REYNOLDS METALS COMPANY v. ALPERSON (1978)

This is an appeal by plaintiff Reynolds Metals Company from a judgment for defendants Norman O. Alperson and Darnold J. Blivas.

The complaint, consisting of three causes of action in tort and three causes of action in contract, was filed on July 11, 1973.

In essence, it alleged that plaintiff corporation had supplied metals to Turner Metals Supply, Inc. (hereinafter, Turner), which was acquired as a wholly owned subsidiary by Titanium Metallurgical, Inc. (hereinafter, TMI). Plaintiff and Turner had executed a general line consignment agreement, and, in 1971, TMI had guaranteed payment of sums due plaintiff from Turner.

Defendants Alperson and Blivas were shareholders and directors of TMI. Plaintiff alleged that they schemed to defraud plaintiff by inducing Turner and TMI to breach the contract with the plaintiff by causing Turner and TMI to deliver to plaintiff false information concerning the financial status of Turner and TMI, thereby persuading plaintiff to extend credit to these corporations; it was also alleged that these defendants engaged in other acts of misconduct relative to the management of these corporate enterprises which led to the diversion of funds which should have been paid to plaintiff and which rendered these corporations unable to pay plaintiff the indebtedness incurred.

In 1973, Turner and TMI became insolvent and bankruptcy proceedings commenced. Plaintiff, having extended credit in the sum of $823,231.48 to Turner, filed a claim in those proceedings and, by initiation of this lawsuit, sought also to hold defendants personally liable for the debt owed to plaintiff on a theory that defendants were “alter egos” of the two bankrupt corporations.

The first cause of action alleged tortious inducement of breach of contract and sought recovery of $823,231.48 from defendants. The second cause of action alleged fraud and sought punitive damages of $1,000,000. The third cause of action charged defendants with conspiracy.

Relying on the same basic facts, the complaint contained a fourth cause of action in contract for goods sold and delivered; there was a fifth cause of action for an account stated; and a sixth cause of action sought recovery on two promissory notes totalling $60,794.12, executed by Turner and delivered to plaintiff in 1972.

On August 27, 1973, plaintiff sought a writ of attachment and a temporary restraining order based upon the fourth, fifth and sixth causes of action which were based upon contract. Plaintiff obtained an Ex parte temporary restraining order. This order restrained the two defendants from “transferring any of (their) property . . . otherwise than in the ordinary course of business; . . .” The order remained in effect until September 25, 1973, when it was modified by stipulation of the parties to apply only to the real property of the defendants.

Defendants had retained counsel and hearings were held in September and December 1973, contesting the application for a writ of attachment and the temporary restraining order. In December 1973, plaintiff abandoned the attempt to obtain a writ of attachment. The temporary restraining order was dissolved on December 13, 1973.

Prior to commencement of trial on the main action, defendants moved (pursuant to Code of Civil Procedure section 597) to bar plaintiff from proceeding on the first three causes of action in tort stated in the complaint. Defendants raised the defense of equitable estoppel, asserting that plaintiff, by obtaining the temporary restraining order, had elected to pursue the contract remedies set forth in the complaint and was now precluded from seeking any tort remedies.

The trial court granted the defense motion, and the trial of the three causes of action in contract was heard by the court sitting without a jury. After a lengthy contest, the trial court made certain findings of fact and conclusions of law which rejected the “alter ego” theory advanced by plaintiff, and absolved defendants from any personal liability for the obligations of Turner and TMI. Besides awarding judgment to defendants, the trial court also granted to defendants a total of $80,500 in attorney fees and additional costs, pursuant to Civil Code section 1717.

Plaintiff has appealed from the judgment but asserts only two errors below: (1) that the trial court erred in dismissing plaintiff's tort causes of action on the basis of an election of remedies; and (2) that the trial court erred in awarding attorney's fees to defendants.

I

The Ruling with Respect to Election of Remedies and Equitable Estoppel

Plaintiff first attacks the trial court's determination that plaintiff was estopped from proceeding on its causes of action in tort by the doctrine of election of remedies, contending that this determination precluded a jury trial as requested by plaintiff and also deprived plaintiff of a fair hearing on the merits of its case.

The doctrine of election of remedies has been described in the following terms: “Where a person has two concurrent remedies to obtain relief on the same state of facts, and these remedies are inconsistent, he must choose or elect between them; and, if he has clearly elected to proceed on one, he is bound by this election and cannot thereafter pursue the other.” (2 Witkin, California Procedure (2d ed. 1970), Actions, s 112, p. 981.)

It was said in Glendale Fed. Sav. & Loan Assn. v. Marina View Heights Dev. Co. (1977) 66 Cal.App.3d 101, 137-138, 135 Cal.Rptr. 802, 823, that “(t)he doctrine of election of remedies is but a specific application of the doctrine of equitable estoppel. . . . (and) operates only where pursuit of alternative and inconsistent remedies substantially prejudices the defendant. . . . Election of remedies is a harsh doctrine and is currently looked upon with disfavor by courts and commentators.”

It is true that the doctrine has been criticized for many years (see Friederichsen v. Renard (1918) 247 U.S. 207, 213, 38 S.Ct. 450, 62 L.Ed. 1075 and Perkins v. Benguet Cons. Min. Co. (1942) 55 Cal.App.2d 720, 755-756, 132 P.2d 70) but it has been recognized in numerous California decisions. (See Steiner v. Rowley (1950) 35 Cal.2d 713, 720, 221 P.2d 9; Estrada v. Alvarez (1952) 38 Cal.2d 386, 391, 240 P.2d 278; Acme Paper Co. v. Goffstein (1954) 125 Cal.App.2d 175, 270 P.2d 505.)

These decisions have held that “a clear election” by the plaintiff takes place when the plaintiff sues in both tort and contract and obtains a writ of attachment with respect to the contract causes of action. (Witkin, Supra, s 120, p. 990; Steiner, supra, 35 Cal.2d 713, 221 P.2d 9.) “It is obvious that issuance of an attachment, which interferes with the defendant's possession of his property or requires that he incur the expense and effort of a bond, is a positive act by which the plaintiff ‘gains an advantage’ over the defendant.” (Witkin, Supra, s 120, p. 990.)

We turn to examination of the situation presented to us here. Plaintiff did rely on the “same state of facts” when it sought recovery from defendants on both tort and contract theories. The facts alleged in the first cause of action were incorporated into the pleading of the fourth, fifth and sixth causes of action.

Plaintiff contends that the remedies it sought were not inconsistent. It relies on Glendale Fed. Sav. & Loan Assn., supra, a decision rejecting the application of the doctrine of election of remedies on various grounds, including the ground that pleading a tort action of inducement of breach of contract is not inconsistent with a contractual action. Here, however, plaintiff also sought punitive damages in tort for fraud. It has been held that “(a)n action for tort in which exemplary damages are sought is inconsistent with one for money had and received.” (Steiner, supra, 35 Cal.2d 713, 720, 221 P.2d 9, 13.) The Glendale Fed. Sav. & Loan Assn. case is also distinguishable from the case at bench because in that case defendants had suffered no actual prejudice from the attempted garnishment of their bank accounts.

In order to invoke the doctrine of election of remedies, a party must raise the issue in the trial court (Roam v. Koop (1974) 41 Cal.App.3d 1035, 116 Cal.Rptr. 539) and establish that plaintiff's election has caused Actual prejudice to the defendant. Plaintiff contends here that defendants Alperson and Blivas were not prejudiced by plaintiff's attempt, later abandoned, to restrain defendants from disposition of property and to obtain a writ of attachment.

The record establishes that, by reason of the Ex parte temporary restraining order, plaintiff did in fact obtain “first call” on the defendants' property for almost four months before the order was dissolved. In our view, the restraint for this period of time constituted substantial inconvenience and interference with property rights insofar as the defendants were concerned.

Plaintiff asks us to distinguish between the effects of a writ of attachment and a temporary restraining order, pointing out that there is no decided case which holds that obtaining a restraining order constitutes the election of a remedy. In terms of the result prejudice to the defendants we fail to see any real distinction. In the case before us, the record shows that the defendants incurred legal fees in substantial amounts to contest the restraint placed upon their property from August 1973, to December 1973. It is just this type of “advantage” that the doctrine of equitable estoppel seeks to minimize. We therefore hold that the doctrine of election of remedies may properly be applied to restraining orders as well as to writs of attachment.

We conclude that the facts presented to us here support the trial court's determination that equitable estoppel barred plaintiff from pursuing its tort causes of action, and that since the issues that remained were dependent upon the resolution of the “alter ego” theory proffered by plaintiff, properly a subject of equitable jurisdiction, plaintiff was not entitled to a jury trial in the matter.

We note also, as a practical matter, that plaintiff cannot benefit from a reversal of the trial court's determination on the matter of election of remedies. Plaintiff is bound by the findings of fact and conclusions of law made below in support of the judgment for defendants, a judgment plaintiff has not challenged here except for the trial court's rulings on election of remedies and the award of attorney's fees. Those findings and conclusions reject the “alter ego” theory with respect to the contract actions and, since plaintiff must proceed on the same state of facts with respect to the tort causes of action, plaintiff is bound by the finality of those findings. They are now res judicata.

II

Attorney's Fees and Costs

Plaintiff also contends that the trial court erred when it awarded $80,500 attorney's fees as well as costs to the defendants as the prevailing parties in the litigation. It is argued that defendants, who were not parties to any contract with the plaintiff, do not come within the ambit of Civil Code section 1717, pursuant to which the trial judge made this award.

Civil Code section 1717 provides, in pertinent part, that “(i)n any action on a contract, where such contract specifically provides that attorney's fees and costs, which are incurred to enforce the provisions of such contract, shall be awarded to one of the parties, the prevailing party, Whether he is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to costs and necessary disbursements.” (Emphasis added.)

The emphasized portion of the statute has been the subject of interpretation by a number of the appellate courts. Does the provision extend the benefit of attorney's fees to Noncontracting prevailing parties to the litigation, or does the section limit awards of fees to Contracting parties who have prevailed? The statute has been subject to different interpretations.

Generally, however, section 1717 has been interpreted as an effort by the Legislature to equalize the position of parties to a contract when that contract only confers the benefit of recovery of attorney's fees on one of the contracting parties. The section contemplates reciprocity, regardless of which of the contracting parties prevails. (Coast Bank v. Holmes (1971) 19 Cal.App.3d 581, 97 Cal.Rptr. 30.) Thus it was said in Arnold v. Browne (1972) 27 Cal.App.3d 386, 399, 103 Cal.Rptr. 775, 784, that “(w)e note that the rule under Civil Code section 1717 appears to be that A party to the contract is entitled to attorneys' fees . . . .” (Emphasis in original.) The facts in the Arnold case are strikingly similar to those in the case at bench; the suit attempted to hold noncontracting parties liable for a breach of contract, as was the case herein. The attempt, however, was not successful. The prevailing defendants noncontracting parties were held Not to be entitled to attorney's fees pursuant to Civil Code section 1717.

But Arnold was not followed in Babcock v. Omansky (1973) 31 Cal.App.3d 625, 633, 107 Cal.Rptr. 512, in which a defendant, sued as a joint venturer but not a contracting party, was awarded statutory attorney's fees as the prevailing party in the litigation.

The more recent case law, however, has adhered to the Arnold v. Browne interpretation. In Boliver v. Surety Co. (1977) 72 Cal.App.3d Supp. 22, 29, 140 Cal.Rptr. 259, 264, the court stated that “(i)t is neither wise nor appropriate to further expand the benefits of Civil Code section 1717 to ensnare guarantors or other nonsigners of the contract who become parties to litigation as a result of corollary transactions or agreements.” This view was also taken in Canal-Randolph Anaheim, Inc. v. Moore (1978) 78 Cal.App.3d 477, 486, 143 Cal.Rptr. 789, which rejected extension of the benefit of contracts for attorney's fees to noncontracting, prevailing parties. The Canal-Randolph court criticized the reasoning of Babcock, finding it to be unsound.

We consider the better view to be that the statutory fees contemplated by Civil Code section 1717 may only be awarded to a Prevailing party who is a Contracting party, “whether he is the party specified in the contract (as one who should receive the benefit) or not.” (Civ.Code, s 1717.)

Here the trial court followed Babcock and awarded the attorney's fees to defendants, who had not entered into any contract with plaintiff. We conclude that the award was erroneous, and we reverse it.

The judgment is reversed as to the award of attorney's fees to defendants. In all other respects the judgment is affirmed.

JEFFERSON, Associate Justice.

KINGSLEY, Acting P. J., and GOERTZEN (Assigned by the Chief Justice of California), J., concur.