MOORE v. FIRST BANK OF SAN LUIS OBISPO (1998)

Appellants' action against respondent was resolved through binding arbitration.   Appellants prevailed, but were denied their attorney's fees by the arbitrators notwithstanding a contractual agreement between the parties authorizing an award of fees to the prevailing party.   Appellants sought to correct the award in the trial court pursuant to Code of Civil Procedure section 1286.6.¹  The court denied their motion, confirmed the award, and entered judgment in favor of appellants with no provision for attorney's fees.

Appellants contend that the arbitrators exceeded their powers by failing to award them fees and costs as prevailing parties under the agreement and that, therefore, the trial court erred in refusing to correct the award.   Pursuant to Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 10 Cal.Rptr.2d 183, 832 P.2d 899, we affirm.

Facts and Procedural Background

Appellants are shareholders in a privately held real estate development corporation.   The corporation purchased real property in San Luis Obispo County on which it intended to develop condominium complexes.   To this end, respondent made a series of construction loans totaling $1,645,435.76 to the corporation secured by seven deeds of trust on the properties.

After construction commenced, appellants discovered that the property was environmentally contaminated which increased development costs.   In order to obtain further financing, appellants executed, among other documents, home equity lines of credit secured by deeds of trust to their personal residences in favor of respondent.   The purpose of this transaction was allegedly to create “equity” in the development project by shifting some of the corporate debt on the parcels to the individual residences of the shareholders.   Appellants allege that, in return, respondent promised to reconvey as many deeds of trust on the property as the new equity lines were able to pay for so that financing from a construction lender could be obtained.

Ultimately, in early 1993, after payments were not made on the debt, respondent initiated non-judicial foreclosure proceedings pursuant to the seventh deed of trust securing a construction loan in the amount of $160,000.   In March of 1993, respondent took title to the real property after making a full credit bid at the foreclosure sale.   Thereafter, respondent filed notices of default against appellants' personal residences under the “equity line” deeds of trust and commenced non-judicial foreclosure proceedings on their homes.

In response, appellants filed the instant action for damages, declaratory relief, and injunctive relief.   Appellants sought to prevent the foreclosures as violative of the anti-deficiency statutes, and to cancel the debt instruments and deeds of trust to their residences on grounds of mistake, fraud, and failure of consideration.   Their complaint also sought monetary damages for fraud and unfair business practices.   Finally, they sought attorney's fees pursuant to a provision in the deeds of trust.

Respondent filed a cross-complaint, seeking judicial foreclosure of the subject deeds of trust, a deficiency judgment for the amount owed after deducting the proceeds of the sales of the homes, and attorney's fees.

The trial court subsequently ordered the action to binding arbitration before the American Arbitration Association pursuant to a provision in the equity line agreements.   A panel of three arbitrators conducted the arbitration.

At the arbitration, the panel asked appellants' counsel to clarify the nature of the relief sought.   Appellants' counsel stated that appellants were seeking to prevent foreclosure on their homes, to rescind the debt instruments based on mistake, and requesting findings of fraud.   Appellants' counsel stated that they were “not pursuing an independent claim for monetary damages.   The only damages that are really present in all this are the attorneys' fees that have been incurred in trying to set aside these instruments.”   In a post-arbitration brief, appellants argued that respondent's conduct warranted a finding of fraud and the imposition of punitive damages.   Appellants also argued that, “[a]t a minimum, [they] have established the invalidity of the equity lines transaction, and should be declared the prevailing party in this action and thereby entitled to costs and attorneys' fees under the relevant agreements.”

In July of 1997, the panel of arbitrators issued their award in favor of appellants.   The arbitrators ordered respondent to (1) cancel all obligations under the home equity lines, the deeds of trust, and the blanket liens that were the subject of the action;  (2) reconvey all deeds of trust;  and (3) release all obligations under any promissory notes or other documents.   The arbitrators found, however, that respondent owed “[n]o monetary sum” to appellants, and directed the parties to file dismissals with prejudice of the complaint and cross-complaint within 30 days of the award.   Finally, the arbitrators ruled that “[e]ach party shall pay its own attorney's fees.”

Respondent subsequently filed a motion in the trial court to confirm the arbitration award.   Appellants opposed the motion and moved to correct the arbitration award to provide that they were entitled to recover their attorney's fees and costs from respondent.   Appellants argued that the arbitration award gave no effect to the mandatory provision for attorney's fees in the deeds of trust, that they had prevailed on their contract claims, and that the arbitrators exceeded their powers by failing to award appellants attorney's fees and costs.²  (See § 1286.6.)   Appellants noted that the arbitrators' award invalidated debt instruments alleged to be in excess of $650,000, and that respondent had recovered nothing by way of its cross-complaint.

Respondent opposed appellants' motion, contending that the arbitrators clearly determined that neither side was a prevailing party.   Respondent argued that the arbitrators considered the issues of who was the prevailing party and who was entitled to attorney's fees.   The arbitrators expressly found that “[n]o monetary sum is owed to [appellants] in this matter” and that “[e]ach party shall pay its own attorney's fees.”   Respondent contended that the arbitrators had the power to decline to find a prevailing party and fashion a relief they considered just and fair under the circumstances.   Respondent argued the award was a “ ‘mixed result’ ” for the parties because both sides won and lost-respondent was denied foreclosure rights and appellants were denied monetary damages against it.

The trial court denied appellants' motion to correct the award, reasoning that the arbitrators were expressly asked to declare appellants the prevailing party and to award them attorney's fees, but it instead ordered the parties to bear their own fees and costs.   The trial court reasoned that “judicial intervention in the arbitration process should be minimized, otherwise the speedy resolution of grievances by private mechanisms will be greatly undermined.”   Accordingly, the court granted respondent's motion to confirm the award and entered judgment consistent with the award.

Discussion

 Appellants aptly phrase the issue in this case:  Where an arbitration panel issues an award which makes one side the prevailing party as a matter of law and then refuses to award attorney's fees under mandatory provisions of the parties' agreement, is this a legal error unreviewable under Moncharsh v. Heily & Blase, supra, 3 Cal.4th at page 33, 10 Cal.Rptr.2d 183, 832 P.2d 899, or an act in excess of the arbitrators' powers which may be corrected under section 1286.6?   We conclude that the award contains a legal error on its face which is not subject to judicial review.

 Civil Code section 1717 provides that fees shall be awarded to the prevailing party on a contract where the contract provides for attorney's fees.   Under Civil Code section 1717, subdivision (b), “the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract.”   Appellants recovered all the relief sought on their contract claims and respondent took nothing under the cross-complaint.   Contrary to respondent's contention, there was no “mixed bag” recovery on the contract claims.  (Compare Kytasty v. Godwin (1980) 102 Cal.App.3d 762, 162 Cal.Rptr. 556 [contractual attorney's fees denied where plaintiff's right to easement was confirmed but its scope was narrower than claimed];  Hsu v. Abbara (1995) 9 Cal.4th 863, 39 Cal.Rptr.2d 824, 891 P.2d 804 [when the results of litigation on the contract claims are not mixed, the trial court has no discretion under Civ.Code, § 1717 to deny attorney's fees to the successful litigant].)

 The fact that appellants did not prevail on their tort claims is irrelevant.   The determination of who is the prevailing party for purposes of contractual attorney's fees is to be made without reference to the success or failure of noncontract claims.  (Hsu v. Abbara, supra, 9 Cal.4th at pp. 873-874, 39 Cal.Rptr.2d 824, 891 P.2d 804.)   Appellants were, as a matter of law, the prevailing parties in this action and were entitled to an award of fees and costs.   The arbitration award shows a clear error of law on this point.

 Nevertheless, the scope of judicial review of arbitration awards is extremely narrow.  “[A]n award reached by an arbitrator pursuant to a contractual agreement to arbitrate is not subject to judicial review except on the grounds set forth in sections 1286.2 (to vacate) and 1286.6 (for correction).”  (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 33, 10 Cal.Rptr.2d 183, 832 P.2d 899.)   Absent proof of one of the grounds listed in those sections, a court may not intervene.   Even “the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.”  (Ibid.)

Appellants acknowledge the holding in Moncharsh, but argue that the arbitrators' erroneous decision to deny fees and costs is judicially reviewable under section 1286.6, subdivision (b).   Under this section, a trial court is empowered to correct an arbitration award if it determines that the arbitrators have “exceeded their powers” and the award may be corrected without affecting the merits of the decision.

Two courts of appeal have addressed this issue and have reached different conclusions.   In Creative Plastering, Inc. v. Hedley Builders, Inc. (1993, 1st Dist.) 19 Cal.App.4th 1662, 24 Cal.Rptr.2d 216, a contractual dispute was submitted to arbitration.   The arbitrator awarded monetary damages in favor of the plaintiff and found that the plaintiff was entitled to attorney's fees under the parties' agreement as prevailing party.   The defendant then sought to modify the award in the trial court on the ground that the arbitrator had erroneously determined that plaintiff was the prevailing party.   The trial court agreed and struck the award.   The Court of Appeal reversed, holding that the trial court lacked authority to modify the arbitrator's finding on the prevailing party issue.   Citing Moncharsh, the Court of Appeal reasoned that the arbitrator was authorized to decide all matters in question arising out of the subcontract, including the identity of the prevailing party for purposes of the fee award.  “So long as an arbitrator has, as conceded here, the power and authority to decide that issue, his decision thereon cannot exceed his powers within the meaning of section 1286.2, subdivision (d).   Even if that decision constituted or was generated by the arbitrator's error of law or fact, it nonetheless binds the parties and is immune from judicial interference.  ‘A contrary holding would permit the exception to swallow the rule of limited judicial review;  a litigant could always contend the arbitrator erred and thus exceeded his powers.’  [Citation.]”  (Id., at p. 1666, 24 Cal.Rptr.2d 216.)

In contrast, in DiMarco v. Chaney (1995, 2d Dist.) 31 Cal.App.4th 1809, 37 Cal.Rptr.2d 558, an arbitrator found that the defendant was the prevailing party but denied all requests for attorney's fees, notwithstanding a provision for such fees in the parties' contract.   The arbitrator then clarified his ruling by stating that he believed he had discretion to deny the request for attorney's fees.   The defendant sought correction of the award in the trial court to reflect her entitlement to attorney's fees as prevailing party.   The trial court granted the motion and awarded the fees in the amount requested.   The Court of Appeal affirmed the trial court's order correcting the arbitration award, but held that the arbitrator should determine the amount of fees to be awarded.   The Court of Appeal reasoned that the arbitrator exceeded his powers in denying the prevailing party's request for fees and costs because the parties' contract expressly provided for such an award.  “Had the arbitrator found neither DiMarco nor Chaney was the prevailing party, the arbitrator properly could have declined to make any award of attorney fees.   But having made a finding Chaney was the prevailing party, the arbitrator was compelled by the terms of the agreement to award her reasonable attorney fees and costs.   In denying Chaney's request for attorney fees, the arbitrator exceeded his powers.   That error was subject to correction because section 1286.6, subdivision (b), provides an award shall be corrected if ‘[t]he arbitrators exceeded their powers [and] the award may be corrected without affecting the merits of the decision․’ ”  (Id., at p. 1815, 37 Cal.Rptr.2d 558.)

Appellants urge us to follow DiMarco, and likewise hold that the arbitrators exceeded their powers under section 1286.6.   We conclude that the reasoning expressed in DiMarco is inconsistent with Moncharsh and decline to follow it.   Appellants concede that the entitlement to fees was a legal question within the power of the arbitrators to decide.   Although the arbitrators erroneously resolved that issue, their legal error was not an excess of their jurisdiction or power.   The Supreme Court rejected a similar argument in Moncharsh, concluding that an arbitrator does not exceed his powers merely by reaching an erroneous decision.  (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at p. 28, 10 Cal.Rptr.2d 183, 832 P.2d 899.)

Appellants were as a matter of law the prevailing parties in this contractual dispute and were entitled to attorney's fees and costs.   Under the arbitrators' award, it appears that appellants must now bear their share of the cost of arbitration (over $40,000 in arbitration fees alone) and their own attorney's fees.   Nevertheless, the Legislature has made a policy decision to limit judicial review of arbitration awards to fulfill the parties' expectations that the award will be final and binding.  (Moncharsh v. Heily & Blase, supra, 3 Cal.4th at pp. 8-9, 10 Cal.Rptr.2d 183, 832 P.2d 899.)   The Legislature has not listed errors of law resulting in a substantial injustice as a ground upon which an arbitration award may be corrected under section 1286.6.   The California Supreme Court has similarly not recognized such a ground under either the judiciary's inherent obligation to conform its orders to the law (see § 128, subd. (a)(8)), or under section 1286.6 as an excess of the arbitrator's power.   Under Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937, we are required to follow Moncharsh.

We conclude that the arbitrators did not exceed their powers in refusing to award attorney's fees and costs.   The award is, therefore, not subject to judicial correction and the trial court correctly denied appellants' motion to correct the award.

The judgment is affirmed.   The parties shall bear their own costs on appeal.³

FOOTNOTES

1.   All further statutory references are to the Code of Civil Procedure unless otherwise specified.

2.   The deeds of trust contain the following provision for attorney's fees:  “If Lender institutes any suit or action to enforce any of the terms of this Deed of Trust, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys' fees at trial and on any appeal․ Trustor also will pay any court costs, in addition to all other sums provided by law.”  (Italics added.)   The equity line agreements contained the following provision for attorney's fees:  “If you do not pay, we may hire or pay someone else to help collect your Credit Line Account.   You also will pay us that amount.   This includes, subject to any limits under applicable law, our attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings ․, appeals, and any anticipated post-judgment collection services.”  (See Civ.Code, § 1717 [provisions for attorney's fees in contracts are given reciprocal enforcement].)

3.   Appellants' opposed motion to augment the record on appeal has been granted.

STEVEN J. STONE, Presiding Justice.

GILBERT, J., and YEGAN, J., concur.