Opinion
H023444, H023848.
9-30-2003
FLEXTRONICS INTERNATIONAL USA, INC., Plaintiff and Respondent, v. SCOTT CURTIS, as Personal Representative, etc., Defendant and Appellant.
Respondent Flextronics International USA, Inc. (Flextronics) entered into a sales and leaseback agreement with appellant Carl Curtis regarding commercial property that included an option for Flextronics to repurchase the property. In 1998, Flextronics discovered a scriveners error in the option provision. When Flextronics attempted to exercise the option in 2000, Curtis relied on the mistake to limit the scope of the option. Flextronics sued for reformation of the lease and specific performance and prevailed in the trial court.
On appeal, Curtis contends that the trial court erred when it concluded that Flextronicss action was not barred by the statute of limitations. Curtis also contends that the trial court erred in calculating the amount of his offset on the damages awarded incident to the courts specific performance decree. Curtis also appeals the post-judgment order awarding Flextronics attorney fees, costs of suit, and expert witness fees.
We conclude that the action was not bared by the statute of limitations. However, we hold that the trial court erred in calculating the damages incident to the specific performance decree and in awarding certain costs that were not authorized by statute. We find no error in the attorney fees award, but conclude that the award of expert witness fees will have to be reevaluated when the court recalculates the damages award. We will therefore reverse the judgment and the post-judgment order.
FACTS
In 1994, Flextronics acquired Relevant Technology and took over Relevants lease on a commercial building located at 2241 Lundy Avenue, San Jose. Flextronics later learned that the owner of the building, Metropolitan Life Insurance Company (MetLife), wanted to sell the building. Flextronics CEO, Michael Marks, approached two of his friends, Tim Mott and Carl Curtis, about the possibility of forming a partnership to purchase the building and lease it back to Flextronics. Marks later decided that it might be a conflict of interest for him to own the building and asked Curtis if he was interested in buying the property and entering into a lease with Flextronics. Curtis was interested in the proposal.
Flextronics purchased the building from MetLife for approximately $ 3.5 million in March of 1995. Shortly thereafter, Flextronics entered into a sales/leaseback agreement with Curtis that provided that Flextronics would sell the property to Curtis and then lease the premises back from Curtis. About the time of these transactions, Flextronics was coming out of bankruptcy and a period of reorganization. Because of this, it had limited avenues for obtaining financing. Flextronics decided to sell the building to Curtis so that it could get cash out of the building that it needed to grow the company. The agreement was to be structured so that Curtis would realize a 12 percent cash-on-cash return on the equity he invested in the property at the time of purchase and a 17 percent internal rate of return over the life of the investment. The sales agreement provided that Flextronics would have "two (2) purchase options . . . which may be exercised either at the end of five (5) years or at the end of ten (10) years of the anniversary date of the close of escrow . . . ." Curtiss final purchase price was $3.84 million.
"Cash-on-cash" refers to the amount of cash earned as a percentage of the amount of cash invested in the transaction.
"Internal rate of return" refers to the cash that results from a persons initial investment, including cash flows and potential net proceeds generated by the sale of an asset.
Curtiss purchase price was increased from the $3.6 million agreed upon originally to $3.84 million because of matters relating to Curtiss financing.
Flextronics arranged for real estate broker D. John Miller to act as its representative in the transaction with Curtis. Miller drafted the purchase agreement and the triple net lease that documented the parties sale/leaseback agreement. He negotiated several of the details of the transaction and assisted Curtis in obtaining financing.
For reasons that are not explained in the record, the financing with Curtiss first lender fell through. Curtis was purchasing the property as part of a tax deferred exchange and needed to complete the transaction by June 30, 1995, in order to meet certain deadlines related to the exchange. Flextronics therefore agreed to carry the financing on the sale to Curtis, subject to his obtaining financing from an outside lender by June 30, 1996.
Although the transaction contemplated a 12 percent cash-on-cash return and a 17 percent internal rate of return, the lease that was drafted by Miller used a fixed number for Flextronicss monthly rent ($31,500 per month for the first five years), rather than describe the rent in terms of the rate of return on Curtiss investment. The rental amount stated in the lease was based on assumptions regarding Curtiss financing and equity interest in the property at the close of escrow.
In early 1996, Curtis obtained financing with Bank of America at rates that were more favorable than those offered by the first lender he had negotiated with. In February 1996, Miller prepared revised amortization schedules for Flextronics, which showed that Curtis was getting a higher rate of return than what the parties had contemplated at the beginning of the transaction. Flextronics asked Curtis to decrease the rent to $28,462, a number that more accurately reflected the rates of return contemplated in the transaction. Curtis was, however, unwilling to decrease the rent from the amount stated in the lease.
By late 1996, early 1997, Flextronics had acquired other properties adjacent to 2241 Lundy Avenue and was in the process of developing the properties into a business campus. As part of that development, Flextronics entered into negotiations with Curtis for the purchase of easements over the 2241 Lundy property for underground utilities, storm drains, rights-of-way, and ingress and egress. Flextronics paid Curtis $100,000 for the easement rights, plus the attorney fees Curtis had incurred in the negotiations over the easements. At that time, the parties agreed to amend their lease agreement. The amendments included decreasing the prices the parties had agreed on as the option prices at the five-year and 10-year marks by $100,000 as a credit for the monies paid for the easements. The addendum to the lease agreement was signed on or about March 31, 1997.
In March 1997, Flextronicss vice president of finance, Don Frederick, once again noted that Curtiss rate of return was greater than what had been originally contemplated. Frederick and Marks talked about exercising the option at the five-year mark. Frederick told Marks that there were discrepancies between the spirit of the deal and the actual deal set forth in the lease. Marks did not think Flextronics could do anything about the rent issue at that time and said that the company would raise the issue when it exercised the option in 2000.
Flextronics did not pay the rent that was due on May 1, 1998 on time. On May 14, 1998, Curtis advised Flextronics of its default and demanded payment of the rent plus a five percent late fee, in accordance with the terms of the lease. Flextronics paid the rent and the late fee, but did not pay the late fee within the three-day notice period set forth in the lease. On May 29, 1998, as a result of this breach, Curtis gave notice of his election to terminate the lease and Flextronicss right to possess the property. However, he offered to allow Flextronics to "continue to rent the property on a month-to-month basis on the terms and conditions set forth in the Lease, exclusive of any purchase option" and advised Flextronics that payment of the June 1998 rent would signify its acceptance of these terms.
Flextronics referred the matter to its general counsel, Tim Stewart, in early June 1998. Stewart made sure the rent payment and late payment had been made and referred the matter to outside counsel to draft a response. Flextronics took the position that Curtiss attempt to terminate the lease was improper.
At trial, the parties stipulated that the question of whether the lease had been terminated as a result of the late payment of rent or the late fee was no longer an issue. However, these events are relevant to Curtiss statute of limitations defense.
In the months following June 1998, Stewart read the lease and became concerned about language in the option that described the option as applying to the "leasehold improvements." He understood the phrase "leasehold improvements" to mean "tenant improvements." He reviewed the documents and talked to Miller, people at Flextronics, and outside counsel. Marks and Miller told him that the option included the right to buy the entire property, including the land and the building, and not just the tenant improvements. Stewart found no evidence that the transaction included anything other than a full option and concluded that the use of the phrase "leasehold improvements" was a mistake, a scriveners error. In the latter part of 1998, Stewart knew that there were problems with the scope of the option, but made a conscious decision not to take the issue to Curtis at that time.
The option provision in the lease was entitled " Option to Purchase " and provided: "Tenant shall have the irrevocable and exclusive right to purchase the leasehold improvements, hereinafter referred to as `Option, from Landlord . . . ."
On February 3, 2000, Flextronics gave notice of its intention to exercise the option. Initially, Curtis refused to acknowledge the validity of Flextronicss exercise of the option. On March 7, 2000, Curtis advised Flextronics that the option applied to the leasehold improvements only, which he understood to mean the building, but not the land. Curtis also took the position that Flextronics had underpaid the rent by $3,500 per month during the first 57 months of the lease term.
In order to obtain the loan from Bank of America, Miller persuaded Curtis and Flextronics to sign a second lease, in which they increased the rent by $3,500 per month from $31,500 to $35,000 in order to satisfy Bank of Americas underwriting requirements. Miller referred to this as "grossing up" the rent in his deposition. Miller and Marks testified that this was done at Curtiss request to enable Curtis to get the loan. The second lease did not reflect what the actual rent would be and Flextronics never paid the higher amount. The expert in real estate law who testified on behalf of Flextronics stated that this was a common practice in the real estate industry and that "lenders often wink on it."
Flextronicss real estate appraiser testified that the value of the property had increased from between $3.5 and $3.6 million in 1995 to $10 million in 2000 and that the value of the land alone was $4 million in 2000. Flextronicss accounting expert testified that, assuming the option applied to the entire property and Flextronics had the right to buy the entire property back, Curtis will still have realized a cash-on-cash return of approximately 15 to 25 percent, depending on the amount of equity he had invested in the property, and an internal rate of return of approximately 25 percent. Both numbers were higher than the parties had anticipated at the beginning of the transaction.
After Flextronics exercised the option, Curtis told Tim Mott that there was a loophole in the agreement that Curtis was going to exploit.
PROCEDURAL HISTORY
On June 13, 2000, Flextronics sued Curtis for reformation of the option provision in the lease, specific performance of the reformed lease, specific performance of the purchase agreement, declaratory relief, and rescission. Curtis answered the complaint. His affirmative defenses included a claim that the action was barred by the statute of limitations.
The case was tried to the court in April 2001. The issues at trial included the scope of the easement, whether the use of the phrase "leasehold improvements" was a mistake, and whether Flextronicss causes of action were barred by the statute of limitations.
The court concluded that "clear and convincing evidence shows that the parties intended that the option would apply to the entire Lundy Property, including the real property and all improvements thereon." The court found that "all of the formal agreements and informal writings[, except for the lease,] show that the parties mutual intent was that the option would apply to the entire Lundy Property and not be limited in its scope to only the leasehold improvements." The court also found that "[t]he apparent limitation on the scope of the option in the Lease was a mistake" caused by a drafting error by Miller. The court concluded that Curtiss testimony "was not credible as to certain material issues" relating to the scope of the option.
The court also found that Curtis had failed to prove that Flextronicss claims were barred by laches or the statute of limitations under Code of Civil Procedure section 338, subdivision (d). The court found that "Curtis failed to prove . . . that Flextronics discovered the facts constituting the mistake or should have discovered those facts under the circumstances prior to June 12, 1997" and that the action "was filed in a timely manner." The court ordered that the language of the option provision in the lease be reformed and that Flextronics was entitled to specific performance of the option, as reformed. The court made detailed orders relating to the sale of the property back to Flextronics. The court also awarded Flextronics its costs of suit and found that it was the prevailing party for the purpose of an award of attorney fees under the lease.
Unless otherwise stated, all further statutory references will be to the Code of Civil Procedure.
In a post-trial proceeding, the court awarded Flextronics $ 340,117.50 in contractual attorney fees, $13, 287.18 in costs pursuant to section 1033.5, $8,211.68 in non-statutory costs pursuant to the contract, and $19,285.41 in expert witness fees pursuant to section 998.
On appeal, Curtis does not challenge the courts findings on the issue of mistake. However, he contends that the court erred when it found that the action was not barred by the statute of limitations. Curtis also contends that the methodology used by the court to calculate the amounts to be paid by Flextronics to Curtis upon transfer of the property was incorrect, that some of the attorney fees awarded were unauthorized, that the court abused its discretion in rendering an unusually high attorney fee award, and that it erred in awarding the expert witness fees and the non-statutory costs.
DISCUSSION
I. Statute of Limitations
A. Applicable Limitations Period
"Under the statute of limitations, a plaintiff must bring a cause of action within the limitations period applicable thereto after accrual of the cause of action. [Citations.] [¶] The general rule for defining the accrual of a cause of action sets the date as the time `when, under the substantive law, the wrongful act is done, or the wrongful result occurs, and the consequent `liability arises. [Citation.] In other words, it sets the date as the time when the cause of action is complete with all of its elements [citations]—the elements being generically referred to by sets of terms such as `wrongdoing or `wrongful conduct, `cause or `causation, and `harm or `injury [citations]." (Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 397 (Norgart).)
"An exception to the general rule for defining the accrual of a cause of action—indeed, the `most important one—is the discovery rule. [Citation.] It may be expressed by the Legislature or implied by the courts. [Citation.] It postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. [Citations.]" (Norgart, supra , 21 Cal.4th at p. 397.)
The parties agree that the applicable limitations period is found in section 338, subdivision (d), which provides that the limitations period for "[a]n action for relief on the ground of fraud or mistake" is three years. Section 338, subdivision (d) contains a discovery provision, which states that the "cause of action . . . is not to be deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake."
A plaintiff discovers a cause of action when he or she at least suspects a factual basis, as opposed to a legal theory, for its elements. (Norgart, supra, 21 Cal.4th at p. 397 citing Jolly v. Eli Lilly & Co. (1988) 44 Cal. 3d 1103, 1110 (Jolly).) In other words, the plaintiff discovers the cause of action when he or she at least suspects that someone has done something wrong to him or her. (Norgart, supra, 21 Cal.4th at p. 397.) "[A] `suspicion of one or more of the elements of a cause of action, `coupled with a knowledge of others, `will commence the [applicable] limitations period. " (Id. at p. 398, fn. 3, citing Jolly, supra, 44 Cal.3d at p. 1112.)
Our Supreme Court discussed the discovery provisions in section 338, subdivision (d) in the context of a cause of action for fraud in Hobart v. Hobart Estate Co. (1945) 26 Cal.2d 412, 437-439 (Hobart). In Hobart, the court stated: " `It is only where the party defrauded should plainly have discovered the fraud except for his own inexcusable inattention that he will be charged with a discovery in advance of actual knowledge on his part. It follows that plaintiff is not barred because the means of discovery were available at an earlier date provided he has shown that he was not put on inquiry by any circumstances known to him or his agents at any time prior to the commencement of the three-year period . . . ." (Hobart, supra, 26 Cal.2d at p. 439, see also Samuels v. Mix (1999) 22 Cal.4th 1, 10, 14, 14, fn. 3 [citing Hobart].)
Flextronics filed its complaint on June 13, 2000. Under the applicable limitations period, the statute of limitations began to run when Flextronics discovered the error in the drafting of the option provision. Flextronics had actual knowledge of the mistake when Stewart read the lease in the months after June 1998, which was well within the three-year limitations period. Pursuant to the rule stated in Hobart, Flextronicss cause of action will not be barred as long as it has shown that it was not put on inquiry by any of the circumstances known to it or its agents at any time prior to June 13, 1997, three years prior to the date it filed its complaint.
Curtis argues that Flextronicss action is barred because Flextronics should have discovered the mistake (1) when the lease was signed in August of 1995; (2) when it was negotiating to purchase the easements from Curtis in 1996 and 1997; (3) during a rent dispute in 1997; and (4) no later than May of 1997, because due diligence would have required Flextronics to have an attorney read the multi-million dollar lease at issue here by that date.
B. Standard of Review
The parties disagree as to the applicable standard of review. Curtis urges us to review the matter de novo, arguing that the relevant facts are not in dispute and that when the facts are not in dispute, the effect of the statute of limitations may be decided as a matter of law. Flextronics contends that the facts were vigorously contested and that the proper standard for reviewing the trial courts ruling as to the discovery of a drafting mistake is substantial evidence.
The time when the discovery of the facts constituting a mistake occurs under section 338, subdivision (d) is a question of fact to be determined by the trier of fact. (Schaefer v. California-Western States Life Ins. Co. (1968) 262 Cal.App.2d 840, 845.) Generally, when the trial court has resolved a disputed factual issue, the appellate court reviews that ruling under the substantial evidence standard of review, which provides that the trial courts resolution of disputed factual issues must be affirmed so long as it is supported by substantial evidence. (Winograd v. American Broadcasting Co. (1998) 68 Cal.App.4th 624, 632.)
It has also been held that where the relevant facts are not in dispute, the effect of the statute of limitations may be decided as a question of law. (McKeown v. First Interstate Bank (1987) 194 Cal.App.3d 1225, 1229 [summary judgment case]; accord Jolly, supra, 44 Cal.3d at p. 1112 [". . . where the uncontradicted facts established through discovery are susceptible of only one legitimate inference, summary judgment is proper"].)
Thus, the threshold question is whether the facts relating to the statute of limitations defense were disputed or undisputed. According to the record, facts related to the statute of limitations issue were disputed at trial. First, there was a dispute as to whether the cause of action for reformation of the lease accrued when Flextronicss counsel discovered the drafting error in the option in mid-1998 or on one of the dates prior to June 13, 1997 that are advanced by Curtis on appeal. Second, there were factual issues as to the parties use of the phrase "leasehold improvements," including whether the phrase applied to the land and the building, only the building, or only tenant improvements, what each party understood the phrase to mean, and the parties intent regarding the scope of the option when they entered into the agreement. For example, Curtis asserted that the phrase "leasehold improvements" applied only to the building and that the option was limited to the building only. Marks, on the other hand, testified that the option applied to the building and the land and that he understood the phrase "leasehold improvements" as used in this case to apply to the entire property. Flextronicss experts included a real estate attorney who testified the "leasehold improvements" is generally understood in the industry to mean improvements made by the tenant or improvements made by the landlord for the benefit of the tenant and that tenant improvements do not generally include preexisting buildings. These disputed facts impacted the issue of whether Marks should have caught the mistake when he signed the lease in 1995. Another disputed issue was whether Flextronicss discovery of facts related to the overpayment of rent should have put Flextronics on notice of an error in the leases option provisions.
Since the statute of limitations issue here involved disputed facts, we shall review this issue under the substantial evidence standard of review. "When a trial courts factual determination is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination." (Bowers v. Bernards (1984) 150 Cal.App.3d 870, 873-874, original italics omitted.) As long as there is substantial evidence, the appellate court must affirm, even if the reviewing justices personally would have ruled differently if they had presided over the proceedings below and even if other substantial evidence would have support a different result. (Id. at p. 874.)
C. Substantial Evidence Supports the Courts Findings
Viewing this evidence in the light most favorable to Flextronics, giving it the benefit of every reasonable inference, and resolving all conflicts in its favor, as we must under the rules of appellate review (In re Marriage of Mix (1975) 14 Cal.3d 604, 614), we conclude that there is substantial evidence to support the trial courts conclusion that the action was not barred by the statute of limitations. Marks scanned the lease before signing it and nothing caught his eye. He did not read and interpret every word of the lease before signing it. When he scanned the lease, he focused on the numbers. He always understood the option to apply to the land and the building and was told that "leasehold improvements" meant the land and the building in this context. Three other witnesses testified that the option applied to the land and the building. Curtis never told Miller or anyone at Flextronics that the option applied to anything less than the entire property. Neither party ever questioned the scope of the option and Miller thought the phrase "leasehold improvements" covered everything.
There was no evidence that the dispute over the amount of the rent in 1996 and 1997 actually put Flextronics on notice of an error in the option. The parties had agreed to use a fixed number to describe the rent and agreed on $31,500 based on Curtiss equity investment and the cost of obtaining financing at close of escrow. Flextronics never claimed that the rent amount was due to a drafting error.
The attorney that negotiated and prepared the easement agreements in 1997 did not recall ever reading the lease or seeing the lease in her files. As part of the negotiations over the easements, Curtis asked for confirmation that Flextronics would assume or pay off the loan upon exercising the option. This tends to confirm that even at the time they were negotiating about the easements, Curtis believed that the option applied to the entire property and was not limited.
Stewart, the attorney that discovered the scriveners error, had nothing to do with the lease until Flextronics received Curtiss letter about the late payment in May 1998. When Stewart told Marks about a potential problem with the use of the phrase "leasehold improvements," Marks assumed "in good faith" that there was not going to be a problem. After investigating the matter and reviewing all of the documents relating to the transaction, Stewart concluded that the use of the phrase "leasehold improvements" was a mistake, an aberration.
Flextronicss expert in real estate law, Charles Hansen, testified that the custom and practice regarding options in sales and leaseback agreements is for the option to include the right for the seller to buy back the entire bundle of rights that had been sold. It would have been unusual for the option not to apply to the entire property. According to Hansen, a tenant typically owns the leasehold improvements and would not need to buy them back, so there would be no need for an option on the leasehold improvements. Hansen opined that the use of the phrase "leasehold improvements" was a mistake. Hansen did not think Flextronics should have discovered the error any sooner than it did. According to Hansen, people frequently do not discover scriveners errors; such problems generally are not discovered until one of the parties is ready to invoke a right. Upon discovering a scriveners error, most people assume the opposing party will do the right thing. In Hansens experience, discovering a drafting error does not always mean discovering a controversy.
This evidence supports the courts conclusion that Flextronics neither discovered nor had reason to discover the error in the option provision in the lease before June 13, 1997. As the court noted in Norgart, "[A] `suspicion of one or more of the elements of a cause of action, `coupled with a knowledge of others, `will commence the [applicable] limitations period. " (Norgart, supra, 21 Cal.4th at p. 397.) In this case, Flextronics had neither knowledge nor a suspicion of any harm flowing from the scriveners error until Curtis refused to allow it to exercise the option in February 2000.
For these reasons, we conclude that the trial court did not err when it found the action was not barred by the statute of limitations.
II. Damages Incident to Specific Performance Decree
In accordance with the judgment of specific performance, Flextronics is entitled to receive the full performance of its contract with Curtis. "However, because execution of that judgment will occur at a date substantially after the date of performance provided by the contract, financial adjustments must be made to relate [the parties] performance back to the contract date. [Citation.]" (Stratton v. Tejani (1982) 139 Cal.App.3d 204, 212 (Stratton).) "A party to a contract for the purchase or exchange of land who is entitled to a decree of specific performance is also ordinarily entitled to a judgment for the rents and profits from the time he [or she] was entitled to a conveyance. The compensation awarded as incident to a decree for specific performance is not for breach of contract and is therefore not legal damages. The complainant affirms the contract as being still in force and asks that it be performed. If the court orders it to be performed, the decree should as nearly as possible require performance in accordance with its terms. One of the terms is the date fixed by it for completion, and since that date is past, the court, in order to relate the performance back to it, gives the complainant credit for any losses occasioned by the delay and permits the defendant to offset such amounts as may be appropriate. The result is more like an accounting between the parties than like an assessment of damages. [Citations.]" (Ellis v. Mihelis (1963) 60 Cal.2d 206, 219-220 (Ellis).)
The basic rules governing such an accounting were concisely stated as follows in Stratton: "First, when a buyer is deprived of possession of the property pending resolution of the dispute and the seller receives rents and profits, the buyer is entitled to a credit against the purchase price for the rents and profits from the time the property should have been conveyed . . . . [Citations.] . . . Second, a seller also must be treated as if he had performed in a timely fashion and is entitled to receive the value of his lost use of the purchase money during the period performance was delayed. [Citations.]" (Stratton, supra, 139 Cal.App.3d at p. 212; fn. omitted.)
"There are, however, some limitations on these general rules. First, the buyer may not receive both the profits and reasonable rental value of the property and the value derived from his use of purchase funds which were not irrevocably allocated toward the purchase price. The buyer must reduce his credit for rents and profits by a sum equivalent to the value of his use of the retained purchase funds. [Citation.] Second, if any part of the purchase price has been set aside by the buyer with notice to the seller, the seller may not receive credit for his lost use of those funds. [Citation.] Third, any award to the seller representing the value of his lost use of the purchase money cannot exceed the rents and profits awarded to the buyer, for otherwise the breaching seller would profit from his wrong. [Citations.]" (Stratton, supra, 139 Cal.App.3d at p. 213.)
The court fixed the date for performance under the option as July 31, 2000 and the parties do not dispute that finding. The court calculated the damages incident to the decree of specific performance as follows:
$ 3,760,000 Purchase price in option - $ 2,659,004 Less principal balance due on Curtiss loan from Bank of America as of July 31, 2000 $ 1,100,996 Difference between purchase price and balance due on loan (net payable to Curtis on July 31, 2000.) + $ 110,100 Interest at legal rate of 10 percent per annum on difference between purchase price and amount due on loan for the period 8/1/00 until 7/31/01. (This was the amount credited to Curtis for the loss of use of Flextronicss purchase money.) $ 1,211,096 Subtotal - $ 396,948 Less rent paid by Flextronics from 8/1/00 until 7/31/01 - $ 19,847 Less interest on Flextronicss rent payments at 10 percent per annum + $ 66,903 Plus amount by which Curtis decreased principal balance between 8/1/00 and 7/31/01 $ 861,204 Net option purchase price to be paid by Flextronics
Curtis contends that the trial court erred in limiting his offset for the loss of use of Flextronicss purchase money to $110,100 (10 percent of $1,100,096, which was the difference between the purchase price and the balance due on the loan as of July 31, 2000). Citing Ellis, he asserts that he is entitled to an interest offset of $376,000, which is equal to 10 percent of the entire purchase price. This contention has merit.
In Ellis, the court stated: "The guiding principle with respect to the calculation of the damages incident to the decree of specific performance, . . . is to relate the performance back to the date set in the contract. Timely performance of the contract would result in the purchasers receiving the rents and profits of the land but being denied the use of the purchase money, and a purchaser who seeks to recover rents and profits must permit an offset for his use of the purchase funds during the period that performance was delayed. In an early case this court held that a defendant in a situation like the one before us should be permitted to offset against the profits interest on the entire purchase price. (Heinlen v. Martin (1879) 53 Cal. 321, 343.) This holding is the overwhelming weight of authority. [Citations.]" (Ellis, supra , 60 Cal.2d at pp. 220-221; italics added.) Pursuant to Ellis, the trial court should have based Curtiss offset for interest on the purchase money on the entire price and not the net proceeds to be paid to Curtis after his loan was paid off. This is also equitable, since Curtis continued to pay both principal and interest on the Bank of America loan while the litigation was pending.
Under the courts calculations, Curtis was credited with the principal he paid while the litigation was pending ($66,903), but not the interest.
Flextronics argues that the trial courts calculations were correct, since in the 1997 amendment to the lease, it had agreed to assume or pay off Curtiss loan upon exercising the option. "An exception to the rule permitting an offset of interest against profits is made insofar as the purchaser has, with notice to the seller, set aside money toward the purchase price in such a manner as to realize no use or benefit therefrom. [Citations.] In this situation there is, of course, no danger that the purchaser will be able to obtain both the profits and the use of the purchase money." (Ellis, supra, 60 Cal.2d at p. 221.) This exception typically applies when the purchaser has placed money in escrow. (See e.g., id. at pp. 221-222 and Stratton, supra, 139 Cal.App.3d at p. 213.) There was no evidence that Flextronics had set aside funds to pay off Curtiss loan upon the exercise of the option in such a way as to realize no benefit or use from those funds. It is standard that, upon the sale of property, the proceeds of the sale would be used to pay off the sellers loan. Flextronics does not cite any legal authority for the proposition that an exception should also apply where the buyer promises to assume or pay off the sellers loan. Since this is a fairly standard part of a real estate transaction, such an exception would swallow up the rule.
Since we conclude that Curtiss interest credit should be based on the entire purchase price, and not the net sales proceeds payable to Curtis on July 31, 2000, we shall not address Curtiss contention that the figure that the court used as the principal balance due on the loan as of that date ($ 2,659,004) was not supported by the record.
Flextronics contends that Curtiss argument ignores equitable issues and asserts that "[a]warding [Curtis] ten percent interest for the period during which he wrongfully delayed performance would give him a windfall" since the interest rate on the loan was only 7.65 percent. Flextronics asserts further that the "trial court acted within its discretion in not paying Curtis interest at ten percent on the entire option price but, instead, adjusting the accounting to recognize the equities." We do not interpret these assertions as challenging the interest rate percentage used in the trial courts calculations and therefore shall not address Curtiss arguments regarding the propriety of the 10 percent rate. In addition, any issue regarding the proper interest rate percentage rate has been waived. Flextronics prepared the proposed statement of decision and proposed judgment using the 10 percent rate and Curtis did not object to the 10 percent rate when it challenged the proposed statement of decision in the trial court.
The trial court anticipated that escrow on the sale of the property to Flextronics would close on July 31, 2001 and awarded delay damages for the period August 1, 2000 through July 31, 2001. According to both parties, escrow did not close until November 2001. Flextronics suggests that, in the event that we conclude that the accounting was flawed, we should "remand the accounting issue to the court below with instructions to modify its accounting so that it covers the entire period during which Curtis delayed performance through close of escrow . . . ." Curtis appears to agree with that suggestion. Damages incident to a decree of specific performance should be awarded for the entire period of delay. (Ellis, supra, 60 Cal.2d at pp. 220-222; Stratton, supra, 139 Cal.App.3d at p. 213.) Although neither party contested the trial courts use of July 31, 2001 as the closing date for the award of damages below, since this case will have to be remanded to recalculate the damages, we shall direct the trial court to make a finding regarding the actual date that escrow closed and to modify the damages award in accordance with the following instructions:
Flextronics used the date November 2, 2001. Curtis does not provide an exact date and merely states that escrow closed in November 2001. We granted Flextronicss request for judicial notice of a grant deed transferring the property from Curtis to Flextronics that was signed by Curtis on September 9, 2001 and recorded on November 2, 2001. It is not this courts role to find facts. It is up to the trial court to make a finding regarding the date that escrow closed.
Curtis shall be awarded the sale price on the option ($3,760,000) plus interest at 10 percent per annum on the entire sale price for the period July 31, 2000 through the close of escrow. Flextronics shall be awarded a credit against the amount awarded to Curtis for rent at a rate of $33,079 per month for the period from July 31, 2000 through the close of escrow, plus interest on the rent at the rate of 10 percent per annum for the period July 31, 2000 through the close of escrow. Presumably, Curtiss loan with Bank of America has been disposed of. Taking into account the payments and credits that were made before the close of escrow, the court shall determine the amount(s) payable to either party as a result of the recalculation of the rent and interest credits. The parties are urged to stipulate if possible to the facts that are necessary to aid the court in its calculations. Our remand order does not affect the trial courts finding that Flextronics was the prevailing party for the purpose of awarding attorney fees.
Curtis does not contest the trial courts award of 10 percent interest on the amounts paid by Flextronics as rent during the period of delay.
III. Attorney Fees
The court awarded Flextronics $340,117.50 in attorney fees pursuant to attorney fee provisions in the purchase agreement and the lease, the entire amount of the fees claimed by Flextronics for work done by the Law Offices of Hoge, Fenton, Jones, and Appel (HFJA).
A. Alleged Unauthorized Practice of Law
Curtis contends that the trial court abused its discretion in awarding Flextronics $21,157 in fees for work done by associate attorney Stephanie Sparks because Sparks, a Nevada attorney who had recently moved to California, had not been admitted to the California bar at the time the work was done. Curtis argues that, as a matter of law, the fees paid to Sparks must be disallowed because she engaged in the unauthorized practice of law in violation of Business and Professions Code section 6125.
Sparks started working on the case shortly before trial. Sparks spent 136.9 hours working on the case. HFJA billed her time at $175 per hour. The firm voluntarily reduced the amount billed for Sparkss work by $2,800, effectively reducing her hourly rate to $154.55 per hour.
The determination of the basis for an award of attorney fees is a question of law which an appellate court reviews de novo. (Honey Baked Hams, Inc. v. Dickens (1995) 37 Cal.App.4th 421, 424, overruled on other grounds in Santisas v. Goodin (1998) 17 Cal.4th 599, 614.)
Curtis relies on Birbrower, Montalbano, Condon & Frank v. Superior Court (1998) 17 Cal.4th 119 (Birbrower). In Birbrower, the California Supreme Court held that a New York law firm had engaged in the unauthorized practice of law in violation of Business and Professions Code section 6125 when it represented a California corporation in a matter pending in California and that the New York firm was therefore not entitled to fees for the work done in California. This case is factually distinguishable from Birbrower. In Birbrower, neither of the attorneys who worked on the case was licensed to practice law in California. In fact, none of the attorneys in the firm were licensed in California. (Id . at p. 124.) In contrast, all of the attorneys from HFJA who represented Flextronics, other than Sparks, were admitted to practice in California. There was also uncontradicted evidence that at all times Sparks worked under the supervision of a California attorney.
Business and Professions Code section 6125 provides: " No person shall practice law in California unless the person is an active member of the State Bar."
Flextronics submitted detailed billing records describing the work done by Sparks, as well as the attorneys who worked on the case. The work done by Sparks was akin to that of a law clerk or paralegal. Sparks assisted lead counsel with the final stages of trial preparation, attended trial with lead counsel, kept notes of the testimony, assisted lead counsel in coordinating witnesses and evidence, did research, prepared research memoranda, and drafted portions of the post-trial briefs, which were reviewed by lead counsel. As lead counsel stated at the hearing on the attorney fees motion, "[Sparks] made no appearances. She represented no clients herself. She gave no advice to clients."
"There are many tasks in a law firm that a non-attorney may appropriately carry out . . . . [¶] Such work by non-attorneys in a law firm must be preparatory in nature. It may include research, investigation of details, the assemblage of data or other necessary information, and other work that assists the attorney in carrying out the legal representation of a client. [Citations.] The work must be supervised by an attorney. [Citation.] Furthermore, the work must become or be merged into the work of the attorney, so that it becomes the attorneys work product. [Citation.]" (In re Carlos (Bankr. C.D. Cal. 1998) 227 B.R. 535, 539, citing Crawford v. State Bar (1960) 54 Cal.2d 659, 668.) The work done by Sparks, under the direction of a licensed attorney, met these requirements. In our view, the trial court did not err when it rejected Curtiss claim that Sparks had engaged in the unauthorized practice of law.
B. Reasonableness of Fees
Curtis also asserts that the court abused its discretion in awarding Flextronics all of its attorney fees because HFJA had overstaffed the case. He argues that HFJA billed Flextronics excessive numbers of paralegal hours, that too many people worked on the file, resulting in a duplication of effort, and that high-priced shareholders did work that should have been done by junior associates. He also asserts that the fees paid for Sparkss time were excessive.
The trial court has broad authority to determine the amount of a reasonable fee in actions on contracts containing attorney fee provisions. (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1094-1095 (PLCM) citing Montgomery v. Bio-Med Specialties, Inc. (1986) 183 Cal.App.3d 1292, 1297 [trial court has "wide latitude in determining the amount of an award of attorneys fees" under Civil Code section 1717]; Vella v. Hudgins (1984) 151 Cal.App.3d 515, 522 ["The amount to be awarded as attorneys fees is left to the sound discretion of the trial court."].) As the PLCM court stated: " `The "experienced trial judge is the best judge of the value of professional services rendered in his [or her] court, and while his [or her] judgment is of course subject to review, it will not be disturbed unless the appellate court is convinced that it is clearly wrong["] —meaning that it abused its discretion. [Citations.]" (PLCM, supra, 22 Cal.4th at p. 1095.)
"[T]he fee setting inquiry in California ordinarily begins with the `lodestar, i.e., the number of hours reasonably expended multiplied by the reasonable hourly rate. `California courts have consistently held that a computation of time spent on a case and the reasonable value of that time is fundamental to a determination of an appropriate attorneys fee award. [Citation.] The reasonable hourly rate is that prevailing in the community for similar work. [Citations.] The lodestar figure may then be adjusted, based on consideration of factors specific to the case, in order to fix the fee at the fair market value for the legal services provided. [Citation.] Such an approach anchors the trial courts analysis to an objective determination of the value of the attorneys services, ensuring that the amount awarded is not arbitrary. [Citation.]" (PLCM, supra, 22 Cal.4th at p. 1095.)
" `The value of legal services performed in a case is a matter in which the trial court has its own expertise. [Citation.] The trial court may make its own determination of the value of the services contrary to, or without the necessity for, expert testimony. [Citations.] The trial court makes its determination after consideration of a number of factors, including the nature of the litigation, its difficulty, the amount involved, the skill required in its handling, the skill employed, the attention given, the success or failure, and other circumstances in the case. [Citation.]" (PLCM, supra, 22 Cal.4th at p. 1096.)
Flextronicss counsel provided the court with detailed billing records outlining the work done on the case. It is evident from the courts remarks at the hearing on the motion for attorney fees that the court reviewed those records, exercised its discretion, and had the relevant factors in mind. The judge was impressed by the detail provided by Flextronicss counsel in its documentation in support of the attorney fees motion. The court was also impressed by the fact that HFJA had voluntarily compromised some of the billing, noting that "throughout the billings theres no charge for point two hours, point five hours." The court stated that the "legal work provided by [HFJA] was of the highest caliber. And the work performed was both reasonable as well as necessary, in light of the claims."
As to the reasonableness of the rate charged for Sparkss work, the court observed that it was only about $50 more per hour than what Curtiss attorneys had charged for their paralegal. HFJA had also voluntarily reduced the amount billed for Sparkss services by approximately 12 percent.
Curtiss counsel charged $120 per hour for paralegal time. HFJA charged $90 to $120 per hour for paralegal time in 2000 and $120 to $130 per hour in 2001. Sparkss time was billed at $175 per hour.
As to the claim that HFJA overstaffed the case, the billing records show that 12 attorneys worked on the case over a period of 19 months. Five of the 12 provided limited advice and worked on the case for less than one hour each. HFJA did not even charge for the services provided by two of the five attorneys in this group. Another three attorneys provided limited consultation services, contributing only one to four hours each to the case. Two of the remaining four attorneys who worked on the file left the firm during the pendency of the litigation, which in turn caused lead counsel to seek the assistance of other personnel when he needed help staffing the case. On this record it was hardly an abuse of discretion for the court to reject Curtiss overstaffing claim. After reviewing the entire record, we find no abuse of discretion in the courts award of attorney fees.
IV. Award of Costs That Were Not Authorized by Statute
Curtis also contends that the trial court erred in awarding Flextronics $8,211.68 in out-of-pocket costs that did not qualify as statutory costs under section 1033.5. These costs included charges for telephone, telecopy (facsimile), photocopies (both those done by the firm and outside services), postage, express mail, messenger services, travel related to discovery other than depositions, parking for unspecified purposes, and computer-assisted and on-line research services.
Curtis argues that the "clear weight of authority holds that disbursements that are not recoverable as costs pursuant to Section 1033.5 are not recoverable under contractual attorneys fees provisions through post-judgment submissions" citing Fairchild v. Park (2001) 90 Cal.App.4th 919, 929-930 and Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1154.
Flextronics responds that the trial court awarded these litigation expenses under the broad reach of the attorney fees clause in the lease which provided: "In the event of any action or proceeding brought by either party against the other under this Lease, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys fees and costs of suit."
Flextronics also relies on Bussey v. Affleck (1990) 225 Cal.App.3d 1162, 1164-1167 (Bussey) where Division Four of the First District Court of Appeal reversed a trial court order that had disallowed the disbursements of plaintiffs counsel, including expert witness fees, photocopy, messenger and express mail charges, telephone costs, travel expenses, and research fees paid to an outside service. The court held that counsels disbursements were allowable as attorney fees on a contract providing for the payment of attorney fees and costs if the disbursements represent expenses ordinarily billed to a client and are not included in the overhead component of the attorneys hourly rate. (Id. at p. 1166.) The court reasoned that "[a]n agreement for attorneys fees and costs would be less than effectual if it could not cover the actual costs of litigation, including disbursements of counsel, and a contrary conclusion would mean that the party prevailing on the contract could never be made whole." (Ibid.) The court explained that the "provisions of section 1033.5 do not dictate a contrary result. Insofar as counsels disbursements are for expenses not included in the list of allowable costs in section 1033.5, subdivision (a), the court has discretion to award them under section 1033.5, subdivision (c)(4). [Citations.]" (Id. at p. 1167.) The court reasoned that such expenses are not precluded by section 1033.5, subdivision (b)(1), because they are authorized by law under section 1021 and Civil Code section 1717, which permit recovery of attorney fees where authorized by contract. (Bussey, supra, 225 Cal.App.3d at p. 1167.)
As the parties note, there is a split of authority on the issue. Several courts have considered the issue since Bussey was decided, focusing on awards of expert witness fees as costs. The cases were summarized as follows in Carwash of America-PO v. Windswept Ventures No. I (2002) 97 Cal.App.4th 540 (Carwash): "In Ripley [v. Pappadopoulos (1994)] 23 Cal.App.4th 1616, [the Third District Court of Appeal] disagreed with the reasoning and conclusion of Bussey. First, [the court] noted that the express provisions of section 1033.5 do not allow for recovery of expert witness expenses as costs, except where the expert was ordered by the court. (Ripley, at p. 1624.) [The court] further noted there are various circumstances where the Legislature has provided for the losing party to reimburse the other for expert witness fees. (Ibid.) [The court] explained: `When the numerous statutory provisions in which expert witness fees are expressly declared recoverable are considered together with the express prohibition against the inclusion of such fees in a cost award otherwise, the Legislatures intent becomes clear. (Id. at p. 1625.) Regarding Bussey, [the court] stated: `In Bussey the court attempted to avoid the statutory prohibition against the inclusion of expert witness fees in a cost award by equating expert witness fees and other nonallowable costs of litigation with attorney fees and by concluding that such costs may be included in an award of contractual attorney fees. We cannot adhere to that approach. In the absence of some specific provision of law otherwise, attorney fees and the expenses of litigation, whether termed costs, disbursements, outlays, or something else, are mutually exclusive . . . . [Citation.]" (Carwash, supra, 97 Cal.App.4th at p. 543.)
The defendants in Carwash urged the court to reconsider and reject the reasoning of Ripley and adopt the approach of Bussey. The court declined to do so, noting that "[e]very subsequent reported decision considering the issue has followed Ripley and rejected Bussey. (See Fairchild v. Park (2001) 90 Cal.App.4th 919, 931 . . . [Second District]; Steiny & Co. v. California Electric Supply Co. (2000) 79 Cal.App.4th 285, 293-294 . . . [Second District]; First Nationwide Bank v. Mountain Cascade, Inc. (2000) 77 Cal.App.4th 871, 878 . . . [First District, Div. 2]; Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1154 . . . [First Dist., Div. 5]; California Housing Finance Agency v. E.R. Fairway Associates I (1995) 37 Cal.App.4th 1508, 1514-1515 . . . .[Third District])" (Carwash, supra, 97 Cal.App.4th at p. 544.)
The court also observed: " `[T]he Legislature has chosen to provide for the recovery of contractual attorney fees in a cost award. [Citations.] But the Legislature has declined to adopt that procedure for the recovery of expert witness fees. (. . . § 1033.5, subd. (b)(1).) Accordingly, assuming expert witness fees may be recovered under a contractual provision, they must be specially pleaded and proven at trial rather than included in a memorandum of costs. [Citation.] In other words, while the parties may agree to allow recovery of expert witness fees by the prevailing party, this is a matter that must be pleaded and proven at trial rather than submitted in a cost bill. [Citations.]" (Carwash, supra , 97 Cal.App.4th at p. 544.)
While Ripley and its progeny focus on expert witness fees, their reasoning and analysis apply to the types of disbursements sought here. Section 1033.5, subdivision (a), lists the items that may be recovered as costs by a prevailing party, including travel expense related to depositions (§ 1033.5, subd. (a)(3)) and attorney fees when authorized by contract, law, or statute (§ 1033.5, subd. (a)(10)(A) & (C); italics added). However, the statute does not provide for the recovery of costs when authorized by contract, law or statute. Section 1033.5, subdivision (b), lists items that may not be recovered as costs unless expressly authorized by law. Included are "postage, telephone, and photocopying charges, except for exhibits." (§ 1033.5, subd. (b)(3).) In our view, the telecopy, express mail, and messenger expenses sought here are analogous to the postage and telephone expenses that are not recoverable under section 1033.5. The statute is silent as to the recovery of on-line research expenses. They are most analogous to investigation expenses, which are disallowed under section 1033.5, subdivision (b)(2).
For all the foregoing reasons, we decline to follow Bussey and hold that the trial court erred when it awarded Flextronics $ 8,211.68 in costs that were not otherwise recoverable under section 1033.5 and were not pleaded or proven at trial.
V. Expert Witness Fees
Prior to trial, Flextronics made a section 998 offer to compromise that provided that Flextronics would pay Curtis $1.1 million and pay off the principal balance due on the existing Bank of America loan on the condition that Curtis deliver a grant deed on the subject property, along with a standard policy of title insurance, each party to bear its own costs, attorney fees, or claims for any other amounts. Section 998, subdivision (d) provides in relevant part: "If an offer made by a plaintiff is not accepted and the defendant fails to obtain a more favorable judgment or award in any action or proceeding . . . , the court or arbitrator, in its discretion, may require the defendant to pay a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, preparation for trial or arbitration, or during trial or arbitration, of the case by the plaintiff, in addition to plaintiffs costs." Since the judgment in favor of Flextronics was more favorable than the section 998 offer, the court awarded Flextronics $ 19,285.41 in expert witness fees.
Curtis contends that since the amount of the judgment was not calculated properly, it was an abuse of discretion for the trial court to award Flextronics its expert witness fees. Since we find error in the way in which the trial court calculated the damages incident to the specific performance decree and remand for the purpose of recalculating those damages, we are not in a position to evaluate the propriety of the courts award of expert witness fees pursuant to section 998. Upon remand and recalculation of the damages, the trial court should reevaluate the propriety of awarding Flextronics its expert witness fees pursuant to section 998.
DISPOSITION
The judgment is reversed. The matter is remanded for further proceedings to recalculate the damages incident to the courts specific performance decree in accordance with this opinion.
The post-judgment order awarding costs and attorney fees is also reversed. The trial court is directed to vacate its order awarding Flextronics non-statutory costs in the amount of $ 8,211.68. The court is also directed to reevaluate the propriety of awarding expert witness fees pursuant to section 998. We do not disturb the portions of the courts post-judgment order awarding Flextronics $340,117.50 in attorney fees and $13,287.18 in statutory costs.
Each party shall bear his or its own costs on appeal.
WE CONCUR: Bamattre-Manoukian, Acting P.J. and Mihara, J.