Recent Second District Decision Illustrates the Pitfalls in Silence or Imprecisely Drafting 998 Offers.
In our section entitled “Cases: Section 998,” we have discussed prior posts on Code of Civil Procedure section 998, which allows the parties to contractually allocate treatment of attorney’s fees and costs in settlement agreements or stipulations. Importantly, 998 offers are judged under contractual interpretation principles. (Ritzenthaler v. Fireside Thrift Co., 93 Cal.App.4th 986, 990 (2001).) A 998 offer silent on fees/costs issues is construed to not exclude recovery of the same to the prevailing party. (Id., at 990-991; Rappenecker v. Sea-Land Service, Inc., 93 Cal.App.3d 256, 262-265 (1979) [costs]; On-Line Power, Inc. v. Mazur, 149 Cal.App.4th 1079, 1083-1084 (2007) [attorney’s fees].) If a 998 offeror wants to make sure fees and costs are expressly dealt with, the preferable route is to have the 998 offer provide that “each side is to bear its own attorney’s fees and costs.” (Ritzenthaler v. Fireside Thrift Co., supra, 93 Cal.App.4th at 991.) The next published opinion shows the surprises that result when a 998 offer is accepted that does not have precise clarifying language on how fees and costs will be dealt with.
Chinn v. KMR Property Management, Case No. B196321 (2d Dist., Div. 5 Aug. 22, 2008) (certified for publication) involved an assault, battery and negligence action by appellant Chinn and her boyfriend, apartment tenants, arising out of an altercation with the manager of the apartment complex (Grimes), the property management company (KMR), and the property owner (CPLP). The suit requested $100,000 in general damages, over $1,000,000 in noneconomic damages, punitive damages, attorney’s fees, and costs, with Grimes cross-complaining for indemnity against KMR and CPLP. After the trial court granted a motion to strike an attorney’s fees request in the complaint, Chinn and boyfriend filed an amended complaint requesting costs of suit (but not fees). In March 2006, Chinn served KRM and CPLP with 998 offers to enter judgment in her favor of $10,000 inclusive of costs, and served Grimes with a 998 offer for $17,000—both of which expired without acceptance. A few months later, KMR and CPLP served Chinn with a 998 offer containing two separate compromise proposals: (1) Chinn could dismiss with prejudice her entire lawsuit against all parties, with KMR and CPLP paying her $23,500 and waiving all costs by the offering parties; or (2) Chinn could allow judgment to be taken in favor of all defendants, with KMR and CPLP paying Chinn $23,500 and these defendants waiving all costs. Chinn accepted the first offer and dismissed her action with prejudice. That is when the fun began.
Chinn filed a costs memorandum totaling $30,279.42 and also indicated she would be seeking attorney’s fees in a separate motion to be filed later. Chinn later filed a narrow motion claiming that she was the prevailing party for fee entitlement based on a broadly-worded fees clause in the lease agreement between Chinn and CPLP (namely, “if any legal action or proceeding be brought by either party to this agreement,” the prevailing party is entitled to reimbursement of fees and costs). After a flurry of paperwork from both sides on the costs and fee issues, the trial court made these determinations: (1) Grimes was the prevailing party vis-à-vis Chinn, so no costs to Chinn; (2) Chinn recovered some routine costs against KMR and CPLP, but not expert witness fees under section 998; (3) Chinn was not entitled to attorney’s fees as against Grimes and KMR, because Grimes prevailed and neither party was in privity under the lease agreement; (4) Chinn was not entitled to fees against CPLP, based on a lack of nexus between the tort claim and the lease; and (5) Chinn failed to specify the amount of fees she wanted to recover. The trial court eventually entered a judgment finding that Chinn was the prevailing party as far as costs against KMR and CPLP, so she was awarded costs of $4,036.58 against these parties. Chinn then appealed.
If you think this summary is a little lengthy, the Second District, Division Five had to parse through numerous fee and costs issues intertwined with section 998 principles. So, patience our readers, here is what happened on appeal.
Point No. 1. The lease language—“any legal action or proceeding brought by either party to this agreement”—was broad enough to encompass tort actions between Chinn and CPLP. Beyond that, Chinn’s negligence claim—failing to protect a tenant from foreseeable harm—clearly arose out of her tenancy in the apartment complex. The fee clause was broad enough to encompass Chinn’s tort claims.
Point No. 2. Chinn was not precluded from recovering her costs under KMR/CPLP’s 998 offer. After a scholarly survey of 998 contract principles (including cases we discuss in the first paragraph of this post), the Court of Appeal decided that the 998 offer was silent about Chinn’s ability to recover her costs. Although the offering defendants agreed to waive their costs, this does not imply anything about Chinn’s ability to seek her costs. Beyond this, the ambiguous 998 offer had to be construed against KMR and CPLP in any event.
Point No. 3. Chinn liked the award of some costs but challenged the lower court’s refusal to award her certain service of process and investigative costs. She lost this one, because the Second District determined KRM and CPLP were the prevailing party for costs purposes. Her claim of error pitted two “costs as a matter of right” provisions in Code of Civil Procedure section 1032—one under which plaintiff obtains a net monetary recovery and one under which defendant obtains a dismissal. In reconciling the entire costs scheme, Justice Kriegler, writing for the unanimous panel, decided that “the Legislature did not intend to include settlement proceeds received by the plaintiff in exchange for a dismissal in favor of the defendant … By precluding consideration of settlement proceeds as a ‘net monetary recovery’ when a dismissal is entered in favor of the defendant, only one party qualifies for a mandatory award of costs, consistent with prior law [which held defendant was the prevailing party in a voluntary dismissal situation].” (Slip Opn., at p. 13.) The appellate panel grounded this on the fact Chinn’s interpretation “would lead to an absurd result, as both plaintiff and defendants would be entitled to an award of costs as a matter of right.” (Ibid.) The legislative history of section 1032 indicated nothing to change the principle that costs are awarded, as of right, to a defendant on dismissal. KMR and CPLP were prevailing parties for purposes of “as of right” costs under section 1032. (However, because these defendants did not appeal, it was a moot point for remand purposes.)
Point No. 4. The appellate panel then considered whether Chinn could recover her attorney’s fees under the tort claims as against CPLP (the signatory to the lease agreement with the fees clause). If a contract claim had been involved, the dismissal pursuant to settlement would have meant there was no prevailing party. (See Civ. Code sec. 1717(b)(2).) However, Civil Code section 1717 did not apply because noncontract causes of action were involved. (Santisas v. Gooden, 17 Cal.4th 599, 603-606, 617 (1998) [one of our Leading Cases].) Because the lower court denied fees to Chinn, a remand was necessary for it to determine if there was a prevailing party under the discretionary prong, “based on a pragmatic assessment of the extent to which Chinn and CPLP realized their objectives through the settlement.”
Point No. 5. Respondents argued Chinn was not entitled to fee because her complaint did not include a prayer for attorney’s fees (which was stricken earlier), but only included a prayer for costs. The Court of Appeal disagreed. Attorney’s fees are now recoverable as costs under Code of Civil Procedure section 1033.5(a)(10), with the noticed motion procedure Chinn used being a proper method to recover fees as an item of costs. “Attorney fees based on a contract provision do not need to be demanded in the complaint.”
Point No. 6. Chinn also correctly contended that she could make a motion for fee entitlement without claiming any amount under the noticed motion procedure specified in California Rule of Court 3.1702(a). However, there is a warning that might mean Chinn is time barred upon remand: “Although there does not appear to be any prohibition against the motion that Chinn filed, the time limits for filing a motion for an award of attorney fees would not be altered by filing a motion for an entitlement to fees.” (BLOG OBSERVATION—If a fee entitlement motion is going to be filed first, we suggest that the party utilizing this approach obtain an order bifurcating the entitlement/reasonable amount issues and extending the 60-day period for filing the second part of the fee motion. Otherwise, an untimeliness argument may loom ahead.)
Point No. 7. Chinn finally contended that she obtained a more favorable award from the settlement agreement than the unsuccessful section 998 offers she made in March 2006 to KMR and CPLP, entitling her to award of costs under 998. The Second District panel disagreed, holding the $23,500 payment by defendants in exchange for an entire dismissal (thereby eliminating Grimes’ indemnification claim), could be seen as a more favorable judgment for KMR and CPLP than Chinn’s March 2006 offers to accept $10,000 from KMR, $10,000 from CPLP, and $17,000 from Grimes.
Thus, the issue on remand was whether Chinn was the prevailing party for entitlement to attorney’s fees against CPLP under the tort claims (which were covered by the broadly-worded lease agreement between Chinn and CPLP).
(BLOG UNDERVIEW—The result here should be compared with the Second District, Division Two’s unpublished decision of Tennen v. Finstad, reviewed in our August 7, 2008 post. There, “prevailing party” principles were found to be inapt for a 998 situation in which a case had gone to judgment and the defense had made a straightforward “better” 998 offer. Different rules apply where there is a dismissal pursuant to a settlement and silence on fees/costs, explaining the variance in analysis by the Chinn court.)