March 23, 2018 – The Wisconsin Supreme Court has ruled that a circuit court properly awarded attorney fees as an equitable remedy to a defendant who prevailed against a mortgage servicer that acted in bad faith and induced a mortgage default.

A unanimous supreme court (6-0), in Nationstar Mortgage LLC v. Stafsholt, 2018 WI 21 (March 23, 2018), decided for the first time that attorney fees may be awarded as an equitable remedy, as an exception to the rule that requires parties to pay their own fees.

Bank of America (BOA) was servicing a note secured by a mortgage for $208,000 executed by Robert and Colleen Stafsholt (Stafsholt) in 2002. In July 2010, BOA requested proof of insurance on the home and informed Stafsholt that failure to provide proof would result in additional costs for Lender Placed Insurance (LPI).

BOA said it would cancel any LPI purchased if Stafsholt provided proof of insurance. BOA purchased LPI in September 2010. Stafsholt provided proof of insurance, but BOA kept charging LPI. He called BOA customer service to resolve the issue.

But a customer service representative said the charge could not be removed unless he talked to an “elevated level of customer service,” and the only way to reach that level of was to skip a mortgage payment and become delinquent on the mortgage So Stafsholt skipped two mortgage payments. Turns out, customer service gave very bad advice.

BOA Accelerates the Problem

Stafsholt never spoke to an “elevated level of customer service.” Instead, Stafsholt received a letter that BOA intended to accelerate the mortgage and continued to charge Stafsholt for LPI for the next 18 months as Stafsholt made repeated attempts to contact BOA to resolve the issue. He also made a $10,000 offer to reinstate the loan.

BOA never responded and its successor by merger, BAC Home Loans (BAC), filed a foreclosure action. Stafsholt raised the defense of equitable estoppel, arguing BAC’s predecessor created the dispute and induced the default with its bad faith dealings.

The St. Croix County Circuit Court ruled that BOA improperly charged LPI, caused the default through its agent’s misrepresentation, improperly commenced the foreclosure action, and breached an implied covenant of good faith and fair dealing.

The circuit court dismissed the foreclosure action, reinstated the mortgage, and did not allow the servicer (now, Ocwen Loan Servicing LLC) to receive interest on the principal loan balance of about $172,000, which had accrued during the litigation.

Initially, the court did not allow Stafsholt to recoup attorney fees of almost $72,000. But Stafsholt filed a motion for reconsideration. Stafsholt said the principal balance should be $10,000 because of a $90,000 loan payment and the attorney fees incurred.

Thus, the couple argued that the litigation put them in a worse financial position, even after prevailing, than they would have been had they just acquiesced to BOA’s bad faith dealings and paid the LPI charges that BOA imposed improperly.

The circuit court agreed, concluding equitable estoppel entitled Stafsholt to offset the principal balance for the amount of attorney fees that Stafsholt incurred.

Using the lodestar method, the court reduced the attorney fee calculation by 10 percent, to $65,000. But then the circuit court deducted $40,000, which represented the interest that was previously denied. The circuit court concluded that Stafsholt was entitled to attorney fees, but not relief from interest, to avoid a windfall to Stafsholt.

Thus, the court allowed a loan balance offset of about $25,000 for attorney fees. After applying the $90,000 that Stafsholt paid, the principal balance came to $58,000.

Appeal and Supreme Court Decision

Nationstar Mortgage LLC (Nationstar), which subsequently acquired the note and mortgage, filed an appeal on attorney fees. Stafsholt cross-appealed on interest.

The Court of Appeals agreed that BOA had breached its implied duty of good faith and fair dealing, and wrongfully advised Stafsholt to skip mortgage payments.

But the appeals court reversed on the award of attorney fees to Stafsholt, relying on the American Rule, which says parties to litigation are responsible for their own attorney fees and the circuit court did not have authority to award attorney fees in this case.

The appeals court also reversed on interest, concluding BAC was not entitled to receive interest on the principal loan balance during the foreclosure litigation.

Supreme Court: Attorney Fees Allowed

In Nationstar Mortgage LLC v. Stafsholt, 2018 WI 21 (March 23, 2018), the supreme court unanimously (6-0) reversed the appeals court, concluding circuit courts have discretion to award attorney fees, despite the American rule, as an equitable remedy.

“We have never decided whether attorney fees may be awarded as an equitable remedy in Wisconsin,” wrote Justice Michael Gableman, noting exceptions to the American Rule that Wisconsin follows. “We hold that attorney fees may be awarded as an equitable remedy ‘in exceptional cases and for dominating reasons of justice.’”

In this case, the supreme court concluded that the circuit court properly exercised its discretion to award attorney fees to Stafsholt because of BOA’s misconduct.

“This is an ‘exceptional’ case in which an award of attorney fees is proper for ‘dominating reasons of justice,’” Justice Gableman wrote.

“BOA intentionally caused this dispute when it told Stafsholt that defaulting on the loan was the only way the erroneous LPI charges could be removed from his account, but then proceeded to file a foreclosure action when Stafsholt followed its directions.”

The supreme court remanded the case to the circuit court “to determine Stafsholt’s reasonable attorney fees at the court of appeals and this court, and then add that amount to the attorney fees previously awarded by the circuit court.”

Although Stafsholt won on attorney fees, he lost on the interest argument. The supreme court concluded, as the circuit court did, that Nationstar was entitled to receive the interest that accrued on the principal while the case was in litigation.

“Nationstar may collect interest accrued during litigation because Stafsholt would receive a windfall if he was both excused from paying interest and received his attorney fees,” Justice Gableman wrote.