Hewitt Wolensky, G. Emmett Raitt, Jr., Cyrus Wilkes; Fleming & Fell and Bibianne U. Fell for Plaintiffs and Appellants. Gladstone Michel Weisberg Willner & Sloane and Allen L. Michel for Respondent and Defendant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. 30-2009-00122142)
Appeal from an order of the Superior Court of Orange County, Nancy Wieben Stock, Judge. Reversed.
Hewitt Wolensky, G. Emmett Raitt, Jr., Cyrus Wilkes; Fleming & Fell and Bibianne U. Fell for Plaintiffs and Appellants.
Gladstone Michel Weisberg Willner & Sloane and Allen L. Michel for Respondent and Defendant.
Plaintiffs and appellants (Members) appeal from an order awarding defendant and respondent William L. Mitchell the attorney fees he incurred in successfully defending the claims alleged against him in the underlying action. The trial court based its award on an attorney fee provision contained in the Operating Agreement the Members signed to govern Orange County Physicians Investment Network, LLC's (OCPIN) operations and the Members' ownership rights in OCPIN.
The plaintiffs and appellants appealing the trial court's order are Ashok Amin, Bharat Chauhan, Surinder Dang, Joginder Jodhka, Jaime Ludmir, Sangamitra Kothapa, Jacob Sweidan, Anthony Lee, Robert Melikian, Ahmed Salem, Yasser Salem, Praful Sarode, Yong Chung, Patrick Walsh, Grace Sein and Ajay Meka.
Mitchell, who served as OCPIN's general counsel and drafted the Operating Agreement, was not an OCPIN member and did not sign the Operating Agreement. The trial court, however, awarded Mitchell his attorney fees as a nonsignatory to the Operating Agreement because the court found the Members sued Mitchell as a coconspirator who helped OCPIN's managing member, Anil V. Shah, breach the Operating Agreement. Because the Members sought to enforce the Operating Agreement against Mitchell in this manner, the trial court concluded Civil Code section 1717's reciprocity principles allowed Mitchell to enforce the Operating Agreement's fee provision when he prevailed.
As a nonsignatory sued by signatories, Mitchell may recover his attorney fees under the Operating Agreement only if the Members would have been entitled to recover their attorney fees from Mitchell had they prevailed on their claims against him. (See, e.g., Reynolds Metal Co. v. Alperson (1979) 25 Cal.3d 124, 128 (Reynolds); Real Property Services Corp. v. City of Pasadena (1994) 25 Cal.App.4th 375, 382 (Real Property Services).) Our de novo review, however, reveals the Members could not have relied on the Operating Agreement's fee provision to recover their attorney fees from Mitchell because they did not sue Mitchell under the Operating Agreement and did not seek to hold Mitchell jointly liable for Shah's breaches of the Operating Agreement. Although the Members' operative pleading included conclusory allegations that Mitchell aided and abetted Shah in breaching the Operating Agreement, the pleading sought only to hold Mitchell liable for breaching the duties he owed as OCPIN's counsel independent of the Operating Agreement.
We also reject Mitchell's contention that he may invoke the Operating Agreement's fee provision as a third party beneficiary. Mitchell fails to demonstrate the Members intended him to be a third party beneficiary of the fee provision. Accordingly, we reverse the trial court's order in its entirety.
FACTS AND PROCEDURAL HISTORY
The Members' claims against Mitchell were dismissed after the trial court sustained Mitchell's demurrer to the operative pleading without leave to amend. We base our summary of the underlying facts on the allegations of the Members' operative pleading, which is nearly 100 pages in length and names 29 defendants. Our factual summary addresses only the allegations and parties relevant to the Members' claims against Mitchell.
In January 2004, Tenet Healthcare Corporation (Tenet) listed for sale four hospitals in Orange County. Integrated Healthcare Holdings, Inc. (Integrated Healthcare) submitted the winning bid for all four hospitals. Before it closed the transaction, however, Integrated Healthcare's principal investor withdrew and it lost the $30 million commitment the investor had pledged toward the transaction.
After learning about Integrated Healthcare's predicament, Shah and the Members formed OCPIN and proposed that OCPIN replace the investor Integrated Healthcare lost. In January 2005, with Shah serving as its sole manager, OCPIN negotiated an agreement with Integrated Healthcare for OCPIN to pay $30 million in exchange for more than one million shares of Integrated Healthcare's common stock, which would make OCPIN Integrated Healthcare's controlling shareholder. Integrated Healthcare agreed to use OCPIN's $30 million, along with $80 million in financing, to close the transaction with Tenet and operate the hospitals.
OCPIN, however, did not have $30 million; at the time, its members had raised only $10 million. Shah nonetheless convinced the Members to agree to the transaction with Integrated Healthcare because he promised to personally loan OCPIN the additional $20 million it needed if OCPIN could not raise the money in time. Shah failed to disclose he did not have $20 million to loan or that he agreed to allow Integrated Healthcare to use OCPIN's $10 million as a nonrefundable deposit on the Tenet transaction. In reaching the agreement with Integrated Healthcare, Shah also promised to personally guarantee the lease Integrated Healthcare would assume on one of the hospitals.
This personal loan and guarantee were included in Shah's capital contribution to OCPIN. Shah also received an option to purchase an additional 10 million shares of Integrated Healthcare's common stock for these commitments and the services he provided in arranging the transactions. As the sole manager of Integrated Healthcare's new controlling stockholder, Shah became Integrated Healthcare's Executive Chairman and obtained well compensated positions for some of his family and friends.
Shah did not loan OCPIN the $20 million he promised, which Integrated Healthcare relied on to close the Tenet transaction. At the time of closing OCPIN was $15 million short of $30 million it promised to contribute. Nonetheless, Shah convinced Tenet and Integrated Healthcare's lender to close the transaction for the four hospitals by using Integrated Healthcare's credit line to cover the $15 million shortfall in OCPIN's contribution. Shah told the Members that OCPIN would still receive the same number of shares in Integrated Healthcare even though Integrated Healthcare used its own credit line to cover one-half of OCPIN's capital contribution.
In April 2005, OCPIN hired Mitchell as its general counsel and directed him to prepare an operating agreement governing OCPIN's management and the relationship among its members. The Operating Agreement Shah and the Members later signed designated Shah as OCPIN's manager.
In May 2005, a dispute arose between OCPIN and Integrated Healthcare's lender. Because Integrated Healthcare used its credit line to cover the additional $15 million OCPIN failed to contribute toward the Tenet transaction, the lender asserted OCPIN must make a $15 million capital contribution to Integrated Healthcare to retain the stock OCPIN received in the deal. Shah assured the Members he would either raise the $15 million or loan OCPIN the funds as he previously promised so that OCPIN would not lose any of its Integrated Healthcare shares. Shah identified an investor willing to contribute the necessary funds, but the investor backed out before doing so. OCPIN thereafter failed to raise the necessary capital and lost approximately 42 million shares of its Integrated Healthcare common stock. When Shah's investor failed to contribute any funds, Mitchell informed the Members Shah had no obligation to loan OCPIN the funds needed to keep the shares because Shah's only obligation was to identify a possible investor.
By early 2007, Integrated Healthcare defaulted on a short term loan obtained to cover operating expenses and lacked the funds needed to pay off the loans used to acquire the hospitals when due in March 2007. Integrated Healthcare negotiated a refinancing agreement with its lender to refinance all loans to avoid further defaults and being forced into bankruptcy.
Although all other members of Integrated Healthcare's board of directors voted to approve the refinancing the lender offered, Shah repeatedly voted against the measure. The lender insisted Integrated Healthcare's board unanimously approve the refinancing agreement, but granted Integrated Healthcare several extensions to obtain that approval. Even after the loans went into default, Shah continued to oppose the refinancing agreement unless Integrated Healthcare agreed to eliminate or renegotiate the personal guarantee he executed regarding the lease for one of the hospitals.
In May 2007, Integrated Healthcare filed a lawsuit against Shah and OCPIN, alleging Shah breached the duties he owed as an Integrated Healthcare director and seeking a court appointed provisional director to break the deadlock Shah created regarding the refinancing. Shah responded by directing Mitchell to file litigation against Integrated Healthcare on OCPIN's behalf accusing Integrated Healthcare and its officers of misconduct.
In July 2007, the court granted Integrated Healthcare's motion to appoint a provisional director and, with the help of that director, Integrated Healthcare's shareholders elected a new board of directors that did not include Shah. The new board thereafter approved Integrated Healthcare's refinancing agreement with its lender and avoided bankruptcy. The loan defaults resulting from Shah's refusal to approve the refinancing, however, diminished OCPIN's ownership interest in Integrated Healthcare because the defaults allowed other shareholders to exercise stock options and acquire more than 20 million shares of Integrated Healthcare common stock.
OCPIN incurred substantial attorney fees and costs in the Integrated Healthcare litigation. According to the Members, OCPIN's Operating Agreement required Shah to pay these fees and costs because his refusal to approve the refinancing agreement unless Integrated Healthcare eliminated or renegotiated the personal guarantee furthered Shah's personal interests rather than OCPIN's interests. Specifically, the members alleged the Operating Agreement prohibited OCPIN from indemnifying Shah or paying the attorney fees and costs to defend his self-serving actions because Shah failed to obtain the Members' approval before taking the actions or authorizing OCPIN to retain the attorneys representing Shah and OCPIN.
Shah authorized OCPIN to lodge two capital calls on the Members to pay his attorney fees and costs even though the Operating Agreement prohibited capital calls to pay any indemnification expenses. Moreover, in making these capital calls, Shah repriced the Members' OCPIN shares in a manner that increased his percentage ownership in OCPIN without disclosing that fact to the Members.
In March 2009, after months of negotiations, Integrated Healthcare, Shah, and OCPIN settled the Integrated Healthcare litigation. Integrated Healthcare agreed to pay OCPIN and Shah $2.7 million to reimburse them for their attorney fees and costs and also to sell OCPIN and Shah 30 million shares of Integrated Healthcare stock for three cents per share. Even though the Members were not parties to the Integrated Healthcare litigation, Shah, Mitchell, and OCPIN's litigation attorneys had the Members sign a separate settlement agreement potentially releasing Shah, Mitchell, and the litigation attorneys from liability for all their acts and omissions to date. Neither Mitchell nor the litigation attorneys explained to the Members that they may have had claims against Shah, Mitchell, and the litigation attorneys or that the separate settlement agreement potentially released those claims.
Immediately after the Members signed the separate settlement agreement, Shah disclosed that the capital calls and share repricing increased his percentage ownership in OCPIN. At the April 2009 annual meeting, the Members, who collectively held 55 percent of OCPIN's outstanding shares, voted to (1) replace Shah as OCPIN's manager; (2) elect a new board of directors; (3) cancel the capital calls Shah made; and (4) terminate Mitchell as OCPIN's counsel.
Following the annual meeting, OCPIN's new managers and directors voted to commence this litigation on OCPIN's behalf to (1) prevent Shah from personally receiving any of the Integrated Healthcare settlement funds or exercising any stock options granted by the settlement, and (2) recover damages for Shah's breach of fiduciary duty in structuring the settlement so he personally received some of the settlement funds and stock options.
In June 2009, OCPIN and the Members filed a first amended complaint that joined all the Members as plaintiffs in this action, added numerous defendants, including Mitchell, and increased the number of causes of action from three to 21. The first amended complaint expanded this action from a dispute regarding who was entitled to the Integrated Healthcare settlement proceeds and stock options to a dispute challenging almost every action Shah took in connection with OCPIN and Integrated Healthcare.
Following a series of successful demurrers, the operative complaint alleged claims against Shah for breach of fiduciary duty, constructive fraud, accounting, and nine declaratory relief causes of action seeking to resolve various disputes regarding control of OCPIN and ownership of its stock. As against Mitchell, the operative complaint alleged claims for declaratory relief regarding his fee agreement and the Integrated Healthcare settlement agreements, legal malpractice, and accounting. The Members alleged Mitchell breached the duties he owed to OCPIN and the Members as their attorney by failing to disclose or prevent Shah's conduct and instead assisting Shah.
In May 2010, the trial court sustained Mitchell's demurrer to the operative complaint without leave to amend. The court thereafter entered a judgment dismissing Mitchell from the action and Mitchell filed a motion to recover his attorney fees based on the attorney fee provision contained in OCPIN's Operating Agreement.
In October 2010, the trial court granted Mitchell's motion and awarded him approximately $178,000 in attorney fees against the Members. The court found, "The main thrust of this Litigation and all Causes of Action attempted to be asserted against Mitchell relied for their viability on the Operating Agreement. Plaintiff's [sic] triggered the attorney fee provision in making these claims based upon the duties associated with the contract. Shah would be entitled to fees under that Operating Agreement were he to prevail in this Litigation. Mitchell is alleged to have aided and abetted and co conspired [sic] with Shah, a Manager, in relation to the Operating Agreement, and is therefore equally entitled to fees under the doctrine of reciprocity of fees. The essential claims against Mitchell were that he aided and abetted and conspired with a manager of OCPIN to perform acts in violation of the Operating Agreement. In addition to expressly citing to the Operating Agreement, the relevant complain[t] also charged violations of fiduciary duty and other malfeasance, also prohibited in the Operating Agreement. [Citations.]" Mitchell timely appealed.
The Members contend Mitchell may not invoke the Operating Agreement's attorney fee provision because he is not a party to the agreement. The members do not challenge the amount of attorney fees the trial court awarded Mitchell. A. Standard of Review
"On appeal this court reviews a determination of the legal basis for an award of attorney fees de novo as a question of law." (Sessions Payroll Management, Inc. v. Noble Construction Co. (2000) 84 Cal.App.4th 671, 677 (Sessions); see also Loduca v. Polyzos (2007) 153 Cal.App.4th 334, 340; Dell Merk, Inc. v. Franzia (2005) 132 Cal.App.4th 443, 450 (Dell Merk).)
Mitchell contends substantial evidence is the governing standard of review to the extent the trial court relied on extrinsic evidence to interpret the Operating Agreement's attorney fee provision. The substantial evidence standard of review, however, applies to contract interpretation questions only when (1) the contract provision is ambiguous; (2) the trial court admits extrinsic evidence, and (3) the extrinsic evidence conflicts. (DVD Copy Control Assn., Inc. v. Kaleidescape, Inc. (2009) 176 Cal.App.4th 697, 713.) Mitchell failed to identify any conflicting extrinsic evidence relevant to interpreting the Operating Agreement's attorney fee provision and therefore we interpret the provision de novo. B. Mitchell Does Not Qualify as a Nonsignatory with Standing to Invoke the Operating Agreement's Attorney Fee Provision
A party may not recover attorney fees unless expressly authorized by statute or contract. (Code Civ. Proc., § 1021; Sessions, supra, 84 Cal.App.4th at p. 677.) under Code of Civil Procedure section 1021, whether and how to allocate attorney fees is left to the agreement of the parties. (Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1341 (Xuereb).)
In any contract action that authorizes the prevailing party to recover attorney fees, Civil Code section 1717 makes the contractual attorney fee provision reciprocal regardless of any contrary language in the provision. (Civ. Code, § 1717, subd. (a); Real Property Services, supra, 25 Cal.App.4th at p. 379.) "[Civil Code s]ection 1717 was enacted to 'avoid the perceived unfairness of one-sided attorney fee provisions . . . .' [Citation.]" (Dell Merk, supra, 132 Cal.App.4th at p. 450.)
In pertinent part, Civil Code section 1717 states as follows: "In 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, 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's fees in addition to other costs." (Civ. Code, §1717, subd. (a).)
"Ordinarily attorney fees can only be awarded when the lawsuit (1) involves a claim covered by a contractual attorney fee clause [citation] and (2) is between the parties to that contract [citation]." (Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th 541, 544-545 (Super 7); Real Property Services, supra, 25 Cal.App.4th at pp. 379-380 ["As a general rule, attorney fees are awarded only when the action involves a claim covered by a contractual attorney fee provision and the lawsuit is between signatories to the contract"].) "Indeed, the basic premise underlying attorney fee clauses [is that] a party is not liable for attorney fees unless he agrees to the clause . . . ." (Super 7, at p. 546.)
"under some circumstances, however, the reciprocity principles of Civil Code section 1717 will be applied in actions involving signatory and nonsignatory parties." (Real Property Services, supra, 25 Cal.App.4th at p. 380.) As our Supreme Court explains, "[i]ts purposes require [Civil Code] 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's fees should he prevail in enforcing the contractual obligation against the defendant." (Reynolds, supra, 25 Cal.3d at p. 128, italics added; Real Property Services, at p. 382 ["in cases involving nonsignatories to a contract with an attorney fee provision, the following rule may be distilled from the applicable cases: A party is entitled to recover its attorney fees pursuant to a contractual provision only when the party would have been liable for the fees of the opposing party if the opposing party had prevailed"].)
Civil Code section 1717 and its reciprocity principles have "limited application. [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. [Civil Code 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." (Xuereb, supra, 3 Cal.App.4th at p. 1342, original italics.) Hence, a nonsignatory cannot invoke Civil Code section 1717 and its reciprocity principles to recover contractual attorney fees unless a signatory sues the nonsignatory "on a contract as if [the nonsignatory] were a party to it . . . ." (Reynolds, supra, 25 Cal.3d at p. 128.)
For example, in Reynolds, the plaintiff sued two nonsignatories to recover on a promissory note, alleging the nonsignatories were liable as the alter egos of the corporation that signed the note. (Reynolds, supra, 25 Cal.3d at p. 127.) The nonsignatories prevailed by showing they were not the corporation's alter egos and therefore the note could not be enforced against them. The Supreme Court allowed the nonsignatories to recover their attorney fees under a fee provision in the note because the plaintiff would have been entitled to recover its fees under that provision if the plaintiff had succeeded in enforcing the note against the nonsignatories. (Id. at p. 129; see also Mepco Services, Inc. v. Saddleback Valley Unified School Dist. (2010) 189 Cal.App.4th 1027, 1045-1048 (Mepco Services) [contractor sued by school district on performance bond between school district and surety company entitled to recover attorney fees under performance bond fee provision because school district would have been entitled to recover fees had it prevailed against the contractor].)
Here, Mitchell concedes he did not sign the Operating Agreement containing the attorney fee provision. Consequently, he must rely on Civil Code section 1717's reciprocity principles to recover his attorney fees under the Operating Agreement's fee provision. Specifically, Mitchell must show the Members sued him "on the contract" — that is, on the Operating Agreement — and he would have been liable for the Members' attorney fees had they prevailed on their claims against him. We conclude, however, the Members did not sue Mitchell on the Operating Agreement and therefore they could not have recovered their attorney fees from Mitchell if they had prevailed.
Although we review the trial court's ruling awarding Mitchell attorney fees de novo, we note the trial court applied the wrong legal standard. The trial court concluded Civil Code section 1717's reciprocity principles applied because "Shah would be entitled to fees under the Operating Agreement were he to prevail in this Litigation" and the Members alleged Mitchell conspired with Shah. As explained above, however, the correct standard is whether the Members would have been entitled to recover their attorney fees from Mitchell if they prevailed on their claims against him. (Reynolds, supra, 25 Cal.3d at p. 128; Real Property Services, supra, 25 Cal.App.4th at p. 382.) Whether Shah could recover his attorney fees is irrelevant.
Mitchell contends the Members sued him on the Operating Agreement because that agreement "permeates the complaint and every cause of action." (Original italics.) The fact the Operating Agreement "permeates" the operative complaint, however, does not establish the Members sued Mitchell on the Operating Agreement. The operative complaint named more than 15 plaintiffs and more than 25 defendants; it alleged 17 causes of action. Each of the causes of action named multiple defendants and alleged each defendant engaged in distinct acts or omissions. We must examine the specific causes of action and allegations made against Mitchell to determine whether the Operating Agreement served as the basis for the claims. (Kachlon v. Markowitz (2008) 168 Cal.App.4th 316, 347 ["In determining whether an action is 'on the contract' under section 1717, the proper focus is . . . on the basis of the cause of action"]; Dell Merk, supra, 132 Cal.App.4th at p. 453 [contractual attorney fees not recoverable unless the claim is based on the specific contract containing the attorney fee provision].)
The operative complaint alleged three causes of action against Mitchell: the second cause of action for declaratory relief, the tenth cause of action for legal malpractice, and the eleventh cause of action for an accounting. The second cause of action sought a judicial declaration that Mitchell's fee agreement was void or voidable, and that Mitchell had no right to keep or receive attorney fees from OCPIN. The cause of action also sought a declaration that the settlement agreement release provision was void or voidable to the extent it released Mitchell from any wrongdoing.
The Members alleged Mitchell violated several rules of professional conduct by simultaneously representing OCPIN and Shah without disclosing and obtaining written waivers regarding the conflicts of interest arising from those simultaneous representations. According to the Members, Mitchell, serving as OCPIN's general counsel, failed to insist on the votes and approvals the Operating Agreement required Shah to obtain from the Members and board of directors before he authorized OCPIN to take the actions giving rise to this lawsuit. The Members alleged Mitchell not only failed to prevent, but actually helped Shah take numerous actions the Operating Agreement prohibited, including paying the attorney fees and costs to defend Shah's self-serving actions in the Integrated Healthcare litigation and making capital calls on the Members to pay those attorney fees and costs. In representing OCPIN, the Members alleged Mitchell favored Shah over OCPIN to further Mitchell's own interests and curry favor with Shah to obtain future business.
Despite numerous allegations referring to the Operating Agreement, the second cause of action was not based on that agreement. It did not seek a judicial declaration that the Operation Agreement was void or voidable. Rather, it asked for a judicial declaration that Mitchell's fee agreement and the settlement agreement were void or voidable. The duties the Members alleged Mitchell breached did not arise from the Operating Agreement, but rather from the attorney-client relationship and fee agreement Mitchell had with OCPIN. If this cause of action against Mitchell is based on any contract, it is based on his fee agreement, not the Operating Agreement. Because he was a nonsignatory to the Operating Agreement, that agreement imposed no obligations on Mitchell that could support a contractually based claim against him. Mitchell's alleged failure to ensure Shah operated OCPIN within the Operating Agreement's terms does not give rise to a claim against Mitchell under the Operating Agreement.
The tenth cause of action against Mitchell sought damages for legal malpractice, alleging his conduct described in the second cause of action fell below the standard of care and breached his fiduciary duty to OCPIN and the Members as OCPIN's counsel. The eleventh cause of action sought a judgment requiring Mitchell to account for all fees he received from OCPIN and to disgorge those fees. As with the second cause of action, these claims are based on duties Mitchell owed by virtue of his attorney-client relationship with OCPIN, not the Operating Agreement.
Mitchell nonetheless contends the Members sued him on the Operating Agreement because they alleged he conspired with Shah to (1) breach the duties Shah owed the Members under the Operating Agreement and (2) operate OCPIN in a manner that violated the Operating Agreement. Mitchell emphasizes that the operative complaint alleged Mitchell aided and abetted Shah's conduct. He points out the complaint also alleged all defendants were "a principal, agent, employee, partner, member, joint venture, co-conspirator, representative or alter ego of some or all of the other [d]efendants" and acted within the course and scope of those relationships.
Despite these conclusory allegations, however, the operative complaint did not seek to hold Mitchell liable for Shah's breach of the Operating Agreement on a conspiracy, aider and abettor, or other joint liability theory. (See Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 511 [civil conspiracy makes conspirators liable as joint tortfeasors]; Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1146 [aiding and abetting makes defendant "cotortfeasor" with person who committed the tort].) Indeed, the operative complaint did not name Mitchell as a defendant on the cause of action seeking damages from Shah for breaching the duties he owed the Members under the Operating Agreement or on the causes of action seeking declaratory relief regarding the validity of Shah's actions under the Operating Agreement.
The operative complaint sought to hold Mitchell liable solely for his own breach of the duty he owed OCPIN and the Members independent of any obligations Shah owed the Members. The conclusory allegations that Mitchell aided and abetted Shah appear to be nothing more than examples showing how Mitchell breached the duty he owed OCPIN. The Members did not allege Shah's breach of his fiduciary duty as a basis for holding Mitchell liable. Indeed, Mitchell's brief concedes the Members never advanced an argument that Mitchell shared Shah's liability as a coconspirator.
The Members failure to sue Mitchell on a conspiracy or aider and abettor theory seeking to hold him liable for Shah's breach of the Operating Agreement renders inapplicable the cases Mitchell cites for the proposition an attorney fee provision may be enforced against a nonsignatory when the nonsignatory is sued as a signatory's partner, coventurer, or coconspirator. (See Babcock v. Omansky (1973) 31 Cal.App.3d 625, 633-634; Walsh v. New West Federal Savings & Loan Assn. (1991) 234 Cal.App.3d 1539, 1546-1547.) Accordingly, we do not address these authorities.
Mitchell contends the absence of any coconspirator liability allegations is irrelevant because the trial court was obligated to consider all possible liability theories before sustaining Mitchell's demurrer, and if the case went to trial the Members could have sought leave to amend after presenting evidence on a conspiracy theory. Mitchell is incorrect. In determining whether an action is "on the contract" for Civil Code section 1717's purposes, we look to the pleading to determine what claims the plaintiff actually alleged, not what claims the plaintiff could have alleged. (Mepco Services, supra, 189 Cal.App.4th at p. 1047; Kangarlou v. Progressive Title Co., Inc. (2005) 128 Cal.App.4th 1174, 1178-1179 ["'In the final analysis we look to the pleading to determine the nature of plaintiff's claim'"].) The Members did not allege claims seeking to hold Mitchell liable for Shah's breach of the Operating Agreement and therefore Mitchell cannot recover his attorney fees under that agreement's attorney fee provision.
The third amended complaint's generic prayer for attorney fees against all defendants also does not entitle Mitchell to recover his attorney fees. A nonsignatory defendant may not recover attorney fees on the theory a signatory plaintiff prayed for fees against the nonsignatory defendant and therefore is estopped from opposing the nonsignatory defendant's fee request. (Sessions, supra, 84 Cal.App.4th at pp. 681-682.) As explained above, the proper inquiry is whether the signatory plaintiff could have recovered attorney fees if he or she prevailed against the nonsignatory defendant. (See, e.g., Reynolds, supra, 25 Cal.3d at p. 128; Real Property Services, supra, 25 Cal.App.4th at p. 382.)
Finally, Mitchell argues whether the Members sued him "on the contract" is irrelevant because the Operating Agreement's broadly worded fee provision applies to both contract and tort claims. According to Mitchell, the Operating Agreement's fee provision broadly applies to "any dispute between [OCPIN] and the Members or among the Members" and therefore he may invoke the fee provision regardless of whether the Members sued him in contract or in tort. Mitchell, however, misconstrues the dispositive issue his attorney fees motion presented. The issue is not whether the Operating Agreement's fee provision broadly applies to contract and tort claims, but whether Mitchell, as a nonsignatory to the Operating Agreement, may invoke the agreement's attorney fee provision on any claim.
Mitchell is not a party to the Operating Agreement. He has no agreement with the Members authorizing the prevailing party to recover attorney fees on any type of claim. Accordingly, the breadth of the Operating Agreement's fee provision is irrelevant to the threshold issue whether Mitchell may invoke the fee provision at all. As explained above, Mitchell must rely on Civil Code section 1717's reciprocity principles to invoke the Operating Agreement's fee provision because he is a nonsignatory. Those principles, however, apply only to claims "on the contact." (Gil v. Mansano (2004) 121 Cal.App.4th 739, 742-743 ["'Civil Code section 1717 . . . determines which party, if any, is entitled to attorney fees on a contract claim only'"]; Moallem v. Coldwell Banker Com. Group, Inc. (1994) 25 Cal.App.4th 1827, 1831-1833 [Civil Code section 1717's reciprocity principles do not apply to tort claims and may not be used to make a unilateral attorney fee provision reciprocal when applied to tort claims]; Xuereb, supra, 3 Cal.App.4th at p. 1342 ["[Civil Code 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" (original italics)].)
The Members did not sue Mitchell on the Operating Agreement within the meaning of Civil Code section 1717 and therefore he may not rely on that section's reciprocity principles to invoke the Operating Agreement's fee provision as a nonsignatory. The trial court erred in ruling Mitchell could recover his attorney fees based on the Operating Agreement's fee provision. C. Mitchell Is Not a Third Party Beneficiary of the Operating Agreement's Attorney Fee Provision
As an alternative ground for affirming the trial court's attorney fee award, Mitchell contends he may invoke the Operating Agreement's attorney fee provision because he is a third party beneficiary of the agreement. Although Mitchell argued this theory in the trial court, the court did not rule on it. Per our de novo review, however, we conclude Mitchell is not a third party beneficiary of the Operating Agreement's attorney fee provision.
"A third party beneficiary may enforce a contract made expressly for his or her benefit. [Citations.] It is also true that a party not named in the contract may qualify as a beneficiary under it where the contracting parties must have intended to benefit the unnamed party and the agreement reflects that intent. [Citation.] The party claiming to be a third party beneficiary bears the burden of proving that the contracting parties actually promised the performance which the third party beneficiary seeks. . . . [Citation.]" (Sessions, supra, 84 Cal.App.4th at p. 680; see also Whiteside v. Tenet Healthcare Corp. (2002) 101 Cal.App.4th 693, 708-709 (Whiteside).)
"'A third party should not be permitted to enforce covenants made not for his benefit, but rather for others. He is not a contracting party; his right to performance is predicated on the contracting parties' intent to benefit him. [Citations.] As to any provision made not for his benefit but for the benefit of the contracting parties or for other third parties, he becomes an intermeddler. Permitting a third party to enforce a covenant made solely to benefit others would lead to the anomaly of granting him a bonus after his receiving all intended benefit.' [Citation.]" (Sessions, supra, 84 Cal.App.4th at p. 680; Whiteside, supra, 101 Cal.App.4th at p. 709.)
A third party beneficiary has "no right to collect anything but those benefits the contracting parties agreed to confer upon [the third party beneficiary]." (Sessions, supra, 84 Cal.App.4th at p. 680.) Accordingly, Mitchell must show the Members, the parties to the Operating Agreement, specifically intended the Operating Agreement's attorney fee provision to benefit Mitchell. It is not sufficient for Mitchell to show the Members intended some other Operating Agreement provision to benefit him. (Super 7, supra, 16 Cal.App.4th at p. 546 [a third party beneficiary may not invoke a contract's attorney fee provision unless the contracting parties specifically intended that provision to benefit the third party]; see also Sessions, at pp. 680-681 [same].)
Mitchell contends he is a third party beneficiary because section 15.17 of the Operating Agreement states each Member warrants that Mitchell "offered no advice, representation, or counsel to him or her with respect to signing this Agreement," and section 15.18 states that the Members waive all conflicts of interest regarding Mitchell's "professional services and advice." Mitchell emphasizes that each Member separately initialed section 15.18 and signed the Operating Agreement.
Although these provisions specifically refer to Mitchell and benefit him, Mitchell fails to point to anything demonstrating the Members intended the separate attorney fee provision to benefit Mitchell. Section 20.18 of the Operating Agreement contains the attorney fee provision and it does not mention Mitchell. In its entirety, section 20.18 states, "In the event that any dispute between the LLC and the Members or among the Members should result in litigation or arbitration, the prevailing party in such dispute shall be entitled to recover from the other party, including without limitation, reasonable attorney's fees and expenses."
This provision establishes the right of the Members and LLC to recover attorney fees in any dispute among themselves, but it does not establish a right to attorney fees in a dispute with a third party such as Mitchell. As the attorney who drafted the Operating Agreement, Mitchell certainly could have requested the Members include him in the attorney fee provision. The Operating Agreement defines the Members' ownership rights and interests in OCPIN and the managers' authority over OCPIN's operation. Mitchell has no ownership rights or interests in OCPIN and, although he acted as OCPIN's counsel, he had no power to operate OCPIN himself.
Moreover, section 20.13 of the Operating Agreement specifically states "[t]here are no third party beneficiaries of this Agreement except Affiliates and Principals of the Members," and section 20.14 states, "[e]xcept as expressly provided in the Statute [that is, the Nevada statute under which the Members formed OCPIN], nothing in this Agreement shall confer any rights or remedies under or by reason of this Agreement on any Persons other than the Members and Managers and their respective successors and assigns . . . ."
Mitchell contends section 20.13 makes him a third party beneficiary because he falls within the Operating Agreement's definition of "Affiliates," which includes "any Person directly or indirectly controlling, controlled by or under common control with such Person." In Mitchell's view, he was Shah's Affiliate because he served as Shah's counsel and therefore Shah either directly or indirectly controlled him. We, however, do not share Mitchell's interpretation of the term Affiliates. A client does not control his counsel in this sense and Mitchell fails to cite any authority or point to any evidence supporting his proffered interpretation of the term "Affiliates."
The order awarding Mitchell attorney fees is reversed. The Members shall recover their costs on appeal.
BEDSWORTH, ACTING P. J.