Fourth District, Division One Harmonizes the Interplay Between Code of Civil Procedure section 998 and Civil Code section 1717(b)(2).
Recently, there has been a rash of decisions dealing with offers to compromise under Code of Civil Procedure section 998. The next case resolves what happens when section 998 collides with Civil Code section 1717(b)(2), which bars an award of contractual attorney’s fees where an action has been voluntarily dismissed. The upshot: section 1717(b)(2) prevails, such that no fee shifting can occur by virtue of the unaccepted section 998 offer.
Ford Motor Credit Co. v. Hunsberger, Case No. D050473 (4th Dist., Div. 1 June 18, 2008) (certified for publication), is the decision confronting the collision of the two statutory schemes and harmonizing the results in line with what made the most sense from a practical level.
In Hunsberger, plaintiff Ford Motor Credit Co. (Ford Motor) sued defendants based on breaches of a lease and a related guarantee. There was a fees clause in the lease. The individual defendants served a 998 offer that Ford Motor let lapse. Ford Motor lost a summary judgment motion and then dismissed the action against the individual defendant without prejudice. Individual defendant moved for a fee award based on the 998 offer, a request denied by the trial court.
Individual defendant appealed. The Fourth District, Division One (in a 3-0 opinion by Justice McIntyre) affirmed.
The Court of Appeal determined that the voluntary pretrial dismissal of the cause of action against individual defendant was dispositive, with section 1717(b)(2) effectively trumping the impact of the 998 offer.
Initially, the appellate court dismissed the suggestion that the entire complaint had to be dismissed in order to trigger the preclusive effect of section 1717(b)(2). Not so, Justice McIntyre wrote, because this requirement “is inconsistent with the purpose of subdivision (b)(2) of Civil Code section 1717—encouraging parties to dismiss pointless litigation and thereby avoid liability for attorney fees based on a contract cause of action.” (Slip Opn., at p. 6.)
The Fourth District, Division One then got down to the nub of the matter. It found that “section 998 does not independently create a statutory right to attorney fees; thus, it is different from numerous statutes wherein the Legislature expressly allowed for the recovery of attorney fees [citing numerous fee-shifting statutes].” (Slip Opn., at pp. 6-7.) Although the lease agreement fees clause was a basis for a fee award, the path to recovery by Ford Motor was blocked by the section 1717(b)(2) preclusion arising from the pretrial dismissal.
Hunsberger demonstrates that a defendant facing contract-based claims can render nugatory a 998 offer by dismissing the contract claims without prejudice. Here, Ford Motor obviously suffered its real strategic defeat in not obtaining a summary judgment grant. Once this occurred, it smartly dismissed the contract claim against individual defendant in order to avoid potential further exposure from the 998 offer.