Talmer Bank and Trust, Successor in Interest to First Banking, Plaintiff,
Thomas S. Jacobsen and Deborah L. Jacobsen, Defendants-Respondents, Felimon Gomez and Teresa Gomez, Defendants-Appellants.
from a judgment of the circuit court for Walworth County, No.
2015CV148 DAVID M. REDDY, Judge.
REILLY, P.J., GUNDRUM AND HAGEDORN, JJ.
The third-party litigation exception to the American Rule
allows a plaintiff to recover attorney fees incurred in
third-party litigation caused by a wrongful act of the
defendant. The question in this case is whether a breach of
contract leading to third-party litigation is a wrongful act.
We hold that a breach of contract can be a wrongful act under
the third-party litigation exception to the American Rule.
The attorneys' fees in this case are rightly considered
part of the damages flowing from the defendants' breach
of contract, and are therefore recoverable. We reverse the
circuit court's holding to the contrary.
The relevant facts are undisputed. Talmer Bank and Trust held
a mortgage on real property owned by Thomas and Deborah
Jacobsen in the Town of Lyons. Felimon and Teresa Gomez
wanted to purchase commercial property to operate their
business, so in 2006, they entered into a land contract with
the Jacobsens for the Town of Lyons' property. Pursuant
to the land contract, the Gomezes made monthly payments to
the Jacobsens and continued to operate their business on the
property. The Jacobsens, however, while pocketing
these payments, failed to make fifteen separate payments on
the mortgage between 2012 and 2015. The Gomezes were unaware
of these delinquent payments.
Talmer Bank initiated a foreclosure action against both the
Jacobsens and the Gomezes. The Jacobsens did not answer
Talmer Bank's foreclosure action, and the circuit court
granted a default judgment against them. The Gomezes did
answer the complaint; they also filed a cross-claim against
the codefendants, the Jacobsens. The cross-claim alleged that
the Jacobsens breached the land contract by failing to make
the mortgage payments to Talmer Bank and alleged that this
breach of contract forced the Gomezes to hire counsel
"to preserve their equitable interests as vendees to the
subject property." Accordingly, the Gomezes sought as
damages reasonable attorneys' fees incurred in defending
the foreclosure action.
In the underlying litigation, Talmer Bank moved for summary
judgment against the Gomezes. After a contested summary
judgment hearing, the circuit court withheld making a
decision and continued the hearing to a later date. Talmer
Bank and the Gomezes eventually settled the claim, and the
Gomezes retained title to the property.
The Gomezes' cross-claim against the Jacobsens, however,
remained to be adjudicated, and the Jacobsens moved for
summary judgment. In their brief in support, the Jacobsens
conceded that they "defaulted on the terms of the
mortgage note by failure to make payments as required under
the terms of the note and mortgage to Talmer Bank resulting
in the commencement of this foreclosure action." The
Jacobsens further conceded the contract with the Gomezes
required that the Talmer Bank "mortgage payments be
made" and the failure to make those payments was a
breach of their contract with the Gomezes. However, the
Jacobsens argued that pursuant to the American Rule-which
dictates that parties generally may not recover attorney
fees-the Gomezes could not recover attorneys' fees as
damages. For their part, the Gomezes maintained that an award
of attorneys' fees was proper under the third-party
litigation exception to the American Rule and requested that
the circuit court grant summary judgment in their favor.
The circuit court sided with the Jacobsens. Resting on the
Wisconsin Supreme Court's decision in Estate of
Kriefall v. Sizzler USA Franchise, Inc., 2012 WI 70, 342
Wis.2d 29, 816 N.W.2d 853');">816 N.W.2d 853, the circuit court held that the
Jacobsens' breach of the land contract was not a wrongful
act and therefore the third-party litigation exception did
not apply. While the circuit court recognized that
Kriefall "does not expressly limit the wrongful
act in the [third-party litigation] exception to a showing of
fraud or breach of fiduciary duty, " the circuit court
declined to apply the exception to a breach of contract.
Accordingly, the circuit court granted the Jacobsens'
motion for summary judgment and denied the Gomezes'
motion. Because the Gomezes' cross-claim did not allege
any additional damages besides attorneys' fees, the
circuit court confirmed that "the litigation is
over." The Gomezes appeal this ruling.
It is undisputed that the Jacobsens breached the land
contract with the Gomezes, and this breach resulted in the
Gomezes being sued in the foreclosure action, thus incurring
attorneys' fees defending the suit. The main issue, then,
is whether this breach of contract was a wrongful act that
could entitle the Gomezes to attorneys' fees under the
third-party litigation exception. Consistent with the circuit
court's decision, the Jacobsens rely on Kriefall
and argue that a wrongful act is limited to fraud, breach of
fiduciary duty, or something similar. Simple breach of
contract, the Jacobsens maintain, is not a wrongful act under
the third-party litigation exception; something more is
required. Whether a party is entitled to attorney fees under
an undisputed fact scenario is a question of law we review de
novo. See id., ¶\6.
Wisconsin follows the American Rule for attorney fees which
provides that "parties to litigation typically are
responsible for their own attorney fees" unless a
statute or contract provides otherwise. Id.,
¶I2. However, consistent with many states,
Wisconsin has adopted a "narrow exception" to this
rule-often referred to as the third-party litigation
exception-when a party is "wrongfully drawn into
litigation with a third party." Id.,
The general rule is that costs and expenses of litigation,
other than the usual and ordinary court costs, are not
recoverable in an action for damages, nor are such costs even
recoverable in a subsequent action; but, where the wrongful
acts of the defendant have involved the plaintiff in
litigation with others, or placed him in such relation with
others as to make it necessary to incur expense to protect