However, Appellate Court Reversal Of Guaranty Rescission Denial Did Trigger Fee Recovery Under Broad Bilateral Fees Clause.
If readers follow us over the years (or if you are new to us, welcome), the actual wording of a contractual attorney’s fees clause can be critical in terms of whether it allows fee entitlement. The disparate language in fees clauses under a lease and guaranty actually led to different results in Orozco v. WPV San Jose, LLC, Case No. H044014 (6th Dist. June 17, 2019) (published).
Orozco involved a situation where a plaintiff lessee successfully sued for fraud in the negotiation of a lease because lessor’s agent failed to disclose that there was a lease with a competing-type of food tenant after indicating that there were no other prospects on board. (NOTE TO TENANTS: Ask landlord for an exclusivity clause in order to truly protect yourselves.) However, that was not true, there was a competing lease in the pipeline. Plaintiff tenant opened with good revenue fanfare, but that died after the competing tenant came aboard. Plaintiff and an affiliate sued for fraud in the lease negotiation and rescission, with lost profits being awarded on the fraud claims but with rescission being denied (with the lease guarantor seeking rescission of the guaranty). The lower court denied attorney’s fees to the suing tenant and guarantor.
The Sixth District affirmed the denial of fees to plaintiffs based on its fraud victory. The problem was that the predicate lease fees clause was narrow and unilateral to Landlord, limited to disputes “arising from the provisions of this Lease or any default hereunder.” Even under Civil Code section 1717, the narrow language of the lease fees clause did not encompass a tort dispute which was not one grounded “on the contract.” However, the appellate court reversed the lower court’s denial of rescission of the guaranty. The guaranty lease clause was much different. The guaranty included a provision entitling a prevailing party in “an action against the other arising out of or in connection with this Guaranty” the right to “recover from the other attorneys’ fees and costs, including collection costs incurred.” This expansive language, which applied to any prevailing party (unlike the unilateral language of the lease’s attorney’s fee provision) was sufficient to encompass Orozco’s fraud action and rescission remedy. (Lerner v. Ward, 13 Cal.App.4th 155, 159– 161 (1993) [clause allowing fees in any action or proceeding arising out of the agreement includes a fraud action arising out of the agreement].) So, the matter was remanded to allow the guarantor to obtain some fee recovery, out of a denied initial fee request of $700,000.