September 2017

Prevailing buyers in contract dispute were entitled to attorney fees under option agreement even though raising that agreement as affirmative defense did not trigger attorney fee provision in agreement.

 

Mountain Air Enters. v Sundowner Towers, LLC (2017) 3 C5th 744

In this complex real estate purchase transaction, Seller brought a breach of contract action against Buyers for failing to purchase the property under a repurchase agreement. The trial court concluded that Buyers were not liable under the repurchase agreement because it had been superseded by the parties’ option agreement, which granted Buyers the exclusive right, but not the obligation, to purchase the property. The trial court entered judgment for Buyers but denied Buyers’ motion for attorney fees under both the repurchase agreement and the option agreement. The court of appeal reversed the denial of attorney fees under the option agreement, relying on the reasoning of Windsor Pac. LLC v Samwood Co. (2013) 213 CA4th 263. The California Supreme Court granted review to resolve a split of authority between Windsor Pac. and two contrary decisions.

In a 4–3 decision, the supreme court held that

·       Buyers’ assertion of the option agreement as an affirmative defense did not trigger the attorney fees provision in that agreement; but

·       Under the circumstances of this case, Buyers were nevertheless entitled to attorney fees under the attorney fee provision in the option agreement.

The court affirmed the court of appeal’s judgment reversing the trial court’s denial of attorney fees under the option agreement.

THE EDITOR’S TAKE: The major lesson of this decision is that a party’s raising of successful affirmative defenses may not support that party’s claims to attorney fees (because these defenses do not amount to “actions” or “proceedings”), but may nevertheless be allowed in through the back door if they relate to a “dispute, breach, default, or misrepresentation” that is covered by the fees clause. But, additionally, some other useful lessons can be derived from this opinion:

First: If an attorney fee clause is to be included in an agreement, which itself is legally uncertain (such as possibly violating the Subdivision Map Act), then it is worth attempting to bolster that fee clause with some independent validity to keep it operative even if the overall deal is held invalid. The bare inclusion of an attorney fee provision in the original repurchase agreement in this deal made it too easy for the courts to simply push it aside entirely once they had concluded that the repurchase agreement was void. I wonder whether a similar fee provision could have been insulated from such a sad fate by including appropriate savings language in it (such as “whether or not any other provisions of this agreement are held to be invalid”).

Second: If an attorney fee clause was present in the original agreement, and that overall agreement was then later revised, be sure that the new agreement accounts for the fate of that provision. The option agreement that replaced the repurchase agreement in this case recited that it “supersede[d] all previous or contemporaneous agreements, understandings, representations, or statements between the parties”—which language might easily have been held by a court to entirely eliminate any previous right to such fees (had the new option agreement not also included its own entitlement to attorney fees). Parties who want to convert a repurchase arrangement into an option (or vice versa), but who nevertheless want their previous attorney fees arrangement to outlive the revisions made by the option, can easily add a survival provision saying just that, rather than making life difficult for themselves by unthinkingly reciting that all previous provisions are superseded.

Third: If one of the unintended effects of numerous contract revisions is that the final draft includes multiple versions of any one provision (dealing with attorney fees or anything else), have someone in the office double-check all those versions for consistency. The fee clause in the Mountain Air option covered an “alleged dispute, breach, default, or misrepresentation,” which could be easily be found inconsistent with “rival” clauses elsewhere that employed slightly different nouns. What would be the effect of “misrepresentation” being in one list but not the other, or of one clause saying “untruth” instead of “misrepresentation”? That carelessness can just ask for trouble.—Roger Bernhardt

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40 Real Property Law Reporter 109 (Cal CEB Sep 2017), © The Regents of the University of California, reprinted with permission of CEB.