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     In Khazan v. Braynin, Case No. A114369 (1^st Dist., Div. 4 Mar. 30, 2009) (unpublished), plaintiffs did prevail on note foreclosure actions involving $300,000 and $57,000 promissory notes, although they did not recover on their fraud and RICO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.

     Initially, the appellate court determined that the note fee clauses were not broad enough to cover tort claims, lacking the broader “arising out of” or “relating to” language that frequently allowed fee clauses to have wider application. (Accord, Loube v. Loube, 64 Cal.App.4^th 421, 429-430 (1998); Exxess Electronixx v. Heger Realty Corp., 64 Cal.App.4^th 698, 702, 708-709 (1998).) This led the appellate panel to then consider whether plaintiff had to apportion time between the successful covered contract and unsuccessful non-covered tort claims.

     Although apportionment will not be required where the claims involve a common nucleus of facts and some of the attorney work arose from issues common to both claims, the appellate panel did find that some proof was not relevant to the contract-based claims, but was little more than an effort to paint the defendants as “bad guys.” These dalliances into peripheral character assassinations did not the constitute the type of work that should be paid for by defendants. (Cf. Boquilon v. Beckwith, 49 Cal.App.4^th 1697, 1723 (1996) [fees spent on “bad actor” portrayal evidence—which was unsuccessful—should not be recovered by plaintiffs].)

     Most importantly, the Court of Appeal reasoned that the lodestar in section 1717 cases should be reduced where the winning litigants only achieve limited success. (Hogar Dulce Hogar v. Community Development Com. of City of Escondido, 157 Cal.App.4^th 1358, 1369 (2000); Sokolow v. County of San Mateo, 213 Cal.App.3d 231, 250 (1989); Harman v. City and County of San Francisco, 158 Cal.App.4^th 407, 415-418 (2007).) “If the successful and unsuccessful claims are found to be related, the court proceeds to the second step of the two-part analysis in limited success cases: In that case, the court should ‘evaluate the “significance of the overall relief obtained by the plaintiff in relation to the hours reasonably expended on the litigation.” [Citation omitted.] If the plaintiff obtained “excellent results,” full compensation may be appropriate. [Citation omitted.] If there was only “partial or limited success,” full compensation “may be …excessive.” [Citation omitted.] Where “’plaintiff achieved only limited success,’” the court “’should award only that amount of fees that is reasonable in relation to the results obtained.’ [Citation.] In conducting this analysis, a court ‘may attempt to identify specific hours that should be eliminated, or it may simply reduce the award to account for the limited success.’” (Slip Opn., at pp. 16-17.) This test was found to apply “with at least equal force” to the section 1717 case before the court, where the parties had agreed by contract to an award of fees for the cost of collecting on the notes. Plaintiffs’ limited success deserved more consideration.

     The panel then confronted defendants’ argument that plaintiffs’ “block billing” made it impossible for the trial court to apportion work between various claims. Although noting that it was not to be condoned, the Court of Appeal did observe that the trial court could accept trial counsel’s explanation that “trial preparation” was accurately recorded to encompass certain tasks described with more precision in his supporting fee declaration. (See Nightingale v. Hyundai Motor America, 31 Cal.App.4^th 99, 102-103 (1994).) Ultimately, the First District followed the stance set forth in Bell v. Vista Unified School Dist., 82 Cal.App.4^th 672, 689 (2000), with the lower court exercising discretion to either assign a reasonable percentage to the “block billed” entries or set them aside completely.

     The fee award was reversed and remanded for consideration of the factors that were found to be worthy of further review.