Benjamin SANTISAS et al., Plaintiffs and Appellants, v. Robert J.J. GOODIN et al., Defendants and Respondents.
We hold that a party who successfully defends a tort action arising from a contract which entitles the winner in any litigation to an award of attorney's fees is the “prevailing party” and may recover such fees as an element of costs, even where the plaintiff dismisses the suit voluntarily.
On May 3, 1988, appellants Anita and Benjamin Santisas filed an action against respondents Robert J.J. Goodin, Phyllis L. Goodin (the Goodins), Goodin Realty, Daniel J. Guthrie, and others. The complaint stems from appellants' purchase of residential property from the Goodins, who were represented by attorney Guthrie in the transaction. Goodin Realty and Robert Goodin acted as broker and salesman on behalf of the sellers. Appellants allege that after signing the required documents and purchasing the home, they discovered extensive repair work that needed to be done, which was not disclosed prior to sale. The complaint contained several causes of action including negligent misrepresentation, suppression of fact, breach of contract and general negligence. The purchase agreement, which was attached to the complaint, provided that “In the event legal action is instituted by the Broker(s), or any party to this agreement, or arising out of the execution of this agreement or the sale, or to collect commissions, the prevailing party shall be entitled to receive from the other party a reasonable attorney fee to be determined by the court in which such action is brought.” (Italics added.) The complaint sought attorney's fees pursuant to this clause.
On July 28, 1993, more than five years after it was filed, appellants voluntarily dismissed the action with prejudice. Respondents then filed a motion to recover their attorney's fees and costs pursuant to the purchase agreement, citing Code of Civil Procedure sections 1021, 1032 and 1033.5. Rejecting appellants' claim that under Civil Code section 1717 (section 1717) there was no prevailing party, the trial court found respondents to be the prevailing parties and awarded them $16,546.90 in attorney's fees.
IThe Applicability of Section 1717
Section 1717, which establishes mutuality of remedy when a contract makes recovery of attorney's fees available to only one party, provides in subdivision (b)(2) that “Where an action has been voluntarily dismissed ․ there shall be no prevailing party for purposes of this section.” Appellants contend that because they voluntarily dismissed their suit, there can be no award of attorney's fees based on the real estate contract and thus the trial court's award of fees exceeded its statutory authority.
There is no question that if section 1717 applies, the fee award must be reversed. But section 1717 expressly limits itself to “any action on a contract, where the contract specifically provides [for an award of] attorney's fees and costs, which are incurred to enforce that contract․ ” (Subd. (a), italics added.) The statute “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's fees incurred to enforce that contract.” (Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1342, 5 Cal.Rptr.2d 154 (Xuereb ) italics original.) Only where those conditions apply does section 1717 entitle “the party who is determined to be the party prevailing on the contract ․” to attorney's fees, whether that party is specified in the contract or not.1
Although most cases involving the enforceability of an attorney's fees clause center around a contract dispute, Code of Civil Procedure section 1021 gives the parties the authority to make an allocation of attorney's fees between them in any kind of litigation. For example, “[t]he parties to a contract may validly agree to allow for the award of attorney's fees, even though the suit is based on tort rather than contract.” (Skyway Aviation, Inc. v. Troyer (1983) 147 Cal.App.3d 604, 610–611, 195 Cal.Rptr. 281.) The fact that attorney's fees are authorized by a contract does not mean the action is to enforce the contract, a distinction highlighted by the Xuereb case.
In Xuereb, as here, the lawsuit arose from a real estate purchase agreement that included a broadly worded attorney's fee provision entitling the prevailing party to recover attorney's fees in the event the agreement “ ‘gives rise’ ” to a lawsuit. (3 Cal.App.4th 1338. 1340, 5 Cal.Rptr.2d 154.) The purchasers sued their brokers for negligence, misrepresentation, breach of fiduciary duty and breach of contract, but the contract cause of action never went to the jury. After the brokers prevailed, they sought attorney's fees pursuant to the agreement. The trial court ruled that section 1717 barred the award, but the Court of Appeal reversed, stating: “Civil Code section 1717 necessarily assumes the right to enter into agreements for the award of attorney fees in litigation, a right which it in fact derives from Code of Civil Procedure section 1021. Because of its more limited scope, Civil Code section 1717 cannot be said to supersede or limit the broad right of parties pursuant to Code of Civil Procedure section 1021 to make attorney fees agreements. It was therefore error for the trial court to conclude that Civil Code section 1717 would independently bar an award of attorney fees in this case because the causes of action argued at trial sounded in tort rather than in contract.” (Id. at p. 1342, 5 Cal.Rptr.2d 154, italics added.) Subsequent cases such as Adam v. DeCharon (1995) 31 Cal.App.4th 708, 37 Cal.Rptr.2d 195, Palmer v. Shawback (1993) 17 Cal.App.4th 296, 21 Cal.Rptr.2d 575 and Lerner v. Ward (1993) 13 Cal.App.4th 155, 16 Cal.Rptr.2d 486 have followed Xuereb's reasoning.
By rejecting the applicability of section 1717, the trial court impliedly found that appellants' lawsuit sought redress in tort rather than contract. This finding is fully supported by the complaint, which sought damages for deceit, negligent misrepresentation, suppression of fact and general negligence. The “breach of contract” count is actually a misnomer, since the alleged “breach” is the failure to disclose certain defects in the property, a claim rooted exclusively in tort.
Since section 1717 does not apply, we look to other applicable statutes to determine whether respondents can be deemed the prevailing parties in the lawsuit.
“A defendant has the right to seek costs after dismissal of the complaint, and attorney fees recoverable under statutory authorization are deemed an element of costs. [Citations.]” (Adler v. Vaicius (1993) 21 Cal.App.4th 1770, 1776–1777, 27 Cal.Rptr.2d 32.) Code of Civil Procedure section 1033.5, subdivision (a)(10)(A) provides that attorney fees when “authorized by ․ [¶] [c]ontract” fall within the category of allowable costs under Code of Civil Procedure section 1032.2
Code of Civil Procedure section 1032, subdivision (b), states, “Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.” That section, which defines prevailing parties for purposes of awarding costs, includes in subsection (a)(4) “a defendant in whose favor a dismissal is entered․” (Italics added.)
In Catello v. I.T.T. General Controls (1984) 152 Cal.App.3d 1009, 200 Cal.Rptr. 4, the court held that a voluntary dismissal is a “dismissal” within the meaning of this language. The court observed that to limit recovery of costs to involuntary dismissal cases “would permit an unscrupulous plaintiff with only a marginal chance at recovery and investing only the filing fee to commence an action, forcing the opposing party to engage in expensive discovery, only to dismiss the action prior to final judgment when it appeared the case was sinking, Titanic-like, beneath the waves of overwhelming adverse evidence. Undoubtedly, it was with this evil in mind that the Legislature included an award of costs to the defendant when the plaintiff voluntarily dismissed its action.” (Id. at p. 1013, 200 Cal.Rptr. 4, accord Santos v. Civil Service Bd. (1987) 193 Cal.App.3d 1442, 1445–1446, 239 Cal.Rptr. 14.)
It follows from the foregoing that a party in tort litigation whose claim to attorney's fees is authorized by a contract derives such right from the broad freedom-of-contract provision contained in Code of Civil Procedure 1021 rather than the limited reciprocal-attorney's fees-in-contract-litigation provisions of section 1717. (Adam v. DeCharon, supra, 31 Cal.App.4th 708, 713, 37 Cal.Rptr.2d 195; Lerner v. Ward, supra, 13 Cal.App.4th 155, 160, 16 Cal.Rptr.2d 486.) Code of Civil Procedure section 1033.5, subdivision (a)(10)(A) denominates attorney's fees in such cases as costs governed by Code of Civil Procedure section 1032, including that section's definition of “prevailing party.” The trial court therefore acted within its statutory authority in determining that respondents were entitled to an award of attorney's fees.
The Olen Case
In addition to their argument based on section 1717, appellants claim that International Industries, Inc. v. Olen (1978) 21 Cal.3d 218, 145 Cal.Rptr. 691, 577 P.2d 1031 (Olen ) precludes the fees awarded here. They argue that Olen established a rule unconditionally barring recovery of contractually authorized attorney's fees whenever there is a pretrial dismissal, regardless of the nature of the underlying litigation. We do not agree.
Olen involved a pure contract dispute between a lessor and lessee. When the lessor filed a dismissal, the lessee sought attorney's fees, claiming he was the prevailing party under section 1717. In 1978, when Olen was decided, section 1717 was silent as to whether attorney's fees could be recovered in voluntary dismissal cases, prescribing only that fees be awarded to a party “ ‘in whose favor final judgment is rendered.’ ” (21 Cal.3d 218, 222, 145 Cal.Rptr. 691, 577 P.2d 1031.)
In a 4–3 decision, the California Supreme Court refused to construe the statute to authorize fees where the plaintiff dismissed his contract suit voluntarily. Noting that “[s]ection 1717 is obviously intended to create a reciprocal right to attorney fees when the contract provides the right to one party but not to the other” (Olen, supra, at p. 223, 145 Cal.Rptr. 691, 577 P.2d 1031), the court held that such equitable considerations did not merit an inference that the Legislature intended attorney's fees to be awarded automatically upon pretrial dismissal, since there may be innocent explanations for why the action was dismissed. (Id. at pp. 223–225, 145 Cal.Rptr. 691, 577 P.2d 1031.) Olen's holding was later codified by the Legislature's enactment of subsection (b)(2) of section 1717. (See Santos v. Civil Service Bd., supra, 193 Cal.App.3d 1442, 1445, 239 Cal.Rptr. 14.)
Olen was decided in an era when the distinction between attorney's fees authorized by a contract and those incurred to enforce the contract was not clearly defined, as it is today. In any event, the case did nothing more than construe section 1717 within the confines of its historical underpinnings. Indeed, Olen acknowledges that unlike section 1717, Code of Civil Procedure section 1032 expressly defines a prevailing party as including a defendant who is dismissed voluntarily before trial. (Olen, supra, 21 Cal.3d at p. 222, 145 Cal.Rptr. 691, 577 P.2d 1031.) Because section 1717 is inapplicable here, Olen is not dispositive of the issue.
We recognize that our decision conflicts with Jue v. Patton (1995) 33 Cal.App.4th 456, 39 Cal.Rptr.2d 364 (Jue ) decided by Division Four of this court. Jue apparently reads Olen as barring recovery of contractually derived attorney's fees in all pretrial dismissal cases, even where the litigation sounds exclusively in tort.
In our view, Jue fails to grasp the limited scope of Olen 's holding.3 It also does not take into account the recent trend in the law, starting with the Xuereb line of cases and validated by the enactment of Code of Civil Procedure section 1033.5, subdivision (a), which recognizes that the parties may by contract allocate attorney's fees between them in subsequent litigation arising from the contract but not brought to enforce it. Attorney's fees in such cases do not come within section 1717 and are instead recoverable as costs under Code of Civil Procedure section 1032.4
The order awarding attorney's fees is affirmed.
I believe the majority reaches the right result for the wrong reasons and write separately to explain why.
The majority concludes that Civil Code section 1717 does not apply to this action because of the trial judge's implied finding, supported by the record, that appellant's lawsuit sought redress in tort rather than contract. While I agree section 1717 is inapplicable, I do so for a more fundamental reason.
Section 1717 applies only to contracts authorizing fees to one party and not the other. (International Industries v. Olen (1978) 21 Cal.3d 218, 223, 145 Cal.Rptr. 691, 577 P.2d 1031.) That does not describe the agreement in this case, which, by authorizing fees to “the prevailing party,” established the reciprocal right to attorney fees that would have resulted from application of section 1717 if the right created under the agreement had instead unilaterally benefitted only one party. Because the fundamental right to obtain fees on the basis of contract exists under Code of Civil Procedure 1021, not section 1717, the latter statute would be redundant if it were deemed to authorize fee awards in cases such as this, in which the underlying contract independently provides a reciprocal right to attorney fees and therefore does not present the unfairness rectified by section 1717. Section 1717 therefore would not apply to this case even if the instant proceeding sounded in contract rather than tort.1
My view of the limited application of section 1717 is not genuinely inconsistent with the line of cases commencing with Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 5 Cal.Rptr.2d 154, which the majority relies upon. The statement in Xuereb that “section 1717 would independently bar an award of attorney fees in this case because the causes of action argued at trial sounded in tort rather than in contract” (Id., at p. 1342, 5 Cal.Rptr.2d 154) was entirely gratuitous, as in this part of the opinion the court was assuming for the sake of argument that section 1717 was facially applicable, as the respondent argued. As the court observed immediately after making the quoted statement, however, “respondents acknowledge that an interpretation of Civil Code section 1717 is not an issue in the instant case, and that under proper circumstances attorney fees may be awarded pursuant to Code of Civil Procedure section 1021.” (Ibid.) In any event, to the extent language in Xuereb and other court of appeal decisions (see, e.g., Adam v. DeCharon (1995) 31 Cal.App.4th 708, 712, 37 Cal.Rptr.2d 195; Lerner v. Ward (1993) 13 Cal.App.4th 155, 160, 16 Cal.Rptr.2d 486) can be read as implying that section 1717 may apply to contracts which by their own terms create a reciprocal right to fees I am unwilling to follow them. Such an interpretation ascribes to section 1717 a redundant purpose the Legislature earlier achieved by enacting Code of Civil Procedure section 1021.
International Industries v. Olen, supra, 21 Cal.3d 218, 145 Cal.Rptr. 691, 577 P.2d 1031 does not, in my view, mean that attorney fees authorized by contract may never be awarded where, as here, the complaint is voluntarily dismissed prior to trial. Thus, I agree with my colleagues that Jue v. Patton (1995) 33 Cal.App.4th 456, 39 Cal.Rptr.2d 364, which adopts that view, was wrongly decided and should not be followed. Again, however, my reasoning is different.
The majority relies primarily on the fact that “Olen involved a pure contract dispute” (maj. opn. at p. 881) rather than a tort action, as we have in the present case, and is therefore distinguishable. I do not believe the case can be satisfactorily distinguished on that ground or any other. Whether the underlying action sounds in contract or in tort is rationally unrelated to the question whether voluntary dismissal of the complaint prior to trial should necessarily bar an award of attorney fees in cases “arising under” a contract authorizing attorney fees to the prevailing party. Nor do I believe that distinction was the gravamen of Olen.
The ratio decidendi of Olen is the equitable nature of section 1717. “Building a reciprocal right to attorney fees into contracts, and prohibiting its waiver, the section reflects legislative intent that equitable considerations must prevail over both the bargaining power of the parties and the technical rules of contractual construction.” (International Industries, Inc. v. Olen, supra, 21 Cal.3d at p. 224, 145 Cal.Rptr. 691, 577 P.2d 1031.) “Because award of contractual attorney fees is governed by equitable principles,” the court held, “we must reject any rule that permits a defendant to automatically recover fees when the plaintiff has voluntarily dismissed before trial.” (Ibid.) The court felt that in pretrial dismissal cases it was “faced with a Hobson's choice of either (1) adopting an automatic right to attorney fees, thereby encouraging the maintenance of pointless litigation and violating the equitable principles which should govern attorney fees clauses, (2) providing for application of equitable considerations, requiring use of scarce judicial resources for trial of the merits of dismissed actions, or (3) continuing the former rule, denying attorney fees in spite of agreement.” (Id., at p. 225, 145 Cal.Rptr. 691, 577 P.2d 1031.) The court chose the third alternative because “[w]e are satisfied that concern for the efficient and equitable adminsitration of justice requires that the parties in pretrial dismissal cases be left to bear their own attorney fees, whether claim is asserted on the basis of the contract or section 1717's reciprocal right.” 2 (Ibid.) This analysis has nothing to do with the difference between tort and contract actions.
The references in Olen to “contractual attorney fees” do not imply that the fees in question must be incurred in litigation seeking to enforce the contract authorizing fees, as the court's analysis is just as logically applicable to fees awarded in tort litigation “arising out of” a contractual relationship governed by an agreement authorizing fees. Nor is the opinion limited to contracts authorizing reciprocal fees. The reference to fees claimed on the basis of “section 1717's reciprocal right” makes it clear the court was also including contracts ostensibly creating only a unilateral right to fees.
The reason Olen does not apply to this case is that subsequent actions of the Legislature have rendered it obsolete. In 1986, eight years after Olen was decided, Code of Civil Procedure sections 1032 and 1033.5 were enacted. The latter section says that attorney fees authorized by contract “are allowable as costs under section 1032.” (Code of Civ.Proc. § 1033.5, subd. (a)(10)(A).) Section 1032 provides that a “prevailing party” is ordinarily entitled to recover such costs “as a matter of right” (Code of Civ.Proc., § 1032, subd. (b)), and defines “prevailing party” as including “a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant.” (Code of Civ.Proc. § 1032, subd. (a)(4).) As the majority points out, this definition includes a defendant in whose favor a dismissal was entered prior to trial. (Adler v. Vaicius (1993) 21 Cal.App.4th 1770, 1777, 27 Cal.Rptr.2d 32; Santos v. Civil Service Board (1987) 193 Cal.App.3d 1442, 1445–1446, 239 Cal.Rptr. 14; Catello v. I.T.T. General Controls (1984) 152 Cal.App.3d 1009, 1013, 200 Cal.Rptr. 4.)
Code of Civil Procedure section 1032 also provides that trial courts have discretion to determine whether a litigant is a “prevailing party” in two situations: (1) “[w]hen any party recovers other than monetary relief,” and (2) “in situations other than as specified” in the statutory definition. (Code of Civ.Proc. § 1032, subd. (a)(4).) The exercise of such discretion will require the expenditure of “scarce judicial resources” to determine the merits of dismissed actions or the absence thereof.
In short, by treating attorney fees as costs to which prevailing parties are entitled, by including defendants in whose favor voluntarily dismissals are entered prior to trial within the definition of “prevailing party,” and by giving trial courts authority to exercise discretion in determining whether defendants are “prevailing parties” in situations not specifically anticipated by the cost bill statutes, the Legislature has discredited the assumptions upon which Olen is predicated. The case is therefore no longer useful.
The finding of the trial court that is dispositive in this case is not the implied finding that appellant's lawsuit sought redress in tort rather than contract (because, as earlier noted, section 1717 would not apply to this case even if it could be deemed a contract action) but the express finding that respondents were prevailing parties within the meaning of the cost bill statutes. This determination, which was legally mandated and factually justified, is all that is necessary to sustain the judgment.
1. Section 1717, subdivision (a) reads in pertinent part: “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.”
2. Subdivision (a) of Code of Civil Procedure section 1033.5 states, “The following items are allowable as costs under Section 1032: [¶] ․ (10) Attorney fees, when authorized by any of the following: [¶] (A) Contract. (B) Statute. (C) Law.” (Italics added.)
3. Jue seems to have placed central emphasis on the following quote from Olen: “We are satisfied that concern for the efficient and equitable administration of justice requires that the parties in pretrial dismissal cases be left to bear their own attorney fees, whether [the] claim is asserted on the basis of the contract or [Civil Code] section 1717's reciprocal right. [Citation.]” (Jue, supra, 33 Cal.App.4th at p. 460, 39 Cal.Rptr.2d 364, quoting Olen, supra, 21 Cal.3d 218, 225, 145 Cal.Rptr. 691, 577 P.2d 1031, fn. omitted, italics original.)The dichotomy to which the Olen court refers is between recovery based on the express provisions of the contract as opposed to the reciprocal right to fees imposed by section 1717. Given the nature of its prior discussion and the narrow question before it, we think it unlikely that the court intended this single sentence to announce a new rule governing pretrial dismissals extending beyond the scope of section 1717.
4. Our holding finds support in the recent case of Honey Baked Hams, Inc. v. Dickens (1995) 37 Cal.App.4th 421, 43 Cal.Rptr.2d 595, which also disagrees with Jue. Although the issue presented to it was different than the one at bar, the court in Honey Baked Hams concluded that Olen was strictly limited to contract claims invoking the procedural provisions of section 1717 and did not purport to announce a general rule barring attorney's fees in all voluntary dismissal cases. (Id. at pp. 427–428, 43 Cal.Rptr.2d 595.) The case further recognizes, as do we, that Code of Civil Procedure section 1033.5 sets forth a separate procedural vehicle for recovering attorney's fees in cases, like the present one, which do not fall within the scope of section 1717. (Id. at pp. 428–429, 43 Cal.Rptr.2d 595.)
1. Confusion as to the application of section 1717 was created by a brief line of cases suggesting that the statute is procedural as well as substantive and that its language is so broad that it applies not only to contractual provisions granting a unilateral right to attorney fees to only one party but as well to those which by their own terms create a reciprocal right benefitting both parties. (T.E.D. Bearing Co. v. Walter E. Heller & Co. (1974) 38 Cal.App.3d 59, 63, 112 Cal.Rptr. 910; Beneficial Standard Properties Inc. v. Scharps (1977) 67 Cal.App.3d 227, 231, 136 Cal.Rptr. 549; and M.C. & D. Capital Corp. v. Gilmaker (1988) 204 Cal.App.3d 671, 676–677, 251 Cal.Rptr. 178.) However, these cases presented an issue completely different from that presented here; namely, whether attorney fees authorized by contract are recoverable as costs or only as special damages. Prior to 1987, such fees could be awarded only on pleading and proof. Attorneys, frequently unaware that “attorneys' fees which are based on contract rather than on statute cannot be taxed as costs under section 1021 ․ and must be alleged and demanded in the complaint” (T.E.D. Bearing Co., supra, at p. 61, 112 Cal.Rptr. 910, italics in original), often neglected to plead and prove them. Responding to this problem, appellate courts in cases such as those just cited conveniently seized upon section 1717 as an alternative statutory basis for contractually authorized fees, thereby eliminating the pleading requirement. This was an equitable result, because the contracts involved in these cases intended all parties to receive the benefit of the fee provision. The strained opinions in these cases do not, however, persuasively explain why the right to fees created in section 1717 should apply to parties not in need of it.In 1986 the Legislature eliminated any confusion as to whether attorney fees are in the nature of costs or special damages by amending section 1033.5 of the Code of Civil Procedure. This amendment to the cost-bill statute specifically provides that “costs” includes attorney fees authorized by contract. (Code of Civ.Proc. § 1033.5, subd. (a)(10); see Bankes v. Lucas (1992) 9 Cal.App.4th 365, 371, 11 Cal.Rptr.2d 723.) Cases such as T.E.D. Bearing, supra, Beneficial Standard Properties, supra, and M.C. & D. Capital Corp., supra, are thus no longer useful.
2. There is, it can be said, an element of illogic in this analysis. If automatically authorizing the recovery of fees would violate the “the equitable principles which should govern attorney fee clauses” why is the automatic denial of fees equitably preferable? The function of equity is to mitigate the harshness that sometimes results from rigid enforcement of a universal legal rule. (See, 1 Blackstone's Commentaries (Jones ed. 1915) p. 103 [defining equity as “the correction of that wherein the law (by reason of its universality) is deficient.”] If, as the Supreme Court emphasizes, equitable considerations are paramount, the most appropriate alternative would be the second alternative, which is the only one of the three that permits the determination to be made on the basis of the circumstances of the particular case. By rejecting that alternative the Supreme Court assigned greater significance to judicial economies than to the equitable considerations of preeminent concern to the Legislature.
SMITH, Associate Justice.
PHELAN, J., concurs.