Opinion
A114773
11-16-2007
MARIA VELASQUEZ et al., Plaintiffs, Cross-Defendants and Respondents, v. MONIKA KHUSHF, Defendant, Cross-Complainant and Appellant.
NOT TO BE PUBLISHED
Monika Khushf (appellant) appeals an order awarding attorney fees to Maria Velasquez and Bich Khoi Do (respondents) pursuant to an attorney fee provision in a contract for the sale of real property, for fees they incurred in (1) filing a complaint seeking a declaration that claims asserted by Khushf were not arbitrable, and an injunction against a pending arbitration initiated by Khushf, (2) unsuccessfully opposing Khushfs cross-petition to compel arbitration, and (3) in preparing for the arbitration until Khushf withdrew her demand for arbitration before a hearing on the merits.
The arbitrator denied respondents request that they be awarded their fees. He found that neither party prevailed in light of Khushfs voluntary withdrawal of her demand for arbitration at an early stage before the arbitrator had a meaningful basis for assessing the relative merits of their positions. Respondents then filed a motion in court seeking fees pursuant to Code of Civil Procedure section 1293.2. Despite the contrary ruling by the arbitrator, the court found that respondents were the prevailing parties in the arbitration, and awarded fees and costs.
Except as otherwise indicated, all subsequent statutory references are to the Code of Civil Procedure.
We shall hold that the court abused its discretion in determining that respondents were the prevailing parties either in the arbitration, or in the judicial proceedings that had resulted in the grant of Khushfs motion to compel arbitration and voluntary dismissal of respondents complaint for declaratory and injunctive relief.
FACTS
Monika Khushf purchased certain real property in San Francisco from respondents. The contract contained an arbitration clause, and an attorney fee provision that provided: "[T]he prevailing party shall be entitled to reasonable attorneys fees and costs from the non-prevailing party" in any action, proceeding, or arbitration.
A dispute arose, and Khushf submitted a demand for arbitration. Respondents asserted that Khushfs claims were not arbitrable because they fell within a specific exclusion in the arbitration clause "for latent and patent defects to which Code of Civil Procedure § 337.1 or 337.15" applies. They also argued that the court, not the arbitrator, should decide the issue of arbitrability. Respondents filed a complaint seeking a declaration that Khushfs claims were not arbitrable, and an injunction against further arbitration proceedings.
Khushf contended the claims she sought to arbitrate did not fall within the exclusion and filed a cross-petition to compel arbitration. The court granted her petition and filed an order compelling arbitration. The order compelling arbitration tracked the language of the arbitration clause excluding claims pursuant to sections 337.1 and 337.15. After some further litigation not here relevant, respondents voluntarily dismissed with prejudice their complaint for declaratory and injunctive relief. Khushf filed a motion for attorney fees, which the court denied as premature in light of the pending arbitration.
Each party blames the other for increasing the cost of litigation by failing to accede to the others legal position, and engaging in unnecessary legal maneuvers. These issues are relevant only to a challenge to the reasonableness of the fees incurred, an issue we need not reach, because we shall hold respondents were not a prevailing party, and therefore they were not entitled to any fees.
In Velasquez v. Khushf (Jan. 19, 2006, A110433 [nonpub. opn.]), this court dismissed Khushfs appeal of this order denying fees, on the ground that despite the dismissal of respondents complaint and the cross-petition, the pending arbitration left the case in the same procedural posture as an order compelling arbitration, which is not an appealable order or final judgment. Therefore, the order denying fees was not an appealable order after judgment. (§ 904.1, subd. (a)(2).) The fee award on appeal in this case was made after the request for arbitration was withdrawn. Since there is no longer any pending arbitration, the dismissal of respondents complaint and Khushfs cross-petition constitutes a final judgment in the court proceeding, and the award of costs and attorney fees pursuant to section 1293.4 is an appealable order after judgment.
After some discovery, Khushf withdrew her demand for arbitration before the arbitrator heard the matter on the merits. This time, respondents sought their attorney fees from the arbitrator. They asked the arbitrator to determine, pursuant to the fee clause in the contract, that they were the prevailing parties, since Khushf had withdrawn her arbitration demand. The arbitrator, in a signed letter, denied respondents request for attorney fees, noting, among other reasons, that he had not made any determination of the merits, and since the demand was withdrawn at such an early stage he had no meaningful basis for assessing the relative merits of the parties positions. He also reasoned, by analogy to Civil Code section 1717, subdivision (b)(2), in light of the voluntary dismissal of the arbitration before a determination on the merits, that neither party had prevailed. He concluded: "[I]n exercise of my discretion to do equity and given my decided view that neither party can truly be described as having `prevailed at this early point, I decline to award costs and leave the parties to bear such costs as have been incurred, expressly including attorneys fees, without alteration or redistribution."
Despite this explicit ruling by the arbitrator that neither party prevailed in the arbitration, respondents filed a motion in superior court pursuant to section 1293.2, which provides that the court shall award costs in "any judicial proceeding" relating to arbitration. They asked the court to award them costs and attorney fees as the "prevailing party in arbitration." Respondents argued that they had prevailed in the arbitration, without informing the court that the arbitrator had already determined that neither party prevailed in the arbitration, and had denied their request for attorney fees. Respondents further contended that Civil Code section 1717, subdivision (b)(2) was inapplicable to the dismissal of an arbitration demand. They argued the court should find they were the prevailing parties as defined in section 1032, subdivision (a)(4) because Khushfs withdrawal or dismissal of her pending arbitration claim rendered respondents parties "in whose favor a dismissal is entered." As the prevailing party in the arbitration, respondents counsel explicitly sought to recover fees incurred in "association with the arbitration and the judicial proceedings related to [arbitration]."
In her opposition, Khushf informed the court that respondents had already requested attorney fees from the arbitrator, and that the arbitrator had denied the request based upon his finding that neither party prevailed in the arbitration. Khushf also submitted a copy of the arbitrators letter stating his ruling on respondents fee request. She argued that the arbitrators decision denying fees was final, absent a petition to vacate, correct or amend. She also argued respondents were not the prevailing party entitled to fees incurred in the judicial proceedings under section 1293.2, since the court had granted her motion to compel arbitration and respondents had dismissed their complaint for declaratory relief with prejudice.
In reply, respondents asserted the arbitrators ruling that there was no prevailing party in the arbitration did not preclude the court from finding respondents prevailed in the court proceedings and awarding fees incurred in that litigation. Yet, they continued to rely upon the dismissal of the arbitration as the factual basis for finding that they were the prevailing party, and included billings for fees incurred not only in the pre-arbitration judicial proceedings, but also fees incurred in preparing for arbitration. At the hearing on the motion, Khushfs counsel pointed this out and urged the court, at a minimum, to deny fees "for anything regarding the arbitration," and limit the award pursuant to section 1293.2 to fees incurred in judicial proceedings.
Among other arguments, respondents contended that the arbitrator only denied fees associated with the arbitration, and that they were now seeking fees incurred in the judicial proceeding, yet the documentation they submitted included billings for both. They further suggested that the arbitrator had actually directed them to seek fees incurred in the judicial proceedings from the court, despite his determination that neither party prevailed. The arbitrator did observe, preliminarily, that respondents motion sought both fees incurred in the arbitration and "in court litigation (for which costs application to the courts is appropriate)," but ruled the "more fundamental" difficulty with the fee request was that neither party had prevailed in the arbitration.
The court filed an order stating respondents motion "for an order awarding them reasonable attorney fees and costs as the prevailing parties in arbitration is GRANTED" and awarded them $35,497.50 in reasonable attorney fees and $ 2, 270.58 in reasonable costs.
Khushf filed a timely appeal from that order.
Khushf challenges only the award of attorney fees, and does not separately challenge the award of costs. She states she also did not appeal a separate order in which the court awarded respondents attorney fees as costs incurred in the prior dismissed appeal.
ANALYSIS
Setting aside for the moment certain procedural anomalies that complicate the analysis, in effect, respondents accomplished a reversal of the arbitrators ruling that neither party prevailed in the arbitration without having to establish any statutory grounds for correction or vacation of an arbitration award. Such a result raises serious concern that the basic policies protecting the finality of an arbitrators decision have been undermined. (See Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 ["[t]he arbitrators decision should be the end, not the beginning, of the dispute"].) There are circumstances in which a court may award fees pursuant to section 1293, even though the arbitrator denied fees. For example, when there is a post-arbitration judicial proceeding to vacate, correct or confirm an arbitration award, the court may, of course, determine who prevailed in the judicial proceeding, even if the arbitrator determined that neither party prevailed in the arbitration. (Carole Ring & Associates v. Nicastro (2001) 87 Cal.App.4th 253, 260 [section 1293.2 permits the award of postarbitration attorney fees and costs to the party prevailing in subsequent judicial proceedings to vacate the award even though the arbitrator had directed the parties to bear their own attorney fees and costs in the arbitration].) In such cases there is no conflict with the principle of finality of the arbitrators decision, because the fee award is for fees incurred in the subsequent judicial proceeding. Here, however, although respondents relied upon the courts independent power pursuant to section 1293.2 to determine the prevailing party and award fees incurred in judicial proceedings as a means of explaining why the arbitrators ruling was not binding, they argued at the same time that the dismissal of the arbitration rendered them the prevailing party. This was the very factual and legal basis for a fee award that respondents submitted to the arbitrator as a basis for finding they had prevailed in the arbitration, and the arbitrator explicitly rejected that argument and found neither party prevailed.
We need not address all of respondents arguments as to why the arbitrators ruling had no effect on the courts discretion to determine the prevailing party and award fees pursuant to section 1293.2, because we shall reverse the courts fee award on other grounds. We do note, however, that to the extent respondents relied upon this courts opinion in the prior appeal, that reliance is misplaced. We stated only that pursuant to section 1293.2, the court has continuing jurisdiction after granting a motion to compel arbitration and that once "the arbitration is had or dismissed" the court could "make an award of costs or fees incurred with respect to the judicial proceedings pursuant to section 1293.2." (Velasquez v. Khushf, supra, A110433, at p. 6.) Nothing in our reference to the courts statutory authority to award costs supports respondents contention that the arbitrators prior ruling on their motion for fees had no relevance to their request that the court award fees pursuant to section 1293.2, not least because these facts were not before us.
In substance, respondents procedural maneuver was "the functional equivalent of the `heads I win, tails you lose proposition that has troubled [the courts] in one-sided de novo attacks on arbitration awards." (Caro v. Smith (1997) 59 Cal.App.4th 725, 731.) Had respondents sought fees in the context of a petition to correct or vacate an arbitration award there is no doubt the court would have denied fees. Their argument that they were the prevailing party was based upon the dismissal of the arbitration, yet the arbitrator had issued a written ruling, based upon the same argument, finding that neither party prevailed. Respondents contention that the arbitrator was wrong in drawing an analogy to Civil Code section 1717, subdivision (b)(2), and should instead have found they were a prevailing party as defined in section 1032, amounts, at most, to a claim that the arbitrator erred factually or legally in determining neither party prevailed, which is not a ground to correct or vacate an award. (See §§ 1286.2 [grounds to vacate] & 1286.6 [grounds to correct]; see also Moore v. First Bank of San Luis Obispo (2000) 22 Cal.4th 782, 784 ["Where the entitlement of a party to attorney fees . . . is within the scope of the issues submitted for binding arbitration, the arbitrators do not `exceed[] their powers [citation] . . . by denying the partys request for fees, even where such a denial order would be reversible legal error if made by a court in civil litigation"]; Moshonov v. Walsh (2000) 22 Cal.4th 771, 775-77 [court held a binding arbitration award may not be judicially corrected to award a party attorney fees that the arbitrator declined to provide]; Pierotti v. Torian (2000) 81 Cal.App.4th 17, 25-26.)
Khushf therefore devotes the bulk of her argument to urging this court to find that, having submitted to the arbitrator the issue of who prevailed in the arbitration, respondents were bound by the arbitrators determination that neither party prevailed, and that the superior court could not award attorney fees based upon a contrary determination in the absence of a petition to correct or vacate the arbitrators award and a showing of legally cognizable grounds for granting such relief. Yet, certain procedural anomalies of this case complicate application of the usual principles that would apply when a party submits an issue to arbitration, obtains an unfavorable award, and then seeks to evade it by initiating a court proceeding other than a petition to confirm, correct or vacate the award. Primary among them is the absence of an arbitration hearing or award on the merits, because Khushf withdrew her arbitration demand before a hearing was held. Neither party addresses the question whether, in these circumstances, an arbitrators written ruling on a postdismissal motion for attorney fees constitutes an "award" that either party could have petitioned to confirm, vacate or correct, or whether, in the absence of an award, the principles of finality normally applicable to an arbitrators decision are implicated.
An arbitration award is binding on the parties even in the absence of a judgment confirming the award. (§ 1287.6.)
Section 1283.4 specifies only that an award shall be in writing, signed by the arbitrator, and shall determine all questions submitted to the arbitrator that are necessary to resolve the controversy.
We, however, need not resolve Khushfs more problematic arguments for reversal based upon the finality of the arbitrators ruling, because we shall find that, even in the absence of the arbitrators ruling, the court abused its discretion in determining respondents were the prevailing party, either in the judicial proceedings that preceded the arbitration, or in the arbitration itself. (See McLarand, Vasquez & Partners, Inc. v. Downey Savings & Loan Assn. (1991) 231 Cal.App.3d 1450, 1456 [the trial courts determination as to who was the prevailing party for the purpose of awarding attorney fees pursuant to Civil Code § 1717 is discretionary and may be reversed only upon a showing of abuse of that discretion].) "A trial courts exercise of discretion is abused only when its ruling ` "exceeds the bounds of reason, all of the circumstances before it being considered." [Citation.] Nonetheless ` " `[t]he discretion of a trial judge is not a whimsical, uncontrolled power, but a legal discretion, which is subject to the limitations of legal principles governing the subject of its action, and to reversal on appeal where no reasonable basis for the action is shown. [Citation.] " [Citations.] " (Gonzales v. Personal Storage, Inc. (1997) 56 Cal.App.4th 464, 479.)
Section 1293.2 provides that a court shall award costs upon any judicial proceeding relating to arbitration, which may include judicial proceedings to enforce an arbitration agreement (§§ 1281-1281.6) and postarbitration enforcement of the award (§ 1285). Attorney fees may be recovered as an item of costs where, as here, a contract between the parties provides that the prevailing party is entitled to fees in any action, proceeding or arbitration arising out of the contract. (See § 1033.5, subd. (a)(10); Civ. Code, § 1717, subd. (a).) Unless the contract provides otherwise, the prevailing party on the contract is "the party who recovered a greater relief in the action on the contract." (Civ. Code, § 1717, subd. (b)(1).) In determining who obtained the greater relief, the court should respect substance rather than form. (Hsu v. Abbara (1995) 9 Cal.4th 863, 877.) It should " `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, " and compare " ` "the extent to which each party ha[s] succeeded and failed to succeed in its contentions." " (Estate of Drummond (2007) 149 Cal.App.4th 46, 51.) However, under Civil Code section 1717, subdivision (b)(2), there is no prevailing party on contract claims when the "action" has been voluntarily dismissed.
Pursuant to section 1293.2, the court may award fees upon any "judicial proceeding," yet respondents asked the court to award them fees based not upon their success in judicial proceedings, but rather upon their success in the arbitration. Respondents urged, and the court adopted, the theory that they were the prevailing party in the arbitration because Khushf had voluntarily withdrawn or dismissed her demand for arbitration. Based upon this fact, respondents contended they were defendants "in whose favor a dismissal is entered." (§ 1032, subd. (a)(4).) Anticipating the possibility of the same outcome they obtained before the arbitrator, they argued Civil Code section 1717, subdivision (b)(2) applies only to voluntary dismissal of an "action" and that arbitration is not an "action" as defined by section 22. They further urged the court not to engage in any analysis of which party obtained the greater relief under Civil Code section 1717, and instead apply the definition of prevailing party set forth in section 1032, subdivision (a)(4).
Even if we accept arguendo that it was correct to apply the definition of the prevailing party in section 1032 rather than that in Civil Code section 1717, it was an abuse of discretion to find that respondents were defendants "in whose favor a dismissal is entered," because no judgment of dismissal in respondents favor was ever entered with respect to the arbitration. "To be a `prevailing party, a defendant who has been voluntarily dismissed from the plaintiffs complaint must secure entry of the order or judgment of dismissal. [Citation.]" (Boonyarit v. Payless Shoesource, Inc. (2006) 145 Cal.App.4th 1188, 1190.) An award of costs to the defendant as the prevailing party within the meaning of section 1032, subdivision (a)(4) should be reversed where no judgment of dismissal has been entered. (Ibid.) A judgment is entered with respect to arbitration proceedings only upon a petition to confirm, vacate or correct an award (§ 1287.4). (City of Shasta Lake v. County of Shasta (1999) 75 Cal.App.4th 1, 10.) " `If an award is confirmed, judgment shall be entered in conformity therewith. The judgment so entered has the same force and effect as, and is subject to all the provisions of law relating to, a judgment in a civil action . . . . " (Caro v. Smith, supra, 59 Cal.App.4th at p. 736 [arbitrators award is not a judgment to which § 1032 applies, but a judgment entered pursuant to § 1287.4 is].) Here, there was no petition to confirm, correct or vacate an award dismissing the arbitration. In the absence of a confirmed arbitration award, or a judgment in their favor on a motion to correct or amend, the withdrawal of Khushfs demand for arbitration before a hearing on the merits is not a judgment of dismissal entered in respondents favor within the meaning of section 1032, subdivision (a)(4). (See Boonyarit v. Payless Shoesource, Inc., supra, at pp. 1192-1193.)
"[S]ection 1032 defines prevailing party only for `costs under that section and does not purport to define it for other statutes." (Sears v. Baccaglio (1998) 60 Cal.App.4th 1136, 1142.) The prevailing party for the award of costs under section 1032 is not necessarily the prevailing party for the award of attorney fees in contract actions under Civil Code section 1717. (Ibid.; see also Santisas v. Goodin (1998) 17 Cal.4th 599, 609 (Santisas) [in the context of voluntary dismissal a defendant may be prevailing party entitled to costs under § 1032, subd. (a)(4), but not entitled to attorney fees in action on the contract based upon Civ. Code, § 1717, subd. (b)(2)].) In Santisas, the court further held that in a voluntary dismissal where the underlying claims are both on the contract and in tort, Civil Code section 1717, subdivision (b)(2) applies only to bar an award of fees on the contract claims. (Santisas, supra, at pp. 617-618.) Although respondents, on appeal and below, cited Santisas for the proposition that the court should look to the definition of the prevailing party in section 1032, and not Civil Code section 1717, they made no attempt at all to demonstrate that the judicial proceeding relating to their complaint for declaratory and injunctive relief, and the cross-petition to compel arbitration, or the pending arbitration, in which they claim to have prevailed, were other than on the contract.
Nor is this a case in which the court entered an order dismissing the arbitration. (Cf. California Teachers Assn. v. Governing Board (1984) 161 Cal.App.3d 393 [court awarded fees and costs after it entered order dismissing arbitration as a sanction for discovery violations].)
Nor can the fee award be upheld on the theory that respondents were the prevailing party in the judicial proceedings. In this case there was no postarbitration petition to confirm, correct, or vacate an award. Therefore, the only judicial proceedings related to the pre-arbitration enforcement of the arbitration agreement. These judicial proceedings were initiated by respondents complaint for declaratory and injunctive relief, seeking a declaration that Khushfs claims in the pending arbitration were not arbitrable, and seeking an injunction against further arbitration. Khushf responded by filing a cross-petition to compel arbitration. Stripped to its essentials, the relief respondents sought was to stop the pending arbitration, and conversely the relief Khushf sought was a court order compelling respondents to submit to it. Since the court granted Khushfs cross-petition to compel arbitration, and respondents voluntarily dismissed their complaint, there is no basis for a finding that respondents prevailed in this judicial proceeding. The grant of Khushfs cross-petition to compel arbitration cannot be a formal or substantive litigation success for respondents, because they lost their bid to avoid arbitration, or to stay it until the court granted the declaratory relief they sought. Nor could they be found to have prevailed upon their complaint. Under Civil Code section 1717, subdivision (b)(2), there is no prevailing party when an action is voluntarily dismissed. Respondents voluntarily dismissed their complaint, and Khushf dismissed her cross-petition after the court issued an order compelling arbitration. Therefore, as a matter of law, neither party prevailed in the judicial proceedings.
We also note that although Khushf did obtain some relief in the form of an order compelling arbitration, she also was not a prevailing party because her claims were never resolved on the merits, due to her withdrawal of her demand for arbitration. "[Civil Code section 1717] requires that there be some final disposition of the rights of the parties." (Lachkar v. Lachkar (1986) 182 Cal.App.3d 641, 648.) "In ordering arbitration . . ., the court was not determining the substantive rights of the parties. Because there was no `reckoning of the net success of the parties, there was no prevailing party under the parties agreements nor pursuant to Civil Code section 1717." (Id. at p. 649.) In this case there never was a determination of the merits of the arbitration because Khushf withdrew her demand for arbitration before a hearing on the merits was held.
For the foregoing reasons, we conclude that the court abused its discretion by finding that respondents were the prevailing party in the arbitration. Nor can its order be upheld on the ground that respondents prevailed in the judicial proceedings. For the purpose of awarding fees, neither party prevailed. (See Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 1398 ["Typically, a determination of no prevailing party results when both parties seek relief, but neither prevails, or when the ostensibly prevailing party receives only a part of the relief sought"].) The order appealed from must be reversed to the extent that it awarded respondent attorney fees as the prevailing party.
Since Khushf does not raise any claim of error with respect to the award of $2,270.58 in costs, that part of the order shall stand.
CONCLUSION
The order appealed from is reversed to the extent that it awarded respondents $35,497.50 in attorney fees. In all other respects it is affirmed. Appellant is entitled to costs on appeal.
We concur:
SWAGER, J.
MARGULIES, J.