SMITH v. FIRST PRINCIPLE CHURCH No. H034075.
RUSSELL SMITH, et al., Plaintiffs and Appellants, v. FIRST PRINCIPLE CHURCH, Defendant and Respondent.
Court of Appeals of California, Sixth District.
Filed January 27, 2011.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
This is an appeal from a post-judgment award of attorney's fees. In the companion appeal (H033637), we affirm the judgment in favor of defendant and respondent First Principle Church (Church or the Church) in a civil action for breach of contract and promissory estoppel filed by plaintiffs and appellants Russell Smith and Helga Smith. (We shall hereafter refer to Russell Smith as "Smith"; his wife, Helga Smith, as "Helga"; and Russell and Helga jointly as "the Smiths.")
In this appeal, the Smiths attack the trial court's post-judgment order awarding Church $401,654 in attorney's fees pursuant to the attorney's fee provision in a pension agreement between the Smiths and Church. In particular, the Smiths challenge the trial court's finding that Church was the prevailing party on the contract, arguing that since Church's cross-complaint was also based on the contract, neither side is entitled to attorney's fees. The Smiths also contend that the attorney's fees order should be modified to indicate that the attorney's fees award is against Smith only and not against Helga. The Smiths do not challenge the reasonableness of the amount awarded as attorney's fees. We find no error and affirm the order.
Smith and his brother, I. M. Nome, founded Church in the 1970's. Smith retired from active ministry at the Church in December 1995. In early 1996, Smith and Church entered into a written agreement whereby Church agreed to pay the Smiths pension benefits. The agreement contained an attorney's fees clause, which provided: "If the Church refuses to honor the terms of this contract at any time and Russell Smith must take legal action to enforce this contract, all reasonable court and attorney's fees incurred by him shall be borne by the Church." (See opinion in H033637 for details about the parties' relationship and the other terms of the contract.)
Church paid pension benefits pursuant to the contract from 1996 until 2003. In 2003, Church questioned its obligation to continue paying pension benefits and consulted an attorney, who advised Church that the agreement was unenforceable because it lacked consideration. Church stopped paying the pension benefits. At that time, the total amount paid was $263,787.
Proceedings in Trial Court
The Smiths sued Church for breach of contract and promissory estoppel. Church filed a cross-complaint against Smith for "recovery of distribution," "money had and received," and breach of fiduciary duty. (The operative pleadings are the Smiths' second amended complaint and Church's first amended cross-complaint. For ease of reference, we shall refer to them simply as the "complaint" and the "cross-complaint.")
The Smiths demurred to the cross-complaint, arguing among other things that all three causes of action were barred by the statute of limitations. The court agreed that the cross-complaint was time-barred, sustained the demurrer without leave to amend, and dismissed the cross-complaint.
The parties tried the allegations of the complaint to the court. The court found that the pension agreement was not enforceable because it lacked consideration. The court found that although Church's head minister (Nome) had made multiple promises to Smith regarding a pension, Nome did not have actual or ostensible authority from Church to promise Smith a pension. In addition, the court held that Smith could not have reasonably relied on Nome's promises. Thus, the court found for the Church on the Smiths' causes of action for breach of contract and promissory estoppel. The court also held that Church did not have to make equitable restitution of donations Smith's parents had made to Church in reliance on Nome's promises because Church was not unjustly enriched by those donations and Smith had breached his fiduciary duty to Church by withholding material information from Church about Nome's promises, which also constituted unclean hands.
Results on Appeal
In the Smiths' appeal in the companion case (H033637), we affirm the judgment on the Smith's complaint. We also grant Church the relief it requested in its cross-appeal and reverse the trial court's order sustaining the demurrer to Church's third cause of action for breach of fiduciary duty without leave to amend and direct the court to grant Church leave to amend its cross-complaint.
Attorney's Fees Motion
After the court entered judgment on the complaint, Church filed a motion for attorney's fees based on the attorney's fees provision in the contract. Church sought fees under Civil Code section 1717 (hereafter "section 1717"), which makes the seemingly unilateral attorney's fees provision in the pension agreement reciprocal. Church argued that it was the prevailing party for the purpose of an award of attorney's fees, since it prevailed on both causes of action in the Smith's complaint. Church also argued that the finding that the contract was unenforceable does not preclude an award of fees and that apportionment of the fees was inappropriate, since both the contract and promissory estoppel causes of action were based on the same common facts and issues.
Church claimed $536,275 in fees based on the work done by six attorneys, including the attorney that originally represented Church, two contract attorneys he hired, and three attorneys from the firm that substituted in as trial counsel 15 months before trial. Church did not claim the $5,345.50 it spent to litigate its cross-complaint. Church supported its motion with detailed billing records from all of the attorneys.
The Smiths opposed the motion, arguing that there was no prevailing party. They acknowledged that the court had found that the Smiths could not enforce the pension agreement, but argued that since the court had dismissed Church's cross-complaint, which meant that Church could not recover the payments that it had made under the contract, neither party obtained the relief requested and there was no prevailing party. The Smiths also argued that the fees were unreasonable. They attacked the use of multiple attorneys and the attorneys' hourly rates and argued that Church's attorneys were inefficient. They asserted that the fees had to be apportioned because the cause of action for promissory estoppel was not "on the contract" as required by section 1717.
In reply, Church argued that the only cause of action "on the contract" was the Smiths' breach of contract claim. Church argued that two of the causes of action in its cross-complaint were statutory actions, that its third cause of action for breach of fiduciary duty was a tort, and that in determining the prevailing party, the court should disregard these non-contract claims. Church asserted its cross-complaint was purely defensive in nature and that the court therefore had the discretion to find that Church was the prevailing party. Church also argued that the fees were reasonable.
The court found that the only cause of action "on the contract" was the Smith's claim for breach of contract and that since Church was the prevailing party on that claim, it was entitled to fees. The court found no basis for apportioning the fees. It found that the fees were excessive in both the number of hours billed and the hourly rate and reduced the amount of the fees, awarding $401,654. The Smiths appeal.
The Smiths contend that the court erred in finding that the cross-complaint was not based "on the contract." They assert that the causes of action in Church's cross-complaint were all based on the pension agreement and argue that the court should therefore have found that there was no prevailing party and not awarded fees. They assert, alternatively, that if the court properly awarded attorney's fees, then the award should only have been entered against Smith and not Helga.
Prevailing Party Determination
At the hearing on the motion for attorney fees, the court stated, "I do think that given the entire circumstances of the case that the Defendant is the prevailing party here, despite the . . . pretrial order sustaining the demurrer on the cross-complaint without leave to amend." The court concluded that the cross-complaint "was a breach of fiduciary duty claim, tort claim" and that "the issues that were determined by the demurrer were not contractual claims, they were tort claims."
Section 1717 permits an award of attorney's fees to the prevailing party in an action on a contract. Section 1717 is the applicable statute when determining whether and how attorney's fees should be awarded under a contract. (Sears v. Baccaglio (1998)
Section 1717 provides in part: "(a) 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. [¶] . . . [¶] Reasonable attorney's fees shall be fixed by the court, and shall be an element of the costs of suit. [¶]. . . [¶] (b)(1) The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. . . . [T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section."
"Civil Code section 1717 has a limited application. It 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." (Xuereb v. Marcus & Millichap, Inc. (1992)
"To achieve its goal, [section 1717] generally must apply in favor of the party prevailing on a contract claim whenever that party would have been liable under the contract for attorney fees had the other party prevailed." (Hsu v. Abbara (1995)
Hsu observed that in 1987 the Legislature amended section 1717 to replace "the term `prevailing party' with the term `party prevailing on the contract,' evidently to emphasize that the determination of prevailing party for purposes of contractual attorney fees was to be made without reference to the success or failure of noncontract claims." (Hsu, supra, 9 Cal.4th at pp. 873-874, italics added.) Accordingly, Hsu held: "When a defendant obtains a simple, unqualified victory by defeating the only contract claim in the action, section 1717 entitles the successful defendant to recover reasonable attorney fees incurred in defense of that claim if the contract contained a provision for attorney fees. The trial court has no discretion to deny attorney fees to the defendant in this situation by finding that there was no party prevailing on the contract." (Id. at p. 877.) In other words, "when a defendant defeats recovery by the plaintiff on the only contract claim in the action, the defendant is the party prevailing on the contract under [Civil Code] section 1717 as a matter of law." (Id. at p. 876.) A defendant that successfully defends a contract action is the prevailing party even if it obtains no affirmative relief. (Foothill Properties v. Lyon/Copley Corona Associates (1996)
Church relies on Hsu and asserts that it is entitled to its attorney's fees as a matter of right because it prevailed on the only contract action in the case, the Smith's cause of action for breach of contract. Church argues, as it did below, that the first and second causes of action in its cross-complaint, for recovery of distribution and money had and received, are statutory actions that are not based on contract and that its third cause of action for breach of fiduciary duty sounded in tort. The Smiths argue that all of the causes of action in Church's cross-complaint are based on contract and that since Church did not prevail on it cross-complaint, there was no prevailing party and neither party is entitled to fees.
A different analysis applies in cases where both parties assert contract claims. "If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees." (Scott Co. of California v. Blount, Inc. (1999)
In this case, the only written contract that contains an attorney's fees clause is the pension agreement. For section 1717 to apply, the cause of action must be a contract action on the pension agreement. (Xuereb, supra, 3 Cal.App.4th at p. 1342.)
Breadth of Attorney's Fees Clause in Pension Agreement
We begin our analysis by determining whether the attorney's fees provision in the pension agreement is worded broadly enough to encompass noncontract claims. If a contractual attorney's fees clause is worded broadly enough, it may support an award of attorney fees to the prevailing party in an action alleging both contract and tort claims. (Exxess Electronixx v. Heger Realty Corp. (1998)
The attorney's fees clause in the pension agreement is "quite narrow" (Exxess, supra, 64 Cal.App.4th at p. 712) and provides that the court can award attorney's fees in a "legal action to enforce this contract . . . ." Where a contract authorizes an award of attorney's fees in an action to "enforce any . . . provision . . . of this [contract]," tort claims are not covered. (Id. at p. 709, internal quotation marks omitted, citing Santisas, supra, at p. 622, fn. 9; accord McKenzie v. Kaiser-Aetna (1976)
Accordingly, we must decide whether the claims in the cross-complaint were contract claims, tort claims, or other noncontract claims and whether they were brought to enforce the pension agreement.
First Cause of Action for "Recovery of Distribution"
Church's first cause of action was for recovery of distributions made to Smith between February 1996 and September 2003. The cross-complaint alleges that Church is a non-profit religious corporation, that Smith was a member of Church, and that Church paid Smith "gains, profits, or dividends" under the pension agreement. A copy of the pension agreement was attached to Church's original cross-complaint as an exhibit, but was not attached to the first amended cross-complaint. Nonetheless, the first amended cross-complaint refers to the pension agreement.
Although the cross-complaint does not expressly refer to any statutes, Church contends that its cause of action for recovery of distribution was a statutory cause of action, based on Corporations Code sections 5410 and 5420, which prohibit non-profit corporations from making distributions to their members.
"It is well settled that while a contract action protects a party's interest in having promises performed, `[a] tort action . . . redresses the breach of the general duty to society which the law imposes without regard to the substance of the contractual obligation.'" (Exxess, supra, 64 Cal.App.4th at p. 711.) "`Whether an action is based on contract or tort depends upon the nature of the right sued upon, not the form of the pleading or relief demanded. If based on breach of promise it is contractual; if based on breach of a noncontractual duty it is tortious. [Citation.] If unclear the action will be considered based on contract rather than tort. [Citation.] [¶] In the final analysis we look to the pleading to determine the nature of plaintiff's claim.'" (Kangarlou, supra, 128 Cal.App.4th at pp. 1178-1179, citing Arthur L. Sachs, Inc. v. City of Oceanside (1984)
The cause of action for recovery of distribution is based on duties that were not created by the pension agreement. The Corporations Code provisions at issue prohibited Church from making "any distribution" (Corp. Code, § 5410) and provided that "[a]ny person who receives any distribution is liable to the corporation for the amount so received" plus interest (Corp. Code, § 5420). These duties are imposed regardless of the substance of the parties' contractual relationship or the fact that the payments were made pursuant to a contract. We therefore conclude that the cause of action for recovery of distribution sounded in tort and was not a contract action to enforce the pension agreement. Consequently, the trial court did not err in concluding that the attorney fees provision did not apply to this cause of action.
Second Cause of Action for "Money Had & Received"
In its second cause of action for money had and received, Church alleged that Smith "received $262,767.29 for [Church's] use and benefit," that Smith has not paid Church any portion of this amount, despite Church's demand that he do so, and that Smith owed Church $262,767.29. Church argues that its cause of action for money had and received was also based on Corporations Code sections 5410 and 5420 and therefore was not on the contract. The Smiths contend that the second cause of action, like the first, was "on the contract" because it seeks to recover monies paid under the pension agreement. The second cause of action does not mention the pension agreement.
The action for money had and received is one of the common counts. In the common law action of general assumpsit, it was customary to plead an indebtedness using "common counts." (Farmers Ins. Exchange v. Zerin (1997)
The essential allegations of a common count are (1) the statement of indebtedness in a certain sum, (2) the consideration (goods sold, work done, money had and received, etc.), and (3) nonpayment. (Farmers, supra, 53 Cal.App.4th at p. 460.) "A cause of action for money had and received is stated if it is alleged the defendant `is indebted to the plaintiff in a certain sum "for money had and received by the defendant for the use of the plaintiff."'" (Ibid.) The action for money had and received is available in a variety of situations, including: (1) quasi-contract; (2) when an express contract is void (i.e. for lack of consideration), voidable or unenforceable; or (3) when an express contract is valid. (4 Witkin, supra, at § 561, pp. 688-690.) It has been used to obtain money from defendants who appropriated a plaintiff's commissions (Fox v. Monahan (1908) 8 Cal.App. 707), in an action by a principal against an agent to recover secret profits (Steiner v. Rowley (1950)
In our view, the common count flows from the cause of action for recovery of distribution, which we have already concluded was a noncontract claim based on Corporations Code sections 5410 and 5420. The common count provides a mechanism by which the funds can be recovered. Moreover, the pension agreement did not contain any provisions requiring the Smiths to repay any of the amounts Church had paid under the agreement. Arguably, Church's claim for money had and received is related to the pension agreement because it seeks the return of funds paid under a contract that was void and unenforceable because it lacked consideration. However, the attorney's fees clause in this case is narrow and applies only to contract actions to enforce the terms of the pension agreement. If the parties had intended the attorney's fees provision to apply to any action that was "related to" or "arose out of" the pension agreement, they could have drafted the provision more broadly to cover such claims. In light of the narrow scope of the attorney's fees provision in this case, we conclude that the court did not abuse its discretion when it held that the cause of action for money had and received was not an action on the contract.
The Smiths' rely on Beeman v. Burling (1990)
The Smith's reliance on Beeman is misplaced for several reasons. First, the attorney's fees provision in Beeman is broader than the attorney's fees clause here, since it allows for the recovery of attorney's fees in actions to both enforce the contract and recover the premises. Second, the plaintiff in Beeman obtained a simple unqualified win on all of the causes of action in his complaint, which included actions to recover the premises. Third, unlike this case, there was no cross-complaint. Fourth, Beeman does not address causes of action for recovery of distribution or money had and received. The analysis in Beeman is very brief and does not address the issues presented here.
Third Cause of Action for Breach of Fiduciary Duty
Church's third cause of action alleged that Smith served as a director and president of Church's board of directors (Board) from 1987 through 1991 and that as a corporate director Smith had a fiduciary duty to act in good faith in the best interests of Church. Church alleged that while Smith served on the Board, he breached his fiduciary duty to Church "by failing to disclose material facts relating to transactions . . . authorized or approved by the [Board] and/or which directly impacted [Church's] operations and financial obligations," including the fact that Nome orally promised Smith a pension in exchange for (1) Smith's agreement to forego his salary in 1987, (2) Parents' agreement to loan Church $55,000 in 1987, and (3) Parent's creation of a charitable trust in favor of Church in 1991. The cross-complaint alleged that Smith, "with malice, fraud, or oppression and in conscious or reckless disregard" of Church's rights "intentionally withheld information" regarding those three transactions from Church and that Church was damaged as a result of Smith's breach of fiduciary duty. The cross-complaint asked for compensatory and punitive damages.
As we noted previously, a tort action redresses the breach of the general duty to society which the law imposes without regard to the substance of any contractual obligation. (Exxess, supra, 64 Cal.App.4th at p. 711.) Smith's duty to disclose the oral promises of a pension associated with the salary forgiveness, loan, and creation of the trust was not created by the pension agreement. It arose out of his fiduciary obligations as a member of the Board to disclose all information, including his material financial interest in transactions under consideration by the Board. His duties as a director arose under common law and statute, not the pension agreement. (Raven's Cove Townhomes, Inc. v. Knuppe Development Co. (1981)
In summary, because the claims in Church's cross-complaint were not brought to enforce the terms of the pension agreement and are not contractual claims, the Smiths cannot recover attorney fees on those claims. Church was the prevailing party on the sole contract claim in this case: the Smiths' claim for breach of contract. Consequently, the court did not err when it awarded Church its reasonable attorney's fees.
Whether Helga Should Be Liable for Attorney's Fees
Without citation to authority, the Smiths argue that the order for attorney's fees should be imposed against Smith only, since Helga did not sign the pension agreement. Church argues that the Smith's have forfeited this contention since they did not raise it below. On the merits, Church contends that attorney's fees are proper against Helga because she sued for breach of the pension agreement and sought attorney's fees under the agreement.
"[A]n appellate court will ordinarily not consider procedural defects or erroneous rulings where an objection could have been, but was not raised below. [Citation.] The policy behind the rule is fairness. `Appellate courts are loath to reverse a judgment on grounds that the opposing party did not have an opportunity to argue and the trial court did not have an opportunity to consider.'" (In re Marriage of Falcone (2008)
Even if the Smiths had not forfeited the issue, we would find no error.
Although Helga did not sign the agreement, she received benefits under the pension agreement. The pension agreement provided that Helga was entitled to medical and dental insurance benefits and in the event Smith predeceased her, "the rights and compensation [under the] contract" transferred to Helga and continued for her lifetime. " `[I]n cases involving nonsignatories to a contract with an attorney fee provision, . . . [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.' (Real Property Services Corp. v. City of Pasadena (1994)
The order on the motion for attorney's fees is affirmed.
Bamattre-Manoukian, Acting P.J.
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