Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Kern County No. S-1500-CV-265096, Sidney P. Chapin, Judge.
Harry J. Histen for Plaintiff, Cross-defendant and Appellant.
No appearance for Defendant, Cross-complainant and Respondent.
OPINION
CORNELL, J.
Laura Louise Lowdon was awarded a residence in Hemet, California (the real property) as part of the settlement in her divorce from Wayne L. Vaughn, Jr. (Vaughn). As part of the settlement, Lowdon executed a promissory note in the amount of $56,000 to the Estate of Wayne L. Vaughn, Sr. (the Estate) secured by a deed of trust on the real property.
Vaughn, acting as the personal administrator of the Estate, declared a default on the promissory note and caused a notice of default to be recorded. Lowdon, denying a default occurred, filed an action seeking an injunction preventing a foreclosure sale. Lowdon obtained preliminary relief and, after two “settlements, ” the real property was sold, the promissory note was paid in full, and the parties agreed to submit the issue of attorney fees to the trial court for resolution.
The trial court, relying on Code of Civil Procedure section 1032, concluded the Estate was the prevailing party and awarded it attorney fees. We reverse because Code of Civil Procedure section 1032 defines the prevailing party for purposes of costs only, not for an award of attorney fees. As we shall explain, the trial court should have applied Civil Code section 1717, and the cases interpreting that statute, in making its determination. We will remand the matter to the trial court to allow it to determine which party, if either, is the prevailing party, utilizing the appropriate legal standards.
FACTUAL AND PROCEDURAL SUMMARY
Vaughn filed a petition to dissolve his marriage to Lowdon around June 2006 in Kern County Superior Court. In March 2008, the parties stipulated to the entry of a judgment of dissolution, including a division of a portion of their real property. As relevant here, Lowdon was awarded the real property. In order to equalize the distribution of property, she executed a promissory note in the amount of $56,000 to the Estate that was secured by a first deed of trust on the real property. Wayne L. Vaughn, Sr., was Vaughn’s father, and Vaughn, along with his two sisters, were the trustees of the Estate.
The promissory note signed by Lowdon did not bear any interest until such time as it became due and payable. There was no due date on the promissory note. It became payable, however, when one of the following conditions occurred:
1. Lowdon transferred title to the real property, in whole or in part;
2. Lowdon borrowed money using the real property as security for the loan;
3. The real property otherwise became subject to a lien, attachment, or levy, not removed within 30 days;
4. The real property ceased being Lowdon’s primary residence; Lowdon failed to live on the real property for a period exceeding 30 consecutive days; or Lowdon rented all or part of the real property;
5. Lowdon died or became incapacitated;
6. Lowdon became a debtor in a bankruptcy proceeding; and,
7. “The occurrence of any event that threatens the repayment of this Note or would substantially impair the value of the [real property].”
As part of this transaction, Lowdon also executed a standard “LONG FORM DEED OF TRUST AND ASSIGNMENT OF RENTS (INDIVIDUAL)” (deed of trust), which was incorporated by reference into the promissory note. As relevant here, the deed of trust required Lowdon to obtain and deliver to the Estate a policy of fire insurance satisfactory to the Estate, naming the Estate as the loss payee. The deed of trust also provided an acceleration clause, which stated, “That upon default by [Lowdon] in payment of any indebtedness secured hereby or in performance of any agreement hereunder[, ] [the Estate] may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold said property which notice Trustee shall cause to be filed of record.”
On June 25, 2008, the Estate sent a letter to Lowdon advising her that she had defaulted on the promissory note because she failed to obtain a policy of fire insurance naming the Estate as the loss payee. The letter concluded, “The Estate hereby gives notice to [Lowdon] that she is in default of both the Note and [deed of trust] and that the Estate is calling the Note immediately due and payable in its entirety.”
On June 30, 2008, Lowdon caused a letter to be sent to the Estate informing it that the June 25, 2008, letter was the first notice of the Estate’s claim that Lowdon was in default of the terms of the deed of trust, provided a copy of the fire insurance policy in force on the property from November 21, 2007, through November 21, 2008, and enclosed a letter requesting the insurance company name the Estate as a loss payee on the insurance policy.
In response, the Estate caused to be filed on July 2, 2008, a “NOTICE OF DEFAULT AND ELECTION TO SELL UNDER DEED OF TRUST” (notice of default). The notice of default stated that Lowdon was in default for failing to pay the entire balance due on the promissory note, which was accelerated due to the failure to provide proof of insurance as required by the deed of trust.
On July 16, 2008, Lowdon’s insurance company issued a document evidencing that the Estate had been added as an additional insured to Lowdon’s insurance policy.
In response, Lowdon filed two essentially identical actions, one in Riverside County (where the real property was located) and the other in Kern County (the residence of Vaughn and the Estate). Lowdon’s complaint contained three causes of action, one for breach of contract, one for the breach of the implied covenant of good faith and fair dealing, and one seeking injunctive relief. The essence of the complaint was that by claiming to accelerate the amount due under the promissory note and filing the notice of default, Vaughn had breached the contract. Lowdon also sought a temporary restraining order, preliminary injunction, and permanent injunction preventing foreclosure of the deed of trust filed on the Estate’s behalf.
Lowdon obtained a temporary restraining order preventing foreclosure in the Riverside County action, which Vaughn unsuccessfully challenged by writ.
Thereafter, in late December 2008, the parties entered into a stipulated judgment on reserved issues in the dissolution proceedings, apparently intended to resolve the pending dispute over the real property. This judgment required Lowdon to do the following: (1) list the real property for sale, (2) pay interest on the promissory note from July 1, 2008, until paid in full, (3) pay the promissory note in full no later than September 30, 2009, and (4) waive any possible defenses to a nonjudicial foreclosure commenced after September 30, 2009.
The judgment, however, was not a final resolution of the dispute between the parties. It allowed Vaughn to rescind the agreement if (1) Lowdon did not list the real property in a timely fashion or failed to pay the promissory note in a timely fashion, and (2) claimed that “If the other executors of the Estate do not agree to the foregoing terms, this entire Agreement may be rescinded at [Vaughn’s] option, up to and including January 22, 2009.” Although unclear from the record, it appears Vaughn eventually rescinded this agreement.
Lowdon listed the real property for sale and quickly found a buyer. She also made a principal payment on the promissory note in the amount of $30,000. According to Lowdon, the sale of the real property was dependent on a short escrow period. A demand for payoff was made to the Estate, but Vaughn, acting on behalf of the Estate, failed to respond. Eventually, the parties to the sale of the real property agreed to leave $112,000 in an escrow account to resolve the promissory note and closed the sale.
The Estate eventually recorded a lis pendens based on claims existing in the family law action, to which it was not a party. Lowdon contends there was no factual or legal basis for the lis pendens. The lis pendens apparently was not recorded before the close of the sale escrow, and did not interfere with the closure of the sale. The Estate also filed a notice of trustee’s sale alleging that Lowdon had failed to pay the promissory note in full when she sold the property. No notice of default was filed on this basis.
In April 2009, Vaughn and Lowdon entered into a stipulation in Riverside County Superior Court, once again intending to resolve their disputes. The stipulation set forth the facts, essentially as described above, and acknowledged Lowdon’s principal payment of $30,000 on December 26, 2008. It also stipulated (1) Lowdon submitted a demand for payoff to the Estate on January 21, 2009; (2) the Estate received the demand on February 3, 2009; (3) the escrow for the sale of the real property closed on February 6, 2009; and (4) the Estate submitted a payoff demand of $137,432.62 on February 24, 2009.
The Estate recorded and served a notice of trustee’s sale on March 5, 2009. Lowdon responded with an application for a temporary restraining order, preliminary injunction, and permanent injunction. On April 15, 2009, Lowdon paid to the Estate $33,308.78, consisting of the remaining principal of the promissory note in the amount of $26,000, interest in the amount of $4,083.78, reimbursement for the premium paid to obtain fire insurance in the amount of $1,650, and reimbursement of trustee fees in the amount of $1,575. The stipulation agreed the sole remaining issue between the parties was which party would be entitled to recover attorney fees and the amount of those fees.
The parties agreed the Estate would postpone the pending trustee’s sale of the real property until two weeks after the trial court determined who the prevailing party was and the amount of attorney fees that would be recoverable. Interestingly, Vaughn represented that he had the authority to enter into the stipulation on behalf of the Estate. The stipulation was signed by the attorneys, Vaughn, Lowdon, Vaughn on behalf of the Estate, and the trial court.
Pursuant to the stipulation, the parties each filed motions to have themselves declared the prevailing party and awarded attorney fees. The trial court determined the Estate was the prevailing party and awarded it attorney fees and costs in the amount of $60,675.10.
DISCUSSION
Lowdon’s sole contention on appeal is that the trial court erred in determining the Estate was the prevailing party in the litigation. Although the litigation between the parties carried strong overtones of dissolution proceedings, and the strong emotions associated therewith, the source of the dispute was the promissory note and deed of trust. The litigation was the result of the Estate’s action in declaring a default on the promissory note, accelerating the due date for full payment on the promissory note, and attempting to foreclose its security interest in the real property.
The “American rule, ” codified in Code of Civil Procedure section 1021, requires each party to the litigation to bear his or her own attorney fees, unless a statute provides for the recovery of attorney fees, or there is an agreement between the parties for the recovery of attorney fees. (Santisas v. Gordon (1998) 17 Cal.4th 599, 607, fn. 4 (Santisas); Sears v. Baccaglio (1998) 60 Cal.App.4th 1136, 1139 (Sears).)
In this action, both parties sought recovery of attorney fees pursuant to the promissory note, which provided, in relevant part, that “In connection with any action, arbitration, or other proceeding to enforce this Note, the collection of any sums due hereunder, any actions for declaratory relief in any way related to this Note, or for the protection or preservation of any rights of the Holder hereunder, the prevailing party shall be entitled to costs and reasonable attorney’s fees.”
Contractual attorney fee provisions, such as this one, are governed by Civil Code section 1717. (Santisas, supra, 17 Cal.4th at p. 614.) Under Civil Code section 1717, the trial court must (1) determine if there is a prevailing party, and if so, which party is the prevailing party, (2) determine the amount of reasonable attorney fees, and (3) award them as costs. (Id., subds. (a), (b)(1).) The trial court may conclude that neither party prevailed in the litigation. (Id., subd. (b)(1).)
Civil Code section 1717, subdivision (b)(1) defines the prevailing party as “the party who recovered a greater relief in the action on the contract.” If one party achieves a simple, unqualified victory on the contract causes of action, then that party has recovered the greater relief on the contract and is the prevailing party as a matter of law. (Hsu v. Abbara (1995) 9 Cal.4th 863, 875-876 (Hsu).) If neither party achieves a simple, unqualified victory, the trial court must exercise its discretion to determine whether either party prevailed in the litigation. (Civ. Code, § 1717, subd. (b)(1); Silver Creek, LLC v. BlackRock Realty Advisors, Inc. (2009) 173 Cal.App.4th 1533, 1538 (Silver Creek).) We review the trial court’s decision for an abuse of discretion. (Silver Creek, at p. 1539.)
In deciding which party has prevailed in the litigation, “the trial court is to compare the relief awarded on the contract claim or claims with the parties’ demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The prevailing party determination is to be made only upon final resolution of the contract claims and only by ‘a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions.’ [Citation.]” (Hsu, supra, 9 Cal.4th at p. 876.) The trial court must focus on substance over form, and must be guided by equitable principles. (Id. at p. 877; Silver Creek, supra, 173 Cal.App.4th at p. 1539; Sears, supra, 60 Cal.App.4th at p. 1154.) A party may prevail if it obtains its main litigation objective, even if it is denied any direct relief. (Hsu, at p. 877; Silver Creek, at p. 1539.) Indeed, the party achieving greater monetary relief will not necessarily be the prevailing party. (Sears, at p. 1151.)
The record here conclusively demonstrates the trial court did not apply these principles when it concluded the Estate was the prevailing party in the litigation. The Estate argued in its moving papers that it was entitled to its attorney fees because it had obtained a net monetary recovery as defined in Code of Civil Procedure section 1032, subdivision (a)(4). The trial court agreed with this assertion when it concluded that the Estate was “the prevailing party pursuant to Code of Civil Procedure section 1032 (a)(4)” because it “obtained a net monetary recovery against” Lowdon.
The trial court erred because the prevailing party pursuant to Code of Civil Procedure section 1032, subdivision (a)(4) is not necessarily the prevailing party under Civil Code section 1717. (Chinn v. KMR Property Management (2008) 166 Cal.App.4th 175, 190; Sears, supra, 60 Cal.App.4th at p. 1151.) Code of Civil Procedure section 1032, subdivision (a)(4) defines the prevailing party only for the purposes of awarding costs. (Santisas, supra, 17 Cal.4th at p. 606.) Under Code of Civil Procedure section 1032, subdivision (a)(4), the trial court is not required to address the equitable considerations in the case, nor focus on the substance of the dispute. Because the trial court applied the wrong rule of law in awarding the Estate attorney fees, it abused its discretion and reversal is required. (Silver Creek, supra, 173 Cal.App.4th at p. 1539.)
We will remand the matter to the trial court to permit it to exercise its discretion in the first instance applying Civil Code section 1717 and the principles stated above. We note for the assistance of the trial court the following factors it should consider in determining which, if either, party prevailed in the litigation.
Lowdon initiated the litigation in response to the Estate’s declaration of a default and accelerated principle payment on very specious grounds. Lowdon’s pleadings and declaration established that her goal in the litigation was to prevent foreclosure and permit sale of the real property. She did not at any time dispute the validity of the debt, only whether it was due and payable as demanded by the Estate. Although minor monetary concessions were made, Lowdon achieved her goal by selling the real property, even though Vaughn, acting on behalf of the Estate, interfered at every opportunity.
The Estate, on the other hand, had no clear, identifiable litigation objective other than interfering with Lowdon’s use and enjoyment of the real property. Vaughn, as the personal administrator of the Estate, entered into agreements with Lowdon to resolve all disputes and then terminated those agreements, claiming that the other beneficiaries refused to abide by the agreement. Yet, Vaughn entered into a final resolution of the dispute when it became clear that he was left with no realistic method of interfering with the sale of the property.
We also note that the Estate demanded over $100,000 in fees from the sale of the property, yet filed a motion seeking to recover only $58,019 in attorney fees. This demand was made over one month after a request for a payoff was sent to the Estate by the escrow company handling the sale of the real property. The Estate, however, received payment in full of the promissory note from Lowdon, even though its efforts to foreclose the real property failed.
Each of these facts, as well as any others deemed relevant by the trial court, must be considered when determining which party, if either, prevailed in the litigation. Specifically, the trial court must “compare the relief awarded on the contract claim or claims with the parties’ demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The prevailing party determination is to be made only upon final resolution of the contract claims and only by ‘a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions.’ [Citation.]” (Hsu, supra, 9 Cal.4th at p. 876.) The trial court must focus on substance over form and must be guided by equitable principles. (Hsu, at p. 877; Silver Creek, supra, 173 Cal.App.4th at p. 1539; Sears, supra, 60 Cal.App.4th at p. 1154.)
DISPOSITION
The order awarding the Estate attorney fees is reversed and the matter is remanded to the trial court to permit it to exercise its discretion in determining which party, if either, prevailed in the litigation, after considering the principles stated herein. Lowdon is awarded her costs on appeal.
WE CONCUR: WISEMAN, Acting P.J. LEVY, J.