MEMORANDUM AND ORDER RE: MOTION FOR ATTORNEYS' FEES
Plaintiff Yenidunya Investments, Ltd. brought this action against defendants Magnum Seeds, Inc. ("Magnum") and Genica Research Corporation ("Genica") for declaratory relief and accounting arising out of defendants' allegedly wrongful violation of plaintiff's rights as a Magnum shareholder. Presently before the court is defendants' motion for attorneys' fees.
I. Factual and Procedural Background
In October 2003, Spiros Spirou & Co. ("SS & Co.") obtained common stock in Magnum by converting a $2,267,995.00 loan into 2,267,995 shares of Magnum. (Compl. ¶ 7 (Docket No. 1).) As a shareholder, SS & Co. signed an "Amendment to Buy-Out Agreement," which contained a "call-option" that required any shareholder to sell its shares back to Magnum when certain conditions were met. (Id. ¶ 15.) The Amendment also incorporated by reference a "Buy-Out Agreement," which contained a prevailing party attorneys' fee clause. (Id. Ex. D at 91.) Both the Amendment to the Buy-Out Agreement and the Buy-Out Agreement were attached to the Complaint. (Id. Ex. D.)
In late October 2003, SS & Co. transferred the 2,267,995 shares of Magnum common stock to plaintiff, which is an affiliated company of SS & Co. (Id. ¶ 8.) In March 2005, Genica offered to purchase all of the outstanding shares of Magnum from the existing shareholders. (Id. ¶ 13.) In a "Stock Purchase Agreement" dated March 7, 2005, Genica offered to pay plaintiff $1,133,997.50 over a ten-year period. (Id.) Plaintiff declined the offer to purchase its shares and never executed or delivered the Stock Purchase Agreement. (Id.) All other Magnum shareholders accepted Genica's offer to purchase their shares and executed the Stock Purchase Agreement, triggering the call option in the Amendment to the Buy-Out Agreement. (Id.) A "Promissory Note" was delivered to plaintiff at closing pursuant to the Stock Purchase Agreement. (Id. ¶ 19.) Both the Stock Purchase Agreement and the Promissory Note were attached to the Complaint and contain prevailing party attorneys' fee clauses. (Id. Exs. C, E.)
Over six years later, on July 6, 2011, plaintiff filed for declaratory relief seeking to be recognized as a Magnum shareholder. (Docket No. 1.) The Complaint asked the court for "a declaration that neither the Stock Purchase Agreement, the Promissory Note, the Buy-Out Agreement or the Amendment to BuyOut Agreement are valid and enforceable agreements with respect to YENIDUNYA." (Compl. ¶ 22.)
On August 11, 2011, defendants moved to dismiss plaintiff's complaint on the ground that it was barred by the statute of limitations. (Docket No. 12.) The court granted defendant's motion on October 31, 2011, finding that the statute of limitations had run because "the gravamen of [plaintiff's] Complaint is that the Promissory Note was never a valid contract." (Oct. 31, 2011, Order at 9:7-9 (Docket No. 23).) On November 7, 2011, plaintiff moved for the court to reconsider its prior order. (Docket No. 25.) The court denied plaintiff's motion, explaining that plaintiff's claims were "barred by the statute of limitations and that the time for the Court to make a determination of the underlying legal issues had passed." (Dec. 7, 2011, Order at 7:10-12 (Docket No. 29).)
Presently before the court is defendants' motion for attorneys' fees pursuant to attorneys' fees clauses in the BuyOut Agreement, Stock Purchase Agreement, and Promissory Note. (Docket No. 32.) As the prevailing party, defendants seek to recover $127,206.96 in attorneys' fees and costs for their work defending this action.
"A federal court sitting in diversity applies the law of the forum state regarding an award of attorneys' fees." Kona Enters., Inc. v. Estate of Bishop, 229 F.3d 877, 883 (9th Cir. 2000). Because this case arises under diversity jurisdiction, 28 U.S.C. § 1332(a), the court must apply California law in deciding plaintiff's motion for attorneys' fees and untaxed costs.
Although California law "ordinarily does not allow for the recovery of attorneys' fees," California Civil Code section 1717 provides for an award of attorneys' fees where "the parties contractually obligate themselves" to so compensate each other. Farmers Ins. Exch. v. Law Offices of Conrado Joe Sayas, Jr., 250 F.3d 1234, 1237 (9th Cir. 2001) (citing Cal. Civ. Code § 1717; Trope v. Katz, 11 Cal. 4th 274, 279 (1995)). Section 1717 specifically instructs:
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.
Cal. Civ. Code § 1717(a). Defendants must therefore show that they are the prevailing party and that the action was "on a contract" that included an attorneys' fee provision.
California Code of Civil Procedure section 1032(a)(4) provides in part that the "'[p]revailing party' includes the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant." Cal. Code Civ. Proc. § 1032(a)(4). Judgment was entered in defendants' favor after they prevailed on a motion to dismiss. (Docket No. 24.) Dismissals based on the expiration of the statute of limitations are treated as dismissal on the merits for the purpose of awarding attorneys' fees. See Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 228 (1995) ("The rules of finality . . . treat a dismissal on statute-of-limitations grounds the same way they treat a dismissal for failure to state a claim, for failure to prove substantive liability, or for failure to prosecute: as a judgment on the merits."); McNabb v. Yates, 576 F.3d 1028, 1030 (9th Cir. 2009) ("A disposition is 'on the merits' if the district court either considers and rejects the claims or determines that the underlying claim will not be considered by a federal court."). Accordingly, defendants are the prevailing party in this action.
"California courts liberally construe 'on a contract' to extend to any action '[a]s long as an action "involves" a contract and one of the parties would be entitled to recover attorney[s'] fees under the contract if that party prevails in its lawsuit.'" In re Baroff, 105 F.3d 439, 442-43 (9th Cir. 1997) (quoting Milman v. Shukhat, 22 Cal. App. 4th 538, 545 (1994)) (alterations in original).
The contracts upon which this action was brought each contain provisions regarding attorneys' fees and costs. The BuyOut Agreement dated April 30, 2003, provides:
Attorneys' Fees. In the event of any controversy, claim or dispute between the parties hereto, arising out of or relating to this Agreement or the breach thereof, the prevailing party shall be entitled to recover from the losing party reasonable expenses, attorney's fees, and costs.
(Compl. Ex. D at 91.) The Stock Purchase Agreement dated March 7, 2005, provides:
Attorneys' Fees. . . . In any action at law or equity to enforce any of the provisions or rights under this Agreement, including any actions accruing pursuant to "drag along" rights or obligations, the unsuccessful party to such litigation, as determined by the court in any final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorney fees incurred therein by such party or parties (including without limitation such costs, expenses and fees on any appeal or in connection with any bankruptcy proceeding), and if the successful party recovers judgment in any such action or proceeding, such costs, expenses and attorneys' fees shall be included in and as part of such judgment.
(Id. Ex. C at 41.) The Promissory Note dated March 8, 2005, provides that:
14. In the event of any arbitration or suit or action under or in connection with this Note or the Security Agreement, the prevailing party shall be entitled to recover, in addition to its statutory costs and expenses, its attorneys' fees incurred incident to such proceeding including attorneys' fees incurred prior to and at trial and on any appeal. (Id. Ex. E at 96.)
Under these three agreements, the prevailing party is entitled to recover its attorneys' fees and costs for suits arising out of or in connection with the contracts. Although plaintiff did not bring an action to enforce these agreements, it did seek declaratory judgment on their validity. The action therefore falls within the broad terms ...