CALIFORNIA ATTORNEY'S FEES

Indemnity And Apportionment: $402,596.40 Fee Award Affirmed In Refusal To Defend Dispute

Sixth District Found Opposing Party Forfeited Challenge to Billing Record Objections When It Failed to Attack Omissions Through Discovery Motion.

     In the next case, the Sixth District—in UDC-Universal Development, L.P. v. CH2M Hill, Case No. H033862 (6^th Dist. Jan. 22, 2010) (unpublished)—affirmed a $402,596.40 fee award under a contractual provision when sustaining a trial court’s ruling that a cross-complainant obtained more relief by obtaining a judgment for breach of the contractual duty to defend even though cross-complainant lost on its indemnification claims.

     This decision does show the considerable discretion vested in lower courts to determine the “prevailing party” when neither side achieves a complete victory. It will not be disturbed in the absence of a clear abuse of discretion, something that did not happen in this particular case.(Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal.App.4^th 858, 894 (2008).)

     However, there is also an important discovery lesson that can be derived from this unpublished decision. Appellant challenged the lower court’s failure to apportion the fees, but made a critical error in proceedings below: it failed to move to compel further responses when it did not receive certain requested billing records from the fee claimant. Both the lower and appellate courts found that this forfeited any challenges that were targeted against the billing records. So, make your discovery motions if you are the fee objector attacking any of the claimant’s billing records.

Indemnity And In The News: Carl Sparks’ Bid To Recoup Attorney’s Fees In Kern County Lawsuit Comes To An End

 

His Failure to Present a Claim to the County Barred Fees Request.

     In our May 3, 2009 post, we discussed former Kern County Sheriff Carl Sparks’ battle in a lawsuit brought by Kern County to obtain an award of attorney’s fees under several theories, but mainly Government Code section 996.4 (a statute requiring a public entity to reimburse fees and costs to an employee/former employee retaining counsel following the public entity’s refusal to provide a defense in a civil action/proceeding brought against that employee on account of an act/omission in the scope of employment).

     Sparks v. Kern County Bd. of Supervisors, Case No. F057600 (5^th Dist. Jan. 6, 2010) (unpublished) might be the final intermediate appellate word on the subject. The lower court denied Mr. Sparks’ request for an award of attorney’s fees under section 996.4, after he had failed to appeal prior denial orders requesting fees under different theories (with these failures to appeal constituting a waiver). Because the Fifth District had earlier determined that Mr. Sparks’ claim for reimbursement was barred by his failure to comply with the governmental claims presentation requirement, that earlier ruling was also dispositive of his appeal of the latest fee denial order.

Res Judicata: Trial Court Awarding Fees To Director Under Corporate Indemnification Statute Reversed On Res Judicata Grounds

Prior Adjudication Precluded the Subsequent Award.

     In South Bay Rod and Gun Club v. Dashiell, Case No. D053658 (4^th Dist., Div. 1 Dec. 4, 2009) (unpublished), director/real estate broker won a lawsuit against non-profit Club over a real estate option transaction. Winning director then sought fees in connection with his slander of title claim (Civil Code section 880.36) or under corporate indemnification statutes (certain Corporations Code sections). The court found no entitlement to fees and entered judgment, which was appealed by Club(but with no cross-appeal filed by director). Eventually, director filed a new motion for fees that was stayed while the Club’s appeal was decided—with Club losing its appeal. Director then brought his amended motion, seeking attorney’ fees under Corporations Code sections 317, 5047.5, 5238, and 7237. This time around, the lower court found that director was entitled to be indemnified for fees under the relevant Corporations Code provisions. Club then appealed.

     Anyone want to guess what happened?

Costs And Fees: Defendants “Unified In Interest” Liable For Routine Costs And Are Denied Substantial Attorney’s Fees Because Allocation Was Proper

Second District, Division 3 Address Many, Many Procedural Issues in Unpublished Opinion.

     In Matusek v. Benn, Case No. B206776 (2d Dist., Div. 3 Oct. 29, 2009) (unpublished), two sets of defendants (the Murad and Benn defendants, each set composed of businesses and their principals) contracted to create an infomercial using an appearance by plaintiff Matusek. Matusek sued for breach of contract, fraud and misappropriation of likeness under Civil Code section 3344, while defendants cross-complained on various counts. The jury awarded plaintiff compensatory and punitive damages against three of the four defendants, although the trial court nonsuited the 3344 claim. The lower court granted some JNOV and new trial motions by which the verdicts were substantially reduced or eliminated as to the three remaining defendants (including Mr. Murad personally). Plaintiff appealed to the Second District, which undid some of the postjudgment rulings and awarded costs to plaintiff. Eventually, the lower court entered a post-appeal judgment, finding that plaintiff was the prevailing party for cost purposes against all defendants because they had unified interests (even though Mr. Benn was exonerated completely). The trial court awarded costs of appeal to plaintiff of $5,778.09 against all defendants, and three defendants prevailing on the 3344 count recovered combined, apportioned attorney’s fees of about $13,500 for nonsuiting the 3344 claim. The Benn defendants appealed, and Matusek moved to dismiss the appeal by the Benn corporate defendant.

     With this convoluted procedural history in mind (which we have truncated tremendously), the Second District, Division 3 addressed many gnarly procedural issues that do sometimes pop up for consideration.

Tort of Another and Equitable Indemnity Claims to Fees Founder

Second District, Division Seven Affirms Denial of Motions for Attorney's Fees and Sanctions

     We have written from time to time about tort of another and section 1021.6 as bases for attorney's fees.  Justice Perluss, author of a 3-0 opinion, has written a conveniently concise primer on the subjects.  State Farm Mutual Automobile Ins. Co. v. Martinez, Case No. B205248 (2nd Dist. Div. 7, July 27, 2009) (unpublished).

     Mr. Martinez, dba Manny's Transmissions, rebuilt a transmission for a truck used by Prime Building to haul construction materials.  The truck caught fire and was a total loss.  State Farm stepped into the shoes of Prime Building, its insured, and filed a subrogation claim against Mr. Martinez.

     Mr. Martinez did not believe he was responsible for the fire, and asked State Farm to preserve the evidence.  Eventually, State Farm did not wish to pay the storage costs, and the the truck was dismantled and the parts sold for salvage value.  Additionally, records relating to the claim were lost.  At this point, it did not look so good for State Farm, but be patient, dear reader, and read on.

Indemnity Clauses: Escrow Company Not Entitled To Fee Award Because Indemnity Clause Did Not Allow For First Party Recoupment Of Fees

Second District, Division 8 Follows Myers-Campbell-Carr Line of Cases In a Scholarly Unpublished Decision.

     In our category “Indemnity,” we have surveyed cases where attorney’s fees have and have not been awarded where contracts contain indemnity clauses. The result frequently depends on the wording of the clauses. If the clauses only really cover exposure relating to third party disputes, no fees will be recoverable. However, if the clause also has a direct attorney’s fees entitlement among the indemnity provisions, then recovery will be allowed. (See Baldwin Builders v. Coast Plastering Corp., 125 Cal.App.4^th 1339, 1344-1346 (2005).) An indemnity clause came up for review in the next unpublished decision that we examine.

     The lower court in Amini v. Cimarron Escrow, Inc., Case No. B205927 (2d Dist., Div. 8 June 16, 2009) (unpublished) awarded an escrow company $263,250 in attorney’s fees and $11,446.08 in costs (out of a requested $297,180 in fees and $19,902.04 in costs) after it prevailed in an owner-buyers dispute occurring on the eve of a tax-lien sale. The basis for the award was an indemnity provision in the escrow agreement, which provided: “If conflicting demands or notices are made or served upon you or any controversy arises between the parties or with any third person arising out of or relating to this escrow, you shall have the absolute right to withhold and stop all further proceedings in, and in performance of, this escrow until you receive written notification satisfactory to you of the settlement of the controversy by written agreement of the parties, or by the final order or judgment of a court of competent jurisdiction. All of the parties to this escrow, jointly and severally, promise to pay promptly on demand, as well as to indemnify you and to hold you harmless from and against all administrative, governmental investigations, audit and legal fees, litigation and interpleader costs, damages, judgments, attorneys’ fees, arbitration costs and fees, expenses, obligations and liability of every kind (collectively ‘costs’) which in good faith you may incur or suffer in connection with or arising out of this escrow, whether said costs arise during the performance of or subsequent to this escrow, directly or indirectly, and whether at trial, or on appeal, in administrative action or in arbitration … If the parties do not pay any fees, costs or expenses due you under the escrow instructions or do not pay for costs and attorneys’ fees incurred in any litigation, administrative action and/or arbitration, on demand, they each agree to pay a reasonable fee for any attorney services which may be required to collect such fees or expenses, whether attorneys’ fees are incurred before trial, at trial, on appeal or in arbitration.” (Emphasis supplied by appellate panel.)

     Both parties appealed the fee award, buyers challenging the entirety of it and escrow company challenging the failure to award nonstatutory costs and the reduction of fees for 45 hours in travel time.

Construction Indemnity/Duty to Defense Added Bonus: The Orange County Lawyer Has A June 2009 Article On The Subject.

Articles Discusses California Supreme Court’s Crawford Decision In Depth.

     On June 6, 2009, we posted a discussion on the trial court’s decision in SSR Marlowe, which placed dispositive weight on the earlier California Supreme Court decision in Crawford v. Weather Shield, 44 Cal.4^th 541 (2008).

     Daniel Lee Jacobson, an Orange County attorney and a professor at Pacific West College of Law, has written an article, “California Supreme Court Declares No Fault Indemnity” in the June 2009 edition of The Orange County Lawyer, discussing Crawford in depth. The article is available on Mr. Jacobson's website.  It is must reading for anyone wanting to get up to speed on construction indemnity/defense contractual provisions.

Construction Indemnity And Duty To Defend Clauses: Unless You Have An Express Disclaimer, Lower Tier Construction Participants May Owe Defense Duties to Higher Up Participants

 

Los Angeles County Judge Carl J. West Grants Summary Adjudication to General Contractor; New Civil Code Section 2782(d) Has New Rules For Construction Projects After January 1, 2009.

     In SSR Marlowe, LLC v. Taisei Construction Corp., Case No. BC363862 (L.A. County Superior Court June 4, 2009), Los Angeles County Superior Court Judge Carl J. West granted summary judgment in favor of a general contractor and against a stucco installation subcontractor based on an indemnity/duty to defend clause in the parties’ subcontract agreement. Contractor was sued by developer, and then tendered defense to subcontractor based on a clause that provided “Subcontractor shall indemnify and hold harmless Owner and [contractor] and all of their agents and employees from and against all claims, damages, losses and expenses including attorney’s fees arising out of, or resulting from, the performance of this Agreement, provided that such claim, damage, loss, or expense, … is caused in whole or in part by any negligent act or omission of the Subcontractor or anyone directly or indirectly employed by him or anyone for whose acts he may be liable …”

     In ruling for contractor, Judge West found that the California Supreme Court’s decision in Crawford v. Weather Shield Mfg., Inc., 44 Cal.4^th 541 (2008) was dispositive. There, a very similarly-worded indemnity/hold harmless clause was found to impose a duty of defense upon a window subcontractor with respect to the general contractor. The Supreme Court stated that Civil Code section 2778(4) placed in every indemnity contract, unless otherwise provided, a duty to assume the indemnitee’s defense if tendered against all claims embraced by the indemnity. (This duty to defend arose even if the subcontractor/indemnitor was eventually found not to be negligent.) Even through Crawford had an additional provision by which a duty to defend was promised, Judge West found that such language is not essential under section 2778(3)—an express disclaimer of a duty to defend is necessary in the parties’ governing contract (something missing in the facts before him).

     Crawford obviously provides some major drafting tips for attorneys representing owners, developers, and contractors/construction professionals at all tiers of the process.

     One should also keep in mind that Civil Code section 2782(d) was recently amended effective January 1, 2009 for residential construction agreements. It provides that a subcontractor may be obligated to provide a defense to a developer or general contractor if the claim is tendered to the sub as required by the subdivision. (Recently amended section 2782(c) generally limits subcontractor indemnity obligations to claims arising from the subcontractor’s work.) Then, the sub may elect to satisfy its defense obligation to the developer or general contractor by (1) either defending the claim with counsel of the subcontractor’s choice, or (2) paying a “reasonable allocated share” of the defense fees/costs incurred by the developer or general contractor (subject to readjustment at the end of a case), as long as payment is made within 30 days of receiving an invoice from the developer or general contractor. This fairly recent legislative enactment, in tandem with Crawford, needs to be considered by transactional attorneys when drafting construction contracts, both before and after January 1, 2009.

Construction Surety Bond Fee Issues: What Is Good For The Goose (Obligor) Is Good For The Gander (Surety)

Second District, Division 5 Confirms That Surety Is Usually Liable For Fees If Obligor-Obligee Contracts Calls For Fees.

     This next case should be of interest for you practitioners who practice construction law involving payment/performance bonds issued by a surety. Usually, the bonds confirm a tripartite arrangement between the obligor (in the next case, the subcontractor), the obligee (the contractor), and the surety (usually an insurance company). However, there is a twist when the contractor has also obtained a similar bond from the same surety running in favor of the property owner. What happens when there is a liability determination and subsequent fees award? Answer: Depends on the factual situation and web of relationships, as the next decision makes clear.

     In First National Ins. Co. v. Cam Painting, Inc., Case No. B200830 (2d Dist., Div. 5 May 15, 2009) (certified for publication), surety on subcontractor’s bond paid out on a claim, but allocated the loss 50/50 between both the subcontractor and contractor bonds (given that the same surety was on the hook for the same project). After a trial, the lower court awarded damages and assessed attorney’s fees in favor of surety and against contractor based on the contractor bond. (These rulings broke down as a 50/50 divide on damages and $25,203 in attorney’s fees awarded jointly and severally against the contractor and subcontractor bonds.) These determinations were reversed because the lower court should have fixed the entire loss on the subcontractor bond running in favor of contractor, because the claim centered around subcontractor’s failure to pay a supplier. “The coincidental fact that [surety] also bonded [contractor] did not dilute its obligation to [contractor] as obligee on the [subcontractor] bond.” (Slip Opn., p. 11.)

Government Claims Act: Public Employee Seeking Return Of Successful Defense Costs From County Must Satisfy Claims Filing Requirements

Fifth District So Holds in Recent Published Decision Involving Carl Sparks.

     With certain exceptions, a California public entity must provide a defense in any civil action brought against an employee or former employee arising out of that employee’s act or omission in the scope of employment. (Gov. Code, sec. 995.) However, the Government Claims Act also collides with this requirement, providing that a written claim must be presented as a condition precedent to bringing a suit for “money or damages” against a California public entity. These two statutory provisions effectively became “worlds in collision” in the next case.

     Former Kern County Sheriff Carl Parks was sued by Kern County for falsely certifying sheriff’s department payrolls. County denied Mr. Spark’s requests that it provide him a defense. Mr. Sparks provided his own defense and apparently “defensed” the County following trial. Mr. Sparks then brought a mandate petition seeking reimbursement of his defense fees by County under section 995. The trial court denied the petition on the ground Mr. Spark had not presented a claim to County before filing his petition.

     On appeal, the Fifth District agreed with decision that the claims filing requirements had to be satisfied, in Sparks v. Kern County Board of Supervisors, Case No. F055455 (Apr. 29, 2009) (certified for publication). Because no injunctive relief or return of specific property was involved, Mr. Sparks reimbursement request was one for “money or damages” for which a claim presentation was a condition precedent. Although he sent a prior letter to County, it was not specific enough and made no reference to his defense costs—failing to fall under the “substantial compliance” exception to the claims filing requirement.

     In the April 30, 2009 edition of The Bakersfield Californian, Paul Coble, Mr. Spark’s attorney, is quoted as saying “[t]here’s an action that’s been on hold in the Kern County courts regarding attorneys fees in the case that will now be activated given the 5^th District ruling.” So, the story goes on . . . this fees battle may not yet be over.

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.

Indemnity Clauses: True Indemnification Clauses Do Not Give A Basis For Attorney’s Fees Recovery

Fourth District, Division 1 Follows Other Precedents We Have Reviewed.

     In our category, “Cases: Indemnity,” we have seen that California appellate courts will not stretch a third-party indemnification clause into a first-party attorney’ fees clause for purposes of fees recovery. The leading cases of Myers Building Industries, Ltd. v. Interface Technology, 13 Cal.App.4^th 949. 968 (1993), Continental Heller Corp. v. Amtech Mechanical Services, Inc., 53 Cal.App.4^th 500, 508-509 (1997), and Baldwin Builders v. Coast Plastering Corp., 125 Cal.App.4^th 1339, 1345 (2005) illustrate the principle and have been discussed in prior posts under this category.

    

Indemnity Clauses: “Batter, Batter, Batter – Up!” Angels Wins Anaheim Appeal, But Court Of Appeal Affirms Denial Of Fee Award To Angels

Fourth District, Division Three Determines Relevant Clause Is Only For Indemnity, Not Fee Recovery.

     In our July 12, 2008 post on indemnity clauses and our August 25, 2008 post on Carr Business, we discussed whether indemnification clauses could give rise to attorney’s fees. The quick answer is that it depends on the wording and placement of the provision in question. However, generally speaking, where the clause is directed at providing protection over third party events, it is difficult to construe the clause as being an attorney’s fees provision in a first party context. These principles did come into play in a very celebrated case that got a lot of publicity and now has come down to decision on appeal—City of Anaheim v. Angels Baseball, L.P., Case No. G037202 (4^th Dist., Div. 3 Dec. 19, 2008) (unpublished).  (For the whole megillah, click here.)

     The opinion makes interesting reading, because it involves contractual interpretation over a lease and whether the language required the use of the name “Anaheim” in the Angels baseball team’s jerseys, tickets, merchandise, souvenirs. Anaheim lost the merits, a judgment affirmed on appeal in a 2-1 opinion with Justices Aronson and O’Leary in the majority and Presiding Justice Sills in dissent. However, Angels appealed the trial court’s decision denying it prevailing party attorney’s fees under the indemnity provision of the same lease. (Although the opinion did not mention the amount, newspaper articles indicated that the Angels spent around $8 million in attorney’s fees litigating the case, not to mention fees on appeal.) Angels separately appealed the adverse fee ruling, but did not prevail.

Fifth District Finds Indemnification Clauses, Even Though Extending To Performance Of Contractual Work, Did Not Allow For Recovery Of Civil Code Section 1717-Type Fees

Court of Appeal Affirms Denial of Attorney's Fees to Prevailing Parties Against the City of Chowchilla.

            In our July 12, 2008 post, we discussed when contract indemnification clauses will and will not be interpreted as allowing a recovery of attorney's fees to litigants in litigation not involving true third-party indemnity issues.  The answer came down to the specifics of the wording and headings of the germane contractual clauses.  Recently, the Fifth District dealt with a hybrid clause—dealing with both third-party indemnity and contractual performance of work issues—and found it more closely resembled the third-party indemnity clauses not giving rise to fee recovery than peculiar provisions that allowed for fee recovery arising from indemnification obligations.

            Carr Business Enterprises, Inc. v. City of Chowchilla, Case No. F051999 (5^th Dist. Aug. 20, 2008) (certified for partial publication) involved a referee's award that went against the City of Chowchilla based upon Carr's performance under two separate agreements with Chowchilla involving city streets and municipal airport improvement work.  Carr moved to fix attorney's fees pursuant to a provision found in both contracts.  The trial court denied the fees request, rolling this determination into a final judgment also encompassing the merits.  Chowchilla appealed an award of prejudgment interest, and Carr cross-appealed the denial of fees.

            Justice Wiseman, the author on behalf of a 3-0 panel of the Fifth District, first considered whether the cross-appeal was timely, because it was filed 20 days after the Chowchilla appealed but more than 60 days from the judgment itself.  It was timely, the appellate panel decided, rejecting the notion that the order denying fees was a separately appealable order such that it had to be appealed 60 days from the judgment.  Rather, the order denying the fees was not a post-judgment order (unlike an order granting fees) such that it can only be reviewed on appeal from the judgment.  (Lacey v. Bertone, 33 Cal.2d 649, 654 (1949).)  Given that Chowchilla appealed from the judgment, Carr likewise had the 20 day cross-appeal extension time to bring the appeal on the fee denial aspect of the judgment.

            That brings us to the merits of the appeal on the fee denial order.

            The street-improvement contract, in a section entitled "Insurance Requirements for Contractors" and with a heading of "Hold Harmless and Indemnification Agreement," stated:  "[Carr] shall indemnify and hold harmless [Chowchilla] … from and against all claims, damages, losses and expenses including the attorney fees arising out of the performance of the work described herein, caused in whole or in part by any negligent act or omission of [Carr], any subcontractor, anyone directly or indirectly employed by any of them or anyone for whose acts any of them may be liable, except where caused by the active negligence, sole negligence, or

willful misconduct of [Chowchilla]."  Elsewhere, the street-improvement contract contained a provision under the section title of "Indemnity Agreement" which stated:  "[Carr] agrees to indemnify and save harmless [Chowchilla] … for and against all loss or expense (including costs and attorney fees) on account of injury or death of persons employed by [Carr], or his subcontractors, his or their agents or employees; injury to or death of any other person; or injury to, damage or destruction of property, real or personal including loss of use thereof.  Upon demand, [Carr] shall defend any suits or actions covered by the terms of this agreement."  The airport-improvement contract had essentially identical provisions.

            The lower court, siding with Chowchilla, found that these provisions were standard indemnity provisions, which do not authorize attorney's fees on a dispute arising out of the two contracts.  The Fifth District agreed.

            After indicating that the "performance of work" language superficially seemed to extend beyond third-party claims, the appellate panel found that similarly-worded language had still been found to be indemnification clauses not giving rise to fees.  See, e.g., Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal.App.4^th 949, 964 (1993); Meininger v. Larwin-Northern California, Inc., 63 Cal.App.3d 82, 84 (1976); Campbell v. Scripps Bank, 78 Cal.App.4^th 1328, 1336 (2000).  The trial court found that the headings in the contractual provisions—relating to indemnity—were helpful in the determination, a point not disputed by the Court of Appeal.

            In contrast, cases like Baldwin Builders v. Coast Plastering Corp., 125 Cal.App.4^th 1339, 1342, 1344 (2005) and Continental Heller Corp. v. Amtech Mechanical Services, Inc., 53 Cal.App.4^th 500, 508-509 (1997) found indemnification clauses did give rise to fee exposure because specific language indicated fees could be awarded for suing on the indemnification agreements themselves. 

            So, how did the Fifth District steer between these two lines of decisions?  Answer:  it found the provisions were indemnification clauses not allowing for a grant of fees.  Justice Wiseman reasoned this way:  "We conclude that the language of the indemnity provision here more closely parallels the language found in Myers, Meininger, and Campbell, than the language examined in Baldwin and Continental.  Unlike in Baldwin, there is no express language authorizing recovery of fees in an action to enforce the contract.  Instead, the language authorizes fees as an expense of litigation that Carr agreed to pay in any action brought by another person arising out of the performance of the contract.  The intent was to ensure that Chowchilla did not suffer any damages if, as a result of Carr's negligence or willful misconduct, it became embroiled in litigation with a third party." 

Corporations Code Section 317(d) Does Not Allow For Award Of Attorney's Fees To Successful Ex-Officer/Director Where Dismissal Of Action Not Based On The Merits

Fourth District, Division Three Affirms Denial of Fees Where Dismissal Predicated On Discovery Terminating Sanctions.

            In our past post of May 28, 2008 on the unpublished decision of Optimal Water, Inc. v. Robbins, we discussed Corporations Code section 317, which provides for indemnification of corporate agents by corporations under specified circumstances.  Section 317(d) states:  "To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) [i.e., a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason that the person was a corporate agent] or in defense of any claim, issue, or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith."  Section 317(d) was at issue in the next case we discuss.

            Gulfstream Retirement Corp. v. Hasso, Case No. G039901 (4^th Dist., Div. 3 Aug. 13, 2008) (unpublished) involved an action brought by a corporation and its sole shareholder (Helen Hasso) against ex-officer/director May Hasso.  The action was dismissed after the trial judge accepted a discovery referee's recommendation and granted a discovery motion for terminating sanctions.  May Hasso filed a motion for attorney's fees under section 317(d), a request denied by the trial judge grounded on the fact the discovery sanction dismissal was not a merits-based determination.  May Hasso appealed this ruling.

            Justice Moore, writing for a 3-0 panel of our local Santa Ana-based Court of Appeal, affirmed after noting that the interpretation of section 317(d) was a de novo exercise on appeal, citing Groth Bros. Oldsmobile, Inc. v. Gallagher, 97 Cal.App.4^th 60, 65 (2002).

            The appellate panel observed that section 317(d) was derived from the Model Business Corporations Act, which provided for mandatory indemnification of a corporate agent to the extent of success "on the merits or otherwise."  Because the California Legislature omitted the "or otherwise" language, it was facially clear that mandatory indemnification revolved around an actual judicial determination of the merits of the agent's defense.  (Accord, American Nat. Bank & Trust Co. v. Schigur, 83 Cal.App.3d 790, 793 (1978).)  In fact, the only case cited by May Hasso interpreting section 317—Groh Bros., supra, 97 Cal.App.4^th at 73—actually supported the responding party, requiring that the defense was merits based—namely, "the disposition reflects the opinion of the court or the prosecuting party that the action would not succeed."  Fee recovery was statutory foreclosed to appellant based on the plain meaning of section 317(d). 

Losing Plaintiff In Casino Marker Case Suffers $400,000 Attorney’s Fees Hit For Losing The Litigation, Two Appeals, And An Appellate Writ Proceeding

Second District Affirms Large Fee Award Based on Indemnification Clause in the Parties’ Banking Account Agreement.

            In our July 12, 2008 post, we discussed what type of indemnification clauses can give rise to attorney’s fees exposure, with the upshot being that the answer depends on the specific wording of the clause at issue.  The next case, which involved protracted litigation over an eight year time span, involved an indemnification clause that was interpreted to allow a fee grant to the prevailing party and which stung the losing party with an ultimate fee judgment of almost $400,000, plus future fees for losing the second appeal decided a few days ago.  The case we discuss also has a good discussion on a cross-over issue that we have discussed previously, reinforcing the principle that generalized attacks on fee reasonableness will not prevail without necessary specificity on what fee items are being challenged. 

            The genesis of the litigation odyssey at issue dated back to 1999, when Prestige’s president, director and shareholder executed three casino markers in Las Vegas (for $20,000 in gambling credits).  After he left without paying off the markers, the casino presented the markers for payment to First Federal, Prestige’s checking account bank.  First Federal honored the markers and paid casino $20,000 from Prestige’s account.  Prestige filed a complaint against First Federal alleging contractual breach, breach of UCC section 4401, negligence and conversion on March 22, 2000.  First Federal’s summary judgment grant was appealed by Prestige, which won a reversal in May 2002.  At trial in March 2004, the jury returned a complete defense verdict in First Federal’s favor.  First Federal sought attorney’s fees of $311,453 from Prestige, but the trial court denied the fee motion as a matter of law.  Both sides appealed, with the appellate court deciding the merit challenges to the jury verdict and fee issues in First Federal’s favor.

            In Prestige of Beverly Hills, Inc. v. First Federal Bank of California, 2006 WL 278995 (2d Dist., Div. 7 Feb. 6, 2006) (Prestige I), the Second District panel found that an indemnification clause in the Prestige-First Federal Account Agreement did allow for an award of attorney’s fees to First Federal.  The clause read:  “Accountholder [Prestige] releases and indemnifies Depository [First Federal], its trustees, directors, officers, employees and agents from and against any liability demand or expense in connection with the collection of any item which is handled by Depository without negligence for or on behalf of any Accountholder ….”  Because Prestige conceded that the indemnity extended to direct liability as well as third party liability, the Second District in Prestige Ifound the indemnification clause was distinguishable from the Myers general rule that applied only to third-party claims.  (See Dream Theater, Inc. v. Dream Theater, 124 Cal.App.4^th 547, 555 (2004).)  The Second District remanded to determine First Federal’s fee award under the indemnification clause.

            First Federal filed a cost memorandum seeking $64,724 for winning appeal number one, with Prestige moving to tax these costs.    First Federal also sought to “strike” the original trial judge under Code of Civil Procedure section 170.6, which was denied by the lower court but overturned when the Second District issued mandate otherwise and awarded costs on appeal to First Federal for the mandate win (Prestige II).  First Federal sought $24,011.50 from Prestige for this appellate exercise.  First Federal and Prestige entered into stipulations by which the $311,453 and $64,724 fee requests were set for argument.  The trial court sustained First Federal’s fee requests in these amounts, which—when added to the $24,011.50 mandate exercise—means that Prestige lost fee awards totaling almost $400,000 in favor of First Federal. 

            Prestige appealed yet again, and finally lost in Prestige III—Prestige of Beverly Hills, Inc. v. First Federal Bank of California, Case No. B199897 (2d Dist., Div. 7 July 15, 2008) (unpublished), a 3-0 decision authored by Justice Zelon.

            The appellate record in Prestige III was fairly circumscribed by the fee entitlement ruling in Prestige I.  This meant that the principal challenge was to fee reasonableness, which is reviewed under the deferential abuse of discretion standard.  (EnPalm, LLC v. Teitler, 162 Cal.App.4^th 770, 774 (2008), reviewed in our May  12, 2008 post.  California Supreme Court review was denied in EnPalm on July 16, 2008.)  The Court of Appeal found that the lodestar was reasonable and that the amount of time was not challenged by Prestige. 

            Additionally, the appellate court rejected generalized, substantiated reasonableness challenges that failed to address specific costs.  In the absence of such particularized challenges, the presumption that fees are reasonable and necessarily incurred was left unrebutted.  (Hadley v. Krepel, 167 Cal.App.3d 677, 684 (1985).)  “Prestige has not alleged its objections with enough specificity to rebut the presumption that defendant’s fees are reasonably incurred.”  (Slip Opn., at p.6.)  This underscores a message that was made in our prior review of Premier Medical Mgt. Sys. Inc. v. Cal Ins. Guar. Assn. in our June 2, 2008 post.

            Because First Federal prevailed on all causes of action, there was no need to apportion work between successful and unsuccessful claims, distinguishing situations like Mann v. Quality Old Time Service, Inc., 139 Cal.App.4^th 328, 342 (2006) where the prevailing party prevailed on only one out of four causes of action at the trial level. 

            The ending conclusion of Justice Zelon sums up the rationale for affirmance:  “Considering this case is on appeal for the third time and has been litigated over eight years, with two jury trials, a multitude of unsuccessful motions, requests filed, and numerous substitutions of counsel by Appellant, this court finds that the fee amount totaling almost $400,000 is not unreasonable.  The trial court did not abuse its discretion.”  (Slip Opn., at p. 7.)  In addition, First Federal was awarded attorney’s fees on appeal, to be determined on remand.  These concluding remarks demonstrate that both trial and appellate courts are not insensitive to the protracted nature of litigation, frequently making decisions on fee awards based on the perception of whether the winning or losing litigant was candid, was credible, and took actions that had merit or furthered the goal to resolve the matter efficiently.

            

            

Indemnification Agreement Clauses—Can You Obtain Attorney’s Fees For Enforcing Them?

The Answer Depends on the Specific Wording of the Clause.

            Various contracts, especially those involved in construction projects, contain indemnity provisions by which one party (the indemnitor) agrees to reimburse another party (the indemnitee) for damages, costs and expenses associated with species of claims covered by the express language in the indemnity agreement.  Although normally the indemnitee is entitled to reimbursement of fees incurred in defending against claims by third parties in most indemnity clauses, the question arises as to whether indemnitee is entitled to an attorney’s fees award for establishing its rights to indemnity from the indemnitor.  The answer in California is, as we shall see, dependent on the wording and breadth of the indemnity clause itself.

            Generally, there is a presumption that an indemnitee is entitled to recover, as a part of damages, reasonable attorney’s fees expended as a result of third-party suits which are encompassed within the scope of the indemnity clause.  (See Peter Fabrics, Inc. v. S.S. “Hermes,” 765 F.2d 306, 316 (2d Cir. 1985) (Friendly, J.).)  However, this presumption is reversed on the fee recovery issue in an indemnity prosecution lawsuit, with the general rule being that an indemnitee cannot recover its attorney’s fees incurred in establishing its indemnification rights absence express contractual language otherwise.  (Ibid.)  This happens to mirror how California courts have come out on the issue, as we survey below.

            California litigators frequently encounter broadly worded indemnification clauses and would like to argue that they are tantamount to attorney’s fee clauses allowing recovery to the prevailing party.  Probably the most oft-cited case to recognize that standard indemnification clauses will not confer fee recovery, without more precise entitlement language, is Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal.App.4^th 949 (1993). 

            Myers involved a general contractor which won a $350,000 attorney’s fees award based on various indemnification provisions in integrated construction documents.  Although contractor agreed to indemnify owner (the indemnitee) for various claims (mainly third-party claims) in the pertinent clauses, nothing in the documents established that owner would face fee recovery exposure to contractor—especially conspicuous was the absent of a fees clause in the construction contract itself.  In reversing the fee award in contractor’s favor, then Justice Grignon wrote:  “The very essence of an indemnity agreement is that one party holds the other harmless from losses resulting from certain specified circumstances.  The provisions of Civil Code section 1717 were never intended to inflict upon the indemnitee the obligation to indemnify his indemnitor in similar circumstances.  Indemnification agreements are intended to be unilateral agreements.  The Legislature has indicated no intent to make them reciprocal by operation of law.  Indeed a contrary intent is evidence by Civil Code section 2778, subdivision 3, including attorney fees as a matter of law as an item of recoverable loss in an indemnity agreement.”  (Myers, supra, 13 Cal.App.4^th at 973.)

            Myers, which follows the general rule that fees incurred in prosecuting indemnification rights are not recoverable, has been followed in subsequent appellate decisions.  (See, e.g., Campbell v. Scripps Bank, 78 Cal.App.4^th 1328, 1337-1338 (2000) [escrow agreement provision; clause did not provide for the recovery of attorney fees in actions between a principal and the escrow holder to enforce the general escrow instructions, but was only a standard indemnity provision]; M. Perez Company v. Base Camp Condominiums Assn. No. One, 111 Cal.App.4^th 456, 463 (2003) [standard indemnity clause in owner-contractor construction agreement “is not a prevailing-party-attorney-fee provision within the meaning of Civil Code section 1717, but an enumeration of the scope of the indemnity,” citing Campbell].)

            However, the exception to the general rule—where express language provides otherwise in a standard indemnity clause—was the focus of attention in Baldwin Builders v. Coast Plastering Corp., 125 Cal.App.4^th 1339 (2005).  There, in a standard indemnity clause between a developer and subcontractors, there was ending language that stated “Subcontractor shall pay all costs, including attorney’s fees, incurred in enforcing this indemnity agreement.”  What a difference a sentence can make.  After surveying prior jurisprudence, the Baldwin Builders court—the same one deciding Campbell—determined this additional express language “authorizes the recovery of attorney fees where one of the parties to the agreement brings an action to enforce the indemnity; such an action is one ‘on [the] contract’ within the meaning of section 1717(a) and thus the attorney fees clauses are subject to the statutory requirement of reciprocity.”  (Id. at 1346.)  In fact, Baldwin Builders disagreed with dicta in Perez, if tenable, that would have refused to interpret the express language as a fees clause enforceable under section 1717.  (Ibid.)

            The upshot on interpretation of indemnification clauses is to carefully read the language and determine if there is “plus” fee recovery language beyond standard indemnity verbiage.  Baldwin Builders is must reading as a compass for determining what verbiage might give rise to fee recovery under section 1717.

            For an excellent article on the assessment of fee recovery situations in contractual indemnity actions, see Johnstone & Yeilding, “The Recovery of Attorney’s Fees In Contractual Indemnity Suits,” The Update, Vol. 8, Issue 5 (Spring 2005), pp. 3-4, 20-21, published by San Diego Defense Lawyers (and previously published in FOR THE DEFENSE, December 2004, Vol. 46, No. 12). 

COURT OF APPEAL AFFIRMS $168,000 FEE/COST AWARD IN FAVOR OF FORMER CEO WHO DEFEATED CORPORATION IN BREACH OF FIDUCIARY DUTY ACTION

Fourth District, Division 3 Finds Corporation Presented Inadequate Appellate Record to Properly Challenge Award.

            California Corporations Code section 317(d) allows a corporate agent who has been successful in the defense of any action by the corporation, where the purpose was to procure a judgment in the corporation’s favor “by reason of the fact that the person is or was an agent of the corporation,” to be indemnified against “expenses actually and reasonably incurred by the agent in connection therewith.” Section 317(c) also provides that the expenses can be reimbursed “if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders."  Most corporate agents rely on these statutes, frequently supplemented by complementary by-laws allowing for indemnification, to protect their interests while acting on behalf of a corporation so as to avoid expenses from third-party actions as well as “strike” suits brought by the corporation after the agency has been terminated. 

            A recent unpublished decision, Optimal Water, Inc. v. Robbins, Case No.G038067 (4^th Dist., Div. 3 May 23, 2008), illustrates the value of these fee/cost shifting indemnification provisions.

            Corporation sued a former CEO for breach of fiduciary duty and unfair competition, and the former agent cross-claimed for unpaid wages.  A trial court defensed the corporation’s claims, and a special jury verdict determined the corporation owed former CEO almost $59,000 in unpaid wages (with the ultimate judgment including $22,000 more in interest and penalties).

            Former CEO moved for an award of attorney’s fees exceeding $330,000 and an award of costs approaching $50,000.  The trial court ultimately awarded former CEO $8,041 in costs and $130,512 in attorney’s fees under Corporations Code section 317.  (The lower court also awarded $3,600 in fees pursuant to Labor Code section 218.5—an area of the law that will be the subject of a future post.)

            Corporation appealed.  It lost, primarily because of presenting an inadequate record on appeal.

            Acting Presiding Justice Rylaarsdam, writing for the unanimous panel, affirmed the fee/cost award.  Not only did the Court of Appeal find that section 317 was sufficiently broad to authorize the fee award, it found that corporation’s failure to provide a reporter’s transcript of the trial prevented meaningful review of the contention that former CEO was not entitled to indemnification because he acted in bad faith.  This underscores what we said in an earlier post about appellate practice being a boutique area that contains traps for the unwary.  (See May 22, 2008 post.)  Justice Rylaarsdam has written many articles stressing the necessity of creating an adequate record on appeal.  (See, e.g., W.F. Rylaarsdam, “Writ Proceedings in the Court of Appeal,” Association of Business Trial Lawyers Report, Vol. III, No. 2, May 2001, p. 12 [“Failure to provide an adequate record is likely to result in an automatic and immediate denial of the petition.”].)

            The appellate court also rejected the argument that former CEO’s activities for which he was sued happened to be divorced from his corporate responsibilities.  The corporation’s complaint belied this challenge, showing various claims attacking his conduct while he was acting as a corporate agent.  This sufficiently satisfied section 317’s “agency” nexus requirements.   

            Former CEO won on appeal, and was also awarded additional costs as the appellate winner.

            

Fourth District, Division 3 Finds Corporation Presented Inadequate Appellate Record to Properly Challenge Award.

            California Corporations Code section 317(d) allows a corporate agent who has been successful in the defense of any action by the corporation, where the purpose was to procure a judgment in the corporation’s favor “by reason of the fact that the person is or was an agent of the corporation,” to be indemnified against “expenses actually and reasonably incurred by the agent in connection therewith.” Section 317(c) also provides that the expenses can be reimbursed “if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders."  Most corporate agents rely on these statutes, frequently supplemented by complementary by-laws allowing for indemnification, to protect their interests while acting on behalf of a corporation so as to avoid expenses from third-party actions as well as “strike” suits brought by the corporation after the agency has been terminated. 

            A recent unpublished decision, Optimal Water, Inc. v. Robbins, Case No.G038067 (4^th Dist., Div. 3 May 23, 2008), illustrates the value of these fee/cost shifting indemnification provisions.

            Corporation sued a former CEO for breach of fiduciary duty and unfair competition, and the former agent cross-claimed for unpaid wages.  A trial court defensed the corporation’s claims, and a special jury verdict determined the corporation owed former CEO almost $59,000 in unpaid wages (with the ultimate judgment including $22,000 more in interest and penalties).

            Former CEO moved for an award of attorney’s fees exceeding $330,000 and an award of costs approaching $50,000.  The trial court ultimately awarded former CEO $8,041 in costs and $130,512 in attorney’s fees under Corporations Code section 317.  (The lower court also awarded $3,600 in fees pursuant to Labor Code section 218.5—an area of the law that will be the subject of a future post.)

            Corporation appealed.  It lost, primarily because of presenting an inadequate record on appeal.

            Acting Presiding Justice Rylaarsdam, writing for the unanimous panel, affirmed the fee/cost award.  Not only did the Court of Appeal find that section 317 was sufficiently broad to authorize the fee award, it found that corporation’s failure to provide a reporter’s transcript of the trial prevented meaningful review of the contention that former CEO was not entitled to indemnification because he acted in bad faith.  This underscores what we said in an earlier post about appellate practice being a boutique area that contains traps for the unwary.  (See May 22, 2008 post.)  Justice Rylaarsdam has written many articles stressing the necessity of creating an adequate record on appeal.  (See, e.g., W.F. Rylaarsdam, “Writ Proceedings in the Court of Appeal,” Association of Business Trial Lawyers Report, Vol. III, No. 2, May 2001, p. 12 [“Failure to provide an adequate record is likely to result in an automatic and immediate denial of the petition.”].)

            The appellate court also rejected the argument that former CEO’s activities for which he was sued happened to be divorced from his corporate responsibilities.  The corporation’s complaint belied this challenge, showing various claims attacking his conduct while he was acting as a corporate agent.  This sufficiently satisfied section 317’s “agency” nexus requirements.   

            Former CEO won on appeal, and was also awarded additional costs as the appellate winner.