Second District So Holds in Topanga and Fourth District, Division One Concurs in Its Unpublished Kilgore Decision.
In our Leading Case No. 6, Santisas v. Goodin, 17 Cal.4th 599, 615-617 (1998), the California Supreme Court determined that a pretrial voluntarily dismissal of a contract claim between two signatories prevents the dismissed party from being a “prevailing party” for purposes of future attorney’s fees recovery under Civil Code section 1717(b)(2). It also recognized that, as to tort or other noncontractual claims that are dismissed, the dismissed party may have a claim to fee recovery if these claims are sufficiently broad so as to be encompassed within the ambit of the fee clause at play. Id., at 617-622.
However, what happens when the actions involves the dismissed claims of a nonsignatory even though the dismissed party is a signatory to a fee clause? That was the issue considered by the Second District in Topanga and Victory Partners v. Toghia, 103 Cal.App.4th 775 (2002) and the Fourth District, Division One in Kilgore v. Rancho Carlsbad Partners, 2004 WL 1551519 (4th Dist., Div. 1 July 12, 2004) (unpublished).
In Topanga, the plaintiff-signatory sued a signatory corporation asserting contractual, tort and statutory claims. The complaint asserted the same claims against Toghia, an individual nonsignatory on the contract, based on the theory he was the alter ego of signatory corporate defendant. Plaintiff and corporate defendant settled, with plaintiff dismissing Toghia as part of the settlement. (The settlement agreement did not expressly deal with the costs/fee issue with regard to Toghia, who was neither a party to it nor demanded the dismissal. BLOG MIDSTREAM OBSERVATION—see our June 16, 2008 post in which we recommend that settlement agreements/stipulations and 998 offers expressly deal with resolution of any open-ended fee/costs issues.)
The trial court granted Toghia’s fee motion under Santisas for an award of attorney’s fees incurred to defend the non-contract claims. On appeal, the Second District reversed, finding primarily that a fee award to or against nonsignatories is necessarily dependent on the application of Civil Code section 1717, which bars fee recovery for voluntarily dismissals. It made no difference Toghia was relying on non-contract claims, because Santisas only allowed recovery on these claims where there was a broadly-worded contract clause as a predicate for recovery (which is not the case with a nonsignatory). Lastly, even though recognizing that Toghia normally would have been entitled to a fee award had he “prevailed” on the alter ego issue under the Reynolds Metals rationale (see our Leading Cases), this relief was not triggered because there was a voluntarily dismissal rather than a merits adjudication of the issue. (Topanga, supra, 103 Cal.App.4th at 786.)
Two years later, Topanga was embraced as the right result by the Kilgore court in another nonsignatory context. There, a nonsignatory member of a mobile home park voluntarily dismissed certain tort and statutory claims against contract signatory defendants. Defendants’ claims for fees against Kilgore fared no better than the fee recovery attempt in Topanga. Defendants’ strongest argument was that a pretrial adverse ruling on Kilgore’s elder abuse claim entitled them to fees, a contention dismissed by the appellate court as follows: “Kilgore’s elder abuse claim asserted liability existed as a result of defendants’ violation of statutory obligations, and defendants do not articulate the basis on which Kilgore would have been entitled to contractually-based attorney fees award even had Kilgore prevailed on the merits of that claim.” (Kilgore, supra, 2004 WL 1551519 at *12.)
(BONUS COVERAGE—Kilgore also has an interesting discussion of when fee recovery can be sought against a dissolved corporation. The evidence showed that a nonprofit mutual benefit corporation (organized by the mobile home park residents to negotiate a purchase of the park) dissolved long before suit was brought. Both the trial and appellate courts found that the action purportedly brought by some plaintiffs in the name of the dissolved corporation could not be pursued in the corporation’s name. The Fourth District, Division One found that “the underlying action did not assert the type of postdissolution ‘winding up’ claims that a dissolved corporation could pursue, but instead sought to prosecute the type of postdissolution claims that [dissolved corporation] was barred from pursuing because of its dissolved status. We conclude that because [dissolved corporation] did not exist for purposes of conducting the underlying lawsuit, the conduct of that lawsuit was not conduct of [dissolved corporation], and defendants may not hold [dissolved corporation] liable for the attorney fees incurred in connection with that lawsuit.” In so reasoning, the Court of Appeal disagreed with contrary logic in Catalina Investments, Inc. v. Jones, 98 Cal.App.4th 1, 10 (1998), labeling it as mere dicta. (Id., at *5.)