NJ Appeals Court Clarifies When Fund in Court Exception Applies

In Grabowsky v. Twp. of Montclairthe Appellate Division clarified when the fund in court exception applies, which alters the general rule that litigants bear their own litigation costs regardless of who prevails. The court held that because no litigation fund was ever created and taxpayers would ultimately bear the expense of the attorney’s fee award, the exception did not apply.  NJ Appeals Court Clarifies When Fund in Court Exception Applies

Facts of the Case

In 2012, the Township of Montclair adopted Ordinance 0-12-28, which amended one of the town’s redevelopment plans to include an assisted living facility as a permitted use for a single-parcel redevelopment area located at 63-65 Church Street in Montclair (Church Street Lot). Plaintiff Richard Grabowsky filed an action in lieu of prerogative writs against the Township of Montclair and the Planning Board, challenging the validity of the Ordinance.

Among other allegations, Grabowsky asserted that Mayor Jerry Fried and Councilman Nick Lewis should have been disqualified from voting on the redevelopment ordinance. In support of that argument, he cited the fact that both Fried and Lewis were members of the Unitarian Universalist Congregation Church located next to the parking lot to be redeveloped.

The trial court dismissed the suit, and the Appellate Division affirmed. It found that any potential benefits the church might obtain from the redevelopment were “far too speculative for consideration in determining whether Fried and Lewis had a disqualifying conflict of interest.” As more fully detailed in a prior post, the Supreme Court of New Jersey reversed. It held that when a public official serves in a substantive leadership role in an organization that brings or opposes a zoning application or that is the owner of property within 200 feet of the property in dispute, he or she is precluded from voting on the matter.

On remand, the trial court granted plaintiff’s motion for partial summary judgment, finding that both Mayor Fried and Councilman Lewis had leadership roles in the Unitarian Church or were about to assume leadership roles at the Church, and were therefore disqualified from voting on the ordinance. As a result, the ordinance was “invalid, unlawful, arbitrary, capricious, null, void ab initio and of no force and effect.”

The trial court also granted plaintiff’s request for attorney’s fees. The trial court applied the fund in court exception to determine that plaintiff was entitled to attorney’s fees, and awarded a total of $123,225.91 in fees and costs. On appeal, the Township argued that the trial court erred in applying the fund in court doctrine because that exception requires the creation of an economic benefit to a class beyond the litigant, and none was created here or identified by plaintiff. The Township further contended that the fund in court doctrine should not apply because the Legislature did not create a fee-shifting provision under either the Municipal Land Use Law (MLUL) and the Local Government Ethics Law (LGEL).

Legal Background

While New Jersey follows the “American Rule,” under which litigants bear their own litigation costs regardless of who prevails, “a prevailing party can recover those fees if they are expressly provided for by statute, court rule, or contract.” One of the exceptions to the American Rule established by court rule is the “fund in court” exception.

The fund in court exception, which is established by Rule 4:42- 9(a)(2), states:

Out of a fund in court. The court in its discretion may make an allowance out of such a fund, but no allowance shall be made as to issues triable of right by a jury. A fiduciary may make payments on account of fees for legal services rendered out of a fund entrusted to the fiduciary for administration, subject to approval and allowance or to disallowance by the court upon settlement of the account.

Under existing court precedent, the fund in court doctrine applies to “situations in which equitably[,] allowances should be made and can be made consistently with the policy of the rule that each litigant shall bear his own costs.” Sunset Beach Amusement Co. v. Belk, 33 N.J. 162, 168 (1996). Such a situation exists “when a party litigates a matter that produces a tangible economic benefit for a class of persons that did not contribute to the cost of the litigation,” making it “unfair to saddle the full cost” of the litigation upon the plaintiff. Henderson v. Camden Cty. Mun. Util. Auth., 176 N.J. 554, 563-64 (2003).

Court’s Decision

The Appellate Division reversed, holding that the fund in court doctrine did not apply.

In reaching its decision, the appeals court highlighted that for the fund in court exception to apply, there must be a “fund” that was created, preserved, increased or, at least, the subject of the litigation. This did not occur in this case, the panel concluded, writing:

Although the trial court described plaintiff’s suit as producing a “tangible conferred benefit of protecting the integrity of government and fostering citizen confidence,” that cannot be substituted for the requirement that the suit produce a “tangible economic benefit” to a class of persons. As to the critical question, “whether a fund in court was created as a result of his litigation,” no fund was the subject matter of the litigation and the plaintiff’s suit did not “create[], preserve[] or increase[] property to the benefit of a class of which he is a member.”

The Appellate Division further noted that the fund in court exception must be applied “equitably” when “allowances should be made and can be made consistently with the policy of the rule that each litigant shall bear his own costs.” In this case, because no fund was created, municipal taxpayers would ultimately fund the award of attorney’s fees.

“Because no fund was created by the litigation, the source for the attorney fee award would be the municipal coffers. The net effect is that, although there is admittedly insufficient evidence of any benefit to them in the form of increased tax revenue, taxpayers would be required to fund plaintiff’s lawsuit,” the court explained. “These circumstances do not rise to the level of a situation where, in equity, the results achieved for the taxpayers make it ‘unfair to saddle the full cost’ of the litigation upon the plaintiff, and appropriate to saddle the taxpayers with those costs.”

For more information about the Appellate Division’s decision or the legal issues involved, we encourage you to contact a member of Scarinci Hollenbeck’s Government Law Group.

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