California Court of Appeals, Fourth District, Third Division
Pub. order Date: 9/13/13
Appeal from an order of the Superior Court of Orange County, Derek W. Hunt, Judge. Super. Ct. No. 30-2009-00122631
AlvaradoSmith, W. Michael Hensley, Kevin A. Day and Gregory G. Snarr for Defendants and Appellants.
Lanak & Hanna, Jennifer M. Schildbach and Mac W. Cabal for Plaintiff and Respondent.
Plaintiff and respondent Brown Bark III, L.P. sued defendants and appellants Jaimie Haver and Westover Capital Corporation to recover funds Westover Financial, Inc. failed to repay on a revolving line of credit. Although Westover Capital was not a party to the contracts that created the line of credit, Brown Bark sued Westover Capital for breach of those contracts on a successor liability theory. Brown Bark also sued Haver and Westover Capital for conversion and fraud, alleging they converted the Westover Financial assets pledged as security for the line of credit and made misrepresentations to prevent and delay Brown Bark’s efforts to recover the outstanding balance from Westover Financial. Following a bifurcated jury and court trial, Haver and Westover Capital obtained a favorable judgment on all of Brown Bark’s causes of action. They subsequently sought their attorney fees under the fee provisions in the line of credit contracts, but the trial court denied their fee motion. Haver and Westover Capital now appeal.
We conclude the trial court erred in failing to award Westover Capital its attorney fees on the breach of contract causes of action. Civil Code section 1717 makes an otherwise unilateral attorney fee provision reciprocal and entitles a noncontracting party to recover contractual attorney fees when it defeats a contract-based cause of action that would have made the noncontracting party liable for contractual attorney fees had it lost. Brown Bark would have recovered its attorney fees if it had prevailed on its successor liability theory against Westover Capital because the line of credit contracts made its fee provisions binding on the contracting parties’ successors. Section 1717 therefore allows Westover Capital to recover its attorney fees because it defeated claims for breach of the line of credit contracts that would have exposed Westover Capital to attorney fee liability had it lost. Section 1717 only applies to contract causes of action, however. We therefore affirm the trial court’s order denying Westover Capital attorney fees on the tort causes of action.
We also affirm the trial court’s order denying Haver’s fee motion. She was not a party to the line of credit contracts and Brown Bark did not sue her for breaching those contracts. Because Haver never faced attorney fee liability under the line of credit contracts, she may not invoke section 1717 to recover her fees.
We remand the matter to the trial court to determine (1) whether and how to allocate Westover Capital’s attorney fees between the breach of contract and successor liability issues and the tort issues; (2) whether and how to allocate the fees for the attorneys who jointly represented Westover Capital and Haver; and (3) the amount of attorney fees Westover Capital may recover for this appeal.
Facts and Procedural History
Westover Financial was a leasing and equipment finance company Joseph G. Woodley founded in the mid-1980’s. Woodley, his wife, and Steven R. Jones were the only shareholders. Westover Financial later hired Haver as an employee and she eventually became corporate secretary, but she never held any shares or voting rights and lacked authority to bind the corporation.
In 2007, Westover Financial opened a $1 million revolving line of credit with First Heritage Bank, N.A. (First Heritage). To open the line of credit Westover Financial entered into several contracts with First Heritage, including the “Credit Agreement, ” the “Revolving Line of Credit Promissory Note” (Promissory Note), the “Security and Pledge Agreement” (Security Agreement), and the “Custodian Agreement” (collectively, “Line of Credit Contracts”). Woodley and Jones also personally guaranteed Westover Financial’s performance. The Line of Credit Contracts each contained unilateral attorney fees provisions entitling the “Lender” or “Secured Party” to recover from the “Borrower” or “Debtor” all attorney fees incurred in any dispute relating to the interpretation, enforcement, or performance of any of the Line of Credit Contracts.
Westover Financial failed to repay more than $850, 000 it borrowed from First Heritage under the line of credit. In January 2009, the Federal Deposit Insurance Corporation, as receiver for First Heritage, sold and assigned all interests in Westover Financial’s line of credit to Brown Bark.
In May 2009, Brown Bark filed this action against Westover Financial, Woodley, and Jones, seeking the outstanding balance on the line of credit plus interest, penalties, costs, and attorney fees. Brown Bark quickly obtained an ex parte right to attach order against Westover Financial. Around the time Brown Bark filed this action, Westover Financial began the process of dissolving as a corporation. It completed the process and filed its certificate of dissolution in November 2009.
Westover Financial’s decision to dissolve left Haver unemployed. She subsequently formed Westover Capital in June 2009 to capitalize on the leasing and equipment finance expertise she acquired while working for Westover Financial. Haver filed the articles of incorporation and all other documents necessary to incorporate Westover Capital just 10 days after Brown Bark obtained its right to attach order against Westover Financial. Haver is Westover Capital’s sole shareholder, officer, and director.
Brown Bark amended its complaint to add Haver and Westover Capital as defendants when it learned Haver continued to operate a business in the leasing and equipment finance industry. Brown Bark took Westover Financial’s default when it failed to respond to any of Brown Bark’s complaints and dismissed Woodley and Jones after they each filed for bankruptcy protection. The operative third amended complaint alleged the following causes of action against the remaining defendants: (1) breach of the Credit Agreement, Promissory Note, and Security Agreement against Westover Financial and Westover Capital; (2) breach of the Custodian Agreement against Westover Financial and Westover Capital; (3) conversion against Westover Capital and Haver; (4) fraud against Westover Capital and Haver; and (5) suppression of material facts against Westover Capital and Haver.
Brown Bark alleged Westover Capital was liable for Westover Financial’s breach of the Line of Credit Contracts because Westover Capital was either Westover Financial’s alter ego or a successor in interest formed to fraudulently avoid Westover Financial’s debts and liabilities. According to Brown Bark, Haver was an officer and director of both Westover Financial and Westover Capital, she transferred Westover Financial’s assets to Westover Capital without any consideration, and she used those assets to conduct the same business under the Westover Capital name. The conversion cause of action alleged Haver and Westover Capital converted all of Westover Financial’s assets it pledged as collateral for the line of credit. Finally, the two fraud claims alleged Haver and Westover Capital misrepresented and concealed facts from Brown Bark to prevent or delay its efforts to collect on Westover Financial’s line of credit.
On the first day of trial, Brown Bark dismissed its alter ego allegations and proceeded against Westover Capital on the breach of contract claims based solely on a successor liability theory. Westover Capital asked the trial court to bifurcate the trial and hear the successor liability issues first. Brown Bark opposed that motion because it intended to offer the same evidence to prove the successor liability theory and the conversion and fraud claims. The trial court decided to bifurcate the trial, but not as Westover Capital had requested. Instead, the court bifurcated the trial into a liability phase and a damages phase. The court explained the successor liability theory and the conversion and fraud claims would both be tried during the liability phase, with the jury deciding the conversion and fraud claims and the court deciding the successor liability theory. The court also explained it would treat the liability phase as a default prove-up for the breach of contract claims against Westover Financial.
At the close of trial, the court instructed the jury on the conversion and fraud claims only. Although the record fails to explain why, the parties agreed not to submit the breach of contract claims to the jury. The court therefore did not instruct the jury on breach of contract and the jury did not return a verdict on the breach of contract claims. The court’s instructions told the jury “not to be concerned about” Brown Bark’s claim that Westover Capital was Westover Financial’s successor in interest, but rather to simply assume that claim was true. The jury returned a verdict in Haver and Westover Capital’s favor, finding they neither converted Brown Bark’s property nor “defrauded [Brown Bark] by the creation of Westover Capital.”
The trial court did not make any express findings or rulings regarding the successor liability theory, but entered judgment for Haver and Westover Capital on all causes of action. Specifically, the court’s judgment stated (1) Brown Bark “sought adjudication of its First and Second Causes of Action for Breach of Contract against Westover Capital Corporation on a theory of successor liability”; (2) Brown Bark “shall recover nothing from Defendants Jaimie Haver and Westover Capital Corporation on the following causes of action: [¶] First and Second Causes of Action for Breach of Contract; [¶] Sixth Cause of Action for Conversion; and [¶] Eighth and Ninth Causes of Action for Fraud”; and (3) Brown Bark “shall take nothing from Defendants Jaimie Haver and Westover Capital Corporation on any cause of action in the Third Amended Complaint.” The judgment awarded Brown Bark a default judgment against Westover Financial on the breach of contract claims in the principal amount of more than $750, 000.
After entry of judgment, Haver and Westover Capital jointly sought more than $170, 000 in attorney fees and costs based on the attorney fee provisions in the Line of Credit Contracts. The trial court denied the motion, finding Haver and Westover Capital were not entitled to the benefit of the Line of Credit Contracts’ attorney fee provisions because Brown Bark did not sue Haver on those contracts and Haver and Westover Capital only prevailed on the two tort causes of action, not a contract cause of action.
Haver and Westover Capital timely appealed the trial court’s decision denying their fee motion. Neither side appealed ...