Dodge v. Dollarstore
Filed 8/16/12 Dodge v. Dollarstore CA4/3
TO BE PUBLISHED IN OFFICIAL REPORTS
California
Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 8.1115(b). This
opinion has not been certified for publication or ordered published for
purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION THREE
PHILLIP DODGE et al.,
Plaintiffs and
Respondents,
v.
DOLLARSTORE, INC., et al.,
Defendants and
Appellants.
G045064
(Super. Ct. No.
30-2008-00102967)
O P I N I O N
Appeal
from a postjudgment order of the Superior Court of
County, Sherri Honer, Temporary Judge. (Pursuant to Cal.
Const., art. VI, § 21.) Reversed and remanded.
Haight
Brown & Bonesteel and Rita Gunasekaran for Defendants and Appellants.
The
Chugh Firm and Paul S. Saghera for Plaintiffs and Respondents.
Defendants
to plaintiffs.
name="_ftnref2" title="">[2] But the court awarded those fees pursuant to
an indemnification clause that does not provide for recovery of attorney fees
in an action between the parties. The
order is reversed.
FACTS
We
addressed the underlying facts in Dodge
v. Dollarstore (May 25, 2012, G044377) [nonpub. opn.] (
“Rakesh ‘Rex’ Mehta (Mehta) founded Dollarstore, Inc. (Dollarstore), and
other entities to sell discount merchandise.”
(Dodge, supra, G044377.) Plaintiffs
provided money to Dollarstore and, in exchange, received convertible promissory
notes, providing for the repayment plus interest or (upon a “Mandatory
Conversion Event”
the issuance of Dollarstore shares. The parties also entered into a “‘LOAN ANDSECURITY AGREEMENT’” (Agreement). (
Agreement contained a section entitled “Remedies; Limitation,” which provided
that each “[plaintiff’s] sole remedy for a default by [Dollarstore] hereunder
or under the Note shall be the right to convert the outstanding principal
balance under the Note into shares of [Dollarstore’s] common stock . . . at a
conversion price of $0.25 per share.”
The notes matured in 2005.
Dollarstore neither repaid the loans nor issued shares to plaintiffs. (Dodge,
Plaintiffs
filed suit against defendants in 2008 for breach of contract, common counts,
and other causes of action. The court
found defendants had breached their agreements, and the remedies-limiting
provision of the Agreement was unconscionable.
It awarded plaintiffs over $620,000.
We affirmed, holding that even if the remedies-limiting provision of the
Agreement was enforceable, plaintiffs would still be entitled to recovery since
they were not issued stock warrants per the Agreement. (Dodge,
supra, G044377.)
Relying
on a provision of the Agreement, plaintiffs moved to recover their attorney
fees as the prevailing party. The
relevant provision provides: “Indemnification. Lender recognizes that the offer and sale of
Securities by Borrower to Lender were and will be based upon the
representations, warranties, acknowledgements and agreements of Lender
contained in this Agreement and hereby agrees to defend and indemnify the
Borrower . . . with respect to the sale of the Securities, and to hold each
such person or entity harmless from and against all losses, liabilities, costs,
or expenses (including reasonable attorneys’ fees) arising by reason of or in
connection with any misrepresentation or any breach of such warranty by Lender,
or arising as a result of the sale or distribution of the Securities by the
undersigned in violation of the Securities Act, or any applicable state
securities laws, or Lender’s failure to
fulfill any of Lender’s covenants or agreements set forth herein.” (Italics added.)
At
the hearing, the court issued a tentative ruling for defendants. It reasoned the Agreement contained a simple
“embedded” prevailing party attorney fee clause. After additional briefing, the court issued a
minute order for plaintiffs. It found the indemnification provision
did incorporate an attorney fee clause, which was severable from the
unconscionable remedy limitation. The court awarded over $450,000 in
attorney fees to plaintiffs.
name="_ftnref3" title="">[3]
DISCUSSION
Defendants
make three contentions on appeal: (1)
the purported attorney fees clause is really an indemnification provision; (2)
the clause is unenforceable because the Agreement containing it was found
unconscionable; and (3) this is not an action “on the contract” making the
provision reciprocal. We agree the
Agreement’s indemnification provision does not provide for recovery of attorney
fees in a dispute between the parties.
Thus, we need not address the last two contentions.
Reversing
field, however, defendants also contend it is they who are entitled to an award
of fees under the very same indemnity clause.
We reject that contention as well.
Indemnification Provision Is Not an Attorney Fee Clause
“Unless
authorized by either statute or agreement, attorney’s fees ordinarily are not
recoverable as costs.” (
25 Cal.3d 124, 127.) Here, plaintiffs
assert the Agreement’s “Indemnification” clause would have allowed
defendants to recover their attorney fees had they prevailed, and, pursuant to
Civil Code section 1717, plaintiffs
therefore have the reciprocal right to recover their attorney fees as the
prevailing party on the contract.
the underlying issue here is whether the Agreement’s “Indemnification”
clause provides for the recovery of defendants’ attorney fees had they
prevailed in defending plaintiffs’ action on the contract.
Indemnity
agreements are construed under the same rules that govern the interpretation of
other contracts. (Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993)
13 Cal.App.4th 949, 969 (Myers).) Accordingly, the contract must be interpreted
to “give effect to the mutual intention of the parties.” (§ 1636.) The intention of the parties is to be
ascertained from the “clear and explicit” contract language. (§ 1638.)
“The words of a contract are to be understood in their ordinary and
popular sense.” (§ 1644.) Determining whether a contract provides for
the recovery of attorney fees is a question of law, and therefore is subject to
our de novo review. (
Systems, Inc. (1997) 55 Cal.App.4th 1014, 1021 (BMS).)
Ordinarily,
an indemnification provision allows one party to recover costs incurred
defending actions by third parties, not attorney fees incurred in an action
between the parties to the contract.
(See BMS, supra, 55
Cal.App.4th at p. 1030.) “[A]n indemnity
clause . . . generally obligates the indemnitor to reimburse the indemnitee for
any damages the indemnitee becomes obligated to pay third persons. [Citation.]
Indemnification agreements ordinarily relate to third party
claims.” (Myers, supra, 13 Cal.App.4th at p. 969 [holding indemnification
clause did not support award of attorney fees to prevailing party in action
between parties to the contract].)
Courts
look to several indicators to distinguish indemnification provisions from
provisions for the award of attorney fees incurred in litigation between the
parties to the contract. The key
indicator is an express reference to indemnification. “A clause which contains the words
‘indemnify’ and ‘hold harmless’ is an indemnity clause . . . .” (Myers,
supra, 13 Cal.App.4th at p. 969; accord
BMS, supra, 55 Cal.App.4th at p. 1029.)
The courts also examine the context in which the language appears. Generally, if the subject matter heading of
the contract incorporates a word like “indemnify,” and the surrounding
provisions describe third party liability, the clause will be construed as a
standard indemnification provision. (
will not infer that the parties intended an indemnification provision to cover
attorney fees between the parties if the provision “‘does not specifically
provide for attorney’s fees in an action
on the contract . . . .” (
For
example, language stating, “Seller . . . agrees to indemnify and save
buyer . . . harmless from any and all losses . . .
including . . . reasonable attorney’s fees . . .
whatsoever,” does not separately provide for attorney fees. (BMS,
supra, 55 Cal.App.4th at pp. 1022, 1030.)
The BMS court concluded that
“there is no language . . . which reasonably can be interpreted as addressing
the issue of an action between the parties on a contract.” (Id.
at p. 1030.) The BMS court considered the heading (titled “Indemnification”
andeffect of surrounding clauses, in which BMS promised to “indemnify and save
Buyer . . . harmless from any and all losses” (id.
at p. 1022) in determining that one could not make a reasonable inference that
the parties had negotiated to address an action between themselves (
meaning of the words used [citation] . . . [citation], we conclude that the
provision was intended to deal with only third party claims.’” (Ibid.)
an indemnification clause titled “‘Contractor’s Liability’” in which one party
promised to “indemnify” the other from “‘any, all, and every claim’ which
arises out of ‘the performance of the contract,’” was intended to deal with
only third party claims. (
974.) The Myers court held that considering “the ordinary meaning of the
words” (ibid.) “‘indemnify’” and
“‘hold free and harmless’” (id. at p.
965), as well as “the subject matter heading and giving effect to the entire
provision,” the contract could not be construed as separately providing for
attorney fees in an action between the parties (id. at p. 974).
Here, the Agreement’s
indemnification provision is just that — an indemnification provision. The
purported attorney fee clause lies within a paragraph entitled “Indemnification.” It obligates plaintiffs to “defend and
indemnify . . . and to hold [defendants] harmless from and against all losses .
. . .” This is a “standard third party
claims indemnification clause.” (
supra, 13 Cal.App.4th at
p. 973.) Plaintiffs also agree to
indemnify defendants from all claims arising out of “Lender’s failure to fulfill any
of Lender’s covenants or agreements set forth herein.”
(Italics added.) When
taken in context, the “ordinary . . . sense” (§ 1644) of this language merely extends plaintiffs’
duty to indemnify Dollarstore against third party claims to those based on
plaintiffs’ breach. And since the
contract does not “‘specifically provide’” otherwise, we conclude as a matter
of law that the contract does not contain a prevailing party attorney fee
provision. (Myers, supra, 13 Cal.App.4th at p. 970.)
Plaintiff relies on two cases that are distinguishable. In Baldwin
Builders v. Coast Plastering Corp. (2005) 125 Cal.App.4th 1339, the
court awarded attorney fees under an agreement which contained an
obligated one party to pay another “‘all costs, including attorney’s fees,
agreement.’” (Id. at p. 1345.) And in Continental Heller Corp. v. Amtech
Mechanical Services, Inc. (1997)
53 Cal.App.4th 500 (Continental Heller),
a contract provision had to be construed as an attorney fee clause to be more
than surplusage. In that case, section
11 of the contract set forth seven subparagraphs, with a standard indemnity
clause in subparagraph (b). (Id. at
p. 508.) But the contract also contained
“an additional provision on attorney fees” “[f]ollowing the last subparagraph”
of section 11. (Ibid.) This separate clause provided: “‘And the Subcontractor shall
indemnify the Contractor, and save it harmless from any and all loss . . . and attorney’s fees suffered or incurred on
account of any breach of the aforesaid obligations and covenants, and any other
provision or covenant of this Subcontract.’” (Id. at pp. 508-509.) The Continental
Heller court held: “It is clear this
concluding paragraph is not referring to indemnity for attorney fees incurred
in defending actions brought against Continental. That indemnity is covered in subparagraph (b)
of the section. Rather, the quoted
language is intended to entitle Continental to attorney fees in any action it
brings against Amtech for breach of any provision of the contract including,
but not limited to, breach of the indemnity provisions of subparagraph
(b).” (Id. at p. 509.)
The contract language here stands in stark contrast to these
cases. The indemnification provision
agreement” between the parties. (
at p. 1345.) Nor must it be construed as such in order to be meaningful. (Cf. Continental Heller, supra, 53
Cal.App.4th at p. 509.) Instead it extends
the scope of the duty to reimburse costs incurred in defending against third
party claims arising from conduct that breached the Agreement. It is an integral part of the indemnification
provision.
Are Not Entitled to Recover Attorney Fees
Defendants contend they
are entitled to attorney fees under the same indemnification clause on the
ground that plaintiffs breached the Agreement by filing this lawsuit in
violation of a provision of the Agreement whereby they arguably promised not to
bring an action against Dollarstore unless Dollarstore was in an undismissed
bankruptcy proceeding for at least 60 days.
In other words, after making lengthy arguments that the indemnification
provisions applied only to third party claims against Dollarstore, defendants
now assert they are nevertheless entitled to treat the indemnification
provision as a prevailing party attorney fee clause. Remarkably, the argument is made here on
appeal, wholly unsupported by any trial court finding that plaintiffs breached
the contract by filing this lawsuit.
Even more remarkably, defendants assert they are entitled to
reimbursement for their fees without ever having raised the request for
attorney fees below. “As a
general rule, ‘issues not raised in the trial court cannot be raised for the
first time on appeal.’” (
Planning Com. (1983) 34 Cal.3d 412,
417.)
Defendants
merely opposed plaintiffs’ motion below.
They never asked the trial court to award them attorney fees. They filed no motion to recover attorney
fees. They never gave the trial court an
opportunity to consider whether they should recover their attorney fees, but
now seek them “‘for the first time on appeal.’”
(Ibid.) We are a court of review and decline to
consider an issue never considered below.
In
their reply brief, defendants argue for the first time on appeal they are
entitled to attorney fees for defeating
plaintiffs’ claim to attorney fees.
Again, defendants have reversed positions by arguing, in effect, that
the indemnity provision is actually a prevailing party attorney fee clause,
thereby entitling them to an award of attorney fees under a (double)
reciprocity theory. Defendants rely on
the dubious proposition: “Where a party
claims a contract allows fees and prevails, it gets fees. Where it claims a contract allows fees and
loses, it must pay fees.” (International
Billing Services, Inc. v. Emigh (2000) 84 Cal.App.4th 1175, 1190 (
embraced so broad a rule. It is only
when “a party litigant prevails in an action on a contract by establishing that
the contract is invalid, inapplicable, unenforceable, or nonexistent,” the high
court held, that “section 1717 permits that party’s recovery of attorney fees
whenever the opposing parties would have been entitled to attorney fees under
the contract if they had prevailed.” (
599, 611.)
Fittingly,
the Third District Court of Appeal that decided International Billing has purported
to decline to follow it. That court
criticized the “rule” upon which defendants rely. (M.
Perez Co., Inc. v. Base Camp Condominiums Assn. No. One (2003)
The Perez court noted the
the contract provided for the recovery of attorney fees — but then, after
losing, they opposed the defendant’s attorney fee request by contending the
contract had no attorney fee clause. (
court recognized International
Billing made improper use of the judicial estoppel doctrine. (Id.
at p. 469.) And it was only in dictum
that International Billing enunciated
the “rule” on which defendants now try to rely.
(Id. at p. 464.)
Further,
the Perez case has itself been
criticized. In Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162
Cal.App.4th 858, the Court of Appeal pointed out an inconsistency in the
first stated that “a prevailing party is entitled to attorney fees only if it
can prove it would have been liable for attorney fees had the opponent
prevailed.” (Perez, supra, 111
Cal.App.4th at p. 467.) But it then
“cast in doubt” the meaning of this formulation of the rule by concluding that
the “rule of International Billing
continued to apply where the losing party had attempted unsuccessfully to
establish that the alleged contract included a fee provision.” (Blickman Turkus,
at p. 899.) The Blickman Turkus court concluded:
“We believe the better rule is the one stated in [Leach v. Home Savings & Loan Assn. (1986) 185 Cal.App.3d
1295, 1307]: A party claiming [a
reciprocal right to] fees under section 1717 must ‘establish that the opposing
party actually would have been
entitled to receive them if he or she had been the prevailing party.’” (Ibid.) Under this formulation of the rule plaintiffs cannot recover their attorney fees
under the indemnification provision.
Defendants cannot either.
But we need not tarry
long over the alternate formulations of the “correct” formulation of the
rule. Defendants raised this argument
for the first time in their reply brief.
“Points raised
the first time in a reply brief
because such consideration would deprive the respondent of an opportunity to
counter the argument.” (American
Drug Stores, Inc. v. Stroh (1992) 10 Cal.App.4th 1446, 1453.) Defendants have not shown good cause to
depart from the usual rule.
DISPOSITION
The postjudgment order
awarding attorney fees is reversed, and the matter is remanded to the court
with directions to vacate its order and enter a new order denying plaintiffs’
motion for attorney fees. Defendants are
to recover their costs on appeal, but not their attorney fees.
IKOLA,
J.
WE CONCUR:
RYLAARSDAM, ACTING P. J.
ARONSON, J.
defendants at trial were Dollarstore, Inc.; Dollarstore Corporation,
Dollarstore International, Inc.; Dollarstore.com Inc.; My Dollarstore
Franchising, Inc.; Rex Mehta, aka Rakesh Mehta; Rishi Mehta; and Reeta Mehta.
plaintiffs at trial were Phillip Dodge; Raghav Sood aka Raj Sood; Nelson
Brewart; Martha Brewart; Jeff Wilhelm; Susan Wilhelm; and Sukhdev Sharma.
