The award of attorney fees in California lawsuits is governed by the “American Rule,” in which ordinarily each party pays their own fees. However, parties may enter a contract that has an attorney fee provision which allocates attorney fees, usually to the prevailing party in a lawsuit. A recent Northern California decision involved such provisions in a complicated real estate transaction. The Seller & Buyer of property (Sundower Towers in Reno) also entered a “repurchase agreement,” which required the Seller to later buy the property back. Later, they entered a third agreement – an option, in which the Buyer granted the Seller the right to buy the property back. A lawsuit followed based on the Repurchase Agreement, but the court found this agreement unenforceable because it created an illegal subdivision. However, the defendant raised the Option agreement as an affirmative defense and sought attorney fees under the Option. In a lengthy opinion, the Supreme Court found that raising the affirmative defense did not trigger the option attorney fees provision, but it still found a way to award attorney fees.
In Mountain Aire Enterprises, LLC v. Sundowner Towers, LLC, the option agreement contained the following attorney fees provision:
“Litigation Costs. If any legal action or any other proceeding, including arbitration or an action for declaratory relief[,] is brought for the enforcement of this Agreement or because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees, expert fees and other costs incurred in that action or proceeding, in addition to any other relief to which the prevailing party may be entitled.” (Italics added.)
The court agreed that an “action” is synonymous with a lawsuit and includes the assertion of any affirmative defenses. But this does not mean that each occurrence within this process is itself an “action.” In this attorney fees context, “courts generally treat the term ‘action,’ as defined by Code of Civil Procedure section 22, as referring to the whole of a lawsuit rather than to discrete proceedings within a lawsuit.” While an affirmative defense is part of the action, it alone does not, in and of itself, constitute an “action” for purposes of recovering attorney fees.
Another reason an affirmative defense is not an action – a defendant who pleads an affirmative defense cannot be liable for malicious prosecution, no matter how meritless the defense. Thus, there may be certain situations where a defendant would prefer not to raise a claim by way of a cross-complaint, but instead raise such new matter by asserting an affirmative defense.
The Court Found Other Grounds for Attorney Fees:
The Option Agreement fee provision stated: “Litigation Costs. If any legal action or any other proceeding, including arbitration or an action for declaratory relief [,] is brought for the enforcement of this Agreement or because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorney fees, expert fees and other costs incurred in that action or proceeding, in addition to any other relief to which the prevailing party may be entitled.” (Italics added.)
Another issue was whether Mountain Air’s action on the repurchase agreement was “brought … because of an alleged dispute … in connection with any provision of” the option agreement, trigger the Option attorney fees. The option had an “integration” clause, which states the option agreement “expressly supersedes all previous or contemporaneous agreements, understandings, representations, or statements between the parties respecting this matter.” The parties disputed whether the option agreement reflects an intent to extinguish the repurchase agreement.
The court felt that once Mountain Air filed suit to compel defendants to repurchase the South Tower, the action necessarily implicated the validity of both the repurchase agreement and the option agreement. The parties were forced to litigate which of these competing and inconsistent agreements was, in the words of the trial court, the “sole agreement controlling the rights of the parties.” Under these circumstances, the court concluded that Mountain Air’s action to enforce the repurchase agreement was brought “because of an alleged dispute … in connection with” the option agreement.
The Court pointed out that in determining whether a contract contains an applicable attorney fees provision, courts have “construe[d] together several documents concerning the same subject and made as part of the same transaction [citations] even though the documents were not executed contemporaneously [citation] and do not refer to each other.” The nature of defendants’ defense of novation required determining whether the option agreement superseded and replaced the terms and conditions of the repurchase agreement. “Whether the new contract was intended as a substitute for the old may be inferred where the terms of the new contract differ widely from those of the old, especially where the two are entirely inconsistent and cannot be operative at the same time.”
The Court Listed Some Rules of Construction:
‘Where general words follow specific words in a [contractual provision] the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words. Where the opposite sequence is found, i.e., specific words following general ones, the doctrine is equally applicable, and restricts application of the general terms to things that are similar to those enumerated.’ ”
The ejusdem generis doctrine is “ ‘an attempt to reconcile an incompatibility between specific and general words’ ” so all words may be “ ‘construed together, and no words will be superfluous’ ”
“Because of’ is a term in common usage. It connotes a causal link….” Tthe word “dispute” is a “general term that includes any conflict or controversy … [and] includes a conflict giving rise to an action.”