THE FLOORING GALLERY, LLC VS. MOREL CONSTRUCTION COMPANY, INC.
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RENDERED: SEPTEMBER 5, 2008; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2007-CA-001934-MR
THE FLOORING GALLERY, LLC
v.
APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE JUDITH E. MCDONALD-BURKMAN, JUDGE
ACTION NO. 05-CI-006863
MOREL CONSTRUCTION COMPANY, INC.
APPELLEE
OPINION
REVERSING
** ** ** ** **
BEFORE: CLAYTON, DIXON, AND WINE, JUDGES.
CLAYTON, JUDGE: The Flooring Gallery, Inc., a bidder for a subcontract,
appeals from the portion of the Jefferson Circuit Court’s decision that awarded
attorney fees to Morel Construction Company, Inc. (Morel), a general contractor.
The issue is whether a trial court may award the prevailing party its attorney fees
and costs under the general rubric of equity, absent a basis in statute or contract.
For the reasons set forth, we reverse.
Background
In 2003, the Commonwealth of Kentucky sought bids for the
renovation of the South Wing of the Kentucky Fair and Exposition Center. Morel
was selected to become the general contractor for the project. When it prepared its
bid, Morel sought subcontracting bids from various contractors for different parts
of the project, including the flooring and carpeting work. Flooring Gallery
submitted a bid of $125,169 for the flooring and carpeting work. Morel relied on
Flooring Gallery’s bid in preparing its bid and used the quoted price as part of its
bid to attain the general contractor contract for the project.
Morel learned on October 6, 2003, that it had been selected as the
general contractor on the project. Subsequently, Morel sent a letter to Flooring
Gallery confirming its selection as a subcontractor on the project. During work on
the project, Flooring Gallery was routinely kept up-to-date on Morel’s progress. In
addition, Flooring Gallery officials attended a progress meeting on the project.
Over a year later, in November 2004, however, Flooring Gallery, without reason,
informed Morel that it was not going to perform the work it had agreed to do.
Morel sent a letter dated December 9, 2004, notifying Flooring Gallery that
because Flooring Gallery was not going to honor its agreement, Morel was going
to hire another subcontractor. In this letter, Morel also informed Flooring Gallery
that it would be seeking attorney fees if Flooring Gallery failed to complete the
work it was obligated to do. Since Flooring Gallery refused to do the work, Morel
conducted a second round of bids, received several bids, and ultimately selected
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the lowest bidder in the second round (K&I Lumber) to complete the flooring
work. Their lowest bid was for $159,974, which was $34,805 more than Flooring
Gallery’s bid.
Pursuant to Meade Construction Co., Inc., v. Mansfield Commercial
Electric, Inc., 579 S.W.2d 105 (Ky. 1979), which substantiates Flooring Gallery’s
liability for its refusal to perform, the trial court granted partial summary judgment
on the issue of liability in its order entered February 7, 2007. The grant of
summary judgment on Morel’s behalf was on the grounds of promissory estoppel,
holding that Morel reasonably relied on Flooring Gallery’s bid in submitting its
proposal, and that this reliance estopped the Flooring Gallery from abandoning the
project. In the same order, the trial court recognized that Morel bore the burden of
proving that the work, for which it paid the substitute contractor, was the same
work that Flooring Gallery bid on.
A bench trial took place on May 18, 2007, on the amount of damages
to be awarded to Morel for Flooring Gallery’s breach of its agreement to perform
flooring work for the renovation of Kentucky Fair and Exposition Center’s South
Wing. Thereupon, in its Opinion and Order dated July 27, 2007, the trial court
granted Morel a judgment to cover its cost ($34,805), plus pre-judgment and postjudgment interest, and attorney fees to be calculated by separate motion. After this
motion, the trial court awarded Morel attorney fees of $25,000, which it had
incurred while seeking the judgment. The trial court reasoned that attorney fees
could be shifted under equitable principles. Specifically, the trial court held “[t]he
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facts and circumstances of this case dictate an award of attorneys’ fees to Morel as
an equitable remedy.”
Standard of Review
While Flooring Gallery states that the standard of review is de novo,
we disagree. Because we are reviewing the trial court’s exercise of its discretion,
rather than its application of the law, the standard of review is whether or not the
trial court abused its discretion. We will not reverse unless the exercise of that
discretion is arbitrary, capricious, or otherwise abusive. As stated in Dorman v.
Baumlisberger, 271 Ky. 806, 809, 113 S.W.2d 432-33 (Ky. App. 1938), “[i]n
equity the award of costs and [an attorney’s] fees is largely within the discretion of
the court, depending on the facts and circumstances of each particular case.” And
once an attorney’s fees have been awarded, the award will not be disturbed on
appeal absent an abuse of discretion. Giacalone v. Giacalone, 876 S.W.2d 616,
621 (Ky. 1994).
Analysis
We observe that attorney fees are generally not recoverable without a
specific contractual provision or a fee-shifting statute. AIK Selective SelfInsurance Fund v. Minton, 192 S.W.3d 415, 420 (Ky. 2006). In fact, Kentucky has
long followed the “American Rule,” that in the absence of statute or contract
expressly providing, attorney fees are not allowable as costs, nor recoverable as an
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item of damages. Dulworth & Burress Tobacco Warehouse Co. v. Burress, 369
S.W.2d 129 (Ky. 1963); Holsclaw v. Stephens, 507 S.W.2d 462 (Ky. 1973),
disapproved on other grounds by Jacobs v. Lexington-Fayette Urban County
Government, 560 S.W.2d 10 (Ky. 1977); Craig v. Keene, 32 S.W.3d 90 (Ky. App.
2000).
Yet, this well-settled rule does not abolish the equitable principle that
a trial court may rely on its equitable powers to award attorney fees even in the
absence of statutory or contractual obligation depending on the circumstances of
each case. For instance, as we stated in Kentucky State Bank v. AG Services, Inc.,
663 S.W.2d 754-55 (Ky. App. 1984), “this rule does not, we believe, abolish the
equitable rule that an award of counsel fees is within the discretion of the court
depending on the circumstances of each particular case.” Moreover, this Court
previously found no abuse of discretion in a trial court’s award of attorney fees,
absent statutory or enforceable contractual authority, based on the bad faith
conduct of one of the parties. See Batson v. Clark, 980 S.W.2d 566, 577 (Ky. App.
1998). The policy reasons behind such an exception to the rule are to deter
illegitimate behavior in the courtroom, and sometimes outside it.
Flooring Gallery argues that the power to assign attorney fees on the
basis of equity is not as broad or discretionary as the trial court believed. Instead,
Flooring Gallery asserts that the equitable power to award attorney fees is limited
to cases where the “common fund doctrine” applies and where a litigant’s efforts
have conferred a benefit on another. Flooring Gallery cites Kentucky State Bank,
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in support of this proposition. A review of the case, however, reveals that while
the Court discusses the power to award attorney fees under the “common fund”
doctrine statute, it also distinguishes a trial court’s equitable powers as separate
and distinct. Similarly, in Cummings v. Covey, 229 S.W.3d 59, 62 (Ky. App.
2007), the Court reviewed an award of attorney fees under Kentucky Revised
Statutes (KRS) 412.070, the “common fund” doctrine. Despite stating that the
“common fund” doctrine might be inapplicable in this particular situation, the
Court then added that the trial court has discretion to award attorney fees in equity.
Id.
And Flooring Gallery provides no other Kentucky case that limits the
court’s discretion in equity only to cases involving a “common fund.” As a matter
of fact, a trial court’s equitable award of attorney fees has been upheld in cases
where the “common fund” was not at issue. See Batson, 908 S.W.2d at 566.
Therefore, although the Kentucky Supreme Court and its predecessor have
recognized that cases involving the common fund may provide an equitable basis
for a reallocation of attorney fees, neither has expressly limited a Kentucky court’s
equitable powers to this particular type case.
Furthermore, a reading of both Batson (bad faith element case) and
also Kentucky State Bank (affected any benefit case/common fund) cannot mean,
as argued by Flooring Gallery, that only the “affected any benefit” element is
mandatory, or both elements are mandatory, to justify an award of attorney fees.
Because Batson affirmed the award of attorney fees in the absence of the “affected
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any benefit” element, the notion of Kentucky State Bank that “affected any benefit”
is “an indispensable element” of an award of attorney fees based on equitable
reasons is strongly discounted. These two cases, as well as Dorman, highlight for
us that there are no set elements required in an equitable award of attorney fees.
One recent case, discussed by both parties, Flag Drilling Co, Inc. v.
Erco, Inc., 156 S.W.3d 762 (Ky. App. 2005), suggests that equity does permit the
reallocation of fees. While the actual award of attorney fees in this case was based
on KRS 134.420(1), entitled “Lien for taxes,” the court states therein:
Although attorney’s fees may be awarded in equity, these
awards are ‘largely within the discretion of the court’ and
are dependent upon ‘the facts and circumstances of each
particular case.’
Id. at 766 quoting Dorman, 113 S.W.2d at 433. Here, the Court clearly opined that
a trial court has the power to award equitable attorney fees.
Because the trial court believed that the facts and circumstances of
this case dictated an award of attorney fees to Morel as an equitable remedy, it
ordered attorney fees of $25,000 based on Flooring Gallery’s bad faith and delay.
Apparently, the trial court believed that Flooring Gallery throughout the pendency
of this case behaved in ways that forced Morel to incur additional expenses. The
trial court’s opinion explains its reasons for an award of attorney fees:
Flooring Gallery was aware of its obligation to Morel
when its bid was accepted on October 7, 2003; when it
refused to perform thereunder in November, 2004; when
it was served with notice of the lawsuit on August 11,
2005; when its Motion to Dismiss was denied on
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September 29, 2005; and when Summary Judgment as to
liability was granted to Morel.
Based on this conduct, the trial court held that “the facts and circumstances of this
case dictate an award of attorneys’ fees to Morel as an equitable remedy.”
In this analysis, we have highlighted that, with regards to an award of
attorney fees, Kentucky courts are guided by the American Rule, and therefore,
each party in litigation will bear its own attorney fees unless a contract or statute
allows otherwise. And we observed that certain cases in the Commonwealth have
expressed, in dicta, and in one case held that a trial judge has the discretion to
award attorney fees where there is bad faith. But in this case, the trial court has
merely provided incidents that occur with regularity in all lawsuits as support for
its award of attorney fees. And while certain trial actions may be vexatious and
frustrating, they do not rise to the level of bad faith. Consequently, we believe that
the trial court abused its discretion in awarding Morel attorney fees. Based on the
foregoing, the Jefferson Circuit Court’s order of July 27, 2007, as it relates to an
order of attorney fees is reversed.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Alan N. Linker
Paul J. Hershberg
Louisville, Kentucky
J. Mark Grundy
Steven A. Brehm
Louisville, Kentucky
ORAL ARGUMENT FOR
APPELLANT:
ORAL ARGUMENT FOR
APPELLEE:
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Paul J. Hershberg
Steven A. Brehm
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