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What Makes a Party a “Prevailing Party” Entitled to an Award of Attorney’s Fees?

Tennessee follows the “American Rule” which holds that the losing party in a lawsuit is not required to pay the attorney’s fees of the wining party. There are exceptions to the American Rule which come up quite often in Tennessee cases. First, if a statute provides that the prevailing party is entitled to an award of attorney’s fees against the non-prevailing party, then the prevailing party may recover its attorney’s fees. There are quite a few Tennessee statutes and federal statutes under which a winning party might be able to recover its attorney’s fees.

The second exception to the American Rule occurs when parties agree in a contract to a provision that permits the award of attorney’s fees. These types of contractual provisions are prevalent. Although the language used in contracts to nullify the American Rule varies, it is common for them to have language which provides that the “prevailing party” in any legal action between the parties is entitled to an award of attorney’s fees and expenses.

So, what makes a party a “prevailing party” under such contract language? In cases where one party prevails on each and every claim asserted in the action, the answer is pretty simple — that party is the prevailing party. Tennessee lawyers who handle commercial and real estate cases know that many cases end with both parties winning some claims and losing some claims. Who is the prevailing party in those kinds of cases?

The Supreme Court of Tennessee held in Fannon v. City of LaFollette that a party does not have to win every issue to be considered a prevailing party. The Court stated that “a prevailing party is one who has succeeded on any significant issue in litigation which achieves some of the benefit the parties sought in bringing suit.”

The meaning of the term “prevailing party” in an attorney’s fees provision was very recently scrutinized by the Court of Appeals of Tennessee in RCK Joint Venture v. Garrison Cove Homeowners Association. In that case, Homeowners who were members of a homeowners association (“HOA”) were sued by the HOA and made third-party defendants to a lawsuit the HOA had filed against Developer. The lawsuit against Developer involved an easement Developer had acquired through property within the subdivision governed by the HOA. The HOA sued the Homeowners, who were members of the HOA, because they had granted the easement in question, which was across their property, to Developer.

The HOA claimed that Homeowners had violated the restrictive covenants of the subdivision by granting the easement. After they were sued, Homeowners filed an answer and a counterclaim against the HOA. Homeowners asserted that the HOA had no standing to sue them and that it was liable to them for intentional misrepresentation, negligent misrepresentation and libel of title. Homeowners claimed that they were entitled to receive an award of damages against the HOA in the amount of the dues which they had paid to the HOA.

The trial court found that the HOA did have standing to sue Homeowners, but that Homeowners had not violated the restrictive covenants. It dismissed Homeowners’ three causes of action set forth in their counterclaim and awarded no damages to Homeowners. So, it was either a draw (because Homeowners recovered no damages and the HOA obtained no injunctive relief regarding the easement) or a 3-1 victory for the HOA (Homeowners lost on three of their claims, but won on the claim asserted by the HOA).

The restrictive covenants in question contained this provision: “In the event litigation is implemented for enforcement of these covenants, the prevailing party shall be entitled to an award of attorney fees as additional damages.” Homeowners sought an award of attorney’s fees. The trial court denied them. The trial court based its decision on the fact that Homeowners had not had to pay any attorney’s fees because those were paid by Developer; on the fact that the HOA won on several issues; and on the fact that the Homeowners were awarded no damages so they could not be awarded any “additional damages” which an award of attorney’s fees would be.

The Court of Appeals reversed and held that Homeowners were entitled to an award of attorney’s fees. The appeals court reasoned that the main issue in the case was whether Homeowners had violated the restrictive covenants and all of the other issues were merely “sub issues.”