Prevailing Nonsignatory Defendants, Who Are Sued On A Contract As If A Party To It, Are Entitled To Fees Where Plaintiff Would Be Entitled If Prevailing In Enforcing Contractual Obligation Against Defendant.
In Town & Country etc. v. King City etc., Case Nos. B296864/B303927 (2d Dist., Div. 5 January 29, 2021) (unpublished), two corporate tenants jointly entered into a lease with commercial landlord to build out and operate a restaurant. The principals of the two corporations also individually executed a guaranty. After the restaurant failed to timely open and rents were unpaid, landlord entered into a secured note in the amount of $83,960 (the amount of unpaid rent to that point) plus interest executed by only one of the corporate tenants and its principal. When that note also went unpaid, landlord sued on the note against both corporate tenants, along with the principal of each.
After tenant/principal who had entered into the note defaulted, landlord continued its litigation against the second tenant/principal – claiming the note resulted from a loan of money to both tenants for use in the operation of their restaurant. Landlord later, merely weeks before trial, unsuccessfully sought leave to amend its complaint to add a breach of lease claim and to redefine the secured note as a forbearance agreement on unpaid rent. Following a bench trial, the trial court found in favor of second tenant/principal concluding they were not parties to the note. Afterward, the trial court awarded second tenant/principal $92,622.50 in section 1717 attorney fees pursuant to the fees provision in the note.
Landlord filed two appeals – consolidated by the 2/5 DCA. One challenged the denial of plaintiff’s motion for leave to amend and the trial court’s finding that second tenant/principal was not liable under the note, and the other challenged the postjudgment attorney fees order. Plaintiff’s arguments on appeal went nowhere – with the panel affirming in a 3-0 opinion.
First, landlord’s unwarranted delay in bringing its motion to amend alone was sufficient support for the trial court’s exercise of discretion to deny leave to amend contention. Next, landlord’s contention that second tenant/principal was bound to the note because first tenant/principal signed it for the benefit of the partnership ignored the fact that approximately 18 months prior to execution of the note, second tenant/principal had given notice that the partnership with first tenant/principal had failed and second tenant/principal was “pulling out” of the venture and no longer involved. Finally, as to the fees, landlord argued for the first time on appeal that the attorney fee clause in the note did not apply to second tenant/principal. At trial, landlord had conceded that second tenant/principal was the prevailing party on the note and entitled to fees – contesting only the amount of those fees. Although considering landlord’s argument regarding the attorney fee clause forfeited on appeal, the panel explained that a nonsignatory defendant, sued on a contract as if a party to it, may recover attorney fees when the plaintiff would clearly be entitled to fees if it prevailed in enforcing the contractual obligation against the defendant. (Reynolds Metals Co. v. Alperson, 25 Cal.3d 124, 128 (1979) [our Leading Case No. 5]; Burkhalter Kessler Clement & George LLP v. Hamilton, 19 Cal.App.5th 38, 40-41, 46 (2018) [discussed in our January 9, 2018 post].)
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