In Brown Bark III LP v. Haver, 2013 DJDAR 12439 (2013), the California Court of Appeal for the Fourth Appellate District decided an interesting fee case arising in the commercial litigation context.
A leasing and equipment finance company obtained a $1 million line of credit from a financial institution. The company (OLDCO) failed to repay more than $850,000 it owed to the lender. The assignee of the financial institution, which had obtained all of the interests in that line of credit, sued OLDCO to recover the unpaid sums. OLDCO then ceased all of its operations. An employee of OLDCO formed a new company, NEWCO, and the lender sued both OLDCO and NEWCO, claiming that NEWCO was formed specifically to avoid OLDCO’s debts.
After a jury trial, a verdict was rendered in favor of the NEWCO. The essential basis of the verdict was that the NEWCO was a legitimate entity and was not formed to end run the debt to the lender. As prevailing party, NEWCO then sought attorney fees and costs from the lender, relying on the attorney fee provisions in the original line of credit contract. The trial court declined the fee application in its entirety.
The court of appeal reversed the trial court’s decision. The court noted that under Civil Code Section 1717, a contract provision drafted to benefit only one side will be interpreted to benefit both. The court also noted that Section 1717 allows a party to recover attorney fees even if the contract was unenforceable. Fees are still recoverable if the prevailing party can prove that the other party would have been entitled to attorney fees if it was successful in the litigation. Thus, NEWCO was entitled to recover a portion of the fees sought in the petition.
