Pre-Judgment Interest Not Imposed on Unpaid Legal Fees

Depending on the statute, pre-judgment interest, interest accrued from either the date of the loss or from the date when the complaint is filed, is statutorily prescribed interest and may or may not be an element of damages  There recently was an interesting case that dealt with the question of whether or not pre-judgment interest was an element of damages where a fiduciary withheld paying legal fees awaiting the court’s determination as to whether or not the legal fees were reasonable and necessary.

A recent decision by New York Surrogate Judge, Rita Mella, held that pre-judgment interest on unpaid legal fees would not be allowed.  As reported in the New York Law Journal, the executor of an estate sought to disallow a portion of legal fees charged by the estate’s former counsel.  However, a referee found the legal fees charged against the estate to be reasonable and necessary, and recommended that the court order payment of the legal fees in full, plus pre-judgment interest on the unpaid legal fees.

Pre-judgment interest is generally awarded to compensate an injured party and is at the court’s discretion.  Pre-judgment interest is rarely granted in an award of legal fees in Surrogate’s court unless the facts are egregious.

Where a fiduciary, in this case the executor,  questions the reasonableness of certain legal fees, he or she may be in a quandary whether to pay the legal fees immediately or wait for the court to determine whether or not the legal fees were reasonable and necessary.  If the fiduciary pays the legal fees without court approval and the legal fees are later determined to exceed a reasonable amount, the fiduciary may be surcharged for the overpayment if the fees cannot otherwise be recovered from the attorney. On the other hand, if the legal fees are not paid awaiting a decision of the court, and are ultimately found to be reasonable and necessary, the fiduciary may be charged interest on the unpaid fees.

The court agreed with the referee’s findings as to the unpaid legal fees but rejected the referee’s recommendation regarding the pre-judgment interest.  Judge Mella  noted that where, as here, the fiduciary had a good faith concern with the magnitude of fees charged (even though such fees were later to be deemed reasonable and necessary), and did not maliciously cause the delay in the payment of the legal fees, imposing pre-judgment interest could have the effect of making fiduciaries in the future hesitant to question what they considered unreasonable and unnecessary legal fees because of a fear that, if the legal fees were found to be reasonable and necessary, the fiduciary would run the risk of having to pay interest on the unpaid fees, and that could cause the fiduciary not to question what he or she considered unreasonable and unnecessary legal fees.

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