‘American Rule’ For Attorney Fees Not Implicated In Accounting Malpractice Claim

‍ ‍The “American rule” does not necessarily bar a claim for attorney fees in an accounting malpractice action, the Michigan Supreme Court has ruled in Merrifield v ATS Advisors, et al.

The Michigan Court of Appeals in Merrifield (Docket No. 368355), an accounting malpractice action, had ruled that Hark Orchids, LP v Buie, ___ Mich ___ (December 30, 2024) (Docket No. 165761), was “limited only to claims for attorney fees as damages for legal malpractice” and declined to apply it “to claims for attorney fees as damages for accounting malpractice as well.”

The Michigan Supreme Court disagreed (Docket No. 169061), saying in an order that its decision in Hark Orchids “is not so limited.” As a result, the Court of Appeals “erred in holding that the legal principles animating our opinion in Hark Orchids were strictly limited to legal malpractice claims.”

Therefore, “we remand this case to the trial court for further proceedings consistent with this order,” the high court held.

Background

The plaintiff opened Merrifield Machinery Solutions (MMS) in 2007. The company provided service and repair work for “CNC milling and turning machinery.” Richard Rohn later became a partial owner of MMS and oversaw the company’s finances and accounting, including a line of credit from Oxford Bank.

In 2017, MMS hired the defendant, ATS Advisors, “to prepare tax returns based on information received from MMS’s representatives.” Randell, a certified public accountant (CPA) who worked for the defendant, helped prepare various tax returns for the plaintiff.

The plaintiff eventually decided to part ways with Rohn. The plaintiff and Rohn entered into a purchase agreement, with the plaintiff paying Rohn a portion of the agreed price for his ownership interest in MMS. Afterward, the plaintiff discovered issues with the company’s financial reports. The plaintiff, who acknowledged he was not “intimately familiar” with the company’s books, did not consult with legal counsel or other professionals to determine the company’s value before entering into the purchase agreement with Rohn. The plaintiff also learned that MMS had fallen “out of formula” on its line of credit with Oxford Bank. As a result, MMS hired a turnaround expert, Fred Leeb, and a CPA, Ronald Schlaupitz, to address the company’s accounting issues. In the meantime, the plaintiff and Rohn entered into a new agreement regarding the amount the plaintiff would pay Rohn for his ownership interest.

The plaintiff later filed this accounting malpractice action against the defendant in Oakland County Circuit Court. The plaintiff claimed various damages, including: 1) tax penalties and interest; 2) IRS audit and associated expenses; 3) attorney fees and costs; 4) accounting fees; and 5) plaintiff’s overpayment for Rohn’s ownership interest in the company.

The defendant denied any liability and eventually filed a motion for summary disposition, asserting the plaintiff could not establish causation or damages. The plaintiff opposed the motion, maintaining that genuine issues of material fact existed for trial. In making this argument, the plaintiff basically referred to Schlaupitz’s 214-page deposition transcript.

After hearing arguments, the trial court granted summary disposition for the defendant. According to the trial court, the plaintiff failed to meet the burden under MCR 2.116(G)(4) to set forth specific facts showing there was a genuine issue for trial. According to the trial court, it was not obligated to “scour the lower court record in search of a basis for denying the moving party’s motion.”

The plaintiff filed a motion for reconsideration. The plaintiff also filed an amended complaint, to which the defendant filed a motion for summary disposition, asserting that res judicata barred the claims and the plaintiff did not obtain leave to file the amended complaint. The trial court denied the plaintiff’s motion for reconsideration and granted the defendant’s motion for summary disposition on the amended complaint.

The plaintiff appealed.

Court Of Appeals: No Attorney Fees

In an unpublished opinion joined by Judges James Robert Redford, Michael J. Riordan and Mariam S. Bazzi, the Court of Appeals addressed the plaintiff’s claim for attorney fees, among various other issues.

“The American rule generally requires parties to shoulder the cost of hiring their own attorneys to assert their legal positions, claims, and defenses,” the Court of Appeals observed.

Regarding attorney fees, the defendant “asserted that summary disposition was proper on this claim because such damages are barred by the American rule,” the Court of Appeals said. On the other hand, the plaintiff maintained the American rule did not apply.

In responding to the defendant’s motion for summary disposition, the plaintiff “acknowledged the American rule,” the Court of Appeals noted. “But, while acknowledging exceptions apply to the American rule, [the plaintiff] did not explain, or rationalize, if an exception applied. Rather, [the plaintiff] appeared to argue that the American rule only applies to attorney fees relating to the underlying litigation.”

This argument “lacks merit because the American rule applies to damages in the underlying litigation,” the Court of Appeals said. The plaintiff “failed to establish, as a matter of law, they were entitled to attorney fees. Summary disposition in favor of [the defendant] on that claim was proper.”

Accordingly, “[w]e affirm in part … and remand to the trial court for further proceedings consistent with this opinion,” the Court of Appeals held.

The plaintiff appealed this decision.

MSC Order: ‘American Rule’ Not Implicated

In lieu of granting leave to appeal, the Michigan Supreme Court issued an order, reversing in part the judgment of the Court of Appeals and remanding the case to the trial court.

“The Court of Appeals based its holding on the ‘American rule,’ which Michigan typically follows and which provides that ‘”attorney fees are not ordinarily recoverable [as an element of costs or damages] unless a statute, court rule, or common-law exception provides the contrary,”’” the high court said.

“Despite acknowledging this Court’s recent opinion in Hark Orchids, LP v Buie, ___ Mich ___ … the Court of Appeals held that it was not applicable, concluding that Hark Orchids was limited only to claims for attorney fees as damages for legal malpractice and declining to apply it to claims for attorney fees as damages for accounting malpractice as well,” the Michigan Supreme Court wrote.

However, the decision in Hark Orchids was “not so limited,” the justices said. “Rather, this Court explained that ‘[a]ttorney fees incurred to correct or limit the damages caused by malpractice are inherent in the underlying injury in malpractice suits.’ … Although the opinion specifically held that ‘[p]ermitting aggrieved clients to recover attorney fees that are caused by legal malpractice and are reasonably and necessarily incurred to mitigate the harm of the malpractice is consistent with the nature of malpractice relief – to make the clients whole,’ … the same principles hold true for accounting malpractice.”

In support of this, the Michigan Supreme Court cited the following from the Hark Orchids opinion:

“Notably, the result in this case is by no means unusual in the context of malpractice generally. When a doctor commits medical malpractice, the patient is entitled to recover the costs of hiring another medical professional to mitigate the harm and repair the injuries caused by the malpractice. The same is true for negligence actions involving engineers, accountants, professional home construction contractors, and others. 40 ________________________________________________________________________

40 … Local 1064, RWDSU AFL-CIO v Ernst & Young, 449 Mich 322, 333; 535 NW2d 187 (1995) (explaining that accounting malpractice is largely governed by “common-law principles articulated in malpractice actions generally”); see also Alt v Konkle, 237 Mich 264, 269; 211 NW 661 (1927) (“A plaintiff in a negligence case is entitled to recover, as a part of his damages, his reasonable and necessary outlays in an attempt to be cured of the injuries resulting from the negligence of the defendant.”) (quotation marks and citation omitted).

________________________________________________________________________

[Hark Orchids, ___ Mich at ___, ___ n 40; slip op at 16-17, 17 n 40 (emphasis added).]”

The Court of Appeals “erred in holding that the legal principles animating our opinion in Hark Orchids were strictly limited to legal malpractice claims,” the justices said. “As stated in Hark Orchids, we hold that plaintiffs’ claim for attorney fees simply ‘does not implicate the American rule.’ … We note, however, that as cautioned in Hark Orchids, ‘the client cannot recover any and all fees that the client incurred in attempted mitigation. Attorney fees subject to recovery must be reasonable and necessary to mitigate the harm from malpractice.’”

Therefore, “[b]ecause we hold that the Court of Appeals erred in holding that the American rule barred plaintiffs’ claim for attorney fees, we remand this case to the trial court for further proceedings consistent with this order,” the Michigan Supreme Court concluded.