Dismissing Contract Action May Mean Attorney’s Fee Liability.

Issue By: Vernice T. Louie

Neeshat S. Khan v. Michael Shim

Court of Appeal, Sixth Appellate District (December 29, 2016)

Civil Code § 1717(b)(2) generally bars the award of attorneys’ fees after a voluntary dismissal of a breach of contract cause of action. In this case, the Court of Appeal addresses whether attorneys’ fees can be awarded when a plaintiff alleges both tort and contract causes of action and dismisses the entire complaint before trial.

Dr. Neeshat S. Khan (“Khan”) purchased Dr. Christine Hoang’s dental practice from Michael Shim (“Shim”), who was Dr. Hoang’s widower and estate executor. The purchase agreement had an attorneys’ fee clause, which allowed the prevailing party to be awarded fees if “any litigation… is commenced between the parties to this Contract of Sale… concerning its terms, interpretation or enforcement or the rights and duties of any party in relation thereto….”

In September, 2012, Khan sued Shim individually and as estate executor for breach of contract, fraud, concealment, negligent misrepresentation, and rescission. Shim filed a cross-complaint against Khan, alleging claims for breach of contract and various torts, including fraudulent concealment.

Before the trial, Khan voluntarily dismissed her entire complaint without prejudice. The case proceeded to a bench trial only on Shim’s cross-complaint. The trial court found for Khan on all causes of action.

Shim filed a motion to compel Khan to pay his attorneys’ fees. The trial court found Shim to be the prevailing party under Code of Civil Procedure § 1032 (a)(4) which states, “‘Prevailing party’ includes… a defendant where neither plaintiff nor defendant obtains any relief” and awarded attorneys’ fees to Shim. Khan appealed.

The Court of Appeal concluded that when a plaintiff voluntarily dismisses an action involving both contract and tort claims, Civil Code § 1717(b)(2) does not preclude a defendant from recovering attorneys’ fees if the fee provision is broad enough to cover the tort claims.

Under Civil Code § 1717(b)(2), there is no prevailing party for the purposes of awarding attorneys’ fees when an action on a contract is voluntarily dismissed before trial or dismissed pursuant to a settlement of the case. This rule applies to all attorneys’ fees awarded on actions on a contract, including reciprocal fee agreements. (Santisas v. Goodin (1998) 17 Cal.4th 599, 614-616.) The Court of Appeal concluded that Shim’s recovery of attorneys’ fees for his defense against Khan’s contract claims based upon Civil Code § 1717(b)(2) was prohibited.

The Court of Appeal applied principles from Santisas and looked to the fee provision in the parties’ purchase agreement to determine whether Shim was entitled to recover fees for his defense against Khan’s tort causes of action. The fee provision stated as follows: “If at any time after the Close of Sale, any litigation or arbitration is commenced between the parties to this Contract of Sale… concerning its terms, interpretation or enforcement or the rights and duties of any party in relation thereto, the party or parties prevailing in such litigation or arbitration shall be entitled, in addition to such other relief as may be granted to them, to a reasonable sum as and for their attorney fees incurred in such litigation or arbitration…” The Court found that the fee provision was broad enough to encompass non-contract claims in particular the language regarding “any litigation” “concerning” the purchase agreement. Since Khan’s fraud and misrepresentation claims were tied to the purchase agreement, these torts were within the fee provision covering “any litigation… concerning [the contract’s] terms….”

The Court of Appeal concluded that the trial court erred when it awarded fees to Shim based on the entirety of Khan’s complaint but found that the fee provision was broad enough to allow the recovery of attorneys’ fees for the defense of the non-contract claims by Shim. The matter was remanded to the trial court to allocate the fees between the causes of action.

COMMENT

Parties need to pay particular attention when drafting fee provisions when contract and tort claims may be brought together. For cases with a fee provision, a liability analysis regarding the impact of attorneys’ fees should be assessed when determining whether to voluntarily dismiss a case.

For a copy of the complete decision, see: Khan v. Shim

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