Opinion
F073191
02-26-2018
LAIRD JOHNSON, Plaintiff and Appellant, v. DEBRA A. JOHNSON, Defendant and Respondent.
Downey Brand, Janlynn R. Fleener and Katie Konz for Plaintiff and Appellant. Crabtree Schmidt and Michael R. Dennis for Defendant and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 2003744)
OPINION
APPEAL from a judgment of the Superior Court of Stanislaus County. Timothy W. Salter, Judge. Downey Brand, Janlynn R. Fleener and Katie Konz for Plaintiff and Appellant. Crabtree Schmidt and Michael R. Dennis for Defendant and Respondent.
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This appeal involves an award of attorney fees in a dispute between siblings arising out of their real estate partnership. The partnership agreement stated the prevailing party was entitled to recover attorney fees "actually expended" if "litigation is instituted with respect to any matter regarding the covenants in this Agreement." The trial court determined the sister, who won a defense verdict on three tort causes of action submitted to the jury, was the prevailing party and awarded her costs and approximately $135,000 in attorney fees. The brother appealed, arguing he was the prevailing party because the jury awarded him $12,822 on his breach of contract claim.
On the question of costs, we conclude the provisions of Code of Civil Procedure section 1032 apply and the brother meets the statutory definition of "prevailing party" because he is "the party with a net monetary recovery" as that phrase is used in subdivision (a)(4) of the statute. As such, he "is entitled as a matter of right to recover costs in [the] action." (Code Civ. Proc., § 1032, subd. (b).) Therefore, costs should have been awarded to the brother and the award of costs to the sister was erroneous.
On the question of attorney fees, we must interpret the attorney fees provision in the partnership agreement and determine its scope before addressing who, if anyone, was the prevailing party for purposes of attorney fees. Initially, we conclude the attorney fees provision's reference to litigation with respect to any matter "regarding the covenants" of the partnership agreement is ambiguous as to scope. To resolve part of this ambiguity, we conclude the attorney fees provision covers both contractual and noncontractual claims that are part of a dispute "regarding the covenants" of the partnership agreement. Thus, the attorney fees provision is not limited to contractual claims. To resolve the ambiguity as to scope presented by the phrase "regarding the covenants," we interpret "regarding" to mean directly or indirectly relating to the covenants. With these ambiguities resolved, we conclude the entire controversy addressed in the lawsuit was covered by the attorney fees provision because (1) the four causes of action submitted to the jury had either a direct or secondary relationship to the covenants in the partnership agreement and (2) the declaratory relief cause of action decided by the trial court also was directly related to the covenants in the partnership agreement.
As to whether the trial court erred in deciding the sister was the prevailing party for purposes of attorney fees, we conclude Civil Code section 1717 does not apply to the claims for attorney fees and, thus, its definition of "prevailing party" does not apply. The record is unclear about how the trial court interpreted the attorney fees provision and the standards used to determine the sister was the prevailing party. Faced with this uncertainty, the brother made a sufficient demonstration of apparent legal error in connection with that prevailing party determination by showing (1) he was awarded damages by the jury and (2) he achieved prelitigation objectives with a financial benefit to him of over $300,000. (See Gorman v. Tassajara Development Corp. (2009) 178 Cal.App.4th 44, 65, fn. 13.) Thus, there is a reasonable probability he would have been deemed the prevailing party under the proper interpretation of the attorney fees provision. When the record is unclear and the appellant establishes apparent error, "we may reverse the award and remand the case to the trial court for further consideration and amplification of its reasoning." (In re Vitamin Cases (2003) 110 Cal.App.4th 1041, 1052.) Therefore, we remand this matter for the trial court to apply our interpretation of the attorney fees provision and determine which party, if any, prevailed.
All unlabeled statutory references are to the Civil Code.
As to the order imposing sanctions under Code of Civil Procedure sections 128.7 and 1008, subdivision (d), we conclude it did not comply with the mandatory 21-day notice period set forth in subdivision (c)(2) of Code of Civil Procedure section 128.7. Also, the court did not issue an order to show cause "describing the specific conduct that appears to violate" the sanctions statute. (Ibid.)
We therefore reverse the sanctions order, reverse the judgment insofar as it addresses attorney fees and costs, and remand for further proceedings.
FACTS
Plaintiff Laird R. Johnson and defendant Debra A. Johnson, Ph.D., are brother and sister. Laird is a resident of Union County, New Jersey. In 1999, he retired as a colonel in the New Jersey National Guard and in 2007 he retired from his position as a captain with Continental Airlines. Debra is a psychologist and a resident of Stanislaus County, California.
On March 16, 1982, Debra and Laird created a partnership named "D & L Associates" by executing a partnership agreement. The purpose of the partnership was to hold, develop and rent real property. The partnership agreement described the capital contributions of the partners and stated withdrawal of capital or voluntary contributions of capital required the consent of both partners. It also provided for the maintenance of a capital account and an income account for each partner, with each partner's distributive share of profits, losses and withdrawals being credited or debited to his or her income account. The partnership's fiscal year ended on December 31 and its books were kept on a cash basis. As soon as practicable after the close of a fiscal year, a yearly accounting was to be made available to any partner for inspection. The term "net profit" was defined by reference to federal income tax law. The partnership agreement required the partners to divide profits equally during the term of the agreement.
Drawing money out of the partnership was to be done as mutually agreed by Laird and Debra. The partnership agreement stated: "Each of the partners shall be entitled to draw such amounts against profits as shall from time to time be agreed upon by the partners. Such amount shall be reflected in the income account of the partner as it is drawn." The partnership agreement addressed a variety of other matters, such as withdrawal, retirement, disability, or death of a partner; grounds for terminating the other partner; the remaining partner's option to purchase the other's share; and partnership liquidation.
The partnership agreement required the keeping of adequate books and records setting forth an accurate account of all business transactions of the partnership and granted partners "the right at all times to have access to, and to inspect and copy the partnership books." The partnership agreement's attorney fees provision, the interpretation of which is an issue in this appeal, states in full: "In the event that litigation is instituted with respect to any matter regarding the covenants in this Agreement, the prevailing party shall be entitled to an award of attorney's fees actually expended and costs actually incurred."
Debra managed the day-to-day affairs of the partnership, including maintaining its books and financial records. The partnership eventually owned two commercial properties in Modesto and three residential properties. Debra's psychology business, which she conducted through a California corporation, operated out of commercial properties owned by the partnership. In 2007, the partnership acquired its last property, which was located on Roth Court in Turlock and was the residence of Debra's wife. The mortgage for the Turlock property was about $220,000 and was taken out in Laird's name.
Another residential property held by the partnership was a beach house in Harvey Cedars, New Jersey. It had been built by their parents and was passed to Debra and Laird upon the death of their mother in 1994. In 2007, at Debra's request, Laird took out a $175,000 mortgage on the beach house and sent the money to Debra for use by the partnership.
In 2009, Laird began to have questions about how the partnership was being run. He flew to California, looked at some financial records, but did not receive a full copy of the books and had a difficult time getting in to look at the property. After further requests for financial information were not satisfied, Laird contacted a law firm.
PROCEEDINGS
The First Lawsuit
In April 2010, Laird filed a lawsuit against Debra in Stanislaus County Superior Court (the "first lawsuit"). The complaint alleged causes of action for accounting, breach of fiduciary duty, breach of the partnership agreement, conversion and appointment of receiver.
In June 2012, the parties agreed to mediation. At the end of the mediation, Laird and Debra signed a two-page handwritten settlement agreement. Debra agreed to give up her 50 percent interest in the beach house in New Jersey and Laird agreed to give up his 50 percent interest in the California properties. Any California property in Laird's name was to be transferred by quitclaim deed to Debra and she was to assume the mortgages on the California properties. The monthly mortgage payments on the New Jersey beach house were to be made by the partnership until December 31, 2012. Debra agreed to pay Laird $150,000 no later than December 31, 2012, and to transfer her interest in the New Jersey property to Laird by quitclaim deed. The parties agreed to other terms about Laird's withdrawal from the partnership, effective January 1, 2013; the partnership's income tax returns; the filing of a notice of conditional settlement; and the filing of a dismissal with prejudice by January 2, 2013. The settlement agreement did not include an attorney fees provision.
The parties were unable to agree to the terms of a formal settlement agreement. Debra filed a motion under Code of Civil Procedure section 664.6 to enforce the handwritten settlement agreement, which was granted in November 2012. A judgment to that effect was filed.
Debra did not perform the terms of the settlement agreement by December 31, 2012. She did not make the $150,000 payment to Laird and did not pay off or have the mortgage on the Turlock property transferred to her name. The Second Lawsuit
In February 2013, Laird filed a second complaint against Debra in Sacramento County Superior Court. The summons and complaint was personally served on Debra on July 1, 2013. The complaint alleged a cause of action for breach of contract relating to the settlement agreement and a cause of action for declaratory relief relating to the parties rights and obligations as partners in D & L Associates. The second action was eventually transferred to Stanislaus County following a motion and order for change of venue.
In March 2013, Debra made the $150,000 payment required by the settlement agreement and stated she was ready to pay off the mortgage on the Turlock property. She asserted her inability to perform on time was caused by Laird's delaying the process.
On December 26, 2013, Debra paid off the mortgage on the Turlock property. In January 2014, Laird filed a first amended complaint alleging causes of action (each primarily related to the mediation and settlement agreement) for (1) breach of contract, (2) negligent misrepresentation, (3) breach of fiduciary duty, (4) conversion, and (5) declaratory relief. Laird's prayer for relief requested restitution of benefits unjustly retained by Debra, damages in an amount to be proven at trial, a declaration requiring Debra to reimburse him for economic injuries caused by her breach of the settlement agreement, interest, and attorney fees and costs, based on the settlement agreement. The request for interest was calculated at 10 percent and based on Debra's late payment of the $150,000 and delay in paying off the mortgage on the Turlock property.
In July 2015, a jury trial was commenced. On August 3, 2015, the first four causes of action were presented to the jury. The jury rendered a unanimous verdict on the four claims. The jury found for Laird on his breach of contract claim and awarded him damages of $12,822. The jury found in favor of Debra on the claims for breach of fiduciary duty, conversion and negligent misrepresentation.
The declaratory relief cause of action was not presented to the jury. Laird's trial brief asserted he was entitled to a declaration that the partnership continued through December 31, 2013, and, as a result, Debra owed him fiduciary duties throughout 2013. Laird's counsel suggested, and the trial court agreed, that counsel meet and confer in an attempt to resolve the remaining issues involving the declaratory relief claim. The court set a status conference in October 2015. Post-Trial Matters
On September 2, 2015, despite the fact the declaratory relief was not resolved, Debra filed a motion for an order determining she was the prevailing party, for entry of judgment in her favor, and for an award of attorney fees and costs. Debra asserted she had incurred attorney fees over $120,000 and requested the damages awarded to Laird be offset against that amount. The same day, Debra also filed a memorandum of costs seeking $3,282.46.
On September 30, 2015, Laird filed a motion for adjudication of the cause of action for declaratory relief. Laird also filed a motion to strike/tax Debra's memorandum of costs. The hearing for this motion and Debra's motion was set for October 23, 2015. The court issued a tentative ruling, heard oral arguments, and took the matters under submission.
The court's minute order denied Laird's motion to strike or tax Debra's memorandum of costs, stating the memorandum was merely premature. The minute order granted Debra's motion to determine she was the prevailing party and awarded her costs and $135,420.50 in attorney fees. The minute order denied Laird's request for attorney fees. It also stated: "'The Partnership known as D&L Associates was terminated on December 31, 2013.'"
In November 2015, Debra served Laird with a copy of a proposed judgment. A few days later, Laird filed (1) objections to the proposed judgment and (2) a motion for reconsideration of the order determining Debra was the prevailing party and awarding her attorney fees and costs.
On November 12, 2015, the trial court filed the judgment submitted by Debra's counsel without changes. Four days later, Debra filed and served a notice of entry of judgment. The judgment stated (1) the partnership was terminated on December 31, 2013; (2) Debra was "the prevailing party in this case and awarded her costs and attorney's fees in the amount of $135,420.50;" (3) Laird was granted a credit of $12,822, the amount of the jury's award; and (4) a judgment of $122,598.50 was awarded in favor of Debra.
On November 25, 2015, Laird filed a memorandum of costs despite the fact the judgment stated Debra was the prevailing party and awarded her costs. On December 1, 2015, he filed a motion for attorney fees on the ground he was the prevailing party. Laird contends he filed these papers to preserve his rights, but cites no authority to support the theory that his rights had not been preserved and filing the motions and memorandum of costs did preserve his rights. Laird also filed a motion to set aside or vacate the judgment pursuant to Code of Civil Procedure section 663a. Debra moved to strike the memorandum of costs and opposed Laird's motions.
In a declaration submitted in reply papers supporting the motion, Laird's attorney stated Laird sought an award of "$190,435.50, which includes all amounts billed (or invoiced) to the client to date."
On January 12, 2016, the trial court issued a tentative ruling continuing the hearing on Laird's motions until January 26, 2016. The tentative also stated Laird's attorney "is notified that contempt sanctions might be imposed on her personally pursuant to California Code of Civil Procedure § 1008 and § 128 .7."
On January 14, 2016, Laird filed a notice of appeal from the November 12, 2015, judgment after jury trial. On January 26, 2016, the court held a hearing on the pending matters. The court denied Laird's motion for attorney fees and granted Debra's motion to strike Laird's memorandum of costs. The minute order stated Laird's "motion for attorney fees was an improper reconsideration motion. The Court used its discretion under Code of Civil Procedure § 1008(d) to deem the Motion to be contempt and to punish it with an award of sanctions to D[ebra]." The minute order also stated Laird's attorney had been notified of the possibility of sanctions if the motion was not withdrawn. The court directed Laird (not his attorney) to pay a sanction of $1,290 to Debra's attorney, which included $1,200 for attorney fees and $90 for the filing fee for the motion to strike. Laird did not file a separate notice of appeal challenging the sanction order. He contends it is reviewable with the judgment because it is a postjudgment award of less than $5,000
DISCUSSION
I. AWARD OF ATTORNEY FEES
A. American Rule
California follows the American rule that successful litigants are not entitled to collect attorney fees from the losers. (See Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 751 (Mountain Air).) Exceptions exist where a statute specifically provides for an award of attorney fees and where the parties have agreed to an allocation of attorney fees. (Ibid.) Thus, the parties may "contract out" of the American rule by agreeing that the prevailing party will recover attorney fees incurred in any litigation between themselves. (Ibid.; Code Civ. Proc., § 1021.)
B. Section 1717 and Its Scope
1. Background
Some attorney fees provisions, or portions of the provisions, set forth in a contract are subject to section 1717. A legal question in this appeal is whether section 1717 applies to the requests for attorney fees made by the parties. Section 1717 has two main features. First, it makes the right to attorney fees in an action to enforce the contract reciprocal, even if the attorney fees provision states only one party is entitled to fees. (§ 1717, subd. (a).) Second, the statute defines who is the party prevailing in actions to enforce the contract—a statutory definition that cannot be altered or avoided by contract. (§ 1717, subd. (b); Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 707.) The question whether section 1717 governs the attorney fees provision in the partnership agreement is significant in this appeal because the answer will determine whether the statutory definition of "party prevailing" has any application to the parties' dispute over who prevailed.
2. Statutory Text and Its Interpretation
The dispute about the scope of section 1717 presents a question of statutory interpretation, which is a legal question subject to de novo review. The relevant text of subdivision (a) of section 1717 provides: "In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs." The statutory text specifying the scope of section 1717 is contained in the phrases (1) "action on a contract"; (2) "where the contract specifically provides that attorney's fees ... shall be awarded"; and (3) "which [fees] are incurred to enforce that contract." (§ 1717, subd. (a).) For purposes of this opinion, we refer to the requirement created by each phrase as a criterion.
From a textual perspective, we note the first phrase uses the indefinite article "a" in its reference to "a contract." The other phrases are more specific. The second phrase uses the definite article "the" in referring to "the contract." The third phrase uses the demonstrative adjective "that" in the reference to "that contract." The use of the more specific definite article and demonstrative adjective narrows the scope of the text.
One practice guide addresses two of these criteria and gives them a literal interpretation. "By its terms, [section] 1717 applies only to actions 'on a contract' and to fees 'which are incurred to enforce that contract.'" (1 Pearl, Cal. Attorney Fee Awards (Cont.Ed.Bar 2017) § 4.25, p. 4-18, italics added.) Our Supreme Court identified the "causes of action within the scope of section 1717" as "causes of action sounding in contract and based on a contract containing an attorney fee provision." (Santisas v. Goodin (1998) 17 Cal.4th 599, 617, italics added (Santisas).) Similarly, in Maynard v. BTI Group, Inc. (2013) 216 Cal.App.4th 984, (Maynard), the court stated "section 1717 applies only to a contractual agreement that attorney fees may be recovered by the party prevailing in an action to enforce that contract." (Id. at p. 993.) Based on the text creating the statutory criteria and the statements from the judicial decisions and practice guide, we interpret section 1717 to apply only when the three criteria are satisfied. Under this interpretation, if one or more of the criteria is missing under the facts presented, section 1717 does not apply. Accordingly, if a cause of action sounding in contract is and "based on a contract [not] containing an attorney fees provision," that cause of action is outside the scope of section 1717. (See Santisas, supra, at p. 617.)
3. Application of Interpretation to this Case
Here, there are two contracts involved in the parties' dispute—the partnership agreement and the settlement agreement. Consequently, we consider how the foregoing interpretation of section 1717 relates to each of those contracts.
The settlement agreement does not "specifically provide[] that attorney's fees ... shall be awarded." (§ 1717, subd. (a).) Consequently, it does not satisfy the second criterion. Accordingly, an "action on" the settlement agreement itself falls outside the scope of section 1717.
In comparison, the partnership agreement is a contract that "specifically provides that attorney's fees ... shall be awarded." (§ 1717, subd. (a).) Thus, an "action on" the partnership agreement where attorney fees "are incurred to enforce that contract" would satisfy all three criteria of subdivision (a) of section 1717 and such an action (or cause of action) would be governed subject to the requirements of section 1717. Based on this conclusion, whether section 1717 governs some or all of the claims for attorney fees in this litigation depends on (1) whether the second lawsuit was an "action on" the partnership agreement for purposes of section 1717 and (2) whether the attorney fees were "incurred to enforce that contact." (§ 1717, subd. (a).)
We conclude neither criteria was satisfied in this case. Laird's breach of contract cause of action referred to specific obligations (such as the payment of money in exchange for a release) created by the settlement agreement, not the partnership agreement. The declaratory relief cause of action requested a declaration of "their rights, duties, and obligations to each other in connection with the promised performance under the Settlement Agreement/implied-in-law contract." Consequently, we conclude the second lawsuit was an "action on" the settlement agreement, not the partnership agreement. Also, the attorney fees were "incurred to enforce" the settlement agreement. (See Milman v. Shukhat (1994) 22 Cal.App.4th 538, 543 [declaratory relief proceeding was brought "to enforce that contract" within the meaning of § 1717].)
Therefore, any award of attorney fees pursuant to the attorney fees provision in the partnership agreement is not governed by section 1717. As a result, section 1717's definition of a "party prevailing" does not apply to some or all of the causes of action asserted in the second lawsuit. When section 1717 does not apply, the parties are free to define contractually the term "prevailing party." (See Santisas, supra, 17 Cal.4th at p. 622.) Stated more broadly, under the freedom of contract allowed by Code of Civil Procedure section 1021, "the parties to a contract may agree that the prevailing party in any litigation between them will be entitled to attorney fees." (1 Pearl, Cal. Attorney Fee Awards, supra, § 4.25, p. 4-19.) It does not matter "'"'whether such litigation sounds in tort or in contract.'"'" (Gil v. Mansano (2004) 121 Cal.App.4th 739, 743.)
C. Scope of Attorney Fees Provision
1. Contentions of the Parties
Laird challenges to the award attorney fees to Debra includes an approach that assumes section 1717 applies and an approach that assumes it does not. We need not address the first approach. Laird's second approach contends that, even if section 1717 does not apply, he is the prevailing party because (1) the attorney fees provision does not permit the recovery of attorney fees related to noncontractual claims and (2) he is the prevailing party on the contractual claims (i.e., the breach of contract and the declaratory relief causes of action) because he achieved his litigation objectives.
In contrast, Debra contends the language in the attorney fees provision is broad and encompasses tort claims, provided that such claims are related to the covenants of the partnership agreement. Debra argues she obtained an unqualified win on the three tort causes of action that arose under the partnership agreement and were decided by the jury. As to the declaratory relief cause of action decided by the court, Debra contends she received the greater relief and, therefore, was the prevailing party on that claim. As to the jury's decision to award Laird $12,822 under his breach of contract cause of action, Debra contends that claim arose under the settlement agreement and, therefore, was not covered by the attorney fees provision in the partnership agreement.
2. Basic Principles for Determining Scope of Contractual Provision
Our Supreme Court has directed California courts to resolve disputes about the scope of an attorney fees provision by applying the traditional rules of contract interpretation. (See Mountain Air, supra, 3 Cal.5th at p. 752.) The traditional analysis used to determine the meaning of a written contract "begins with the threshold question of whether the writing is ambiguous—that is, reasonably susceptible to more than one interpretation." (Adams v. MHC Colony Park L.P. (2014) 224 Cal.App.4th 601, 619 (Adams); Winet v. Price (1992) 4 Cal.App.4th 1159, 1165-1166.) Whether an ambiguity exists is a question of law subject to independent review on appeal. (Winet v. Price, supra, at p. 1165.)
The threshold question of ambiguity creates a fork in the analytical path. If the court determines the writing is not ambiguous—that is, the language is reasonably susceptible to only one interpretation—the judicial inquiry into meaning is finished and the clear and explicit meaning of the written text governs. (Scheenstra v. California Dairies, Inc. (2013) 213 Cal.App.4th 370, 390 (Scheenstra).) Thus, the last step on this fork of the analytical path is to apply that clear meaning to the facts of the case. (Ibid.)
Alternatively, if the court determines the writing is ambiguous, the judicial inquiry into meaning continues and the court must resolve the ambiguities. (Scheenstra, supra, 213 Cal.App.4th at p. 390.) When no extrinsic evidence is presented, the resolution of a contractual ambiguity is a question of law subject to independent review on appeal. (Ibid.) The determination of the meaning of ambiguous contractual language is guided by the principles of contract interpretation. (See Mountain Air, supra, 3 Cal.5th at p. 752.) Under those principles, the words of the contract are usually interpreted in their ordinary and popular sense. (Ibid.; § 1644.) Also, the contract must be understood with reference to the circumstances under which it was made and the matter to which it relates. (Mountain Air, supra, at p. 752; § 1647.) An unexpressed subjective intention or understanding is not relevant to interpreting ambiguous contractual language. (See Bustamante v. Intuit, Inc. (2006) 141 Cal.App.4th 199, 208.) Rather, the meaning of language is determined by applying an objective standard of reasonableness. (Ibid.)
Here, the parties have not referred to extrinsic evidence in arguing how the partnership agreement's attorney fees provision should be interpreted. (See Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [interpretation of written instrument is solely a judicial function unless the interpretation turns on the credibility of extrinsic evidence].) The presentation of extrinsic evidence increases the complexity of the inquiry into the existence of ambiguity, and the resolution of any ambiguity. (See Adams, supra, 224 Cal.App.4th at p. 620.)
When resolving an ambiguity and choosing among the reasonable interpretations of the contractual language, the court adopts "the most reasonable interpretation." (Global Modular, Inc. v. Kadena Pacific, Inc. (2017) 15 Cal.App.5th 127, 138; see Silver v. Beverly Hills Nat. Bank. (1967) 253 Cal.App.2d 1000, 1006, fn. 3.) To harmonize the case law, we conclude the phrase "the most reasonable interpretation" is the equivalent of the phrase "the most natural reading of th[e] provision" used by Justice Kruger in Mountain Air, supra, 3 Cal.5th at page 755.
This interpretation of ambiguous contractual language parallels the approach to ambiguous statutory text. (See People v. Manzo (2012) 53 Cal.4th 880, 886 [courts attempt to ascertain the most reasonable interpretation of ambiguity in statute]; Nick v. City of Lake Forest (2014) 232 Cal.App.4th 871, 881 [same approach to ambiguous municipal resolution].)
3. Words Used in the Attorney Fees Provision
The full text of the attorney fees provision in the partnership agreement reads: "In the event that litigation is instituted with respect to any matter regarding the covenants in this Agreement, the prevailing party shall be entitled to an award of attorney's fees actually expended and costs actually incurred." A party's right to recover attorney fees and the corresponding duty of the other party to pay attorney fees is conditional in the sense that "the right[ ]or dut[y] ... depend[s] upon the occurrence of an uncertain event." (§ 1434.) The first event that must occur is the institution of "litigation ... with respect to any matter regarding the covenants in [the Partnership] Agreement." The second condition to the recovery of fees is the party seeking fees must be "the prevailing party."
Here, we consider the words used in the first condition and how it affects the scope of the attorney fees provision. Some of those words have generated little disagreement between the parties. Those words, in the order they appear, are "litigation," "instituted," "any" and "covenants." A lawsuit is litigation. The filing of a complaint commences or institutes litigation. Thus, for purposes of the attorney fees provision, the two lawsuits filed by Laird qualify as litigation instituted.
The term "any," which modifies "matter," is a broad term that ordinarily means "'of whatever kind'" or "'without restriction.'" (Zabrucky v. McAdams (2005) 129 Cal.App.4th 618, 628.) Covenant means "'a promise to render some performance.'" (Dillingham-Ray Wilson v. City of Los Angeles (2010) 182 Cal.App.4th 1396, 1406, fn. 9.) A longer definition states a covenant "is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way." (MDY Industries, LLC v. Blizzard Entertainment, Inc. (9th Cir. 2010) 629 F.3d 928, 939 [distinguishing between covenants and conditions]; see Knight v. Black (1912) 19 Cal.App. 518, 522 [the creation and effect of a covenant is distinct from that of a condition].)
The words at the center of the disagreement about the scope of the attorney fees provision are the prepositions "with respect to" and "regarding" and the noun "matter." The word "matter" has various definitions. It may be "a subject (as a fact, an event or course of events, or a circumstance, situation, or question) of interest or relevance." (Webster's Third New Internat. Dict. (1993) p. 1394.) This definition shows the word "matter" is ambiguous as to scope because the subject in question can be a single event or, more broadly, a course of events. The word "matter" is also defined as "something that is a subject of disagreement, strife or litigation : a source or topic of contention" and "something that is to be proved (as in a court of law)." (Ibid.) Again, these definitions show the word "matter" is ambiguous as to scope, because the terms "something," "source" and "topic" are similar to the word "subject" in that they can be interpreted narrowly (a single event) or broadly (a course of related events). Therefore, we conclude the term "matter" does not unambiguously inform us (or the objectively reasonable person) whether the subject of the litigation referenced in the attorney fees provision is broad or narrow in scope.
For example, a single event could be an act or omission constituting a breach of contract. A course of events could include all acts and omissions relevant to the partnership disputes and litigation between Laird and Debra.
Next, we consider the prepositions. The word "regarding" and the phrase "with respect to" ordinarily mean the same thing. (See Skrbina v. Fleming Companies (1996) 45 Cal.App.4th 1353, 1369, fn. 10.) "Regarding" is defined as "with respect to : CONCERNING." (Webster's Third New Internat. Dict., supra, pp. 1911 [definition of "regarding"] & 1934 [definition of "respect" and phrase "with respect to"].) "Concerning" is defined as "relating to." (Id. at p. 470.)
These basic definitions have been used in a variety of cases. For example, in a case involving an insurance policy, the court stated: "The phrase 'with respect to' generally means 'with reference to', 'relating to', or 'pertaining to.' [Citation.]" (Smith v. Matthews (La. 1993) 611 So.2d 1377, 1380.) In a case involving a loan agreement, the court stated the phrase "with respect to" meant reference to, relating to, or pertaining to. (Pheonix Leasing Inc. v. Sure Broadcasting, Inc. (D.Nev. 1994) 843 F.Supp. 1379, 1388.) In a case involving the interpretation of a federal statute, the court stated "with respect to" was generally understood to be synonymous with "relating to." (California Tow Truck Assn. v. City and County of San Francisco (9th Cir. 2015) 807 F.3d 1008, 1021.) In a case involving a state statute addressing "'[a]n action respecting the title to property,'" the North Dakota Supreme Court referred to a dictionary that defined "the word 'respecting' as meaning 'with regard or relation to; regarding; concerning.'" (Dunham Lumber Co. v. Gresz (N.D. 1940) 295 N.W. 500, 502.)
Based on the foregoing dictionary definitions and case law, we conclude the terms "with respect to" and "regarding" are synonymous and mean relating to, reference to or concerning. We further conclude these terms are ambiguous as to scope because the definitions of these words do not specify the strength or closeness of the relationship or connection between the two things under consideration. For instance, does the phrase "matter regarding the covenants" require a direct relationship between the matter and the covenants or, alternatively, does it have a broader meaning, which encompasses matters both directly and indirectly related to the covenants in the partnership agreement?
4. Conclusions as to Ambiguities
Our conclusions on the threshold legal question of ambiguity are summarized as follows. First, the terms "matter," "with respect to" and "regarding" are reasonably susceptible to more than one meaning when the question presented is the scope of the attorney fees provision. (See State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 195 [contractual language cannot be determined to be ambiguous in the abstract; determination is based on the context created by circumstances of the case].) The ordinary meanings usually attributed to these terms are imprecise and flexible as to scope, which allows them to be interpreted narrowly or expansively.
Second, the ambiguity in the specific words does not diminish when they are read together as part of the attorney fees provision or as part of the partnership agreement as a whole. (See § 1641 [contract must be read as a whole and, if reasonably practicable, each clause helping interpret the other].) Rather, the ambiguities in the terms cause the attorney fees provision's reference to litigation instituted "with respect to any matter regarding the covenants in this [Partnership] Agreement" to be ambiguous as to scope when applied to the facts of this case.
5. Analysis of Scope—"With Respect to Any Matter"
The resolution of the ambiguities in the attorney fees provision is important in this appeal because Laird's first lawsuit and, thus, the parties' 2010 settlement agreement, was directly related to the covenants in the partnership agreement. By comparison, the breach of contract claim in Laird's second lawsuit was directly related to the settlement agreement and indirectly related to (i.e., one step removed from) the covenants of the partnership agreement.
The first goal of our analysis of how to interpret the attorney fees provision is to determine whether the parties adopted a narrow type that is limited to the attorney fees incurred to enforce the contract (i.e. the partnership agreement), or the broad type that authorizes the recovery of fees by the party who prevails in the action as a whole. (See Maynard, supra, 216 Cal.App.4th at p. 990.) That analysis begins with the meaning of the phrase "with respect to any matter" that appears after the reference to litigation instituted.
We conclude this phrase, standing alone, is most reasonably interpreted broadly to include the whole of the dispute between Laird and Debra that is the subject of the litigation instituted. In our view, it is less reasonable to interpret "any matter" as excluding some types of claims, such as tort claims. Consequently, we conclude the attorney fees provision's reference to "litigation" instituted "with respect to any matter" encompasses the entire controversy and is not limited to claims enforcing the contract. If such a limitation exists, it must come from other words in the attorney fees provision.
The foregoing interpretation is consistent with the way other decisions have interpreted the phrase "any dispute," which is similar to the phrase "any matter." When the phrase "any dispute" appears in an attorney fees clause, it is interpreted as covering contract, tort and other claims. For instance, in Maynard, supra, 216 Cal.App.4th 984, the First District stated "an attorney fee provision awarding fees based on the outcome of 'any dispute' encompasses all claims, whether in contract, tort or otherwise." (Id. at p. 993.) In Miske v. Coyeter (2012) 204 Cal.App.4th 1249, the attorney fees provision in question appeared in a partnership agreement and stated: "'If any dispute arises between the Partners, whether or not resulting in litigation, the prevailing party shall be entitled to recover ... reasonable attorneys' fees.'" (Id. at p. 1259.) Again, the First District stated the phrase "any dispute" encompassed tort claims. (Ibid.) Specifically, the court concluded the provision's language was broad enough to cover the type of fraud in the inducement claim brought by the appellants. (Ibid.)
In sum, the contractual language referring to litigation "with respect to any matter," standing alone, is broad enough to cover the entire subject of the parties' disagreement involving the partnership, including contractual and noncontractual causes of action. Therefore, the reference to litigation "with respect to any matter," standing alone, covers the contractual and noncontractual claims asserted in the second lawsuit Laird filed against Debra in February 2013. Consequently, the ultimate scope of the attorney fees provision will be determined by the effect of the limiting phrase "regarding the covenants of this Agreement."
6. Analysis of Scope—"Regarding the Covenants of this Agreement"
It is not uncommon for an attorney fees provision to be drafted with broad language in the beginning and limiting language at its end. (E.g., Casella v. SouthWest Dealer Services, Inc. (2007) 157 Cal.App.4th 1127, 1161 (Casella) [attorney fees provision started broadly, but then narrowed in scope by limiting language].) Here, the attorney fees provision started with broad language referring to "litigation" instituted "with respect to any matter" and then limited the scope of that broad language by inserting the phrase "regarding the covenants in this Agreement." The parties recognize the phrase "regarding the covenants in this Agreement" has a limiting effect, but disagree about where to draw the line.
To illustrate the limiting effect, the term "any matter" is broad enough to encompass litigation about an automobile accident or a probate proceeding. If a lawsuit arose between Laird and Debra in connection with such matters, the phrase "regarding the covenants in this Agreement" would prevent the attorney fees provision in the partnership agreement from being applied in that lawsuit.
Based on the definitions of the terms "regarding" and "covenants" discussed earlier, the phrase "regarding the covenants in this Agreement" is the equivalent of the phrase "relating to the promises in the partnership agreement." On the threshold question of ambiguity, we concluded the contractual phrase "regarding the covenants in this Agreement" is ambiguous as to scope because it is reasonably susceptible to more than one interpretation. (See pts. I.C.3. & I.C.4., ante.) In particular, the word "regarding" refers to a relationship or connection between the matter and the covenants. There is a range in the strength of the possible relationships or connections between these two things and, in general terms, that range can be divided into direct and indirect relationships or connections. Therefore, the word "regarding" is ambiguous because it reasonably could be interpreted as referring to direct relationships only, or it could be interpreted more broadly to include disputes directly or indirectly related to a covenant in the partnership agreement.
The distinction between direct and indirect relationships appears elsewhere in California law. For example, the evaluation of the significance of the environmental effects of a project requires the consideration of both direct and indirect physical changes in the environment that may be caused by the project. (Cal. Code Regs., tit. 14, §§ 15064, subd. (d) & 15378.) Also, under Government Code section 27366, county boards of supervisors are directed to set copy fees at "an amount necessary to recover direct and indirect costs of providing the [copy]." (Italics added.)
To resolve the ambiguity in the phrase "regarding the covenants in this Agreement," we must adopt the most reasonable of the competing interpretations. (See Global Modular, Inc. v. Kadena Pacific, Inc., supra, 15 Cal.App.5th at p. 138.) In other words, we attempt to adopt "the most natural reading of th[e] provision." (Mountain Air, supra, 3 Cal.5th at p. 755.)
Laird argues the phrase "regarding the covenants of this Agreement" excludes his tort causes of action (i.e., breach of fiduciary duty, conversion and negligent misrepresentation) from the attorney fees provision. Debra contends Laird argued exactly the opposite in the trial court when addressing motions in limine and his earlier position was correct. Based on the arguments presented by the parties, we consider the specific question whether the phrase "regarding the covenants of this Agreement" restricts the otherwise broadly worded attorney fees provision to contractual claims.
In analyzing the reasonableness of an interpretation limiting the provision to contractual claims, we consider alternate wording the drafter might have chosen to more clearly or simply express that intention. For instance, the drafter of the partnership agreement chose not to limit the attorney fees provision to litigation or actions "'enforcing or attempting to enforce'" the covenants of the partnership agreement. (See Casella, supra, 157 Cal.App.4th at p. 1161, italics omitted.) Such a reference would have more clearly expressed an intention to exclude tort and other noncontractual claims from coverage. (Id. at p. 1162.) The term "regarding" has a broad meaning and is the equivalent of in reference to, relating to, with respect to and concerning. (See pt. I.C.3., ante.) The use of the word "covenants" does not convert the broad term "regarding" into a narrower term, such as "enforcing." Because terms narrower than "regarding" were readily available for the drafter to use, we conclude that term was used in a broad sense. As it is possible for both contractual and noncontractual claims to have some relationship to the covenants of the partnership agreement, we conclude the phrase "regarding the covenants in this Agreement" does not limit the scope of the attorney fees provision to contractual causes of action.
We recognize the drafter referred only to covenants and did not use the broader phrase "any of the terms, covenants or conditions" of the contract. (See Casella, supra, 157 Cal.App.4th at p. 1161.)
The next ambiguity we address is the closeness or strength of the relationship between the dispute (i.e., matter) and the covenants. We conclude the most reasonable interpretation of the phrase "regarding the covenants" requires a primary (i.e., direct) or secondary (i.e., only one step removed from a direct) relationship between the matter and a covenant of the partnership agreement. This interpretation is based in part on the whole of the contract of which the attorney fees provision is a part. The partnership agreement defined the siblings' rights and responsibilities with respect to the partnership and its business. The purpose of the real estate partnership was to make money and, more generally, to derive benefits from the control of real estate. The outcome or financial benefits derived by a particular partner would be reduced by litigation expenses. The reference in the attorney fees provision to attorney fees "actually expended" demonstrates the parties were concerned with the actual financial impact of the litigation on the prevailing party. As litigation of a matter indirectly related to a covenant is as likely as litigation of a matter directly related to a covenant to cost money and decrease the net benefit derived from the partnership, it is reasonable to allow a prevailing party to recover fees for litigation involving a matter directly or indirectly related to a promise contained in the partnership agreement. Under this interpretation, (1) the losing party is financially responsible for the attorney fees actually expended and (2) the prevailing party's financial benefits from the partnership's business are not diminished by being involved in litigation that existed only because of the promises exchanged by Laird and Debra in their partnership agreement.
Under the facts presented, we need not decide if a tertiary relationship to a covenant (i.e., a relationship one step removed from a secondary relationship) is covered. (See pt. I.D., post.)
In summary, we resolve the ambiguity in the phrase "regarding the covenants of this Agreement" by interpreting the attorney fees provision to cover attorney fees actually expended in litigation over a disputed matter that cannot be decided without a direct or a secondary reference to the promises in the partnership agreement. Stated in the negative, a dispute does not regard the covenants if the dispute can be decided without any reference to the partnership agreement (i.e., a direct reference) or without any reference to something that directly referred to the partnership agreement (i.e., a secondary reference). Under this interpretation, the attorney fees provision covers contractual causes of action and noncontractual causes of action that require the court to refer, directly or indirectly, to the covenants of the partnership agreement to decide the claim.
D. Application of Attorney Fees Provision
1. Breach of Contract Cause of Action
Laird's first cause of action was labeled "Breach of Implied-in-Law Contract" and alleged (1) the court previously determined the settlement agreement between Laird and Debra was enforceable and (2) Debra disregarded her obligations under the settlement by refusing to pay Laird $150,000 and by refusing to assume the mortgage on the Turlock property. The primary role of the settlement agreement (as opposed to the partnership agreement) in the first cause of action is confirmed by Laird's opening appellate brief, which states he "filed a First Amended Complaint in January 2014, focusing again on [Debra's] breach of the settlement agreement."
Laird contends his cause of action for breach of the settlement agreement relates to the partnership agreement "as the settlement agreement arose directly from the parties' rights and duties under the Partnership Agreement and [Debra's] failure to comply with the terms of the settlement agreement that meant the Partnership could not end." Laird argues Debra's breach directly affected the partnership's termination and liquidation, which were governed by the promises set forth in paragraphs 18, 22 and 23 of the partnership agreement.
We conclude the connection between Laird's first cause of action for breach of the settlement agreement and the covenants of the partnership agreement are indirect, but sufficiently strong for that cause of action to fall within the scope of the attorney fees provision. The settlement agreement was entered to resolve Laird's claims that Debra had violated the covenants governing the allocation of the partnership assets. Therefore, a secondary relationship exists between the cause of action and the covenants of the partnership agreement. Consequently, we conclude the first cause of action for breach of the settlement agreement was a "matter regarding the covenants" in the partnership agreement.
2. Breach of Fiduciary Duty Cause of Action
Laird's cause of action for breach of fiduciary duty alleged Debra owed fiduciary duties to him by virtue of her position as a partner in the partnership. The cause of action alleged Debra breached her fiduciary duty by (1) converting partnership assets to her own use, (2) precluding Laird from accessing partnership money, and (3) refusing to apply partnership assets to partnership debts, including the mortgage on the Turlock property.
The fiduciary duties a partner owes to the other partners and the partnership itself are addressed in Corporations Code section 16404. The fiduciary duties "are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c)" of Corporations Code section 16404. (Corp. Code, § 16404, subd. (a).) Laird's allegations involve the duty of loyalty, which requires partners to "account to the partnership and hold as trustee for it any property, profit, or benefit [1] derived by the partner in the conduct and winding up of the partnership business or [2] derived from a use by the partner of partnership property." (Corp. Code, § 16404, subd. (b)(1).) Accordingly, under California law, partners are subject to a general fiduciary duty of loyalty that requires partners to (1) hold profits and benefits derived from partnership property for the partnership and (2) account for those profits and benefits. These statutory fiduciary duties become part of the partnership agreement under the principle of contract law that all applicable laws in existence when the agreement is made become part of the agreement as fully as if they were incorporated by reference. (See 1 Witkin, Summary of California Law (11th ed. 2017) Contracts, § 775, and cases cited therein.)
In this case, the general fiduciary duty of loyalty was reinforced by particular covenants in the partnership agreement. For instance, paragraph 11 of the partnership agreement addresses the division of profits and losses. Paragraph 14 addresses how a partner may draw amounts from the partnership's profits and the accounting for such draws. Paragraph nine provides for a yearly accounting.
The resolution of Laird's allegations about breaches of fiduciary duties was directly related to the covenants in the partnership agreement. For example, for Laird to have prevailed on his allegations that Debra breached her fiduciary duty by using partnership property for her own purposes, the jury would have had to find Debra's handling of a property or income from a property (1) violated the general fiduciary duty of loyalty and (2) was not authorized by the covenants of the partnership agreement.
Furthermore, the direct relationship between the partnership agreement and the alleged breaches of fiduciary duty was not severed or extinguished by the provision in the settlement agreement stating Laird would "withdraw from the partnership effective January 1, 2013." First, the legal theory underlying Laird's breach of fiduciary duty cause of action was that the partnership agreement remained in effect after January 1, 2013, because Debra had not performed her obligations under the settlement agreement and, therefore, the withdrawal or termination provision never became operative. Second, the fiduciary duty of loyalty owed by a partner remains in effect during the "winding up of the partnership business." (Corp. Code, § 16404, subd. (b)(1).)
Based on the foregoing, we conclude Laird's breach of fiduciary duty cause of action had a direct relationship to the partnership agreement. As a result, that cause of action qualifies as a "matter regarding the covenants in this Agreement" as that phrase is used in the attorney fees provision of the partnership agreement.
3. Conversion Cause of Action
Laird's cause of action for conversion alleged he had a right to possess partnership property for the purposes of applying it to partnership business operations and, despite this right, Debra moved all partnership funds out of the partnership bank accounts to a separate account, which only she could access. The cause of action also alleged Debra used rental income from the Turlock property as her own personal money and refused to apply it to the monthly mortgage payments for August, October, November and December of 2013, which Laird had to pay from his personal funds.
The division of profits and losses of the partnership, devotion to the partnership's business, and drawing accounts are addressed in paragraphs 11, 13 and 14 of the partnership agreement. As a result, Debra's entitlement to take funds for her own use is addressed by the covenants in the partnership agreement. It follows that there is a direct relationship between the conversion cause of action and the covenants of the partnership agreement. This direct relationship is demonstrated by the fact the jury would not have been able to resolve the conversion cause of action without examining the covenants in the partnership agreement and deciding what rights and obligations those covenants created regarding the use of and access to funds of the partnership. Stated another way, if Debra's action in handling partnership funds and money conformed with the terms of the partnership agreement, she would not have wrongfully converted partnership assets to her own use. Consequently, we conclude the conversion cause of action was a matter regarding the covenants in the partnership agreement.
4. Negligent Misrepresentation Cause of Action
Laird's cause of action for negligent misrepresentation alleged (1) Debra represented that she could and would perform under the settlement agreement on or before December 31, 2012; (2) Debra intended Laird to rely on these representations; (3) Laird reasonably relied on the representations; and (4) the representations were not true and Debra had no reasonable grounds for believing she could obtain access to the funds necessary to perform her obligations because her credit rating was poor.
Like Laird's first cause of action for breach of the settlement agreement, the negligent misrepresentation cause of action is indirectly related to the partnership agreement. The alleged misrepresentations are directly related to the settlement agreement and, as described earlier, the settlement agreement is directly related to the covenants in the partnership agreement. From these two direct relationships it follows that the negligent misrepresentation cause of action is indirectly (i.e., secondarily) related to the covenants of the partnership agreement. As a result of this secondary relationship, the negligent misrepresentation cause of action is covered by the attorney fees provision.
5. Declaratory Relief Cause of Action
The declaratory relief cause of action sought a declaration of the rights, duties and obligations between Laird and Debra in connection with the settlement agreement and resulted in the trial court declaring the partnership was terminated on December 31, 2013—approximately 22 months before the court's judgment was filed. Partnership liquidation is addressed in the paragraph 23 of the partnership agreement.
We conclude the declaratory relief cause of action was directly related to the settlement agreement and the settlement agreement was directly related to the covenants of the partnership agreement. As with the breach of contract and negligent misrepresentation causes of action, the combination of these two direct relationships creates an indirect (i.e., secondary) relationship between the declaratory relief cause of action and the covenants in the partnership agreement. As a result of this secondary relationship, the declaratory relief cause of action is a "matter regarding the covenants in this Agreement" as that phrase is used in the attorney fees provision of the partnership agreement.
E. Summary
Our interpretation of the attorney fees provision is broader than the interpretations presented by the parties. The first part of the provision identifies a condition that must be satisfied before a prevailing party is contractually entitled to an award of attorney fees. The condition is stated in the following language: "In the event that litigation is instituted with respect to any matter regarding the covenants in this Agreement ...." Here, Laird's second lawsuit against Debra is litigation instituted. Furthermore, the lawsuit was instituted with respect to a matter regarding the covenants of the partnership agreement. Consequently, the condition referring to litigation instituted with respect to any matter regarding the covenants in the partnership agreement was satisfied by the facts of this case.
Next, we consider the language of the second condition the attorney fees provision and address whether the trial court correctly determined Debra was the prevailing party for purposes of both an award of attorney fees and an award of costs. That language states "the prevailing party shall be entitled to an award of attorney's fees actually expended and costs actually incurred." II. PREVAILING PARTY
The term "prevailing party" is defined differently depending upon the context in which it is used. For instance, there is (1) a statutory definition applicable to an award of costs under Code of Civil Procedure section 1032, (2) a statutory definition applicable to an award of attorney fees under a contract governed by section 1717, and (3) the judge-made definition used to award attorney fees under contracts that are (a) authorized by Code of Civil Procedure section 1021 and (b) do not set forth a contractual definition of "prevailing party." The definition in section 1717 was referred to by the parties in their arguments, but we determined the attorney fees claims presented in this litigation are not subject to section 1717. (See pt. I.B.3., ante.) Consequently, the definition of "party prevailing" in section 1717 does not apply in this case. Accordingly, our discussion is limited to the other definitions of prevailing party and the principles related to those definitions.
A. Costs
1. Basic Principles
Code of Civil Procedure section 1032 is the fundamental authority for awarding costs in civil litigation. (Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1108.) It establishes the general rule that "[e]xcept as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding." (Code Civ. Proc., § 1032, subd. (b).) Some courts have stated a litigant's right to recover any costs in a civil action is determined entirely by statute and, thus, no costs can be recovered without an authorizing statute. (E.g. Charton v. Harkey (2016) 247 Cal.App.4th 730, 737 (Charton).)
Code of Civil Procedure section 1032, subdivision (a)(4) defines who is a prevailing party entitled to costs. The first sentence of that subdivision identifies four categories of litigants who automatically qualify as prevailing parties by stating: "'Prevailing party' includes [1] the party with a net monetary recovery, [2] a defendant in whose favor a dismissal is entered, [3] a defendant where neither plaintiff nor defendant obtains any relief, and [4] a defendant as against those plaintiffs who do not recover any relief against that defendant.'" (Code Civ. Proc., § 1032, subd. (a)(4).) A trial court has no discretion to deny prevailing party status to a litigant who falls within one of these four statutory categories. (Charton, supra, 247 Cal.App.4th at p. 738.)
The plain meaning of the phrase "the party with a net monetary recovery" is the party who gains money free from all deductions. (Goodman v. Lozano (2010) 47 Cal.4th 1327, 1334 (Goodman).) Thus, when a plaintiff obtains a verdict that is offset to zero by settlements with other defendants, that plaintiff did not achieve a "net monetary recovery" in the litigation with the remaining defendant. (Ibid.)
In contrast, where one of the four categories does not determine who is the prevailing party, the second sentence of Code of Civil Procedure section 1032, subdivision (a)(4) grants the trial court the discretion to determine the prevailing party and then allow costs or not, or to apportion costs. This prong of the statute operates as an express statutory exception to the general rule that a prevailing party is entitled to costs as a matter of right. (Charton, supra, 247 Cal.App.4th at p. 738.)
Code of Civil Procedure section 1033 does not alter the definition of prevailing party, but creates an exception to the provision stating a prevailing party is entitled to costs as a matter of right. Subdivision (a) of the statute provides: "Costs or any portion of claimed costs shall be as determined by the court in its discretion in a case other than a limited civil case in accordance with Section 1034 where the prevailing party recovers a judgment that could have been rendered in a limited civil case." (Code Civ. Proc., § 1033, subd. (a).) Under this provision, "if a plaintiff brings an unlimited civil action and recovers a judgment within the $25,000 jurisdictional limit for a limited civil action, the trial court has the discretion to deny costs to the plaintiff." (Carter v. Cohen (2010) 188 Cal.App.4th 1038, 1052.) The purpose underlying the statute is to discourage plaintiffs from over-filing their cases and thereby wasting judicial resources. (Id. at p. 1053.)
The items "allowable as costs under Section 1032" are specified in Code of Civil Procedure section 1033.5. "It lists as one category of costs '[a]ttorney fees, when authorized by ... [¶] (A) Contract.' ([Code Civ. Proc.] § 1033.5, subd. (a)(10)(A).)" (Scott Co. v. Blount, Inc., supra, 20 Cal.4th at p. 1108.) This inclusion of attorney fees as an item of costs suggests that an award of attorney fees is not considered when determining the net monetary recovery of the plaintiff. (See generally, 7 Witkin, Cal. Procedure (5th ed. 2008) Judgment, § 91 [net monetary recovery; none of the cases described used an award of attorney fees to calculate net monetary recovery].)
2. Application of Principles
In this case, Laird obtained a jury verdict in the amount of $12,822 on the breach of contract cause of action and no other damages were awarded to either party under the four other causes of action. Also, in March 2013, Laird recovered $150,000 from Debra, and in December 2013 he received the benefit of Debra paying off the mortgage on the Turlock property, which mortgage had been in his name.
In DeSaulles v. Community Hospital of Monterey Peninsula (2016) 62 Cal.4th 1140, the Supreme Court concluded a monetary settlement fits within the term "monetary recovery" for purposes of Code of Civil Procedure section 1032, subdivision (a)(4). Here, Laird's breach of a contract causes of action alleged Debra breached the settlement agreement by failing to make the $ 150,000 payment required by that agreement. Debra's payment of the $150,000 shortly after Laird filed his second lawsuit, though not part of a formal or informal settlement of that particular claim, acted to negate part of the damages from the alleged breach (it did not resolve Laird's claim for interest due to the delay). By analogy to the settlement payment made in DeSaulles, we conclude Debra's payment of $150,000 to Laird constitutes part of his "net monetary recovery" for purposes of Code of Civil Procedure section 1032, subdivision (a)(4). Similarly, the payment of the mortgage on the Turlock property that was in Laird's name also is part of the net monetary recovery achieved by Laird after filing this lawsuit.
Debra contends the definition of prevailing party in the first sentence of Code of Civil Procedure section 1032, subdivision (a)(4) does not apply in this case because the second sentence applies. In her view, the phrase "[w]hen any party recovers other than monetary relief" applies because she successfully defended three causes of action that arose under the partnership agreement, she recovered attorney fees under section 1717, and the declaratory relief terminating the partnership at the end of 2013 is "other than monetary relief."
First, we conclude that Laird is the party who "recover[ed] other than monetary relief" as a result of the judgment stating the partnership was terminated on December 31, 2013. Laird is the party who pursued that relief even though it is not explicitly listed a part of the relief sought in his first amended complaint. His trial brief asserted that he was entitled to a declaration that, among other things, the partnership continued through December 31, 2013. Also, Laird filed a motion for adjudication of the cause of action for declaratory relief after the trial. Thus, Laird is the party who gained the declaratory relief by legal process. (Goodman, supra, 47 Cal.4th at p. 1334 ["'"recover"'" means "'"to gain by legal process"'"].) Accordingly, Laird "recovered" that relief for purposes of Code of Civil Procedure section 1032, even though he did not obtain all of the declaratory relief he requested.
The June 2012 settlement agreement stated, "Laird will withdraw from the partnership effective January 1, 2013." The settlement agreement was reduced to a judgment when the court in the first lawsuit granted Debra's motion for entry of judgment under Code of Civil Procedure section 664.6.
Laird's recovery of declaratory relief does not remove or negate his entitlement as a matter of right to an award of costs as "the party with a net monetary recovery." Under a natural reading of the statutory text, the test for a prevailing party that applies "[w]hen any party recovers other than monetary relief" is not operative when the party recovering nonmonetary relief is the same party with a net monetary recovery. Under this interpretation, Laird's prevailing party status as "the party with a net monetary recovery" is not put in question or jeopardized because he also is a party who recovered "other than monetary relief." (Ibid.) Restating this conclusion using the facts of this case, Laird did not lose his status as the prevailing party by filing the motion for adjudication of the cause of action for declaratory relief and obtaining a declaration that the partnership terminated on December 31, 2013.
Second, the attorney fees provision in the partnership agreement is not subject to section 1717. (See pt. I.B.3., ante.) As a result, we reject Debra's arguments to the extent they are based on section 1717.
Third, the introductory language to the statutory definitions in Code of Civil Procedure section 1032, subdivision (a) states the definitions apply "unless the context clearly requires otherwise." (Code Civ. Proc., § 1032, subd. (a).) Considering the application of this statutory language to the facts of this case, we conclude as a matter of law that the instant facts, which includes the partnership agreement's failure to define the term "prevailing party," do not create a "context [that] clearly requires otherwise." This case is not extraordinary and, thus, it falls within the general provisions of the statute. Accordingly, the trial court did not have the discretionary authority to deviate from the statutory provision defining who the "prevailing party" was in this case.
In summary, Laird is "the party with a net monetary recovery" as that phrase is used in Code of Civil Procedure section 1032, subdivision (a)(4). As such, he meets the statutory definition of "prevailing party" and "is entitled as a matter of right to recover costs in [the] action." (Code Civ. Proc., § 1032, subd. (b).) It follows that the trial court's determination that Debra was entitled to recover costs was an abuse of discretion in the sense that the court misinterpreted or misapplied the statute. (See Prigmore v. City of Redding (2012) 211 Cal.App.4th 1322, 1333 [abuse of discretion to misinterpret or misapply the law].)
B. Attorney Fees
1. Basic Principles for Determining Prevailing Party
The standard for determining the prevailing party for purposes of awarding costs under Code of Civil Procedure section 1032 does not control who is the prevailing party for purposes of awarding attorney fees under a contractual provision authorized by Code of Civil Procedure section 1021. Consequently, the determination that Laird is the prevailing party for purposes of awarding costs does not resolve the question of who, if anyone, is the prevailing party for purposes of awarding attorney fees.
Under Code of Civil Procedure section 1021, parties are free to agree that the prevailing party in any litigation between themselves will be awarded attorney fees. (Maynard, supra, 216 Cal.App.4th at pp. 989-990.) Under that statute, parties are free to adopt their own definition of prevailing party. (See Santisas, supra, 17 Cal.4th at p. 622.) The partnership agreement, however, did not define the term "prevailing party." Consequently, the definition of that term must be derived from the case law.
Generally, when an attorney fees provision covers both contractual and noncontractual claims, "the prevailing party entitled to recover fees normally will be the party whose net recovery is greater, in the sense of most accomplishing its litigation objectives, whether or not that party prevailed on a contract cause of action." (Maynard, supra, 216 Cal.App.4th at p. 992.) Restated in the language of our Supreme Court:
"If ... the contract allows the prevailing party to recover attorney fees but does not define 'prevailing party' ... a court may base its attorney fees
decision on a pragmatic definition of the extent to which each party has realized its litigation objectives, whether by judgment, settlement, or otherwise." (Santisas, supra, 17 Cal.4th at p. 622; see 1 Pearl, Cal. Attorney Fee Awards, supra, § 4.90, p. 4-70.)
In determining who prevailed, "courts should respect substance rather than form." (Hsu v. Abbara, supra, 9 Cal.4th at p. 877.) "For example, a party who is denied direct relief on a claim may nonetheless be found to be a prevailing party if it is clear that the party has otherwise achieved its main litigation objective." (Ibid.)
We conclude the principles set forth in Maynard and Santisas govern the determination of who prevailed for purposes of awarding attorney fees under the contractual provision.
2. Trial Court's Determination
The trial court determined Debra was the prevailing party for purposes of both costs and attorney fees. This determination as to costs was error. It is unclear from the record whether the court committed error in determining Debra prevailed for purposes of awarding attorney fees, because the record does not show (1) how the trial court interpreted the attorney fees provision or (2) which standards the court applied in determining Debra was the prevailing party. Despite this lack of clarity in the record, we conclude Laird has demonstrated a strong enough probability of error to justify "revers[ing] the award and remand[ing] the case to the trial court for further consideration and amplification of its reasoning." (In re Vitamin Cases, supra, 110 Cal.App.4th at p. 1052; see Gorman v. Tassajara Development Corp., supra, 178 Cal.App.4th at p. 65, fn. 13.)
When Laird filed the second lawsuit, he sought to have Debra pay him the $150,000 stated in the settlement agreement and refinance the mortgage on the Turlock property, which mortgage was in his name. He also alleged damages, including interest, related to Debra's delay in performing the settlement agreement. Laird achieved these objectives when Debra made the $150,000 payment in March 2013, refinanced the mortgage in December 2013, and was held liable for damages of $12,822 in the jury's August 2015 verdict. Under the principles set forth in Maynard and Santisas, these facts would have supported a determination that Laird was the prevailing party for purposes of awarding attorney fees. This showing, coupled with the error as to who prevailed for purposes of costs, leads us to conclude the trial court's determination that Debra was the prevailing party for purposes of attorney fees should be reversed and the matter remanding for further proceedings.
C. Proceedings on Remand
1. Costs
Laird is the prevailing party for purposes of costs. On remand, the trial court shall determine the amount of costs to be awarded to Laird, which will require the court to consider the application of Code of Civil Procedure section 1033, subdivision (a).
2. Attorney Fees—Prevailing Party
On remand, the trial court shall determine which party, if any, prevailed in the litigation for purposes of awarding attorney fees pursuant to the partnership agreement. That determination shall be made in accordance with the principles set forth in Maynard and Santisas.
3. Attorney Fees—Apportionment
The attorney fees provision is broad enough to cover litigation of the entire controversy, including both contractual and noncontractual claims. Therefore, "in awarding fees to the prevailing party it is unnecessary to apportion fees between those claims." (Maynard, supra, 216 Cal.App.4th at p. 992.) On remand, if the trial court determines there was a prevailing party, the court is not required to apportion attorney fees among the five causes of action.
For example, in a dispute between a landlord and former tenants, the written leases contained an attorney fees provision stating, "'If civil action is instituted in connection with this Agreement, the prevailing party shall be entitled to recover court costs and any reasonable attorney's fees.'" (Cruz v. Ayromloo (2007) 155 Cal.App.4th 1270, 1277, italics omitted.) This broad language made it unnecessary to apportion the attorney fees among the breach of contract claim for the return of security deposits and the tort causes of action for forcible detainer, wrongful eviction and negligent infliction of emotional distress. (Id. at pp. 1272-1273, 1277.)
4. Attorney Fees—Amount Actually Expended
Laird and Debra agreed that "the prevailing party shall be entitled to an award of attorney's fees actually expended and costs actually incurred." By limiting the attorney fees awarded to the amount "actually expended," the parties, in effect, trusted one another not to actually pay exorbitant or excessive fees. We note that Laird and Debra did not agree to an award of "reasonable" attorney fees and, as a result, they avoided the uncertainty inherent in a trial court's discretionary determination as to reasonableness.
To guide the trial court's application of the "actually expended" limitation, we note that the verb "expend" is potentially ambiguous when used in connection with attorney fees. This ambiguity is shown in its dictionary definitions. Expend is defined as "to pay out" or to "spend money." (Webster's Third New Internat. Dict., supra, p. 799.) It also is defined as "to consume by use" or "use up." (Ibid.) Thus, it is possible to interpret the phrase "actually expended" to refer to fees actually paid—that is, fees for which money was spent. Alternatively, it could be interpreted more leniently to mean attorney time used up or consumed in connection with the litigation and not as requiring actual compensation to have been paid to the attorney whose time was used.
When the phrase "actually expended" is considered in the context of the attorney fees provision as a whole, we conclude it is not reasonably susceptible to more than one meaning. The only reasonable interpretation is that it refers to attorney fees that have been actually paid. The provision was drafted to give the prevailing party the right to "an award of attorney's fees actually expended and costs actually incurred." If the drafter had intended to cover all the fees for which an obligation to pay to had arisen, the drafter could have omitted "actually expended" and simply referred to "attorney fees and costs actually incurred." Instead, the structure of the sentence demonstrates that "actually expended" and "actually incurred" mean different things. The verb "incur" means "become liable or subject to : bring down upon oneself <incurred large debts to educate his children> <fully deserving the penalty he incurred>." (Webster's Third New Internat. Dict., supra, p. 1147.) This definition shows it is possible to incur liability for attorney fees without actually expending any money paying those fees.
We further note that the declarations submitted in connection with Debra's motion for attorney fees did not directly address the attorney fees Debra actually paid. Instead, those declarations addressed the attorney time devoted to the litigation and the law firm's billing rate for that time. This information is insufficient to demonstrate the attorney fees "actually expended" by Debra. Similarly, the papers Laird submitted to support his motion for attorney fees referred to amounts billed or invoiced to the client, and not to amounts actually paid. If the trial court determines there was a prevailing party for purposes of attorney fees, that party is entitled by the terms of the agreement to recover only the amount of attorney fees he or she actually paid, which will required the submission of evidence not currently in the record. III. SANCTIONS
On January 26, 2016, the trial court ordered sanctions in the amount of $1,290 against Laird. The court determined Laird's motion for attorney fees was, in effect, an improper motion for reconsideration of the court's earlier order awarding attorney fees to Debra. Code of Civil Procedure section 1008, subdivision (d) provides in part: "A violation of this section may be punished as a contempt and with sanctions as allowed by Section 128.7"
A. Contentions of the Parties
Laird contends the trial court abused its discretion in two ways when it sanctioned him. First, Laird contends the trial court failed to comply with the mandatory notice provisions set forth in subdivision (c)(2) of Code of Civil Procedure section 128.7. Second, Laird contends the conduct for which he was sanctioned was objectively reasonable.
Debra responds by arguing Laird failed to show he was harmed in any way by the improper notice or the failure to set an order to show cause hearing, much less that there was a grave miscarriage of justice. Debra notes Laird did not assert he would have withdrawn or amended the offending motions if he had been given more time and his reassertion of the claim that his motions were properly filed demonstrates he would not have withdrawn or amended them regardless of the amount of notice. Alternatively, Debra contends Laird forfeited his arguments because he did not preserve his procedural claims for appeal. Debra points to the fact Laird did not file any briefs on the issue after receiving the trial court's warning he might be sanctioned and, during oral argument before the trial court, Laird made none of the arguments that appear in his opening appellate brief.
Laird's reply brief contends Debra's two arguments have missed the mark. First, Laird contends the statutory procedural requirements are mandatory and the failure to comply absolutely precluded the court from issuing sanctions. Second, Laird notes Debra cited no authority for her argument that he failed to preserve the issues for appeal and contends his issues were not forfeited because there is no forfeiture "'when the new theory on appeal is a pure question of law with no factual disputes.' [Citation.]" Laird asserts there are no relevant factual disputes because the date and contents of the trial court's tentative and final rulings cannot be disputed.
B. Procedural Prerequisites
Code of Civil Procedure section 128.7 authorizes a court to impose sanctions if it determines a pleading or motion was filed for an improper purpose or was indisputably without merit, either legally or factually (i.e., was frivolous). (Guillemin v. Stein (2002) 104 Cal.App.4th 156, 168.) A request for sanctions may be brought by a party to the litigation as a separate motion or by the court on its own motion. (Code Civ. Proc., § 128.7, subd. (c).) Regardless of who brings the motion, the statute provides a 21-day period during which a party may avoid sanctions by withdrawing the offending pleading or other document. (Ibid.; Li v. Majestic Industry Hills LLC (2009) 177 Cal.App.4th 585, 590-591.) The Legislature included this safe harbor provision so that the statute would be remedial rather than punitive. (Li, supra, at p. 591.) The procedures applicable when the court brings the motion are set forth in subdivision (c)(2) of Code of Civil Procedure section 128.7, which states:
"On its own motion, the court may enter an order describing the specific conduct that appears to violate subdivision (b) and directing an attorney, law firm, or party to show cause why it has not violated subdivision (b), unless, within 21 days of service of the order to show cause, the challenged paper, claim, defense, contention, allegation, or denial is withdrawn or appropriately corrected."
The application of this statutory provision was addressed by the Fourth District in Interstate Specialty Marketing, Inc. v. ICRA Sapphire, Inc. (2013) 217 Cal.App.4th 708 at pages 715 through 716:
"[W]e cannot bring the trial judge's sanctions within the statute and case law developed under it. The text of the statute in [Code of Civil Procedure] section 128.7, subdivision (c)(2) plainly provides for a 21-day safe harbor that begins to run from the service of notice of the [order to show cause] hearing at which sanctions under section 128.7 might be imposed. We cannot make Sapphire's motion for summary judgment serve as the equivalent of such an OSC. Sapphire did not ask for sanctions based on section 128.7 in that motion. Nothing in the section would allow for silent running of a safe harbor statute; it is not a safe harbor if there are enemy submarines in it. Indeed, this court rejected a similar argument (the idea counsel's adequate warning was enough to excuse the safe harbor provision) in (Hart v. Avetoom (2002) 95 Cal.App.4th 410, 414, ['"Close" is good enough in horseshoes and hand grenades, but not in the context of the sanctions statute.'].)" (Fn. omitted.)
Here, the trial court did not serve notice of an order to show cause hearing 21 or more days before such hearing. Its tentative ruling of January 12, 2016, mentioned sanctions and the hearing was held on January 26, 2016. Therefore, the statutory requirements were not satisfied and the award of sanctions must be reversed. Accordingly, we do not address whether counsel's actions were reasonable under an objective standard.
DISPOSITION
The judgment is reversed, except for part A labeled "Jury Trial" and the paragraph on the third page that states, "2. The Partnership known as D&L Associates was terminated on December 31, 2013." The subjects of attorney fees and costs are remanded for further proceedings not inconsistent with this opinion. The order imposing sanctions of $1,290 is reversed.
Laird Johnson shall recover his costs on appeal.
/s/_________
FRANSON, J. WE CONCUR: /s/_________
LEVY, Acting P.J. /s/_________
MEEHAN, J.