Fee Clause Interpretation, Section 1717: In San Diego Real Estate Investment Dispute, One Fee Award Of $227,734.32 Reversed While Another Fee Award Of $75,262.50 Affirmed

Whether Fee Clause Was “On The Contract” Or Fell Within The Fee Clause Language Determined The Results In This Case.

            In the attorney’s fees area in California state courts where contractual fee clauses are at issue, key issues are whether a prevailing party actually prevailed “on a contract” for fee entitlement under Civil Code section 1717 or whether a particular successful result on a contract claim fell within the governing language of the fees clause.  Chhatrala Investments, LLC v. Elajou Investment Group, L.P., Case No. D074840 (4^th Dist., Div. 1 Jan. 21, 2021) (unpublished) confronted such issues, which were key in reaching the end results.

            There, plaintiff real estate investors sued to recoup $1.79 million in funds for the sale of a San Diego commercial parcel properly known as the Waterfall Property.  They brought various contractual, tort, common count, and equitable claims against various defendants.  The defendants obtained wins through an eventual demurrer of a third amended complaint which was sustained without leave, a merits ruling affirmed on appeal.  Later, defendant Zephyr obtained $227,734.32 in contractual attorney’s fees, and remaining defendants were awarded $75,262.50 in fees as against the losing plaintiffs.

            The $75,262.50 fee award held up on appeal.  Plaintiffs’ claims were based on breach of a promissory note (based on a fees clause) and foreclosure of the underlying security; as such, the “enforce this Note” language was broad enough to provide fee entitlement.  It did not matter that plaintiff was a nonsignatory on the note because plaintiff claimed entitlement to enforce the note—seeking the benefits of the note gave rise to fee exposure.

            A different result occurred with respect to the $227,734.32 fee award obtained by Zephyr.  That one was reversed because Zephyr only prevailed on tort-based and common count claims, ones which were not “on the contract” under section 1717 (an essential component of recovery under this statute).  Zephyr’s main fallback was that it prevailed on affirmative defenses involving the contract so as to provide entitlement, but this argument was dispatched by the Mountain Air decision to the contrary [our Leading Case #22] and by the wording of the fees clause which only applied to “commenced” litigation rather than affirmative defenses.