However, Majority Still Allows Fee Recovery Based On Interrelatedness Of Two Agreements In Overall Action, Although Dissent Finds This Result Unwarranted.
Today, the California Supreme Court came out with an important fee decision in the form of Mountain Air Enterprises, LLC v. Sundowner Towers, LLC, Case No. S223536 (Cal. Supreme Court July 31, 2017) (published). Although unanimous on the first issue, there was a 4-3 split decision on the second issue.
The matter arose out of a complicated real estate transaction by which a plaintiff brought both a specific performance and breach of repurchase agreement action against the defense. Two agreements were involved in the case, an option agreement and a repurchase agreement. The defense raised an affirmative defense of novation based on the option agreement, a defense that was successful. It did prevail eventually, but the trial judge concluded no fee recovery was allowable because the assertion of an affirmative defense did not fall within the definition of the option agreement fees clause allowing recovery when “an action” or “a proceeding” was brought. The appellate court disagreed on the affirmative action issue, although there was a split in authority between Exxess/Gil (no recovery) and Windor (recovery). We posted about the appellate decision way back on November 21, 2014. The state supreme court granted review to resolve this split.
On the affirmative defense issue, all seven justices agreed that fees should not be recovered because an affirmative defense was not the equivalent of an action or a proceeding for purposes of the option agreement fees clause.
However, the majority (four justices) found the defense still was entitled to recovery based on the fact that the case involved inextricably intertwined connections between the two agreements, although the fees clause was in the option agreement and plaintiff had sued to compel a purchase of a building by the defense based on specific performance action and breach of a repurchase agreement counts (with the repurchase agreement not having a fees clause). The majority expressly declined to articulate the exact nature of the causal link necessary, but found the issues arising under the two agreements were “inextricably intertwined” under the “because of” language in the option agreement fees clause. The minority (3 justices) did not agree that there was a sufficient connection such that they dissented from the majority’s interpretation of the fees clause language.
BLOG OBSERVATION—The majority was comprised of Justices Chin (author), Cantil-Sakauye (Chief Justice), Werdegar (who is retiring in August of this year), and Cuellar, while the minority justices were Kruger (author of dissent), Corrigan, and Liu. I do believe that the failure to articulate the contours of a “causal link” test, relying only on the Civil Code section 1717 “inextricably intertwined” rubric, will engender further jurisprudence on this point where there are separate contracts or independent legal bundles of rights involved in a particular case.