California Civil Code Section 1717 Provides for Mutuality of Remedy in Favor of a Third Party Beneficiary

Posted on January 31, 2012 by David J. McMahon

In Cargill Inc. v. Souza, 2011 DJDAR 17680 (2011), the California Court of Appeal for the Fifth Appellate District decided a novel case relating to the attempt by a litigant’s attempt to enforce a fee clause in a contract against a purported third party beneficiary of the agreement.

The Teixeiras borrowed $1 million from the Souzas to buy cattle and farm equipment. The Teixeiras executed a promissory note (the “Note”) and a security agreement (the “Agreement”) in favor of the Souzas. The Note and the Agreement created a security interest on behalf of the Souzas in the cattle and farm equipment. In addition, the Teixeiras bought feed from Cargill Inc. The feed purchase resulted in a further unsecured indebtedness in favor of Cargill in the sum of $262,000.

The Teixeiras soon defaulted on the promissory notes.

They executed a Transfer Agreement (“Transfer Agreement”) with the Souzas. Under the Transfer Agreement, the Souzas agreed to pay the Teixeiras’ outstanding obligations listed on an exhibit to the Agreement. By omission, the exhibit was not completely filled out. The Transfer Agreement had a prevailing party fee clause indicating that the winner of any dispute arising under the Transfer Agreement would be entitled to reasonable attorney fees.

The bill for feed was never paid. Eventually, Cargill brought suit to collect the unpaid invoice. Cargill alleged that the Souzas failed to pay the Teixeiras’ obligation owed to Cargill for the unpaid feed bills. Cargill alleged that it was a third party beneficiary of the Transfer Agreement. The Souzas moved for summary judgment and the trial court granted the Souzas’ motion. The Souzas moved for attorney fees, but the trial court denied the motion.

The court of appeal reversed the decision of the trial court. The court of appeal noted that under Civil Code Section 1717 in an action on a contract, if a non‑party to the Agreement sues a signatory party and the signatory defendant prevails, the signatory defendant is entitled to attorney fees if the nonsignatory plaintiff would have been entitled to fees in the case had they won the litigation. 

Because Cargill was a third party beneficiary of the Transfer Agreement, and would have been entitled to fees if it had won, the court of appeal concluded that the Souzas were entitled to reasonable attorney fees as the prevailing party under the reciprocal provisions of Civil Code Section 1717.

 

Legally Separate Cause of Action Supports a Fee Award Under Civil Code Section 1717

Posted on December 13, 2011 by David J. McMahon

In CDF Firefighters v. Maldonado, 2011 DJDAR 15709 (2011), the California Court of Appeal for the Fifth District decided a complex case involving a claim for fee recovery arising under California Civil Code Section 1717. That statute is designed to ensure mutuality of a remedy for attorney fee claims under contractual attorney fee provisions. The case arose out of a labor union dispute.

CDF Firefighters is a labor union for California wild‑land firefighters. One of the members of the CDF labor union filed charges against two other members. He alleged that the two members conspired to violate his right to attend a conference and to vote during the proceedings.

The aggrieved member filed formal charges and a CDF Committee sustained the charges against one of the members. The CDF Committee levied a $743 fine against that member. At that point, the case and the related proceedings get complex, factually and procedurally.

Subsequently, another former CDF labor union member filed charges against the same two CDF members involved in the first case. The member alleged that the two other members refused to comply with their trustee obligations. As a result, both members were expelled from CDF membership and fined more than $22,000 each. Those members refused to pay the fines. CDF then sued them for breach of contract. Ultimately, the fines were found to be invalid by the court. In an effort to avoid a fee award, CDF then dismissed its remaining claims.

The defendant then moved for an award of attorney fees under Civil Code Section 1717 contending he was the prevailing party. The trial court denied the motion, concluding that CDF’s dismissal of the remaining claims essentially ended the action. The defendant appealed and the appellate court reversed.

The court of appeal stated that in contractual litigation, the party prevailing on the claim is entitled to attorney fees under Section 1717. However, there is no prevailing party for purposes of Section 1717 if an action has been voluntarily dismissed. The court then drew a highly technical distinction and concluded that CDF’s dismissal of the remaining claims was not sufficient to bar the claim for reasonable attorney fees.

 

An Employer is Eligible to Recover Costs Under Labor Code Section 1194

Posted on November 21, 2011 by David J. McMahon

In Plancich v. United Parcel Service Inc., 198 Cal. App. 4th 308 (2011), the California Court of Appeal for the Fourth Appellate District decided a unique issue relating to the recovery of costs under the California Labor Code. The case arose out of the plaintiff’s claim that United Parcel Service (“UPS”) failed to pay the plaintiff proper overtime wages and related compensation.

Larry Plancich (“Plancich” or “Plaintiff”) was a supervisor for UPS. He sued UPS, alleging failure to pay proper wages for overtime compensation as well as unfair competition. He alleged that he worked more than 40 hours per week, and UPS had misclassified him as an exempt employee. The judge ruled in favor of UPS on the unfair competition cause of action. Subsequently, a jury found in favor of UPS on the remaining claims.

The trial court awarded costs to UPS. The amount of the cost award was not decided. 

UPS filed a memorandum of costs amounting to $38,387.20. The Plaintiff moved to strike costs, arguing that an employer may not recover costs, even where it arises from an employee’s claim for overtime compensation under Labor Code Section 1194 which is not successful. In response, UPS argued that Code of Civil Procedure Section 1032(b) required that costs be awarded to the prevailing party, whether it be the employee or employer. The trial court struck the costs request.

The Court of Appeal reversed under Section 1032(b). 

The Court noted that a prevailing party is entitled as a matter of right to recover costs in any action, unless the applicable statute provides an express exemption from cost recovery. Section 1194 gives a prevailing employee in an action for overtime compensation an avenue to recover attorneys’ fees and costs. Because the Court concluded that the statute does not contain express language excluding a prevailing employer from recovering costs, a cost award was appropriate.

 

Attorney Fee Award Overturned in Tobacco Litigation

Posted on May 16, 2011 by David J. McMahon

In a significant case captioned In re Tobacco Cases I, 2011 DJDAR 4896 (2011), the California Fourth District Court of Appeal overturned an award of attorney fees.

The case arose from a consent decree which was entered into between most states, including California and several tobacco manufacturers. The consent decree was finalized in 1998.

A key section of the consent decree permanently enjoined R.J. Reynolds Tobacco Company (“Reynolds”) from using cartoons in tobacco advertising. The plaintiffs alleged that the use of the cartoons was inappropriate as it made the product appealing to children.

In 2007, Reynolds placed tobacco ads in Rolling Stone Magazine. The ads were placed by the editor of Rolling Stone, next to editorial content which contained cartoon images.

A plaintiff in the case, the State of California, brought proceedings to enforce the decree prohibiting the use of cartoons in advertising. After a hearing, the court concluded that only a part of the advertisement violated the cartoon prohibition, and that Reynolds was not responsible for the placement of its ad in the magazine. On those grounds, the court refused to issue further relief.

Despite the court’s ruling, the State of California submitted a petition for attorney fees under the provisions contained in the consent decree. Part of those provisions allowed for attorney fees in any proceedings resulting in a finding that the defendant was in violation of the injunction.

The court awarded attorney fees to the State pursuant to Civil Code Section 1717. Reynolds asserted that Section 1717 was inapplicable, that the State was not a successful litigant and filed an appeal.

The court of appeal reversed and remanded the award of fees. The court noted that Section 1717 set forth the grounds for a fee award in a contract action. It provides for attorney fees to the prevailing party. A prevailing party is one who recovers “greater relief” in the litigation. The trial court has discretion to find that no prevailing party exists when the results of the litigation are mixed.

The court of appeal concluded that Section 1717 applied as the injunction was in the nature of a contract. It was entered into with mutual agreement between the State and Reynolds. Thus, Section 1717 applied.

However, the fee award was improper as the State did not recover the “greater relief” it had sought. The People were not a “prevailing party” and the fee award was reversed.

Lower Court Properly Reinstates Arbitration Award Granting Fees

Posted on April 26, 2011 by David J. McMahon

In Lee v. Kwong, 2011 DJDAR 4599 (2011), a panel from the California Fifth District Court of Appeal affirmed the lower court’s decision to reinstate an arbitrator’s decision, granting a fee award.

Audrie Lee (“Lee”) entered into an agreement for the purchase of a restaurant business with David and Alice Kwong (“Kwong”). The agreement included an arbitration clause as well as an attorney fee provision. That provision provided for an award of fees in favor of a prevailing party in any dispute arising from the agreement.

The parties agreed to judicial arbitration when the dispute arose. The sale of the business failed to close in a timely manner. The arbitrator denied Lee’s claims and awarded attorney fees to the Kwongs. Lee requested a trial de novo, but later filed a request for dismissal, which the clerk promptly entered as requested.

The trial court granted the Kwongs’ motion to vacate the dismissal filed by Lee. The court entered judgment to the Kwongs and awarded attorney fees pursuant to the parties’ agreement. Lee argued that the action of the lower court went too far, and exceeded its jurisdiction by vacating the dismissal and reinstating the award.

The court of appeal affirmed, noting that a plaintiff is allowed to voluntarily dismiss an action before the commencement of trial. After entry of a voluntary dismissal, the trial court would not have any power to issue further orders in the case.

However, the court of appeal noted that the phrase “commencement of trial” is not restricted to only jury or court trials on the merits. The court noted that the term also includes pretrial process and procedures that dispose of litigation. The court of appeal noted that Lee’s reliance on the statute was misplaced. The arbitration was effectively a trial on the merits. 

For these reasons, the court of appeal ruled that the trial court did not err in vacating the dismissal and affirming the fee award.

Is It Becoming Near Impossible for a Prevailing Defendant to Collect Its Fees?

Posted on February 9, 2011 by Gary A. Bresee

Once again, the Ninth Circuit Court of Appeals has reversed a District Court decision granting a prevailing defendant its attorneys' fees and costs. 

In R.P. v. Prescott Unified School District, 09-15651 (9th Cir., Feb. 4, 2011), the parents of an autistic child brought an administrative action under the Individuals with Disabilities Education Act (IDEA) against the School District, alleging the District failed to provide their child with free, appropriate public education. 

When an administrative law judge ruled against them, the parents appealed to the District Court alleging the same IDEA violations, but also included claims under the Americans with Disabilities Act (ADA) and the Rehabilitation Act. 

The District Court not only found for the School District, but also found the parents' action both without foundation and brought for an improper purpose, consquently awarding the District its attorneys' fees and costs. 

While the Ninth Circuit generally affirmed the substantive portion of the lower court's decision, it reversed the fee award.  

The court determined the action was not unfounded, citing to the parents' claim for additional education, which was a remedy available to them under the IDEA statutory scheme. The parents had made plausible arguments; the fact that their arguments did not carry the day did not make those arguments automatically frivolous.

Similary, the court determined the action was not brought for an improper purpose. 

If the claims were not frivolous, then as a matter of law they could not have been filed for an improper purpose. Moreover, the non-IDEA claims were not frivolous either, because the parents would have had plausible claims under the ADA and Rehabilitation Act, but they were not allowed to amend their complaint after the cutoff date for amended pleadings.

While it is not impossible for a prevailing defendant to collect its statutory fees from a plaintiff, the burden of proof can be daunting in most instances.

Attorney Fee Award is Appropriate Based on Successful Forum Non Conveniens Motion

Posted on December 15, 2010 by David J. McMahon

 

The California Court of Appeal for the Fourth District recently decided a novel fee question. In PNEC Corp. v. Meyer, 2010 DJDAR 17387 (2010), the trial court awarded attorney fees to the Defendant after a successful motion to dismiss on the grounds of inconvenient forum (CCP § 418.10(a)(2).

The plaintiff, PNEC Corp., sued the Defendant for breach of guaranty. Plaintiff alleged that it provided Defendant with products and that she failed to pay for them. Plaintiff based its fee claim on a written guaranty of payment signed by Defendant, stating that the customer will be required to pay attorney fees if the account is referred to an attorney for collection.

Plaintiff filed suit and Defendant’s counsel moved alternatively to quash service of process due to lack of personal jurisdiction, or to dismiss the action due to inconvenient forum. Defendant proved that she lived in Washington. She submitted additional proof that she had never worked or initiated a lawsuit in California.

The trial court granted the motion to dismiss. The court also awarded Defendant $21,667.25 in attorney fees as the prevailing party. Plaintiff claimed that the attorney fee award was improper as a litigant is never entitled to a fee award based on dismissal of an action on forum non conveniens grounds.

The court of appeal affirmed, noting that under Civil Code Section 1717(a), in any action on a contract that provides for attorney fees, the party determined to be the prevailing party on the contract is entitled to attorney fees. 

The court held that if the action on a contract is dismissed based on forum non conveniens, the trial court may award attorney fees to the moving party where the contract has a fee clause. Because the lawsuit was based on the collection efforts, it triggered the attorney fee provision. For these reasons, the trial court award of fees to the Defendant was proper.

 

Injunctive Relief Related Fee Awards are Subject to Automatic Stay Pending Appeal

Posted on September 3, 2010 by David J. McMahon

In Chapala Management Corp. v. Stanton, 2010 DJDAR 11821 (2010) the court of appeal reviewed the trial court’s grant of an injunction and an attorneys’ fees award. Subsequent to granting the fee award, the court ordered that a bond was required from Appellants to stay the collection of the fee award, pending appeal of the decision. Appellants then filed a petition for a writ of supersedeas. Appellants argued that a bond was not required to stay the fee award as it was tantamount to an award of costs relating to a claim for injunctive relief.

The dispute commenced when Appellants’ replaced two windows in their condominium in violation of the Covenants, Conditions and Restrictions (“CCRs”) of their Condominium Association (“Association”). Appellants used colored windows in their replacement project, despite the Association’s denial of their application to use that type of an improvement. The Association filed suit against Appellants for violation of the CCRs. 

After a hearing the trial court ordered the Appellants to modify or replace their windows and that they were required to obtain the Association’s approval prior to doing so. The appeal followed and the Appellants refuse to post an undertaking as ordered by the trial court. The Appellants petitioned for writ of supersedeas, arguing an undertaking was not required to stay an award of costs made in connection with a judgment for injunctive relief.

The appellate court noted that under Code of Civil Procedure Section 916, routine or incidental items of costs of injunctive relief are automatically stayed pending an appeal. The court of appeal noted that the trial court made the fee award pursuant to Civil Code Section 1354. That Code Section provides that in an action to enforce “governing documents,” the prevailing party shall be awarded reasonable attorney fees and costs. 

The court of appeal concluded that because attorney fees were expressly provided for under Section 1354, such an award was a matter of right, and therefore routine. Thus, the attorney fee award did not require the posting of a bond.

 

Attorney Fees Awards Subject to Offset Litigants' Preexisting Debts to the U.S. Government

Posted on June 21, 2010 by David J. McMahon

 

In Astrue v. Ratliff, 2010 DJDAR 8875 (2010), the United States Supreme Court held that attorney fees awards are properly payable to the litigant, not to her attorney. For this reason, a fee award is subject to an offset where the litigant owed the government a preexisting debt.

Ruby Ree (“Ree”) successfully sued the Social Security Administration (“SSA”) for benefits. Her attorney was Catherine Ratliff (“Ratliff”). Ree filed a successful motion for attorney fees which was not opposed by the government. Before the government reimbursed Plaintiff for the fee award, it discovered Ree owed the United States a debt that predated the award. The government sought an administrative offset against the award. Counsel for the prevailing party, Ms. Ratliff, intervened challenging the offset on the grounds that the fee award belonged to her, as a litigant’s attorney, and thus could not satisfy the litigant’s debts. The district court disagreed, but the appeals court agreed with Ratliff. The issue was then appealed to the United States Supreme Court.

The high court reversed and remanded the decision of the court of appeal. 

The court specifically stated its longstanding view of the term “prevailing party.”  The court noted that in attorney fees statutes that term refers to the “prevailing litigant.” Statutes that mean to distinguish the attorney from the litigant in fees cases do so explicitly. The court also stated that the word “award” in the litigation context means giving or assigning by judicial decree. Here, the Equal Access to Justice Act provides for the court to “award” the “prevailing party” attorney fees. As such, an attorney fees award is payable to the litigant rather than to the attorney. Because the award is properly payable to the litigant it is subject to an offset for the preexisting debt.