67 Cal.App.5th 459
Cal. Ct. App.2021Background
- Owners (Hom’s parents) leased a San Francisco building to Pure Entertainment; the lease expressly allowed future lenders to encumber the tenant’s leasehold and detailed lenders’ rights.
- Lease included a broad attorney’s fees clause: “Should any dispute arise from this Lease or the tenancy hereby created... the prevailing party will be entitled to reimbursement of its reasonable attorneys’ fees.”
- Pure Entertainment borrowed from Petrou and Utter and granted promissory notes; Hom (as successor trustee) later sued Pure and cross-complained against Petrou and Utter alleging tortious interference, conspiracy, and seeking declaratory relief about the lease.
- Hom and Pure settled; Hom dismissed the cross-complaint with prejudice. Petrou and Utter then sought attorney’s fees under the lease and the trial court awarded about $150,000.
- On appeal Hom argued (1) §1717 bars fees for the contract-based declaratory claim because the action was dismissed pursuant to settlement, and (2) Petrou and Utter (nonsignatories) cannot recover fees for his tort claims unless expressly identified in the lease. The Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of Civ. Code §1717 to declaratory relief (contract) claim | Hom: Settlement dismissal leaves no prevailing party under §1717(b)(2), so fees on the contract claim are barred | Petrou/Utter: Hom failed to seek apportionment below, so he cannot exclude fees tied to the contract claim | Court: §1717(b)(2) would bar fees on the contract claim, but Hom did not request apportionment and, because fees on non-contract claims stand, the award remains; remand for trial court to fix fee amount |
| Can nonsignatories recover fees for tort claims under the lease? | Hom: Nonsignatories cannot recover fees for tort claims unless the contract expressly identifies them | Petrou/Utter: As lenders with lease-encumbrance rights, they are entitled to benefits of the lease (third-party beneficiaries) including fees | Court: No blanket bar; nonsignatories may recover if contract language shows intent to benefit them. Here Petrou/Utter qualify as third-party beneficiaries and may recover fees on tort claims |
| Does the lease’s fee clause cover lenders/third-party beneficiaries (interpretation of “any dispute” and “parties”)? | Hom: Use of “parties” elsewhere in lease shows it was meant to mean only landlord and tenant | Petrou/Utter: The phrase “any dispute” is broad; the lease separately grants extensive lender rights, so fees should extend to disputes involving lenders | Court: “Any dispute” is broad; although “parties” is ambiguous in the fee clause, contextual reading (detailed lender rights, modification restrictions) supports including lenders as intended beneficiaries of the fee provision |
| Were Petrou and Utter prevailing parties under the fee provision for Hom’s tort claims? | Hom: (did not meaningfully contest prevailing status on tort claims at appeal) | Petrou/Utter: They prevailed on the tort claims within the meaning of the fee clause | Court: They prevailed as to the tort claims within the fee provision and are entitled to recover related fees |
Key Cases Cited
- Santisas v. Goodin, 17 Cal.4th 599 (1998) (§1717 reciprocity does not apply to tort claims; scope of contractual fee rights governed by contract language)
- Brown Bark III, L.P. v. Haver, 219 Cal.App.4th 809 (2013) (discussion of §1717 reciprocity and fee recovery on contract and tort claims)
- Topanga v. Victory Partners v. Toghia, 103 Cal.App.4th 775 (2002) (nonsignatory shareholder could not recover fees where fee clause expressly applied only to landlord and tenant)
- Super 7 Motel Assocs. v. Wang, 16 Cal.App.4th 541 (1993) (broker not party to purchase agreement; fee clause did not extend to nonsignatory broker)
- Goonewardene v. ADP, LLC, 6 Cal.5th 817 (2019) (elements for third-party beneficiary status under California law)
- Sessions Payroll Mgmt., Inc. v. Noble Constr. Co., 84 Cal.App.4th 671 (2000) (analyzing whether a fee clause covers third-party beneficiaries)