PLAINTIFF’S ASSIGNEE—A NONSIGNATORY TO A CONTRACT—AND ASSIGNOR—A CONTRACT SIGNATORY—BOTH HIT WITH $1.4 MILLION FEE AWARD AFTER DEFENDANT PREVAILS IN ASSIGNEE’S LITIGATION

Second District Affirms Fee Award Against Both Assignor and Assignee Based on California Wholesale and the Assignor’s Surety Status.

            One of the time-honored principles in assignment law is that assignee’s voluntary acceptance of benefits normally means consent to bear the burdens from the assignment.  Civil Code sec. 1589.   However, the assignor normally still remains liable to the promisee. These tenets were fully at play in the next case, where both the assignor and assignee where assessed with an adverse $1.4 million fee award which was affirmed by the Second District, Division Four on appeal.

            In New York Times Company v. Click2Boost, Inc., Case No. B195419 (2d Dist., Div. 4 June 20, 2008) (unpublished), plaintiff assignee asserted both contract and tort claims against defendant, which in turn cross-claimed for breach of contract against assignor.  The trial court granted summary judgment in defendant’s favor on assignee’s complaint, issuing a substantial fee award of $1,430,754.50 (out of a sought-after $1,732,298) against both assignee and assignor.  The trial judge also observed that even if defendant won its cross-complaint in the future, he would be careful to not allow a “double dipping” as far as fee recovery in the cross-action.  Assignor appealed, with Justice Manella affirming on behalf of a 3-0 panel consisting of Presiding Justice Epstein and Justice Willhite. 

            At the outset, Justice Manella addressed the appealability issue even though the appellant failed to discuss it (although a statement of appealability is required in appellate briefs).  Because the award directed the payment of money, and appellant assignor was a guarantor of the fee award against assignee, it was a final determination on an issue collateral to the litigation between defendant and assignor.  (Slip Opn., at p. 4, fn. 7.)

            The appellate court then summarized the standards of review governing fee awards:  (1) the section 1717 prevailing party determination is examined for abuse of discretion, Sears v. Baccaglio, 60 Cal.App.4^th 1136, 1158 (1998); (2) a party’s contractual entitlement to a fee award is reviewed de novo unless there are factual disputes, Exxess Electronixx v. Heger Realty Corp., 64 Cal.App.4^th 698, 705 (1998); and (3) factual findings made in the award, expressed or implied, are examined under the substantial evidence rule, Federal Home Loan Mortg. Corp. v. La Conchita Ranch Co., 68 Cal.App.4^th 856, 860 (1998).  (Slip Opn., at p. 5, fn. 8.)  Good primer on review standards.

            With jurisdictional and review standards out of the way, Justice Manella got to the crux of the matter quickly, determining that the lower court did not err in concluding that assignee was liable for defendant’s fees under Civil Code section 1717 by virtue of assignor’s assignment of rights under a contract between assignor and defendant with a fees clause.  Relying on California Wholesale Material Supply, Inc. v. Norm Wilson & Sons, Inc., 96 Cal.App.4^th 598, 608 (2002), the appellate court found that a signatory defendant has fee entitlement where the nonsignatory plaintiff, if it had won, would have been entitled to a fee recovery under section 1717.  In essence, application of the mutuality principle underlying section 1717 was determinative.  Even though assignee had asserted a fraud claim, the Second District, Division Four sustained the trial court’s implied finding that any work on it was “inextricably intertwined” with issues arising under the covered contractual claims.  (Slip Opn., at pp. 6-7 & p. 7, fn. 9.)

            With respect to assignor’s liability for the defense fees in the assignee-defendant litigation, Justice Manella determined that the assignee’s assumption of an obligation does not necessarily discharge the assignor’s responsibilities regarding the same obligation.  A novation is required from the promisee, with the assignor remaining secondarily liable as a surety or guarantor, citing Witkin’s Summary of California Law treatise on “Contracts.”  This surety reasoning also found support in two fee recovery cases, Erickson v. R.E.M. Concepts, Inc., 126 Cal.App.4^th 1073, 1086-1087 (2005) and Cutting Packing Co. v. Packers’ Exch., 86 Cal. 574, 577 (1890).  (BLOG OBSERVATION—See, who says older cases are not instructive?)

            Defendant, as a creditor, could sue both the principal (assignee) and surety (assignor), and did not have to exhaust remedies against assignee first.  (Slip Opn., at p. 11.)  The Court of  Appeal then rejected assignor’s due process argument, finding that assignor had notice that defendant sought a fee award on a surety basis—with ample opportunity to respond to defendant’s request.  (Slip Opn., at pp. 11-12.)

            Click2Boost is a sobering lesson to assigning parties that fee awards can be issued against them jointly and severally.  Assignors are well advised to think carefully before making an assignment of a contract with a fees clause.  In California, section 1717 will render the clause reciprocal in operation such that nonsignatory plaintiffs face exposure if they would have been entitled to a fee award under the contractual clause.