ILC E-Bulletin: Yoon v. Cam IX Tr., 60 Cal.App.5th 388 (2021) - Attorney's fees awarded in successful defense of tort claims under Civil Code § 1717

These materials were prepared by ILC member Joseph Boufadel.

July 6, 2021

Dear constituency list members of the Insolvency Law Committee:

The following is a case update written by Joseph Boufadel analyzing a recent decision of interest:

SUMMARY

In a lawsuit contesting the foreclosure of a borrower’s home, the California Court of Appeal held that defendants were entitled to their reasonable attorney’s fees and costs in successfully defending against the borrower’s tort claims pursuant to Civil Code § 1717. Yoon v. Cam IX Tr., 60 Cal.App.5th 388 (2021). Because borrower’s tort claims sought to avoid his obligations under a promissory note and deed of trust, by contesting both their enforcement through foreclosure and the validity of the underlying debt obligation, the borrower’s unsuccessful action was “on a contract” and the jury’s defense verdict entitled the defendants to attorney’s fees under the provisions of the documents. Defendants were also entitled to attorney’s fees for the borrower’s unjustified denial of key requests for admission in discovery pursuant to Code of Civil Procedure § 2033.420.

To read the decision, click here.

FACTS

Plaintiff Edward Yoon (“borrower”) sued defendants CAM IX Trust and BSI Financial Services, Inc. (“defendants”) in connection with a trustee’s sale of his home. Defendant CAM IX Trust was the assignee of a deed of trust on borrower’s home that secured repayment of a promissory note, and BSI was Cam IX Trust’s loan servicer.

Borrower proceeded to trial on his claims for negligence and fraud, arguing that defendants failed to properly review his request for a short sale, and that the defendants told him the foreclosure sale date had been postponed for several days, when in fact it had not, causing him to miss the deadline for making the loan current or finalizing a short sale. In short, the borrower was seeking to avoid the underlying debt obligation and the enforcement of the promissory note and deed of trust by contesting the foreclosure process. The jury was unpersuaded and ruled in favor of the defendants.

As the prevailing party, the defendants then requested – and the trial court awarded – attorney fees and costs of approximately $220,000 on two grounds. First, pursuant to Civil Code § 1717, defendants were awarded their reasonable attorney fees and costs as provided for under the terms of the promissory note and deed of trust. Second, defendants were awarded their fees incurred in proving the truth of matters the borrower denied in response to key requests for admission from the date of the denials pursuant to Code of Civil Procedure § 2033.420. Since those same fees were already awarded under section 1717—and there was no double recovery—no adjustment to the award was necessary.

The Court of Appeal affirmed the trial court’s award.

REASONING

Attorney fees awarded under Civil Code § 1717.

Pursuant to Civil Code § 1717, in any action “on a contract” where the contract provides for attorney fees and costs, the party prevailing on the contract is entitled to its reasonable attorney fees and costs.

The borrower argued that it was improper to award attorney fees because his lawsuit did not assert breach of the contract. The borrower argued that his tort claims for negligence and fraud never mentioned or relied on the existence of a contract.

The Court of Appeal was unpersuaded and held that the whole point of the borrower’s lawsuit was to contest the validity of the obligation and the defendants’ alleged conduct in connection with enforcing the terms of the promissory note and deed of trust. A breach of contract claim is not a prerequisite for awarding attorney fees under Civil Code § 1717. Courts liberally construe the meaning of “on a contract” and so long as an action “involves a contract,” it is “on a contract” within the meaning of section 1717. Therefore, the Court of Appeal determined that the borrower’s tort claims were an action “on a contract” because they directly related to enforcement of the promissory note through foreclosure.

Turning to the relevant language in the promissory note and deed of trust, the Court of Appeal held that the attorney fee provisions in both the note and deed of trust provided for fees to the defendants as the prevailing party in the borrower’s lawsuit. The fee provision in the promissory note provided that, in the event of default, “the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by Applicable Law. Those expenses include, for example, reasonable attorneys’ fees.” The deed of trust contained a similar provision and provided that the lender “shall be entitled to collect all expenses incurred in pursuing the remedies provided in this [section], including, but not limited to, reasonable attorneys’ fees and costs of title evidence.”

Fees awarded for unjustified denial of requests for admission.

The Court of Appeal also held that the defendants were entitled to their reasonable attorney fees and costs arising from the borrower’s unjustified denial of key requests for admission. Under Code of Civil Procedure § 2033.420, “[i]f a party fails to admit … the truth of any matter when requested to do so …, and if the party requesting that admission thereafter proves … the truth of that matter, the party requesting the admission may move the court for an order requiring the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney’s fees.”

The borrower denied several requests for admission that cut to the heart of his case, namely that defendants properly reviewed borrower’s short sale offer in good faith and in a timely manner, and that the defendants never informed the borrower that the foreclosure sale was continued.

The borrower argued that only one of the four exceptions to the award of fees under this statute applied—that he failed to make the admissions because he had reasonable grounds to believe that he would prevail in the case—justifying denial of fee award.  (The borrower did not argue that the other three exceptions applied under Code Civ. Proc. § 2033.420(b): an objection to the request for admission was sustained or a response waived, the admission was of no substantial importance, or there was a good reason for the failure to admit).

In opposing the fee request, borrower failed to explain how or why he had reasonable grounds to deny the admission requests. Borrower did not identify any evidence or circumstance to the trial court nor on appeal justifying his belief that he would prevail at trial.  Borrower’s lack of evidence or testimony justifying his belief was a fait accompli.

The borrower also argued that the trial court’s denial of the defendants’ motion for nonsuit evidenced triable issues of material fact justifying a denial of the fees awarded. The Court of Appeal was unpersuaded for two reasons. First, the bases for the nonsuit were not the same issues raised in the requests for admission. Second, and importantly, the standard for evaluating a nonsuit motion does not help the borrower demonstrate that he had reasonable grounds to believe he would prevail on the merits of his case. In evaluating a nonsuit motion, the trial court cannot consider witness credibility nor weigh evidence, and the court must disregard conflicting evidence. Therefore, denial of a nonsuit motion is not proof that borrower’s case-in-chief has merit or that he will prevail.  

AUTHOR’S COMMENTARY

It appears that the only issue contested by the borrower with respect to the award of fees under Civil Code § 1717 was whether his lawsuit constituted an “action on a contract.” The borrower’s main argument was that he never alleged a breach of contract claim – an allegation that is irrelevant to the analysis.  The case law is clear that the meaning of “action on a contract” under section 1717 is to be liberally construed and has never been synonymous with breach of contract. See, e.g., Santisas v. Goodin, 17 Cal.4th 599 (1998); In re Tobacco Cases I, 193 Cal.App.4th 1591, 1601 (2011); Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc., 211 Cal.App.4th 230 (2012).

It is also important to note that the language of the attorney fee provision matters. One lesson to be taken from this case is that if the language of the fee provision in the contract is broad enough to support a tort claim, then attorney fees and costs may be awarded to the prevailing party. But keep in mind that section 1717 is not the only provision that may support the basis for a fee request: Code of Civil Procedure §§ 1021 and 1032(b) also permit parties to agreethat the prevailing party may be awarded attorney fees incurred whether such litigation sounds in contract or tort. In many of these cases, whether attorney fees are awarded boils down to the scope and breath of the fee provision in the contract.

The case also provides a word of caution to borrowers and their counsel. Note that the Court of Appeal’s recitation of the attorney fee provisions in the promissory note and deed of trust appear to show that the fee award is a separate debt rather than an expense added to the mortgage or underlying obligation secured by the home (that would otherwise be wiped out in a nonjudicial foreclosure). As a result of losing his case, the borrower not only lost his home but was saddled with a substantial judgment.

These materials were prepared by ILC member Joseph Boufadel of Salvato Boufadel LLP in Los Angeles (Jboufadel@salvatoboufadel.com), with editorial contributions from ILC member Summer Shaw of Shaw & Hanover PC (ss@shaw.law).