Attorney’s Fees Not Recoverable As Compensatory Damages Under Uniform Fraudulent Transfer Act or “Tort of Another” Doctrine

 

Fourth District, Division Three Reverses Wide-ranging Fee Award and Remands For Narrower Determination.

     We have seen the litigants in the next case before. (See our posts of June 2, 2008 and August 27, 2008, where the McMahons have suffered adverse fee awards and sanctions in a long-standing battle with a homeowners association.) Here, they obtained a reversal of a substantial fee award made as part of a compensatory damage “prove-up” and a remand for a new trial on the damages issue. In the process, Justice Ikola, writing for a 3-0 panel of our local Court of Appeal, faced some interesting legal issues relating to fee entitlement under the Uniform Fraudulent Transfer Act (UFTA) or the “tort of another” doctrine.

     In Palacio Del Mar Homeowners Assn. v. McMahon (Palacio VI), Case No. G039731 (4^th Dist., Div. 3 Dec. 1, 2008) (unpublished), after McMahons failed to appear at trial, Palacio (the HOA) introduced evidence and was awarded $570,000 in compensatory damages, $250,000 in punitive damages, and an unspecified amount of attorney’s fees and costs. McMahons lost their motion to set aside the judgment, prompting the appeal in Palacio VI.

     They did better this time, because the five other appeals were losses for them.

     The bulk of the compensatory damage award—around $500,000—represented attorney’s fees and costs by Palacio in maintaining the fraudulent transfer action after the much smaller judgment was satisfied. Justice Ikola initially concluded that Palacio could not recover its attorney’s fees as compensatory damages under the UFTA. Because the UFTA authorizes “any other relief the circumstances require subject to the applicable principles of equity and in accordance with applicable rules of civil procedure” (Civ. Code sec. 3439.07(a)(3)(C)), it does not authorize recovery of fees because “applicable rules of civil procedure” include the American rule requiring each side to bear his own costs unless a statute specifically provides otherwise. Nothing in the UFTA specifically provides for fee recovery, with many out-of-state authorities supporting this result. (See, e.g., Gardiner v. York, 153 P.3d 791, 795 (Utah Ct.App. 2006); Volk Constr. Co. v. Wilmescherr Drusch Roofing Co., 58 S.W.3d 897, 901 (Mo.Ct.App. 2001); Morris v. Askeland Enterprises, Inc., 17 P.3d 830, 833 (Colo.Ct.App. 2000); Selvage v. J.J. Johnson & Associates, 910 P.2d 1252, 1264 (Utah Ct.App. 1996); Golconda Screw, Inc. v. West Bottoms Ltd., 894 P.2d 260, 266 (Kan. App. 1995); Spanier v. U.S. Fid. & Guar. Co., 623 P.2d 19, 28-30 (Ariz.Ct.App. 1980).)

     That turned attention to Palacio’s reliance on the “tort of another” doctrine emanating from Prentice v. North Amer. Title Guar. Corp., 59 Cal.2d 618, 620 (1963).

     The problem with McMahons’ reliance on this doctrine is that it properly focuses only upon fees incurred in an action against a third party. (See Golden West Baseball Co. v. Talley, 232 Cal.App.3d 1294, 1302-1303 (1991) [doctrine inapplicable where plaintiff sought to recoup fees from principal for fees incurred against agent; only one true party involved].) If “tort of another” could be stretched this far, Justice Ikola observed, “attorney fees could be recovered in every civil action.” (Slip Opn., at p. 10.) Palacio did not fare better in arguing that fees could be recovered against joint tortfeasors; the doctrine did not allow Palacio to recover from McMahons any fees incurred in prosecuting UFTA claims against any transferees who were joint tortfeasors. (Vacco Industries, Inc. v. Van Den Berg, 5 Cal.App.4^th 34, 57 (1992); but see Filip v. Bucurenciu, 129 Cal.App.4^th 825, 837 (2005).) However, the “tort of another” doctrine did allow potential recovery to Palacio for fees incurred in connection with transfers to innocent transferees (third parties who are not joint tortfeasors), requiring remand to see if Palacio could prove any such fees as “compensatory damages.”

     BLOG UNDERVIEW—Co-contributors Marc and Mike recently surveyed the “tort of another” doctrine in an article entitled “When the American Rule Doesn’t Apply: Attorney’s Fees as Damages in California Legislation,” which was published in Vol. 21, No. 3 of California Litigation (which came out in November 2008). The article can be found on our post of November 13, 2008, and we thank the California State Bar (whose Litigation Section publishes California Litigation) for allowing us to link to it. Our discussion of “tort of another” is at pages 20-22 of the article; for another case that holds that the doctrine does not apply in essentially a two-party lawsuit (even though there may be more nominal parties), see David v. Hermann, 129 Cal.App.4^th 672, 689 (2005).

     Some of you may wonder what happened to the punitive damage award in Palacio VI. That, too, was reversed because Palacio had failed to submit meaningful current evidence of McMahons’ income, expenses, assets, or liabilities, something that is required in California in order to recover punitive damages. (See Baxter v. Peterson, 150 Cal.App.4^th 673, 680 (2007).) Palacio relied on McMahons’ sale of two properties in 2000 and appraisal of their house in 2004, but this information was outdated and said nothing about the sales proceeds/equity involved in the respective situations. No retrial was allowed, because Palacio had a “full and fair opportunity to present [its] case for punitive damages,” citing Baxter, supra, 150 Cal.App.4^th at 681 and Kelly v. Haag, 145 Cal.App.4^th 910, 919-920.

     McMahons finally won an appeal that will likely prevent them from being exposed to the brunt of the $750,000-plus judgment overturned upon review.

     The opinion’s discussion of fees under UFTA and the “tort of another” doctrine is must reading for parties or practitioners confronting these issues.