Opinion
NOT TO BE PUBLISHED
Super. Ct. No. C050950.
NICHOLSON, J.
The trial court granted defendant Frank O. Fox’s motion to file a cross-complaint, but it did so on condition Fox pay plaintiff Dianna Mitzner some $80,000 to compensate her for attorney fees she incurred in preparing for an arbitration hearing aborted in part due to Fox’s actions. Fox appeals from the trial court’s order, claiming the trial court acted outside its discretion in imposing the condition. In opposition, Mitzner argues the order is not an appealable order and, even if it is, the trial court did not abuse its discretion. We conclude the order is appealable as an order directing payment of a monetary sanction, and we conclude the trial court abused its discretion by imposing the sanction in this instance. We strike the sanction from the court’s order.
FACTS
Mitzner retained Fox, an attorney, in May 2000 to represent her in a divorce action. She signed a retainer agreement formalizing the relationship. The agreement was drafted by Fox.
In the agreement, Mitzner waived her statutory right to have fee disputes resolved by trial or by the procedure provided by the Mandatory Fee Arbitration Act (Bus. & Prof. Code, § 6200 et seq.) (MFAA). That procedure calls for the dispute to be resolved by non-binding arbitration unless the parties, after the dispute has arisen, agree to binding arbitration. In the absence of such an agreement, either party is entitled to a trial after arbitration. (Bus. & Prof. Code, § 6204.)
Instead of agreeing to the MFAA procedure, Mitzner and Fox agreed in the retainer agreement that all disputes regarding attorney fees would be resolved by arbitration. The agreement gave Mitzner the option to select non-binding arbitration or binding arbitration. If she selected non-binding arbitration, and either party was unhappy with the result of that arbitration, the dispute would then be decided by binding arbitration.
The retainer agreement also authorized Fox to demand security for the payment of his attorney fees. The security would consist of a note secured by a deed of trust against Mitzner’s real or personal property.
In October 2000, Mitzner signed a note promising to pay Fox $65,464.19 plus interest, “plus any and all additional attorney’s fees and costs” Fox incurred in the divorce action on Mitzner’s behalf. The amount was due and payable by October 1, 2001.
The note was secured by a deed of trust recorded against real property Mitzner owned in Markleeville, Alpine County. The deed named Fox as the beneficiary, and it granted to him the power of sale to secure payment of the note.
Mitzner claims that prior to executing the note, she had paid Fox $85,000. She claims that after executing the note, she paid Fox an additional $76,000.
In April 2005, Fox recorded a notice of default and election to sell under the October 2000 deed of trust. The notice sought to recover the balance of principal and interest owed under the note that became due on October 1, 2001, along with any other legal fees that had been incurred. The notice stated Mitzner owed Fox $248,360.09 as of April 4, 2005.
In response, Mitzner filed this action. She sought declaratory and injunctive relief and a judgment quieting title to her property. She also sought a preliminary injunction enjoining Fox from proceeding with the sale of the Markleeville property.
The trial court granted Mitzner’s request for a preliminary injunction. Pursuant to Code of Civil Procedure section 1281.2, the court required Mitzner, as a condition of receiving the preliminary injunction, to file a motion to compel arbitration as required by the retainer agreement.
Mitzner complied with the court’s condition and filed a petition to compel arbitration. Citing the option given her by the retainer agreement to choose either non-binding arbitration or binding arbitration, Mitzner elected binding arbitration and requested the court submit all of her and Fox’s disputes to binding arbitration. Fox did not object to Mitzner’s petition.
The trial court granted the petition. It ordered Mitzner and Fox to arbitrate all disputes between them “through binding arbitration to be conducted by the Santa Monica Bar Association in accordance with the Retainer Agreement.”
The arbitration convened about a year and a half later, on January 30, 2007. The arbitration, however, turned out to be non-binding. The arbitrator’s findings state why this occurred: “There was some confusion with the initial filings, therefore the arbitration is non-binding. Mr. Fox modified his attorney’s response at the time of the hearing to agree to one arbitrator provided that the arbitration would be non-binding. Mr. Oyler [Mitzner’s counsel] moved that the arbitration be binding pursuant to Mr. Fox’s retainer agreement. The arbitrator found that the arbitration is non-binding pursuant to Business & Professions Code § 6204(a) -- mandatory fee arbitrations conducted by a State Bar authorized program are only binding if both parties agree in writing after the fee dispute arose. In the instant case, the agreement to binding arbitration pre-dated the fee dispute and therefore is unenforceable in this forum.” (Original emphasis.) Apparently none of the parties informed the arbitrator of the trial court’s order mandating binding arbitration.
When Mitzner faced a different arbitration forum than she had anticipated, she chose to abbreviate her presentation and did not present a full audit of Fox’s fees. She feared presenting all of her evidence in what was now a non-binding arbitration would amount to free discovery for Fox.
The arbitrator found that Mitzner owed Fox $255,450 in fees and costs. The arbitrator also determined that Fox’s lien against Mitzner’s Markleeville property was not specific enough to secure all outstanding fees Mitzner owed, and thus was limited to the amount of $65,464.19 as stated in the note. Moreover, because the lien was never executed, it was now wholly ineffective.
Within 30 days of the arbitrator’s rendering of the reward, Mitzner rejected the award and requested a trial de novo after arbitration pursuant to the MFAA’s statutory right to trial after non-binding arbitration. (Bus. & Prof. Code, § 6204.)
At a subsequent case management conference, the parties informed the court they would participate in binding arbitration. However, 10 days later, Mitzner filed a first amended complaint. The amended complaint contained additional factual allegations as well as two additional causes of action against Fox: breach of fiduciary duties and breach of the retainer agreement.
Fox filed a motion to strike the first amended complaint, transfer the case to Los Angeles County where Mitzner’s dissolution action was litigated, confirm the case has been transferred to binding arbitration, or dismiss the action. Fox also filed a demurrer to the amended complaint.
The trial court denied the motion to strike, overruled the demurrer, and determined Alpine County was the proper venue for the action. It ordered Fox to file an answer and, if he chose, a motion to compel arbitration.
Fox then filed a motion to compel arbitration. Mitzner opposed the motion, arguing that Fox waived his right to any further arbitration when he demanded non-binding arbitration at the arbitration session. Mitzner also claimed the arbitration clause in the retainer agreement was not effective under the MFAA as the agreement for binding arbitration was made before the fee dispute arose.
The trial court denied Fox’s motion to compel arbitration. It ruled that because the arbitration had been conducted pursuant to the MFAA and was non-binding at Fox’s insistence, and because the MFAA provided for a court trial upon either party’s rejection of the non-binding arbitration award, Mitzner was entitled to have her fee dispute resolved by a court.
According to Fox, the trial court in June 2008 granted a motion for summary adjudication in favor of Mitzner on two of her causes of action. It granted declaratory relief determining that Fox could not conduct a trustee’s sale under the deed of trust for Mitzner’s Markleeville property, and it quieted title in that property in favor of Mitzner.
Having lost his ability to recover on the lien and to pursue arbitration, Fox filed a motion pursuant to Code of Civil Procedure section 426.50 (hereafter section 426.50) for permission to file a compulsory cross-complaint. His proposed cross-complaint alleged causes of action against Mitzner for breach of the retainer agreement and for common counts. He argued he was entitled to file the cross-complaint because its causes of action arose from the same transactions and occurrences Mitzner alleged in her amended complaint.
The trial court granted the motion to file the cross-complaint, but it conditioned the order on Fox paying Mitzner the attorney fees and costs she incurred in the arbitration process, a sum of $80,843.01. The court reasoned section 426.50 constrained it to grant the motion only “‘upon such terms as may be just.’” The court found Fox’s actions in the case justified requiring him to pay Mitzner’s attorney fees from the arbitration.
The court recounted Fox’s actions in this matter, in particular Fox’s last-minute insistence that the arbitration be non-binding despite the court’s order to the contrary and the retainer agreement’s giving that choice to Mitzner, and it concluded such actions were “questionable conduct.” When Mitzner faced a different arbitration forum than she had anticipated, she chose to abbreviate her presentation and did not present all of the evidence she had intended to present. Then, after choosing to go to trial, she had to oppose Fox’s efforts to circumvent the litigation process by his motion to compel arbitration. She had incurred over $80,000 in costs and fees from the aborted arbitration, a process that, but for Fox’s actions, would have concluded this matter. Mitzner claimed paying her attorney fees and costs in the arbitration would prejudice her ability to continue with this matter. Thus, the court found it “just” under section 426.50 to require Fox to pay Mitzner “$80,843.01, representing the amount she justifiably incurred in anticipation of a binding arbitration so as to ameliorate the financial prejudice she suffered as a consequence of the actions of [Fox] as set forth herein.”
Fox both appealed from the trial court’s order and filed a petition for writ of mandate in this court challenging the order’s validity. We denied the writ petition on the ground that Fox made no showing why the remedy of appeal was inadequate. (Fox v. Superior Court (Mar. 26, 2009, C061235) [nonpub. opn.].)
We now face Fox’s appeal from the order. Initially, Mitzner contends the order is not an appealable order, and by motion asks us to dismiss this appeal. Fox argues the order is an appealable order, and he claims the trial court abused its discretion by imposing the payment condition on his right to file a cross-complaint.
DISCUSSION
I
Motion to Dismiss
Mitzner asks us to dismiss this appeal. She claims the court’s order is not an appealable order, as there is no right to appeal from an order made before judgment that permits the filing of a cross-complaint. She acknowledges an appeal may be taken from an interlocutory judgment or order directing payment of monetary sanctions by a party, but she asserts the court’s order cannot be characterized as imposing sanctions. This, she claims, is because the order does not compel Fox to pay anything unless he chooses to file a cross-complaint.
We disagree with Mitzner and deny the motion to dismiss the appeal. An appeal may be taken from an order of the court directing payment of monetary sanctions by a party where the amount exceeds $5,000. (Code Civ. Proc., § 904.1, subd. (a)(12).) Although the trial court here did not use the word “sanction, ” and it purported to act pursuant to its authority under section 426.50 to grant the motion “‘upon such terms as may be just, ’” it nonetheless imposed an $80,000 penalty on Fox because of his actions that thwarted the court’s earlier order for mandatory arbitration. Such a penalty qualifies as an appealable sanction.
Mitzner claims the court’s order cannot qualify as a sanction because it did not compel Fox to comply with its terms. Fox did not have to pay the sanction if he chose not to file his cross-complaint. But that fact exposes why the court’s order is in fact a sanction. Fox could either pay the $80,000, or he could forfeit any claims he has against Mitzner that arose out of the same transaction being litigated by her complaint. Either way, Fox suffers a forfeiture on account of his questionable conduct in the arbitration. Such a forfeiture is a sanction, and is one that we can address on direct appeal from the sanction order.
II
Trial Court’s Discretion Under Section 426.50
Fox claims the trial court abused its discretion when it imposed the monetary sanction as a condition of filing his cross-complaint. He argues the discretion granted the trial court under section 426.50 does not include the authority to impose a sanction. He also argues the court has no other authority under which it could impose the sanction. We agree.
In Bauguess v. Paine (1978) 22 Cal.3d 626, 634-639 (Bauguess), our Supreme Court held that trial courts may not award attorney fees as a sanction for misconduct unless they do so pursuant to statutory authority or an agreement of the parties. “Although Bauguess acknowledged that trial courts possess inherent powers to supervise judicial proceedings, [Bauguess] placed limits on these powers to avoid the ‘serious due process problems’ that would arise if trial courts had unfettered authority to award fees as sanctions. [Citation.] Hence, Bauguess prohibited a trial court from using fee awards to punish misconduct unless the Legislature, or the parties, authorized the court to impose fees as a sanction.” (Olmstead v. Arthur J. Gallagher & Co. (2004) 32 Cal.4th 804, 809.)
Mitzner asserts the trial court had the authority to award her attorney fees under section 426.50 and under the attorney fees clause contained in the retainer agreement. She is incorrect on both counts.
Section 426.50 does not authorize conditioning the filing of a cross-complaint on the party’s payment of attorney fees as a sanction for conduct unrelated to the filing of the cross-complaint. Section 426.50 requires a trial court to grant leave to file a compulsory cross-complaint “upon such terms as may be just to the parties” so long as the requesting party acted in good faith. The statute must be liberally construed to avoid forfeiture of causes of action. (§ 426.50.)
Section 426.50 reads in relevant part: “A party who fails to plead a cause of action subject to the requirements of this article [on compulsory cross-complaints]... may apply to the court for leave... to file a cross-complaint, to assert such cause at any time during the course of the action. The court... shall grant, upon such terms as may be just to the parties, leave... to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action.”
The Legislative Committee Comment on section 426.50 explains the Legislature’s intent for allowing a court to grant leave upon “such terms as may be just to the parties.” It states: “Where necessary, the court may grant such leave subject to terms or conditions which will prevent injustice, such as postponement or payment of costs.” (14B West’s Ann. Code Civ. Proc. (2004 ed.) foll. § 426.50, p. 488.)
The Legislature was concerned about any injustice that could occur on account of the court allowing a cross-complaint to be filed late in the action. It granted courts the authority to impose conditions that could correct any such injustice. But nowhere did the Legislature grant a court the authority to condition the filing of a cross-complaint on paying a sanction for conduct unrelated to any injustice that may arise from the filing of the cross-complaint.
Here, the trial court imposed the condition based on an asserted injustice that did not arise from the filing of the cross-complaint. The injustice the court sought to correct arose from Fox’s previous efforts to avoid a mandatory arbitration contrary to the terms of a court order and the terms of the retainer agreement. Any injustice Mitzner suffered from that misconduct did not arise from the filing of the cross-complaint and thus cannot serve as the basis under section 426.50 for imposing the sanction as a condition to the filing of the cross-complaint.
Mitzner claims the court had authority to impose the condition because the court could impose the payment of “costs” as a condition for granting the motion, and attorney fees are recoverable costs under the retainer agreement. However, the retainer agreement attorney fees clause does not apply at this juncture. That clause grants attorney fees only to the prevailing party in a fee dispute. The grant of a motion to file a cross-complaint in no way establishes a prevailing party in the action.
Mitzner directs us to no additional statutes or contractual agreements that could authorize the trial court’s sanction, and we have found none. The court thus abused its discretion in imposing the sanction in this instance.
DISPOSITION
We strike that portion of the trial court’s order conditioning the filing of Fox’s cross-complaint on the payment of $80,843.01 to Mitzner, and we affirm the remainder of the order granting Fox leave to file a cross-complaint. This matter is remanded to the trial court for further proceedings consistent with this opinion. Costs on appeal are awarded to Fox. (Cal. Rules of Court, rule 8.276(a).)
We concur: BLEASE, Acting P. J., ROBIE, J.