State v. Braverman: $5 million fee award here today, gone tomorrow

By Brad McCullough

In an opinion featuring forceful and direct language, the Court of Special Appeals recently reminded us that the “American Rule” regarding attorneys’ fees remains alive and well in Maryland. In 2007, 49 plaintiffs, led by William Braverman and Stanley Goldberg, sued the State of Maryland, challenging the constitutionality of recently enacted legislation affecting the use of “ground leases” in Maryland. After several years of litigation – including removal to federal court followed by a remand to state court, an effort to change venue, certification as a class action, and a trip to the Court of Appeals – the plaintiffs succeeded in their attack on that legislation. See State v. Goldberg, 437 Md. 191 (2014). The plaintiffs then filed a fee petition in the circuit court, which, after an evidentiary hearing, ordered the State to pay $5 million in fees. But the joy of that victory was short-lived, as the Court of Special Appeals, in State v. Braverman, No. 429 Sept. Term (June 1, 2016), reversed the circuit court’s award as running afoul of the American Rule.

A ground lease, which grants the use and improvement of property for 99 years in exchange for annual rent and payment of taxes and assessments, is perpetually renewable. If the ground lessee defaults in those obligations, the ground lessor may terminate the lease, eject the ground lessee, and take possession of the property along with any improvements made. The ground lessee then loses any equity he or she had obtained in the property. In 2007, legislation was enacted that largely replaced the ejectment remedy with “a lien-and-foreclosure remedy, similar to the remedy for mortgage foreclosures.” Slip Op. at 2. That remedy would not strip a defaulting ground lessee of any accrued equity “if the proceeds of the foreclosure sale exceeded the unpaid rent and the recoverable costs.” Id.

In the lawsuit they filed later that year, Braverman, Goldberg, and other plaintiffs raised various claims, including that the legislation took their “property without just compensation in violation of the federal and State constitutions.” Id. at 3. The State removed the case to federal court, but the case was remanded to state court. The State then failed in an effort to transfer the case from Anne Arundel County to Baltimore City. The circuit court eventually certified the case as a class action for liability only.

While the case was still pending, the Court of Appeals issued a decision that invalidated another piece of 2007 legislation concerning ground leases. In Muskin v. State Department of Assessments and Taxation, 422 Md. 544 (2011), the Court, in a 5-to-2 decision, held that legislation requiring the recordation of ground leases and “extinguishing ground rents and transferring title to lessees as a penalty for the failure to record” the leases, “abrogated vested rights and took private property without just compensation in violation of the Maryland Constitution.” Slip Op. at 4 (citing Muskin at 553, 560, 563 & 565) (footnote omitted). Although the decision did not involve the lien-and-foreclosure remedy, “the Muskin majority implied that the owner of a ground lease had a vested right in the right of reentry,” but the Court clearly did not decide whether it was unconstitutional to substitute the lien-and-foreclosure remedy for the right of reentry and the remedy of ejectment. That question remained open. Id. at 4.

After the Muskin decision was issued, the plaintiffs renewed their earlier motion for partial summary judgment, claiming that replacing the ejectment remedy with the lien-and-foreclosure remedy abrogated “their vested right to reenter the leased property in case of a default.” Id. at 5. The court granted that motion, the plaintiffs dismissed their remaining claims, and the State appealed. In a 5-to-2 decision, the Court of Appeals affirmed, holding “that the legislation unconstitutionally impinged upon a vested right to reenter the leased premises and to terminate the lease.” Id. at 6 (citing 437 Md. at 216-17). After their victory in the Court of Appeals, the plaintiffs filed a fee petition in the circuit court, which ultimately granted the request and ordered the State to pay $5 million. The State appealed that decision.

In an opinion written by Judge Kevin Arthur, the Court of Special Appeals reversed the lower court. Judge Arthur began with the admonition that Maryland follows the “American Rule,” by which each party must shoulder its own legal fees, and that “[e]xceptions are available only by contract, by statute or court rule, or (in rare instances) under a well-established common-law principle.” Id. at 8 (footnote omitted) (citations omitted). Judge Arthur explained that “[t]he circuit court premised its award of fees on four legal grounds,” none of which supported that award. Id.

As one of those grounds, the circuit court relied on 42 U.S.C. § 1988, which allows an award of attorneys’ fees to the prevailing party in an action to enforce various federal statutes, including 42 U.S.C. § 1983. But although the plaintiffs alleged that the statute at issue “violated the federal Constitution in several respects, they did not expressly or even impliedly set forth a claim for relief under § 1983.” Id. at 9-10. Even if they had, they sued only the State of Maryland – and, “because the United States Supreme Court has held that a State is not a ‘person’ under § 1983,” the circuit court, as a matter of law, lacked authority to base its award on § 1988. Id. at 10 (citation omitted).

The circuit court also cited the “common-fund doctrine,” which allows a court to direct payment of attorneys’ fees from a fund that benefits the public and has been created by the attorneys’ efforts. But, “by definition, the common-fund doctrine requires a fund,” and the judgment obtained by counsel “resulted in the invalidation of the statute, but not in any actual monetary recovery or fund.” Id. at 11. The circuit court relied on a 1972 Fourth Circuit decision that had “employed what that court called ‘a quasi-application of the ‘common fund’ doctrine.’” Id. at 12 (citing Brewer v. School Bd. of Norfolk, 456 F.2d 943 (4th Cir. 1972). That decision, however, was issued “at a time when federal courts were devising federal common-law theories to compensate prevailing parties for the attorneys’ fees that they had incurred in civil rights cases and other litigation against governments and governmental officials,” a practice that the Supreme Court ended when it decided Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975). Id. Thus, the Court of Special Appeals was not persuaded by the circuit court’s analysis: “Applying the common-fund doctrine where there is no fund is not just uncommon; it is unheard of in Maryland (or anywhere else within the last 44 years). We do not start today.” Id. at 13 (footnote omitted).

Furthermore, the common-fund doctrine allows “an award of fees off the top of the fund, not on top of it.” Id. at 13-14. As Judge Arthur summarized: “Class counsel cannot use the common-fund doctrine to collect fees out of nothing. Nor can the class employ the common-fund doctrine to require its adversary to pay the class counsel.” Id. at 14. The circuit erred when it relied on that doctrine.

As a third basis for its fee award, the circuit court pointed to Md. Code Ann., Real Prop. § 12-106 (b)(5), which concerns eminent domain proceedings and requires a court to shift the costs of a condemnation proceeding from the defendant to the plaintiff. The appellate court’s response was scathing.

In plain English, § 12-106 (b)(5) compels the court to shift the costs of a condemnation proceeding from the defendant to the plaintiff. (Emphasis added). Despite the plain language of § 12-106 (b)(5), however, the circuit court concluded that the statute authorized an award of fees to the plaintiffs from the defendant. The circuit court’s interpretation is untenable.

Nothing about this statute is ambiguous, debatable, or open to interpretation. “Defendant” does not mean “plaintiff,” and “plaintiff” does not mean “defendant.” Unless words are to become untethered from all meaning, § 12-106 (b)(5) cannot be read to authorize the State, as the defendant, to pay the plaintiffs’ attorneys’ fees.

Id. at 14-15.

After further criticizing other aspects of the lower court’s treatment of section 12-106 (b)(5), Judge Arthur turned to a final point – that the section only “authorizes an award of fees that have been ‘actually incurred.’” Id. at 16. But the lawyers for the class worked on a contingent-fee basis, agreeing that if the case was certified as a class action, they would apply to the court for an attorneys’ fee award. Thus, “no one [had] ‘actually incurred’ any attorneys’ fees, much less $5 million in fees.” Id. Plus, the plaintiffs had no “contractual liability for the fees, as the fee agreement stated that class counsel would look only to the court for an award of fees.” Id. Once again, the circuit court erred.

The circuit court’s final justification for its fee award was found in Md. Rule 1-341. That justification fared no better on appeal than did the other ones. Rule 1-341 allows a court to award a party its attorneys’ fees if an adverse party has litigated a proceeding in bad faith or without substantial justification.

The circuit court found that the State had acted both in bad faith and without substantial justification, but the Court of Special Appeals held that the trial court erred in both respects. A position espoused in litigation has substantial justification if it is “fairly debatable” and “within the realm of legitimate advocacy.” Id. at 17 (internal quotation marks omitted) (citations omitted). The circuit court itself made numerous rulings recognizing the legitimacy of the State’s positions, dismissing portions of the plaintiffs’ complaint, denying cross-motions for summary judgment, and remarking that the “case presented novel and difficult constitutional questions.” Id. at 18 (internal quotations marks omitted).

As Judge Arthur explained, “if those issues were sufficiently novel, difficult, and debatable to justify dismissing portions of the complaint and denying cross-motions for summary judgment, they must also have been sufficient to justify the State in defending the case.” Id. (citation omitted). While the Court of Appeals in Goldberg ultimately accepted the plaintiffs’ arguments and rejected those offered by the State, two judges on that Court dissented. “When two of the seven judges of the State’s highest court agree with a party’s position, it is, as a matter of law, erroneous to conclude that the party lacks substantial justification to advocate that position.” Id. at 19 (footnote omitted).

The circuit court’s finding of bad faith fared no better. That finding rested in part on comments of three legislators made during the legislative process. Yet “those comments have no bearing on whether the State defended this litigation in bad faith,” and the court was wrong “to impose sanctions against the State for comments made by three legislators before this litigation ever began.” Id.at 20.

The comments were not party-admissions that bound the State, and, “under the doctrine of separation of powers,” the court should not have inquired into the legislators’ motives. Id. at 20-21 (citations omitted). The circuit court also ignored the Attorney General’s duty to present arguments supporting the constitutionality of duly enacted legislation. While the Attorney General may decline to defend “a law that is undeniably unconstitutional,” the statute at issue “was not such a law.” Id. at 22 (citation omitted). Moreover, Rule 1-341 “authorizes an award only of the fees that a party has ‘incurred,’” and, as Judge Arthur had previously explained, the plaintiffs had not incurred any fees. Id. at 23.

The opinion of the Court of Special Appeals conveyed several clear messages. One message was that no matter what result a lawyer obtains for his or her client, the lawyer’s fees may be recouped from an opposing party only under the very limited exceptions to the American Rule. Another message is that statutes and rules will not be twisted and construed in a way that ignores their plain meaning, even it seems somehow fair or just to do so. And a third such message is that a party’s litigation position does not lack substantial justification when the trial court’s own rulings recognize that it is colorable and when it is adopted by appellate judges, even in a dissenting opinion.

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