Division III Warns Potential Defendants: Denying a Clearly Valid Claim Could Mean You Owe Attorney’s Fees if You Get Sued

Since its adoption by the United States Supreme Court in 1796, the “American Rule” has been a bedrock principle of American law.¹ The basis for the rule is the idea that it promotes access to the courts: potential litigants may be discouraged from pursuing their claims if losing would mean they had to pay the other side’s attorney’s fees. A downside, however, is that without default fee-shifting, plaintiffs can end up with a pyrrhic victory when one’s own attorney’s fees swallow the eventual award.

Despite its flaws, the American Rule has persisted.  And it remains the general rule in Washington: each side pays its own attorney’s fees unless there is a contractual, statutory, or recognized equitable basis to award them.² The Washington Supreme Court has recognized four categories of equitable grounds for a fee award: bad faith conduct of the losing party, preservation of a common fund, protection of constitutional principles, and private attorney general actions.³  There are three types of bad faith conduct: (1) prelitigation misconduct — obstinate conduct that necessitates legal action to enforce a clearly valid claim or right; (2) procedural bad faith — dilatory and obstreperous conduct during the course of litigation; and (3) substantive bad faith — filing a frivolous lawsuit or asserting a frivolous defense with the intention to harass.⁴

Two Washington appellate courts have refused to award attorney’s fees based upon prelitigation bad faith conduct. In Maytown Sand & Gravel, LLC, the Washington Supreme Court held that attorney’s fees were not recoverable based upon the other party’s prelitigation conduct during the administrative permitting process.⁵ And earlier, in Greenbank Beach & Boat Club, Division I denied attorney’s fees for prelitigation substantive bad faith conduct.⁶ Thus, until recently, it seemed that courts would refuse to award attorney’s fees based upon prelitigation bad faith — despite the Supreme Court’s acknowledgment that the ground exists.

In Dalton, Division III directly addressed this issue.⁷ Plaintiff had purchased land in a tax sale. The former owner of the parcel later defaulted on his loan from US Bank, which was no longer secured by the property Plaintiff had purchased in the tax sale. But US Bank foreclosed on Plaintiff’s property anyway—despite having title reports showing US Bank had no interest in Plaintiff’s property. When Plaintiff discovered this and tried to get the loan servicer for US Bank to clear title, the servicer’s attorney gave him the run around, forcing Plaintiff to file suit.

The Dalton Court found that US Bank had engaged in bad faith conduct, but had to wrestle with the Maytown and Greenbank decisions regarding whether it could award fees on that basis. The Court did so by first discussing the history of the American Rule and origins of the bad faith exception, addressing decisions from other jurisdictions, and reviewing a line of marital dissolution cases in Washington regarding prelitigation bad faith.

After doing so, the Court concluded that Maytown was a narrow decision which only concerned prelitigation conduct during administrative proceedings, and thus did not stand for the proposition that a party can never recover fees for a party’s refusal to honor a valid claim which forced plaintiff to file suit. Regarding Greenbank, the Court determined it had been wrongly decided, and noted that it is not required to follow the decisions of its sister circuits.  The Dalton court also made another key distinction, noting that Maytown and Greenbank involved prelitigation bad faith in creating the cause of action, whereas US Bank in Dalton engaged in the bad faith conduct of rejecting an indisputable claim.

Whether the Dalton decision is a departure from prior Washington precedent, or offers a refined analysis of the bad faith exception to the American Rule, is arguably subject to debate. Either way Dalton may serve as a warning to potential defendants. When presented with a plainly valid claim or a clear right, engaging in a strategy that forces the party to file suit could result in having to pay their attorney’s fees.  Indeed, Division III recently reaffirmed its holding in Dalton, indicating that decision was not confined to its facts.^[8]

¹ Dalton M, LLC v. N. Cascade Tr. Servs., Inc., 2022 Wash. App. LEXIS 353, 2022 WL 480978, *39-40 (February 17, 2022).

² Dalton M, LLC, 2022 Wash. App. LEXIS 353, 2022 WL 480978 at *41.

³ Id.

⁴ Id. at *42.

⁵ Maytown Sand & Gravel, LLC v. Thurston Cty., 191 Wn.2d 392, 438, 423 P.3d 223 (2018), abrogated by other grounds in Yim v. City of Seattle, 194 Wn.2d 682, 451 P.3d 694 (2019).

⁶ Greenbank Beach & Boat Club, 168 Wn. App. 517, 280 P.3d 1133 (2012).

⁷ Interestingly, the Court addressed this issue even though the plaintiff had not asked for an attorney’s fee award on equitable grounds.

⁸ Grider v. Quinn, 2022 Wash. App. LEXIS 408, 2022 WL 600234, at *65-66 (March 1, 2022).