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SJC Denies Attorneys’ Fees In Fiduciary Suit

By August 1, 2022No Comments

The “American Rule” has long disallowed a prevailing party in litigation from recovering its attorneys’ fees from the losing party, absent unusual circumstances. The Supreme Judicial Court held in the recent case of Tocci v. Tocci that the American Rule stands as firmly as ever, denying a closely held corporation from recovering the attorneys’ fees that it had expended in proving that one of its family shareholders had breached his fiduciary duties to the corporation by engaging in prohibited self-dealing.

In Tocci, decided on June 17, 2022, three brothers had inherited equal interests in a construction company founded by their father. One brother became the company’s chief executive officer, while the other two intermittently held lower-level positions and, for the most part, did not participate in the company’s affairs. Over the years, the CEO took sums of the company’s money and used it for various non-company purposes, without the knowledge of the other two brothers. Once this misconduct was discovered, the company sued the CEO for breach of fiduciary duty, among other things, and won $1 million in damages. On appeal, the corporation asked for an award of attorneys’ fees via the equitable remedy of surcharge. The Supreme Judicial Court denied such request on the ground that the plaintiff would not be recovering the attorneys’ fees for the benefit of others but, rather, would be obtaining such fees for its own benefit. Such an outcome would turn the American Rule and the goal of equity – to restore justice – on their heads. Thus, the Tocci Court held that, like any typical litigant, the construction company in that case was responsible for bearing its costs of litigation, including its attorneys’ fees.

At first blush, the Tocci decision may appear to contradict the rule recognized in the trusts and estates context – i.e., that, in a lawsuit involving claims that a trustee has violated their fiduciary duties, a prevailing trust beneficiary may recover, on behalf of the trust, attorneys’ fees in the form of an equitable remedy called a “surcharge.” That rule arose from recognition that (1) attorneys’ fees are customary costs in the administration of a trust or estate, but attorneys’ fees in breach of fiduciary duty litigation can be substantial because of the complexity involved in such litigation; (2) a trustee can be held individually liable to the trust for his/her misconduct, including misconduct that harms the very thing that the trustee was entrusted to protect; (3) the availability of attorneys’ fees incentivizes trust beneficiaries to become plaintiffs and pursue necessary litigation without the burden of assuming all of the legal fees on one’s own; (4) success in a lawsuit for breach of fiduciary duty benefits the trust; and, (5) surcharges are paid directly to the trust or estate, and not to the plaintiff.” As recognized by the Tocci Court, allowing for the recovery of attorneys’ fees through surcharge in such a context provides a desirable incentive to rectify breaches of trust for all trust beneficiaries and a desirable outcome of making the trust whole again. In other words, equity and justice are restored to the parties through an attorneys’ fees surcharge.

The context of a closely held corporation suing one of its family shareholders for breach of fiduciary duty, the Supreme Judicial Court reasoned, however, is different, and thus the same equitable rationale did not apply in Tocci. As a result, the corporation could not recover its attorneys’ fees. Despite its outcome, this case serves as a warning that those who breach a fiduciary duty may sometimes be liable not just for ordinary damages, but for their opponent’s attorneys’ fees as well.

For the Court’s full opinion, see here.