Don't Bet the Business

In commercial disputes, when drafting a complaint, one of the first questions attorneys typically ask is what are the potential damages that can be recovered for claims that may be pled. A second question that generally flows from the first is how the amount of the damages sought effects the question of subject matter jurisdiction. Put simply, the amount of damages sought may decide where the case must be filed.

Courts are driven by subject matter jurisdiction. Subject matter jurisdiction typically is based on the “amount in controversy.” For example, Michigan’s district courts have limited jurisdiction. They hear and decide disputes when the amount in controversy does not exceed $25,000. When the amount in controversy exceeds $25,000, the case is generally filed in a circuit court. 

The amount of “damages,” for the purpose of establishing the amount in controversy (and a court’s subject matter jurisdiction), historically has not included litigation costs, such as attorney fees. At least for some cases, including contract disputes with a fee-shifting provision as part of the disputed contract, how an attorney fee claim affects the amount in controversy recently came into sharper focus.

On April 29, the Michigan Court of Appeals decided the case of ABCS Troy, LLC v Loancraft, LLC, Case No. 349835. That case involved a commercial lease dispute. It began in the district court when the plaintiff sought to recover $6,132 for certain repairs to the leased property. However, the lease also included a “fee-shifting” provision. That provision stated, in simple terms, that if a lawsuit decided the parties’ dispute the losing party would be required to pay the winning party’s actual attorney fees.

In the lawsuit, the defendant won and was awarded $2,692.56 on its counterclaim. As the prevailing party, the defendant also sought $48,576.25 in attorney fees. The district court awarded attorney fees, but capped the amount awarded at $22,307.44, reasoning that its jurisdiction was limited to $25,000. On appeal, the circuit court affirmed that ruling. In response to the defendant’s application for leave to appeal, the appellate court decided to take a second look.

The appellate court first set the stage. By constitutional grant, Michigan’s circuit courts are the state’s trial courts of general jurisdiction. It was the Michigan Legislature that created district courts of limited jurisdiction. The Legislature decided that district courts should have “exclusive jurisdiction in civil actions when the amount in controversy does not exceed $25,000.00.” MCL 600.8301(1). Given this jurisdictional limit, the Michigan Supreme Court has ruled that district courts cannot award damages in amounts greater than $25,000.

As part of the ABCS Troy appeal, the appellate court saw the potential conflict of two well-established rules. The first is the so-called “American Rule” which says that parties to a lawsuit typically pay their own attorney fees – win or lose. Under the American Rule, attorney fees are not considered part of the controversy for jurisdictional purpose. Because attorney fees and other litigation costs are not part of the amount in controversy, an award of attorney fees to a prevailing party is generally not subject to the district court’s $25,000 limit when awarding damages.

The second rule is an offshoot of the first. That rule states that when parties contractually agree to shift litigation cost to the losing side, attorney fees in that context are “damages.” Attorney fees as damages are, therefore, counted towards the amount in controversy which is used to set a court’s subject matter jurisdiction. 

The appellate court saw that these two rules “cross” in the ABCS Troy appeal and so, it decided to uncross them.

Subject matter jurisdiction is established when a case is filed. That said, the appellate court recognized that at the outset of the lawsuit the claims pled did not signal to anyone, including the district court, that the amount in controversy exceeded $25,000. 

Even so, the appellate court also recognized that circumstances change during litigation. Because lawsuits are fluid, merely because the final damages proven at trial may exceed $25,000 does not mean that a district court’s jurisdiction is undermined by the amount of the verdict. The district court can still enter a final judgment in such a case, but the prevailing party’s damage award will be capped at $25,000, which may be an amount less than could have been recovered in circuit court.

To uncross the rules and do damage to neither, the appellate court adopted a treatment like that found in the federal courts. Specifically, federal courts recognize that attorney fees, when sought under a contractual fee-shifting provision, are “damages.” Because they are damages, attorney fees can, and should, play a part when determining the amount in controversy for jurisdictional purposes.   

Borrowing from this rule, the appellate court in ABCS Troy held that “contractual attorney fees are an element of general damages and are to be included in the amount-in-controversy calculation for purposes of a district court’s jurisdiction. If a dispute involves a contract with a fee-shifting provision and a party makes a claim for attorney fees under that provision, then that party can submit a reasonable estimate of such fees that it expects to incur during the lawsuit for purposes of determining the amount in controversy” (emphasis added).

The appellate court reasoned that in ABCS Troy the defendant may not have known when the case was filed that its attorney fees together with the damages sought would exceed the district court’s jurisdiction. However, that reality would have become clear at some point.  When the $25,000 limit was approached, the Michigan Rules of Civil Procedure, specifically MCR 4.002(B), permitted the defendant to seek a transfer to the circuit court. Because the defendant did not seek to transfer the case, but rather elected to remain in the district court, the defendant remained subject to that court’s $25,000 limit when damages were finally calculated and awarded.

In the end, the appellate court concluded that the district court possessed subject matter jurisdiction which was not undermined by the amount of attorney fee “damages” the defendant was ultimately entitled to receive. However, the district court remained subject to its jurisdictional limit and, as such, it did not err in capping the damage award, including the amount of contractual attorney fees at $22,307.44. 

What all this means is that cases that otherwise look like they should be filed in district court because modest damages may be sought at the time of filing may be a self-imposed trap for the unwary. 

When means exists to award attorney fees as part of a party’s “damages,” such as through a contractual fee-shifting provision, counsel must be careful to reasonably estimate expected attorney fees and choose the appropriate court based on the total damages claimed. For counter-plaintiffs, the same analysis should be done when considering whether to seek a transfer to district court.

Lacking this additional level of scrutiny can greatly impact the amount recovered as a prevailing party and turn a what would otherwise be a good day into bad.