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Mountain Air Enterprises, LLC v. Sundowner Towers, LLC

California Court of Appeals, First District, Second Division

November 20, 2014

MOUNTAIN AIR ENTERPRISES, LLC, Plaintiff and Respondent,
v.
SUNDOWNER TOWERS, LLC et al., Defendants and Appellants.

[REVIEW GRANTED BY CAL. SUPREME COURT]

Marin County Superior Court No. CIV081957 Hon. Roy O. Chernus Judge.

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COUNSEL

Law Office of Erik A. Humber and Erik A. Humber for Plaintiff and Respondent.

Abramson & Brown and Joe R. Abramson for Defendants and Appellants.

OPINION

STEWART, J.

Plaintiff Mountain Air Enterprises, LLC (Mountain Air) sued defendants Sundowner Towers, LLC (Sundowner), Bijan Madjlessi and Glenn Larsen for breach of a contract to purchase real estate. As affirmative defenses, defendants alleged that the contract was illegal and that it was extinguished by novation when the parties entered into a later option agreement. Following a bench trial, the court ruled in favor of defendants on both defenses.

When defendants moved for an award of attorney fees, the trial court denied the motion, holding that because of illegality the attorney fees clause in the initial contract could have no effect and that the attorney fees clause in the option agreement did not encompass defendants’ affirmative defense.

Defendants appeal from the trial court’s denial of their motion to award attorney fees, contending that they are entitled to fees under both the illegal contract and the option agreement. We agree with the trial court that defendants may not be awarded attorney fees under the illegal contract, but conclude that the trial court erred when it interpreted the attorney fees clause of the option agreement to exclude defendants’ affirmative defense of novation.

BACKGROUND[1]

Mountain Air is a single-purpose California limited liability company. Steven Scarpa is Mountain Air’s sole member. Sundowner is a Nevada limited liability company, and its members are Madjlessi and Larsen.

Prior to February 17, 2006, two buildings were located on a single parcel of real property located at 450 Arlington Avenue in Reno, Nevada (the

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property). On February 17, 2006, by the recordation of a map, the property became three separate legal parcels: the north tower, the south tower, and the casino building.

On December 12, 2005, before the subdivision of the property into separate parcels, Scarpa and Sundowner entered into two separate written agreements: (1) an agreement whereby Sundowner agreed to sell the south tower to Scarpa for $7 million (the purchase agreement), and (2) an agreement whereby Sundowner agreed to later repurchase the south tower from Scarpa for $7 million plus an “inflation factor” of 12 percent (the repurchase agreement). Madjlessi and Larsen guaranteed Sundowner’s obligations under the repurchase agreement. Scarpa’s rights under the two agreements were subsequently assigned to Mountain Air.

On or about April 25, 2006, Mountain Air, as seller, and Larsen and Madjlessi, as buyers (Sundowner was not a party), executed a written option agreement whereby Mountain Air granted Larsen and Madjlessi the exclusive right to purchase the south tower during the option period (the option agreement). Madjlessi and Larsen personally guaranteed their obligations under the option agreement.

Sundowner acquired the south tower from a third party on April 27, 2006, and transferred it to Mountain Air the same day pursuant to the purchase agreement.

Sundowner never repurchased the south tower, and Mountain Air filed suit. The operative second amended complaint alleged three causes of action: (1) specific performance of the repurchase agreement, (2) breach of the guaranty of the repurchase agreement, and (3) breach of the repurchase agreement. The first and third causes of action were asserted against all defendants. The second cause of action was asserted against Madjlessi and Larsen.

Defendants raised two affirmative defenses: (1) that the option agreement was a novation, extinguishing the repurchase agreement; and (2) that the repurchase agreement was illegal and therefore void and unenforceable.

A bench trial was held over 13 days between April 26, 2011, and March 22, 2012. The trial court ruled in defendants’ favor on both affirmative defenses in its FSOD, filed on October 10, 2012.

The trial court found that the repurchase agreement could not “be enforced because it was illegal and void under both Nevada and California law.” Both Nevada and California prohibit any sale of real property without a subdivision map first being recorded, or unless the seller is contractually obligated to

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obtain the subdivision map before the transfer of title or possession. The repurchase agreement violated the law because it was executed before the map was recorded and did not require either party to prepare or record a map.

The trial court also held that the option agreement was a novation. It found “by clear and convincing evidence that the parties treated the Repurchase Agreement as having been extinguished and the Option Agreement as the operative agreement. After December 12, 2005, the terms of the Repurchase Agreement were ignored and the terms of the Option Agreement were followed.” It also held that the integration clause of the option agreement was unambiguous in expressly superseding all prior agreements relating to the same subject matter, including the repurchase agreement, which involved precisely the same subject matter-that is, the purchase of the south tower. The court also found that the option agreement contained materially different terms from the repurchase agreement, not the least of which was that “the form of the agreement changed from a purchase and sale agreement to an option.” The consequence of this change, of course, was that defendants were no longer obligated to purchase the south tower; they had the right but not the obligation to do so. This and other differences between the repurchase and option agreements supported the trial court’s conclusion that the option agreement was a novation.

Also on October 10, 2012, the trial court entered judgment in favor of defendants.

On December 7, 2012, defendants filed a motion seeking an order determining that they were the prevailing parties and an award of attorney fees pursuant to attorney fees clauses in both the repurchase and option agreements. Mountain Air opposed the motion. On March 13, 2013, the court issued a tentative ruling denying an award of attorney fees. On March 20, 2013, the court issued an order incorporating the tentative ruling as its decision.

Defendants timely filed a notice of appeal on March 29, 2013.[2]

DISCUSSION

Defendants sought attorney fees under two theories: (1) because the case sounded in contract and the repurchase agreement contained an attorney fees

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provision, they are entitled to attorney fees pursuant to Civil Code section 1717; and (2) because they raised an affirmative defense involving the option contract, which also contained an attorney fees provision, they are entitled to attorney fees under Code of Civil Procedure section 1021, at least to the extent the litigation involved the affirmative defense.

Mountain Air contests defendants’ entitlement to fees under either theory and also maintains that the appeal should be dismissed because the record in this case is inadequate. We first address the state of the record.

I. The State of the Record

Defendants elected to proceed in this case with an appellants’ appendix pursuant to California Rules of Court, rule 8.124, [3] and a reporter’s transcript of the hearing concerning attorney fees pursuant to rule 8.130. The rules governing the record on appeal allow an appellant to incorporate portions of the record in another case or of a prior appeal in the same case. If an appellant proceeds with an appellant’s appendix, incorporation by reference is governed by rule 8.124(b)(2), requiring that the appendix provide the name and number of the prior appeal and that parts to be incorporated by reference be identified both in the body of the appendix and in a separate section at the end of the index. In this case, defendants incorporate by reference portions of the record of Mountain Air’s prior appeal, which was dismissed. Mountain Air does not maintain that defendants failed to conform to the requirements of rule 8.124(b)(2).

Rule 8.147 governs incorporation of the record of a prior appeal when “the parties are using either a clerk’s transcript under rule 8.122 or a reporter’s transcript under rule 8.130.” (Rule 8.147(b).) If rule 8.147(b) applies, the appellant is required to specify in its designation of the record on appeal the parts of the record in the prior appeal to be incorporated by reference-a requirement not contained in rule 8.124(b)(2). (Rule 8.147(b)(1).) Mountain Air contends that defendants failed to satisfy this requirement and the designation of the record on appeal verifies that contention. Because defendants proceeded with a reporter’s transcript under rule 8.130, in addition to proceeding with an appellants’ appendix, theoretically both rules 8.124(b)(2) and 8.147(b) apply.

However, rules 8.124(b)(2) and 8.147(b) serve the same purpose: to ensure that when parts of the record of a prior appeal are incorporated by reference, the parties and the court know what is being incorporated. Mountain Air cites no authority for the proposition that when both these rules apply, the

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appellant must satisfy the requirements of both, as opposed to complying with one or the other. Although it seems to us that requiring conformance with both rules would be duplicative, we need not decide the issue. Following the filing of Mountain Air’s reply brief, defendants sought to cure any potential deficiency in the record by requesting that this court take judicial notice of the parts of the prior appeal incorporated by reference. Mountain Air did not oppose that request, which we granted on March 5, 2014.[4] Accordingly, any nonconformance with the rules governing incorporation by reference has been cured.[5]

II. The Merits of Defendants’ Claims for Attorney Fees

A. Legal Standard and Background

“A request for an award of attorney fees is entrusted to the trial court’s discretion and will not be overturned in the absence of a manifest abuse of discretion, a prejudicial error of law, or necessary findings not supported by substantial evidence. [Citations.] Where fees are claimed under a contract allowing for their recovery, the scope of activities for which fees may be recovered is governed by the terms of the contract.” (Yield Dynamics, Inc. v. TEA Systems Corp. (2007) 154 Cal.App.4th 547, 577 [66 Cal.Rptr.3d 1].) "Whether a contractual attorney fee clause provides for a fee award in a particular case is a question of contract interpretation. We interpret a contract de novo if the interpretation does not turn on the credibility of extrinsic evidence....” (Windsor Pacific LLC v. Samwood Co., Inc. (2013) 213 Cal.App.4th 263, 273 [152 Cal.Rptr.3d 518] (Windsor Pacific).)

Civil Code section 1717 governs a fee award in an action on a contract. Subdivision (a) of that section provides, in relevant part, “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.”

Civil Code section 1717 is inapplicable to noncontract claims, but a contractual provision for attorney fees may ...


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