Opinion
A161965
05-03-2023
BING FU KUNG, Plaintiff and Appellant, v. CHRISTOPHER CARTHY et al., Defendants and Respondents.
NOT TO BE PUBLISHED
San Francisco County Super. Ct. No. CGC-18565765
GOLDMAN, J.
Plaintiff Bing Fu Kung (Kung) and defendant Christopher Carthy (Carthy) formed a limited liability company, defendant Armentum Partners, LLC (Armentum), to offer investment banking services. Under their agreement, Kung and Carthy were to share any net income earned by Armentum. After the first year of business, Kung sold back his interest in Armentum and executed a release of claims. Several years later, notwithstanding the release, Kung brought this action seeking a share of money paid to Armentum after his departure.
The trial court granted summary judgment on Kung's claims, finding them barred by the release. We affirm the grant of summary judgment. In response to Carthy's cross-appeal, we affirm the trial court's order sustaining a demurrer to a cause of action asserted in his cross-complaint, affirm its refusal to award the costs of electronic legal research, and vacate its denial of the costs of electronic document hosting.
FACTUAL AND PROCEDURAL BACKGROUND
I. The Pleadings
Kung's complaint (complaint), filed in April 2018 against Carthy and Armentum (defendants), alleged that he and Carthy formed Armentum as a limited liability company in September 2009 under a written agreement (operating agreement). Pursuant to the operating agreement, Carthy owned 75 percent of Armentum and Kung owned 25 percent, and the pair were to be compensated proportionally from net revenues of Armentum. Soon after, Armentum began providing consulting services to Gatekeeper Pharmaceuticals, Inc. (Gatekeeper) with respect to the commercialization of a potential cancer treatment, known as WZ4002. Gatekeeper had arranged to license WZ4002 from the research institute that developed it.
Within a short time, Gatekeeper received a letter from another pharmaceutical company, Novartis International Pharmaceuticals, Ltd. (Novartis), challenging Gatekeeper's right to license WZ4002. After Gatekeeper expressed confidence in its licensing rights, Armentum continued providing services for about one year. In September 2010, the complaint alleges, Carthy told Kung that the dispute over the right to exploit WZ4002 was preventing Armentum from successfully completing its work for Gatekeeper. Carthy suggested that "they should stop working together" and Kung should sign a series of documents terminating his relationship with Armentum, including a Termination And Release Agreement (release). Kung executed the documents and ceased work for Armentum, but, the complaint alleges, he believed that he retained the right to receive a share of any compensation paid to Armentum for services rendered prior to his termination. That belief was founded on "Carthy's frequent prior assurances to [Kung] that [he] would receive 25% of any money Gatekeeper paid Armentum" and on Kung's trust in his friendship with Carthy.
After extensive litigation, Novartis relinquished its claim to WZ2004 and paid Gatekeeper a settlement. In July 2014, Kung learned that Gatekeeper paid Carthy $2 million from the settlement. In January 2018, Gatekeeper told Kung that the payment was actually $2.5 million and was paid as compensation for Armentum's services. In March 2018, Kung's attorney sent a letter to Carthy's attorney purporting to rescind the release.
The complaint, which seeks a 25 percent share of the $2.5 million payment from Gatekeeper, asserts claims for breach of the operating agreement against Carthy and Armentum and breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty against Carthy.
Carthy filed a cross-complaint. In addition to a series of claims against John Chant (Chant), Gatekeeper's President and CEO, which are not at issue here, the cross-complaint alleges a single cause of action against Kung for breach of the release, premised on Kung's filing of this action. Kung filed a demurrer to that claim, arguing that Carthy suffered no injury from the filing of the lawsuit other than incurring attorney's fees, which are not available under the release. The trial court sustained Kung's demurrer without leave to amend.
II. Defendants' Summary Judgment Motion
Defendants filed a motion for summary judgment, arguing that Kung's claims are barred by the release, the statute of limitations, and the doctrine of laches.
According to a declaration submitted by Carthy in support of the motion, he and Kung first became acquainted when both were working at an investment bank a few years before Armentum was founded. When Carthy decided to start Armentum, he invited Kung to join him, and the pair agreed to split any profits. For the first year of Armentum's existence, Carthy worked to find investors or partners for Gatekeeper in its efforts to commercialize WZ4002, but his efforts were stymied by the cloud over Gatekeeper's right to license the technology created by Novartis. Kung, who had continued to work full-time for another investment bank during this time, had limited involvement in Carthy's work for Gatekeeper.
When Armentum secured no other investment banking clients in the first year, Carthy decided to focus Armentum's business on debt financing. Because Kung had no experience in this area of finance, Carthy "explained to [Kung] that I was going to be taking Armentum in a different direction and asked him to withdraw." Kung executed the release and a letter of withdrawal. The release contains a provision stating that Kung and Armentum release each other "from any and all past or future claims, demands, causes of action of any kind, . . . whether known or unknown, suspected or claimed, disclosed or undisclosed, matured or unmatured which either party ever had, now has, or which may hereafter accrue or otherwise be acquired ...." The letter of withdrawal notified Armentum of Kung's intent to withdraw as a member and to return his ownership units to Armentum for a payment of $250, "in full and complete satisfaction of any and all obligations which [Armentum] has owed, owes or owes to [Kung] in the future." The $250 payment equaled Kung's capital contribution to Armentum.
Carthy thereafter formalized his work with Gatekeeper by becoming the company's Vice President of Business Development and assisting Gatekeeper on a full-time basis in its litigation against Novartis. Carthy was initially compensated in April 2011 by an award of shares in Gatekeeper. When Gatekeeper settled the lawsuit against Novartis in 2013, Carthy was paid $2.5 million. Carthy characterized this payment as compensation for his work for Gatekeeper between September 2010 and September 2013.
After the settlement, Carthy told Kung to contact Chant to discuss payment "for the work he did back in 2009-2010." Kung and Chant agreed that Kung would be paid $100,000 by Gatekeeper, half of which would be paid in Gatekeeper stock. At Chant's request, Kung asked Carthy whether Armentum would pay half of the remaining $50,000, but Carthy declined because Armentum had never received any compensation from Gatekeeper. Carthy heard no more about the matter until March 2018, when he was contacted by Kung's attorney.
In opposing summary judgment, Kung's declaration acknowledged that he continued to work full-time for another investment firm back during the year in which he participated in Armentum. His declaration, however, detailed work he performed for Armentum, including "spending numerous hours over the course of several months preparing extensive materials and contacting and meeting numerous potential partners, investors, and lenders on Gatekeeper's behalf." During that work, he became aware of the claims asserted by Novartis.
In September 2010, Carthy told Kung that "because Novartis's claim to have first rights to Gatekeeper's IP was blocking Armentum from closing any transactions with third parties for Gatekeeper, and because Armentum had not made any money from Gatekeeper, which was Armentum's only major client, we should stop working together." At that time, Kung was aware that Gatekeeper intended to bring an action against Novartis and was confident of a substantial recovery.
Kung acknowledged executing the release and letter of withdrawal and reading the documents prior to signing them. He did so believing that Gatekeeper would eventually receive money from Novartis and pay Armentum for services rendered in 2009 and 2010 and that he would receive 25 percent of that compensation. Kung averred that he would not have signed the documents if he had thought they effected a release of his claim to a share of the money paid by Gatekeeper for Armentum's services.
After Kung learned from Chant in 2013 that Gatekeeper had settled its lawsuit with Novartis, Kung was told by Carthy that Kung would receive $100,000 "as [his] share of the settlement." In August 2014, Kung was paid $50,000 by Gatekeeper and given an equity interest in the company.
The trial court granted the motion, reasoning that (1) the broad and general language of the release bars Kung's claims; (2) Kung's purported rescission of the release was ineffective because the release was not a product of fraud, was unreasonably delayed, and constituted a prohibited partial rescission; (3) Kung affirmed the release when he accepted a payment from Gatekeeper in 2014; and (4) Kung's claims are barred by Code of Civil Procedure section 338, the three-year statute of limitations for fraud. In response to Kung's motion for a new trial, the court withdrew its ruling that the action is barred by the statute of limitations, but the court otherwise affirmed its order granting summary judgment.
Kung appeals the grant of summary judgment, while Carthy appeals the sustaining of a demurrer to his cause of action against Kung for breach of the release and the denial of a portion of his request for costs.
DISCUSSION
I. Kung's Appeal
Kung contends that the trial court erred in granting summary judgment because (1) there is a triable issue of material fact whether Carthy, a fiduciary by virtue of his partnership with Kung, had a duty to explain to Kung the legal effect of the release, (2) defendants failed to rebut the presumption that the release was secured by fraud because it conferred an unfair advantage on Carthy, (3) defendants failed to negate Kung's allegation that he was entitled to rescind the release on grounds of mistake, (4) there is a triable issue of fact whether Kung's acceptance of compensation from Gatekeeper affirmed the release, and (5) Kung's purported rescission of the release was not a partial rescission.
"A party is entitled to summary judgment only if there is no triable issue of material fact and the party is entitled to judgment as a matter of law. [Citation.] . . . [¶] We review the trial court's ruling on a summary judgment motion de novo, liberally construe the evidence in favor of the party opposing the motion, and resolve all doubts concerning the evidence in favor of the opponent." (California DUI Lawyers Assn. v. Department of Motor Vehicles (2022) 77 Cal.App.5th 517, 529.)
A. Enforceability of the Release
1. The effect of the release
Kung does not dispute that his execution of the release and withdrawal letter effected a release of his present claims if the documents are enforceable. "In general, a written release extinguishes any obligation covered by the release's terms, provided it has not been obtained by fraud, deception, misrepresentation, duress, or undue influence. [Citations.]' "The general rule is that when a person with the capacity of reading and understanding an instrument signs it, he is, in the absence of fraud and imposition, bound by its contents, and is estopped from saying that its provisions are contrary to his intentions or understanding." '" (Skrbina v. Fleming Companies (1996) 45 Cal.App.4th 1353, 1366.)
The language of the two documents is broad and unequivocal. The release states that Kung releases Armentum "from any and all past or future claims, . . . of any kind, . . . whether known or unknown." It confirms the import of this language in a separate paragraph, which states that "Kung represents and agrees that he has read this Release Agreement, [and] understands its terms and the fact that it releases certain claims Kung might have against the Company and its agents." The letter of withdrawal states that Armentum's return of capital to Kung was "in full and complete satisfaction of any and all obligations which [Armentum] has owed, owes or owes to [Kung] in the future." The clear meaning of this language is that Kung, in executing the documents and withdrawing from Armentum, was forfeiting all claims he might otherwise have against Armentum, including claims on the LLC's future income.
Kung does not claim that he was incapable of reading and understanding the documents. On the contrary, as an experienced investment banker, Kung works in a profession that relies on contracts to create and enforce legal relationships. Accordingly, in the absence of a demonstration that the release and withdrawal letter are unenforceable, the documents bar Kung's claims against defendants.
2. Constructive fraud
Kung first contends that he was entitled to rescind the release and withdrawal letter because Carthy obtained his consent to the agreements through constructive fraud. Specifically, Kung argues that Carthy, a fiduciary by virtue of his membership in Armentum, breached a fiduciary duty "to specifically explain or disclose to Kung that by [signing the documents] he would be releasing his right to receive 25% of any future payment by Gatekeeper to Armentum."
A party seeking to rescind an agreement must demonstrate one of the grounds for rescission specified in Civil Code section 1689. (Estate of Eskra (2022) 78 Cal.App.5th 209, 221 (Eskra).) Among other grounds, a party can show that consent to the agreement "was given by mistake, or obtained through duress, menace, fraud, or undue influence." (Civ. Code, § 1689, subd. (b)(1).) The reference to "fraud" in section 1689 includes constructive fraud. (Vai v. Bank of America (1961) 56 Cal.2d 329, 342.)
" '[A]s a general principle constructive fraud comprises any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another even though the conduct is not otherwise fraudulent....'" (Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 562; see Civ. Code, § 1573, subd. (1) [defining constructive fraud].) "The existence and scope of a [fiduciary] duty is a question of law for the court to decide, so our review is de novo." (Mt. Holyoke Homes, L.P. v. Jeffer Mangels Butler &Mitchell, LLP (2013) 219 Cal.App.4th 1299, 1308-1309 (Mt. Holyoke).)
Carthy's fiduciary duty to Kung was governed by former Corporations Code 17153, which stated that" '[t]he fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partnership.' " (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1480.) Under Corporations Code section 16404, partners owe to each other duties of loyalty and care. (Corp. Code, § 16404, subds. (a), (b), (c).) In addition, partners must act "consistently with the obligation of good faith and fair dealing." (Corp. Code, § 16404, subd. (d).) Notably, however, a partner does not violate a fiduciary duty "merely because the partner's conduct furthers the partner's own interest." (Corp. Code, § 16404, subd. (e).) In more general terms, "Partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other. '" '. . . [I]n all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.'" '" (BT-I v. Equitable Life Assurance Society (1999) 75 Cal.App.4th 1406, 1410-1411.) The precise scope of a fiduciary's obligation, however, depends on the specific circumstances, taking into account such factors as" 'the relative sophistication and experience of the vulnerable party.'" (Desert Outdoor Advertising v. Superior Court (2011) 196 Cal.App.4th 866, 873 (Desert Outdoor).)
Although former Corporations Code section 17153 has been repealed and replaced by Corporations Code section 17704.09, former section 17153 continues to govern LLC transactions that occurred prior to January 1, 2013. (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451 at p. 1480, fn. 18.) Section 17704.09 would not appear, however, to change the law in any manner material to the present dispute.
We assume that, in suggesting Kung withdraw from Armentum, Carthy's fiduciary duty required him to disclose to Kung the facts material to Kung's exercise of that choice. Kung's declaration, however, makes clear that he was aware of the challenges facing Gatekeeper and Armentum in commercializing WZ2004 when he withdrew from the LLC, as well as the possibility of a future payment from Gatekeeper if the Novartis litigation was successful. He does not contend that Carthy withheld from him any factual information material to his decision whether to withdraw.
Rather, Kung contends that Carthy was required to "explain or disclose" to him that he was giving up any right he might have had to receive a share of future Gatekeeper payments by executing the release and withdrawal letter. Carthy's fiduciary obligations, however, did not include the duty to offer unsolicited legal advice that Carthy was not qualified to give. The impact of the documents on Kung's potential claims was not a matter of fact exclusively within the knowledge of Carthy. Rather, the legal effect of the documents was a matter of law governed by their language, and that language was equally available to Kung and Carthy. Both are experienced investment bankers; neither are lawyers. Carthy was no more qualified than Kung to offer an opinion about the documents' legal effect. For that reason alone, Carthy was under no duty to offer such an opinion.
Kung, a sophisticated investor, presumably knew that he should consult a lawyer if he was uncertain about the legal effect of the release and withdrawal letter. The release, in fact, states that Kung "understands that [he] has the right to consult counsel of choice and has either done so or knowingly waived the right to do so, and enters into this Release Agreement without duress or coercion from any source. Kung acknowledges that the Company has allowed him at least seven (7) days to consider this Release Agreement before executing this Release Agreement, allowing Kung time to consider whether to execute this Release Agreement and to seek the advice of legal counsel or other advisors to be able to make an informed decision." There was no reason for Kung to depend on his lay colleague to explain the legal effect of the documents.
Our conclusion is supported by the straightforward language of the release and the withdrawal letter. The purpose of a release is to resolve legal relations between the parties. To that end, the release states that Kung and Armentum release each other "from any and all past or future claims, demands, causes of action of any kind, . . . whether known or unknown, suspected or claimed, disclosed or undisclosed, matured or unmatured which either party ever had, now has, or which may hereafter accrue or otherwise be acquired ...." The withdrawal letter similarly states that Kung accepted the return of his investment "in full and complete satisfaction of any and all obligations which [Armentum] has owed, owes or owes to [Kung] in the future." Given the ordinary purpose of a release and the straightforward language of the documents, there was no reason for Carthy to have explained to Kung that the documents' language meant what it said, in part because Carthy had no reason to know that Kung labored under the misimpression that some of his claims survived.
There is no evidence to suggest that Kung sought Carthy's views on the meaning of the documents or told Carthy of his belief that he would retain a claim on future Armentum income. On the contrary, Carthy's declaration states that "[Kung] never contacted me or asked me any questions about the Release and Withdrawal-either before he signed the documents or in the following years." Kung's declaration did not contradict this assertion.
Kung lists a variety of circumstances that, he contends, weigh in favor of imposing on Carthy a fiduciary duty to explain the documents. These include the parties' long relationship, the manner in which compensation was paid by Armentum, the work Kung performed for Gatekeeper, the fact that Chant and Carthy told Kung about the possibility of a future payment, and Carthy's purported failure to explain to Kung that his primary reason for seeking the release was to cause Kung to forfeit his right to future payments. In light of the factors discussed above, we are not persuaded that any of these circumstances, individually or together, imposed on Carthy a fiduciary duty to explain to Kung the clear implications of the language of the release and withdrawal letter.
The case law is consistent with our holding. Even lawyers who propose fee agreements to their clients are not required by their fiduciary duty to explain the legal implications of those agreements. In Desert Outdoor, supra, 196 Cal.App.4th 866, an attorney who changed law firms sent his clients a new fee agreement. The original fee agreement did not contain an arbitration agreement; the new fee agreement did. (Id. at p. 869.) In seeking to avoid arbitration over a claim of legal malpractice, the clients argued constructive fraud, contending that the attorney's "fiduciary duty included separately informing them of the arbitration clause in the new fee agreement." (Id. at p. 873.) Desert Outdoor rejected the argument, noting that the clients were sophisticated businesspersons, the fee agreement was described in a cover letter as "new" and was twice the length of the first agreement, suggesting it needed to be reviewed and approved, and the arbitration provision "was readily discernable and clear. There is no assertion of any effort to conceal the arbitration clause or any affirmative misrepresentations about it." (Id. at p. 874.)
The plaintiffs in Mt. Holyoke, supra, 219 Cal.App.4th 1299, similarly attempted to avoid the arbitration provision in a fee agreement, arguing their attorneys "had a [fiduciary] duty to disclose and explain the significance of the arbitration provision." (Id. at p. 1308.) Relying in part on Desert Outdoor, the court rejected the argument, explaining that the arbitration provision was "clear and explicit," the plaintiff's principal had "substantial experience" with litigation, the agreement expressly advised plaintiff to consult counsel, and the contract was not a contract of adhesion. (Id. at p. 1309.) The same conditions were present here.
Kung argues that the language of the documents was not" 'clear and explicit'" because "a reasonable non-lawyer" would not have understood the language of the documents to have "meant that they were releasing their right to a possible substantial payment of money in the future," particularly in the circumstances presented.
We do not agree. The language of the release states that Kung releases Armentum "from any and all past or future claims, demands, causes of action of any kind." The withdrawal letter is even more explicit in stating that the return of Kung's investment constitutes "full and complete satisfaction of any and all obligations which [Armentum] has owed, owes or owes to [Kung] in the future." In our view, a reasonable non-lawyer reading this language would not conclude that Armentum had any remaining obligations to Kung, or that Kung could later claim that Armentum owed him money.
Kung's argument appears to be that, under the circumstances, he believed that Carthy would not expect him to release his claim on compensation for the work he did for Armentum and that it was reasonable for him to assume that the language of the release reflected his belief. But we must evaluate the legal effect of the release, in the first instance, on the basis of its language. In the absence of an ambiguity, that language governs. (E.g., Civ. Code, §§ 1638 ["The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity"]; 1639 ["When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible"].) Whether or not one has legal training, it is not reasonable to understand "all" to mean "not all," as Kung urges, merely because the documents do not enumerate specific claims that are included within "all" claims.
For the first time on appeal, Kung purports to raise the claim that the release and withdrawal letter were procedurally and substantively unconscionable. Although Kung refers to the documents as unconscionable, he cites no applicable law and makes no attempt to demonstrate that they meet the legal standard for unconscionability. We therefore disregard the claim. (See, e.g., City of Santa Maria v. Adam (2012) 211 Cal.App.4th 266, 287 [declining to consider arguments for which the appellant did not supply "some cogent argument and the legal basis for it"].)
In an argument raised for the first time in his new trial motion, Kung contended that the trial court erred in granting summary judgment because Carthy failed to rebut the presumption under Probate Code section 16004, subdivision (c), that the release and withdrawal letter were obtained as a result of undue influence.
Probate Code section 16004, subdivision (c) applies by its terms to transactions entered into between the trustee of a trust and the trust's beneficiaries. It states that such a transaction "which occurs during the existence of the trust . . . by which the trustee obtains an advantage from the beneficiary is presumed to be a violation of the trustee's fiduciary duties." In these circumstances, section 16004 establishes a rebuttable "presumption of undue influence" in connection with the transaction. (Ferguson v. Yaspan (2014) 233 Cal.App.4th 676, 687-688.)
Although section 16004 has been applied to transactions between an attorney and client, we are unaware of any case applying it to transactions between LLC members. As Kung points out, however, one decision did impose a similar presumption on joint venturers, requiring them to show "fairness and good faith" in these circumstances. (Davis v. Kahn (1970) 7 Cal.App.3d 868, 877.) Although the presumption articulated in Davis v. Kahn has not been adopted by any subsequent court, we will assume for purposes of argument that such a presumption applies here.
We have located only one subsequent decision citing the case and discussing a presumption, and that decision assumed the presumption applies only when there is a "confidential" relationship. (Toney v. Nolder (1985) 173 Cal.App.3d 791, 796.) Because there is no reason to presume undue influence outside a confidential relationship, we are skeptical that section 16004 should be applied outside these circumstances merely because a fiduciary duty is present.
Contrary to Kung's claim, the undisputed facts disclosed in defendants' summary judgment motion rebut any presumption of undue influence. Kung and Carthy were equally sophisticated. Kung was aware of the circumstances that caused Carthy to propose that Kung leave Armentum, and he knew that he might have a claim on future income of Armentum. There is no indication that Carthy pressured Kung to withdraw or to release his claim to future Armentum income. Carthy merely proposed the withdrawal and provided Kung with documents to effectuate it. The pair never spoke about the meaning of the documents. The release provided by Carthy is a standard form release; it does not contain unusual language or seek to effectuate any legal result other than a release of claims. Further, by the terms of release itself, Kung was given a full opportunity to review it and consult counsel with respect to its terms. Even assuming a statutory presumption of undue influence in these circumstances, the undisputed facts rebut the presumption by demonstrating that Kung's execution of the release and withdrawal letter did not, in fact, result from undue influence.
4. Mistake
Kung argues that even if he was not entitled to rescind the release and withdrawal letter on grounds of constructive fraud, the trial court erred in granting summary judgment because defendants failed to carry their burden of negating an allegation in his complaint that he was entitled to rescind the documents on grounds of mistake. (See, e.g., Residential Capital v. Cal-Western Reconveyance Corp. (2003) 108 Cal.App.4th 807, 829 [" 'The burden of a defendant moving for summary judgment . . . requires that he or she negate plaintiff's theories of liability as alleged in the complaint' "].)
Kung acknowledges that he did not raise this issue in the trial court. The argument was thereby forfeited. (Wisner v. Dignity Health (2022) 85 Cal.App.5th 35, 44 ["Generally, issues not raised in the trial court cannot be raised for the first time on appeal"].)
Yet even if we were to entertain Kung's argument, we would find no merit in it because Carthy's declaration adequately negated the facts necessary for a finding that Kung was entitled to rescind on grounds of mistake.
Division Five of this court recently explained the relevant law of mistake in Eskra, supra, 78 Cal.App.5th 209:
" 'The grounds for rescission are stated in . . . [Civil Code] section 1689. One such ground exists when consent to a contract is given by "mistake." The term "mistake" in . . . section 1689, however, is a legal term with a legal meaning. [¶] The type of "mistake" that will support rescission is defined in . . . [Civil Code] section 1577 ("mistake of fact") and . . . [Civil Code] section 1578 ("mistake of law").' [Citation.] . . .
"Section 1578 provides, 'Mistake of law constitutes a mistake, within the meaning of this Article, only when it arises from: [¶] 1. A misapprehension of the law by all parties, all supposing that they knew and understood it, and all making substantially the same mistake as to the law; or, [¶] 2. A misapprehension of the law by one party, of which the others are aware at the time of contracting, but which they do not rectify.' . . . 'A mistake of law is when a person knows the facts as they really are, but has a mistaken belief as to the legal consequences of those facts.' [Citation.] Misinterpretation of a contract is a mistake of law." (Eskra, supra, 78 Cal.App.5th at pp. 221-222.)
Because the mistake claimed by Kung, his misunderstanding of the release and withdrawal letter, was a mistake of law, to justify rescission on ground of mistake he was required to demonstrate either that Carthy shared this misunderstanding or that Carthy was aware of Kung's misunderstanding and did not correct it, as required by Civil Code section 1578, subdivision (2).
Kung argues he was entitled to rescind on grounds of "unilateral" mistake, citing M. F. Kemper Const. Co. v. City of L. A. (1951) 37 Cal.2d 696. Kemper involved rescission due to a mistake of fact. (Id. at p. 701.) Because Kung's claimed mistake was a mistake of law, not fact, he was required to satisfy the requirements of Civil Code section 1578.
Carthy's declaration adequately demonstrates that he was neither aware of Kung's misunderstanding nor shared it. First, the declaration demonstrates that Carthy did not share Kung's misunderstanding because it asserts that he understood the documents to result in the relinquishment of "any and all claims [Kung] might have had against Armentum." Second, the declaration states that Carthy never discussed the terms of the release and withdrawal letter with Kung. Thus, Kung could not have made Carthy "aware," as the statute requires, that Kung had misunderstood the release to preserve his claim to compensation, notwithstanding what we concluded above was unequivocal and readily understandable language to the contrary. The declaration therefore negates the factual circumstances necessary for rescission based on a mistake of law.
5. Remaining Issues
The trial court also concluded that Kung was not entitled to prevail because his letter of rescission was unreasonably delayed and constituted a partial rescission, but it is unnecessary for us to address these matters. To avoid the legal effect of the release, Kung was required to demonstrate that he was entitled to rescind under Civil Code section 1689. Because, on the undisputed facts, his two alleged grounds for rescission fail, any imperfections in his manner of rescission are immaterial. For the same reason, we need not consider whether Kung's action was filed within the applicable statute of limitations. Summary judgment was properly granted.
II. Carthy's Cross-Appeal
Carthy's cross-appeal challenges orders by the trial court sustaining a demurrer to the Sixth Cause of Action in his crosscomplaint and denying defendants' recovery of costs for electronic document hosting and computerized legal research.
A. The Demurrer
The Sixth Cause of Action of Carthy's cross-complaint alleged that Kung breached his obligation under the release to "release all claims against Carthy and Armentum" by "filing this lawsuit." The trial court sustained Kung's demurrer without leave to amend on the ground that Carthy suffered no injury from the filing of the lawsuit other than incurring attorneys' fees, which are not available under the release.
California follows what is commonly referred to as the "American rule," which provides that each party to a lawsuit must ordinarily bear its own attorney fees. (Mix v. Tumanjan Development Corp. (2002) 102 Cal.App.4th 1318, 1322-1323.) Civil Code section 1717, subdivision (a), makes an exception to this general rule by allowing an award of attorney's fees in a contract action when the contract contains a clause permitting their recovery. The statute expressly labels such fees as "an element of the costs of suit." (Ibid.) Where the contract does not provide for such an award, however, the American rule precludes recovery of attorney's fees on a cause of action for breach of contract. (Code Civ. Proc. § 1021; Navellier v. Sletten (2003) 106 Cal.App.4th 763, 776-777 (Navellier).)
As Carthy acknowledges, "[a] breach of contract is not actionable without damage." (Bramalea California, Inc. v. Reliable Interiors, Inc. (2004) 119 Cal.App.4th 468, 473; see Copenbarger v. Morris Cerullo World Evangelism, Inc. (2018) 29 Cal.App.5th 1, 9 (Copenbarger) ["An element of a breach of contract cause of action is damages proximately caused by the defendant's breach"].) Assuming Kung breached the release by bringing this lawsuit, Carthy alleged no harm from the breach other than the attorney's fees that he was forced to incur to defend the action. Because the release contains no attorney's fees provision, he may not recover them. The trial court therefore properly sustained the demurrer to Carthy's breach of contract cause of action because he was unable to plead actionable damages.
Carthy argues, contrary to Navellier, that attorney's fees are allowed as damages in an action for breach of contract in the absence of an attorney's fees provision, but he cites no decision so holding. The closest he comes is Copenbarger, supra, 29 Cal.App.5th 1, which questioned whether Navellier and an earlier decision on which Navellier relied, Olson v. Arnett (1980) 113 Cal.App.3d 59, were properly decided. (Copenbarger, at p. 11.) Yet Copenbarger does not help Carthy. The attorney's fees sought as damages in Copenbarger were incurred in a separate lawsuit; the breach of contract was the failure to dismiss that separate lawsuit. (Id. at p. 10.) Copenbarger suggested that such attorney's fees might be recoverable as damages, but it recognized that when the attorney's fees sought are those incurred in the breach of contract action itself, they constitute costs of suit, not damages. They are therefore not recoverable in the absence of an attorney's fees provision. (Ibid.)
The other two cases cited by Carthy are inapplicable. Brandt v. Superior Court (1985) 37 Cal.3d 813, approved an award of attorney's fees in connection with a cause of action for breach of implied covenant of good faith and fair dealing. This is a tort, not a contract, cause of action. (Id. at p. 817.) Monster, LLC v. Superior Court (2017) 12 Cal.App.5th 1214, considered whether a jury trial is available on the amount of attorney's fees when they are sought as contract damages, rather than costs of suit. The case did not address the underlying question whether the attorney's fees in question were available as damages. (Id. at pp. 1227-1231.)
At oral argument, Carthy contended for the first time that the availability of attorney's fees as damages should depend on the purpose of the agreement, citing the distinction between attorney's fees incurred as an incidental cost of any litigation and attorney's fees associated with the primary purpose of the contract. With respect to the award of attorney's fees, the incidental/primary distinction is generally employed in connection with the private attorney general statute, Code of Civil Procedure section 1021.5. (E.g., Hall v. Department of Motor Vehicles (2018) 26 Cal.App.5th 182, 189-191; Marine Forests Society v. California Coastal Com. (2008) 160 Cal.App.4th 867, 873-874; Planned Parenthood v. City of Santa Maria (1993) 16 Cal.App.4th 685, 691-692.) Carthy has not cited any decision in which this distinction was employed in connection with a private contractual dispute, let alone used to justify the allowance of attorney's fees as damages under a contract.
There is a simple and conclusive reason why the attorney's fees incurred in a breach of contract action are not recoverable as damages. Such a ruling would nullify Civil Code section 1717 and Code of Civil Procedure section 1021, which preclude an award of attorney's fees in a contract action unless the contract contains an attorney's fees provision. If the attorney's fees Carthy incurred in this action were allowed as damages, attorney's fees would be recoverable as damages in every breach of contract action; his action is no different from any other contract action in this respect. Yet that would directly conflict with the intent of these statutes to bar the recovery of attorney's fees in an action brought on a contract that does not contain an attorney's fees provision. Characterizing the fees as damages, rather than costs of suit, cannot permit a plaintiff to evade the statutory bar.
For essentially the same reason, we decline to remand to permit Carthy to amend his cause of action to allege a right to non-statutory costs or nominal damages. A prevailing party is permitted to recover the costs authorized by statute. There is no indication that the Legislature intended to allow the recovery of additional costs in a breach of contract action by labelling them "damages," as Carthy seeks to do. On the contrary, a claim to non-statutory costs fails in the absence of an attorney's fees provision. Nominal damages are recoverable when a plaintiff cannot demonstrate "appreciable detriment"-in other words, cannot demonstrate actual damages. (Civ. Code, § 3360.) Permitting Carthy to proceed on an allegation solely of nominal damages would violate the rule that "[a]n element of a breach of contract cause of action is damages proximately caused by the defendant's breach." (Copenbarger, supra, 29 Cal.App.5th at p. 9.)
B. Costs
Following the trial court's entry of judgment in this action, Carthy submitted a memorandum of costs in the amount of $46,494.51, including charges of $19,628.64 for "fees for hosting electronic documents" and $12,258.24 for "other," of which $11,380.50 was for computerized legal research. The trial court granted Kung's motion to tax costs as to these charges, among other items. As the court explained in its ruling, "Fees for the hosting of electronic documents are allowable as costs only 'if a court requires or orders a party to have documents hosted by an electronic filing service provider.' (Code Civ. Proc. sec. 1033.5(a)(15).) Only items not mentioned in section 1033.5 (i.e., as allowable under subdivision (a) or not allowable under subdivision (b)) may be allowed or denied in the court's discretion. (Sec. 1033.5(c)(4); Ripley v. Pappadopoulos (1994) 23 Cal.App.4th 1616, 1623 ....) Thus, neither fees for hosting electronic documents nor the costs of litigation technical support is allowable. (Science Applications Internat. Corp. v. Superior Court (1995) 39 Cal.App.4th 1095, 1103 ....) . . . The costs of computerized legal research are not recoverable under Ladas v. California State Auto. Assoc. (1993) 19 Cal.App.4th 761, 776."
As to the denial of his costs for electronic document hosting, Carthy contends that the trial court misunderstood the nature of its discretion under section 1033.5, citing Segal v. ASICS America Corp. (2022) 12 Cal.5th 651 (Segal), a Supreme Court decision issued after the trial court's ruling. We agree and remand for reconsideration of the award.
The law governing an award of costs is explained in Segal, supra, 12 Cal.5th at p. 658: "A prevailing party is entitled 'as a matter of right' to recover costs in any action or proceeding unless a statute expressly provides otherwise. ([Code Civ. Proc.,] § 1032, subd. (b).) [Code of Civil Procedure s]ection 1033.5 sets forth the types of expenses that are and are not allowable as costs under section 1032. Specifically, subdivision (a) of section 1033.5 describes items that are 'allowable as costs,' subdivision (b) describes items 'not allowable as costs, except when expressly authorized by law,' and section 1033.5(c)(4) provides that '[i]tems not mentioned in this section and items assessed upon application may be allowed or denied in the court's discretion.' All costs, whether expressly permitted under section 1033.5, subdivision (a) or awarded in the trial court's discretion pursuant to section 1033.5 (c)(4), must be 'reasonably necessary to the conduct of the litigation rather than merely convenient or beneficial to its preparation' (§ 1033.5, subd. (c)(2)) and 'reasonable in amount' (§ 1033.5, subd. (c)(3))."
The Supreme Court granted review in Segal to resolve conflicting Court of Appeal rulings regarding the application of Code of Civil Procedure section 1033.5 (section 1033.5). (Segal, supra, 12 Cal.5th at p. 658.) Some of the cost items allowed as a matter of right under subdivision (a) of section 1033.5 are allowable only if they meet specified conditions. An example is costs for the preparation of trial exhibits at issue in Segal. Under section 1033.5(a)(13), such costs are recoverable as a matter of right only "if they were reasonably helpful to aid the trier of fact." (§ 1033.5, subd. (a)(13).) Because the exhibits in Segal were not used at trial, they did not satisfy subdivision (a)(13). The conflict among the Courts of Appeal was whether the failure of a cost item to satisfy a condition in subdivision (a) requires that the cost item be disallowed or whether the cost item could still be allowed at the court's discretion under subdivision (c). (See Segal, at pp. 659-660.) The Supreme Court found more persuasive the position of Science Applications Internat. Corp. v. Superior Court (1995) 39 Cal.App.4th 1095, which held that "if an expense is neither expressly allowable under subdivision (a) nor expressly prohibited under subdivision (b), it may nevertheless be recovered if, in the court's discretion, it is 'reasonably necessary to the conduct of the litigation rather than merely convenient or beneficial to its preparation.'" (Id. at p. 1103; see Segal, at pp. 665, 667.)
Like costs for exhibits and other demonstratives, the cost of electronic document hosting is allowed under section 1033.5, subdivision (a) only upon a condition: "Fees for the hosting of electronic documents [are allowable] if a court requires or orders a party to have documents hosted by an electronic filing service provider." (§ 1033.5, subd. (a)(15).) Because the trial court did not order Carthy to host the documents, it disallowed the costs. Although that was a permissible interpretation of section 1033.5 at the time of the court's ruling, the Supreme Court clarified in Segal that Carthy's failure to meet the terms of subdivision (a)(15) merely means that the costs are not allowed as a matter of right; it did not mean that they are disallowed. The trial court was therefore required to exercise its discretion to determine whether the costs should be allowed under subdivision (c), and we will remand for that determination.
As to the costs of computerized legal research, Carthy acknowledges that Ladas v. California State Auto. Assn. (1993) 19 Cal.App.4th 761 (Ladas) holds that such costs are not recoverable, but he contends Ladas was wrongly decided.
The costs of computerized legal research are not specifically mentioned in section 1033.5. In disallowing such costs, Ladas held, in full, "Section 1033.5, subdivision (b)(2) precludes recovery of investigation expenses[,] and attorney fees are not compensable as costs in the absence of an agreement of the parties or statutory authority. [Citation.] Fees for legal research, computer or otherwise, may not be recovered under section 1033.5." (Id. at p. 776.) In the nearly 30 years since Ladas, no published decision has questioned this ruling or reconsidered the issue.
Carthy criticizes the reasoning of Ladas as "opa[que]" and "provid[ing] little guidance on whether legal research expenses incurred for the sole purpose of preparing legal arguments for law and motion are prohibited under subdivision (b) or allowable under subdivision (c)(4)."
While we agree with Carthy that the analysis of Ladas is brief and subject to question, we decline his invitation to reject its holding for two reasons. First, section 1033.5 has been amended six times since Ladas was decided in 1993. If the Legislature viewed the ruling as inconsistent with its intent, the Legislature has had ample opportunity to overrule it. That has not happened. While the Legislature's silence is by no means conclusive, it is entitled to some deference with respect to a decision that has stood unchallenged for 30 years.
Second, the use of computerized legal research is more akin to attorney overhead than allowable costs. Computerized legal research has to a large extent replaced library research; in many offices, a computer has undoubtedly replaced the law books. Section 1033.5 does not permit recovery of the cost of maintaining a law library, presumably because it is regarded as an item of attorney overhead. Like legal reporters, computerized legal research services are often purchased by subscription, requiring periodic payments for unlimited access. Such payments are analogous to the cost of maintaining a law library, rather than a typical recoverable cost.
DISPOSITION
The matter is remanded to the trial court, which is directed to vacate its denial of Carthy's request for an award of the cost of electronic document hosting and to consider whether to allow such costs in the exercise of discretion under section 1033.5, subdivision (c). In all other respects, the judgment of the trial court is affirmed. Carthy is entitled to recover costs.
WE CONCUR: STREETER, Acting P. J., WHITMAN, J. [*]
[*] Judge of the Superior Court of California, County of Alameda, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.