Fee Awards in Contract Actions

by Archer Norris PLC

The California Supreme Court is reviewing the following question: "Is a party who obtains the dismissal of a contract action entirely on procedural grounds entitled to an award of attorney fees under Civil Code section 1717 as the prevailing party in an action on a contract?"  The case being reviewed is Kandy Kiss of California v. Tex-Ellent (2012) 209 Cal.App.4th 604.  Kandy Kiss follows other appellate court decisions awarding contractual attorney fees for procedural wins.  How much longer will such decisions be good law?

In Kandy Kiss, the defendant obtained dismissal of Kandy Kiss's suit for lack of subject matter jurisdiction.  Even though the battle would shift to federal court, the trial court awarded defendant $129,000 in contractual attorney fees.  Kandy Kiss appealed, arguing that since the merits of the dispute would proceed in federal court, there was no contract action winner yet.  But the Second District Court of Appeal concluded that "[defendant] should not be deprived of compensation for the fees it expended in defeating a separate action brought in an independent and separate forum."

Now the Supreme Court has granted review. 

The starting point is Civil Code section 1717.  Subdivision (b)(1) states that "the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract."  In Hsu v. Abarra (1995) 9 Cal.4th 863, 876, the high court stated that when one party obtains a "simple, unqualified victory" on the contract claims, that party is entitled to attorney fees as a matter of right.  In the same decision, however, the Court also stated that "the prevailing party determination is to be made only upon final resolution of the contract claims" and only by comparing the extent to which each party succeeds or fails in its contentions.

What about those procedural victories that effectively end the litigation in the current forum, but contemplate the possibility of the war continuing elsewhere?  As to such procedural dismissals, has there been “final resolution of the contract claims?"  Has a party prevailed "in the action on the contract?"  If not, what becomes of Hsu’s "simple, unqualified victory" fee trigger?

The Court of Appeal in Kandy Kiss concluded that the defendant had defeated "a separate action brought in an independent and separate forum."  Thus, it appears the Court of Appeal found itself in the presence of a "simple, unqualified victory" -- dismissal for lack of subject matter jurisdiction.  The fee award is somewhat ironic given that when the war shifted to federal court, the district court refused to award defendant attorney fees after prevailing on summary judgment because it concluded that the federal suit was not "an action on a contract containing a fee provision."  (But see, Santisas v. Goodwin (1998) 17 Cal.4th 599, 611 (party defeating validity/applicability of contract entitled to fees if that party would have been subject to fees had the other party prevailed on those contract claims).)  

An example of a court refusing to award fees for procedural battles is Estate of Drummond (2007) 149 Cal.App.4th 46, 53–54 (Drummond II).  There, the defendants obtained dismissal of their former lawyer’s petition for contractual attorney fees filed in probate court.  That was the only issue in that court, so the defendants then sought a fee award for defeating the probate court action. The probate court awarded fees.  But in Drummond I the Sixth District Court of Appeal reversed, observing that the lawyer’s fee claim would still be pursued as a counterclaim in a pending civil action.  On remand, the defendants sought fees again, but were denied an award.  They appealed again and Drummond II followed.

In Drummond II, the Sixth District affirmed concluding that despite obtaining dismissal of their former attorney’s fee petition that ended the probate action, the defendants were not prevailing parties for fee purposes.  The appellate court concluded that even if the outcome is "final for the purposes of a particular lawsuit," if there has been no "strategic victory at the end of the day" but only a "tactical victory in a preliminary engagement," fee awards are improper.  Because the litigation on the contract would continue, Drummond II concluded that "[defendants] no more 'prevailed' than does a fleeing army that outruns a pursuing one.  Living to fight another day may be a kind of success, and surely is better than defeat. But as long as the war goes on, neither side can be said to have prevailed."  (149 Cal.App.4th at pp. 52-53.)

How will the high court rule in Kandy Kiss?  No fees unless the merits are reached?  No fees unless the contract action is over?  If the procedural win is truly decisive—a statute of limitations defense for example, isn't there truly a victor "in the action on the contract?"  Isn't that within Hsu's "simple, unqualified victory?"  And if the war is moving to a different battlefield, then isn't determining the party obtaining the "greater relief in the action on the contract" premature until all the firing is over and the smoke has cleared?

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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