Tuesday, September 17, 2013

Fee Estoppel Under Civil Code § 1717

Brown Bark III LP v. Haver, No. G047198 (D4d3 Sept. 13, 2013)

Plaintiff sued defendant for failure to repay money owed on a line of credit. Defendants weren’t a party to the credit agreement; plaintiff pursued them on alter ego and successor liability theories as well as for conversion and fraud. Defendants won at trial. Because the underlying credit agreement had an attorneys’ fees provision, defendant sought a fee award, which the trial court denied. Defendants appealed. 

The court of appeal recognized the case addressed Civil Code § 1717’s mutuality rules for contractual attorneys’ fees clauses under Civil Code § 1717. These have two aspects. First, § 1717 makes an attorneys’ fees clause drafted in favor of only one party reciprocal for any cause of action for breach of contract. Second, § 1717 “allows a party who defeats a contract claim by showing the contract did not apply or was unenforceable to nonetheless recover attorney fees under that contract if the opposing party would have been entitled to attorney fees had it prevailed.” The second aspect applies even when a non-party to the contract is sued under a theory that seeks to make it liable on the contract’s obligations. Although the quintessential case on this point involves an alter ego theory, the court found little difficulty finding that the same rule applied to a theory successor liability. Thus, because one defendant had prevailed on the contract claim based on successor liability, and because the contract had a fee provision, the trial court erred in failing to award fees on the contract claim. The fact that the plaintiff had never submitted the contract case to the jury and that it had previously obtained a default judgment against the defendant’s predecessor did not preclude the defendant from being the prevailing party.

But the same rule did not apply to tort claims since § 1717 applies only to claims arising from breaches of a contract. Thus, § “1717’s reciprocity principles therefore make a unilateral attorney fees provision reciprocal only on contract claims; they do not make a unilateral provision reciprocal on tort claims.
Although the contract at issue did provide for fees on related tort claims, it was unilateral and thus could not be invoked by the defendant. Thus, the trial court would need to address allocation between the contract and tort fees on remand. The court noted that any fees incurred for aspects of the defense that were “inextricably intertwined” between the contract and tort theories did not need to be apportioned.

Reversed and remanded.

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