Sears v. Baccaglio

• Decision Date: 14 January 1998
• Docket Number: No. A070295,A070295
• Court: California Court of Appeals Court of Appeals
• Parties: , 98 Cal. Daily Op. Serv. 463, 98 Daily Journal D.A.R. 553 Brian F. SEARS, Plaintiff and Appellant, v. Martin H. BACCAGLIO, Defendant and Appellant.

Page 769

70 Cal.Rptr.2d 769

60 Cal.App.4th 1136, 98 Cal. Daily Op. Serv. 463,

98 Daily Journal D.A.R. 553

Brian F. SEARS, Plaintiff and Appellant, v. Martin H. BACCAGLIO, Defendant and Appellant.

No. A070295.

Court of Appeal, First District, Division 2, California.

Jan. 14, 1998.

Certified for Partial Publication. ^*

Rehearing Denied Feb. 13, 1998.

Review Denied April 22, 1998. ^**

[60 Cal.App.4th 1138] Christopher Ream, Palo Alto, for Plaintiff and Appellant.

Berliner Cohen, Frank R. Ubhaus, San Jose, Jeffrey S. Stone, Sacramento, for Defendant and Respondent.

LAMBDEN, Associate Justice.

This opinion considers a question which routinely troubles trial courts attempting to identify the "prevailing party" for the purpose of awarding attorney's fees resulting from litigation of contracts. Periodic legislative modification of the "American" rule provided by Code of Civil Procedure section 1021, which generally requires litigants to pay their own attorney fees, has created uncertainty over the extent of trial court discretion to award fees. This has been particularly apparent in cases where there are multiple issues and parties, where there is recovery of extra-judicial or nontangible benefits, and where the line between "winner" and "loser" is not finely drawn. The two basic statutes regularly employed by the courts to award fees in contract cases, Code of Civil Procedure section 1032 (section 1032) and Civil Code section 1717 (section 1717), differ in their analytic approach to the issue. Trial courts may have little difficulty applying these statutes to simple victories, and within their express boundaries, but occasionally struggle to avoid an inequitable result seemingly prescribed by them. Prior appellate opinions have either taken a narrow view of the questions raised by the statutory collage created by the Legislature or have assumed, as though obvious, an inherent, equitable compensating component in the court's power to award fees. We conclude these statutes can be reconciled to inform the entire process of fee allocation while answering the specific question posed by this case:

Can a party denied additional damages on his cross-complaint, and ordered to return part of a payment on the complaint, be considered the "prevailing party" entitled to attorney's fees pursuant to section 1717? Appellant Brian F. Sears raises this question on appeal and we answer affirmatively: a party can fail to recover a net monetary judgment and yet prevail for purposes of collecting fees in an action founded in contract. The trial court did not abuse its discretion when it relied on section 1717 to award costs, including attorney's fees, to respondent Martin H. Baccaglio.

In the unpublished portion of this opinion we consider Baccaglio's assertion, on cross-appeal, that the trial court abused its discretion when it granted Sears's motion to amend his complaint and fixed 1989 as the date for interest to accumulate on the disputed overpayment. Baccaglio concedes he suffered no prejudice from the court's granting the motion to amend if this court affirms the award of attorney's fees; accordingly, Baccaglio's We affirm the trial court's judgment.

cross-appeal challenging the amendment of the complaint is moot. The trial court neither erred nor abused its discretion in fixing the date interest should begin, because Baccaglio failed to present contrary evidence at trial.

BACKGROUND

On April 13, 1984, New Tonko Corporation (Tonko) signed a five-year lease of a building owned by American Tempering, Inc. (AT). The lease required a bank letter of credit to secure Tonko's performance. Tonko's inability to obtain such a letter of credit jeopardized AT's attempts to sell the building to Robert Cucinotta. Consequently, AT persuaded Sears, the principal shareholder of Tonko, to substitute a personal guaranty and secure it with a $200,000 deed of trust on his home. According to Sears, AT orally promised he could later replace the guaranty with other assurance.

On May 3, 1984, Sears signed the guaranty, which stated he "unconditionally and irrevocably" guaranteed the performance of the lease by the lessee and agreed the lessor could assign the lease. The lease could be "altered, affected, modified or changed by agreement between Lessor and Lessee." Additionally, the guarantor "shall thereupon and thereafter guarantee the performance of said Lease as so changed, modified, altered or assigned." The guaranty required payment of reasonable attorney's fees to the prevailing party in any legal action concerning the guaranty.

Cucinotta later sold the building to Baccaglio. The lease and the guaranty were delivered to Baccaglio, who purchased the building in good faith and for value. Sears sold his principal ownership in Tonko, but Tonko remained on the lease. Within months, Tonko failed to pay the rent due on the lease and Sears, "seeing the handwriting on the wall," gave notice of revocation of the guaranty on April 11, 1986.

In June of 1986, Baccaglio agreed with the new owners of Tonko to alter the terms of the lease, so another company could re-lease 25 percent of the leased space. However, Tonko filed bankruptcy in July 1986 and defaulted under the altered lease.

Baccaglio estimated he lost $112,000 from Tonko's default and demanded the money from Sears. Sears needed to clear title to his house, and Baccaglio agreed to return the $200,000 deed of trust for $112,000. On May 4, 1987, Sears paid the $112,000 under protest. Years later, Baccaglio received an additional $33,512.74 from Tonko's bankruptcy estate on March 2, 1994, which is the date on the checks sent to Baccaglio by Tonko's bankruptcy trustee, and of which this court has taken judicial notice.

On February 24, 1988, Sears sued Baccaglio for breach of contract, declaratory relief, and bad faith denial of existence of contract. He prayed for $112,000 in damages and alleged the guaranty no longer existed, not only because of his revocation but also as the result of Baccaglio's material modification of the lease without Sears's consent. Baccaglio cross-complained for an additional $5,461.27. In 1994, on the first day of trial, Sears amended the complaint to allege Baccaglio suffered damages substantially less than $112,000.

DISCUSSION

The court bifurcated the trial to hear the contract claims first, and then, if necessary, to determine damages. After two days of trial, the court issued a tentative decision, delineating the three issues in the case:

"[F]irst, is the guaranty of a lease a continuing guarantee as defined by Section 2814 of the Civil Code? Second, if it is, can a writing signed by the guarantor in which he states that he 'unconditionally and irrevocably guarantees' the performance of the lease be valid in the face of Section 2815 of the Civil Code stating that a continuing guarantee may be revoked at any time by the guarantor? Third, if the instrument in this case was in fact a continuing guaranty and was not revoked may a guarantor who has agreed that the underlying obligation may be 'altered, affected, modified or changed by agreement' and whose underlying burden is in fact lightened by such a modification take advantage of Section 2819 of the Civil Code exonerating the guarantor where the original obligation is altered 'in any respect'?"

The court found Sears liable based on the guaranty and ordered a further hearing to determine the extent of his liability.

After the damages hearing, the court found Tonko owed $291,556.54 on the lease, but further found Baccaglio had already received $359,386 ($33,513 from Tonko's bankruptcy estate, $204,753 from rent received in mitigation, $9,120 from the security deposit, and $112,000 from Sears). In the judgment, Sears recovered $67,829.46 plus 10 percent interest calculated from May 4, 1987, and Baccaglio received nothing on his cross-complaint.

The parties briefed the court regarding the attorney's fees which were sought under section 1717, and the court awarded Baccaglio his fees after finding he prevailed on the contract issue. The court explained its ruling:

"In short the whole thrust of this Court's decision is to give effect to the guaranty (which was hotly disputed) and award Baccaglio the damages to which he was entitled under that contract. By no stretch of the imagination can Sears claim that he was in fact the prevailing party because, having lost on his principal claim that the contract was ineffective, he recovered more of the $112,000 than Baccaglio."

Section 1032, subdivisions (a)(4) and (b), states: "(4) 'Prevailing party' includes the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant. When any party recovers other than monetary relief and in situations other than as specified, the 'prevailing party' shall be as determined by the court, and under those circumstances, the court, in its discretion, may allow costs or not and, if allowed may apportion costs between the parties on the same or adverse sides pursuant to rules adopted under Section 1034. [p] (b) Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding."

Sears incorrectly concludes the Code of Civil Procedure provides the only statutory basis permitting an award of fees in this case. While it is true section 1033.5 allows fees to be considered as costs in contract cases under section 1032, it does not follow that section 1032 is the exclusive statute governing recovery of fees in contract actions. By its own terms, section 1032 defines prevailing party only for "costs" under that section and does not purport to define it for other statutes. (Heather Farms Homeowners Assn. v. Robinson (1994) 21 Cal.App.4th 1568, 1572, 26 Cal.Rptr.2d 758.)...