Bunnett v. Smallwood

• Decision Date: 18 June 1990
• Docket Number: No. 88SC543,88SC543
• Citation: 793 P.2d 157
• Parties: William E. BUNNETT, Petitioner, v. Donald L. SMALLWOOD, Respondent. BUNNETT/SMALLWOOD & CO., INC., Petitioner, v. Donald SMALLWOOD, Respondent.
• Court: Colorado Supreme Court

Page 157

793 P.2d 157

9 A.L.R.5th 1191

William E. BUNNETT, Petitioner, v. Donald L. SMALLWOOD, Respondent.

BUNNETT/SMALLWOOD & CO., INC., Petitioner, v. Donald SMALLWOOD, Respondent.

No. 88SC543.

Supreme Court of Colorado En Banc.

June 18, 1990.

Joseph P. Genchi, Estes Park, for petitioners.

Michael A. Williams, Steven D. Plissey, and Sherman & Howard, Denver, for respondent.

Justice MULLARKEY delivered the Opinion of the Court.

We granted certiorari in this case in order to decide if attorney fees could be awarded as damages in a case where the lawsuit was barred because of an agreement not to sue. The court of appeals held in Bunnett v. Smallwood, 768 P.2d 736 (Colo.Ct.App.1988), that the defendant was entitled to recover his attorney fees and costs where the legal proceedings were instituted in violation of an agreement not to sue. We reverse the court of appeals and hold that, absent a contractual agreement or statutory or rule authority, the non-breaching party to a release is not entitled to attorney fees and costs.

I.

This case involves two consolidated appeals arising from a series of business transactions between the parties. We summarize only the facts which are relevant to the issue before us.

In 1974, William E. Bunnett and Donald E. Smallwood formed Bunnett/Smallwood & Co., Inc., a company engaged in the business of buying and selling fertilizer, feed supplements, and hay. Bunnett/Smallwood was incorporated in Texas and had its principal place of business in Colorado. Both Bunnett and Smallwood were fifty percent shareholders in the corporation.

Several points of contention arose between the two parties. In February 1984, Smallwood resigned his office at Bunnett/Smallwood and started another company in competition with Bunnett/Smallwood. Bunnett filed a claim against Smallwood in August 1984 charging that Smallwood had obtained certain raw materials by misrepresentation that he was still a Bunnett/Smallwood officer. For his part, Smallwood was concerned about his potential liability to a Texas bank for a separate personal guaranty that he had signed as a Bunnett/Smallwood officer in return for the bank extending an open line of credit to the company. Smallwood wanted to avoid liability for both the claims filed against him by Bunnett and the personal guaranty. After previous unsuccessful negotiations, Smallwood and Bunnett met at a Denver-area restaurant on October 3, 1984 in order to discuss the Bunnett/Smallwood Company stock still owned by Smallwood. Smallwood told Bunnett that he wanted to end all of the "hassle" in exchange for giving his stock to Bunnett. ¹

The effect of the parties' informal, oral agreement was raised in the two lawsuits which were consolidated in this appeal. Smallwood contended that he received a release from liability for "any and all claims of any kind or nature which Bunnett or Bunnett/Smallwood had against Smallwood." Bunnett, on the other hand, claimed that Smallwood received a release from liability for the August 1984 claim, but not for any other claims. It is undisputed that after Bunnett received the stock, he dropped the August 1984 suit against Smallwood and notified the Texas bank that Smallwood was no longer personally liable for Bunnett/Smallwood debts.

Bunnett, however, instituted two other lawsuits against Smallwood after the meeting of October 3, 1984. In the first case, Bunnett v. Smallwood, No. 86CA1302 (Bunnett case), Bunnett claimed that Smallwood converted partnership property and Smallwood counterclaimed for breach of the October 1984 agreement. In the second case, Bunnett/Smallwood & Co. v. Smallwood, No. 87CA0469 (Bunnett/Smallwood case), Bunnett claimed that Smallwood had breached his fiduciary duty to Bunnett/Smallwood prior to February 1984, usurped a corporate opportunity, and tortiously interfered with a Bunnett/Smallwood contract. Smallwood moved for summary judgment and dismissal on the ground that Bunnett was collaterally estopped from contesting the exclusivity of the October 1984 release.

The jury in the Bunnett case held against Bunnett on June 20, 1986, finding that Bunnett had breached a contract which released Smallwood of all future claims, and granted damages to Smallwood of $30,000, equal to his attorney fees and costs for defending both the Bunnett case and Bunnett/Smallwood case. The trial court in the Bunnett/Smallwood case granted Smallwood's motions concluding that because of the judgment in the Bunnett case, the doctrine of collateral estoppel barred relitigation of a vital issue involved in the Bunnett/Smallwood case. Both cases were appealed. The court of appeals consolidated the appeals and affirmed the trial court judgments. The validity of the settlement agreement or Bunnett's breach are not before us. Rather, we granted certiorari in order to address the following question: whether the prevailing party in a lawsuit can recover attorney fees and costs for breach of an agreement not to sue.

II.

The jury found that the agreement between Bunnett and Smallwood constituted a release of all claims and controversies. ² A release is the relinquishment of a vested right or claim to the person against whom the claim is enforceable. Neves v. Potter, 769 P.2d 1047 (Colo.1989); see also Restatement (Second) of Contracts, § 284 (1981). Furthermore, a release is an agreement to which general contractual rules of interpretation and construction apply. Rocky Mountain Ass'n of Credit Mgmt. v. Hessler Mfg. Co., 37 Colo.App. 551, 553 P.2d 840 (1976).

Smallwood's claim for attorney fees and costs after his successful defense must be analyzed against the background of the caselaw, statutes, and court rules regarding the award of attorney fees and costs. In the absence of a statute or private contract to the contrary, attorney fees and costs generally are not recoverable by the prevailing party in a breach of contract case. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616-17, 44 L.Ed.2d 141 (1975); Cement Asbestos Prods. Co. v. Hartford Accident & Indem. Co., 592 F.2d 1144, 1148 (10th Cir.1979); Buder v. Sartore, 774 P.2d 1383, 1390 (Colo.1989); Beebe v. Pierce, 185 Colo. 34, 38, 521 P.2d 1263, 1265 (1974). Requiring each party in such cases to pay its own legal expenses is based on the well-established American rule. See generally 1 M. Derfner & A. Wolfe, Court Awarded Attorney Fees p 1.01 (1990). Numerous rationales are advanced in support of the American rule. For example, attorney fees and costs are not considered actual damages "because they are not the legitimate consequences of the tort or breach of contract sued upon." Taxpayers for the Animas-LaPlata Referendum v. Animas-LaPlata Water Conservancy Dist., 739 F.2d 1472, 1480 (10th Cir.1984) (construing Colorado law). Additional rationales include that the rule promotes equality among litigants, does not penalize parties for merely asserting their legal positions, and does not substantially burden judicial administration. M. Derfner & A. Wolfe, at p 1.03.

In affirming the trial court judgments, the court of appeals reasoned that, if a party must defend a suit despite a release, then the attorney fees and costs which the party incurs are the measure of actual damages because they represent the direct consequences of the breach. Bunnett, 768 P.2d at 739 (citing Anchor Motor Freight, Inc. v. International Bhd. of Teamsters, 700 F.2d 1067 (6th Cir.), cert. denied 464 U.S. 819, 104 S.Ct. 81, 78 L.Ed.2d 92 (1983)). As such, the court of appeals concluded that Smallwood was entitled to compensatory damages sufficient to place him in the position in which he would have been if the breach had not occurred. Id.; see also General Ins. Co. v. City of Colorado Springs, 638 P.2d 752, 759 (Colo.1981); Combined Communications Corp. v. Bedford Motors, Inc., 702 P.2d 281, 282 (Colo.Ct.App.1985); Kniffin v. Colorado W. Dev. Co., 622 P.2d 586 (Colo.Ct.App.1980) (damages awarded in contract dispute to make the nonbreaching party whole).

The court of appeals followed a line of cases which has held that attorney fees are recoverable as damages for breach of a release. See Anchor Motor Freight, Inc., 700 F.2d 1067; Widener v. Arco Oil and Gas Co., 717 F.Supp. 1211 (N.D.Tex.1989); Borbely v. Nationwide Mut. Ins. Co., 547 F.Supp. 959 (D.N.J.1981); Desroches v. Ryder Truck Rental, Inc., 429 So.2d 1010 (Ala.1983); Colton v. New York Hospital, 53 A.D.2d 588, 385 N.Y.S.2d 65 (1976); Scott v. Reedy, 5 Ohio Dec. Reprint 388 (Ohio 1876). These cases provide little explanation for their holdings, and several of the cases merely state that a party breaching a release "may be compelled to respond in damages." Colton, 53 A.D.2d at 589, 385 N.Y.S.2d at 66. See also Borbely, 547 F.Supp. at 977. We find two general theories underlying the award of attorney fees in the jurisdictions which have followed this practice. First, several cases maintain that the traditional American rule, providing that each party to a lawsuit pays its own attorney fees and costs, is not applicable in this situation because the attorney fees are the subject of the lawsuit itself rather than an award to the successful litigant. Anchor Motor Freight, Inc., 700 F.2d at 1072 (citing Scott v. Local Union 377, 548 F.2d 1244, 1266 (6th Cir.), cert. denied, 431 U.S. 968, 97 S.Ct. 2927, 53 L.Ed.2d 1064 (1977)).

Secondly, it is argued that attorney fees should be awarded for breach of a release based on equitable principles. For example, the court in Widener stated, "[b]ecause the purpose of entering into a release is to avoid litigation, the damages a releasor suffers when the release is breached are its costs and attorneys' fees incurred in defending against the wrongfully brought action." 717 F.Supp. at 1217. Moreover, in urging us to affirm the court of appeals, Smallwood argues that to hold otherwise would create unfair results, would enable some defendants to evade damages despite...