Second District, Division 6 Considers Scope of CCP Section 720.260.
Code of Civil Procedure section 720.260(c) allows a creditor with a competing claim to prevent release of funds to a secured party or lienholder claiming priority by posting an undertaking in favor of secured party/lienholder to “[i]ndemnify the secured party or lienholder against any loss, liability, damages, costs, and attorney’s fees, incurred by reason of the enforcement proceedings.” The next case explored whether this meant that the winning lienholder also obtains entitlement to fees in the subsequent action on the undertaking in which lienholder prevailed.
In Franke v. BAM Building Co., Case No. B204830 (2d Dist., Div. 6 Mar. 17, 2009), a lengthy battle ensued between an attorney granted a first priority, secret attorney lien and a prior judgment creditor as to who had priority to debtor’s bankruptcy distributions for purposes of satisfying their claims. Attorney eventually won priority in bankruptcy proceedings after prior judgment creditor had posted a $2,500 undertaking to prevent release of bankruptcy distribution funds. Attorney then filed an action to recover distribution-related losses on the undertaking, which he prevailed in when the trial court awarded him $136,869.90 in losses—broken down as $33,898.48 in attorney’s fees incurred in the bankruptcy priority litigation, $1,907.88 in fees and costs in the municipal court enforcement proceedings to determine lien priority, $16,412.58 reduction in distribution, $30,215.86 value of delay in distribution, and $54,435.10 in prejudgment interest. (The opinion is a little unclear on the total losses, but they are in the $127,000-$136,000 range.) The lower court also awarded attorney $39,270 in fees and $2,148.71 in costs as the prevailing party in the action on the section 720.260 undertaking.
Losing judgment creditor appealed, losing the challenge to the undertaking “loss” award but winning a reversal of the fee award relating to the undertaking action itself.
Justice Coffee, writing for a 3-0 panel of the Second District, Division 6, initially found that section 720.260(c)(2) was broad enough to justify awarding attorney the fees and costs incurred in prior municipal and bankruptcy proceedings in order to prevail on the priority issue. The appellate panel also found that judgment creditor’s exposure was not capped at the $2,500 penal sum of the undertaking. (Slip Opn., at p. 6.)
That brought the Court of Appeal to the $39,270 in fees awarded to attorney for winning the action on the undertaking. Nothing in Code of Civil Procedure sections 720.260 (liability on the undertaking) or section 996.430(a) (action on the undertaking itself) provides that a prevailing party on an action on the undertaking is entitled to fees. The reference to fees in section 720.260 only refers to earlier fees incurred in the earlier municipal and bankruptcy proceedings. (Exchange Nat. Bank v. Ransom, 52 Cal.App.2d 544, 545-547 (1942) [predecessor statute to section 720.260].) Because the undertaking at issue did not contain a fee provision, there was no basis for the fee award—either by statute or agreement between the parties.