First published: Feb 2023
Attorney Fees: Who Will Foot The Bill?
The specific language relating to attorney’s fees in proprietary leases matters! If the language in the proprietary lease only provided for fees when prosecuting a shareholder default (and not, as here, defending a shareholder claim) or such fees were not explicitly categorized as additional rent, it is very possible this case could have gone the opposite way and the bank would have priority over the cooperative. If your board has not reviewed the attorney fee language in your co-op’s proprietary lease recently, it would be wise to have your attorney do so. You want to make sure it maximizes protection for the co-op.
KASOWITZ, BENSON, TORRES & FRIEDMAN, LLP V. JP MORGAN CHASE BANK, THE DAKOTA
WHAT HAPPENED This history between Fletcher and the Dakota, the co-op overlooking Central Park and home to many famous luminaries, began in 2011, primarily related to the Dakota’s denial of Fletcher’s purchase of another apartment in the building. Over the years Dakota and Fletcher have asserted claims and counterclaims, resulting in significant attorney fees for the co-op totalling $4.5 million, plus interest, as of November 2020. The Dakota wanted to recoup the legal fees and asserted that they had a priority lien for this amount - citing the Recognition Agreement and its interest under Article 9 of the Uniform Commercial Code. Chase, the bank that held Fletcher’s loan, countered that the priority is limited to “obligations incident to ownership of that cooperative interest”, and the award of attorney’s fees (as opposed to maintenance obligations or an assessment) is not an obligation incident to ownership.
IN THE COURT Chase argued that it is only responsible for legal fees if the lessee (Fletcher) was in default, but the Court found that the legal fee provision in the proprietary lease means that the judgment for attorney’s fees is incident to the Fletcher’s ownership of cooperative interest. This includes “defend[ing] any action or proceeding” commenced by the shareholder, which attorney’s fees the cooperative has the right to collect as additional rent.” Moreover, the Court concluded that Chase (or Fletcher) should have raised those arguments in the original case, and Chase’s attack on that judgment in the lien priority action was an impermissible collateral attack on that judgment. The Court also rejected Chase’s argument that the legal fee provision was unconscionable and unenforceable because such argument was also an impermissible collateral attack on the prior judgment, and suggested that Fletcher could have raised such defense in the original action and didn’t and Chase could have sought to intervene in the original action and didn’t.
COUNSEL: For the Dakota: John Vandertuin, Daniel Goldstein, Morgan Manley, SMITH, GAMBRELL & RUSSELL; For JP Morgan Chase: Zachary Newman, HAHN & HESSEN, Ashley Ragan, PARKER IBRAHIM & BERG, Alan Schoenfeld, WILMER CUTLER PICKERING HALE & DORR; JUDGE: Lewis J. Lubell
