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Zislis v. Nam, Case No. B143706 (2d Dist., Div. 5 Nov. 21, 2001) (unpublished) involved a letter of intent (LOI) entered into between plaintiff tenants and defendant landlords, containing an agreement on many material terms, a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.4th 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.4th 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.4th 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.
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