will be referred to court-ordered arbitration will be those filed in District Court unless the parties agree, or a party makes a motion for arbitration demonstrating the value of the claim is less than $15,000.00. Certainly, many experienced personal injury attorneys will file very small claims in District Court seeking less than $10,000.00 while building their file in support of a motion for attorney’s fees pursuant to N.C.G.S. § 6-21.1.

Over the past ten years there has been considerable debate as to whether arbitrators have the authority to award attorney’s fees. An analysis of the leading opinions suggests that attorney’s fees pursuant to N.C.G.S. § 6-21.1 are recoverable even if a case is referred to mandatory arbitration with some limitations. Taylor v. Cadle, 130 N.C. App. 449 (1998); Compare Bass v. Goss, 105 N.C. App. 242 (1992) The Taylor court held as follows:

“…under the language and intent of the Rules for Court-Ordered Arbitration, an arbitrator is authorized to decide all monetary claims raised by the pleadings in civil actions requesting damages in an amount less than $15,000.00, including those claims for attorney’s fees and costs where permitted by law.”

Previously, there was the theory encouraged by the Bass opinion that the Plaintiff could wait until after the arbitration award had been entered, the 30 day appeal period had passed, and then petition the presiding judge for attorney’s fees. Although the North Carolina Supreme Court has not addressed this issue directly, that approach would likely now result in a malpractice claim against the lawyer. The Taylor court expressly held as follows:

“Whenever a party requests attorney’s fees and the arbitrator awards or denies attorney’s fees or fails to consider the issue, the dissatisfied party must timely appeal the award, even though it is satisfactory in all other respects. Failure of the dissatisfied party to timely preserve the issue will result in a waiver of this issue on appeal.”

Taylor and Bass are inconsistent with one another and essentially there are two different panels of the Court of Appeals reaching arguably contrary results. 21 Campell L. Rev. 191 (1999) If for no other reason than judicial economy, it makes sense to have the arbitrator determine all issues in controversy, including attorney’s fees. Additionally, the AOC created an Arbitration Award and Judgment form in order to expedite the arbitration process. This form contains sections in which the arbitrator is to enter the amount of any award, including an award of a principal sum, the interest to date, attorney's fees and other costs, and the total amount of the award.

Despite dicta from the Taylor opinion, there is presently no requirement that the arbitrator include detailed findings of fact pursuant to the Washington factors concerning the reasonableness of the attorney's fee award although that case may one day be decided by the courts. Given the relatively informal nature of arbitration and the desire to resolve these disputes efficiently, it is unlikely that the courts will impose the same level of scrutiny upon the award of attorney’s fees in arbitration as it does with District or Superior Court judges.

B. Binding Arbitration

The Uniform Arbitration Act (UAA) applies to any agreement to arbitrate a dispute in North Carolina unless preempted by the Federal Arbitration Act in a given case. Lucas v. City of Charlotte, 123 N.C. App. 140 (1996) The UAA seemingly prohibits the award of attorney’s fees in an arbitration award subject to the Act. N.C.G.S. § 1-567.11 The trial judge in Lucas, however, allowed attorney’s fees to the Plaintiff in a case which was referred to binding arbitration pursuant to N.C.G.S. § 6-21.1. The difference was that the trial judge only allowed attorney’s fees for time spent by the Plaintiff’s attorney working on the case prior to the Order referring the case to arbitration. The Court concluded that so long as the fees were not those generated during the arbitration process itself, the Plaintiff could still go back to the trial judge after the arbitration award and collect his attorney’s fees under N.C.G.S. § 6-21.1.

As a practical consideration, attorneys hoping to recover fees should conduct all the major work on the case before they agree to binding arbitration. The distinction between Lucas and Taylor has to be the fact that in Lucas there was an agreement by the parties to submit the dispute to binding arbitration thereby removing the case from the standard rules affecting court-ordered arbitrations.

C. Attorney’s Fees In Uninsured/Underinsured Cases

The standard auto policies in North Carolina allow the submission of a Plaintiff’s personal injury claim to arbitration pursuant to the insurance contract when there is a claim for uninsured or underinsured coverage. As a practical matter, unless there is some hope of recovery under N.C.G.S. § 6-21.5 for frivolous action in the lawsuit, there will not be a contention regarding attorney’s fee in an underinsured case, since the Plaintiff will have already recovered at least $10,000.00 from the tortfeasor before entering arbitration.

In an uninsured motorist case in which the damages are likely to be under $10,000.00 the Plaintiff can litigate the claim in court against the uninsured driver, and then seek attorney’s fees pursuant to N.C.G.S. § 6-21.1 from the court which are taxed against her own UM carrier. Turnage v. Nationwide Mutual Ins., 109 N.C. App. 300; aff’d, 335 N.C. 168 (1993) This approach will likely take longer, result in more unrecoverable costs, but is condoned by well settled law.

Alternatively, the Plaintiff may try to collect attorney’s fees pursuant to N.C.G.S. § 6-21.1 by filing a civil action, engaging in discovery as necessary, demanding arbitration, and then seek attorney’s fees with the court after the arbitrators have made their award. The standard UM and UIM arbitration clauses do not permit the arbitration award to include “fees to lawyers.” Under the Bass, Taylor, and Lucas holdings, supra, there is a reasonable argument that attorney’s fees can be awarded for the time spent prior to the demand for arbitration. Certainly, the Plaintiff’s counsel must be careful not to waive her rights to demand arbitration by pursuing the civil action to the prejudice of the UM/UIM carrier. Hackett v. Bonta, 113 N.C. App. 89 (1993)

VII. PUNITIVE DAMAGES

Effective January 1, 1996 the General Assembly adopted a statutory framework for the imposition of punitive damages, codified in Chapter 1D. N.C.G.S. § 1D-45 provide for the imposition of attorney’s fees in cases involving punitive damages as follows:

The court shall award reasonable attorney’s fees, resulting from the defense against the punitive damages claim, against a claimant who files a claim for punitive damages that the claimant knows or should have known to be frivolous or malicious. The court shall award reasonable attorney’s fees against a Defendant who asserts a defense in a punitive damages claim that the Defendant knows or should have known to be frivolous or malicious.

To date, there has been only one published appellate decision interpreting this statute. Rhyne v. K-Mart Corporation, 562 S.E.2d 82 (2002) In Rhyne, the trial judge refused to impose sanctions against K-Mart for its alleged “frivolous” or “malicious” defense despite the jury award of $23,000,000.00 in punitive damages. The court quoted Black’s Law Dictionary to define the terms of the statute. It held that “a defense is frivolous if "a proponent can present no rational argument based upon the evidence or law in support of [it]. A defense is malicious if it is wrongful and done intentionally" without just cause or excuse or as a result of ill will.”

Even though the Court noted the Plaintiffs had presented evidence that the Defendant had engaged in malicious acts or practices, there was no evidence that the defense of the punitive damage claim was frivolous or malicious. Although not cited by the Court it would appear that this analysis is somewhat similar to the recovery of attorney’s fees pursuant to N.C.G.S. § 6-21.5. It would be hard to imagine, however, any scenario in which the defense of a punitive damage claim could ever be determined to be frivolous or malicious, since the jury always has the authority to award punitive damages in its discretion after considering the appropriate constitutional factors. It would seem that the protection of the defendant’s assets from a large punitive damage claim similar to the one in Rhyne would always have merit.

On the other hand, it is much easier to contemplate a case in which a plaintiff is sanctioned under N.C.G.S. § 1D-45 for pursuing a clearly frivolous punitive damage claim. Similar to those cases under N.C.G.S. § 6-21.5 which allowed sanctions against plaintiffs who persist in litigation even in the face of an iron-clad affirmative defense, a plaintiff who pursues a punitive damage recovery despite the absence of objective evidence which would get the case to the jury could find themselves paying attorney’s fees. It would seem logical, however, that any attorney’s fees imposed should only cover expenses incurred after the totality of the circumstances and discovery revealed further attempts were frivolous or malicious.

Interestingly, a Plaintiff should be able to satisfy Rule 11 requirements for filing a complaint including a claim for punitive damages fairly easily in any tort action with some evidence of aggravated conduct by the Defendant, or a reasonable belief that discovery would reveal a pattern of such conduct. Only after discovery provided a wholly insufficient basis for a punitive damage recovery should the claim become “frivolous.” The safest course of action would be to file the personal injury action without a claim for punitive damages, and then seek to amend the complaint after discovery clearly provides the factual basis. The problem with this approach, of course, is that the defendant could object to discovery attempts seeking a pattern of misconduct since they could argue that absent a claim for punitives in the complaint, such discovery would not “be reasonably calculated to lead to the discovery of admissible evidence.” (See Rule 26 of the North Carolina Rules of Civil Procedure) Additionally, it would be risky not to include the claim if the case is filed very near the statute of limitations and an amendment is not allowed.

VIII. DIVISION OF ATTORNEY’S FEES

A. No Fee Split With Nonlawyers

For various public policy reasons, North Carolina prohibits the division of legal fees with non lawyers, and any such fee split would violate Rule 5.4 of the Revised Rules of Professional Conduct. The theory is that splitting fees with non lawyers would compromise the independent professional judgment of the attorney. A movement is gaining strength in North Carolina, however, that may ultimately authorize the creation of multidisciplinary practices which will make fee sharing arrangements with non lawyers routine. 36 Wake Forest L. Rev. 185 (2001) The North Carolina State Bar is currently studying the issue.

B. Fee Splits Between Lawyers

Perhaps somewhat more surprisingly, an attorney is ethically prohibited from dividing or splitting an attorney’s fee with another lawyer who does not practice in his law firm absent very specific exceptions. (See Rule 1.5 of the Revised Rules of Professional Conduct; RPC 148 and RPC 205(decided under previous version of Rules of Professional Conduct))

In the field of personal injury law, the most common scenario concerning a division of fees occurs when a prospective client approaches a local attorney who has little or no experience in these types of cases. That attorney often does a preliminary investigation, and determines the case has merit. The attorney would then like to refer the client for both financial reasons as well as practical reasons to a trial law firm that specializes in personal injury law. (See also Rule 1.1 of the Revised Rules of Professional Conduct which require the association of competent counsel) Of course, the referring attorney would like to be compensated for his services, and perhaps gain more experience in personal injury cases.

In order for the referring attorney to be ethically compensated Rule 1.5 of the Revised Rules of Professional Conduct require that the division of fees must be based upon the actual work done by each lawyer or the client’s consent in writing, the fee is reasonable and responsibility for the case is joint. Usually, in this scenario, the division of the fee will not be based upon the amount of actual work done by each lawyer, so it is necessary to obtain the client’s consent in writing. It should be noted that the actual division of the fee between the lawyers does not need to be disclosed to the client, so long as the other requirements are met.

Disclosure always seems to avoid more problems than it creates, so the most practical way to accomplish this is for the lawyers to agree on the division of the ultimate contingency fee that is collected, and have the client sign off on the agreement as well. Both lawyers should indicate in writing that the responsibility for the entire case will be joint even though the more experienced law firm will undertake most, if not all, of the actual trial work in the case. Often, in this scenario, the referring attorney remains a contact resource for the client’s questions, and she can assist with the collection of evidence which often is present near where the client lives, particularly with medical providers. A sample of a division of fee agreement which complies with Rule 1.5 is attached to this paper. (See Appendix B)

One critical issue that must be addressed when more than one law firm assumes responsibility for a personal injury case is how the costs of the action will be allocated. Typically, the client is indigent and can not assist with the employment of experts, preparation of exhibits, depositions, and other trial preparation. The division of costs normally correlates with the contemplated fee split, but there is no legal or ethical requirement that these amounts actually match.

C. Sharing Statutory Attorney’s Fees With The Client

The North Carolina State Bar recently received a great deal of response to its 2002 Proposed Formal Ethics Opinion 4 which addressed the propriety of splitting fee awards generated by N.C.G.S. § 6-21.1 with the client, as well as addressing whether an attorney might accept both a contingency fee and statutory fee in the same case. After a great deal of public comment, the Ethics Committee referred the matter to a subcommittee for further study effectively killing the proposal for the immediate future. Concerns included whether allowing the client to share in the statutory fee would defeat the legislative purpose of N.C.G.S. § 6-21.1 by allowing the client a greater recovery than his damages. Also, the proposed opinion would have prohibited an attorney from taking a small statutory fee award from the Defendant, and the balance of her fee from the client’s share which would have actually increased the client’s recovery. In particular, the proposed opinion might have dissuaded attorneys from seeking fee awards in the event the judge awarded a smaller fee than the contingency contract amount. (See Appendix C for an example of the author’s fee agreement which, in part, attempts to address this issue)

D. Discharged Lawyer In Contingency Fee Case

Nearly all personal injury cases handled for the Plaintiff involve representation in the form of a contingency fee. Although not legally or ethically required in North Carolina, it is certainly strongly advisable to put the contingency fee agreement with the client in writing. (See Appendix C for a sample contingency fee agreement)

Of course, from time to time in our adversarial system not only does the attorney fight with the opposing party and her counsel, but occasionally ends up in a substantial disagreement with his own client. Various legal principles apply to situations in which an attorney who has undertaken representation of a client with a contingency fee agreement is discharged before he or she is paid. The attorney’s remedies are set forth in the next section.

IX. ATTORNEY WITHDRAWS FROM REPRESENTATION

A. Charging Lien

Once a verdict or settlement is achieved in a personal injury contingency fee case, the attorney obtains through operation of law a “charging lien.” This charging lien is an equitable remedy which allows the attorney to attach his claim for attorney’s fees on the settlement proceeds “recovered by his aid,” so that he or she is paid prior to the disbursements of the remaining funds to the client and other claimants. The well established law in North Carolina, however, is that no right to an attorney's charging lien exists when an attorney working pursuant to a contingent fee agreement voluntarily withdraws prior to settlement or judgment being entered in the case. Mack v. Moore, 107 N.C. App. 87 (1992) In fact, the attorney in the Mack case was subject to Rule 11 sanctions for filing a purported “notice of charging lien” after her withdrawal.

What is somewhat less clear is whether an attorney can impose a charging lien on settlement proceeds when he is discharged by the client. One case from the North Carolina Court of Appeals held that “no lien could have attached because ‘an attorney cannot attach a lien to a fund recovered after his discharge or withdrawal, since at that time the fund would not be ‘recovered by his aid.’" Clerk of Court for Guilford County v. Guilford Building Supply Company, 87 N.C. App. 386 (1987) A charging lien attaches to a judgment, not a cause of action. Dillon v. Consolidated Delivery, Inc., 43 N.C. App 395 (1979) Regardless of whether the attorney may claim a “charging lien” on the settlement proceed funds, the attorney may still make a claim for recovery in quantum meruit for the reasonable value of his services provided. Id.

B. Attorney Is Discharged Prior To Completion Of The Representation

The client has the absolute right to representation from the attorney of his choosing, and can fire an attorney hired on a contingency fee contract with or without cause. Covington v. Rhodes, 38 N.C. App. 61 (1978) Even though an attorney and client typically execute a written fee agreement with various express mutual obligations, the client has the unilateral right provided by North Carolina common law to discharge the attorney. It is interesting to note that the attorney is limited in his ability to withdrawal from representation, but the client has no such limitations on his choice of counsel at any stage of the litigation.

If the client discharges the attorney in a contingency fee relationship after the attorney has provided significant valuable services to the Plaintiff for which has not been compensated, the client still remains liable to the attorney for compensation in quantum meruit. Furthermore, a discharged attorney who does not even have a charging lien may pursue her claim directly against the “settling attorney” who takes over a contingency case that is later settled. Pryor v. Merten, 127 N.C. App. 483 (1997) There are still many unanswered questions regarding North Carolina case law in this area. A recent case in our law firm illustrates some of the complications that can arise when an attorney is discharged.

My partner and I tried a significant automobile collision case in which the impact occurred around the centerline of a two lane divided highway. There were substantial problems proving liability, and as a result we engaged in serious settlement negotiations with the Defendant even through the course of the trial. Ultimately, the client rejected an offer which we had recommended, and he elected to allow “those twelve people” to decide his fate. Not surprisingly, the jury deadlocked on the issue of liability 10-2. The client then unilaterally discharged our firm from further representation. At this time, we had expended nearly two hundred and fifty hours representing the Plaintiff and had advanced thousands of dollars in fees towards various experts.

The Plaintiff then retained a second attorney with a similar contingency fee agreement, and that second attorney ultimately settled the case without having to go to trial. The second attorney then claimed that we were not entitled to any fee. He also claimed that any such fee dispute must be decided by a jury trial to assess the relative contributions of the law firm’s towards the eventual outcome of the litigation. Judge Richard Boner disagreed with that argument, and heard the case as an equitable issue in a bench trial in which he assessed the reasonable value of the services provided by the discharged law firm, and the successor “settling” law firm. Judge Boner agreed that the reasonable value of services is not dependent upon the actual number of hours devoted to the case, but upon the totality of the circumstances and relative risks involved. This case is currently on appeal to the Court of Appeals which will hopefully settle some of the law in this area.

Case law does support fee disputes between lawyers in this scenario being decided by the court in equity. The requirement of a jury trial to allocate attorney’s fees when a client unilaterally discharges a lawyer has never been judicially approved to date in North Carolina. See Pryor

C. Record Keeping

One of the advantages of representing clients in personal injury cases is that the fees generated are not necessarily tied to the number of hours spent on that particular case. Regardless, it makes good sense for the Plaintiff’s lawyer to keep an ongoing contemporaneous record of the actual work she performs on the case. This will accomplish several things. First, it will provide the best documentation in support of a statutory attorney’s fee pursuant to N.C.G.S. § 6-21.1, N.C.G.S. § 6-21.5, or discovery or pleadings sanction provisions. In addition, if there is ever an eventual fee dispute with a client, which may have to be resolved through judicial intervention, there is a superior record for the court to understand the amount of effort put into the case by the Plaintiff’s lawyer. This may also be helpful in situations in which the lawyer must seek court approval as in the case of incompetent clients and minor Plaintiffs. If, however, the attorney does not keep contemporaneous records and ends up in a situation in which fees are sought, she may still reconstruct her time based upon the records in her case file. Obviously, although it may be possible to recreate time spent on pleadings, correspondence, and court appearances, it is quite likely that valuable time will be lost which was never recorded contemporaneously.

D. Settlement Of Claims Involving Minors And Incompetents

Any settlement of a minor’s personal injury case, including the attorney’s fee, must be judicially approved, since a minor can not bind herself by contract. Payseur v. Rudisill, 15 N.C. App. 57 (1972) The same rationale applies to the settlement of any person operating under a disability. Given the inherent power of the courts to insure that the settlement is in the best interests of the minor child, the trial judge may also examine a contingency fee. There are anecdotal reports of judges reducing express contingency fee agreements from time to time, but the appellate courts have not squarely addressed this issue.

It would seem that the minor’s guardian ad litem would have the freedom of contract to engage an attorney on a contingency basis. It is hard to understand under what authority a trial judge may have to modify the fee, so long as that fee was not unethically excessive. Nevertheless, the North Carolina Supreme Court has said “the judiciary’s role in protecting the interests of infants is broad, comprehensive and plenary.” Creech v. Melnik, 147 N.C. App. 471 (2001) As a practical matter the attorney should keep careful track of her hours in a case involving a minor or incompetent so that the fee can be justified at the settlement hearing. Affidavits from other attorneys in substantial cases may be helpful to justify a large fee.

X. MISCELLANEOUS ISSUES

A. Health Care Provider Liens

N.C.G.S. § 44-49 and § 44-50 address the creation of health care provider liens, and the distribution of funds received for personal injury whether through settlement or litigation. The statutes expressly permit the attorney to withdraw his fees first, and preserves one-half of the remaining funds for the client in cash. This payment to the client does not, however, extinguish any deficiency of the debt to the health care providers.

B. Medicare, Medicaid, Champus, Indian Health Service, Erisa, Etc.

Unfortunately, the scope of this paper does not allow a thorough examination of attorney’s fees when battling with third parties who claim some or all of the client’s recovery. Reference is made to Arthur J. Donaldson’s excellent manuscript entitled “Handling Medical Liens And Claims For Reimbursement Or Subrogation” available through the North Carolina Academy of Trial Lawyers. Attorneys may expose themselves to separate lawsuits from third parties (including the government) for improperly disbursing settlement funds.

XI. SPECIAL STATUTES

In addition to the recovery of attorney’s fees from the opposing party through the Rules of Civil Procedure in personal injury cases, there are also specific statutes that allow an attorney to obtain fees in certain circumstances. Some of these include: fees for the prevailing party in any civil action brought by the state or by a party contesting state action, fees for public school teachers and principals who prevail in an action involving corporal punishment, some worker’s compensation cases and intentional torts such as assault and battery. (See Appendix E)