Bending the American Rule

'Pullman' Decision Allows Third-Party Litigation Expenses in Tennessee

The "American Rule" bars recovery of attorneys' fees in the absence of a statutory or contractual basis, right? Wrong " at least in Tennessee. The often-overlooked Tennessee Supreme Court's decision in Pullman Standard Inc. v. Abex Corporation provides two exceptions to the American Rule with potentially broad application in matters involving more than two parties: (1) the implied indemnity exception and (2) the tort of another exception.[1] These two "Pullman claims" permit recovery of attorneys' fees incurred in litigation with a third party as a result of another's wrongdoing. This article provides an overview of the Pullman decision, analyzes the current state of Tennessee law on Pullman claims and offers practice pointers for their use in litigation.

1. The American Rule

Under the American Rule, parties are generally responsible for paying their own attorneys' fees even if they prevail in litigation. Four public policy considerations are said to justify Tennessee's longstanding adherence to the American Rule: (1) not penalizing a party uncertain about his prospects for prevailing from bringing or defending a lawsuit; (2) not discouraging the poor from filing claims; (3) promoting settlement; and (4) avoiding burdening courts with ancillary proceedings.[2]

These considerations, however, give way to various exceptions to the American Rule, such as where: (1) the parties agree otherwise (contract); (2) the legislature requires otherwise (statute); (3) an attorney's negligence causes expenditure of certain "initial" and "corrective" legal fees (legal malpractice);[3] (4) the litigant succeeds in securing funds to which others are entitled to share (the common fund doctrine);[4] or (5) a recognized ground of equity requires payment of fees.[5]

2. 'Pullman' Claims

In Pullman, decided in 1985, the Tennessee Supreme Court established two additional exceptions that apply where a party's wrong causes another to incur legal expenses in litigation against a third party: the "implied indemnity" and "tort of another" exceptions.

Pullman, a manufacturer of a railroad car's superstructure, was sued following a tragic and highly publicized derailment disaster. Pullman then sued Abex, the manufacturer of a defective wheel on the railroad car that allegedly caused the derailment, for recovery of its attorneys' fees incurred in defending the first action. The Supreme Court held that Pullman stated a claim for recovery of those fees under two different theories. [6]

First, the Supreme Court recognized an implied indemnity exception to the American Rule permitting recovery of attorneys' fees incurred in defending litigation brought by a third party based upon the relationship of the parties and their respective degrees of fault " even in the absence of a contract.[7] Under this theory, Abex had an implied duty to indemnify Pullman as Abex, not Pullman, manufactured the defective wheel that caused the crash.

Second, Pullman adopted the Second Restatement of Torts' tort of another doctrine (or the "independent tort" exception) and held that:
One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.[8]

Accordingly, the tort of Abex in manufacturing the defective wheel caused Pullman to be sued and, therefore, gave rise to Pullman's claim for recovery of the attorneys' fees incurred in defending the earlier action brought by third parties.

In the twenty-five years since Pullman was decided, Tennessee courts have offered additional guidance on use of Pullman claims.

A. The Implied Indemnity Exception
The more widely used of the two Pullman claims is for implied indemnity where a party incurs attorneys' fees in defending an action resulting from another's fault.[9] As noted above, this doctrine allows recovery of attorneys' fees incurred in defending litigation brought by a third party based upon the relationship of the parties and their respective degrees of fault.[10]

Tennessee case law provides several guideposts for application of the implied indemnity exception. First, the fees to be recovered are those incurred in litigation against the third party, not those incurred in pursuing recovery against the wrongdoer.[11] Second, this exception applies only with respect to fees incurred in defending, not bringing, an action.[12] Third, the exception does not apply where there are no allegations of fault or wrongdoing against the party from whom the attorneys' fees are sought.[13]

Fourth, there must be a sufficient relationship between the parties to invoke implied indemnity.[14] Courts have construed this requirement both vis-à-vis each other (e.g., principal and agent, fiduciary relationship),[15] and also in terms of a common liability as joint tortfeasors.[16]

On the latter point, a party's own negligence or comparative fault does not necessarily preclude recovery. A party engaging in merely "passive negligence" may recover its fees from a party committing "active negligence."[17] In Stanfield v. Jenkins, a buyer of real property sued the seller for misrepresenting the environmental condition of the land. The seller sought indemnification for the attorneys' fees incurred in defending the action against the buyer from an adjacent gas company and its employee, who spilled 50 gallons of gasoline that seeped into the property at issue. The court held that the seller stated a claim for implied indemnification because the negligence of the gas company's employee was active, and the seller's negligence, if any, was passive.[18]

A related principle is that a negligent party can recover attorneys' fees where another's fault or responsibility is "qualitatively different" (i.e., qualitatively greater) from the party seeking indemnity.[19] In First Title Insurance Company v. Cumberland County Bank, a title insurance company sued five defendants, including its agent, for reimbursement of money it paid insuring the title to certain real property. The title insurance company's agent sought implied indemnification from a bank, which issued an incorrect title payoff letter. The court held that an issue of fact existed as to whether the negligence of the bank was qualitatively greater than any negligence of the agent.[20]

B. The Tort of Another Doctrine
Though apparently seldom employed, the tort of another doctrine generally has broader application than the implied indemnity exception for two reasons. First, and most importantly, it is not restricted to fees incurred in defending litigation, but also allows recovery of fees incurred in bringing an action. Only a handful of cases have addressed a plaintiff's offensive use of Pullman's independent tort theory, most notably the U.S. Court of Appeals for the Sixth Circuit's 2006 case Engstrom v. Mayfield.[21] There, investors sued an LLC and others when their investment in the LLC became essentially worthless. The investors later filed a separate action against the LLC's attorneys (non-parties to the first lawsuit) for prematurely releasing funds to the LLC and sought recovery of the attorneys' fees they incurred in prosecuting the first case. The Sixth Circuit then certified to the Tennessee Supreme Court the question of whether the independent tort theory could be used offensively. After discussing both Pullman claims in some detail, the Supreme Court declined to answer the certified question.[22] The Sixth Circuit then held that the independent tort theory permits recovery of fees incurred in bringing an action against a third party, and that the investors had stated a claim for relief.[23]

Similarly, in Whitelaw v. Brooks, the Tennessee Court of Appeals affirmed an order requiring a negligent surveyor to pay the attorneys' fees incurred by a landowner in bringing an action to quiet title against other landowners holding land interests that encroached upon the plaintiff's real property.[24] Likewise, in Resolution Trust Corp. v. Myers, the Sixth Circuit reversed a grant of summary judgment against a bank seeking to recover from its attorney the attorneys' fees the bank incurred (as a result of the attorney's alleged negligence) in bringing an action against the estate of a condo project's seller, who had pledged a certificate of deposit as collateral for repayment of the bank's loan for purchase of the condo project.[25]

The second primary difference with the implied indemnity exception is that there is no requirement that a relationship exist between the parties to invoke the independent tort doctrine.[26] As such, a company could seek recovery of third-party litigation expenses from a business competitor if the requisites of the claim were otherwise satisfied.

Despite their differences, the implied indemnity exception and a defensive use of the independent tort theory can have significant overlap, and, indeed, some courts have described the two interchangeably.[27]

Tennessee courts have not had occasion to address certain aspects of the tort of another exception. As an example, the "tort of another" doctrine is a misnomer among courts expanding its application to breaches of contract and statutory violations.[28] Further defining the parameters of this doctrine in Tennessee would likely hinge on a balancing of the competing policies for the American Rule and the tort of another exception.

3. Practice Pointers
Though the two Pullman claims bear some similarities, they should be pled as separate causes of action, as they are independent bases of recovery with different elements.[29]

A recurring issue concerns whether to bring a Pullman claim in the same proceeding in which the sought attorneys' fees are being incurred, or to file a separate action for recovery of those fees after conclusion of the earlier action. Though either is permissible, the better practice may be to seek Pullman fees in the same proceeding, if possible, for the sake of efficiency and cost-savings, and to minimize the risk of any applicable statute of limitations barring the claim.[30] On the other hand, a plaintiff will be unable to prove the total amount of attorneys' fees incurred until after the underlying claims are resolved, and, accordingly, a court may choose to defer discovery on the Pullman claim until late in the proceeding.
As the rationales for the American Rule attest, the prospect of recovering attorneys' fees from another can serve as a significant consideration in advancing or defending litigation. Accordingly, in matters involving more than two parties, a litigator would be well advised to consider whether the facts give rise to a Pullman claim.

Notes

  1. 693 S.W.2d 336 (Tenn. 1985).
  2. Cracker Barrel Old Country Store Inc. v. Epperson, 284 S.W.3d 303, 309 (Tenn. 2009).
  3. John Kohl & Co. P.C. v. Dearborn & Ewing, 977 S.W.2d 528, 534 (Tenn. 1998) ("initial" and "corrective" fees are recoverable, whereas "litigation fees" are not).
  4. Epperson, 284 S.W.3d at 312-13.
  5. Evans v. Young, No. 01A01-9711-CV-00638, 1999 Tenn. App. LEXIS 17, at *12 (Tenn. Ct. App. Jan. 14, 1999) (applying "equitable principals" to require third-party conspirators, who sought to prevent collection of a judgment, to pay the attorneys' fees that a judgment creditor incurred in a proceeding to enforce the judgment).
  6. Pullman Standard Inc., 693 S.W.2d at 338, 340.
  7. See Id. at 338-39.
  8. Id. at 340 (quoting Restatement (Second) Torts  § 914(2) (1979)).
  9. See Chambers v. City of Chattanooga, 71 S.W.3d 281, 285 (Tenn. Ct. App. 2001).
  10. Pullman Standard Inc., 693 S.W.2d at 338-39.
  11. See Winter v. Smith, 914 S.W.2d 527, 543 (Tenn. Ct. App. 1995); see also Reece v. Elliott, 208 S.W.3d 419, 423 (Tenn. Ct. App. 2006) (denying request for attorneys' fees under implied indemnity theory where defendant sought recovery of fees incurred in defending the plaintiff's declaratory judgment action).
  12. Engstrom v. Mayfield, 195 Fed. App. 444, 451 (6th Cir. 2006).
  13. Chambers, 71 S.W.3d at 285; Elec. Controls v. Ponderosa Fibres of Am., 19 S.W.3d 222, 229-30 (Tenn. Ct. App. 1999).
  14. See Pullman Standard Inc., 693 S.W.2d at 339.
  15. See Jackson v. Hayes, No. 03A01-9504-CH-00116, 1996 Tenn. App. LEXIS 31, at *13 (Tenn. Ct. App. Jan. 18, 1996) (declining to apply implied indemnity exception and distinguishing Wilson Estate v. Arlington Auto Sales Inc., 743 S.W.2d 923 (Tenn. Ct. App. 1987) in part on grounds that Wilson involved a principal-agent relationship); Chambers v. First Trust & Sav. Bank, No. 030A1-9108-CH-00293, 1992 Tenn. App. LEXIS 231, at *11 (Tenn. Ct. App. Mar. 4, 1992) (fiduciary relationship).
  16. See Union Planters Corp. v. Peat, Marwick, Mitchell & Co., 733 S.W.2d 509, 516 (Tenn. Ct. App. 1987).
  17. Stanfield v. Jenkins, No. 1:03-cv-231, 2005 U.S. Dist. LEXIS 33278, at **9-11 (E.D. Tenn. Dec. 8, 2005).
  18. Id. at *11.
  19. First Am. Title Ins. Co. v. Cumberland Cty. Bank, 633 F. Supp. 2d 566, 576 (M.D. Tenn. 2009).
  20. Id. at 577.
  21. 195 Fed. App. 444 (6th Cir. Aug. 24, 2006).
  22. Engstrom v. Mayfield, No. M2004-02661-SC-R23-CQ, 2005 Tenn. LEXIS 631, at *4 (Tenn. July 6, 2005).
  23. Engstrom, 195 Fed. App. at 451-52.
  24. 138 S.W.3d 890, 894 (Tenn. Ct. App. 2003).
  25. No. 92-6143, 1993 U.S. App. LEXIS 29326, at **12-13 (6th Cir. Nov. 9, 1993).
  26. See Pullman Standard Inc., 693 S.W.2d at 340.
  27. See Carr v. Carr, No. 85-351-II, 1986 Tenn. App. LEXIS 2719, at *3 (Tenn. Ct. App. Jan. 3, 1986) ("[A]n action for indemnification may be maintained to recover attorneys fees and costs incurred by one person because of the negligence of another."); Resolution Trust Corp., 1993 U.S. App. LEXIS 29326, at *12 (characterizing the offensive use of the independent tort exception as an action for "breach of an implied contract of indemnity").
  28. Town of Winnsboro v. Wiedeman-Singleton Inc., 414 S.E.2d 118, 121 (S.C. 1992) (breach of contract); Macris & Assocs. Inc. v. Neways Inc., 60 P.3d 1176, 1179-80 (Utah Ct. App. 2002) (breach of contract and violation of Uniform Fraudulent Transfer Act).
  29. See Engstrom, 195 Fed. App. at 451.
  30. Cf. Whitelaw, 138 S.W.3d at 894 (affirming award of Pullman fees in same proceeding in which those fees were incurred).

W. RUSSELL TABER III W. RUSSELL TABER III, an attorney with Riley Warnock & Jacobson PLC in Nashville, focuses his practice on complex business litigation, representing individual and corporate clients in a broad range of industries. Prior to joining the firm, he served as a law clerk for the Hon. Gilbert S. Merritt Jr. of the U. S. Court of Appeals for the Sixth Circuit. Taber graduated Phi Beta Kappa from Georgetown University and received his law degree from Vanderbilt University Law School, where he was a member of the Vanderbilt Law Review, the Moot Court Board and the Order of the Coif.