Elder v. Triax Co., 19420

• Decision Date: 14 July 1987
• Docket Number: No. 19420,19420
• Citation: 740 P.2d 1320
• Parties: Ronald Q. ELDER, Reed A. Elder, and Alan G. Elder, Plaintiffs and Respondents, v. The TRIAX COMPANY, a corporation, Defendant and Appellant.
• Court: Utah Supreme Court

Page 1320

740 P.2d 1320

Ronald Q. ELDER, Reed A. Elder, and Alan G. Elder, Plaintiffs and Respondents, v. The TRIAX COMPANY, a corporation, Defendant and Appellant.

No. 19420.

Supreme Court of Utah.

July 14, 1987.

Michael E. Talbot, Murray, William L. Nixon, Timothy M. Willardson, Alpine, for defendant and appellant.

Claron C. Spencer, Keith W. Meade, Salt Lake City, for plaintiffs and respondents.

DURHAM, Justice:

Plaintiffs, prime contractors on a government project, sued defendant, a subcontractor, alleging defendant had breached a contract with plaintiffs. Plaintiffs sought to collect attorney fees as provided by the contract if they prevailed on the merits. Defendant answered by denying liability under the contract and asserted permissive counterclaims arising out of three other contracts between plaintiffs and defendant that were entirely unrelated to the contract under which plaintiffs sued.

In response to plaintiffs' motion for summary judgment, defendant stipulated that it was liable for the principal and interest claimed by plaintiffs. Defendant argued that it could not be liable for attorney fees under the contract until its counterclaims were resolved. The court entered judgment in plaintiffs' favor as to principal and interest, but reserved the issue of the amount of attorney fees. At a later hearing, the court took evidence and then awarded plaintiffs $10,000 in attorney fees, stating that "[t]his judgment is a final judgment as to the remaining issue of attorney fees on the plaintiff's [sic] complaint" pursuant to Utah Rule of Civil Procedure 54(b). This appeal presents us with several issues: whether the district court erred in awarding attorney fees before the counterclaims were resolved; whether the attorney fees award was improper; and whether the district court abused its discretion in certifying the judgment for attorney fees as final under Utah Rule of Civil Procedure 54(b). We affirm.

Defendant cites Nalder v. Kellogg Sales Co., 6 Utah 2d 367, 314 P.2d 350 (1957), and Sugar v. Miller, 6 Utah 2d 433, 315 P.2d 862 (1957), arguing that if a plaintiff sues on a contract or note that provides for an award of attorney fees but the defendant successfully counterclaims, the plaintiff's recovery of attorney fees is precluded or, if the amount of the counterclaim is less than the amount the plaintiff seeks under the contract or note, proportionately diminished; therefore, the amount the defendant owed the plaintiff for attorney fees could not be determined until the counterclaims were decided. We agree with defendant that Nalder and Sugar embody correct statements of law. We think, however, that an examination of the logic and history of the rule stated in Sugar and Nalder demonstrates that the rule should not be applied in cases in which the counterclaims arise out of transactions totally unrelated to the note or contract pursuant to which the party seeks attorney fees. The rationale underlying the rule is that

the holder of the note being indebted to the defendant maker in a greater amount than the sum due on the note, the note is substantially paid, or, if the setoff or counterclaim allowed is in a sum smaller than the amount due on the note, then the note has been proportionately paid.

41 A.L.R.2d 677, 678 (1955).

We are aware that the rule is frequently recited and even applied on occasion without distinction between counterclaims arising and counterclaims not arising out of the same transaction. We agree, however, with the phrasing and application of the rule recently stated by the Colorado Appellate Court: "[W]e hold that the contractor is not entitled to a judgment for attorney fees or interest under the applicable contract provision when the owners obtained a judgment on their counterclaim arising out of the same transaction that is greater than the amount of judgment in favor of the contractor." Wagonmaster, Inc. v. Parrot, 713 P.2d 417, 418 (Colo.App.1985) (emphasis added).

The foregoing language from Wagonmaster is in keeping with the inferences that can be drawn from other authority. We note that in Pioneer Constructors v. Symes, 77 Ariz. 107, 267 P.2d 740 (1954), the lead case for the general rule, the debtor counterclaimed for lack of consideration, overcharge, fraud, and misrepresentation, claims arising out of the same transaction in which his note was executed. See also Dooling v. Casey, 152 Mont. 267, 273-74, 448 P.2d 749, 756-57 (1968) (following Nalder in denying attorney fees to creditor who counterclaimed for payment on note which financed the contract debtors claimed creditor breached); Morgan v Young, 203 S.W.2d 837, 858 (Tex.Civ.App.1947) (counterclaim arose out of breach of a contract that was entered into in conjunction with an extension of the time the debtor had to pay the note upon which the plaintiff sued). Our own case, Sugar v. Miller, is a good illustration of when the general rule should logically apply. In Sugar, the plaintiff contracted with the defendant, a printer, for the printing of offering circulars and stock certificates. The plaintiff gave his personal guarantee that he would pay for the documents. When the defendant later demanded payment, the plaintiff explained that he did not have the cash. The plaintiff and the defendant then went to the plaintiff's bank, where they signed a note for $2,000 on the proceeds of the note to pay for the printing, and the plaintiff repaid the bank. The plaintiff then sued the defendant, alleging that as cosigner, the defendant owed the note. The defendant admitted liability on the note and counterclaimed for the balance remaining on the printing contract. It would have been manifestly unfair for the court to have imposed attorney fees on the defendant because the defendant's counterclaim amounted to an assertion that he did not really owe the plaintiff anything on the note, which was signed only to facilitate the plaintiff's payment of the defendant under the printing contract.

Early statements of the general rule do not carefully distinguish between counterclaims that arise out of the same transaction and counterclaims that do not because those claims that we now denominate permissive counterclaims used to be available only under a narrow range of circumstances and because the vocabulary of early courts and commentators was imprecise. At common law, a counterclaim arising out of the same transaction was called a "recoupment" and was asserted only to diminish the plaintiff's affirmative claim; it did not serve as a basis for affirmative relief. By contrast, setoffs were based on unrelated claims and served as sources of affirmative relief. Setoffs, however, were allowed only for liquidated amounts or claims arising from a contract or judgment. See Wright & Miller, Federal Practice and Procedure § 1401 (1971). Early pleading rules required that "counterclaims" arise out of the same transaction and diminish or destroy the affirmative claim in some way, but the pleading rules eliminated the restriction on setoffs, thus making counterclaims into expanded recoupment actions. The terms were often used imprecisely. For example, the paragraph from the A.L.R. article quoted earlier speaks of "setoffs" being considered as payment on the note, a rationale which makes sense in terms of "recoupment," which at common law served to diminish or destroy the existence of the plaintiff's affirmative claim or a counterclaim setoff under some pleading codes, but makes no sense in terms of the concept of setoff at common law.

Aside from the historical analysis, it is difficult to justify a rule under which defendant could defeat plaintiffs' right to attorney fees under a contract or note by selecting the action on the note as the forum for the resolution of its unrelated counterclaims. In short, under defendant's argument, if it had sued on the counterclaims earlier, later, or in a different forum, plaintiffs' right to collect attorney fees under the contract would have remained unimpaired, but it should be permitted to change this result merely by using the permissive counterclaims defensively. We do not agree, and we affirm the trial judge's award of attorney fees before the resolution of the counterclaims.

Defendant argues that the trial court acted improperly because it awarded plaintiffs fees for time their attorney spent defending the counterclaims and awarded an excessive amount for fees. We have reviewed the record, which indicates that plaintiffs' attorney testified that the hours for which fees were awarded were spent pursuing the collection action and not responding to the counterclaims. This testimony went unchallenged and supports the trial judge's conclusion. The reasonableness of the attorney fees award is also well documented by the record, which contains detailed documentary evidence supporting the testimony of plaintiffs' attorney.

We also reject defendant's claim...