Morrison Law Journal


The Morrison Law Journal February 2018 Volume XIII, Edition 2 A Victory for the Trial Court in Contract Disputes: Court of Appeal Affirms Discretion of the Trial Court in Determining Whether a Litigant to a Contract Dispute Is a Prevailing Party Entitled to Attorney's Fees By: Edward F. Morrison, Jr., Esq. Larry A. Schwartz, Esq.
In California, attorney's fees are recoverable in a contract dispute so long as the dispute arises from the contract and the contract calls for attorney's fees to be awarded to the prevailing party. See, Civil Code § 1717. However, much debate has occurred over the years as to whether a party to a contract with an attorney's fee clause, which has substantially succeeded in obtaining its objectives - but not all of its objectives - is entitled to attorney's fees as a prevailing party. The California Supreme Court in Hsu v. Abbara (1995) 9 Cal.4th 863 ruled that - based upon the language of Civil Code § 1717 - the Trial Court may determine there is no party prevailing on the contract if, in its opinion, the results of the litigation are mixed. In making such a determination, the Trial Court is to compare the relief awarded on the contract claim or claims with the parties' demands on those claims and the parties' litigation objectives based upon the pleadings and evidence in the litigation. This past month, the California Court of Appeal, Second District, in the matter Marina Pacific Homeowners Association v. Southern California Financial Corporation (2018) Westlaw 70311 ("Marina Pacific"), confirmed that the discretion invested in the Trial Court is sufficiently broad such that a party which succeeds in reducing its contractual liability, but not voiding it, and which faces a judgment which will result in significant liability, may not owe attorneys' fees based on a finding that no "party prevailed on the contract" for purposes of Civil Code § 1717. In the Marina Pacific case, substantial litigation occurred over assignment fees that were due to a developer of a complex in Long Beach. In that case, the original unit owners acquired an ownership interest in their individual units and a share of an undivided leasehold interest on the land in which the complex was built (with the developer apparently retaining the fee interest in the land). The fees were to be relatively nominal until October 2006, when the monthly rent would significantly increase, and there would also be an assignment fee in addition to the rent (payments of rent and assignment fees were owed through 2041). As relevant to this article, the Plaintiff owners association bought the land underlying the development and sold pro rata shares to the individual unit owners, thus terminating rent payments. However, insofar as the assignment fees, the Plaintiff owners association was only able to buy out the rights to assignment fees from two of the three development partners, leaving one partner, who had retained a 43.75 percent interest in 1 the assignment fees, demanding fees. Litigation began in 2005 between the Plaintiff and the original development partner which had declined to sell his assignment rights. In 2009, the Plaintiff association instructed the unit owners not to pay the assignment fees billed by the development partner and sued the development partner. The Plaintiff owners association's Complaint alleged numerous causes of action, including breach of contract, and asserted that the assignment fees were either void or excessive. As for the fees being excessive, a principal question involved whether the assignment fees were to be based on a ten percent (10%) fair market level or four percent (4%) fair market level. At trial, the Plaintiff owners association did not prevail on its voidness argument, but did prevail on its argument that the assignment fees should be calculated at the four percent level (4%). The Plaintiff argued that achieving a judgment at the four percent (4%) level resulted in an overcharge of $58 million. Both sides demanded attorney's fees as prevailing parties. The Plaintiff argued that it had prevailed because the judgment of the Trial Court had resulted in a $58 million reduction in amounts owed. The Defendant argued that the judgment established a present right to approximately $12 million in assignment fees and a future right to obtain an additional $27 million in assignment fees (essentially not contesting the $58 million reduction). The Trial Court determined that neither side had prevailed and did not award attorney's fees to either side. On appeal, the Court of Appeal analyzed the California Supreme Court's decision in Hsu v. Abbara (1995) 9 Cal.4th 863, as well as, among other decisions, Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1003, and held that the Trial Court did not abuse its discretion in determining that neither side had prevailed. In its opinion, the Court of Appeal noted that there was no "doubt" that the Plaintiff had attempted to eliminate the fee in its entirety. However, the Court of Appeal ruled that the Plaintiff's failure in that objective did not cancel out its success in reducing the assignment fees by an enormous amount ($58 million). The Court of Appeal ruled that a party's failure to obtain its preferred litigation objective did not mean that the other party is "ipso facto" the prevailing party. The Court of Appeal also noted that there had been settlement discussions (not in a statutory offer) which suggested that the Defendant may have been willing to accept assignment fees at a four percent (4%) level. However, the Court of Appeal declined to use that as a basis to overturn the decision of the Trial Court. The Marina Pacific case is important in that it highlights the discretion to award attorney's fees which is imbued in the Trial Court. About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com. 2 Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com. Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter. 3

In California, attorney's fees are recoverable in a contract dispute so long as the dispute arises from the contract and the contract calls for attorney's fees to be awarded to the prevailing party. See, Civil Code § 1717. However, much debate has occurred over the years as to whether a party to a contract with an attorney's fee clause, which has substantially succeeded in obtaining its objectives - but not all of its objectives - is entitled to attorney's fees as a prevailing party. The California Supreme Court in Hsu v. Abbara (1995) 9 Cal.4th 863 ruled that - based upon the language of Civil Code § 1717 - the Trial Court may determine there is no party prevailing on the contract if, in its opinion, the results of the litigation are mixed. In making such a determination, the Trial Court is to compare the relief awarded on the contract claim or claims with the parties' demands on those claims and the parties' litigation objectives based upon the pleadings and evidence in the litigation.

This past month, the California Court of Appeal, Second District, in the matter Marina Pacific Homeowners Association v. Southern California Financial Corporation (2018) Westlaw 70311 ("Marina Pacific"), confirmed that the discretion invested in the Trial Court is sufficiently broad such that a party which succeeds in reducing its contractual liability, but not voiding it, and which faces a judgment which will result in significant liability, may not owe attorneys' fees based on a finding that no "party prevailed on the contract" for purposes of Civil Code § 1717.

In the Marina Pacific case, substantial litigation occurred over assignment fees that were due to a developer of a complex in Long Beach. In that case, the original unit owners acquired an ownership interest in their individual units and a share of an undivided leasehold interest on the land in which the complex was built (with the developer apparently retaining the fee interest in the land). The fees were to be relatively nominal until October 2006, when the monthly rent would significantly increase, and there would also be an assignment fee in addition to the rent (payments of rent and assignment fees were owed through 2041).

As relevant to this article, the Plaintiff owners association bought the land underlying the development and sold pro rata shares to the individual unit owners, thus terminating rent payments. However, insofar as the assignment fees, the Plaintiff owners association was only able to buy out the rights to assignment fees from two of the three development partners, leaving one partner, who had retained a 43.75 percent interest in

the assignment fees, demanding fees. Litigation began in 2005 between the Plaintiff and the original development partner which had declined to sell his assignment rights.

In 2009, the Plaintiff association instructed the unit owners not to pay the assignment fees billed by the development partner and sued the development partner. The Plaintiff owners association's Complaint alleged numerous causes of action, including breach of contract, and asserted that the assignment fees were either void or excessive. As for the fees being excessive, a principal question involved whether the assignment fees were to be based on a ten percent (10%) fair market level or four percent (4%) fair market level.

At trial, the Plaintiff owners association did not prevail on its voidness argument, but did prevail on its argument that the assignment fees should be calculated at the four percent level (4%). The Plaintiff argued that achieving a judgment at the four percent (4%) level resulted in an overcharge of $58 million.

Both sides demanded attorney's fees as prevailing parties. The Plaintiff argued that it had prevailed because the judgment of the Trial Court had resulted in a $58 million reduction in amounts owed. The Defendant argued that the judgment established a present right to approximately $12 million in assignment fees and a future right to obtain an additional $27 million in assignment fees (essentially not contesting the $58 million reduction).

The Trial Court determined that neither side had prevailed and did not award attorney's fees to either side. On appeal, the Court of Appeal analyzed the California Supreme Court's decision in Hsu v. Abbara (1995) 9 Cal.4th 863, as well as, among other decisions, Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1003, and held that the Trial Court did not abuse its discretion in determining that neither side had prevailed. In its opinion, the Court of Appeal noted that there was no "doubt" that the Plaintiff had attempted to eliminate the fee in its entirety. However, the Court of Appeal ruled that the Plaintiff's failure in that objective did not cancel out its success in reducing the assignment fees by an enormous amount ($58 million). The Court of Appeal ruled that a party's failure to obtain its preferred litigation objective did not mean that the other party is "ipso facto" the prevailing party. The Court of Appeal also noted that there had been settlement discussions (not in a statutory offer) which suggested that the Defendant may have been willing to accept assignment fees at a four percent (4%) level. However, the Court of Appeal declined to use that as a basis to overturn the decision of the Trial Court.

The Marina Pacific case is important in that it highlights the discretion to award attorney's fees which is imbued in the Trial Court.

About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.

Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com.

Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter.