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Rossa v. D. L. Falk Construction

May 6, 2010


(San Mateo County Super. Ct. No. CIV442294). Honorable Marie S. Weiner.

The opinion of the court was delivered by: Richman, J.


A party required to post an appellate bond is statutorily entitled to recover the premiums necessary for the bond if that party prevails on the appeal. (Code Civ. Proc., § 1033.5, subd. (a)(6).) Rule 8.278(d)(1)(F) of the California Rules of Court specifies that a recoverable cost of appeal is "The cost to procure a surety bond, including the premium and the cost to obtain a letter of credit as collateral, unless the trial court determines the bond was unnecessary."*fn1 The question presented is whether this rule allows the recovery of interest paid on sums borrowed to fund a letter of credit used to secure the undertaking. We conclude that the rule in its current form does not include interest as part of "the cost to obtain a letter of credit," the same conclusion reached by the trial court. We thus affirm.


After a jury awarded plaintiffs Steve and Connie Rossa (plaintiffs) $100,000 for breach of contract, the trial court added approximately $680,000 in costs, expert witness fees, and attorney fees pursuant to the contract they had with defendant D. L. Falk Construction, Inc. (Falk). Falk appealed only from the fee award, which we reversed. Concluding that the fee award was an abuse of discretion because the trial court did not explain why plaintiffs‟ should be awarded the full amount requested when they had prevailed on only one of five causes of action, we remanded in order that the trial court could consider this issue of apportionment. We also awarded Falk its costs on appeal. (Rossa v. D.L. Falk Construction, Inc. (Sept. 9, 2008, A116151) [nonpub. opn.].)

On remand, Falk filed a memorandum of costs seeking (among other items) $28,650 for "Premium on [] surety bond on appeal"; $950-subsequently amended to $2,734-for "Other expenses reasonably necessary to secure surety bond"; and $99,289.81 for "Other: Int[erest] on LOC [line of credit] to Secure Bond."

The details of the interest item were explained in a declaration by Janice Sutton, a vice president of Falk: "In order to obtain the issuance of the appellate bond in the amount of $955,000, the surety required [Falk] to procure a Standby Letter of Credit, having an acceptable financial institution guarantee payment in the event a claim was made against the bond. At the time, [Falk] was banking with Wells Fargo Bank . . . [which] required [Falk] to open a deposit account and deposit funds as security totaling $954,070." Falk provided $483,070, and its president, David Falk, provided $471,000, sums drawn from existing lines of credit. The $99,289.81 was the combined total of "interest expense,"*fn2 that is, interest paid by Falk and David Falk on these sums from the posting of the undertaking to its exoneration by the trial court. The $1,784 added as "Other expenses reasonably necessary to secure surety bond" appears to have been a special interest charge.*fn3

Plaintiffs moved to strike these items on the ground they were not reimbursable under rule 8.278. Falk responded that the expenses were proper under the rule as construed in Cooper v. Westbrook Torrey Hills (2000) 81 Cal.App.4th 1294 (Cooper). After hearing extensive argument, the trial court determined that Cooper was distinguishable, and granted plaintiffs‟ motion to strike Falk‟s claim for the $1,784 and $99,289.81 of interest incurred on the sums borrowed to fund the letter of credit used to collateralize the undertaking.*fn4


The essence of Falk‟s position is not hard to comprehend: money paid as interest on money borrowed to obtain a letter of credit which is used to secure an undertaking is an out-of-pocket expense and thus a "cost to procure a surety bond, including . . . the cost to obtain a letter of credit as collateral" within the plain language of rule 8.278(d)(1)(F). Citing the interlocking definitions of "cost," "price," and "expenditures" in Black‟s Law Dictionary, Falk argues: "In order to obtain the letter of credit to secure the bond, Falk was required to incur an obligation to pay interest. Accordingly, interest payments were part of "[t]he amount paid or charged‟ for the letter of credit, and were part of "consideration asked for [and] given in exchange for‟ the letter of credit. They were indeed "paid out‟ by Falk, and the obligation to make such payments was required to "accomplish [the] result‟ of obtaining the letter of credit as collateral to secure the appeal bond. [¶] Simply put, the obligation to pay interest was part of the consideration of the letter of credit and must therefore be considered part of the "cost‟ of obtaining such letter of credit." We are not persuaded.

Rules of court are examined according to the same canons governing construction of statutes. (Silverbrand v. County of Los Angeles (2009) 46 Cal.4th 106, 125; Alan v. American Honda Motor Co., Inc. (2007) 40 Cal.4th 894, 902.) That makes the issue of construing rule 8.278(d)(1)(F) an issue of law for our de novo review. (Vidrio v. Hernandez (2009) 172 Cal.App.4th 1443, 1452; In re R.D. (2008) 163 Cal.App.4th 679, 684.) Were the issue solely one of abstract logic, we might agree with plaintiffs. But it is not a blank slate we examine, and rule 8.278(d)(1)(F) cannot be examined in splendid isolation. This rule comes to us with a quite a history.

It was at the end of the 19th century that our Supreme Court first enunciated the principle that "The right to recover costs is purely statutory, and, in the absence of a statute, no costs could be recovered by either party." (Fox v. Hale & Norcross S. M. Co. (1898) 122 Cal. 219, 223.) Premiums for undertakings frequently fell victim to excision for lack of express statutory authorization. (Moss v. Underwriters' Report, Inc. (1938) 12 Cal.2d 266, 274-275; Williams v. Atchison etc. Ry. Co. (1909) 156 Cal. 140, 141; Christenson v. Cudahy Packing Co. (1927) 84 Cal.App. 237, 238-239.)

What is now rule 8.278 was originally rule 26 of the rules on appeal drafted by Bernard Witkin in 1943. The principle of strict construction was retained, and early versions of rule 26 made no mention of bond premiums. (See Witkin, New California Rules on Appeal (1944) 17 So.Cal.L.Rev. 232, 258-259; 36 Cal.2d 22-23 [text of rule 26 as amended in 1951]; Hogan v. Ingold (1952) 38 Cal.2d 802, 814 [principle of strict construction applied]; Lane v. Pacific Greyhound Lines (1947) 30 Cal.2d 914, 918 [same].)

It was not until the enactment in 1951 of former section 1035 (Stats. 1951, ch. 1327, § 1, p. 3217.) that recovery of bond premiums had the requisite authorization. (See Stockton Theatres, Inc. v. Palermo (1956) 47 Cal.2d 469, 476-477; Crag Lumber Co., Inc. v. Crofoot (1958) 156 Cal.App.2d 568, 570.) It was not until 1959 that rule 26(c) was amended to allow recovery of "the premium on any surety bond procured by the party recovering costs." (50 Cal.2d 24-25.) In 1982, the substance of former section 1035 was reenacted in what is now section 995.250. (Stats. 1982, ch. 998, § 1, p. 3662.) In the meantime, the principle of strict construction was still being applied. (E.g., Ladas v. California State Auto. Assn. (1993) 19 Cal.App.4th 761, 774; ...

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