CALIFORNIA ATTORNEY'S FEES

Section 1717 And Fees Clause Interpretation: Fee Denials Against Apartment Seller And Escrow Company Reversed And Remanded For Reconsideration

 

Second District, Division 7 Finds Reversal of Prejudgment Interest Issue Requires Reexamination of Prevailing Party Determination and the Escrow Instructions Fee Clauses Were Sufficiently Broad for Fee Entitlement Purposes

     In Marina Glencoe, L.P. v. Malibu Escrow Corp., Case No. B203415 (2d Dist., Div. 7 Mar. 1, 2010) (unpublished), an apartment building purchaser recovered $100,000 from an escrow company for wrongfully withholding a deposit and $9,416.43 interest from seller in litigation over a canceled real estate transaction. Buyer had also sought additional damages for tax liability damages, a claim abandoned by buyer after 16 months of litigation. The trial court refused to award any attorney’s fees to buyer, who had moved to recover more than $380,000 against both defendants pursuant to fee clauses in the purchase agreement and escrow instructions under Civil Code section 1717.

     The Second District, Division 7, in a 3-0 decision authored by Presiding Justice Perluss, reversed and remanded for reconsideration.

     Although defendants challenged the fee denial appeal as untimely, the appellate panel disagreed. Seller only sent a “Notice of Ruling,” which does not comply with the strict rules for sending a “Notice of Entry.” This meant that the longer 180-day appeal period applied, with buyer’s appeal being timely in nature. (Sadler v. Turner, 186 Cal.App.3d 245, 248 (1986).) Similarly, the court’s minute order had no “Notice of Entry” of order language and was not file stamped, meaning it did not trigger the shorter appeal periods. (Alan v. American Honda Motor Co., Inc., 40 Cal.4^th 894, 905 (2007).)

     With respect to the fee denial as to apartment seller, the Court of Appeal agreed that this was a “mixed result” case because buyer did not gain his tax liability damages, giving the lower court discretion to determine if there was a prevailing party. Under Santisas v. Goodin, 17 Cal.4^th 599 (1998) [one of our Leading Cases], nothing prevented the lower court from examining the voluntary dismissal of the tax liability claim in determining if there was a prevailing party. However, because there was a reversal on a narrow prejudgment interest issue, the fee determination was remanded for the trial court to reexamine whether buyer’s additional success on the prejudgment interest issue altered the “prevailing party” decision.

     That brought Justice Perluss and his colleagues to the fee denial as to escrow company for withholding a deposit made by buyer in the canceled transaction. Escrow company argued that the lower court correctly denied fees, because the pertinent clauses were third-party indemnity rather than general attorney’s fees clauses. The appellate court nonetheless found that one of the fee clauses allowed escrow to recover fees for performance arising out of the escrow transaction, which under section 1717’s mutuality principle meant that the clause was sufficiently broad to allow for fee recovery. (Accord, Paul v. Schoellkopf, 128 Cal.App.4^th 147, 152-154 (2005).)

Fee Clause Interpretation: Broad LLC Operating Agreement Fee Clause Encompasses Tort Claims

$38,000 Fee Award Out of Requested $88,795 Amount Affirmed on Appeal.

     Civil Code section 1717 does not always govern the award of contractual attorney’s fees. Code of Civil Procedure section 1021 allows the parties to make attorney’s fees agreements, by contract, that go beyond section 1717 dictates, allowing recovery for tort or even other causes of action depending on the breadth of the language in the fees clause. Section 1021 was the important provision at issue in the next case.

     In Ha v. Yi, Case No. 214212 (2d Dist., Div. 7 Jan. 6, 2010) (unpublished), the LLC Operating Agreement between different members contained a broad attorney’s fees provision—“In the event of a dispute arising out of or in connection with this Agreement, the party prevailing in such dispute shall be entitled to its reasonable costs and attorney’s fees in addition to all other relief to which it may be entitled.” A donnybrook lawsuit ensued in which both contractual and tort claims were asserted by some signatories against other contractual parties. The lower court eventually awarded $38,000 in attorney’s fees (out of a requested $88,795) to the prevailing party, mainly on tort claims.

     On appeal by the losing party, the appellate panel affirmed. CCP § 1021—as interpreted by the trilogy of Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1341 (1992), Allstate Ins. Co. v. Loo, 46 Cal.App.4^th 1794, 1798-1799 (1996), and Lerner v. Ward, 13 Cal.App.4^th 155, 158-160 (1993)—allows fee recovery for torts under a broadly-worded attorney’s fees clause. The clause in this case was broad enough to encompass recovery on various torts, so no substantive problem with the result below according to the Court of Appeal.

     Losing party was shocked by the amount of the fees, apparently ignoring the $50,000 discount by the trial court. Didn’t go very far with the reviewing court. Appellant only made generalized assertions of unreasonableness and did not include a hearing of the reporter’s transcript on the fee hearing, effectively waiving an assertion of error on appeal. (See Gee v. American Realty & Construction, Inc., 99 Cal.App.4^th 1412, 1416 (2002).)

Fee Clause Interpretation, 998 Offers, And Routine Costs: A Three-Fer In One Case—And A Resultant POOF! Upon Reversal Of The Fee Award

Substantial Fee Award Reversed Because Fees Provision Did Not Reach Noncontract Recovery, While Rest of Trial Court’s Fee/Costs Orders Affirmed on Appeal.

     In Gaggero v. First Federal Bank of California, Case No. B207273 (2d Dist., Div. 1 Nov. 30, 2009) (unpublished), Borrower voluntarily dismissed with prejudice his equitable, statutory and breach of contract claims, on the eve of a jury trial, after the trial court held a pretrial hearing on contractual interpretation issues and indicated that the defense would be entitled to a nonsuit or directed verdict. Lender filed a costs bill and moved for an award of attorney’s fees. After determining that Lender was not entitled to fees for Borrower’s dismissal of the contract claim, the trial court did award Lender $1.5 million in fees and $22,000 in costs (after disallowing some other routine costs to Lender) for prevailing on the noncontract (primarily tort and statutory) claims. The trial court also disallowed Lender’s expert witness fees on the ground that its Code of Civil Procedure section 998 offer was not made in good faith. Both sides appealed.

     On appeal, the substantial fee/costs award went POOF!, but the lower court’s other rulings were sustained.

Prevailing Party And Fee Clause Interpretation Issues: Court Of Appeal Sustains Trial Court Denial Of Fees To Either Side

Fourth District, Division 1 Utilizes “Pragmatic” Prevailing Party Test and Determines Narrow Fee Clause Did Not Allow For Recovery on Successful Tort Claim.

     In a dispute involving a brokerage arrangement with respect to a mobile home, seller won a small compensatory and punitive damages jury verdict against brokers for breach of fiduciary duty, although seller lost a contractual claim and brokers lost a contract-based cross-claim after having it dismissed because no supporting evidence was presented at trial. Seller moved for $89,772.50 in contractual attorney’s fees for prevailing on his tort claim, and brokers moved for $61,217.50 in contractual fees and costs for obtaining a directed verdict on seller’s breach of contract claim. The trial court denied fees to either side, and both sides appealed claiming each one respectively should have been awarded fees.

     The Fourth District, Division 1 affirmed the fee denials in Whitton v. AAAmerican Pacific Manufactured Homes, Inc., Case No. D053737 (4^th Dist., Div. 1 Nov. 24, 2009) (unpublished).

     The appellate court found that under the Hsu v. Abbara, 9 Cal.4^th 863 [one of our Leading Cases] “pragmatic” test, brokers did not prevail overall despite defensing seller’s contract claim through a directed verdict. The reason is that broker suffered a defeat by losing their contract cross-claim, with no authority being cited to show that the trial court had to ignore this defeat when determining if brokers prevailed for purposes of fee recovery.

     That brought the panel to seller’s claim that it was entitled to fees under a fees clause for winning his tort claim. Not so, said the Court of Appeal. The fee clause at issue was very narrow, only encompassing contractual enforcement rather than broader claims “arising out of” the agreement. The fiduciary duty claim was not brought to enforce the agreement. (Exxess Electronixx v. Heger Realty Corp., 64 Cal.App.4^th 698, 709 (1998).) Thus, the more narrow nature of the fees clause prevented seller from recovering his fees, meaning the lower court’s interpretation of the contract was correct.

Fee Clause Interpretation and 998 Offers: Court Of Appeal Remands $400,000 Fee Award against Contractor But Affirms Separate $296,148.84 Against Contractor In Favor of Subcontractor

Fourth District, Division 1 Address Plethora of Fee Issues in Unpublished Decision.

     Well, strap your helmets on, readers, because we now synopsize a 75-page unpublished decisions dealing with a cornucopia (a good word in celebration of upcoming Thanksgiving) of attorney’s fees issues under California law.

     In The Gifted Schools v. Grahovac Construction Co., Case No. GIC840032 (4^th Dist., Div. 1 Nov. 19, 2009) (unpublished), plaintiffs Trust and an associated Corporation received an aggregate award of $438,610 against defendant Contractor as well as a Civil Code section 1717 attorney’s fees award of $400,000 to both “Plaintiffs” (out of submitted bills totaling $772,001). Earlier, plaintiffs had rejected a substantial, higher 998 offer of $605,000 made by Contractors jointly to “Plaintiffs.” Contractor also lost his cross-complaint against subcontractor, which was awarded fees of $296,148.84 under section 1717. Everyone appealed except subcontractor.

Fee Clause Interpretation And Allocation: Substantial Fee Award Affirmed Where Fees Clause Was Broad In Nature And All Claims Based On Same Operative Facts

Fourth District, Division 2 Sustains $382,233.25 Fee Award Under Code of Civil Procedure Section 1021.

     As we have reminded readers before, a broad fee clause will frequently give winning litigants a “big bonus” for fee recovery purposes: the broader the clause, the better the chances that noncontractual claims will be found to give rise to fee recovery. The next case we look at is an example of how a substantial fee recovery can flow from a broadly worded attorney’s fees clause.

     Roadway Construction Co., Inc. v. Hanson Enterprises, Inc., Case No. E046037 (4^th Dist., Div. 2 Nov. 19, 2009) (unpublished) involved a grading contractor which sued the former owner of the property subject to its construction for breach of contract, unjust enrichment, and declaratory relief, requesting attorney’s fees based on a fees clause in the grading contract. The clause read this way: “If any arbitration or legal action is commenced between the parties concerning the Contract Documents, or the rights and duties of any person in relation thereto, the party prevailing in such action shall be entitled to recover its attorney’s fees and costs in connection therewith from the losing party.” The trial court dismissed the unjust enrichment claim based on the two-year statute of limitations, which prompted contractor to dismiss the other claims with prejudice. Later, the lower court awarded former owner contractual attorney’s fees of $382,233.25, prompting an appeal by contractor.

Fee Clause Interpretation: Landlord Awarded Substantial Attorney Fees For Prevailing In Three Actions Against Feisty Former Tenant

 

Court of Appeal Finds Fee Clause is Broad Enough to Encompass All Three Actions.

     Under Civil Code section 1717, the key to recovering fees in disputes involving contract and tort claims often devolves to a determination of whether the fee clause is sufficiently broad to encompass matters “arising out of” or “concerning” the agreement in question. That breadth did occur in the next case we review, which concomitantly led to an affirmance of a sizable attorney’s fees award in favor of a landlord as against former tenants.

     In Lippett v. Lembi, Case Nos. A115453, A116342, & A117583 (1^st Dist., Div. 5 Nov. 17, 2009) (unpublished), landlord basically won three actions against tenants arising out of a lease with a fees clause—an initial action by which the lease was declared to have been forfeited (awarding back rent and an attorney’s fees award of $80,000), a second action in the lease battle by which the parties entered into a settlement agreement (under which tenants were to pay certain principal sums and the $80,000 prior fee award over time on an installment basis), and a third action alleging primarily torts against landlord, in which tenants requested reinstatement of the lease (the lease previously determined to have forfeited by tenants). Landlord successfully obtained summary judgment in the third action, with the trial court awarding landlord $82,050.50 in further attorney’s fees against tenants. Unhappy, tenants appealed.

Fee Clause Interpretation: Narrowly-Worded Fee Clause Did Not Allow For Fee Recovery By Attorney In Successfully Defending Against Legal Malpractice Action

Fourth District, Division 1 So Holds In a Result Consonant With Prior Reviewed Decisions on this Website.

     Here is one we have seen before, but bears repeating.

     Attorney sues to collect on a receivable owed from a former client, but through a cross-complaint after client sues for legal malpractice. Attorney prevails in both actions, defensing the malpractice action and affirmatively recovering on the receivable cross-complaint. Attorney has a retainer agreement, with a fees clause, albeit fairly narrow in scope—allowing for fee recovery if prevailing in any action “to recover any amount due pursuant to the terms of this Attorney/Client Fee Agreement.” Attorney moved to recover fees of $343,205 in fees expended in defending against the legal malpractice action and in recovering on the receivable. The trial court awarded successful attorney $68,641 in fees based on recovery under the receivable cross-complaint. Disgruntled she did not get more, attorney appealed seeking additional fees.

     Not to be had, said the Court of Appeal in Ferrey v. Hasso-Najm, Case No. D053741 (4^th Dist., Div. 1 Nov. 13, 2009) (unpublished).

     The problem here was that the retainer agreement fees clause was narrow in scope, reaching only fees in an action to recover expenses “pursuant to the terms” of the retainer agreement, not more broadly worded “arising out” retainer language. The legal malpractice action did not challenge the enforceability of the retainer agreement, but was one for a tort independent of recovery under the contract. The narrow wording of the fee clause properly did not allow for recoupment of fees expended in successfully defending against the malpractice action, but only recoupment of apportioned fees spent in winning under the receivable lawsuit. Judgment affirmed, given that the lower court only awarded apportioned fees in the non-malpractice segment of the litigation.

     BLOG UNDERVIEW—This case is hardly an aberration. We refer readers to these posts that are consistent with the ruling in Ferrey: July 1, 2008 post on Wolf v. Glassberg, Pollak & Associates (1^st Dist., Div. 4 unpublished) [legal malpractice action was not “on the contract”, but based on a tort, for purposes of Civil Code section 1717 fee recovery] and May 27, 2009 post on Tesh v. LeTourneau (4^th Dist., Div. 1 unpublished) [narrow fee clause did not allow for recovery in action with malpractice claims].

Civil Code Section 1717: Nonsignatories Who Were Intended To Be Parties Can Be Entitled To Contractual Fee Recovery Even Though Contractual Clauses Are Very Limited In Nature

Second District, Division 4 Explores Some “Nooks and Crannies” of Section 1717 in Unpublished Opinion.

     This next case, albeit unpublished, is a very scholarly discussion of Civil Code section 1717, exploring nonsignatory and fee clause breadth issues. And, best for us, only a challenge to a denial of attorney’s fees is involved. So, with type of narrow issue on which we regularly report and with no further delay, here we go.

     Trading Post Loan v. Kiss, Case No. B212886 (2d Dist., Div. 4 Oct. 22, 2009) (unpublished) involved some defendant real property owners selling a business to plaintiffs and leasing the property back to plaintiffs under a lease agreement with a purchase option (complete with an attorney’s fees provision covering all reasonable fees “necessary to enforce Lessor’s rights”). Later, the parties executed a purchase agreement for sale of the real property (plaintiffs being the buyers), also with a fees clause but which was cancelled mutually through escrow with a release of liability relating to the escrow. Plaintiff lessees/buyers sued defendant lessors/sellers on the ground plaintiffs had exercised the lease purchase option, but defendants obtained summary judgment on the ground that the later purchase agreement had superseded the earlier option and that the parties had cancelled the later purchase transaction (because plaintiffs had never properly exercised the lease purchase option). Defendants sought an award of attorney’s fees, a request denied by the lower court. They appealed solely on the fee denial.

Broad Fees Clause And Failure To Challenge Excessiveness Of Fee To Winner Spells Trouble For Losing Country Club Members

 

Fourth District, Division 1 Affirms $779,955.97 Postjudgment Fees/Costs Award.

     The next case covers several cross-over issues: fees clause interpretation; apportionment between covered and noncovered claims; and reasonableness of fees.

     Here we go.

     In Urquhart v. Del Mar Country Club, Case No. D052711 (4^th Dist., Div. 1 Sept. 28, 2009) (unpublished), a couple who were members in the country club reached a settlement agreement with the Del Mar Country Club under which an easement dispute was resolved and country club allowed a membership to couple’s son under certain conditions. Couple initiated a lawsuit claiming, among other things, that country club was required to quitclaim some property to them under the settlement agreement and that country club terminated their memberships as retaliation for suing. Because the case involved primarily contractual interpretation, the trial court granted summary judgment to country club (a determination that was upheld on appeal). The lower court also ordered couple to pay country club postjudgment fees/costs totaling $779,955.97 (gulp!, broken down as $720,636.85 in fees and $59,319.12 in costs). Couple also appealed this award, naturally.

     The Fourth District, Division 1, unfortunately for couple, affirmed across the board.

     Based upon a very broad fees clause in the membership agreements between the parties, the appellate panel found that the parties can by contract agree that fees will be shifted in any litigation (whether sounding in contract or tort), although normally a more narrowly worded fees clause only encompasses contractual claims. (Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1341 (1992) [relying on Code of Civil Procedure section 1021].)

     Couple argued that the lower court erred in not apportioning country club attorney time between contract and tort claims. The problem here is that apportionment is a discretionary tool for the lower court, which does not have to do so where if it is impracticable to so divide when there are common legal and factual issues involved. (Bell v. Vista Unified School Dist., 82 Cal.App.4^th 672, 687 (2000).)

     Finally, in the one that may have hurt the most, couple challenged the fee award as outrageous in amount. Actually, the appellate court agreed that the “fees do appear rather astounding” for a dispute involving mainly contractual interpretation issues over a small amount of property subject to the easement controversy. However, couple waived the excessiveness challenge by failing to contest the attorney hourly rates or time expended at the lower court level. (City of Santa Paula v. Narula, 114 Cal.App.4^th 485, 494 (2003).)

     BLOG UNDERVIEW—The moral of this case is to make sure you make an excessiveness challenge, if contesting a fee recovery, with specific evidence or objections in the lower court. If not, you will likely be subject to a similar waiver argument or given “short shrift” attention by the appellate court. (Compare Christian Research v. Alnor, 165 Cal.App.4^th 1345 (2008), reviewed in our December 31, 2008 “Top Ten Decision” list, where Justice Aronson—in an oft-cited decision—sustained the ability of trial judges to make wholesale reductions in sought-after fees where specific challenges to excessiveness/unreasonableness were made.)

Voluntary Dismissal Of Tort Claims: Be Careful—If Contract Clause Allows For Recovery, You May Not Seek Refuge Under Santisas

Second District, Division 1 Affirms Fee Award to Broker Under Broadly Worded CAR Form Agreement.

     Under Santisas v. Goodin, 17 Cal.4^th 599 (1998), a voluntary dismissal will end fee exposure on contract claims. However, there is a hitch (usually is). The dismissal will not necessarily insulate against fee exposure for tort or noncontract claims. That hitch came to bite the losing litigants in the next case, Kymm v. O’Loughlin, Case No. B211512 (2d Dist., Div. 1 Sept. 24, 2009) (unpublished).

Special Fee Shifting Statute and Fee Clause Interpretation: Singapore Law Governs Non-Statutory Issues

 

Ninth Circuit Reverses Denial of Fees Award, Remanding for A New Look in COGSA, Bill of Lading Case.

     So what happens when you have a seemingly statutory choice-of-law clause (that means no attorney’s fees) and a contractual clause (that may mean attorney’s fees) in the same case? Well, if you are the litigant arguing for a fee award—argue that the contractual clause governs. That is what the litigant argued in the next case did and—wonders of wonders—it obtained a reversal of a fee denial on appeal.

     The case is APL Co. Pte. Ltd. v. UK Aerosols Ltd., Case No. 07-16739 (9^th Cir. Sept. 21, 2009) (for publication), which involved a bill of lading governed by Singapore law and the operation of the Carriage of Goods by Sea Act (COGSA). The district judge essentially held that COGSA was the governing choice-of-law provision in a bill of lading that “preempted” a fees clause applying Singapore law (which adopted the English Rule that the prevailing party wins). Federal law generally does not permit the prevailing party in an admiralty case to recovery attorney’s fees. (B.P.N. Am. Trading, Inc. v. Vessel Panamax Nova, 784 F.2d 975, 977 (9^th Cir. 1986).) However, notwithstanding this rule, admiralty courts will generally give effect to a contractual agreement that holds otherwise. (Chan v. Soc’y Expeditions, Inc., 123 F.3d 1287, 1297-97 (9^th Cir. 1997).) Because the contractual bill of lading clause specified Singapore law (winner obtains fees) and Singapore law was the proper choice of law over COGSA, the matter had to be reversed and remanded for a calculation of fees due to the prevailing party.

Fee Clause Interpretation: Narrowly Drawn Settlement Agreement Fees Provision Applying to Affirmative Enforcement Action Does Not Cover Defensive Use

Fourth District, Division 1 Finds Gil v. Mansano Persuasive.

     The next case demonstrates that both trial and appellate courts will interpret contractual fee clauses by their terms—if the scope is narrow, the fee recovery will be narrow and restricted in application.

     In Tesh v. LeTourneau, Case No. D052873 (4^th Dist., Div. 1 May 26, 2009) (unpublished), son of a declining mother challenged the transfer of mother’s assets into a court-approved trust. Son (brother) and daughter (sister), among other parties, participated in a mediation that produced a settlement agreement with a release of future claims (except about including a certain McDonald’s lease in the trust) and a narrowly drawn fees clause, to wit: “If any action or proceeding is instituted to enforce or interpret any right or obligation under this Agreement, the prevailing party shall be entitled to receive … his or her costs of such action or proceeding, including reasonable attorneys’ fees, … and all other costs incurred in enforcing or interpreting this Agreement.” Son brought an action to prevent inclusion of the McDonald’s lease in the trust and to nullify the settlement agreement. Son won issue number one and lost issue number two. The trial court awarded daughter some limited attorney’s fees to the extent it covered son’s efforts to rescind or terminate the settlement agreement, but denied fees on other issues. After an appellate court rejected son’s appeal of the adverse determinations, daughter/sister then moved for more fees after prevailing on the trust validity issues. The probate court denied the motion, finding that the settlement fees clause did not encompass “defense of Trust validity as a basis for a fee award. Instead, fees were to be awarded to the prevailing party in any action brought ‘to enforce or interpret any right or obligation under th[e] Agreement.’” Daughter/sister appealed.

Nearly $900,000 In Attorney’s Fees Affirmed In Billboard Litigation

 

Second District, Division 3 Finds Defendant Lessors Prevailed Despite Claim of “Triplicative” Work By Three Law Firms.

     The next one is a wild one and illustrates that substantial attorney’s fees will be awarded under Civil Code section 1717 once the court determines which litigants “prevailed” by achieving their main objectives in the germane litigation.

     In Superior Property of Carson LLC v. Regency Outdoor Advertising, Inc., Case No. B203251 (2d Dist., Div. 3 Apr. 16, 2009) (unpublished), certain billboard lessors prevailed in a protracted lawsuit involving wild claims of what lease governed (an October 10 or 11 document) and whether lessors were judicially estopped after many of them had earlier banked on the October 11 lease—but then shifted course late in the litigation and stood on the October 10 lease, which was indeed found governing by the trial court following a bench trial. Because the plaintiff wanted removal of the billboard and defendants prevented this from happening, the trial court determined the defendants were the prevailing parties under Civil Code section 1717 (based on the existence of fee clauses in both leases) and awarded the three defendants collectively $892,944 in fees—after all, each defendant had its own counsel to defend its interests. Plaintiff appealed.

Retainer Agreements: Quantum Meruit Award of $22,670.24 To Discharged Contingency Fee Attorney, After Offsets, Is Affirmed On Appeal

Fourth District, Division 2 Construes “Recovery” Fee Retainer Language Against Drafting Attorney.

     The next decision demonstrates that practitioners need to be careful how they draft retainer agreements. Because the drafter is usually an attorney, any ambiguity will likely be construed in favor of the client. That is what occurred in the next case, involving a discharged contingency fee attorney hoping to get more than a quantum meruit award under a contingency fee agreement. It did not happen.

     In Strickland v. Mason, Case No. E044910 (4^th Dist., Div. 2 Apr. 10, 2009) (unpublished), attorney entered into a contingency fee arrangement with client to recover loans client had made to her daughter and daughter’s boyfriend between a 5 year period of time. Client agreed to certain contingency arrangements “of any money recovered” at various points of the legal proceedings, with attorney granted a lien on “any recovery [client] may obtain in the court action ….” In the discharge and withdrawal provisions of the retainer agreement, client could discharge attorney at any time, with attorney entitled to the reasonable value of her services at a $200 hourly rate “payable upon any collection of funds in this matter.”

Civil Code Section 1717 and Fee Clauses Interpretation: Appellate Court Reverses $1,370,604 Fee Award Because Some Recovery Was On Uncovered Fraud Counts And Winner’s Limited Success Required Some Further Apportionment

First District, Division 4 Believed Award Needed to Apportion Out Some Fraud Work and Take Into Account Plaintiff’s Limited Success on the Promissory Note Claims.

     Who says that appellate courts blindly rubberstamp fee awards by trial courts? The next case certainly demonstrates that this is not the case, with the reviewing courts making sure that substantial fee awards do not encompass work on uncovered substantive claims, that apportionment was done in certain areas, and that a litigant’s limited success was properly taken into account.

     In Khazan v. Braynin, Case No. A114369 (1^st Dist., Div. 4 Mar. 30, 2009) (unpublished), plaintiffs did prevail on note foreclosure actions involving $300,000 and $57,000 promissory notes, although they did not recover on their fraud and RICO claims. The fees clauses in the promissory notes were narrow—allowing recovery “should suit be commenced to collect this note or any portion thereof.” The trial court then awarded a whooping $1,370,604 in fees to plaintiffs, broken out by applying a 1.5 multiplier on a $850,732 lodestar (out of a requested lodestar of $944,952) sought by a veteran attorney with about 45 years of experience and also awarding a full $94,506 in fees to another of their attorneys. (The veteran was awarded $400 per hour and the other attorney was awarded $285 per hour.) Defendants lost an appeal on the merits, but did win a reversal of the fee award.

Civil Code Section 1717: Trial Court Erred In Denying Fee Award To Defendant Defeating A Lease Purchase Option Specific Performance Claim

Second District, Division 1 Reverses Fee Denial as Too Restrictive.

     We have reviewed many decisions involving interpretation of contractual fees clauses, which involve a construction of the ambit of Civil Code section 1717. In the next case, the appellate court reversed based on the determination that the lower court interpreted the scope of the fees clause too restrictively. Contractual interpretation is a nice issue on appeal, because it is a judicial function in the absence of conflicting parol evidence.

     Dayco Funding Co. v. Schneider, Case No. B196591 (2d Dist., Div. 1 Mar. 27, 2009) (unpublished) involved a defendant who defeated a specific performance claim based on a purchase option provision in a residential lease agreement. The lease clause provided that “[i]n the event that legal action is undertaken by any party to enforce the terms of this lease or to recover possession of the premises, the prevailing party shall be entitled to recover from the other party all costs incurred in connection with such action, including reasonable attorney fees and collection costs, with or without suit.” The trial court did not award fees to defendant under this provision.

     The appellate court reversed.

     It found that (1) Civil Code section 1717 did apply, (2) defendant won decisively because plaintiff failed to achieve its litigation objective, and (3) there was no support for the conclusion defendant was not entitled to fees because the lease was “limited to the terms of the tenancy.” Rather, because the opposite losing party would have been entitled to fees based on the broadly-worded lease option provision, the section 1717 mutuality principle required the same result with respect to defendant. (Care Construction, Inc. v. Century Convalescent Centers, Inc., 54 Cal.App.3d 701, 705-706 (1976), disapproved on unrelated grounds in Canal-Randolph Anaheim, Inc. v. Wilkoski, 78 Cal.App.3d 477, 497 (1978).)

Civil Code Section 1717: Without Prejudice Dismissal Of Apartment Fire Damage Suit Did Not Give Rise To Fee Exposure

 

Second District, Division 4 Applies Santisas in Affirming Denial of Fees.

     In our category “Leading Cases,” we have listed Santisas v. Goodin, 17 Cal.4^th 599 (1998), which held that a voluntary dismissal of contractually-based claims will not lead to fee exposure under Civil Code section 1717. However, Santisas did leave open the exception that the breadth of a fees clause might give rise to fees for covered tort or statutory claims. The next case followed Santisas, determining that the narrow fees clause at issue only covered contract-based claims that were dismissed by the plaintiff. Hence, plaintiff did not face fee exposure.

Fee Clause Interpretation: Narrow Provision Requires Elimination Of Fee Award From Default Judgment

First District, Division 2 Determines Fee Clause Only Allows For Recovery of Fees in Arbitration Proceeding.

     Unless there is ambiguity or mistake, courts are generally charged with enforcing contracts as written. This applies equally to fee clauses in contracts, as the next unpublished decision illustrates.

     In Quraishi v. Delta Pools and Patios, Inc., Case No. A120697 (1^st Dist., Div. 2 Mar. 13, 2009) (unpublished), plaintiff pool company recovered a default judgment for $42,582.50 in compensatory damages, $2,640 in prejudgment interest, $14,325.90 in attorney’s fees, and $618 in costs against the owners of the property where the pool was being installed. Property owners appealed. Although they lost the challenge to the broader default judgment, they did gain a reduction in compensatory damages and elimination of the fee award in entirety.

Ambiguous Figure.  Sir John Tenniel's illustration of the Caterpillar for Lewis Carroll's Alice's Adventures in Wonderland

Estoppel And Fee Clause Interpretation: Losing Broker Using MLS Was Not Liable To Winning Seller For Fees Just Because Broker Pled Fee Recovery And When Fees Clause Did Not Encompass Losing Broker

First District, Division Five Follows Blickman Turkus and Sessions Decisions.

     This next case is a virtual paradigm for students of fees clauses in exclusive listing agreements involving MLS brokers who sue sellers and then lose. It deals with judicial estoppel and fee clause interpretation issues frequently seen in these types of disputes.

     Menasco v. Nagel, Case No. A121570 (1^st Dist., Div. 5 Mar. 9, 2009) (unpublished) involved a plaintiff real estate broker who found buyers for an interested defendant seller, even though the seller's exclusive listing agreement was with a separate broker posting on the multiple listing service (MLS). Plaintiff sued defendant when he failed to consummate a sale of defendant's residence to several ready, willing, and able buyers, alleging breach of contract and third party beneficiary contractual theories. Plaintiff's complaint referenced the MLS broker-defendant listing agreement (which had a fees clause) and sought entitlement to fees under that clause. Plaintiff lost to seller, with the trial court awarding $17,387.50 in attorney's fees based upon the fact that plaintiff had asked for fees in his complaint.

     The First District, Division 5, in a 3-0 decision authored by Presiding Justice Jones, reversed the fee award.

Probate Settlement: Heir Loses Matter Encompassed By Settlement Agreement Fee Clause, Suffering Adverse Award Of $51,205.36 In Costs and Attorney's Fees

 

Second District, Division 5 Sustains Award Based on Broad Fees Clause in Settlement Agreement and Confirms 60 Day Fee Deadline Does Not Apply in Probate Litigation Matters.

     Most of the time in probate matters, attorney's fees are awarded for services to an estate. (Estate of Trynin, 47 Cal.2d 265, 272-273; see also cases under our category "Probate.") However, fees can also be awarded under contractual fee clauses in probate settlement agreements, as the next case illustrates.

     Estate of Simon, Case No. B209553 (2d Dist., Div. 5 Feb. 23, 2009) (unpublished) involved a settlement agreement that was reached in a prior probate action brought by son against his father and his father's second wife.

Construction Litigation: Fourth District, Division 1 Reverses Fee Awards Under Code of Civil Procedure Section 1038 and Reverses/Affirms Others Under Civil Code Section 1717

Court of Appeal Discusses Numerous Issues Under the Two Statutes.

     In a complicated construction dispute between window subcontractor and other construction professionals sued for equitable indemnity and contribution, the Fourth District, Division 1 reversed and affirmed some fee awards against window subcontractor after overturning a judgment on the pleadings, affirming a summary judgment as to one party, and giving effect to a prior appellate decision overturning judgments in favor of the parties sued by window subcontractor. The decision is Jeld-Wen, Inc. v. Action Iron Works, Inc., Case Nos. D051465 & D053094 (4^th Dist., Div. 1 Feb. 17, 2009) (Jeld-Wen II) (unpublished). We summarize the parts of it that are germane on attorney’s fees awards.

Arbitration: Appellate Fees Awardable Upon Prior Reversal Without Awaiting the Final Result

Second District Panel Splits 2-1 on Whether Contractual Clause Allowed for Fee Recovery From Post-Arbitration Judicial Proceeding Win Before the “Dispute” Was Finally Resolved.

     The next case illustrates how even appellate jurists will come to different conclusions when construing a contractual fees clause where the matter is one for de novo review based on the absence of parol evidence. The key question was how to construe the breadth of the term “dispute.”

Fraud Cases: Don’t Forget That You May Get Fees Under Robinson Helicopter

 

Second District, Division Seven Awards Fees To Broker Based On Fraud and Fees Clause in Brokerage Agreement.

     Normally, Civil Code section 1717 does not allow recovery for fraud counts, unless the fees clause is broadly worded. (See our category “Cases: Section 1717.”) However, practitioners should not forget that fee recovery may be possible under Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal.4^th 979, 992 (2004). The next decision we discuss is a good illustration of a situation justifying fee recovery under Robinson Helicopter.

Pre- And Post-Arbitration Fees: Trial Courts Can Award Even If Arbitrator Denies Fees For Arbitration Work

Sixth District So Rules In Sustaining Fee Award For Some Work By Winning Litigant’s Attorneys Before and After Arbitration Proceeding.

     Defendant suffered an adverse arbitration award of $67,089.16 to plaintiff for failing to pay plaintiff his value in a health center pursuant to a second buy-out agreement. The arbitrator awarded arbitration costs/fees, but ordered that the parties bear their own attorney’s fees and other costs. Plaintiff petitioned to confirm the award and requested the superior court to award him attorney’s fees of $50,000. The lower court awarded pre-arbitration fees, mediation fees, and post-arbitration fees totaling $25,477 to plaintiff.

     Defendant unsuccessfully appealed both the merits and fee judgments to the Sixth District.

     In Baird v. Manayan, Case No. H032241 (6^th Dist. Nov. 25, 2008) (unpublished), the Court of Appeal found nothing wrong with the fee award by the superior court. The operating agreement between the parties allowed for the award, and the lower court properly divided the litigation into phases—not awarding fees for the arbitration based on the arbitrator’s denial of fees but allowing recovery for pre-arbitration and post-arbitration enforcement work by plaintiff’s attorneys. “Nothing in the parties’ agreement or the rules governing judicial review of arbitration decisions prevented the trial court from applying paragraph 11.6 [of the parties’ operating agreement] to award [plaintiff] the attorney fees he had incurred for enforcing his right to recover from [defendant].”

     Paragraph 11.6, entitled “Attorney Fees,” stated, “In the event that any dispute between the Company and/or the Members should result in litigation or arbitration, the prevailing party in that dispute shall be entitle to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorney fees and expenses.”

Fee Authorization: No Fees Can Be Awarded Unless Predicate Statute Or Contract Authorizes Their Recovery

Second District, Division One Sustains Denial of Fee Recovery Without Predicate Underpinnings for an Award.

     The first step of any analysis for recovery of fees is to locate a statute or contractual clause authorizing their recovery. Without this, the American Rule will usually preclude any efforts to recoup incurred attorney's fees in litigation. The next case depicts how this plays out in a real-life matter taken all the way through appeal.

     Plaintiffs alleged that they purchased a "lemon" of a car that could not be repaired—not just once, but three times—by Ford and by certain Ford repair dealers. They eventually sued defendants for violations of the Song-Beverly Consumer Warranty Act and Magnuson-Moss Consumer Warranty Act, as well as for fraud and breach of oral contract. (None of these claims have fee-shifting features or clauses that would aid the defendants in this area.) Plaintiff was defensed (even though the jury found there was an oral contract, albeit one insufficiently clear for enforcement). One of the defendants moved to recover fees and costs totaling $104,284.08, claiming entitlement both by statute and by contract. The trial court denied the request, and losing defendant appealed.

     The Second District, Division One—in a 3-0 opinion penned by Justice Rothschild—affirmed in VanSchaik v. Magic Acquisition Corp., Case No. B205209 (Nov. 25, 2008) (unpublished). The rationale: there was no predicate basis for defendant's recovery of its fees.

     The first claimed basis—the Automobile Sales Finance Act (ASFA), Civil Code section 2983.4—was not triggered because plaintiff's action was not based on this statute and the oral contract was certainly not subject to ASFA. Even though they pled conduct that might have amounted to a breach of duties under ASFA, plaintiff did not seek relief under the statute such that these incidental averments were inconsequential. (See Brown v. West Covina Toyota, 26 Cal.App.4^th 555, 563-564 (1994), disapproved on another ground in Murillo v. Fleetwood Enterprises, Inc., 17 Cal.4^th 985, 996 (1998).)

     The second claimed basis—a written contract with a fees clause—failed because no such contract was in the appellate record and the feigned language (allowing defendant to recover fees for its "reasonable collection efforts") was not in play because plaintiff's suit was not a collection action.

   Lesson from this case: make sure you have a fee "anchor" before you seek to recover them from an opponent and, in the process, spend substantial resources trying to sustain the unsustainable before an appellate court.

Fee Clause Interpretation: Use of “Subject To” Rather Than “Incorporation” Language in Sub-Sublease Can Have Dramatic Implications In Recovery of Attorney’s Fees By A Prevailing Landlord

Fourth District, Division Three Reverses A Fee Award Based on Lack of “Incorporation” Verbiage in Sub-Sublease.

     The next case shows that use of the words “subject to” rather than “incorporation” language may impede an award of attorney’s fees to a winning party in a sublease dispute context.

     In Head and Neck Associates v. Coastal Vascular Specialists Medical Corp., Case No. G039159 (4th Dist., Div. 3 Oct. 17, 2008) (unpublished), landlord (a sublessee and sub-sublessor) won a general reference dispute against sub-sublessee, with the landlord also awarded attorney’s fees of almost $60,000 based on a fee provision in the sub-sublease. 

     Sub-sublessee appealed, losing the merits determination but winning a reversal of the fee award as a matter of law.

     Justice Aronson, writing for a 3-0 panel of the Fourth District, Division 3, fundamentally found that the sub-sublease did not contain a fee clause providing entitlement to an award in landlord’s favor. The appellate panel’s reasoning is important for all drafters of real estate leases.

     Landlord defended the award by contending that a fee clause in the sublease was incorporated into the sub-sublease, which would have sustained the award if that were really true.  (Kleveland v. Chicago Title Ins. Co., 141 Cal.App.4th 761, 765 (2006).)  However, the problem was that the sub-sublease merely indicated that the sub-sublessee was “subject to” all the provisions of the sublease.  After surveying Pedro v. Potter, 197 Cal.751, 754, 758, 762-763 (1926) and Reed v. South Shore Foods, Inc., 229 Cal.2d 705, 712 (1964), the appellate panel concluded that “subject to” language did not allow sublessees to take advantage of master lease clauses because the “[b]enefits conferred and considerations given for such benefits may be entirely different.”  (Reed, supra, 229 Cal.App.2d at p. 712.)  Applying the rationale of these cases to the situation before the 4/3 panel, Justice Aronson stated:  “In the present case, the attorney fee provision represents an agreement only between [sublessor] and [sublessee], and is based on considerations separate from the exchanges in the sub-sublease.  Thus, the defendants are not subject to the attorney fee provision.”  (Slip Opn., at p. 15.) 

     Similar support for the appellate panel’s conclusion was also found from Selma Auto Mall II v. Appellate Dept., 44 Cal.App.4th 1672, 1687 (1996), where a writ of mandate was issued not requiring a sublessee to bond attorney fees as part of an adverse unlawful detainer judgment when nothing indicted the sublessee assumed the master lease obligations.

     Finally, landlord argued that the sub-sublease did incorporate by reference “portions of the Sublease attached [to the Sub-Sublease].”  That would have justified the fee award, but the problem with the contention was that landlord failed to attach any portions of the sublease to the sub-sublease.

     The judgment was modified to eliminate the attorney’s fees award, reminding lease drafters to choose wisely in using “subject to” rather than “incorporation” language.

Plaintiff Losing Trespass Case Against Defendant Landlords Liable For Opposition Attorney's Fees Under Broadly Worded Lease Clause

Second District, Division Four Determines Landlord Prevailed and Dismisses Other Technical Challenges to Major Portion of Fee Award.

            Tenant got caught up in an imbroglio with her Landlords when she moved her business into a residential apartment after the roof of her off-premises store collapsed.  After being served with an eviction notice, Tenant brought a civil action against Landlords arising from their efforts to evict her from the apartment (Vinci I).  Landlords filed an unlawful detainer action, which Tenant lost such that possession of the apartment was restored to Landlords.  This prompted Tenant to file an amended complaint in Vinci I, adding claims for trespass (based on Landlords' entry into the apartment to photograph its contents) and bad faith denial of contract.  The lower court sustained demurrers to all claims but the trespass count, which was transferred to a limited jurisdiction department.  Tenant filed a new action, Vinci II, asserting the same causes of action she tried to add to her complaint in Vinci I (with the trespass claim consolidated into this new action).  Vinci II proceeded to trial, with the court entering judgment in favor of Landlords based on the litigation privilege defense.  Tenant appealed, with the Court of Appeal finding that all the rulings in Vinci I and Vinci II were correct, excepting reversal on the trespass claim which was remanded for trial.  The jury found one of the Landlords had trespassed, but caused Tenant no harm and no damages.  The trial court awarded Landlords $157,940 in attorney's fees under a fees clause in the lease with Tenant.  Tenant appealed.

            In Vinci v. Pollyea, Case No. B199494 (2d Dist., Div. 4 Oct. 2, 2008) (unpublished), Presiding Justice Epstein—writing for a 3-0 panel of the Second District, Division 4—affirmed with a modification of the fee award.

            Initially, the appellate panel determined that Tenant's loss on the trespass count was covered by a broadly worded fees clause in the lease, which was not limited to actions on the contract but included "any legal action or proceeding" brought by either party to the agreement.  This was broad enough to cover the trespass cause of action.  (Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1341 (1992).) 

            Landlords were definitely the prevailing parties, the Court of Appeal reasoned.  Most of Tenant's claims were dismissed before trial, and she did not obtain any damages on a trespass claim for which she sought more than $1 million.  Beyond that, Tenant did not beat two prior CCP section 998 offers, one for $1,001 and a subsequent one for waiver of costs or fees. 

            Tenant next suggested that Landlords' fees motion was untimely because it was filed more than 40 days after issuance of the remittitur in the prior appeal in which the Court of Appeal had ordered both sides to bear their own costs, contravening the 40-day deadline of California Rules of Court, rule 8.278.  Not so, said Justice Epstein.  Because the prior appeal resulted in a reversal and remand, the prevailing party could not be determined until the case was at an end after remand.  Even a successful appellant who loses on the merits after trial will not be the prevailing party for purposes of Civil Code section 1717 fees for the appeal if that party ultimately loses on the merits.  (See Butler-Rupp v. Lourdeaux, 154 Cal.App.4^th 918, 928 (2007).)  Justice Epstein put it this way:  "Our order requiring each side to bear its own costs on appeal had no bearing on the entitlement to attorney fees under section 1717; based on the ultimate result in the action, respondents were the prevailing parties and were entitled to recover attorney fees, including the attorney fees in this court."  (Slip Opn., at p. 9.)  As far as timing of the motion, the appellate panel determined that rule 3.1702, not rule 8.278, governed, which meant Landlords had 180 days from entry of the ultimate judgment to timely file their fee motion. Landlords filed their fee motion 10 days after judgment entry, so there was no time bar.

            Tenant also challenged Landlords requesting the normal hourly rates charged by their attorneys rather than the rate Landlords' insurance carrier actually paid attorneys for defending the cases.  Justice Epstein rejected this challenge.  Fees can be based on the prevailing market value of comparable legal services, with the trial court not required to base its fee award on the actual contract between the insurer and counsel.  (Slip Opn., at p. 11, citing PLCM Group, Inc. v. Drexler, 22 Cal.4^th 1084, 1096, 1098 (2000).)  The trial court did not commit error in utilizing the lodestar approach.

            However, the appellate panel did reduce the fee award by $46.046, down to $111,894.  This reduction was grounded on the fact that the trial court had awarded fees previously for a period up to judgment in Vinci II, and Landlords did not move for reconsideration or challenge that award which was $46,046 less than the amount of fees claimed in the fee motion under review.  Even though the Court of Appeal agreed that the question of prevailing party could not be finally determined at the time the appellate court previously remanded the cause for trial, it was improper for the trial court to revisit the earlier portion of the fee award on remand.  Except for this reduction, Landlords won the final battle and were awarded costs on appeal (which will likely include supplemental fees based on the lease clause).

            

Second Sentence Of Civil Code Section 1717(a) Precludes Restricted Application Of Mutuality Principle Unless Parties Recite That Counsel Was Involved In Negotiation and Execution Of The Contract

Second District, Division Eight Reverses Lower Court Determination Denying Fee Based on Limited Scope of Fees Clause.

            In enacting Civil Code section 1717, the Legislature made it abundantly clear that mutuality principles are to govern interpretation of attorney’s fees clauses such that unilaterally worded provisions are construed as reciprocal in nature.  Civ. Code, sec. 1717(a).  The broadness of this policy was also confirmed by the second sentence of section 1717(a), which provides that an attorney’s fees clause “shall be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract.”  This second sentence was directly at issue and resulted in a reversal of a lower court decision to deny fees to a prevailing party in Hile v. Clippinger Chevrolet, Case No. B196615 (2d Dist., Div. 8 Sept. 23, 2008) (unpublished).

            Hile involved a towing business operator who purchased a new model truck that failed to properly tow automobiles.  Repairs and modifications did not cure the problems, with plaintiff suing the truck seller for breach of contract and revocation of acceptance, praying for an award of “attorney fees pursuant to the contract or statute as appropriate.”  After determining that the plaintiff was entitled to rescind the contract, the lower court summarily denied plaintiff’s request for a fee award. Plaintiff appealed that denial, and the Second District, Division Eight, in a prior opinion, reversed and remanded to the lower court for purposes of holding a hearing on the fees issue.  On remand, the trial court yet again denied the fee motion, ruling that the contract allowed fees only in connection with limited types of breaches, none of which was involved in the case.  Plaintiff appealed the fee denial a second time.

            The Second District, Division Eight initially observed that the review was de novo because it involved a matter of contractual interpretation and application of section 1717.  (Carver v. Chevron U.S.A., Inc., 97 Cal.App.4^th 132, 142 (2002).)

            Presiding Justice Cooper, writing for a 3-0 panel, also agreed with the trial court that the fees clause in the contract between plaintiff and defendant was limited, only covering breaches such as failing to pay, moving the truck out of the country, transferring it without written permission, and misusing it.  The language of the fee clause did not extend to product nonconformity.

            However, that was hardly the end of the matter.  The second sentence of section 1717(a) prevented upholding the result reached by the lower court.

            That sentence was intended to preclude the type of restricted application of fee clauses that occurred below, unless there was compliance with its strict dictates (counsel involvement and recital of same in the contract)--something absent in the case before the appellate panel.  Justice Cooper stated that this second sentence of section 1717(a) was enacted to abrogate a case upholding a one-sided fee clause, namely, Sciarotta v. Teaford Custom Remodeling, Inc., 110 Cal.App.3d 444, 446 (1980).  Accord, Harbor View Hills Community Assn. v. Torley, 5 Cal.App.4^th 343, 348-349 (1992); Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal.App.4^th 949. 970 (1993); see also Paul v. Schoellkopf, 128 Cal.App.4^th 145 (2005) [discussing the abrogation of Sciarotta].

            The end result was that plaintiff was deemed the prevailing party and the cause was remanded to award reasonable attorney’s fees to plaintiff, with the fees to cover its wins at both the trial and appellate levels.

            

Arbitration Provision In Fee Retainer Agreement Enforced According To Its Terms

Second District, Division Two Finds Arbitrator Did Not Exceed His Power In Awarding Substantial Fee Award In Favor of Law Firm and Against Former Client.

            Former Client in 1999 signed a fee retainer agreement, both individually and on behalf of two affiliates, in which arbitration was the dispute resolution remedy.  The clause provided that "any dispute concerning [Law Firm's] representation, including disputes regarding the amount of fees or quality of [Law Firm's] services .. shall be determined by binding arbitration" and that the arbitrator had "discretion to order that the costs of arbitration, including fees, other costs and reasonable attorneys' fees, shall be borne by the losing party."

            Client got way behind, but reached a catch-up arrangement in January 2004.  However, the 1999 fee retainer agreement was never rescinded, and Law Firm continued to do more work.  By the end of 2004, Client was delinquent to the tune of $3 million.  Law Firm initiated arbitration, and Former Client never objected to the arbitrator's jurisdiction.  The arbitrator eventually awarded Law Firm $3,171,456.80, plus interest, based on the 1999 fee retainer agreement.  Later, Law Firm sought a further award of attorney's fees and costs, which was granted in mid 2007—swelling the final award to $5,044,762.80.  The award was confirmed as a judgment, and Former Client appealed. 

            Law Firm's fee judgment was affirmed in Howrey LLP v. Casden, Case No. B202839 (2d Dist., Div. 2 Sept. 22, 2008) (unpublished).  Nothing demonstrated that the arbitrator exceeded the authority granted him under a  plain construction of the fee retainer arbitration clause.  The 1999 fee agreement was still in force, and the arbitrator was well within his rights to conclude that the catch-up arrangement did not extinguish the earlier fee retainer.  Because Moncharsh v. Heily & Blase, 3 Cal.4^th 1, 11 (1992) generally immunizes the merits of an arbitral award from judicial review, the appellate court did not even need to address Former Client's redux of defenses he lost at the arbitration.

            

Deed of Trust Fee Clause: Successor Borrower Assuming Loan Without Lender Consent Held Subject To Fee Award Exposure

Fourth District, Division Two Holds Successor Bound By Fee Clause in Loan Documents.

            In this interesting time of economic woes, there are many persons who “assume” loans from borrowers without lender consent.  Not only can this practice likely trigger “due on sale” clauses, it also may expose the successor borrower to exposure for attorney’s fees award under the fee clauses in the trust deeds.  The next decision proves that this result does indeed happen.

            Haynes v. First Federal Bank of Cal., Case No. E044500 (4^th Dist., Div. 2 Sept. 17, 2008) (unpublished) involved a home purchaser who “took over” a borrower’s loan with First Federal, but without the lender’s consent.  Plaintiff filed a lawsuit seeking to enjoin a foreclosure of the home.  In the complaint, plaintiff claimed First Federal had allowed him to assume the loan, he was the borrower under the trust deed, he had the right to cure the default, and First Federal had breached contractual obligations to him.  First Federal won summary judgment.  After the trial court determined that First Federal was the prevailing party, First Federal moved for and obtained an award of $141,173 in attorney’s fees and $4,027.80 in costs.  Plaintiff appealed.

            On appeal, plaintiff argued that he was a nonsignatory to the trust deed containing the fees clause such that First Federal could not be a prevailing party.

            Justice McKinster—writing for a 3-0 panel of the Fourth District, Division Two—dispatched this contention on appeal.  Plaintiff’s own allegations in the complaint were damning, because he took the position that he “stood in the shoes of the rightful borrower, with all the rights attendant thereto.”  Given this stance, he would have claimed to be the prevailing party had he won, which means he faced exposure under the fee clause as a nonsignatory.  (See Real Property Services Corp. v. City of Pasadena, 25 Cal.App.4^th 375, 382 (1994), also discussed in our September 14, 2008 post on Aluisi v. Kolkka.) 

            Plaintiff tried to shift course on appeal, arguing that his claim was really based on First Federal’s breach of an “oral agreement” to assume the loan—with no fee exposure based on the absence of a fees clause.  Unavailing, said the appellate panel.  It observed that this new theory would not stop the foreclosure.  Justice McKinster concluded: “Such a suit would have been useless and impractical.  We decline to attribute such a futile and frivolous intention to plaintiff’s underlying suit.  Substantively, he sought to enforce the original loan agreement and deed of trust terms, which did contain the attorney fees clause.” 

End result:  the fee award was affirmed and First Federal was awarded costs on appeal (which likely means an additional fee award for the bank’s win at the appellate level).

Even Though Letter Of Intent Required Good Faith Consummation Of A Subsequent Definitive Agreement, Lack Of Attorney's Fees Clause In LOI Gave Winning Plaintiffs No Fee Entitlement Basis

Second District Reversed $119,947 Fee Award Under Definitive Agreement Fee Clause.

            One of the first concerns that a winning litigant must face in post-trial proceedings is whether the litigant has a fee entitlement basis to seek an award of attorney's fees.  This usually focuses on a contractual fee clause or a fee-shifting statute.  The next case illustrates how the lack of a basis for fee entitlement can lead to a determination that no fee award is proper.

            Zislis v. Nam, Case No. B143706 (2d Dist., Div. 5 Nov. 21, 2001) (unpublished) involved a letter of intent (LOI) entered into between plaintiff tenants and defendant landlords, containing an agreement on many material terms, a representation to carry out the transaction described in the LOI, and some concluding language that stated "this constitutes a binding legal agreement between the parties to negotiate and execute a Definitive Agreement, including the terms and conditions of this letter of intent and other provisions customarily and ordinarily included in the type of transaction contemplated herein …"  Importantly, the LOI did not include a provision for attorney's fees except for the situation where landlords incurred attorney expenses to review a sublease presented by tenants.

            Drafts of the Definitive Agreement were exchanged, but landlords decided to terminate negotiations even though tenants sent a signed Definitive Agreement to landlords for signature.  The draft of the Definitive Agreement did contain an attorney's fees clause.  Landlords did not sign the draft, which prompted a declaratory relief action by tenants to force landlords to execute the draft final lease or alternatively for a monetary damages award.  Landlords cross-claimed for a judicial declaration that the LOI was only "an agreement to agree" rather than a binding contract. 

            In pretrial submissions, both sides agreed the litigation focused upon the legal effect of the LOI.  The principal dispute was whether two Definitive Agreement provisions, one concerning lease assignment and the other concerning rent payment in the event of discovery of hazardous waste contamination, were "ordinary and customary" in such a transaction. 

            Following a bench trial, the trial court found the LOI created a leasehold interest and that the two disputed terms were "ordinary and customary" terms, ordering landlords to execute the Definitive Agreement (which they did).  Later, the trial court awarded $119,947 in attorney's fees to tenants, reasoning that a fee clause would have been "ordinarily and customarily included in the [final] Lease" and that this clause entitled tenants to a fee award.

            Tenants appealed only the fee award, and won a reversal.

            Justice Armstrong, the author for a 3-0 panel of the Second District, Division Five, determined that the fees clause in the Definitive Agreement did not apply to the particular lawsuit litigated below.  He found that the focus of attention was on the LOI, and the parties did not litigate in the main action the question of whether the fees clause was an "ordinary and customary" provision.  "Instead, the parties, both experienced in business, negotiated a contract, the Letter of Intent, which did not provide for the award of fees in the event of its breach, even though they later agreed that any Definitive Agreement would include such a clause.  Therefore, no such fees may be awarded on an action for breach of the Letter of Intent, even though fees could be awarded on an action for breach of the Definitive Agreement.  There is no inherent inequity in enforcing the agreements, as written." 

            Tenants then argued that the LOI incorporated the Definitive Agreement by reference, including the Definitive Agreement's fees clause.  Not so, Justice Armstrong wrote.  This was not an integrated transaction involving distinct documents forming the overall bargain; rather, the Definitive Agreement was independent and actually superseded/canceled the prior LOI. 

            Tenants next contended that the fees clause was a missing element of the LOI which the trial court could supply.  In reasoning that indicated landlords may have been wise to have also appealed the merits judgment, the Court of Appeal rejected such a contention as follows:  "No legal authority allows a trial or appellate court to add a term to a contract, no matter how usual and customary it is, in the absence of evidence that the parties so intended.  The only reference to usual and customary contract provisions in the Letter of Intent states that such terms will be included in the lease.  That reference does not open the door to the addition of terms to the Letter of Intent." 

            That left Tenants with a judicial estoppel argument—reliance on landlords' mention of or request for attorney's fees in their answer and cross-complaint.  Tenants principally relied on International Billing Services, Inc. v. Emigh, 84 Cal.App.4^th 1175, 1178-1179 (2000), where judicial estoppel was found where a party drafting an ambiguous contract provision depended on it to request fees but then backtracked by arguing it was not an enforceable fees provision.  The Second District panel found Emigh unpersuasive, but most of all distinguishable.  Initially, Justice Armstrong suggested that the panel had some doubts about Emigh's use of the judicial estoppel theory, labeling it "a departure from the usual rules on judicial estoppel" and suggesting it ran afoul of earlier Second District authority that held a "mere allegation of a contractual right to attorney fees is not sufficient to create an estoppel" (citing Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal.App.4^th 949, 962 n. 12 (1993) [written by Justice Grignon when she was on the bench, a participant with Justice Armstrong on many prior causes including this unpublished decision]).  Nonetheless, the appellate panel found "no need to be drawn into any controversy about International Billing Services," finding it distinguishable on these grounds:  (1) "the simple, boilerplate fee requests in the answer and cross-complaint are too slight to uphold a finding of judicial estoppel, especially since the answer also included the affirmative defense that there was no basis for an award of fees, since there was no contract between the parties"; (2) Emigh affirmed a trial court determination that there was an actual fees clause in the contract (unlike no fees clause in the LOI); and (3) the party estopped in Emigh was the plaintiff who was using the fees clause as a club (unlike the landlords who were not using it as a threat).  Based on these distinctions, the appellate panel concluded "[t]he doctrine of judicial estoppels does not apply." 

            BLOG OBSERVATION—In our May 18, 2008 post, we discussed Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal.App.4^th 858 (2008), which rejected Emigh's judicial estoppel approach and followed the reasoning of Leach v. Home Sav. & Loan Assn., 185 Cal.App.3d 1295, 1387 (1986).  Myers, cited by Justice Armstrong in Zislis, endorsed the same test enunciated in Leach—the mere allegation of a right to recover fees does not give rise to an estoppel where the alleging litigant had no actual entitlement to fee recovery. 

            

            

Judicial Foreclosure Actions—Attorney’s Fees Are Added to the Loan Indebtedness for Purposes of Calculating Deficiency and Fee Exposure

Second District Rejects Borrower’s Argument That Contractual Fees Incurred by Lender Are Excluded from Deficiency Calculation.

            In this time of subprime lending fallout and rising foreclosures, judicial foreclosures are making a comeback, as they typically do when market values plunge.  Lenders on commercial and investment residential projects frequently opt to pursue a deficiency if the loan indebtedness is substantially higher than the market value of the underlying real estate collateral.  Are attorney’s fees awardable after a fair value hearing that results in a determination that the market value of the property was higher than the underlying loan indebtedness but where a deficiency existed when attorney’s fees were added to the loan debt total?  The next case we consider answers this question with a resounding “yes.”

            First, a short primer on judicial foreclosure actions.  Except where the lender opts for a nonjudicial foreclosure (trustee’s sale) or where a purchase money loan in involved, a creditor secured by California real estate can bring a judicial foreclosure action to have the court declare the loan in default, order the real estate sold at a sheriff’s sale to satisfy the loan balance, and then enter a deficiency judgment after sale (with the deficiency being the differential between the fair market value of the property and the loan indebtedness).  The focal point of this post is whether attorney’s fees are added to the loan indebtedness for purposes of calculating the ultimate “deficiency.”

            In First Federal Bank of California v. Blanchard, Case No. B136268 (2d Dist., Div. 7 Oct. 3, 2001) (unpublished), a Second District, Division Seven panel concluded that the fees are added to the loan indebtedness as part of the deficiency calculus. 

            Borrower defaulted on a refinance loan on an investment property located in Venice, California.  Both the note and trust deed had attorney’s fees clauses, with the trust deed expressly providing that attorney’s fees incurred would become additional secured indebtedness.  Lender obtained a foreclosure decree and purchased the property by a partial credit bid of $560,000 (even though the loan indebtedness was well over $705,000 about a year earlier).  At the fair value hearing, the judge accepted Borrower’s “high” market appraisal of $815,000, indicating that the Lenders’ attorney’s fees and costs would be added to the loan arrearage to determine if there was a deficiency.  After two more years of legal maneuvering and a redemption by Borrower, Lender was eventually awarded $151,296.90 in fees and Borrower was awarded a $12,791.11 offset.  The court then entered a final judgment in Lender’s favor of $81,477.51, consisting of the difference between the foreclosure sale loan arrearage ($757,971.72) plus attorney’s fees ($151,296.90) less the $12,791.11 offset and the $815,000 fair value credit. 

            Borrower appealed, and lost.

            The Blanchard panel rejected Borrower’s main argument that attorney’s fees and costs are excluded from the debt for purposes of calculating the deficiency.   Code of Civil Procedure section 726(b) provides that the deficiency is “the amount by which the amount of the indebtedness with interest and costs of levy and sale and of action exceeds the fair value of the real property …sold as of the date of sale.”  The Court of Appeal held that “[t]he statutory inclusion of “costs … of action” with the amount of the indebtedness, we conclude, necessarily refers to the costs of the lawsuit that is a requisite part of the judicial foreclosure process.”  The justices also found that this result was proper under Civil Code section 1717 and the trust deed “additional indebtedness” provision, with any other conclusion tantamount “to re-writing both the statute and the parties’ written agreements.”  The panel found no fault with the arithmetic of the lower court, finding that the loan indebtedness (inclusive of the fee award) outstripped the fair value determination.

            Borrower’s final argument was that the trial court failed to make into account “equitable considerations” that should have warranted a “no fee” award.  The appellate court did not find the pleas to equity persuasive in nature.  Even though Borrower argued that it was unconscionable to allow Lender a possible “double recovery” in the event the debtor did not contest a low appraisal at the fair value hearing stage, the Second District panel found that the judicial foreclosure protections—the fair value offset and redemption rights—more than compensate for any theoretical fairness.  (Also, this argument seemed somewhat misplaced given that Borrower won the fair value appraisal battle, showing the protections indeed work out in the debtor’s favor in the right circumstances.)  Borrower further argued that Lender’s failure to accept a deed in lieu of foreclosure at a much earlier junction of the litigation meant that the bank could have achieved its objectives without the expenditure of substantial attorney’s fees.  Maybe, said the appellate court, but Lender “had the statutory right to seek a deficiency, and it is only with the benefit of hindsight that its choice of remedies may appear debatable.”  Borrower finally contended that Lender could continue to add attorney’s fees indefinitely after the sale without penalty.  The appellate court nixed this potential harm by noting “[t]he debtor is fully protected by the requirement that fees must be reasonable, and are fixed by the court.”

            Although this unpublished decision is not citable, its reasoning may aid debtors and creditors in evaluating the risks and expenses in engaging in a protracted judicial foreclosure action.  We might add that Blanchard was authored by Justice Paul Boland, a fine jurist who unexpectedly passed away after a sudden illness in fall of last year.

Attorneys Successfully Sue Former Client For Collection Of Full Receivable Plus Attorney’s Fees In Collecting The Receivable

Recent Case Illustrates the Right Way to Handle A Dispute in Segments and Highlights Good Provisions to Have in Retainer Agreement

            In Fitzgerald Abbott & Beardsley LLP v. Miller, Case No. A118762 (1^st Dist., Div. 3 July 31, 2008) (unpublished), Former Client hired Attorneys to resolve a dispute with Client’s neighbors over the use of mosquito repellant and other toxins on their adjacent property. 

The first retainer agreement specified that it involved services only for pre-litigation services, with a separate agreement being needed if litigation became necessary.  The fax accompanying the first retainer provided an estimate for the first demand letter and initial settlement discussions, further indicating that as fees approached $6,000, both Client and Attorneys would meet to discuss the future of how the dispute would be handled.  The first retainer indicated that fees would be based on hourly rate charging, that invoice payments were due within 15 days of invoice receipt, that interest would be charged on accounts delinquent over 30 days, and that attorney’s fees and costs were recoverable by the prevailing party “in any action or proceeding to enforce any provision of this Agreement … [if] incurred in that action or proceeding or in efforts to negotiate the matter.”  A handwritten provision was added indicating that Attorney would consult Client before taking on any new legal task requiring more than 2 hours of work.  Attorneys helped broker a settlement agreement between Client and neighbors, which worked for a time until neighbors allegedly breached it in March 2004.

            Based on the belief that injunctive relief was necessary, Client and Attorney entered into a second retainer agreement in March 2004.  The second retainer had nearly identical terms as the first, but had these important differences:  (1) the services were expanded to include litigation activities; and (2) there was no handwritten amendment about consultation for work beyond a certain hour specification.  Furthermore, Attorney sent Client an email providing an estimate of $12,000 to prepare the TRO papers, but carefully indicating this estimate was “not a fixed fee or not-to-exceed amount” that could very well exceed the estimate based on revisions and changed circumstances.  Attorney also advised that a preliminary injunction hearing would be required and that cost of a trial could swell the cost to “in excess of $100,000.” 

            Client needed a lot of attention, and fees/costs swelled.  Attorneys at several times offered to obtain replacement counsel as fees/costs mounted.  The TRO and preliminary injunction were denied, and alternate counsel took over the case. 

            Client paid in 2003 and also paid the retainer under the March 2004 second agreement.  She made no further payments, and Former Attorneys sued her.  After a 7-day bench trial, Former Attorneys were awarded $52,741.09 fees/costs plus prejudgment interest (on the receivable) as well as $57,269 in fees/costs for using outside counsel to successfully prosecute collection of the receivable (breaking down as $51,520 in fees and $5,749 in costs).

            Client appealed in pro per, and lost on appeal in a 3-0 decision authored by Justice Jenkins for a First District, Division Three panel.

            Client initially argued that Former Attorneys had a duty to advise her before the retainer was spent.  Nothing in the retainer agreements contained such a duty (which is consistent with what we normally see in fee agreements), with the duty being upon Client to replenish any retainer upon request by Attorneys (another standard term of most retainer letters).

            Client’s argument that Attorney failed to seek consent to do work over 2 hours under the March 2004 agreement was rejected, because this second agreement did not have the handwritten amendment that applied only to pre-litigation work under the first retainer agreement.  The Court of Appeal similarly found that Former Attorneys did a good job of qualifying their “estimates” and that their work did not exceed the estimates provided to the Client.

            Because Client did not meet her obligations under the retainer agreements and routinely received monthly invoices with detailed breakdowns, her nonperformance was easily established at trial. 

            Client protested to the awarding of prejudgment interest, based on prohibitions contained in the Mandatory Fee Arbitration Act, Bus. & Prof. Code sec. 6200 et seq.  There was a fatal flaw with this argument, the appellate panel found:  she waived her right to arbitrate under MFAA by actually litigating the fee dispute with Former Attorneys. 

            Lastly, the award of fees/costs to Former Attorneys under the retainer fee clauses was found to be proper.  Former Attorneys’ outside counsel provided declarations with detailed invoices substantiating their services and resulting charges.  The appellate panel did not believe that $51,520 in fees was unreasonable for prosecuting the entire case through a 7-day bench trial, reinforced by the fact outside counsel only charged a “modest” $160 hourly rate for handling the case on behalf of Former Attorneys. 

            The nice lessons of this case can be summarized this way:

• Retainer agreements need to carefully define the scope of services, providing that subsequent agreements will be reached when more cost-intensive tasks are contemplated (which was done with the two agreements in this particular case);
• Monthly invoices with detailed breakdown of services and charges need to be sent (which was also done, in compliance with Business and Professions Code requirements);
• Retainer provisions in fee agreements should have no language stating that there is a duty to account to Client for use of retainers, although the duty should be imposed on Client to replenish retainers under penalty of withdrawal by the handling attorneys;
• Estimates need to be carefully made and modified as the representation evolves, especially in litigation matters (NOTE:  Some firms do not even give estimates, but many clients insist on them given the high costs of litigating these days; the key is to be realistic and be overly cautious in the estimation process, never capping any fees/costs unless it is carefully negotiated this way in the first place); and

If retainer letters have fee clauses (with some attorneys opting not to include them), the attorneys suing to collect a receivable need to hire outside attorneys who prosecute the case in order to avoid the prohibition of Trope v. Katz.

Winning Joint Venture Litigant Denied Attorney's Fees Because The Operative Memorandum Of Understanding Had No Fees Clauses And Other Peripheral Contracts With Fees Clauses Were Not Part of An Integrated Transaction

Sixth District Finds That Stock Option and Voting Trust Agreements Were Not Interrelated and Never Sued Upon In Winning Litigant's Complaint.

            Under Civil Code section 1717, one needs a written agreement with a fee clause for potential attorney's fees recovery.  Many times, there are several agreements involved in an overall transaction, some with fee clauses and some containing none.  The focal question on determining fee entitlement is whether the agreements with fee clauses were an integral part of a single interrelated transaction or simply peripheral to the dispute centering upon another agreement without a fees clause.  The case we next explore discusses this issue, determining that two subsidiary agreements with fees clauses were not integrated and too peripheral to give rise to fee recovery by a winning litigant.

            In Pellegrini v. Weiss, Case Nos. H029772 & H029988 (6^th Dist., July 29, 2008) (certified for publication), Weiss and Pellegrini entered into a joint venture agreement for the purchase and development of real property in the Aptos hills called Telford Ranch.  Pellegrini filed suit primarily for breach of contract and fiduciary duty, and Weiss counterclaimed for restitution and rescission.  Pellegrini and Weiss were parties to three agreements—a Memorandum of Understanding (MOU) with no fees clause, a stock option agreement with a fees clause, and a voting trust agreement with a fees clause.  Pellegrini's suit sought enforcement of the MOU; he did not sue for a breach of the other two agreements.  Pellegrini obtained a $300,000 jury verdict.   The trial court denied Pellegrini's motion for attorney's fees.

            Both parties appealed.  Except for a slight modification for interest calculation, the results in the lower court were affirmed.  Pellegrini lost his bid to recoup attorney's fees from Weiss.

            Because only legal questions were presented, Pellegrini reviewed the issues de novo, but came to the same result.  The Court of Appeal, in a 3-0 opinion authored by Presiding Justice Rushing, determined that Pelligrini's suit focused on the MOU without an attorney's fees clause.  Both the stock option and voting trust agreements were between unrelated persons, on one side, and Weiss and Pelligrini, on the other.  Pelligrini never sued for a breach of the two agreements containing fee clauses in his complaint.  Based on similar reasoning found in Pilcher v. Wheeler, 2 Cal.App.4^th 352 (1992), the appellate panel found the two agreements with fee clauses were peripheral to the dispute and not intended to be integrated into the MOU with the fees clause. 

            

            

            

Suing Real Estate Buyers, Who Were Defensed At Judgment On The Pleadings Stage, Were Not Stung With Real Estate Purchase Contractual Fees By Victorious Brokers, But Did Suffer Fee Exposure From Lis Pendens Expungement Proceeding

Third District Affirms Award of Lis Pendens Expungement Fees to Brokers and Sustains Denial of Attorney’s Fees to Brokers Under Real Estate Purchase Agreement Fee Clause.

            This next case deals with contractual fee awards under Civil Code section 1717 and fees assessed against a party that lost a lis pendens expungement motion.  Two lessons are learned in this case:  (1) the winning party must demonstrate that the losing party would have recovered under the contractual fee clauses vis-à-vis winning party in order to be entitled to a potential fee recovery; and (2) a writ of mandate is the exclusive mechanism to obtain review of a lis pendens expungement or associated fee award, rather than an appeal.

            The facts go like this.  Unsuccessful real estate buyers, a husband and wife, sued dual real estate agents for fraud after their purchase fell through and the brokers then bought the same residential property.  All of buyers’ claims were for monetary or injunctive relief, but prayed for “costs of suit, including attorney’s fees, if appropriate,” and were backed up by a lis pendens.     Buyer wife was not a signatory to the purchase agreement (only husband).  The trial court granted a lis pendens expungement motion on the ground the complaint did not contain a “real property claim” and deferred the question of attorney’s fees on the lis pendens issue for a later date.  The trial court granted a defense motion for judgment on the pleadings to remove wife as a plaintiff.  After plaintiffs were unsuccessful in obtaining leave to file a third amended complaint, husband voluntarily dismissed the remainder of the lawsuit without prejudice. 

            Brokers moved for over $290,000 in attorney’s fees based on several documents, with the only possibly relevant one being the fee clause in the purchase agreement.  The trial court denied this motion because husband dismissed the lawsuit and because brokers never had a right to fees against wife under the purchase agreement fee clause. The trial court also determined that the absence of pleading 1717 fees as damages precluded their recovery.   Later, on the reserved issue of fees under the lis pendens expungement motion, the trial court awarded brokers fees of $2,407.50 against both plaintiffs.  Brokers appealed from the denial of attorney’s fees, and disgruntled buyers appealed the lis pendens expungement and fee award thereunder.

            In a very elaborate and scholarly analysis, the Third District—in a 3-0 decision authored by Justice Sims—dismissed the cross-appeal by buyers and affirmed the fee denial with respect to brokers in Lair v. Hendrickson, Case No. C054514 (3d Dist. July 25, 2008) (unpublished). 

            With respect to the lis pendens expungement and accompanying fee award, the Third District determined that these were only reviewable upon a petition for writ of mandate (which did not occur) rather than an appeal.  Although not having to directly decide the issue because mandate was not sought, the appellate panel implied that the deferred fee award could have been challenged later by writ, but that the buyers never did so such that their appeal should be dismissed.

            The denial of fees to brokers spawned a more elaborate discussion.  (This unpublished opinion is 40 pages long, so that tells you we do our best to distill the decisions down to their “bottom lines.”)  The appellate court disagreed with the trial court’s belief that the failure to plead 1717 fees as damages was preclusive; it found that this omission did not necessarily preclude the brokers from recovering fees as costs under Code of Civil Procedure section 1033.5.  Justice Sims separately considered whether brokers had fee claims against husband or wife.

            No fees based on the contractual claims were recoverable because husband voluntarily dismissed the lawsuit, with the dismissal cutting off fee recovery under Santisas v. Goodin, 17 Cal.4^th 599, 619 (1998).  Tort claims, too, did not result in fee exposure for husband based on the rationale of Super 7 Motel Associates v. Wang, 16 Cal.App.4^th 541, 550 (1993), which held under similar circumstances that a broker was not entitled to fees for defeating a fraud claim because, had the buyer prevailed, broker would not have been liable for fees.  (Accord, Topanga and Victory Partners v. Toghia, 103 Cal.App.4^th 775, 786 (2002) [although a nonsignatory can recover for fees for contractual claims under the right circumstances, he cannot recover fees for noncontract claims because he was not a party to the contract with the fees clause].) 

            Wife’s situation was even simpler.  Wife and brokers were not parties to the purchase agreement, such that there was no nexus or third party beneficiary theory that could possibly ensnare wife for fee exposure.  The court also rejected a judicial estoppel theory based on wife’s prayer for fees, finding that its prior reasoning in M. Perez Co., Inc. v. Base Camp Condominiums Assn. No. One, 111 Cal.App.4^th 456, 468 (2003) was dispositive—“It is only where the parties litigate the existence of an attorney fee provision and the party claiming such a right prevails that the party should be entitled to attorney fees.  Under such circumstance, if the opponent succeeds in proving there is no attorney fee provision, it should be awarded its fees in order to further the purpose of Civil Code section 1717.”  Justice Sims found no basis that would have entitled wife to an award of attorney’s fees, such that brokers had no reciprocal right under section 1717.  (See also Loduca v. Polyzos, 153 Cal.App.4^th 334, 341 (2007).)

            The end result was that buyers avoided $300,000 in fee exposure and only had to pay brokers a little over $2,400 for losing the lis pendens expungement motion. 

Appellate Court Reverses Non-Prevailing Party Determination Because Client Defensed Attorney on Contract Claim In A Jury Trial

Second District Remands For Settling the Reasonable Amount of Attorney’s Fees and Costs.

            Usually, prevailing party determinations are reviewed under the abuse of discretion standard on appeal.  Not always, however.  Sometimes the contractual fees clause is clear in specifying a prevailing party and one side wins a final judgment in their favor on a contract claim.  As the next case shows, this means that the determination is a legal one, with the appellate court not having to give deference to a lower court conclusion.  In this particular situation, it might mean a swing of $400,000, the approximate amount of fees spent by Former Clients in defensing Former Attorney’s contract claim and prosecuting an inextricably intertwined fraud cross-claim.

            

            In Horn v. Hoffman, Case No. B187647 (2d Dist., Div. 8 July 22, 2008) (unpublished), Former Attorney filed a contractually-based collection action against Former Clients, who asserted an affirmative defense and a cross-claim of fraud based on the theory that Former Attorney misrepresented his level of experience and expertise in handling property line disputes and submitting fraudulent billings.  A jury found Former Attorney committed fraud, but awarded no damages to Former Clients.  The retainer agreement provided “[t]he parties agree that if collections action is taken to collect the fees or costs owed by [Former Clients] to [Former Attorney] that the prevailing party shall be entitled to reasonable attorney’s fees and court costs.”  The trial court denied Former Clients’ new trial motion on fraud damages as well as their request for fees and costs after finding neither party prevailed.

            Both sides appealed.  Former Clients won in a major turnaround.

            Initially, the jury indicated some intention to award damages to Former Clients on their fraud cross-claim.  After several clarification attempts, jurors came back with zero damages for both sides.  The appellate court found fraud had been proven and that a zero damages award was legally inadequate such that Former Clients were entitled to a retrial solely on the fraud cross-claim damages issue. 

            As germane to this post, the Court of Appeal also found the prevailing party was ripe for review given that Former Clients had defensed Former Attorney’s contract claim.  Relying on Lerner v. Ward, 13 Cal.App.4^th 155, 160-161 (1993) and Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1341-1343 (1992), the Second District, Division Eight found that the fee clause was narrowly drafted to encompass only contract claims, but that Former Client were the prevailing parties on the contract claim under Civil Code section 1717.  The same held true for other litigation costs, with the panel citing Michell v. Olick, 49 Cal.App.4^th 1194, 1198-1199 (1996).  This gave Former Clients a shot to recoup approximately $400,000 in attorney’s fees, with the appellate court overturning the non-prevailing party determination and remanding for establishment of the amount of the fees.

            Former Attorney did argue that Former Clients had to apportion fees between their defense of the contract claim and the significant sums spent on prosecution of the fraud cross-claim. Although indicating “ordinarily, we would agree,” the appellate panel went on to observe that both actions involved inextricably intertwined facts—the elements of Former Clients’ successful fraud defense were identical to the elements of the fraud cross-claim, meaning the lower court on remand might “deem it impracticable to apportion fees.”  (Slip Opn., at pp. 17-18.)

              Quite a reversal of fortune. Former Attorney went from losing a collection action with no repercussions to facing a retrial with fraud damage exposure to his Former Clients and to facing a heavy attorney’s fees determination (possibly unapportioned) in the hundreds of thousands of dollars range.

Real Estate Sales Contract Allows Plaintiffs to Recover Attorney's Fees for Judicial Proceedings Connected with Arbitration

Fifth District Drops Some Tantalizing Dicta About The Causal Relationship Necessary to Conclude Disputes “Arise Out of a Contract” for Purposes of Awarding Fees.

            Although one might think that unpublished decisions only involve mundane issues of legal application, our posts have shown that they frequently confront novel issues or provide dicta indicating departure from the reasoning of colleagues in other appellate districts.  The latter situation is what we see in Kurtz v. Wizbowski, Case No. F053776 (5^th Dist. June 30, 2008) (unpublished), a 3-0 decision authored by Justice Wiseman of the Fifth District.

            In Kurtz, the appellate court determined that although an arbitration agreement amending the sale contract said nothing about recovery of arbitration fees, the original sales contract had a broadly-worded fee clause allowing for fees expended in judicial proceedings to compel arbitration and enforce the resultant arbitration award arising from a settlement agreement between each side which was instrumental in consummating the sale in the first place.   (The fees clause was paragraph 22 of the standard CAR residential sales contract, which provided “In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the non-prevailing Buyer or Seller …”).  Justice Wiseman reasoned that the expansive “arising out of” language is essentially the same as  “to which this Agreement gives rise” verbiage found to cover both contractual or tort disputes generated by the entire purchase agreement in Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1343-1344 (1992).  However, the Court of Appeal then proceeded to provide interesting dicta that may produce a different result depending on the particular circumstances.  It stated:

            

“We need not go as far as the Xuereb court, however. To resolve this case, we do not need to say that every dispute of which a contract is a but-for cause is a dispute that arises from the contract.  The causal relationship was stronger here.  Defendant signed a settlement agreement that required her to do only one thing—pay $22,500—and then immediately refused to do it.   The fees were for proceedings needed to obtain relief from defendant’s total repudiation of the settlement agreement, a repudiation which left the alleged harm on which the original dispute was based completely unremedied.  Circumstances might exist in which proceedings to enforce a settlement agreement might not arise from the contract at the root of the original dispute.  If the settlement agreement in this case had included provisions on some collateral or subsidiary matter—for instance, if it had altered the provision in the sale contract stating that a stove and refrigerators were included in the sale price—proceedings to resolve a subsequent dispute over that matter would not necessarily fall within the attorneys’ fees clause of the original contract, even though the original contract might be a but-for cause of that dispute.  Even if the causal relationship would not be strong enough to bring proceedings within an attorneys’ fees clause in a situation like that, we hold it was strong enough here.”  (Slip Opn., at pp. 4-5.)

            Defendant also complained that the fee substantiation—counsel’s declaration and attorney bills—were inadequate, even though counsel apportioned out time relating only to the judicial proceedings.  Wrong, said the appellate court, observing:  “[Tbe attorney] declaration and the supporting bills formed the evidentiary basis for the court’s award.  This is the type of evidence upon which attorneys’ fees awards are normally based, and the evidence was sufficient.”  (Slip Opn., at p. 5.) 

            Winning plaintiffs, although they only defended against defendant’s appeal, asked for fees incurred in the arbitration.  The appellate panel found they were not entitled to relief, because plaintiffs filed no cross-appeal and cannot raise such an independent claim of error in response to defendant’s appeal.  (Slip Opn., at p. 7.)

            (SIDE NOTE—Mike Hensley was on the Cal. State University Fresno forensics squad for two years, and one of his teammates was Justice Wiseman, known at that time as Ms. Becky Case.  Justice Hill, another jurist on the Fifth District, was also a year behind Mike at Fresno’s Bullard High.  Greetings to both of you.)

            

            

Plaintiff's Professional Malpractice Claim, Although Involving A Contractual Relationship, Was Not "On the Contract" So As To Allow Fee Recovery Under Civil Code Section 1717

First District Recognizes the Distinction In Affirming Trial Court Decision Refusing To Award Fees to a Winning Plaintiff.

            Client retained Former Attorneys to represent his interests as a creditor in a bankruptcy proceeding.  Client signed a retainer agreement providing that Attorneys would use their best efforts to represent Client’s interests and “[s]hould it become necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees.”  One of Former Attorneys failed to properly submit a proof of claim form, prompting Client’s suit against Former Attorneys for professional malpractice—alleging claims for “negligence and/or breach of contract.”  Plaintiff, in pro per, successfully established breach of duty, failed to prove damages, was deemed the prevailing party, and was denied a request for a fee award.  The trial court found that the professional liability claim was the crux of the dispute, outside of the scope of being “on the contract” for purposes of a fee award under Civil Code section 1717.

            The First District, Division Four, in a 3-0 decision authored by Justice Reardon, affirmed after observing that the interpretation of an unambiguous retainer agreement and section 1717 presented legal questions subject to de novo review.  The decision is Wolf v. Glassberg, Pollak & Associates, Case No. A120240 (1^st Dist., Div. 4 June 30, 2008) (unpublished).

The panel found that the nature of the right sued on, not the form of the pleading or relief, is paramount in determining whether the action sounds in contract or tort.  Because all professional malpractice claims necessarily involve a contractual relationship, section 1717 has been interpreted to only extend to actions “on the contract,” as opposed to actions merely “arising out of” or “related to the contract.”  As a matter of law, the Court of Appeal concluded that the legal malpractice action sounded in tort such that it was not “on the contract” for purposes of allowing fee recovery to Client under section 1717, primarily citing Loube v. Loube, 64 Cal.App.4^th 421, 429-430 (1998) and Maollem v. Coldwell Banker Com. Group, 25 Cal.App.4^th 1827, 1830, 1832 (1994) as support for its affirmance.   

Routine Costs Can Include Court-Appointed Assistants Necessary to the Litigation and Attorney's Fees Clauses in Several Agreements Will be Interpreted in an Integrated Fashion

Fourth District, Division One So Holds In Partnership Dissolution Case.

            In our June 27, 2008 post, we examined Roberts v. Ross, a recent Fourth District, Division One unpublished case construing trial court discretion to award certain non-specified, non-prohibited costs as routine costs “necessary for the litigation” under a catchall provision, Code of Civil Procedure section 1033.5(c)(4).  One day later, the same division considered the same catchall, as well as determined how broadly an attorney’s fees clause should be interpreted under Civil Code section 1717.  We now discuss this recent decision in Vesco v. San Diego Community Correctional Center, Case No. D049266 (4^th Dist., Div. 1 June 26, 2008) (unpublished), written by Acting Justice Nares on behalf of a 3-0 panel.

            In a partnership judicial dissolution action, the trial court awarded plaintiff Vesco $25,298.71 in court-appointed referee and appraiser costs.  However, the trial judge denied plaintiff’s $224,000 fee request based on its view that the fees clause in a written buy/sell agreement was not broad enough to encompass the litigation at issue.  Both sides appealed the respective adverse determinations.

            First, the appellate court affirmed the costs award.  Although suggesting that the referee and appraiser expenses were court-ordered expert fees awardable under Code of Civil Procedure section 1033.5(a)(8), the Court of Appeal hinged its affirmance—as it did in Roberts v. Ross—on catchall section 1033.5(c)(4).  It made a nice summary of decisions awarding the expenses of various court-appointed assistants necessary for the conduct of the litigation as statutory costs under section 1033.5(c)(4).  (See, e.g., Gibson v. Bobroff, 49 Cal.App.4^th 1202, 1207-1210 (1996) [private mediator]; Winston Square Homeowner’s Assn. v. Centex West, Inc., 213 Cal.App.3d 282, 292-293 (1989) [special discovery/settlement master]; ABC Egg Ranch, Inc. v. Abdelnour, 223 Cal.App.2d 12, 19 (1963), abrogated on other grounds in Weiner v. Fleischman, 54 Cal.3d 476, 485 (1991) [accountant]; Most Worshipful Lodge v. Sons etc. Lodge, 140 Cal.App.2d 833, 834-835 (1956) [referee]; Estrin v. Fromsky, 53 Cal.App.2d 253, 255 (1942) [accountant].)  Because no party disputed that the referee and appraiser costs were other than reasonable and necessary for the litigation, no abuse of discretion occurred under the trial court’s award of these expenses as statutory costs.

            Next, focus turned to the decision declining to award Vesco attorney’s fees under the fees clause of the buy/sell agreement.  Justice Nares, on behalf of the appellate panel, found error and reversed this decision. 

            Based on Neptune Society Corp. v. Longanecker, 194 Cal.App.3d 1233, 1250 (1987), the Court of Appeal determined that the trial court was too myopic in not enforcing the fees clause which was contained in one or more of several documents that formed an integrated transaction.  It observed that only the operative documents in an integrated transaction need to contain a fee clause in order to authorize a grant to the prevailing party. (See also Torrey Pines Bank v. Hoffman, 231 Cal.App.3d 308, 325-326 (1991); South Bay Transportation Co. v. Gordon Sand Co., 206 Cal.App.2d 650, 660-661 (1988).)  In the case before the Fourth District panel, the fees clause in the buy/sell agreement applied to the entire contract and to the litigation, negating the linchpin of the lower court’s analysis to the contrary.

            Beyond that, Justice Nares rejected the argument that the fee clause language—applying to any action seeking to “enforce, protect, or establish any right or remedy under this agreement”—was too narrow so as to not apply in the pending litigation.  The appellate court cited to numerous decisions holding that broad “any dispute under the agreement” language was sufficiently akin to “arising out of this agreement” language so as to make its terms apply to the partnership agreement as a whole.  (See, e.g., Gil v. Mansano, 121 Cal.App.4^th 739, 744 (2004); Santisas v. Goodin, 17 Cal.4^th 599, 607 (1998); Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4^th 1338, 1342 (1992); Thompson v. Miller, 112 Cal.App.4^th 327, 335-336 (2003).)  After finding error, the panel remanded to determine if Vesco was the prevailing party and, if so, the amount of any fee award.

            (BLOG OBSERVATION—Again, the standards of review were very determinative in this case.  Abuse of discretion was the one applied to the costs award, while de novo was the one used to interpret a contractual fees clause with no conflict in extrinsic evidence.  Appellate courts are much more likely to reverse under the independent review standard, when interpreting statutory or unambiguous contractual provisions.)