Opinion
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of Los Angeles County, Teresa Sanchez-Gordon, Judge. Los Angeles County Super. Ct. No. BC327511
Willoughby & Associates, W. Anthony Willoughby and Edward S. Hubbard, Jr., for Defendant and Appellant.
Rodi Pollock Pettker Christian & Pramov, Allan E. Ceran and Richard W. Petty for Plaintiff and Respondent.
MANELLA, J.
Appellant Brad Pye, Jr. appeals from the judgment entered in respondent Los Angeles Sentinel, Inc.’s action for breach of contract. In the underlying lawsuit, respondent sought and obtained damages consisting of attorney fees expended in defending a prior action instituted by appellant. Appellant had pursued the prior action in violation of an existing release and settlement agreement. Appellant contends that any fees recoverable for his prosecution of the prior action should have been sought as costs after judgment was entered in that action rather than by way of a separate lawsuit. We agree. Under California law, attorney fees are not recoverable as damages in an action for breach of a release. Although the parties’ settlement agreement contained an attorney fee provision, current law mandates that contractual attorney fees be recovered as costs. We therefore reverse the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
I
Prior Civil Actions, Settlement Agreement, and Motion for Attorney Fees
There is no dispute concerning the underlying facts. In December 1985, appellant commenced a civil action for wrongful termination against respondent (the first civil action). In March 1990, respondent and appellant resolved the first civil action by entering into a written settlement agreement containing a mutual general release (the Settlement Agreement). The Settlement Agreement released all claims between the parties, both known and unknown. The Settlement Agreement included language entitling the prevailing party to attorney fees “[i]n the event of any dispute as to whether a violation of any [of its provisions] has occurred.” As part of the settlement, appellant received shares of respondent’s stock.
Approximately 12 years later, in July 2002, appellant commenced a shareholder action against respondent, Ken Jen Company, Danny Bakewell, and Jennifer Thomas (the second civil action). The complaint in the second civil action included both individual and derivative claims. The defendants raised as an affirmative defense that some or all of appellant’s claims arose before March 1990 and were barred by the Settlement Agreement. In June 2003, after a bench trial, the court entered judgment in the second civil action in favor of the defendants. The trial court’s minute order explained that the derivative claims were “barred by the decision of [respondent’s] board of directors not to pursue them.” Appellant’s individual claims were either “released” by the Settlement Agreement or “time-barred.”
According to the allegations of the complaint in the second civil action, Ken Jen was the majority shareholder of respondent; Bakewell was proxyholder of the shares owned by Ken Jen; and Thomas was president, chief executive officer and chairman of the board of both respondent and Ken Jen.
In the complaint, appellant challenged the conduct of the officers, directors, and majority shareholders of respondent for failing to hold shareholder meetings, converting property owned by respondent, and distributing dividends to themselves. Appellant also contended that respondent issued shares and repurchased stock on several occasions without giving appellant an opportunity to buy a pro rata share, in violation of an alleged agreement to do so.
In July 2003, the defendants -- including respondent herein -- filed a memorandum of costs and a separate motion for attorney fees, requesting $50,000 in fees. The motion sought only such fees as were awardable under Corporations Code section 800 subdivision (c). At that time, the defendants claimed to have expended approximately $200,000 for attorney fees. The court awarded the $50,000 requested by the defendants, the maximum available under the Corporations Code.
Section 800 requires a plaintiff who files a derivative action to furnish a bond in the amount of $50,000 on motion of the corporation or a corporate defendant in order to “secure the reasonable expenses of the parties entitled to make the motion.”
The defendants also contended: “the overwhelming majority of Defendants’ attorneys’ fees were incurred in defending against the derivative claims asserted by [appellant]”; “only 2 of plaintiff’s 13 causes of action were exclusively individual, while the remaining claims were derivative or partially derivative”; and “[o]ver 75% of the work done by Defendants’ attorneys and of the trial of this matter concerned [the derivative] claims.”
II
Underlying Complaint
The complaint that underlies this appeal was filed in January 2005 by respondent against appellant. It asserted a single claim for breach of written contract, alleging that appellant breached the parties’ 1990 Settlement Agreement by raising in his second civil action claims that had been released under the Settlement Agreement. Respondent claimed to have incurred attorney fees in excess of $150,000 in defending the claims wrongfully asserted by appellant in the second civil action.
The matter proceeded to a bench trial. According to the evidence presented, respondent’s attorney fees for defending the second civil action totaled $214,656. Robert McNeill and Allan Ceran, attorneys who had represented the defendants in the second civil action, testified they could not entirely segregate attorney time devoted to the derivative claims from the time spent on the individual claims. Ceran estimated that approximately 20 per cent of attorney time was devoted solely to individual claims and 60 percent was spent on issues pertaining to both individual and derivative claims, leaving only 20 per cent attributable solely to the derivative claims. Ceran further testified that the evidence presented at the trial in the second civil action focused on whether appellant was entitled to additional shares of stock based on an alleged 1983 agreement -- a claim later found by the court to have been released under the Settlement Agreement. Ceran also stated that the failure to pursue contractual attorney fees as costs in the aftermath of the second civil action was not an oversight, but the result of an affirmative decision.
Respondent claimed no damages other than attorney fees and presented no evidence of other damages.
After taking the matter under submission, the trial court issued a brief order containing no factual findings. The order awarded respondent $200,000 plus prejudgment interest at the rate of 10 percent from June 30, 2003. Respondent does not dispute that “[t]he damages awarded by the trial court consisted of the attorney’s fees that [respondent] had incurred in defending against the released claims in the prior action and prejudgment interest.”
On the last day of trial, which took place over the course of three partial court days, appellant’s counsel requested a statement of decision. One of the bases for the current appeal is the court’s failure to prepare a statement of decision. Because we dispose of this appeal on other grounds, we do not reach this issue.
DISCUSSION
I
Issue Presented
The primary issue presented in this appeal is whether respondent, as a party seeking attorney fees under a contractual fee provision, was required to comply with the procedures set forth in Civil Code section 1717 (section 1717), Code of Civil Procedure section 1033.5 (section 1033.5), and rule 3.1702 of the Rules of Court (rule 3.1702). Section 1717 applies to “any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party,” and provides that “[r]easonable attorney’s fees shall be fixed by the court, and shall be an element of the costs of suit.” Section 1033.5 states in subdivision (a)(10)(A) that “[a]ttorney fees, when authorized by . . . Contract” are allowable as costs under [Code of Civil Procedure] section 1032 and further provides in subdivision (b)(5) that “[a]ttorney’s fees allowable as costs pursuant to subparagraph (A) . . . of paragraph (10) of subdivision (a) shall be fixed either upon a noticed motion or upon entry of a default judgment, unless otherwise provided by stipulation of the parties.” Rule 3.1702 applies to both “claims for statutory attorney’s fees and claims for attorney’s fees provided for in a contract” and requires that “[a] notice of motion to claim attorney’s fees” be filed “within the time for filing a notice of appeal . . . .”
Section 1033.5 also states that “[a]ttorney’s fees awarded pursuant to Section 1717 of the Civil Code are allowable costs under Section 1032 as authorized by subparagraph (A) of paragraph (10) of subdivision (a).” The Supreme Court explained the point of this apparent redundancy in Santisas v. Goodin (1998) 17 Cal.4th 599, 618-619: “The legislature apparently added this . . . provision because it recognized that fee claims under section 1717 are based in part on a contractual provision and in part on a statute (that is, section 1717). To avoid any uncertainty about the proper classification of section 1717 attorney fees claims, the Legislature specified that they should be regarded as claims based on contract.”
Appellant contends that because respondent did not seek fees payable under the Settlement Agreement by noticed motion within the time specified by rule 3.1702 after judgment was entered in the second civil action, the opportunity for respondent to recover such fees was forever lost. Respondent argues that attorney fees for breach of the Settlement Agreement were not available under section 1717 or section 1033.5 after the disposition of the second civil action, and that, in any event, filing a separate action for damages, as was done here, represents an alternative method for obtaining fees for breach of a release. We reject both of respondent’s contentions. Accordingly, despite appellant’s clear breach of the Settlement Agreement and respondent’s entitlement to fees as the prevailing party in a dispute under the Settlement Agreement, we must reverse.
II
Availability of Attorney Fees as Damages for Breach of the Settlement Agreement
Respondent contends it was entitled to pursue an action for breach of the Settlement Agreement independent of any rights it may have had under section 1717 and section 1033.5. Respondent stresses that in the underlying action, it “pleaded and proved that [appellant] had breached [the Settlement Agreement] by litigating, in [the second civil action], certain claims that he had released in the [Settlement Agreement]” and that “[t]here was no dispute at trial that . . . [respondent] had been damaged . . . in the amount of attorneys’ fees that it had incurred in defending against those claims through appeal.”
Respondent is correct that appellant breached the Settlement Agreement by filing the second civil action; it is incorrect in its assumption that attorney fees constitute damages for that breach. California has long followed the rule that attorney fees incurred in enforcing a settlement agreement or release are not recoverable as damages. (Navellier v. Sletten (2003) 106 Cal.App.4th 763, 776-777; Olson v. Arnett (1980) 113 Cal.App.3d 59, 67-68; see also Bunnett v. Smallwood (Colo. 1990) 793 P.2d 157, 161 [“[M]ost jurisdictions have applied the American rule barring the award of attorney fees and costs in cases involving a breach of a release.”].)
In Olson v. Arnett, the defendants filed a cross-complaint to enforce a settlement agreement after the plaintiff repudiated the agreement and continued to prosecute his personal injury action. The defendants contended that “when [the plaintiff] repudiated the settlement, [they] were forced to continue to employ attorneys and that therefore their attorney fees logically flow as damages from the breach.” (113 Cal.App.3d at p. 67.) The court found the reasoning unpersuasive: “[T]o allow [the defendants] to recover their attorney’s fees would be contrary to the well-established rule that in the absence of a special statute or a contractual provision for attorney’s fees, the prevailing party is not entitled to recover attorney’s fees from his opponent. [Citations.] [¶] The instant case is based on a contract, the agreement to settle the underlying action . . . . [The plaintiff] breached his contract, and [the defendants] had to employ attorneys in order to enforce that contract. We think this case is not basically different from any other contract action where the nonbreaching party is forced to employ an attorney to enforce the contract but is not entitled to his attorney’s fees as damages.” (Id. at pp. 67-68; accord Navellier v. Sletten, supra, 106 Cal.App.4th at p. 776 [affirming trial court order striking plaintiffs’ claim for breach of release under anti-SLAPP statute, and finding plaintiffs had not substantiated any damages because “the attorney’s fees they incurred in connection with defendant’s [earlier claims], [are] not available as a matter of law . . . .”].)
III
Availability of Attorney Fees as Costs
Of course, attorney fees are recoverable where the release or settlement agreement specifically so provides, as the parties’ Settlement Agreement did here. (See Navellier v. Sletten, supra, 106 Cal.App.4th at p. 776; Olson v. Arnett, supra, 113 Cal.App.3d at p. 67.) However, section 1717, section 1033.5, and rule 3.1702 prescribe specific procedures for obtaining fees under a contractual fee provision: recoverable fees are to be “fixed by the court” as “an element of the costs of suit” (§ 1717) “either upon a noticed motion or upon entry of a default judgment, unless otherwise provided by stipulation of the parties” (§ 1033.5, subd. (b)(5)), and the prevailing party has only until “the time for filing a notice of appeal” to file such motion (rule 3.1702).
Respondent contends attorney fees were not recoverable under section 1717 because the statute applies on its face to an “action on a contract,” and neither party brought an action “on” the Settlement Agreement; “[r]ather, [respondent] asserted the Settlement Agreement as a defense to those of [appellant’s] individual claims in [the second civil action] which had accrued before the execution of the Settlement Agreement.” As discussed below, the contention that section 1717 does not apply in this situation is based on a narrow reading of its language, which courts have traditionally rejected. Moreover, even if section 1717 did not apply, we conclude section 1033.5, as written, applies to all contractual attorney fee provisions and prescribes essentially the same procedures. The failure to follow these procedures results in a loss of the right to collect otherwise awardable fees.
A
Section 1717 Applies Where Contract is Used Defensively
Section 1717 has been interpreted to apply to situations in which a contract containing an attorney fee provision is not the subject of the complaint, but is used solely as a defense. (North Associates v. Bell (1986) 184 Cal.App.3d 860, 864-866; In re Baroff (9th Cir. 1997) 105 F.3d 439, 442-443.) In North Associates v. Bell, the court held that the key question under section 1717 is whether the action “‘involves’ a contract.” (184 Cal.App.3d at p. 865.) The court found the underlying unlawful detainer action “involved” a contract, where the defendant/lessee sought to avoid eviction by claiming the lease under which the premises were originally rented had been extended by agreement of the parties. The trial court ruled against the lessee, finding the original lease had been replaced by another agreement. Although the only fee provision was in the original lease, the trial court awarded fees to the plaintiff/lessor under section 1717. The Court of Appeal affirmed, explaining in its opinion: “[The lessee] defended by alleging that he had been granted extensions under [a] written lease [containing an attorney fee provision]. Had [the lessee] been successful in making this defense, he would have been entitled to attorney fees . . . . [A]lthough the trial court found that the original lease had expired and a new lease had taken its place . . . [,] [i]t would be inequitable to deny attorney fees to [the lessor], the prevailing party, when [the lessee] would have been entitled to an award of attorney fees had he prevailed under the same facts.” (Id. at pp. 865-866.)
In In re Baroff, supra, 105 F.3d 439, the court applied similar reasoning to an action defended by interjection of a release containing an attorney fee provision. The debtor defended a nondischargeability action by presenting to the bankruptcy court a settlement agreement that covered the debt. The agreement contained a provision stating that if one of the parties to the agreement brought an action to enforce it, the losing party would pay the prevailing party’s attorney fees. (105 F.3d at p. 440.) The bankruptcy court granted summary judgment to the debtor based on the terms of the agreement, but denied the debtor’s motion for attorney fees. The Ninth Circuit reversed. Noting that “California courts liberally construe [the phrase]‘on a contract’ [contained in section 1717],” the court held: “[B]ecause the bankruptcy court needed to determine the enforceability of the settlement agreement to determine dischargeability[,] . . . the document containing the attorney fees clause . . . played an integral role in the proceedings.” (105 F.3d at p. 442.) It followed that the nondischargeability action was “an action on [the] contract . . .,” and the debtor was entitled to attorney fees under California law. (Ibid.; see also Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 707 [claim for declaratory relief is action “‘on a contract’”]; Milman v. Shukhat (1994) 22 Cal.App.4th 538, 545-546 [rejecting “literal application” of section 1717 as “contrary to the overwhelming weight of authority”].)
Under these authorities, the parties’ dispute over whether the Settlement Agreement covered some or all of the claims asserted in the second civil action was an “action on a contract” under section 1717. The Settlement Agreement entitled the prevailing party to attorney fees “[i]n the event of any dispute as to whether a violation of any [of its provisions] has occurred.” Respondents’ invocation of the Settlement Agreement as an affirmative defense in the second civil action clearly raised a “dispute as to whether” its terms had been violated -- a dispute that became an integral part of the lawsuit. Accordingly, at the conclusion of the second civil action, when judgment was entered in favor of respondent, respondent could have requested attorney fees for appellant’s breach of the Settlement Agreement under section 1717. Section 1033.5 specifically states that attorney fees should be requested by “noticed motion.” (§ 1033.5, subd. (c)(5).) Because respondent did not file such a motion within the time limits of rule 3.1702, that avenue for recovery of fees has been foreclosed.
B
Section 1033.5 Applies to All Contractual Attorney Fee Provisions
In recent years, some courts have taken a more restrictive view concerning the reach of section 1717. In Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1342, the court stated: “[Section 1717] covers only contract actions, where the theory of the case is breach of contract, and where the contract sued upon itself specifically provides for an award of attorney fees incurred to enforce that contract.” (Accord Wakefield v. Bohlin (2006) 145 Cal.App.4th 963, 974; Childers v. Edwards (1996) 48 Cal.App.4th 1544, 1548.) But even where section 1717 does not apply, attorneys fees are awardable as costs under section 1033.5. (Wakefield v. Bohlin, supra, at pp. 974-975; Childers v. Edwards, supra, at pp. 1548-1549.)
The only practical effect of this more restrictive interpretation is to place contractual fees outside the scope of section 1717 where (1) the fee provision grants attorney fees to the prevailing party in litigation “arising out of” the execution of the agreement; and (2) the prevailing party seeks attorney fees for litigating tort claims. Courts have concluded that where the fee provision contains the “arising out of” or similar language, it can be interpreted broadly enough to include tort claims between the contracting parties, but the language of section 1717 cannot. (Wakefield v. Bohlin, supra, at pp. 973-975; Xuereb v. Marcus & Millichap, Inc., supra, at pp. 1341-1344; Childers v. Edwards, supra, at p. 1548; Sweat v. Hollister (1995) 37 Cal.App.4th 603, 610-611, disapproved in part on another ground in Santisas v. Goodin, supra, 17 Cal.4th 599.) Accordingly, attorney fees for such claims may be awarded without regard to section 1717. (Ibid.) In Santisas v. Goodin, supra, 17 Cal.4th at page 599, the Supreme Court confirmed that attorney fees are recoverable for litigation of tort claims where the parties’ contract granted fees to the prevailing party in litigation “arising out of the execution of [the] agreement” and that section 1717 does not apply to attorney fees awarded for tort claims. It did not, however, endorse the language in Xuereb concerning the reach of section 1717. Indeed, it explicitly rejected the assertion that “attorney fees due under a contractual attorney fee provision may be recovered as costs only when expressly allowed under the terms of section 1717.” (17 Cal.4th at p. 617.)
A case in point is Thompson v. Miller (2003) 112 Cal.App.4th 327. There a contract was raised defensively and the court concluded attorney fees were outside the ambit of section 1717, but nonetheless awardable as costs. The case involved a series of “Share Purchase Agreement[s],” each of which contained an attorney fee provision stating, “[t]he prevailing party in any dispute under this Agreement shall be entitled to reasonable attorneys fees incurred in such dispute.” (112 Cal.App.4th at p. 333.) The sellers of the shares sued the buyer, contending the sales had been induced through breach of fiduciary duty, fraud, and elder abuse, but asserted no contract claims. The buyer raised as a defense a provision of the Share Purchase Agreements warranting that “Seller’s decision to sell or otherwise convey the Shares as provided herein was not made in reliance upon any representation made by Purchaser, the Company or its officers, directors, agents or others acting with or on behalf of any of them.” (Id. at p. 332.) After entering judgment in favor of the buyer, the trial court denied his request for attorney fees. The Court of Appeal reversed, holding that because the Share Purchase Agreements stated fees would be awarded to the prevailing party in “any” dispute, “[a]ny conflict concerning the effect of the agreements [gave] rise to a right to an attorney fees award by the prevailing party.” (Id. at p. 337.) Therefore, “[t]he assertion of the defense, fatal to the plaintiffs’ causes of action, that the Share Purchase Agreements established that plaintiffs did not rely on [the buyer’s] representations when they sold their . . . stock, created a dispute under the agreements,” entitling the prevailing party to his fees. (Ibid.)
In Gil v. Mansano (2004) 121 Cal.App.4th 739, where the plaintiff pursued noncontractual claims and defendant asserted an existing release as an affirmative defense, the court acknowledged that “an attorney fee provision applicable to ‘any dispute under the agreement’ is sufficiently broad to include the assertion of a contractual defense to fraud and breach of fiduciary duty causes of action.” (Id. at p. 744.)
The Legislature drafted section 1033.5 broadly enough to include all requests for attorney fees, regardless of the applicability of section 1717. Section 1033.5 specifically states that attorney fees allowable as costs are to be “fixed upon a noticed motion or upon entry of a default judgment unless otherwise provided by stipulation of the parties.” Thus, whether we follow the older cases interpreting section 1717 liberally to include the attorney fee provision in the Settlement Agreement or more recent authority suggesting a narrower interpretation, we conclude that attorney fees were available to respondent as costs after the conclusion of the second civil action.
C
The Procedures Outlined in Section 1717, Section 1033.5, and Rule 3.1702 Are Mandatory and Exclusive
Respondent disputes whether the prescribed procedures are intended to be mandatory and exclusive. Their nature is clear from the language used. Both section 1717 and section 1033.5 use the term “shall,” stating that attorney fees “shall” be fixed by the court, “shall” be an element of costs of suit, and “shall” be fixed on noticed motion. It is an established principle of statutory construction to construe the word “shall” as mandatory. (Common Cause v. Board of Supervisors (1989) 49 Cal.3d 432; Rosenfield v. Superior Court (1983) 143 Cal.App.3d 198, 202.) Similarly, Rule 3.1702 states that a motion for attorney fees “must be served and filed within the time for filing a notice of appeal . . . .” (Italics added.)
That the Legislature intended these procedures to be the exclusive method for recovery of attorney fees is further supported by the legislative declaration issued when the current version of section 1033.5 was enacted in 1990: “The Legislature finds and declares that there is great uncertainty as to the procedure to be followed in awarding attorney’s fees where entitlement thereto is provided by contract to the prevailing party. It is the intent of the Legislature in enacting this act to confirm that these attorney’s fees are costs which are to be awarded only upon noticed motion, except where the parties stipulate otherwise or judgment is entered by default.” (Stats. 1990, ch. 804, § 2, p. 3552.)
The Legislature went on to say: “It is further the intent of the Legislature to vest the Judicial Council with the discretion provided in Section 1034 of the Code of Civil Procedure to adopt procedural guidelines establishing the time for the hearing of these motions, but the Legislature finds and declares that the criteria set forth in [former] Section 870.2 of the California Rules of Court provide a fair and equitable procedure for the motions.” Appellant refers to former rule 870.2 as the predecessor to rule 3.1702. That is not precisely correct. From 1987, when it was promulgated, to 1994, former rule 870.2 applied only to “[a]ny notice of motion to claim attorney fees as an element of costs under Civil Code section 1717 . . . .” and stated that any such motion “shall be served and filed before or at the same time the memorandum of costs is served and filed.” (Deering’s Ann. Court Rules, Rule 870.2 (1988 Supp.) p. 88.) Effective January 1, 1994, it was amended to apply more broadly to “claims for statutory attorney’s fees and claims for attorney’s fees provided for in a contract” and to require such motions to be filed “within the time for filing a notice of appeal . . . .” (23 pt. 2 West’s Ann. Court Rules, Rule 870.2 (1996 ed.) p. 146.) The 1994 version of rule 870.2 is rule 3.1702’s predecessor.
To fully appreciate the Legislature’s concerns and goals, it is useful to examine the situation that prevailed at the time the Legislature revised section 1033.5. The “uncertainty” referred to derived from judicial decisions under section 1717. Prior to the enactment of that statute in 1968, it was generally agreed that whereas statutory attorney fees were awardable as costs (T.E.D. Bearing Co. v. Walter E. Heller & Co. of Calif. (1974) 38 Cal.App.3d 59, 62 (T.E.D. Bearing Co.); System Inv. Corp. v. Union Bank (1971) 21 Cal.App.3d 137, 162), contractual attorney fees were a form of special damages, to be pleaded and proved like other contractual damages (Genis v. Krasne (1956) 47 Cal.2d 241, 246; Hunt v. Smyth (1972) 25 Cal.App.3d 807, 832). But requiring parties to prove fees during trial was not an ideal procedure. (See Beneficial Standard Properties, Inc. v. Scharps (1977) 67 Cal.App.3d 227, 232, fn. 3 [“When a case is tried, neither party knows whether he will prevail until the trial is concluded, so both parties must present evidence of attorneys’ fees and estimates must be made on work yet to be performed.”]; Mabee v. Nurseryland Garden Centers, Inc. (1979) 88 Cal.App.3d 420, 426 [in upholding fee determination by bench trial after verdict rendered, court stated: “One glancing look illustrates the incongruous situation that would develop by a requirement of a jury -- midstream in the process of determining liability of the respective parties -- to hear from both sides proof and argument as to the nature, extent and value of the attorney services rendered and yet to be rendered”].) Consequently, once section 1717 was enacted, courts were quick to conclude that contractual attorney fees falling under its provisions were a type of statutory fee, thus enabling the prevailing party to recover such fees during post-trial cost proceedings. (See, e.g., T.E.D. Bearing Co., supra, 38 Cal.App.3d at pp. 63-64; System Inv. Corp. v. Union Bank, supra, 21 Cal.App.3d at p. 162.)
Although the courts’ goal in placing section 1717 attorney fees in the category of “statutory” fees was simplification of claim procedures, the actual result was the “great uncertainty as to the procedure to be followed in awarding attorney’s fees where entitlement thereto is provided by contract to the prevailing party,” described by the Legislature in 1990. In the aftermath of decisions allowing section 1717 attorney fees to be claimed as costs, debate arose whether section 1717 applied to all contractual attorney fee provisions or merely to unilateral fee provisions, and if the latter, whether either party could recover fees as costs or only the party not named in the fee provision in the contract. (Compare Beneficial Standard Properties, Inc. v. Scharps, supra, 67 Cal.App.3d at p. 231 [award of attorney fee as costs to prevailing party affirmed over appellant’s argument that section 1717 could not apply because contract was bilateral] and T.E.D. Bearing Co., supra, 38 Cal.App.3d at pp. 63-64 [where attorney fee provision was unilateral, prevailing parties permitted to recover fees as costs despite being parties named in the fee provision], with Mabee v. Nurseryland Garden Centers, Inc., supra, 88 Cal.App.3d 420 at page 427 [contractual attorney fees not awardable as costs because provision was bilateral and section 1717 did not “convert every contractual entitlement of a prevailing party to attorney fees into a statutory right recoverable only as part of costs”].)
This debate derived from the original language of 1717. At that time, the first paragraph stated that it applied “[i]n any action on a contract, where such contract specifically provides that attorney’s fees and costs, which are incurred to enforce the provisions of such contract, shall be awarded to one of the parties . . . .” (Stats. 1968, ch. 266, § 1, p. 578, italics added.) This led at least one court to conclude it applied only “to a species of attorney fee contract where ‘one of the parties’ is entitled to an award” and not where either party was entitled if he or she prevailed. (Mabee v. Nurseryland Garden Centers, Inc., supra, 88 Cal.App.3d at p. 427, fn. 4, italics omitted; see also Associated Convalescent Enterprises v. Carl Marks & Co., Inc. (1973) 33 Cal.App.3d 116, 120, quoting San Luis Obispo Bay Properties, Inc. v. Pacific Gas & Elec. Co. (1972) 28 Cal.App.3d 556, 570 [“The sole purpose of section 1717 is to transform a unilateral contact right to attorneys’ fees ‘into a reciprocal provision giving the right to recover fees to whichever party prevails [in the contract action]”.) In 1981, the provision was amended to clarify that it applied “[i]n any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce the provisions of that contract, shall be awarded either to one of the parties or to the prevailing party . . . .” (Stats. 1981, ch. 888, § 1, p. 3399, italics added.)
Additionally, there were conflicting views concerning whether contractual attorney fees that fell under section 1717’s provisions could be awarded only as costs or whether parties retained the option of seeking fees as special damages. (Compare Moulin Electric Corp. v. Roach (1981) 120 Cal.App.3d 1067, 1069 [“Where [attorney] fees are awarded pursuant only to Civil Code section 1717, they are recoverable only as costs.”], with Lanyi v. Goldblum (1986) 177 Cal.App.3d 181, 187 [italics added] “[T]he plaintiff [in an action on a contract with an attorney fee provision] may elect to have the court determine the fees under section 1717 as costs”] and T.E.D. Bearing Co., supra, 38 Cal.App.3d at p. 63 [“[W]hile [the prevailing parties] had rights to attorneys’ fees by contract, they also had rights to attorneys’ fees by statute -- that is, they had rights as the ‘prevailing parties’ under [section 1717].”].)
There was also confusion as to the proper procedure to follow when seeking attorney fees as costs. Some parties merely added attorney fees to the cost memorandum and awaited their opponent’s motion to tax costs before coming forward with evidence to support the fees requested. (See Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 776; M. C. & D. Capital Corp. v. Gilmaker (1988) 204 Cal.App.3d 671, 678; California Recreation Industries v. Kierstead (1988) 199 Cal.App.3d 203, 206-207.) Even after the Legislature amended section 1717 in 1981 to add a provision stating “[r]easonable attorney’s fees shall be fixed by the court, upon notice and motion by a party, and shall be an element of the costs of suit” (Stats. 1981, ch. 888, § 1, p. 3399), the confusion persisted. (See, e.g., California Recreation Industries v. Kierstead, supra, 199 Cal.App.3d at pp. 206-207 [stating that “[o]ne reasonable interpretation” of the phrase was “the Legislature was merely restating the usual procedure of opposing cost bills by moving to tax costs and endorsing this same procedure for determining the amount of attorney’s fees awards” because “the amendment stated only that the notice of motion shall be by ‘a party,’ rather than specifically requiring that the motion be brought by the party seeking attorney’s fees”]; Christensen v. Dewor Development, supra, 33 Cal.3d at p. 786 [where prevailing parties included attorney fees in their memorandum of costs, “the spirit, if not the letter, of the amended statute was complied with”].)
Prior to 1981, section 1717’s language stated that the prevailing party “shall be entitled to reasonable attorney’s fees in addition to costs and necessary disbursements,” without specifying the procedure for obtaining them. (Stats. 1968, ch. 266, § 1, p. 578.) In 1987, the phrase “upon notice and motion by a party,” was deleted. (Stats. 1987, ch. 1080, § 1, p. 3648.)
Given this background, it is clear that the Legislature’s intent in revising section 1033.5 was to eliminate confusion and debate by endorsing a single procedure for all attorney fee requests. (See Allstate Ins. Co. v. Loo (1996) 46 Cal.App.4th 1794, 1797 [recognizing that section 1033.5 was enacted to end the confusion over whether an attorney fee award should be claimed as an element of damages or as an item of costs].) Not surprisingly, courts interpreting this provision have generally required strict adherence to the outlined procedures. In Russell v. Trans Pacific Group (1993) 19 Cal.App.4th 1717, cited by appellant, the parties seeking contractual attorney fees included them in their cost memorandum, but did not file a noticed motion. (Id. at pp. 1720-1721.) Prior to 1990, courts considered this to be “substantial compliance” with the procedural requirements for requesting attorney fees (M. C. & D. Capital Corp. v. Gilmaker, supra, 204 Cal.App.3d at p. 678) or a “technical error” (California Recreation Industries v. Kierstead, supra, 199 Cal.App.3d at p. 209). The court in Russell concluded these authorities were “no longer good law.” (19 Cal.App.4th at p. 1726.) Under section 1033.5 “[the prevailing parties] were required to file a noticed motion for attorney fees, and were further required by [former] rule 870.2 to file the motion before or at the same time as the cost memorandum.” (Id. at p. 1725.) “[I]n light of the Legislature’s express intent to resolve uncertainty in this area of law,” the court determined it could not “sanction an approach to handling these attorney fee claims that can only generate litigation such as the instant case.” (Id. at p. 1728.) The court further held that “the trial court does not have discretion to disregard the statutory requirement that a claim for contractual attorney fees must be made by timely written motion.” (Ibid.) Although the procedural requirements were not “jurisdictional,” they were “mandatory.” (Ibid.) Accordingly, the only relief possible for a party who failed to comply with the procedures was on a showing of excusable neglect, mistake, inadvertence, or surprise under Code of Civil Procedure section 473. (Id. at p. 1729.)
The reference to “rule 870.2” in the opinion is to the 1987 version. (See 19 Cal.App.4th 1726, fn. 16.)
The court also took a strict approach in Bankes v. Lucas (1992) 9 Cal.App.4th 365, where attorney fees had been included in the judgment for damages. After finding there was no prevailing party under the contract, the appellate court concluded the award of fees “would need to be reversed in any event” because they were awarded as part of the judgment, and the party to whom they were awarded did not file a motion requesting such fees until several months after the judgment had been entered. (Id. at p. 369.)
Similarly, in Nazemi v. Tseng (1992) 5 Cal.App.4th 1633, the prevailing party waited until the appeal had concluded to file a motion for fees, seeking to recover fees for both the appeal and the trial, although the trial had concluded more than a year earlier. The trial court granted the request and the Court of Appeal reversed, because “[a]ccording to statute and rule, attorney fees, when an item of costs, must be claimed within specified time limits,” and “the trial court abused its limited discretion by considering [the] motion for attorney fees for trial long after the . . . maximum time extension allowed by rule.” (Id. at p. 1641.)
The court took a less restrictive view in Gunlock Corp. v. Walk on Water, Inc. (1993) 15 Cal.App.4th 1301. Under a factual scenario similar to that in Russell v. Trans Pacific Group, the court held the trial court had abused its discretion in refusing to award attorney fees included in a cost bill, but not made the subject of a separate motion. The court concluded that pre-1990 decisions such as Christensen v. Dewor Development, supra, and California Recreation Industries v. Kierstead, supra, remained good law and gave the trial court “substantial latitude in allowing fees to be awarded without strict compliance with statutory temporal and procedural limitations” where the violation is “‘technical[]’” and there was “no prejudice . . . from the procedural departure.” (15 Cal.App.4th at pp. 1304-1305.)
Whether we follow the reasoning of Gunlock or Russell, however, the result here is the same. Respondent, the prevailing party, neither included contractual attorney fees in its cost memorandum nor filed a motion requesting attorney fees a few days or months late. Respondent deliberately eschewed the statutory procedures and elected instead to file a new action for breach of contract. It cannot be said that the violation was technical or that appellant suffered no prejudice. Rather than disputing the appropriate amount of attorney fees through opposition to a motion, appellant was forced to defend a lawsuit. The judge before whom the underlying lawsuit was tried was not familiar with the issues litigated in the second civil action, necessitating several days of evidentiary hearings and extensive briefing. Moreover, having two separate attorney fee hearings before two different judges enabled respondent to give contradictory assessments of the time its attorneys had spent on the individual and derivative claims in the second civil action. In sum, although our conclusion results in an undeserved windfall for appellant who clearly breached the Settlement Agreement by pursuing long-released claims, we must reverse the underlying judgment in order to uphold the Legislature’s clear intent to put in place a single, uniform procedure for recovery of attorney fees.
The court in Russell “respectfully disagree[d]” with the holding in Gunlock because “it recreates the ‘uncertainty’ the Legislature so clearly sought to dispel in its declaration of intent in amending section 1033.5 in 1990.” (19 Cal.App.4th at p. 1728.) In Lee v. Wells Fargo Bank, N.A. (2001) 88 Cal.App.4th 1187, this court noted the split of authority on the question whether a late-filed attorney fee request could be granted (id. at p. 1198) and upheld a trial court decision to grant relief under Code of Civil Procedure section 473 where a motion for fees was filed late (id. at p. 1201).
In the second civil action, respondent represented that “[o]ver 75% of the work done by Defendants’ attorneys and of the trial of this matter concerned [the derivative] claims.” In the instant action, respondent claimed that only 20 per cent of its attorneys’ time was devoted to the derivative claims.
We do not mean to suggest that respondent was precluded from pursuing an independent action for breach of contract to recover any damages arising from appellant’s breach of the Settlement Agreement. As noted above, attorney fees are not damages in such cases. (Navellier v. Sletten, supra, 106 Cal.App.4th at pp. 776-777; Olson v. Arnett, supra, 113 Cal.App.3d at pp. 67-68.) Had respondent suffered some other type of loss from appellant’s breach, it could have brought a new action to recover both damages and attorney fees expended in pursuit of that recovery. Respondent was entitled to an award of attorney fees in the second civil action not because respondent had established breach of the Settlement Agreement and ensuing damages, but because the Settlement Agreement provided for recovery of attorney fees in a dispute over whether a violation of its provisions had occurred, and the second civil action represented such a dispute.
DISPOSITION
The judgment is reversed. Each party is to bear its own costs.
We concur:
WILLHITE, Acting P. J., SUZUKAWA, J.