Opinion
G054997
05-18-2018
KYBER ZAFFARKHAN, Plaintiff, Cross-defendant, and Appellant, v. JUSTIN DOMESEK, Defendant, Cross-complainant, and Respondent, GREG CHERRY, Defendant and Respondent.
Fingal, Fahrney & Clark and Christopher R. Clark for Plaintiff, Cross-defendant and Appellant. Justin Domesek, in pro. per., for Defendant, Cross-complainant and Respondent. Gregg Cherry, in pro. per., for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2014-00755427) OPINION Appeal from a postjudgment order of the Superior Court of Orange County, Robert J. Moss, Judge. Reversed and remanded. Fingal, Fahrney & Clark and Christopher R. Clark for Plaintiff, Cross-defendant and Appellant. Justin Domesek, in pro. per., for Defendant, Cross-complainant and Respondent. Gregg Cherry, in pro. per., for Defendant and Respondent.
* * *
Plaintiff Kyber Zaffarkhan appeals from the trial court's postjudgment order granting defendants Justin Domesek and Greg Cherry a reduced portion of their requested attorney fees as the prevailing parties within the meaning of a fee provision in a shareholder agreement that Domesek signed, but Cherry did not. Before trial, Zaffarkhan dismissed his breach of contract claims against Cherry under the shareholder agreement, pursuing only tort claims against him (breach of fiduciary duty and unfair business practices), on which Cherry prevailed at trial. As Zaffarkhan correctly argues, while a party to a contract may be entitled to recover attorney fees as the prevailing party on tort claims arising out of the agreement—if the terms the parties agreed upon in signing the contract are broad enough (Santisas v. Goodin (1998) 17 Cal.4th 599, 617 (Santisas))—a nonsignatory is not entitled to fees on such tort claims, though he or she is the prevailing party. (Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 785-786 (Topanga); Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th 541, 549 (Super 7 Motel).)
We therefore reverse the attorney fee order and remand the case for a new hearing on fees. Any new fee order shall omit fees attributable to Cherry's defense, to the extent such fees are severable from counsel's common defense of both Cherry and Domesek. We do not reach Zaffarkhan's alternate claims that the fees awarded were improper because the attorney billing records Cherry and Domesek attached to their fee request lacked foundation, constituted hearsay, or failed to support the necessity, value, or number of hours billed. These and similar matters related to the rate recoverable for a subcontracted defense attorney's work, and the exact hours or percentage of attorney fees allocable between defending against the complaint and pursuing the cross-complaint, are committed to the court's sound discretion on remand in entering a new fee award.
I
FACTUAL AND PROCEDURAL BACKGROUND
As we explained in the related opinion upholding the trial court's judgment in the underlying lawsuit, this case arose when Domesek, Zaffarkhan, and a third individual formed a startup technology company, Prescription Diversion Solutions, Inc. (PDS), to develop software to aid doctors in managing patient medications to prevent fraud and prescription drug abuse. (Zaffarkhan v. Domesek (May 18, 2018, G054604) [nonpub. opn.].) After Domesek and the third founder dissolved the company and transferred its assets to a new venture, Zaffarkhan sued. The trial court found Domesek breached his fiduciary duty by participating in the asset transfer as an interested director, and similarly breached the founding shareholder agreement. The court nevertheless ruled Zaffarkhan did not meet his burden to establish damages with reasonable certainty because PDS never developed a marketable product. The court also found Cherry was only a minority shareholder and not a PDS director or board member, and therefore did not owe or breach a fiduciary duty in the sale of the company.
Domesek and Cherry had counsel during the two-year period leading up to trial, but represented themselves at trial. After the court entered judgment, they sought their attorney fees under the shareholder agreement's broad attorney fee provision, which provided, "In the event of any dispute involving the terms of this Agreement, the prevailing party shall be entitled to collect reasonable fees and expenses incurred by the prevailing party in connection with the terms of this Agreement . . . ."
The trial court granted the motion, but reduced the fee award from the $221,471 that Domesek and Cherry requested to $173,617.50. The court explained it "significantly reduced the fees sought by the Landay Roberts Firm on the grounds of overbilling and pervasive block billing, rendering the court's job difficult to impossible to determine the time spent on a number of entries." The reduced sum included defendants' "fail[ure] to meet their evidentiary burden as to the flat fee charged by [another f]irm, and the entire amount was disallowed." The court then applied to the discounted $173,617.50 figure "an apportionment of 75% for the defense of the complaint," and disallowed "25% for the prosecution of the unsuccessful cross-complaint," awarding Domesek and Cherry together a net sum of $130,213.13 in attorney fees. Zaffarkhan now appeals.
II
DISCUSSION
Cherry did not sign the founding shareholders agreement that provided for attorney fees but, as Zaffarkhan acknowledges, fees may be available to a nonsignatory by operation of law through Civil Code section 1717. That section "ensure[s] mutuality of remedy" in enforcing contractual claims by "mak[ing] an attorney fee provision reciprocal even if it would otherwise be unilateral either by its terms or in its effect." (Brown Bark III, L.P. v Haver (2013) 219 Cal.App.4th 809, 818 (Brown Bark).) In relevant part, section 1717 states, "In any action on a contract, where the contract specifically provides that attorney[] fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney[ ] fees in addition to other costs." (§ 1717, subd. (a), italics added for later reference.) Thus, section 1717 makes unilateral attorney fee provisions—i.e., a contract expressly providing fees "shall be awarded . . . to one of the parties" (ibid., italics added)—effectively bilateral. (Santisas, supra, 17 Cal.4th at pp. 610-611.)
All further statutory references are to the Civil Code unless noted.
Section 1717 also applies to make the right to attorney fees on contractual claims reciprocal "when a person sued on a contract containing a provision for attorney fees to the prevailing party defends the litigation 'by successfully arguing the inapplicability, invalidity, unenforceability, or nonexistence of the same contract.' [Citation.] Because these arguments are inconsistent with a contractual claim for attorney fees under the same agreement, a party prevailing on any of these bases usually cannot claim attorney fees as a contractual right. If section 1717 did not apply in this situation, the right to attorney fees would be effectively unilateral . . . because only the party seeking to affirm and enforce the agreement could invoke its attorney fee provision." (Santisas, supra, 17 Cal.4th at p. 611.) Santisas holds that section 1717 allows a party who defeats a contract claim by showing the contract did not apply or was unenforceable to nonetheless recover attorney fees under that contract if the opposing party would have been entitled to attorney fees had it prevailed. (Santisas, at p. 611.)
The Supreme Court expressly extended this interpretation of section 1717 to nonsignatories in Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124 (Reynolds). The court explained: "Its purposes require section 1717 be interpreted to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorney[ ] fees should he prevail in enforcing the contractual obligation against the defendant." (Id. at p. 128.)
In Reynolds, the signatory plaintiff sued two nonsignatories to recover on two promissory notes, alleging they were liable as the alter egos of the corporation that signed the notes. (Reynolds, supra, 25 Cal.3d at p. 127.) The nonsignatories prevailed by showing they were not the corporation's alter egos and therefore the plaintiff could not enforce the notes against them. The Supreme Court allowed the nonsignatories to recover their attorney fees under a fee provision in the notes because the plaintiff would have been entitled to recover its fees under that provision if the plaintiff had succeeded in enforcing the notes against the nonsignatories. (Id. at p. 129.)
Fatal to Cherry's attorney fee request, however, section 1717 does not apply to tort actions. As we noted in Brown Bark, "Section 1717 and its reciprocity principles . . . have 'limited application.'" (Brown Bark, supra, 219 Cal.App.4th at p. 820.) They "'cover[] 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. [Section 1717's] only effect is to make an otherwise unilateral right to attorney fees reciprocally binding upon all parties to actions to enforce the contract.' [Citation.]" (Ibid., original italics.) "Tort and other noncontract claims are not subject to section 1717 and its reciprocity principles." (Ibid., italics added.) With section 1717's express limitation to "action[s] on a contract" (§ 1717, subd. (a)), "the Legislature has prescribed with clarity that the public policy [of reciprocity that the prevailing party] seeks to invoke . . . applies only to attorney fees for contract actions, not tort claims." (Moallem v. Coldwell Banker Com. Group, Inc. (1994) 25 Cal.App.4th 1827, 1832 (Moallem).)
Nor does section 1717 allow attorney fees on contract claims a party has voluntarily dismissed—as Zaffarkhan did against Cherry—because under section 1717, subdivision (b)(2), there is no prevailing party on the dismissed claims. (Santisas, supra, 17 Cal.4th at p. 617; see Wegner et al., Cal. Practice Guide: Civil Trials and Evidence (The Rutter Group 2017) ¶ 17:156, p. 17-164 (hereafter, Wegner).)
It is true that "[a] broadly worded fee clause in [the] underlying contract" may "open[] up [the] possibility that [a] defendant could recover fees related to tort claims." (Wegner, supra, at ¶ 17:156, p. 17-164, italics added.) The trial court's minute order rested on this exception in granting Cherry's request to recover his attorney fees in defending against the tort claims Zaffarkhan asserted at trial, after voluntarily dismissing his contract claims against Cherry before trial. The order quoted from Santisas: "If the voluntarily dismissed action also asserts causes of action that do not sound in contract, those causes of action are not covered by section 1717 , [yet the parties'] attorney fee provision, depending upon its wording, may afford the defendant a contractual right, not affected by section 1717, to recover attorney fees incurred in litigating those causes of action." (Santisas, supra, 17 Cal.4th at p. 617, italics and brackets added.)
We note that the Rutter treatise gives the following example of a broad attorney fee provision that opens the door for a party to recover fees in a tort action arising from or related to a contract: "Plaintiff Buyer's tort claims were covered within a fee provision permitting recovery of attorney fees 'if "any litigation . . . is commenced between the parties to this Contract of Sale . . . concerning its terms . . . ."'" (Wegner, supra, at ¶ 17:164.10h, p. 17-188, citing Khan v. Shim (2016) 7 Cal.App.5th 49, 52-55, 62-64.)
But even if the attorney fee provision here was broadly worded—and it was, authorizing fees for the prevailing party in "any dispute involving the terms of this Agreement"—an agreement among particular contracting parties to extend the right to attorney fees to include those incurred in asserting or defending tort claims does not extend to nonsignatories. (Topanga, supra, 103 Cal.App.4th at pp. 785-786; Super 7 Motel, supra, 16 Cal.App.4th at p. 549.) In brief, because "causes of action that do not sound in contract . . . are not covered by section 1717" (Santisas, supra, 17 Cal.4th at p. 617), disputes involving tort or other noncontract claims fall outside the reciprocity principle that section 1717 extends by statutory command to attorney fee agreements involving contract causes of action. That statutory reciprocity requirement enables nonsignatories to recover their attorney fees related to contract causes of action (Reynolds, supra, 25 Cal.3d at p. 129), but has not been held to apply to tort claims.
Thus, in Super 7 Motel, a real property "Purchaser . . . lost [its] suit against [the] Seller's Broker for fraud in connection with [the] purchase. Seller's Broker was not entitled to a fee award against [the] Purchaser because [he] was not a party to the main body of the purchase contract containing the attorney fee provision." (Wegner, supra, at ¶ 17:154.22, p. 17-151; see Super 7 Motel, supra, 16 Cal.App.4th at p. 549 [section 1717 reciprocity does not apply to noncontract claims even if "the underlying transaction in which the fraud occurred involved a contract containing an attorney fee clause"].)
Topanga similarly held that section 1717 reciprocity did not apply to nonsignatories attempting to recover fees incurred in defending noncontract causes of action. The court observed that the defendant's status as a nonparty to a contract that included an attorney fee provision precluded him from recovering attorney fees as a form of cost under section 1033.5: "Toghia was not a party to the contract underlying the breach of contract cause of action and cannot rely on Code of Civil Procedure section 1033.5, subdivision (a)(10)(A), authorizing an award of attorney fees as costs pursuant to a contract between the parties." (Topanga, supra, 103 Cal.App.4th at p. 783.)
The court then considered whether section 1717 permitted a nonsignatory to enforce an attorney fee provision for costs incurred in defending noncontract claims. The court concluded that the Supreme Court's decisions in Reynolds and Santisas "[u]ndisputedly" demonstrated "th[at] . . . application of section 1717 is restricted to actions on contracts." (Topanga, supra, 103 Cal.App.4th at p. 785.)
So it is here. Where section 1717 does not provide a basis for relief, it is the terms of the contract that determine the scope of the right to fees; a nonsignatory has no such rights unless granted by the parties. Defendants offer no argument against this conclusion. The court in Moallem many years ago invited the Legislature to expand the scope of reciprocal fees under section 1717. (Moallem, supra, 25 Cal.App.4th at p. 1832.) No such legislative expansion has yet occurred.
The trial court entertained the possibility that equitable estoppel might enable a tort defendant to recover its attorney fees under section 1717, citing Walsh v. New West Federal Savings & Loan Assn. (1991) 234 Cal.App.3d 1539. But the estoppel at issue there applied under federal decisions concerning bank failure, not to attorney fees. Instead, fees were proper precisely because the plaintiffs' "breach of contract cause of action against [the defendant] falls within the purview of section 1717." (Walsh, at p. 1547.)
Consequently, we reverse the attorney fee order and remand the case to the trial court to recalculate its award, omitting fees that are attributable to Cherry's defense to the extent they are severable from counsel's common defense of both Cherry and Domesek. For example, Zaffarkhan may show that fees are not appropriate for counsel representing Cherry in his deposition. We do not reach Zaffarkhan's alternate claims that the fees awarded were improper for various other reasons because those issues are committed to the court's sound discretion on remand in entering a new fee award.
We note Zaffarkhan's claims may trigger the old adage, "Be careful what you wish for." For example, after the trial court pared the fee request from approximately $220,000 to roughly $174,000 because of unsupported billing entries, Zaffarkhan suggests the court should have reduced the $174,000 amount by about $34,000 based on the hours defense counsel billed for the unsuccessful cross-complaint. But in applying a rough rule-of-thumb allocating defense attorney fees 75/25 percent respectively to the complaint/cross-complaint, it appears the court's 25 percent discount factor for the cross-complaint reduced the $174,000 figure by $44,000—which is $10,000 more than under Zaffarkhan's hourly calculation. We leave these issues to be resolved on remand. --------
III
DISPOSITION
The attorney fee order is reversed and remanded for further proceedings consistent with this opinion. Zaffarkhan is entitled to his appellate costs.
GOETHALS, J. WE CONCUR: BEDSWORTH, ACTING P. J. IKOLA, J.