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Newport Psychcare v. Windstone Behavioral Health, Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE
Jan 31, 2012
G044449 (Cal. Ct. App. Jan. 31, 2012)

Opinion

G044449

01-31-2012

NEWPORT PSYCHCARE et al., Plaintiffs and Appellants, v. WINDSTONE BEHAVIORAL HEALTH, INC., et al., Defendants and Respondents.

Jeffrey Lewis, Kelly B. Dunagan and Karen E. Zubiate-Beauchamp for Plaintiffs and Appellants. Rutan & Tucker, Richard K. Howell and Gerard M. Mooney, Jr., for Defendants and Respondents.


NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 06CC03500 consol. with 06CC12777)


OPINION

Appeal from a judgment and orders of the Superior Court of Orange County, Robert J. Moss, Judge. Affirmed.

Jeffrey Lewis, Kelly B. Dunagan and Karen E. Zubiate-Beauchamp for Plaintiffs and Appellants.

Rutan & Tucker, Richard K. Howell and Gerard M. Mooney, Jr., for Defendants and Respondents.

Plaintiffs Newport Psychcare (Newport), Peter S. Currie, Ph.D., a professional corporation doing business as PsychHealth Services (PsychHealth), and Peter S. Currie (Newport, PsychHealth, and Currie collectively referred to as the Sellers)appeal from the judgment and posttrial orders following a bench trial in this action arising from the sale of Newport's and PsychHealth's assets to defendant Windstone Behavioral Health, Inc. (Windstone).

We refer to Newport, PsychHealth, and Currie collectively as the Sellers, but do so for easy of reference only. Currie repeatedly argues he is not a party to any of the contracts at issue in his individual capacity. We need not reach that issue to decide this appeal and our reference to Currie as one of the Sellers does not imply a finding on that issue.

The Sellers contend the trial court erred by (1) failing to expressly decide their declaratory relief cause of action; (2) determining they failed to obtain judgments more favorable than Windstone's Code of Civil Procedure section 998 settlement offers (all statutory references are to the Code of Civil Procedure); (3) finding Currie individually liable for Windstone's attorney fees; and (4) misinterpreting the obligations Windstone assumed under the Independent Contractor Agreement it entered into with Currie's professional corporation. As explained below, we find no basis for the Sellers' challenges and affirm the court's judgment and posttrial orders.

I


FACTS AND PROCEDURAL HISTORY

Currie is a licensed psychologist. In addition to treating patients in his private practice, Currie formed and operated PsychHealth and Newport, which are behavioral healthcare businesses. PsychHealth and Newport contracted with health insurers to provide a variety of services including behavioral health care services for patients and billing and claims processing for insurers and healthcare providers. Windstone sought to purchase PsychHealth's and Newport's assets, including their contracts with various health insurers.

In March 2005, PsychHealth entered into an Asset Purchase Agreement to sell Windstone all of its assets for $175,000, with a $24,500 downpayment due at closing and the remaining $150,500 due in monthly installments starting in October 2005. At the same time, Newport entered into an Asset Purchase Agreement to sell Windstone all of its assets for $75,000, with a $10,500 downpayment due at closing and the remaining $64,500 due in monthly installments starting in October 2005. Through his professional corporation, Currie also entered into an Independent Contractor Agreement with Windstone to provide Windstone with marketing services to attract new business for PsychHealth and Newport.

Windstone made the downpayments under the Asset Purchase Agreements and PsychHealth and Newport transferred all their assets to Windstone. Windstone, however, failed to make any of the installment payments required by the Asset Purchase Agreements and refused to accept any of the potential business Currie brought to Windstone under the Independent Contractor Agreement.

After PsychHealth and Newport transferred their assets, some insurers continued to pay PsychHealth and Newport for services Windstone provided. The Sellers notified Windstone about these incoming payments and forwarded them to Windstone. Windstone, however, instructed the Sellers to retain these payments and credit them toward the sums Windstone owed under the Asset Purchase Agreements. The Sellers were reluctant to do this because they believed at least a portion of these payments ultimately belonged to the individual healthcare providers who performed the underlying medical services.

Accordingly, the Sellers informed Windstone they would apply the payments to the Asset Purchase Agreements only if Windstone agreed to indemnify the Sellers against all claims any healthcare providers might later assert to those funds. Windstone refused to indemnify the Sellers and therefore the Sellers deposited the $52,492 it erroneously received from the insurers in an interest bearing trust account until the parties resolved the dispute over ownership of the funds.

In February 2006, the Sellers filed this action against Windstone, alleging claims for breach of the Asset Purchase Agreements, the Independent Contractor Agreement, and the covenant of good faith and fair dealing implied in each of those agreements. The complaint also asserted a declaratory relief claim over ownership of the funds held in the trust account. Windstone's answer asserted as an affirmative defense that the trust account funds belonged to Windstone and therefore should be offset against any damages awarded to the Sellers. Windstone also filed a cross-complaint alleging the Sellers converted the funds held in the trust account.

The complaint also named Windstone Group, Windstone Health Services, Inc., Timothy L. Salyer, Peter James Davidson, George L. Orras, and Gary Davidson as defendants. The trial court found in favor of these defendants on all claims and the Sellers do not challenge those rulings on appeal.

Both the Sellers' operative third amended complaint and Windstone's operative first amended cross-complaint alleged additional equitable and tort claims that are not at issue on this appeal.

In September 2006, Windstone made separate settlement offers to each of the Sellers under section 998. In exchange for the Sellers dismissing all claims alleged in their complaint, Windstone offered to (1) pay PsychHealth $91,000, Newport $70,000, and Currie $15,000; and (2) dismiss all claims it alleged against the Sellers in its cross-complaint. The Sellers rejected Windstone's offers.

The trial court conducted a 13-day bench trial on the operative complaint and cross-complaint in June 2009 and entered its statement of decision in August 2009. The court found for the Sellers on their claims for breach of the Asset Purchase Agreements, but for Windstone on its offset affirmative defense and conversion claim. Specifically, the court (1) found Windstone breached PsychHealth's and Newport's Asset Purchase Agreements; (2) awarded PsychHealth $94,700 in damages against Windstone plus prejudgment interest; (3) awarded Newport $64,500 in damages against Windstone plus prejudgment interest; (4) found the Sellers converted the $52,492 they held in the trust account; (5) awarded Windstone $40,580.43 in damages on its conversion claim against PsychHealth; (6) awarded Windstone $11,911.77 in damages on its conversion claim against Newport; and (7) offset the damages awarded to Windstone against the damages awarded to PsychHealth and Newport. The court also found Windstone did not breach either the Independent Contractor Agreement or the covenant of good faith and fair dealing implied in the contracts.

The offsets the trial court awarded total $52,492.20, but none of the parties address this minor, 20-cent discrepancy.

The Sellers moved for a new trial on their declaratory relief claim, arguing the trial court erred by failing to address the claim in its statement of decision. The trial court denied the new trial motion. The trial court granted Windstone's motion to declare it the prevailing party under section 998's cost-shifting provisions because the Sellers failed to obtain judgments more favorable than Windstone's settlement offers.

After the trial court entered judgment, Windstone filed a memorandum of costs and a motion seeking to recover its attorney fees based on the trial court's ruling Windstone was the prevailing party and the attorney fee provisions contained in the Asset Purchase Agreements and Independent Contractor Agreement. The Sellers filed a motion to strike and/or tax Windstone's memorandum of costs. The trial court appointed a referee to hear the motions and make recommendations, but the referee had not decided the matter by the time the parties completed the briefing in this appeal.

The Sellers appealed from the trial court's judgment and its orders denying the new trial motion and declaring Windstone the prevailing party under section 998.

II


DISCUSSION

A. The Trial Court's Statement of Decision Decided the Sellers' Declaratory Relief Claim

The Sellers contend the trial court should have granted a new trial on their declaratory relief claim because the court's statement of decision failed to decide the issue. The Sellers' opening brief, however, concedes the trial court "implicit[ly]" ruled on the declaratory relief claim through its ruling on Windstone's offset affirmative defense and conversion cause of action.

In their complaint, the Sellers sought a judicial declaration regarding "who is entitled to the funds held in trust under the [Asset Purchase Agreements]." Specifically, the operative complaint prayed for a declaration "to determine (1) whether it is proper to use the subject trust funds to offset the unpaid amounts owed by [Windstone under the Asset Purchase Agreements]; (2) whether [the Sellers] should pay the trust funds directly to the third party Providers; (3) whether the trust funds should be returned to the Payors, as some funds have already been returned pursuant to Payor demands; (4) whether the trust funds should be delivered to [Windstone] despite the fact that there [are] amounts due and owing and unpaid to [PsychHealth and Newport] under the [Asset Purchase Agreements]."

In its statement of decision, the trial court found the $52,492 the Sellers held in the trust account belonged to Windstone and the Sellers converted those funds when they refused to deliver them to Windstone or offset them against the amount Windstone owed under the Asset Purchase Agreements. The trial court further ruled the Sellers could retain the funds and offset them against the damages it awarded PsychHealth and Newport for Windstone's breach of the Asset Purchase Agreements. The Sellers do not challenge the trial court's ruling on Windstone's conversion claim or the court's decision to offset the funds held in the trust account against PsychHealth's and Newport's damages.

By offsetting the trust account funds against the damages it awarded PsychHealth and Newport, the trial court provided the Sellers with the specific relief they sought in their declaratory relief claim — a judicial determination that "it is proper to use the subject trust funds to offset the unpaid amounts owed by [Windstone under the Asset Purchase Agreements]." Any further judicial declaration that the funds in the trust account could be used to offset the amount Windstone owed under the Asset Purchase Agreements would be redundant and unnecessary. (See § 1061; Meyer v. Sprint Spectrum L.P. (2009) 45 Cal.4th 634, 647 ["'The court may refuse to [grant declaratory relief] in any case where its declaration or determination is not necessary or proper at the time under all the circumstances'"]; C.J.L. Construction, Inc. v. Universal Plumbing (1993) 18 Cal.App.4th 376, 390 ["'"The availability of another form of relief that is adequate will usually justify refusal to grant declaratory relief""].)

Although the trial court's statement of decision did not expressly find it was unnecessary to decide the Sellers' declaratory relief claim, the court nonetheless rendered the claim unnecessary when it resolved all the issues the declaratory relief action raised when it ruled on Windstone's conversion claim and offset affirmative defense. Moreover, the trial court's statement of decision decided the Sellers' declaratory relief claim by stating, "The Court finds for all Defendants on all of Plaintiffs' tort and other causes of action." Nothing more was required. B. Windstone May Recover the Costs It Incurred After Making Its Section 998 Settlement Offers

1. Legal Principles Governing Section 998 Settlement Offers

The prevailing party generally may recover his or her costs from the nonprevailing party. (§ 1032, subd. (b); Goodman v. Lozano (2010) 47 Cal.4th 1327, 1333.) Section 998, however, establishes a cost-shifting procedure that allows a nonprevailing party to recover costs when the prevailing party rejects a reasonable pretrial settlement offer. (Fassberg Construction Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 764 (Fassberg).)

Section 998 provides that if a plaintiff rejects a defendant's written settlement offer and fails to obtain a more favorable judgment at trial, the plaintiff may not recover his or her postoffer costs and must pay the defendant's postoffer costs, even if the plaintiff otherwise prevailed. (§ 998, subd. (c)(1); Fassberg, supra, 152 Cal.App.4th at p. 764.) The postoffer costs recoverable by a nonprevailing defendant include attorney fees when a contract or statute otherwise authorizes a fee award to the prevailing party. (Biren v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 140.) In its discretion, the court also may order the prevailing plaintiff to pay the defendant's expert witness fees for trial and trial preparation. (§ 998, subd. (c)(1); Fassberg, at p. 764.)

Section 998 requires the offeror to make a sufficiently specific settlement offer so the recipient may evaluate whether to accept it. (Fassberg, supra, 152 Cal.App.4th at p. 764.) "Any nonmonetary terms or conditions must be sufficiently certain and capable of valuation to allow the court to determine whether the judgment is more favorable than the offer. [Citations.]" (Id. at pp. 764-765.) The offeror bears the burden to establish the offer satisfied these standards. (Berg v. Darden (2004) 120 Cal.App.4th 721, 727; Barella v. Exchange Bank (2000) 84 Cal.App.4th 793, 799.) "To that end, a section 998 offer is construed strictly in favor of the party sought to be subjected to its operation." (Berg, at p. 727; see also Barella, at p. 799.)

Section 998 also requires that the proposed settlement resolve all claims between the offeror and the offeree alleged in either a complaint or cross-complaint. Because a complaint and cross-complaint usually are treated as two separate actions, a section 998 settlement offer may propose to resolve all claims alleged in a complaint while leaving the claims between the same parties alleged in a cross-complaint unresolved, and vice versa. (Westamerica Bank v. MBG Industries, Inc. (2007) 158 Cal.App.4th 109, 133-135 (Westamerica Bank); see also One Star, Inc. v. Staar Surgical Co. (2009) 179 Cal.App.4th 1082, 1096.)

A judgment is more favorable to a plaintiff than a prior section 998 settlement offer only if the value of the plaintiff's recovery in the judgment exceeds the offer's value. (Fassberg, supra, 152 Cal.App.4th at p. 764.) When the defendant's settlement offer includes costs, the judgment's value to the plaintiff includes the plaintiffs preoffer costs (and preoffer attorney fees if recoverable), but excludes the plaintiff's postoffer costs (and postoffer attorney fees). (Ibid.; § 998, subd. (c)(2)(A); Mesa Forest Products, Inc. v. St. Paul Mercury Ins. Co. (1999) 73 Cal.App.4th 324, 330.) When a plaintiff is entitled to prejudgment interest, the judgment's value to the plaintiff includes the prejudgment interest that accrued before the settlement offer, but excludes prejudgment interest that accrued after the settlement offer. (Bodell Construction Co. v. Trustees of Cal. State University (1998) 62 Cal.App.4th 1508, 1526.)

When the facts are not in dispute, we conduct a de novo review to determine whether a settlement offer is enforceable under section 998 and whether a plaintiff obtained a more favorable judgment. (Westamerica Bank, supra, 158 Cal.App.4th at p. 130; Fassberg, supra, 152 Cal.App.4th at p. 765.) Here, the parties agree the facts relating to the section 998 offers are not in dispute and therefore the de novo standard of review applies.

2. Windstone Made Valid Section 998 Settlement Offers

The Sellers contend Windstone cannot recover the costs it incurred after making its section 998 offers because the offers failed to resolve all claims alleged in either the operative complaint or cross-complaint. According to the Sellers, Windstone's offers failed to specify how the funds they held in the trust account would be disbursed and therefore failed to resolve either the complaint's declaratory relief claim or the cross-complaint's conversion claim. The Sellers argue Windstone's offers should have specified whether the funds in the trust account would be disbursed to the Sellers, Windstone, the insurers who erroneously submitted the funds to the Sellers, or the healthcare providers who rendered the underlying healthcare services. The Sellers, however, misconstrue Windstone's offers and overstate the requirements for a valid section 998 settlement offer.

Windstone's settlement offers unambiguously proposed settling all claims alleged in both the operative complaint and cross-complaint. Windstone offered to pay each of the Sellers a designated amount ($91,000 to PsychHealth, $70,000 to Newport, and $15,000 to Currie) if the Sellers dismissed with prejudice all claims they alleged in the operative complaint, including the declaratory relief claim regarding the funds the Sellers held in the trust account. In addition, Windstone offered to dismiss with prejudice all claims it alleged in its operative cross-complaint, including its claim the Sellers converted the funds they held in the trust account. No cause of action would have survived if the Sellers had accepted the settlement offers.

Although the settlement offers did not expressly state what would happen to the funds the Sellers held in the trust account, the offers clearly resolved any claims Windstone had to those funds. If the Sellers accepted Windstone's offers, Windstone would have release any claim it had to those funds and the Sellers would have been entitled to keep the funds they already held in the trust account. The settlement offers did not require an offset for the funds in the trust account nor did they require the Sellers to return those funds. As a result, not only would the Sellers have received the $176,000 Windstone offered to pay ($91,000 + $70,000 + $15,000), they also could have retained the $52,492 they held in the trust account. The total value of the settlement offers to the Sellers was therefore $228,492.

The Sellers nonetheless contend the settlement offers were invalid because they did not resolve the Sellers' request for a judicial declaration regarding ownership of the trust account funds against the claims of any third party insurers or healthcare providers. Windstone's settlement offers, however, need only resolve the claims between the Sellers and Windstone, not anyone else. The Sellers had no right to a judicial declaration in this action deciding the rights of third parties to the trust account funds because the Sellers failed to name as a defendant any third party claiming an interest in those funds. The trial court properly determined Windstone made valid settlement offers under section 998.

3. None of the Sellers Obtained a Judgment More Favorable than Windstone's Section 998 Settlement Offers

The Sellers contend PsychHealth and Newport obtained judgments more favorable than Windstone's settlement offers and therefore Windstone may not invoke section 998's cost-shifting provisions against PsychHealth and Newport. The Sellers, however, undervalue Windstone's settlement offers and overvalue the judgments PsychHealth and Newport obtained.

The Sellers do not argue Currie obtained a judgment more favorable than Windstone's settlement offer, nor could they. The trial court ruled against Currie on all claims he alleged against Windstone and on Windstone's conversion claim against Currie. The trial court awarded Currie no relief against Windstone.

First, the Sellers undervalue Windstone's settlement offers as $91,000 to PsychHealth and $70,000 to Newport. Those are the figures Windstone offered to pay PsychHealth and Newport to settle this action, but those figures do not include the value of the Sellers' trust fund account that the Sellers would have retained had they accepted Windstone's offers.

The Sellers concede the funds they held in the trust account represented payments insurers erroneously made to them for services rendered after PsychHealth and Newport transferred all their assets to Windstone. The Sellers retained the funds only because Windstone proposed using the funds to offset some of the payments it owed under the Asset Purchase Agreements. The Sellers do not dispute the insurers should have paid these funds to Windstone.

At trial, the court allowed the Sellers to keep the $52,492 they held in the trust account, but applied those funds against the damages the court awarded to PsychHealth and Newport. Specifically, the court offset $40,580.43 against the damages awarded to PsychHealth and the remaining $11,911.77 against the damages awarded to Newport. Under Windstone's settlement offers, no offset would have transpired. Rather, PsychHealth and Newport would have retained the funds they held in the trust account and Windstone would have paid PsychHealth $91,000 and Newport $70,000. Accordingly, the total value of the settlement offer to PsychHealth was $131,580.43 ($91,000 + $40,580.43) and the total value of the settlement offer to Newport was $81,911.77 ($70,000 + $11,911.77).

Second, the Sellers overstate the amount of prejudgment interest they may include when valuing the judgments and ignore the prejudgment interest the trial court awarded Windstone on its offsets against PsychHealth's and Newport's judgments. The Sellers contend they may recover prejudgment interest on the full amount of the breach of contract damages the court awarded PsychHealth and Newport from the date Windstone missed its first installment payment to the date of Windstone's settlement offers. That contention, however, ignores that the Asset Purchase Agreements required Windstone to make monthly installment payments of $3,500 to PsychHealth and $1,500 to Newport over several years.

When Windstone missed its first installment payments in October 2005, prejudgment interest began accruing on those first installment payments only. Interest began accruing on all subsequent monthly installment payments only after Windstone failed to make those payments. PsychHealth and Newport do not argue they had the right to accelerate the entire balance after Windstone missed the first installments. Consequently, when Windstone made its settlement offers in September 2006, it had missed only 12 installment payments under each Asset Purchase Agreement and only one installment payment under each agreement had accrued interest for that full 12-month period. All other payments only accrued interest from the date on which Windstone failed to make the installment payments. Windstone calculated the actual preoffer, prejudgment interest due PsychHealth as $2,086.10 and Newport as $894.04. The Sellers do not dispute these calculations.

In their opening brief, the Sellers asserted PsychHealth could claim $9,470 in prejudgment interest when valuing its judgment and Newport could claim $6,450 when valuing its judgment. The Sellers calculated those amounts by applying a 10 percent interest rate to the full amount of damages the trial court awarded.

On the same day the trial court declared Windstone the prevailing party under section 998, the court also granted Windstone's motion for prejudgment interest on the amounts the court offset against PsychHealth's and Newport's judgments, that is, the damages on Windstone's conversion claim. The court awarded Windstone $10,965.61 in prejudgment interest against PsychHealth and $3,218.78 in prejudgment interest against Newport. These amounts must be added to Windstone's offsets when valuing the judgments PsychHealth and Newport obtained.

Third, the Sellers overstate the amount of preoffer attorney fees they sought to include when valuing PsychHealth's and Newport's judgments. In the trial court, the Sellers presented evidence showing they had incurred $31,000 in attorney fees when Windstone served its settlement offers. The Sellers credit both PsychHealth and Newport with the full amount of these fees (for a total of $62,000) when valuing their judgments even though the fees related to work performed in representing all three Sellers on all claims alleged in the complaint and cross-complaint.

PsychHealth's and Newport's preoffer attorney fees claims, however, must be treated like any other contractual attorney fees claim. PsychHealth and Newport may recover fees incurred on claims covered by the applicable contractual attorney fee provision, but not fees incurred on claims outside the fee provision's scope. (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129-130; Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582, 1603-1604.) Accordingly, PsychHealth and Newport must apportion their fees between claims that support the recovery of attorney fees and those that do not. (Ibid.) PsychHealth and Newport need not apportion fees incurred on issues common to a claim on which fees may be recovered and a claim on which fees may not be recovered. (Ibid.; see also Cruz v. Ayromloo (2007) 155 Cal.App.4th 1270, 1277-1278 [fees for an attorney representing multiple parties must be allocated between fees for parties entitled to recover attorney fees and fees for parties not entitled to recover attorney fees unless work related to representing both groups].)

PsychHealth claims attorney fees under its Asset Purchase Agreement with Windstone and Newport claims attorney fees under its separate Asset Purchase Agreement with Windstone. Both agreements included an attorney fee provision authorizing the prevailing party to recover attorney fees in any action "to interpret or enforce any of the provisions of this Agreement . . . ." Accordingly, PsychHealth could recover fees it incurred on its claim that Windstone breached PsychHealth's Asset Purchase Agreement and Newport could recover fees it incurred on its separate claim that Windstone breached Newport's Asset Purchase Agreement. Neither PsychHealth nor Newport, however, could recover fees incurred on the other's claim for breach of the separate Asset Purchase Agreement unless the work related to issues common to both claims for breach of the Asset Purchase Agreements.

Similarly, neither PsychHealth nor Newport could recover fees on the breach of the Independent Contractor Agreement claim or any of the tort claims alleged in the Sellers' complaint unless the fees also related to their claims for breach of the Asset Purchase Agreements. PsychHealth and Newport also could not recover for fees incurred to defend against the conversion and other claims Windstone alleged in its cross-complaint unless the fees also related to the breach of the Asset Purchase Agreement claims.

PsychHealth and Newport made no attempt to allocate the $31,000 in attorney fees they claim among the various claims and they failed to provide any evidence from which Windstone, the trial court, or this court could attempt an allocation. In any case, we need not decide how much PsychHealth and Newport could have claimed in attorney fees when valuing their judgments because, as explained below, both failed to obtain a more favorable judgment even if we allow both to claim the full $31,000 in attorney fees. It is sufficient to note they are not allowed to both claim the full amount of the fees.

Finally, the Sellers overvalue PsychHealth's and Newport's judgments by adding the trust fund amount to the damages the trial court awarded PsychHealth and Newport for Windstone's breach of the Asset Purchase Agreements. The Sellers contend the trust account funds must be added to the damages the trial court awarded them because the trial court's ruling implicitly allowed the Sellers to keep the trust account funds. The Sellers are mistaken.

The trial court ruled the Sellers converted the funds in the trust account and found them liable to Windstone for the amount held in that account plus interest. The court nonetheless allowed the Sellers to keep those funds and offset them against the damages the court awarded PsychHealth and Newport because the damages awarded to PsychHealth and Newport exceeded the damages awarded to Windstone on the conversion claim. Allowing the Sellers to keep the funds in the trust account therefore reduced PsychHealth's and Newport's net recovery and the value of their judgments under section 998. Under no interpretation of the trial court's statement of decision could the funds be added to PsychHealth's and Newport's damages to increase the value of their judgments.

With this understanding regarding how Windstone's settlement offers and PsychHealth's and Newport's judgments must be valued, we now compare the offers to the judgments to determine whether PsychHealth and Newport obtained more favorable judgments. The values of PsychHealth's and Newport's judgments are as follows:

Value of PsychHealth's Judgment

+-----------------------------------------------------------------------------+ ¦Damages Awarded on Claim for Breach of PsychHealth's Asset ¦$94,700.00 ¦ ¦Purchase Agreement ¦ ¦ +----------------------------------------------------------------+------------¦ ¦Preoffer, Prejudgment Interest ¦$2,086.10 ¦ +----------------------------------------------------------------+------------¦ ¦Preoffer Attorney Fees (assuming PsychHealth may recover full ¦$31,000.00 ¦ ¦amount) ¦ ¦ +----------------------------------------------------------------+------------¦ ¦Offset for Damages Awarded to Windstone on Conversion Claim ¦($40,580.43)¦ +----------------------------------------------------------------+------------¦ ¦Prejudgment Interest Awarded on Windstone's Conversion Claim ¦($10,965.61)¦ +----------------------------------------------------------------+------------¦ ¦Total Value ¦$76,240.06 ¦ +-----------------------------------------------------------------------------+

Value of Newport's Judgment

+-----------------------------------------------------------------------------+ ¦Damages Awarded on Claim for Breach of Newport's Asset Purchase ¦$64,500.00 ¦ ¦Agreement ¦ ¦ +----------------------------------------------------------------+------------¦ ¦Preoffer, Prejudgment Interest ¦$894.04 ¦ +----------------------------------------------------------------+------------¦ ¦Preoffer Attorney Fees (assuming Newport may recover full ¦$31,000.00 ¦ ¦amount) ¦ ¦ +----------------------------------------------------------------+------------¦ ¦Offset for Damages Awarded on Windstone's Conversion Claim ¦($11,911.77)¦ +----------------------------------------------------------------+------------¦ ¦Prejudgment Interest Awarded on Windstone's Conversion Claim ¦($3,218.78) ¦ +----------------------------------------------------------------+------------¦ ¦Total Value ¦$81,263.49 ¦ +-----------------------------------------------------------------------------+

The value of Windstone's settlement offer to PsychHealth was $131,580.43. When that value is compared with the $76,240.06 value of the judgment PsychHealth obtained, it is clear PsychHealth failed to obtain a more favorable judgment, even if we allow it to claim the full amount of preoffer attorney fees. The value of Windstone's settlement offer to Newport was $81,911.77. When that value is compared with the $81,263.49 value of the judgment Newport obtained, it is clear Newport also failed to obtain a more favorable judgment, even if we allow it to claim the full amount of preoffer attorney fees. Consequently, the trial court did not err in finding Windstone to be the prevailing party under section 998. C. The Trial Court Did Not Award Attorney Fees Against Currie Individually

The Sellers argue the trial court erred by awarding Windstone attorney fees against Currie individually because Currie was not a party to any contract containing an attorney fee provision. This argument, however, is premature because the trial court has not yet awarded Windstone attorney fees against any party.

The judgment declares Windstone is the prevailing party under sections 998 and 1032 and shall recover its costs. Costs include attorney fees under a contractual fee provision (§ 1033.5, subd. (a)(10)(A)) but the judgment did not specify the amount of costs and attorney fees to be awarded against the Sellers. The judgment, however, provides that the amount of costs and attorney fees shall be determined on a future motion. The judgment does not state any of the Sellers are actually liable for attorney fees, but instead merely leaves it as a possibility for future determination.

Contractual attorney fees must be sought pursuant to a noticed motion. (§ 1033.5, subd. (c); Russell v. Trans Pacific Group (1993) 19 Cal.App.4th 1717, 1725.) After the trial court entered the judgment, Windstone filed a motion seeking attorney fees against the Sellers and the trial court referred that motion to a referee. The referee had not ruled by the time the parties completed their briefing on this appeal and Windstone's fee motion is not before us. Accordingly, the Sellers' argument that the trial court erroneously awarded Windstone attorney fees against Currie is premature. D. The Trial Court Did Not Err in Interpreting the Independent Contractor Agreement

The Sellers contend the trial court erroneously interpreted the Independent Contractor Agreement to give Windstone the option to use PsychHealth to market PsychHealth's and Newport's services, but not the obligation to use PsychHealth for this purpose. In the Sellers' view, the court's interpretation rendered the Independent Contractor Agreement illusory and unenforceable because Windstone did not assume an obligation to do anything under the agreement. The Sellers conclude we must reverse and remand for a new trial on the breach of the Independent Contractor Agreement claim because contract interpretation principles required the trial court to interpret the agreement to provide mutuality of obligation, not prevent it. The Sellers, however, misconstrue the trial court's ruling and misapply the law on interpreting contracts to avoid rendering them illusory and unenforceable.

The trial court did not rule Windstone had no obligation to use PsychHealth's marketing services. Rather, the trial court ruled the Independent Contractor Agreement gave Windstone the discretion to decide whether it would accept any potential business PsychHealth's marketing efforts brought to Windstone. The court interpreted the Independent Contractor Agreement as requiring Windstone to use its "independent business judgment" in deciding what, if any, potential business it would accept from PsychHealth's marketing efforts. The trial court also pointed out that the Independent Contractor Agreement required Windstone to pay PsychHealth only for the business Windstone accepted from PsychHealth's marketing efforts.

The trial court's interpretation is consistent with the policy of interpreting contracts to avoid making them illusory and unenforceable. When a contract provides a party with discretion to decide whether and how to perform under a contract, courts generally will imply an obligation for the party to exercise that discretion fairly and in good faith because without that implied obligation the party's promise to perform would be illusory. (Third Story Music, Inc. v. Waits (1995) 41 Cal.App.4th 798, 806 ["'The tendency of the law is to avoid the finding that no contract arose due to an illusory promise when it appears that the parties intended a contract. . . . An implied obligation to use good faith is enough to avoid the finding of an illusory promise'"].)

Here, the trial court interpreted the Independent Contractor Agreement to require Windstone to use its "independent business judgment" in deciding what potential business to accept from PsychHealth's marketing efforts despite the fact the agreement did not expressly establish any standard for Windstone to follow in deciding what potential business to accept. Thus, contrary to the Sellers' contention, the trial court interpreted the Independent Contractor Agreement in a manner that avoided rendering it illusory rather than in a manner that made it illusory.

The Sellers do not argue Windstone exercised its judgment unfairly or in bad faith. Indeed, the Sellers make no argument whatsoever regarding the manner in which Windstone performed under the Independent Contractor Agreement. The only challenge the Sellers make is to the trial court's interpretation of that agreement and that challenge fails for the reasons set forth above. Moreover, assuming the Sellers established that Windstone breached the Independent Contractor Agreement in some manner, they failed to address the trial court's finding that the Sellers did not prove any damages resulting from the breach. Consequently, the trial court's finding for Windstone on the claim for breach of the Independent Contractor Agreement would survive any challenge to the trial court's interpretation of the agreement. We therefore conclude the trial court did not err in ruling in Windstone's favor on the breach of the Independent Contractor Agreement claim.

The Sellers also argue the trial court erred in failing to rule on whether Windstone breached the covenant of good faith and fair dealing implied in the Independent Contractor Agreement. Not so. The trial court's statement of decision specifically stated the court "finds no evidence to support the cause[] of action for breach of the implied covenant . . . ."
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III


DISPOSITION

The judgment and orders are affirmed. Windstone and the other defendants shall recover their costs on appeal.

ARONSON, J. WE CONCUR: RYLAARSDAM, ACTING P. J. MOORE, J.


Summaries of

Newport Psychcare v. Windstone Behavioral Health, Inc.

COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE
Jan 31, 2012
G044449 (Cal. Ct. App. Jan. 31, 2012)
Case details for

Newport Psychcare v. Windstone Behavioral Health, Inc.

Case Details

Full title:NEWPORT PSYCHCARE et al., Plaintiffs and Appellants, v. WINDSTONE…

Court:COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION THREE

Date published: Jan 31, 2012

Citations

G044449 (Cal. Ct. App. Jan. 31, 2012)