Mo-Jack Distrib., LLC v. Tamarak Snacks, LLC, 2013–CA–001845–MR

• Decision Date: 04 December 2015
• Docket Number: NO. 2013–CA–001845–MR,2013–CA–001845–MR
• Parties: Mo–Jack Distributor, LLC and Charles T. Clark, Appellants v. Tamarak Snacks, LLC and Richard Cohen, Appellees
• Court: Kentucky Court of Appeals

476 S.W.3d 900

Mo–Jack Distributor, LLC and Charles T. Clark, Appellants

v.Tamarak Snacks, LLC and Richard Cohen, Appellees

NO. 2013–CA–001845–MR

Court of Appeals of Kentucky.

RENDERED: DECEMBER 4, 2015; 10:00 A.M.

BRIEFS FOR APPELLANT: J. Gregory Troutman Louisville, KentuckyBRIEF FOR APPELLEE: Scott P. Zoppoth Louisville, Kentucky

BEFORE: CLAYTON, J. LAMBERT AND THOMPSON, JUDGES.

OPINION

THOMPSON, JUDGE:

Mo–Jack Distributor, LLC and its owner, Charles T. Clark, (collectively Clark) appeal from a judgment entered following a jury trial. A jury found Clark committed fraud and forgery and awarded Tamarak Snacks, LLC and Tamarak's owner, Richard Cohen, (collectively Cohen) $65,000 in compensatory damages and $95,000 in punitive damages. Clark alleges three errors: (1) the trial court erroneously instructed the jury on compensatory damages because the only evidence of damages was attorney fees incurred by Cohen in defending this action; (2) the award of punitive damages was constitutionally excessive; and (3) the trial court erred when it did not instruct the jury on an alleged breach of oral contract by Cohen. We agree the award of compensatory damages based only on evidence of the amount of attorney fees incurred by Cohen in defending this action must be reversed and this case remanded for an award of nominal damages and a new trial on the amount of punitive damages. We also hold Clark did not properly preserve his allegation of error regarding his oral contract claim.

In 2011, Clark filed a complaint against Cohen alleging the parties executed a "Bill of Sale and Assignment" and "Individual Guarantee" (referred to together as the contract) on May 29, 2009, for the purchase and distribution of certain snack foods within a designated territory. The alleged contract also contained a covenant not to compete, a covenant not to solicit and a liquidated damage clause establishing $5,000 in damages for each violation. The complaint alleged Cohen breached the contract by failing to pay the agreed amount for snack foods and distributed products outside territory designated in the contract. The complaint alleged Cohen violated the non-compete and non-solicitation clauses on nineteen separate occasions and sought $95,000 in liquidated damages.

Cohen filed an answer alleging a contract did not exist and asserting a counterclaim alleging Cohen's signature on the alleged contract was forged by Clark. Cohen sought damages for forgery and fraud, including punitive damages. Cohen also sought reasonable attorney fees and costs.

A relatively lengthy trial ensued. Much of the evidence is irrelevant to this appeal and does not need to be recited. We address the three issues presented considering the evidence relevant to each.

At trial, Cohen made clear the only damages sought were the legal expenses incurred to defend against Clark's action. The Court ruled that although Cohen could introduce evidence that he was required to hire counsel to defend against the breach of contract action, he would not be permitted to introduce evidence regarding the actual hours billed by counsel or the amount paid. The trial court reasoned that such evidence would permit the jury to award attorney fees, which it could not do under prevailing Kentucky law.

Throughout the trial, the jury heard references to Cohen's employment of counsel to defend. The only evidence regarding the amount of attorney fees came from Clark who, on cross-examination and in response to a question regarding his answers to interrogatories, testified that he was being countersued for $75,000 in attorney fees. Cohen did not testify regarding any amount of attorney fees incurred but testified he was required to hire counsel to defend the action.

Following presentation of the evidence, the trial court specifically asked Cohen's counsel what evidence supported the damages he claimed for fraud. Counsel responded that Cohen was damaged by expending money to defend this action based on the forged contract. Cohen's counsel stated he understood the attorney fees claim would be subsumed by the claim for compensatory damages in the amount to defend. While the trial court acknowledged the claim for the cost of defense was difficult to differentiate from a claim for attorney fees, the trial court ruled because Cohen introduced evidence he incurred attorney fees caused by Clark's fraud, it would allow the jury to consider the evidence of the "cost of defense."

If there was any doubt Cohen sought to recover attorney fees, it was clarified to the jury in closing argument when counsel explained that the damages sought were the costs incurred to hire his law firm. Counsel argued that legal fees incurred by Cohen were solely due to the fraud and forgery committed by Clark and asked the jury to award damages of $100,000.

Without objection from Clark, the jury was instructed as follows:

If you have found in favor of the Defendants, Richard Cohen and Tamarak Snacks, LLC against the Plaintiffs, Charles T. Clark and Mo–Jack Distributor, LLC, under Instruction No. 5, then you shall award the Defendants a sum or sums of money, up to $100,000, as you find will fairly compensate them for their damages, if any, as a result of Charles T. Clark forging Richard Cohen's signature.

Pursuant to the instruction, the jury awarded Cohen $65,000 in compensatory damages. Clark filed a motion to alter, amend, or vacate the judgment pursuant to Kentucky Rules of Civil Procedure (CR) 59.05 arguing among other errors, the compensatory damages award was excessive because no evidence of compensable damages was introduced. The motion was denied.

Cohen candidly admits to this Court that the only evidence of damages caused by the forgery of the contract was that Cohen incurred "significant legal expenses" to defend the fraudulent lawsuit filed by Clark. Cohen points out the jury heard evidence that Cohen had to hire counsel to defend this lawsuit and the damages sought by Cohen were $75,000 in attorney fees. The issue squarely before this Court is whether the jury could properly award compensatory damages on the evidence presented. The established law teaches it could not.

As a prelude to our discussion, a brief comment is warranted. Cohen's counterclaim asserted Clark forged the contract and then fraudulently filed a breach of contract action. Although the jury was instructed on fraud and found fraud, Cohen's cause of action appears to this Court to be more properly akin to an abuse of process action or one where possible civil sanctions may be proper. However, Clark does not quarrel with the jury's finding of fraud or that Cohen is entitled to nominal damages and punitive damages. With those concessions in mind, we resolve the issues presented.

American courts have typically required "each party to a lawsuit to pay its own legal expenses regardless of the outcome." Mihalik v. Pro Arts, Inc., 851 F.2d 790, 793 (6th Cir.1988). Under what is commonly referred to as the "American Rule," the English tradition of routinely awarding attorney fees to a prevailing party has been rejected. Id.

Kentucky has long adhered to the American Rule. Generally, "in the absence of a statute or contract expressly providing therefor, attorney fees are not allowable as costs, nor recoverable as an item of damages." Cummings v. Covey, 229 S.W.3d 59, 61 (Ky.App.2007). As noted in Aetna Cas. & Sur. Co. v. Commonwealth, 179 S.W.3d 830, 842 (Ky.2005), it is a rule deeply embedded in our jurisprudence: "[W]ith the exception of a specific contractual provision allowing for recovery of attorneys' fees or a fee-shifting statute, ... each party assumes responsibility for his or her attorneys' fee[s]."

Not only are attorney fees typically not recoverable, but Kentucky has taken the view that attorney fees are not compensatory damages. "Compensatory damages are designed to equal the wrong done by the defendant." Gibson v. Kentucky Farm Mutual Insurance Company, 328 S.W.3d 195, 204 (Ky.App.2010) (quoting Jackson v. Tullar, 285 S.W.3d 290, 297–98 (Ky.App.2007) ). Attorney fees are not compensatory damages because any award "does not compensate the plaintiff for any wrong done by the defendant." Id.

As with most general rules, there is an exception to the American Rule. In Batson v. Clark, 980 S.W.2d 566, 577 (Ky.App.1998) (quoting Kentucky State Bank v. AG Services, Inc., 663 S.W.2d 754, 755 (Ky.App.1984) ), this Court held that the general rule disallowing attorney fees in the absence of a statute or contract providing for such fees does not "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."

However, the equitable exception does not alter the rule that attorney fees in this Commonwealth are not compensatory in nature. Because the exception is grounded in equity, the issue of whether attorney fees are recoverable is one exclusively within the discretion of the trial court and not properly submitted to the jury as an element of compensatory damages. Unless agreed to by the parties, equitable issues are not triable by juries. Smith, v. Bear, Inc., 419 S.W.3d 49, 58 (Ky.App.2013). Even if permitted, unless otherwise directed by statute, whether attorney fees are available and the amount of such fee "is the responsibility of the trial court, and not the jury[.]" Gibson, 328 S.W.3d at 204.

The existing precedent is clear that absent statutory authority, attorney fees incurred to either bring or defend an action cannot be submitted to a jury as an item of compensatory damages. Yet, that is precisely what occurred in this case. There was no evidence of any damages other than the attorney fees incurred by Cohen and, therefore, no evidence to support the instruction permitting a compensatory damage award "up to $100,000."

Despite the error, Cohen asserts the award must stand because the issue was not properly preserved. Cohen contends the issue could have been properly preserved only by...