Attorneys’ Fees Awarded Based on Bad Faith Exception to American Rule

 The case of In Re: Grupo Dos Chiles, LLC, read opinion here, is an example of the rare exception to the general rule (known as the American rule)  that each party “pays his own way” in a lawsuit, regardless of victory. This is a “cleanup letter opinion” following the main opinion previously summarized here on this blog, the formal caption for which is:  In Re:  Grupo Dos Chiles, LLC, 2006 WL 668443 (Del. Ch., Mar. 10, 2006).  The opinion issued in March of 2006 concluded that the petitioner and respondent were members of an LLC and that the LLC was not properly returned to good standing by the unilateral payment by one member of past due Delaware franchise taxes.  The petitioner moved for an award of attorneys’ fees pursuant to the bad faith exception to the American Rule.  In this August 2006 letter opinion the court grants to the petitioner 75% of the attorneys’ fees incurred  by the petitioner in the case—payable by the respondent.  The opinion discusses the general rule that even the prevailing party usually must pay for its own fees, but the court discusses the several exceptions to that rule.

 The court cites other cases that have found the bad faith exception to apply where parties have changed their testimony to suit their needs or when parties mislead the court, but also noted that the court does not invoke the bad faith exception lightly and imposes a stringent evidentiary burden of producing clear evidence of bad faith conduct on the party seeking an award of fees.

  In this case, the court in a polite manner basically described the reasons why the testimony of the parties against whom attorneys’ fees were assessed, was simply not believable.  The court described the testimony, which changed over time, as contrary to common sense and “not consistent with the operative reality.”  In sum, the court found that the ever changing testimony of the party against whom attorneys’ fees were assessed satisfied two components of bad faith:  (1) The position was “so strained and wholly at odds with the operative reality” that it fell outside the bounds of good faith advocacy (citing Rule 11); and, (2) Respondents could not in good faith aver, under oath, facts directly opposite to those they averred in the Virginia litigation nor could they, with impunity, change their testimony to suit their needs in this litigation.  The Court held that “Respondents’ violations of these fundamental tenets rise to the level of intentional bad faith conduct that justifies an award of attorneys’ fees under the bad faith exception to the American rule.”

 The court also awarded costs pursuant to Chancery Court Rule 54(d) to the prevailing party (which would not otherwise cover attorneys’ fees). Moreover, pursuant to Section 4734 of Title 10 of the Delaware Code, the court concluded that the order awarding fees and costs should be entered “in the same manner and form and in the same books and indexes as judgments and orders entered in the Superior Court.” (Ouch).