Mountain Air Enters., LLC v. Sundowner Towers, LLC, S223536

• Decision Date: 31 July 2017
• Docket Number: S223536
• Court: California Supreme Court
• Parties: MOUNTAIN AIR ENTERPRISES, LLC, Plaintiff and Respondent, v. SUNDOWNER TOWERS, LLC, et al., Defendants and Appellants.

3 Cal.5th 744

398 P.3d 556

220 Cal.Rptr.3d 650

MOUNTAIN AIR ENTERPRISES, LLC, Plaintiff and Respondent,

v.SUNDOWNER TOWERS, LLC, et al., Defendants and Appellants.

S223536

Supreme Court of California

Filed July 31, 2017

Abramson & Brown, Law Offices of Joe R. Abramson, Joe R. Abramson ; Degani & Galston, Law Office of Katharine J. Galston and Katharine J. Galston, for Defendants and Appellants.

The Ehrlich Law Firm, Jeffrey I. Ehrlich ; Law Office of Erik A. Humber and Erik A. Humber, San Rafael, for Plaintiff and Respondent.

Kruger, J.

In this complex real estate purchase transaction, the seller brought a breach of contract action against the buyers for failing to purchase the subject property. The defendant buyers asserted an affirmative defense of novation, arguing that they were not liable under the purchase agreement because it had been superseded by the parties' option agreement; that option agreement granted them the exclusive right, but not the obligation, to purchase the property. The trial court agreed.

The question we must answer is whether the defendants' assertion of the option agreement as an affirmative defense triggers the attorney fees provision in that agreement. For reasons that follow, we conclude that it does not. However, as we also explain, defendants are nonetheless entitled to attorney fees under that provision.

FACTUAL AND PROCEDURAL BACKGROUND

Like the Court of Appeal, we draw most of the underlying facts from the trial court's over-40-page final statement of decision. (See Chapala Management Corp. v. Stanton (2010) 186 Cal.App.4th 1532, 1535, 113 Cal.Rptr.3d 617.)

The principals to this dispute are Steven Scarpa of Mountain Air Enterprises (Mountain Air) and Bijan Madjlessi of Sundowner Towers (Sundowner), both of whom are described as experienced real estate investors and developers. In early 2004, Madjlessi explored possible real estate investments outside of California.

Madjlessi discovered the subject single parcel of real property located at 450 Arlington Avenue, in Reno, Nevada (Property). The improvements consisted of the "North Tower," the "Casino Building," and the "South Tower." As relevant here, the Property remained a single parcel until February 17, 2006, when it was separated into three parcels, the North Tower, the South Tower, and the Casino Building.

On or about December 12, 2005, when the Property was still a single parcel, Scarpa and Sundowner entered into two separate agreements: (1) an agreement wherein Sundowner agreed to sell the South Tower to Scarpa for $7 million (the purchase agreement); and (2) an agreement whereby Sundowner agreed to later repurchase the South Tower from Scarpa for $7 million plus an "inflation factor" of 12 percent (the repurchase agreement). Madjlessi and Glenn Larsen, a business associate of Madjlessi's and a member of Sundowner, guaranteed Sundowner's obligations under the repurchase agreement. Scarpa subsequently assigned his rights under both agreements to Mountain Air.

On or about April 25, 2006—just days before Sundowner transferred the South Tower to Mountain Air—Mountain Air as seller, and Larsen and Madjlessi individually, as buyers, executed a written option agreement whereby Mountain Air granted Larsen and Madjlessi the exclusive right to purchase (or rather repurchase) the South Tower during the option period (the option agreement). Larsen and Madjlessi personally guaranteed their obligations under the option agreement. On April 27, 2006, Sundowner, after acquiring the South Tower from a third party, concurrently transferred it to Mountain Air pursuant to the purchase agreement. However, Sundowner never repurchased the South Tower as agreed to in the repurchase agreement, and Mountain Air filed suit.

In its operative second amended complaint, Mountain Air alleged three causes of action: (1) specific performance of the repurchase agreement; (2) breach of the guaranty of the repurchase agreement; and (3) breach of the repurchase agreement. The first and third causes of action were asserted against all three defendants. The second cause of action was alleged against Madjlessi and Larsen, as the guarantors. In response, defendants raised numerous affirmative defenses, two of which are relevant here: (1) the second affirmative defense stated that the option agreement, which included an integration clause stating that the agreement "expressly supersedes all previous or contemporaneous agreements, understandings, representations, or statements between the parties respecting this matter," was a novation that extinguished the repurchase agreement; (2) the fourth affirmative defense stated that the repurchase agreement was illegal, and therefore void and unenforceable.

After a 13-day bench trial, the trial court ruled in defendants' favor. It found the repurchase agreement "void, illegal and unenforceable" because the agreement did not require either party to prepare or record a parcel map in accordance with the subdivision map laws of Nevada and California. The trial court also concluded the option agreement was a novation and extinguished the repurchase agreement and any obligation defendants had under it. It entered judgment in favor of defendants.

As the prevailing parties, defendants filed a motion for an award of attorney fees in the amount of $774,141 under both the repurchase agreement and the option agreement. The motion stated the following grounds: (1) because the action sounded in contract and the repurchase agreement contained an attorney fees provision, they were entitled to an award of attorney fees under Civil Code section 1717 ; (2) based on their assertion of the option agreement as an affirmative defense, which also included an attorney fees provision, defendants were entitled to such fees under Code of Civil Procedure section 1021, to the extent the litigation involved the affirmative defense.

The trial court denied defendants' attorney fees motion. Based on the illegality of the repurchase agreement and "to prevent defendants from profiting by their knowing involvement in the illegal transaction," the trial court determined that attorney fees were unavailable under that agreement. The court also found that defendants could not recover attorney fees under the option agreement, which authorized fees to the prevailing party if a "legal action" or "proceeding" "is brought for the enforcement of this Agreement or because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this Agreement." It explained that defendants had not "brought" an action for the enforcement of the agreement. Moreover, even though the trial court considered whether the option agreement was intended as a novation to the repurchase agreement, it ultimately concluded that "none of the provisions in the Option Agreement were actually ‘in dispute.’ "

The Court of Appeal majority reversed the trial court's judgment in part. It agreed with the trial court that the repurchase agreement was "entirely void and unenforceable" because it failed to comply with the subdivision map laws of both Nevada and California. Like the trial court, the majority concluded that attorney fees were unavailable under the repurchase agreement.

The Court of Appeal majority, however, held that defendants were entitled to attorney fees under the option agreement. The majority determined that defendants' assertion of the option agreement and the affirmative defense of novation fell within the broad definition of "proceeding," which may refer to a " ‘ "mere procedural step that is part of the larger action or special proceeding." ’ " (Quoting Zellerino v. Brown (1991) 235 Cal.App.3d 1097, 1105, 1 Cal.Rptr.2d 222.) In addition, though not strictly necessary to its holding, the majority concluded that the affirmative defense also constituted a "legal action"¹ based mainly on the reasoning of Windsor Pacific LLC v. Samwood Co., Inc . (2013) 213 Cal.App.4th 263, 274-275, 152 Cal.Rptr.3d 518 ( Windsor Pacific ). As discussed further below, Windsor Pacific rejected the contrary holdings of Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 75 Cal.Rptr.2d 376 ( Exxess ) and Gil v. Mansano (2004) 121 Cal.App.4th 739, 17 Cal.Rptr.3d 420 ( Gil ), to conclude: "To the extent that either Exxess or Gil suggests, or can be read to support the proposition, that the word ‘action’ does not encompass a defense, we disagree." ( Windsor Pacific , supra , 213 Cal.App.4th at p. 276, 152 Cal.Rptr.3d 518 ; see Gil , supra , 121 Cal.App.4th at p. 747, 17 Cal.Rptr.3d 420 (dis. opn. of Armstrong, J.).)

Relying on Windsor Pacific and Justice Armstrong's dissent in Gil , the Court of Appeal majority concluded that " ‘[r]aising ... an affirmative defense is legally the same as bringing an "action" to enforce it.’ " The majority explained that by raising the option agreement as a novation, "defendants sought to enforce the integration clause and by doing so to accomplish a material purpose of the option agreement: the extinguishment of the repurchase agreement." Further, the majority found the fee provision's language—"in connection with"—to be "broad enough" to encompass a dispute over the effect of the option agreement's integration clause.

In rejecting Mountain Air's urging to distinguish Windsor Pacific , the majority below did not find significant either the absence or presence of the words "brought" or "brings": "To hold that attorney fees clauses referring to ‘ "action[s] brought to enforce" ’ ( Gil , supra , 121 Cal.App.4th at p. 742, 17 Cal.Rptr.3d 420 ) have a materially different meaning from those referring to ‘ "action[s] ... to enforce" ’ ( Windsor Pacific , supra , 213 Cal.App.4th at p. 268, fn. 1, 152 Cal.Rptr.3d 518 ) elevates form over substance and fiction over reality."

We granted review to resolve this split of authority.

DISCUSSION

A. Standard of Review

" ‘On review of an award of attorney fees after trial, the normal standard of review is...