Monmouth Meadows Homeowners Ass'n v. Hamilton

ON MOTION FOR RECONSIDERATION ADKINS, J. In this appeal we address how courts should determine the amount of attorneys’ fees to be awarded in suits by homeowners associations against property owners to collect annual assessments in cases where recovery of fees is governed by contractual provisions in the homeowners agreement. Petitioner homeowners associations (the “Associations”) appeal the amount of attorneys’ fees awarded to them by the Circuit Courts for Harford and Prince George’s Counties. These courts assessed the reasonableness of the attorneys’ fees ³²⁹ requested by the Associations and correctly declined to apply the “lodestar method” in calculating fees. We affirm.

FACTS & LEGAL PROCEEDINGS The litigation in these cases stems from an attempt to collect attorneys’ fees for services rendered to the Petitioners, three homeowners associations (the Monmouth Meadows Homeowners Association, the Constant Friendship Homeowners Association, both in Harford County, and the Montpelier Hills Homeowners Association, in Prince George’s County). The legal services in question involved, among other things, the pursuit of delinquent homeowners association fees from residents living within each association (Tiffany Hamilton, Bode and Bonike Thomas-Ojo, and Kevin Tillery, respectively; collectively, the “Residents”). 1 These legal services were performed by the law firm of Nagle & Zaller, P.C. (“Nagle & Zaller”) The facts in each case are similar. As a condition of membership in the Associations, the Residents were contractually obligated to pay annual assessments to the Associations.

Delinquent assessments resulted in charged interest on past due amounts plus late fees. 2 The Residents were also contractually required to pay costs and attorneys’ fees incurred by the Associations in the pursuit of delinquent assessment payments. 3 In each case, the Residents failed to pay the assess ³³⁰ ments in a timely fashion and, in each case, the Associations directed Nagle & Zaller to collect on the debt. Nagle & Zaller contacted the Residents in writing in an effort to resolve their situations, but the Residents did not make payments sufficient to settle their debts. Because the Residents were unable or unwilling to make the required payments, the Associations established and recorded liens on the Residents’ properties in accordance with the Maryland Contract Lien Act (“CLA”), which allows for the creation of a lien on real property as the result of a breach of contract. See Md.Code (1974, 2003 Repl.

Yol.), §§ 14-201 to 206 of the Real Property Article (“RP”). The liens included principal and interest on the assessments owed, court costs, and attorneys’ fees. The Associations notified the Residents of the liens in writing, and demanded payment of the debts, as well as attorneys’ fees pursuant to the Residents’ contractual agreements. The Associations then initiated suits against the Residents in the District Court, sitting in Harford and Prince George’s Counties.

In each case, the Associations won affidavit judgments against the Residents in “largely uncontested” proceedings. The Associations also sought attorneys’ fees from the Residents in those courts, calculated according to the “lodestar method,” which takes as a starting point for a fee award the product of the number of hours reasonably expended on a legal matter and the reasonable hourly rate for the type of work performed. 4 This method could allow the Associations to recover more in fees than the amount of the debt owed by the Residents. The District Court, in each instance, elected not to calculate attorneys’ fees under the lodestar method, but rather chose to award fees as a flat percentage of the amounts of ³³¹ principal sought in each case. 5 Notably, the District Court sitting in Harford County, which heard both Hamilton and Tillery’s cases, informed the Associations that barring a contractual agreement on a percentage fee, “reasonable [attorneys’] fees will be set at 15% of the principal claimed, except in extraordinary circumstances.” The Associations appealed these decisions to the Circuit Courts for Harford and Prince George’s Counties. On appeal, the Circuit Courts used different approaches in awarding fees in their respective cases.

In the Hamilton and Tillery cases, the Circuit Court for Harford County awarded the fees that the Associations initially requested with the filing of the notice of intent to file a lien, plus fees incurred in the District Court litigation, but nothing for the appeals. In the Thomas-Ojos’s case, the Circuit Court for Prince George’s County discussed the lodestar method, found that it was not bound to use it, and also took into consideration the guidance presented by Rule 1.5 of the Maryland Lawyers’ Rules of Professional Conduct. See Md. Rule 16-812. That court concluded that the fees requested by the Montpelier Hills Homeowners Association in that case were unreasonably high for the work actually required, and accordingly reduced the fee award to $300.

Like the Circuit Court for Harford County, the court also declined to award fees incurred on appeal. We granted certiorari to consider four questions, 6 which we have rephrased as follows: ³³² I. Whether the District Courts of Maryland for Harford County and Prince George’s County abused their discretion in awarding attorneys’ fees based upon a percentage of the principal sought, a practice that they consistently employ in each and every case coming before them?

II

Whether the District Courts of Maryland for Harford County and Prince George’s County abused their discretion when they refused to consider any attorneys’ fees incurred by Petitioners when they created a hen against Respondents’ lots for nonpayment of homeowners association assessments?

III

Whether the Circuit Court for Harford County abused its discretion when it refused to award any attorneys’ fees incurred on the appeal of this matter, but determined that all of the attorneys’ fees requested in the District Court matter were fair and reasonable and awarded such fees?

IV

Whether the Circuit Court for Prince George’s County abused its discretion when it increased the attorneys’ fees award given in the District Court to a flat $300.00 with no explanation of what such fee award was for, and refused to award any attorney’s fees incurred on the de novo appeal of this matter to that Court? 7 As ah of these cases were heard de novo in their respective Circuit Courts, we review what the Circuit Courts did, not the District Court. We will address the Petitioners arguments as they apply to the Circuit Courts’ rulings, after we answer what we perceive to be the Petitioner’s principal argument— that the lodestar method of determining attorneys’ fees should have been applied in these cases. DISCUSSION We review a trial court’s award of attorneys’ fees under an abuse of discretion standard. See Myers v. Kayhoe, ³³³ 391 Md. 188, 207 , 892 A.2d 520, 532 (2006) (holding that when there are contract provisions requiring the award of attorneys’ fees to the prevailing party, the amount of the fees to be award is “within the sound discretion of the trial court”).

The Lodestar Method Our previous holdings with respect to attorneys’ fees have emphasized that trial courts must routinely undertake an inquiry into the reasonableness of any proposed fee before settling on an award. See, e.g., Meyer v. Gyro Transp. Sys., 263 Md. 518, 531 , 283 A.2d 608, 615 (1971) (holding that the award of “reasonable attorney’s fees” contemplates “a judicial proceeding by the court for the purposes of ascertaining the amount which may reasonably be charged ....”) (citations omitted). Contractual clauses providing for awards of specific amounts of attorneys’ fees are generally valid and enforceable.

See Myers, 391 Md. at 207 , 892 A.2d at 532 . Even where such a provision is not explicitly limited to reasonable fees, 8 however, “trial courts are required to read such a term into the contract and examine the prevailing party’s fee request for reasonableness.” Id. “The party requesting fees has the burden of providing the court with the necessary information to determine the reasonableness of its request.” Id. The Associations argue that the proper way to calculate attorneys’ fees in these cases is through the use of the lodestar method. As noted above, a court that uses the lodestar method to calculate a fee award begins by multiplying the number of hours reasonably spent pursuing a legal matter by “a reasonable hourly rate” for the type of work performed.

See Hensley v. Eckerhart, 461 U.S. 424, 433 , 103 S.Ct. 1933, 1939 , 76 L.Ed.2d 40 (1983), abrogated in part on other grounds, Gisbrecht v. Barnhart, 535 U.S. 789 , 122 S.Ct. 1817 , 152 L.Ed.2d 996 (2002). This amount is then adjusted by the court, depending on the effect of numerous external factors bearing on the litigation as a whole. For example, the Su ³³⁴ preme Court has approved a list of twelve factors to be considered in a lodestar analysis in federal court: (1) the time and labor required; (2) the novelty and difficulty of the questions; (8) the skill requisite to perform the legal service properly; (4) the preclusion of other employment by the attorney due to acceptance of the case; (5) the customary fee; (6) whether the fee is fixed or contingent; (7) time limitations imposed by the client or the circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation, and ability of the attorneys; (10) the “undesirability” of the case; (11) the nature and length of the professional relationship with the client; and (12) awards in similar cases. Blanchard v. Bergeron, 489 U.S. 87 , 91 n. 5, 109 S.Ct. 939 , 943 n. 5, 103 L.Ed.2d 67 (1989) (citing Johnson v. Ga.

Highway Express, Inc., 488 F.2d 714 , 717-19 (1974)). This Court has relied on these factors in lodestar calculations. See, e.g., Manor Country Club v. Flaa, 387 Md. 297, 313 , 874 A.2d 1020, 1030 (2005). This approach may very well return a fee award that is actually larger than the amount in controversy, as occurred in both Hamilton’s case and Tillery’s case here.

We are not persuaded by the Associations’ arguments that the lodestar method is applicable in these cases. We said in Friolo v. Frankel, 373 Md. 501, 504-05 , 819 A.2d 354, 356 (2003), that the lodestar method of calculating attorneys’ fees was generally appropriate in the context of fee-shifting statutes. This holding is justified by the public policy underlying most statutes that allow for fee-shifting. Fee-shifting provisions frequently apply in “complex civil rights litigation involving numerous challenges to institutional practices or conditions.” Friolo, 373 Md. at 525 , 819 A.2d at 368 (quoting Hensley, 461 U.S. at 436 , 103 S.Ct. at 1941 ).

As the Supreme Court of Alaska has observed, these provisions “are not policy-neutral. They are usually designed to encourage suits that, in the judgment of the legislature, will further public policy goals.” State v. Native Village of Nunapitchuk, 156 P.3d 389, 403 (Alaska 2007) (footnotes omitted). A court’s application of the lodestar method in these cases “is designed to reward ³³⁵ counsel for undertaking socially beneficial litigation in cases where the expected relief has a small enough monetary value that [other methods] would provide inadequate compensation.” Krell v. Prudential Life Ins. Co. of Am., 148 F.3d 283, 333 (1998).

The policy considerations mentioned above do not apply here because these cases do not involve a fee-shifting statute. The CLA simply permits attorneys’ fees provided for in a contract 9 or awarded by a court for breach of a contract to be enforced by establishment of a lien. See RP § 14-203. It is by contract, not because of public policy, that the Residents are obligated to pay attorneys’ fees to the Associations.

Without the public policy underpinnings, attorneys’ fees awarded based on contractual obligations that may be enforced with a lien on real property simply do not fit the bases of the lodestar model. The Associations argue that the cases before us are sufficiently related to advancing the public interest to justify use of the lodestar method in determining reasonable attorneys’ fees. The Associations claim that “Molding delinquent owners accountable for paying their share of association assessments supports social benefits that extend far beyond the association itself.” They allege that they and other homeowners associations provide public services such as street maintenance and security, thus relieving local governments of those obligations. We are unpersuaded that any tangential benefit the Associations may provide to local government or to the public is sufficient to justify use of the lodestar method in awarding the fees for their attorneys.

With this argument, the Associations fail to apprehend a fundamental distinction between the legal liabilities incurred by the Residents in these cases and the legal wrongs that are the subject of public interest litigation under true fee-shifting statutes. The fact remains that this ³³⁶ litigation arises from disputes between private parties over breaches of contract. Passage of a law by the General Assembly enabling parties to remedy breaches of certain contracts by the creation of liens on a breaching party’s property does not constitute a legislative pronouncement that the contracts themselves are so infused with any public interest, or that breaches thereof represent any substantial threat to the public interest. The enactment of RP Section 14-203 merely reflects that the General Assembly chose, as it has done many times, to facilitate the enforcement of legitimate private contractual obligations.

The procedure set forth in the statute for creating the lien does not imbue these private contracts with public interest significance of the level protected by the enactment of other fee-shifting statutes. See Friolo, 373 Md. at 526 , 819 A.2d at 369 (quoting Pennsylvania v. Del. Valley Citizens’ Council for Clean Air, 478 U.S. 546, 565 , 106 S.Ct. 3088, 3098 (1986)) (holding that fee-shifting statutes are designed to “enable private parties to obtain legal help in seeking redress for injuries resulting from the actual or threatened violation” of duly enacted laws, and are not intended as “a form of economic relief to improve the financial lot of attorneysf.]”). We hold that the lodestar method is an inappropriate mechanism for calculating fee awards in private, contractual debt-collecting cases.

Use of the lodestar method in such cases is inappropriate because they lack the substantial public interest justification underlying its application in the context of true fee-shifting statutes. Our rejection of the lodestar approach does not mean that the time spent by the lawyers and a reasonable hourly rate should not be an important component of a court’s analysis. Indeed, Rule 1.5(a) of the Maryland Lawyers’ Rules of Professional Conduct, which lists factors that should be considered in determining the reasonableness of a fee, identifies “the time and labor required” first in a list of eight factors for determining a reasonable fee. 10 Courts should use the ³³⁷ factors set forth in Rule 1.5 as the foundation for analysis of what constitutes a reasonable fee when the court awards fees based on a contract entered by the parties authorizing an award of fees. 11 In reiterating this, we recognize that there is likely to be some overlap between the Rule 1.5 factors and the mitigating factors typically considered in a lodestar analysis. See, e.g., Manor Country Club, 387 Md. at 313 , 874 A.2d at 1030 (discussing lodestar factors).

Nonetheless, there is a significant reason for choosing Rule 1.5—unlike the lodestar method, Rule 1.5 does not carry with it the notion that the importance of the right vindicated will justify an expenditure of attorney time that is hugely disproportionate to the dollar amount at issue in the case. Indeed, when applying Rule 1.5, trial judges should consider the amount of the fee award in relation to the principal amount in litigation, and this may result in a downward adjustment. Although fee awards may approach or even exceed the amount at issue, the relative size of the award is something to be evaluated. 12 A trial court also ³³⁸ may consider, in its discretion, any other factor reasonably related to a fair award of attorneys’ fees. In awarding attorneys’ fees when the legal costs are passed on to a third party to the contract agreeing to the fees, trial courts may choose to consider the terms of the contract between the passing party and its attorneys (e.g., between the Associations and Nagle & Zaller).

Trial courts are not bound by the monetary amounts in such contracts, however, and need not cleave to the contracts at all if they improperly influence the fee award. If a trial court chooses to consider contract terms, it also should carefully consider the nature of the work performed, and whether there is a risk that certain rote tasks (for example, the filling out and sending of form letters) are being billed at a higher than reasonable rate. This may occur, for example, in a fee contract like Nagle & Zaller’s, which uses a hybrid method to determine the fee— with the rote tasks defined and paid by a flat amount and the other work billed at an hourly rate. We hasten to say, however, that we do not opine on the reasonableness of the fee agreement between the Associations and their attorneys for the purposes of determining any ethical violation by Nagle & Zaller.

Although the Rules of Professional Conduct certainly place limitations on how much attorneys may charge their clients, we do not address that issue here, even though we use Rule 1.5 as a rubric for our reasonable fee analysis. When courts are asked to award “reasonable attorneys’ fees” against a person or entity not privy to the fee agreement, they act in a different role than a court reviewing a charge by the Attorney Grievance