Alki Partners, LP v. DB Fund Services, LLC ( 2016 )

Filed 10/24/16
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
ALKI PARTNERS, LP, et al., D068063
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2011-00056561-
CU-BC-NC)
DB FUND SERVICES, LLC, et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of San Diego County, Timothy
M. Casserly, Judge. Affirmed in part and reversed in part with directions.
James A. Shalvoy for Plaintiffs and Appellants.
Pillsbury Winthrop Shaw Pittman, Richard M. Segal, Nathaniel R. Smith, Kirke
M. Hasson and G. Allen Brandt for Defendants and Respondents.
After allegedly losing millions of dollars in a hedge fund, investors sued the fund's
administrator for breach of contract, alleging the administrator failed to (1) value the
hedge fund's assets, (2) advise investors of the hedge fund's net asset value, and (3)
respond to investor inquiries about the fund. The superior court granted summary
judgment in favor of the fund administrator, determining the undisputed material facts
established no breach of contract. Later, the court awarded the fund administrator
$3,027,237.96 in attorney fees based upon a contractual provision entitled "Standard of
Care," which provides the administrator is to be indemnified for losses, including
reasonable attorney fees "resulting in any way from the performance or non-performance
of Administrator's duties hereunder . . . ."
The investors appeal, asserting triable issues of material fact preclude summary
judgment. They also contend the court erroneously awarded attorney fees. We affirm
summary judgment, determining the undisputed material facts establish the administrator
did not breach the applicable contract. However, we reverse the award of attorney fees
because the contractual language relied upon is a third party indemnity provision that
does not create a right to prevailing party attorney fees in litigation between the parties to
the contract. (See Carr Business Enterprises, Inc. v. City of Chowchilla (2008) 166
Cal. App. 4th 14, 22-23 (Carr).)
FACTUAL AND PROCEDURAL BACKGROUND
A. Introduction—The Parties
This appeal involves several distinct entities having similar names. The
investment fund entities are Alki Partners, LP; Alki Capital Partners, L.P.; Alki Fund,
Ltd.; and Alki Capital Management, LLC. The fund administrators are DB Hedgeworks,
LLC, and Hedgeworks Fund Services Limited.
Adding to the potential for confusion, these entities are parties to distinct
contracts, one called a "Fund Administration Agreement" and the other an
2
"Administrative Services Agreement." The record contains three such contracts, but they
differ from each other in material respects. One of them is not even signed.
Thus, to say "Hedgeworks" or "Respondents" breached "contracts" with "Alki"—
as plaintiffs often assert in their briefs, is confusing at best, and potentially misleading.
To clarify, the following persons or entities are involved in this appeal:
1. Alki Partners, LP
Alki Partners, LP (also known as Alki Capital Partners, L.P.) is a limited
partnership in the business of operating a hedge fund.1 Hereafter, we refer to Alki
Partners, LP, and Alki Capital Partners, L.P., as Alki Partners.
2. Alki Capital Management, LLC
Alki Capital Management, LLC (Alki Capital) was the general partner of Alki
Partners until approximately September 2008.
3. Scott Wilfong
Scott Wilfong is the president of Alki Capital. Wilfong was also the portfolio
manager for Alki Partners. Wilfong had sole authority to make investment decisions for
Alki Capital and Alki Partners.
1 The term "hedge fund" is commonly used "as a catch-all for 'any pooled
investment vehicle that is privately organized, administered by professional investment
managers, and not widely available to the public.'" (Goldstein v. SEC (D.C. Cir. 2006)
451 F.3d 873, 875.) Hedge funds are "'usually structured as limited partnerships to
achieve maximum separation between ownership and management . . . .'" (United States
v. Lay (6th Cir. 2010) 612 F.3d 440, 447.)
3
4. DB Fund Services, LLC, formerly known as DB Hedgeworks, LLC
DB Fund Services, LLC, formerly known as DB Hedgeworks, LLC
(Hedgeworks), is a company that provided administrative services to Alki Partners under
a contract entitled "Fund Administration Agreement" dated January 1, 2002.
5. Bullfrog Research, LLC
Bullfrog Research, LLC (Bullfrog) became the general partner of Alki Partners in
September 2008. Bullfrog is also the assignee of certain claims and causes of action of
individuals who are limited partners of Alki Partners.
6. Alki Fund, Ltd.
Alki Fund, Ltd. (Alki Fund) is a Cayman Islands company, an "offshore hedge
fund."
7. Hedgeworks Fund Services Limited
Hedgeworks Fund Services Limited (HFSL) is a Cayman Islands limited liability
company. HFSL provided administrative services to Alki Fund under a contract entitled
"Administrative Services Agreement" dated August 1, 2005.
B. Summary Judgment and Summary Adjudication Rulings
In May 2014 the court issued the summary judgment ruling that is the basis for the
instant appeal. However, in March 2014 the court made several rulings on a separate
motion for summary judgment and summary adjudication. As a result of those March
2014 rulings, which are not challenged here, some of the entities and contracts noted ante
are no longer involved in this case.
4
For example, in the March 2014 ruling, the court granted summary judgment in
favor of HFSL on the grounds it was dissolved before plaintiffs' action was commenced.
Thus, HFSL is out of the case.
The court also granted summary adjudication in favor of Hedgeworks against Alki
Fund on the grounds no contract existed between them. As a result, the court dismissed
claims alleged by Alki Fund. Alki Fund is out of the case.
There are other important results of these March 2014 rulings. The administrative
services agreement dated August 1, 2005, between Alki Fund and HFSL is not relevant in
this appeal. That August 1, 2005 contract does not determine Hedgeworks's contractual
obligations to Alki Partners because the court has already adjudicated that Hedgeworks is
not a party to that contract, and that ruling is not challenged on appeal.
The only contract that is relevant here is the fund administration agreement dated
January 1, 2002, between Alki Partners and Hedgeworks. In their response to
Hedgeworks's separate statement of undisputed material facts, plaintiffs concede this
point, agreeing it is "undisputed" that the agreement is the contract for administrative
services between Hedgeworks and Alki Partners.2
With these preliminary matters clarified, the relevant facts are summarized below.
2 Plaintiffs' briefs create considerable confusion by frequently quoting and relying
on terms of the inapplicable Alki Fund-HFSL contract. As noted ante, the court's March
2014 summary judgment and summary adjudication rulings established that HFSL
(which was a party to that contract) is out of the case because it was dissolved before
plaintiffs filed suit, and Hedgeworks (which is in the case) was not a party to that
contract.
5
D. The Alki Partners Hedge Fund
Alki Partners was created to acquire, invest in, and sell or otherwise trade in
securities, defined broadly to include "investment instruments and vehicles of every kind
and nature, foreign or domestic, whether publicly or nonpublicly traded . . . ."
Alki Capital, the general partner of Alki Partners, was given vast authority in
running Alki Partners. For example, the limited partnership agreement gives Alki Capital
exclusive authority to determine the value of the partnership's assets:
"10.6 Valuation. The value of the assets and liabilities of the
Partnership shall be determined by the [g]eneral [p]artner in good
faith and such determination shall be conclusive and binding on all
of the [p]artners . . . ."
The limited partnership agreement also gives Alki Capital "full, exclusive and
complete authority in the management and control of the business of the
[p]artnership . . . and [it] shall make all decisions affecting the [p]artnership."
From 2002 to September 2008, Wilfong, as owner of Alki Capital, had the sole
authority to make investment decisions for Alki Partners.
Only wealthy and sophisticated investors were eligible to become limited partners
in Alki Partners. The minimum investment was $250,000. The offering was available
only to investors having a net worth in excess of $1.5 million. Before being accepted into
the limited partnership, an investor had to demonstrate that he or she was an "accredited
investor," sophisticated in financial and business matters generally and in investing in
securities.
6
The Alki Partners' offering circular warned potential investors in all upper case
letters, "THESE SECURITIES ARE SUBJECT TO A HIGH DEGREE OF RISK."
Elsewhere, the circular explained that the general partner "has broad discretion to employ
any [s]ecurities trading or investment techniques" many of which "are high-risk activities
that could result in substantial losses under certain circumstances." After providing
biographical information about Wilfong, the offering circular states, "The [p]artnership's
performance depends, to a great extent, on the ability and experience of Mr. Wilfong in
making investment decisions."
G. The Hedgeworks Fund Administration Agreement
Alki Partners entered into a contract with Hedgeworks entitled "Fund
Administration Agreement," dated January 1, 2002 (the Agreement). The Agreement
refers to Alki Partners as "Client" and to Hedgeworks as "Administrator." The
Agreement provides that "No provision of this Agreement may be amended, modified,
waived or discharged except as agreed to in writing by the parties."
Under the Agreement, Hedgeworks agreed to perform certain accounting and
administrative functions for Alki Partners. In the ordinary course of business, each
month Alki Partners (or its prime broker) would provide Hedgeworks with values for the
fund's assets.3 If the value of a particular asset was not available on the securities
exchange or market, or if Alki Partners believed the reported value was not indicative of
3 A prime broker executes trades for a hedge fund.
7
fair value, Alki Partners had the right under the Agreement to provide Hedgeworks its
own valuation. Schedule A, paragraph 2(d) of the Agreement provides in part:
"The value of assets will be recorded at their fair value as
determined in good faith by the Client in the absence of current
quotations or if Client[] concludes that such quotations are not
indicative of fair value by reason of illiquidity of a particular
security or other factors."
Consistent with this provision, Wilfong testified in deposition, "I'm the one that
valued it. Hedgeworks had nothing to do with the valuation."
In turn, Hedgeworks would take the asset values provided by Alki Partners, factor
in monthly expenses and any other adjustments, and calculate the net asset value (NAV)
of the fund. Under schedule A.2. of the Agreement, Hedgeworks was required to prepare
limited partner statements on a monthly basis. Based on the fund's NAV, Hedgeworks
would calculate individual investor balances and prepare monthly statements of account
that it would send to each limited partner investor.
Hedgeworks issued the last such statements in mid-February 2008 for the month
ending January 31, 2008. It is undisputed that these statements were accurate. The
witness plaintiffs designated as the person most knowledgeable about their claims could
not identify any situation where Hedgeworks failed to provide information Alki Partners
requested or did something prohibited by the Agreement. Wilfong testified the
statements Hedgeworks sent to investors were "100 percent" accurate.
H. The Vatas Trades, Collapse, and Settlement
RemoteMDX, Inc. (RMDX) sells tracking devices to monitor individuals in the
criminal justice system. (See Alki Partners, L.P. v. Vatas Holding GmbH (S.D.N.Y.
8
2011) 769 F. Supp. 2d 478, 485.) In 2007 Wilfong became acquainted with Lars
Windhorst, who was managing a German company called Vatas Holding GmbH (Vatas).
Wilfong learned that Vatas was interested in purchasing large quantities of RMDX stock,
but was having difficulty doing so "because of the time difference and the structure of his
firm." Wilfong agreed to purchase RMDX stock through Alki Partners and then transfer
the stock to Vatas for a fee.
From April 2007 to February 2008, Wilfong caused Alki Partners to purchase
large quantities of RMDX stock with the expectation that Alki Partners would then resell
that RMDX stock to Vatas at a profit. The market price of RMDX stock, which was less
than $2.00 per share in April 2007, rose to a high of $4.24 on December 7, 2007, and
remained at prices between $3.50 and $4.00 per share in January and early February
2008.
Initially, Wilfong's investment strategy was very profitable. In 2007 Alki Partners
was up approximately 35 percent. Wilfong testified that during this period, "People were
starting to beat down my door to get in."
However, in February 2008, when about 80 percent of Alki Partners' holdings
were in RMDX stock—expected trades with Vatas did not close. Wilfong testified Vatas
"reneged their trades . . . ."
Within just a few days, RMDX stock price plummeted—from $3.09 per share on
February 11 to $1.52 per share on February 15. Wilfong testified in deposition, "[T]he
trades broke. Stock had collapsed."
9
With Alki Partners owning a large amount of high-priced RMDX stock with no
one to whom to sell it, Wilfong went to Germany to negotiate a resolution with Vatas.
Wilfong believed Vatas was supported "by a family . . . worth $8 billion. Vatas had over
a billion dollars worth of public assets that were shown." Wilfong thought the "trades
were going to settle out."
In late February 2008, Wilfong (through Alki Capital, among other entities) and
Vatas entered into a "confidential" settlement agreement entitled "Heads of Terms for
Settlement" (Settlement). In the Settlement, Vatas agreed to pay approximately $5
million no later than March 6, 2008, as "collateral." Additionally, Vatas granted Alki
Partners a "put option" for 3,441,000 shares of RMDX stock at $3.84 per share, due April
30, 2008.4
The Settlement contains a "Confidentiality" provision, stating the terms of
settlement "and all communications between the parties related directly or indirectly
thereto . . . are of a confidential nature and shall not be disclosed except to directors or
employees of either [p]arty with a need to know or to advisors under duty of
confidentiality to such [p]arty." In deposition testimony, Wilfong explained that Vatas
insisted on such confidentiality:
"I thought I was the only one that he [(Lars Windhorst, of Vatas)]
owed money to. Turns out later on we found out he owed money to
lots of people. And he wanted us—the only way he was going to
send us money is if I didn't tell my investors what was going on. [¶]
4 A put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an asset at an agreed price on or before a
particular date. The value of the 3,441,000 shares at $3.84 per share was $13,213,440.
10
It was an absolute—that was his No. 1 thing. . . . I was highly
regulated. Last thing he wanted was to have U.S. regulatory
authorities coming in because he had his entity and he was trying to
juggle all these balls and keep them up. [¶] . . . [¶] . . . So he was
afraid if I went to my investors in February and told them exactly
what was going on . . . Vatas would be shut down. [¶] . . . So it
was—it was Vatas's deal that if we told anybody anything, we
wouldn't have gotten any money."
I. Wilfong Instructs Hedgeworks Not to Communicate with Investors
To maintain the confidentiality of the Settlement, Wilfong instructed Hedgeworks
"not to say anything." Wilfong and his lawyers "bound the administrators not to disclose
information to investors." In deposition testimony, Wilfong further explained:
"Q: What did you instruct the administrators to do if they got
questions from the investors about this stuff?
"A: I told them not to say anything.
"Q: Who did you tell that to?
"A: All of them. It was not my administrator's responsibility to ever
interface with my investors. That—that wasn't their job. That
was—they'd be breaking confidentiality agreements with me and
stuff; so I told them if any of my investors reached out to them,
direct them back to me.
"Q: And you had authority to give that instruction?
"A: Absolutely.
"Q: You expected them to obey that instruction?
"A: I did, and if they had—if they had broken that, it would have
gone back to Lars [Windhorst], we wouldn't have gotten any money
out of Vatas."
Wilfong instructed Hedgeworks to refer any investor inquiries to himself. An e-
mail Wilfong sent to Hedgeworks in June 2008 states:
11
"The counter party [(Vatas)] in the unsettled trades is making
progress and I am feeling more confident everyday. . . . If
[investors] call you please remember that the settlement agreement is
confidential and refer them to either me or the fund's attorneys . . . ."
J. Wilfong Instructs Hedgeworks to Not Issue NAV's
Pending full performance of the Vatas Settlement, Wilfong directed Hedgeworks
to not prepare NAV's to send to investors. In deposition testimony, a Hedgeworks
representative testified:
"The reason why we didn't issue an NAV is because we were
directed by Mr. Wilfong to not issue investor statements to the
investors."
In Wilfong's own words, he "froze the NAV." He further explained in his
deposition testimony:
"'If the counterparty [(Vatas)] didn't follow through [on the
Settlement], the loss was material enough that I didn't feel
comfortable issuing official NAV's. I spoke to our administrators
and told them I was going to suspend issuing official NAV's unless
this situation was resolved.' [¶] . . . [¶] . . . [As] . . . the GP [general
partner], . . . I froze the NAVs until this problem was fixed."
In April 2008 Alki Capital sent a letter to investors, explaining, "Our fund recently
experienced settlement issues with a number of trades we executed with a single
counterparty," and "[w]e entered into a written agreement with the counterparty to protect
us against losses." The letter also stated that Alki Capital "will not be releasing
performance data pending the resolution of these settlement issues."
Wilfong also spoke to the investors by telephone. He testified, "If they had
questions, I answered what I could, let them know where we were, what was going
on . . . we'd received some money, that I think we're going to be made whole, that . . . I
12
had a confidentiality agreement with these people and that I didn't want to break it
because I want to get all our money back." Wilfong decided it was not appropriate to
report a value for Alki Partners' assets (and therefore it did not provide Hedgeworks with
asset values) unless Vatas fully performed under the Settlement. In deposition testimony,
Wilfong explained that even though Alki Partners' auditor, PriceWaterhouse, valued the
options Vatas had given in the Settlement, he determined it was inappropriate to use
those values to calculate NAV for the investors:
"He [(Vatas)] wasn't fulfilling his obligations. . . . I didn't feel
comfortable until—we got our money 100 percent that the NAV
should go out. I thought it would be . . . fraudulent for me to go out
and represent an NAV when we had half the assets of our fund in
these . . . instruments. [¶] I wanted to get the money in . . . before I
put out a real NAV."
In a letter to an investor, Wilfong explained, "After the original [Vatas] agreement
was in place my initial intention was to put out Alki's official NAV as normal; however,
with the underlying security [RMDX stock] continuing to go down I didn't feel
comfortable and thought it would be unethical to issue official NAV's."
In the ordinary course of business, Hedgeworks would have received asset values
at the end of February 2008 and used them to calculate NAV's and investor balances to
distribute by mid-March. However, without Alki Partners providing or approving the
asset value of the RMDX stock and put options in the Settlement, Hedgeworks could not
calculate the NAV or the investors' respective interests in the fund.
13
L. Hedgeworks Resigns
Vatas paid Alki Partners another $2 million in June 2008. However, Vatas did not
pay the remaining $1 million collateral, nor did Vatas honor the put options it granted in
the Settlement.
In July 2008 Hedgeworks notified Alki Partners it was immediately terminating its
administration services "in light of recent events" with the Alki Partners' funds "and due
to the lack of transparency available to us." Although the Agreement provided for 60-
days' notice of termination, Alki Partners agreed to the immediate termination.
M. Procedural History
1. Plaintiffs' first amended complaint
Alki Partners, Alki Fund, and Bullfrog (plaintiffs) sued Hedgeworks and HFSL in
a first amended complaint as follows:
1. Alki Fund alleged breach of contract;
2. Alki Partners alleged breach of contract;
3. As assignee of investors' claims, and as an alleged third party
beneficiary of the contract, Bullfrog alleged breach of contract;
4. All plaintiffs alleged breach of fiduciary duties.
More specifically, the first amended complaint alleged Hedgeworks breached its
contractual duties in the following respects:
1. "[F]ailing and refusing to calculate NAVs for the investors'
accounts;"
2. "[F]ailing and refusing to alert investors and/or agents of the
funds of their inability to calculate NAVs and the reasons therefor;"
14
3. "[F]ailing and refusing to communicate with investors in
response to their direct inquiries;"
4. "[M]aintaining as confidential the facts behind its inability to
calculate NAVs for the investors' accounts."
2. Hedgeworks's cross-complaint
Hedgeworks filed a first amended cross-complaint containing allegations against
Alki Partners, Alki Capital, and Wilfong for express contractual indemnity and equitable
indemnity.
3. Demurrer to first amended complaint
The court sustained a demurrer to the breach of fiduciary duty cause of action,
with leave to amend.5 Plaintiffs did not amend and have not challenged that ruling here.
4. March 2014 rulings
Subsequently, as discussed ante, the court dismissed HFSL from the action
because HFSL was dissolved before plaintiffs commenced the lawsuit. Plaintiffs do not
challenge this ruling.
Based on evidence that Hedgeworks was not a party to the fund administration
agreement for the Cayman Islands-based Alki Fund, Ltd, the court dismissed the claims
of Alki Fund, Ltd. (and its investors, through Bullfrog). In issuing this ruling, the court
determined that the administrative services agreement dated August 1, 2005, "is the
hedge fund administration contract relating to Alki Fund, Lt[d]." This ruling is also not
challenged on appeal.
5 The record does not include the order sustaining the demurrer; however, the
parties' briefs agree on this point.
15
As a result of these rulings, only the second cause of action (breach of contract by
Alki Partners against Hedgeworks) and the third cause of action (breach of contract by
Bullfrog against Hedgeworks) remained in the case.
5. Motion for summary judgment
In April 2014 Hedgeworks filed a motion for summary judgment, asserting
(among other grounds) the undisputed evidence established it did not breach the
Agreement because: (1) By not providing Hedgeworks with a value of the fund's assets,
Alki Partners did not fulfill a condition precedent to Hedgework's obligation to calculate
NAV's; and (2) Alki Partners instructed Hedgeworks to not communicate with investors,
and therefore cannot assert Hedgework's compliance with such directions breached the
Agreement.
Plaintiffs filed opposition. Relying heavily on provisions in the (inapplicable)
2005 administrative services agreement between Alki Fund, Ltd., and HFSL, they
asserted Alki Partners "had nothing to do with valuing the assets" and Hedgeworks was
contractually obligated to value the assets and calculate NAV's. Plaintiffs also argued the
"anti-fraud safeguards provided by a fund administrator" obligated Hedgeworks to
communicate with the investors, despite Alki Partners' contrary instructions to
Hedgeworks. Plaintiffs also asserted the RMDX stock trades were the product of a
fraudulent scheme between Hedgeworks and Wilfong to "cook the books" by increasing
Hedgeworks's own profitability, making it "a more attractive candidate to be acquired by
a larger organization."
16
In reply, Hedgeworks asserted its contractual duties were determined by the
Agreement alone, which created no duty to police the discretionary decisions of Alki
Partners. Hedgeworks's reply noted plaintiffs had misquoted provisions in the
Agreement and relied on terms in the Cayman Islands contracts that were inapplicable.
The court conducted a hearing. As the following colloquy shows, plaintiffs'
counsel agreed the material facts were undisputed:
"The Court: [T]his appears to be a purely legal issue. You're not
disagreeing on what occurred here. You're not disagreeing that
Wilfong told them not to—didn't give them the information they
needed to write the reports. And he told them not to send reports.
He told them not to have direct communication with the investors. I
mean, you're both agreeing that that's what occurred. The question
is, is that a breach of contract? That's legal. That's not a triable
issue. You agree on what the facts are.
"Mr. Shalvoy: Well, and we submit the evidence submitted, the
PriceWaterhouse fraud risk assessment memo, clearly establishes
that the only reason for this contract is to protect investors.
"The Court: All right. Thank you."
After taking the matter under submission, the court granted summary judgment to
Hedgeworks on several alternative grounds. Among other rulings, the court determined
"Hedgeworks['s] performance obligations under the contract were excused by failure of a
condition precedent. Specifically, the evidence shows that Hedgeworks had no
obligation to prepare investor statements because Alki [Partners] did not provide the
necessary value upon which those calculations would be based . . . ."
The court also determined the "undisputed material facts and evidence establish
that Alki [Partners] instructed Hedgeworks not to issue statements to Alki [Partners']
17
investors, thus waiving Hedgeworks['s] performance and Alki [Partners] is estopped from
now contending that Hedgeworks breached its contract with Alki [Partners] by following
Alki [Partners'] own instructions."
The court also granted summary judgment to Hedgeworks on the third cause of
action by Bullfrog because those claims "are derivative claims belonging to Alki
[Partners]."
The Agreement provides Hedgeworks shall not be liable to Alki Capital "except to
the extent such losses result from willful misconduct, gross negligence, fraud or
dishonesty by Administrator in the performance of its obligations and duties . . . ." The
court also granted summary judgment on the grounds that "even if Hedgeworks'
following of Alki [Partners'] instructions could be interpreted to constitute a technical
breach . . . Alki [Partners'] claims still fail because of the . . . provision limiting
Hedgeworks['] liability."
Additionally, the court ruled, "Plaintiffs' claims also fail for admitted lack of loss
causation."
Later, the court awarded Hedgeworks $3,027,237.96 in attorney fees based on an
indemnity provision in the Agreement.
After Hedgeworks dismissed its first amended cross-complaint without prejudice,
this appeal followed.6
6 The parties do not address whether the dismissal without prejudice renders the
judgment nonappealable. Because the record does not indicate the dismissal was
18
DISCUSSION
I. THE STANDARD OF REVIEW
"'We review a grant of summary judgment de novo and decide independently
whether the facts not subject to triable dispute warrant judgment for the moving party as
a matter of law.'" (Griffin v. The Haunted Hotel, Inc. (2015) 242 Cal. App. 4th 490, 498.)
II. THE COURT CORRECTLY GRANTED SUMMARY JUDGMENT
A. Appellants Have Forfeited Their Argument by Citing Their Own Points and
Authorities Rather Than Evidence
We begin by noting a few cardinal principles of appellate review. We start with
the presumption the judgment is correct. (In re Marriage of Arceneaux (1990) 51 Cal. 3d
1130, 1133.) An appellant has the burden to demonstrate error. (Denham v. Superior
Court (1970) 2 Cal. 3d 557, 564.) An appellant who fails to cite accurately to the record
forfeits the issue or argument on appeal that is presented without the record reference.
(City of Lincoln v. Barringer (2002) 102 Cal. App. 4th 1211, 1239 (City of Lincoln).)
California Rules of Court,7 rule 8.204(a)(1)(C) provides that each brief must
"[s]upport any reference to a matter in the record by a citation to the volume and page
number of the record where the matter appears." The purpose of this rule is to enable
appellate justices and staff attorneys to locate relevant portions of the record
expeditiously. (City of Lincoln, supra, 102 Cal.App.4th at p. 1239, fn. 16.)
accompanied by any agreement for future litigation, the judgment is sufficiently final to
be appealable. (See Kurwa v. Kislinger (2013) 57 Cal. 4th 1097, 1105.)
7 All references to rules are to the California Rules of Court.
19
Plaintiffs did not comply with rule 8.204(a)(1)(C). In the "Argument" section of
the opening brief, they assert, "Alki [Partners] had no obligation to value fund assets."
To support that assertion, plaintiffs cite only to their trial court points and authorities.
The opening brief also asserts, "a triable issue of fact exists whether Alki [Partners]
waived [Hedgeworks's] performance by instructing it not to issue monthly statements."
As support for this assertion, plaintiffs again cite only to their own points and authorities
filed in opposition to the motion for summary judgment.
Citing points and authorities filed in the trial court is not appropriate support for
factual assertions in a brief. Points and authorities are not presented under penalty of
perjury. Matters set forth in points and authorities are not evidence. (Brehm
Communities v. Superior Court (2001) 88 Cal. App. 4th 730, 735.) Evidence appears
elsewhere—in deposition testimony, discovery responses, and declarations. The
"Argument" section in the appellants' opening brief should have cited to those pages of
the record.8
By failing to support the factual assertions in their legal arguments with citations
to the evidence, plaintiffs have forfeited their argument the court erred in granting
8 The factual portion of appellants' opening brief does contain citations to evidence.
However, such citations do not cure the failure to cite evidence in the argument section of
the brief, and we will not pick and choose the portions of the brief in the statement of
facts that we may think are applicable to each assertion in the argument. Rule
8.204(a)(1)(C) is intended to enable the reviewing court to locate relevant portions of the
record "without thumbing through and rereading earlier portions of a brief." (City of
Lincoln, supra, 102 Cal.App.4th at p. 1239, fn. 16.) To provide record citations for
alleged facts at some points in a brief, but not at others, frustrates the purpose of that rule,
and courts will decline to consider any factual assertion unsupported by record citation at
the point where it is asserted. (Ibid.)
20
summary judgment. (City of Lincoln, supra, 102 Cal.App.4th at p. 1239 [arguments not
supported by adequate citations to record need not be considered on appeal].) In
reviewing a ruling on a motion for summary judgment, "de novo review does not obligate
us to cull the record for the benefit of the appellant in order to attempt to uncover the
requisite triable issues. As with an appeal from any judgment, it is the appellant's
responsibility to affirmatively demonstrate error and, therefore, to point out the triable
issues the appellant claims are present by citation to the record and any supporting
authority." (Lewis v. County of Sacramento (2001) 93 Cal. App. 4th 107, 116,
disapproved on other grounds in Kaufman & Broad Communities, Inc. v. Performance
Plastering, Inc. (2005) 133 Cal. App. 4th 26, 41-42.)
B. The Court Correctly Entered Summary Judgment
Notwithstanding plaintiffs' forfeiture, we have examined the record and conclude
the court properly entered summary judgment.
1. Failure to calculate NAV
Plaintiffs' first amended complaint alleges Hedgeworks breached the Agreement
by "failing and refusing to calculate NAVs for the investors' accounts." However, the
undisputed evidence is that Hedgeworks's ability to calculate NAV was dependent upon
Alki Partners providing values for the fund's assets. In deposition, Wilfong testified,
"Hedgeworks had nothing to do with the valuation." He explained that Alki Partners was
responsible for providing asset values to Hedgeworks:
"Q: So I wanted to ask you about that part of Schedule A that says:
[¶] 'The value of assets will be recorded at their fair value as
21
determined in good faith by the client.' [¶] You understood that that
was part of the function of Alki Partners?
"A: That was my function, yeah, as the—the GP, as the managing—
I'm the one that came up with the valuations.
"Q: And before you—in order to do a calculation of net asset value,
you have to have a valuation from someone, correct?
"A: Correct. Yes."
Wilfong decided to not value the put options in the Vatas settlement until the
situation with Vatas was resolved, and therefore he did not provide Hedgeworks with a
value for those assets. As Wilfong explained in a letter addressed to an investor:
"After the original [Vatas] agreement was in place my initial
intention was to put out Alki Partners' official NAV as normal;
however, with the underlying security continuing to go down, I
didn't feel comfortable and thought it would be unethical to issue
official NAV's. I spoke to our administrators and told them I was
going to suspend issuing official NAV's until this situation was
resolved . . . ." (Italics added.)
In deposition, Wilfong testified he directed Hedgeworks to not calculate NAV,
stating, "I froze the . . . NAVs until this problem was fixed." Wilfong further explained:
"Q: So I don't understand why the NAVs weren't prepared and sent
out. [¶] . . .
"A: . . . I didn't feel comfortable until—until we got our money 100
percent that the NAV should go out. I thought it would be
fraudulent for me to go out and represent an NAV when we had half
the assets of our fund in these—these . . . instruments. [¶] I wanted
to get the money in and—in it before I put out a real NAV."
Based on this evidence, the court properly determined the undisputed material
facts establish Hedgeworks did not breach the Agreement by not calculating NAV's for
the investors' accounts. A party's failure to perform a condition precedent will preclude
22
an action for breach of contract. (Richman v. Hartley (2014) 224 Cal. App. 4th 1182,
1192.) Where one party's obligation is dependent on the prior proper performance of the
other party, and that other party does not perform, the obligation is excused. (Mainieri v.
Magnuson (1954) 126 Cal. App. 2d 426, 429 (Mainieri).)
Here, the undisputed evidence established Hedgeworks could not calculate NAV
unless and until Alki Partners provided Hedgeworks with the value of the fund's assets
(consisting mostly of RMDX stock and the value of the put options in the Settlement).
The undisputed evidence also established that Alki Partners refused to supply such data.
The court therefore correctly determined that Hedgeworks's contractual obligation to
calculate and disseminate NAV's was excused for failure of the condition precedent.
(Mainieri, supra, 126 Cal.App.2d at p. 429 ["The failure of appellant to perform this
condition precedent excused respondent's performance which was dependent on it."].)
Plaintiffs' arguments to the contrary are not persuasive. First, they assert Alki
Partners "had no obligation to value fund assets." Plaintiffs further contend, "the fund
administration agreements were clear in this regard." However, all the relevant
evidence is to the contrary. Without contradiction, Wilfong testified that pending Vatas's
performance under the Settlement, the fund's assets could not be appropriately valued:
"'If the counterparty [(Vatas)] didn't follow through, the loss was
material enough that I didn't feel comfortable issuing official NAVs.
I spoke to our administrators and told them I was going to suspend
issuing official NAVs until this situation was resolved.' [¶] . . .
[¶] . . . [T]he stock—it went from a small loss to a massive loss, and
I think . . . at that time I made the decision . . . it would
be . . . inappropriate to be putting out the NAVs like there was—
there were no problems . . . ."
23
Section 2(d) of the Agreement provides that under such circumstances—i.e.,
where Alki Partners determined market quotations were not indicative of an asset's fair
value—Alki Partners was solely responsible for valuing fund assets:
"The value of assets will be recorded at their fair value as
determined in good faith by the Client in the absence of current
quotations or if Client[] concludes that such quotations are not
indicative of fair value by reason of illiquidity of a particular
security or other factors. Independent appraisals generally will not
be obtained in these situations. Securities or other assets that are not
readily marketable generally will be valued as determined in good
faith by the Client based upon the most appropriate information
available at that time."9
Ignoring section 2(d) of the Agreement, plaintiffs instead quote provisions in the
August 1, 2005 administrative services agreement between Alki Fund and HFSL. That
contract states the administrator will "calculate the value of the assets and liabilities of
the Fund."
However, plaintiffs cannot rely on the August 1, 2005 administrative services
agreement to create a triable issue of fact here because (1) Hedgeworks was not a party to
that 2005 agreement; (2) plaintiffs concede as an "undisputed" fact the Agreement (dated
January 1, 2002) "is the contract for the provision of hedge fund administration services"
to Alki Partners; and (3) the trial court dismissed all of Alki Fund's claims in this case, a
ruling plaintiffs do not challenge on appeal.
9 Plaintiffs' briefs contains only an incomplete quotation of the relevant provision in
the Agreement about valuation. They omit and ignore the contractual language: "The
value of assets will be recorded at their fair value as determined in good faith by the
Client in the absence of current quotations or if Client[] concludes that such quotations
are not indicative of fair value by reason of illiquidity of a particular security or other
factors."
24
Plaintiffs also assert a triable issue exists that Hedgeworks was obligated to value
fund assets because "[t]here is an inherent conflict in allowing Alki [Partners] to value
assets because the fund manager's compensation is tied to the value of the assets he is
managing." However, any such conflict, even assuming it exists, does not negate
unambiguous contract language in the Agreement that "[t]he value of assets will be
recorded at their fair value as determined in good faith by the Client in the absence of
current quotations or if Client[] concludes that such quotations are not indicative of fair
value . . . ." (See Estate of Bodger (1955) 130 Cal. App. 2d 416, 425 ["'It is not the
province of the court to alter a contract by construction or to make a new contract for the
parties; its duty is confined to the interpretation of the one which they have made for
themselves, and, in the absence of any ground for denying enforcement, to enforcing or
giving effect to the contract as made . . . without regard to its wisdom or folly . . . .'"].)
Plaintiffs further contend it is undisputed Hedgeworks could value the RMDX
stock itself. However, the put options in the Vatas Settlement were also fund assets. The
Alki Partners' limited partnership agreement defines "securities" in which the fund could
invest to include "options" and "puts." Moreover, the witness plaintiffs designated as the
person most knowledgeable about their claims, Hilaire Atlee, testified the Vatas put
options were fund assets:
"Q: Is a put option an asset?
"Mr. Shalvoy: Same objection.
"A: It is.
"Q: And the owner of this asset would be the grantee of the option?
25
"A: Yes.
"Q: So the owner would be [Alki Partners]?
"Mr. Shalvoy: Same objection.
"A: Correct."
Without contradiction, Wilfong testified he was unable to value the Vatas put
options, stating, "I thought it would be . . . fraudulent for me to go out and represent an
NAV when we had half the assets of our fund in these—these . . . instruments. [¶] I
wanted to get the money in and—in it before I put out a real NAV."10
2. Failure to communicate with investors
Under the Agreement, Hedgeworks was required to engage in "[i]nvestor
[r]elations" and communicate with investors on an "[a]s [n]eeded" basis and "only when
specifically instructed by Client."
Plaintiffs' first amended complaint alleges Hedgeworks breached the Agreement
by failing to communicate with investors. More specifically, the first amended complaint
alleges Hedgeworks breached the Agreement by failing to (1) "communicate with
investors in response to their direct inquiries," and (2) "alert investors and/or agents of
the funds of their inability to calculate NAVs and the reasons therefor." The first
10 In their reply brief, plaintiffs cite a July 2008 e-mail from Hedgeworks to Wilfong
as evidence Hedgeworks "admitted tht it never considered the Vatas 'agreement' to be a
fund asset." However, that e-mail contains no such admission. In the e-mail,
Hedgeworks explains it has been unable to calculate a NAV since January 31, 2008,
because the outcome of the Vatas Settlement remained uncertain and "we cannot report
unsubstantiated numbers to your investors."
26
amended complaint also alleges Hedgeworks breached the Agreement by "maintaining as
confidential the facts behind its inability to calculate NAVs for the investors' accounts."
The court properly determined these claims fail as a matter of law because the
undisputed evidence establishes Alki Partners instructed Hedgeworks to not send
monthly statements to investors and to not communicate with investors. Wilfong
testified the Vatas Settlement was confidential, and "if we told anybody anything, we
wouldn't have gotten any money." Wilfong testified that Hedgeworks "had no legal
authority to tell my investors anything." Wilfong and his lawyers "bound the
administrators not to disclose information to investors." Alki Partners instructed
Hedgeworks to not communicate with investors:
"Q: What did you instruct the administrators to do if they got
questions from the investors about this stuff?
"A: I told them not to say anything.
"Q: Who did you tell that to?
"A: All of them. It was not my administrator's responsibility to ever
interface with my investors. That—that wasn't their job. That
was—they'd be breaking confidentiality agreements with me and
stuff, so I told them if any of my investors reached out to them,
direct them back to me.
"Q: And you had authority to give that instruction?
"A: Absolutely.
"Q: You expected them to obey that instruction?
"A: I—I did, and if they had . . . broken that, it would have gone
back to Lars [Windhorst], we wouldn't have gotten any money out of
Vatas."
27
The trial court correctly determined that Hedgeworks did not breach the
Agreement by following Alki Partners' instructions to not communicate with investors.
To begin with, other than sending monthly NAV statements to investors (discussed ante),
the Agreement provides Hedgeworks will communicate with investors "only when
specifically instructed by Client." Alki Partners specifically instructed Hedgeworks to
not communicate. As quoted above, Wilfong told his administrators to refer all investor
inquiries to himself. In an e-mail dated June 23, 2008, Wilfong reminded Hedgeworks,
"If they [(investors)] call you please remember that the settlement agreement [(with
Vatas)] is confidential and refer them to either me or the fund's attorneys . . . ."
The court correctly determined Hedgeworks cannot breach its Agreement with
Alki Partners by complying with Alki Partners' own directions. In analogous
circumstances, the court in Sutherland v. Barclays American/Mortgage Corp. (1997) 53
Cal. App. 4th 299 (Sutherland) stated:
"'We know of no principle of law . . . which will permit a party to a
contract, who is entitled to demand the performance by the other
party of some act within a specified time, and who has consented to
the postponement of the performance to a time subsequent to that
fixed by the contract, and where the other party has acted upon such
consent, and in reliance thereon has permitted the contract time to
pass without performance, to subsequently recall such consent and
treat the non-performance within the original time as a breach of the
contract.'" (Sutherland, supra, 53 Cal.App.4th at pp. 311-312.)11
11 Plaintiffs attempt to distinguish Sutherland on the grounds the Agreement here
contains a no-oral modification clause, whereas there is no mention of such a provision in
the contract involved in Sutherland. This argument fails because the court in Sutherland
rejected a similar argument. (Sutherland, supra, 53 Cal.App.4th at p. 311 [declaring
"without merit" the position that a valid modification had to be in writing].) Moreover,
28
Plaintiffs do not deny or dispute that Alki Partners directed Hedgeworks to not
communicate with the investors. Instead, they contend Hedgeworks agreed to not
communicate with investors to "prevent the collapse of the Alki [Partners'] funds" and
thus increase Hedgeworks's own value and performance bonus. In their reply brief,
plaintiffs assert, "It is also reasonable to infer that [Hedgeworks] did not disclose the
RMDX trading problems in order not to alarm investors and derail Wilfong's efforts to
raise $100 million."
Plaintiffs also contend a triable issue exists whether Hedgeworks failed to
communicate with investors "to further its own financial self interest" and not because of
any instruction from Alki Partners. They claim that in 2005, Hedgeworks was losing
money and decided to "cook Alki [Partners'] books" to increase Hedgeworks's fees and
make it a more attractive acquisition for Deutsche Bank. Plaintiffs assert the evidence
reasonably shows Hedgeworks was in "collusion" with Wilfong to further its own
financial interests at the investors' expense and loss. They essentially assert Wilfong and
Hedgeworks conspired to create false "'pricing memos'" that "grossly inflated the asset
prices in the Alki [Partners'] accounts." Plaintiffs contend the evidence shows
Hedgeworks agreed to help Wilfong hide huge investment losses from the investors.
Plaintiffs also contend the evidence is reasonably susceptible to an inference that
Hedgeworks did not inform investors of the RMDX problems in order to secure its own
$22 million performance bonus as it anticipated being acquired by Deutsche Bank.
contrary to plaintiffs' assertion, Wilfong's instructions to not communicate were given
both orally and in a writing, an e-mail.
29
In this action for alleged breach of contract, all of these assertions are unavailing.
The trial court dismissed plaintiffs' breach of fiduciary duty claims against Hedgeworks,
and plaintiffs do not challenge that ruling on appeal. Because plaintiffs' claims are
limited to those alleging breach of the Agreement, Hedgeworks's motives are irrelevant.
(See Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal. 4th 503, 516
["the law generally does not distinguish between good and bad motives for breaching a
contract"].) A party's purported motive to breach a contract is not relevant to the issue of
whether there has been a breach. If failing to communicate with investors was not
otherwise a breach of contract, there was no breach even if Hedgeworks's failure to
communicate with investors stemmed from a bad motive, greed, or other self-interest.
(JRS Products, Inc. v. Matsushita Electric Corp. of America (2004) 115 Cal. App. 4th 168,
182 ["motive, regardless of how malevolent, remains irrelevant to a breach of contract
claim"].)
3. Immediate resignation
The Agreement provides it may be "terminated by either party hereto upon at least
60 days' written notice . . . ." On July 16, 2008, Hedgeworks wrote to Alki Capital,
stating it was terminating its services under the Agreement "effective immediately." The
same day, after receiving the letter, Wilfong signed underneath a line stating,
"Acknowledged and Agreed." In deposition testimony, Wilfong stated he agreed to the
resignation.
Plaintiffs contend the court erroneously granted summary judgment because there
is a triable issue Hedgeworks breached the Agreement by not giving 60-days' notice of
30
termination. However, plaintiffs' first amended complaint does not plead the immediate
resignation as constituting a breach of contract. Because the pleadings set the boundaries
of the issues to be resolved in a motion for summary judgment, Hedgeworks was not
required to refute liability on a theory not included in the operative complaint. (Hutton v.
Fidelity National Title Co. (2013) 213 Cal. App. 4th 486, 499.) Moreover, the undisputed
evidence is Alki Partners consented in writing to the immediate resignation.
Accordingly, the court properly entered summary judgment against Bullfrog because all
of Alki Partners' claims alleged in the first amended complaint fail as a matter of law.
III. THE COURT ERRED IN AWARDING ATTORNEY FEES
A. Factual Background
There is no prevailing party attorney fees clause in the Agreement. After the court
granted summary judgment, Hedgeworks sought $3,027,237.96 in attorney fees under an
indemnity provision in the Agreement, which provides in part:
"5. Standard of Care. Neither [Hedgeworks] nor any of its
affiliates, members, officers, directors, employees or agents, shall be
liable to [Alki Partners] or the Account for any acts or omissions or
any error of judgment or for any loss suffered by the Account in
connection with the subject matter of this Agreement, except to the
extent such losses result from willful misconduct, gross negligence,
fraud or dishonesty by [Hedgeworks] in the performance of its
obligations and duties, or by reason of [Hedgework's] reckless
disregard of its obligations and duties hereunder. [Alki Partners]
shall indemnify [Hedgeworks] . . . against any and all costs, losses,
claims, damages or liabilities, joint or several, including without
limitation, reasonable attorneys' fees and disbursements, resulting in
any way from the performance or non-performance of
[Hedgeworks's] duties hereunder, except those resulting from the
willful misconduct, gross negligence, fraud or dishonesty of
[Hedgeworks] or [Hedgeworks's] reckless disregard of its obligations
and duties hereunder, and in the case of criminal proceedings, unless
31
[Hedgeworks] had reasonable cause to believe its actions
unlawful . . . .
"Notwithstanding any of the foregoing to the contrary, the provisions
of this paragraph 5 shall not be construed so as to relieve
[Hedgeworks] of, or provide indemnification with respect to, any
liability to the extent (but only to the extent) that such liability may
not be waived, limited or modified under applicable law or that such
indemnification would be in violation of applicable law, but shall be
construed so as to effectuate the provisions of this paragraph 5 to
the fullest extent permitted by law."
In its attorney fee motion, Hedgeworks stated it was not seeking attorney fees
incurred in defending any third party claim. Rather, Hedgeworks explained it was
seeking "only to recover the attorneys' fees it spent defending against the claims
unsuccessfully brought against it by its contractual counterparty, Alki [Partners]."
Hedgeworks asserted this indemnity provision afforded a right to prevailing party
attorney fees in an action between the parties to the contract for its alleged breach.
Plaintiffs did not challenge the reasonableness of the amount sought (over $3
million), but argued: (1) the Agreement lacked an attorney fee provision for the
prevailing party in litigation on the contract itself, and (2) recovery of attorney fees under
the indemnity provision required Hedgeworks to first prevail on its cross-complaint for
indemnity. The court rejected plaintiffs' arguments and awarded Hedgeworks the entire
$3,027,237.96 it requested.
B. The Standard of Review
Interpretation of a written contract is a question of law for the court unless that
interpretation depends upon resolving a conflict in properly admitted extrinsic evidence.
(City of Hope National Medical Center v. Genetech, Inc. (2008) 43 Cal. 4th 375, 395
32
(Genetech).) Here, the trial court interpreted the Agreement without considering any
extrinsic evidence. Therefore, we exercise our independent judgment in interpreting the
indemnity provision, giving no deference to the trial court's ruling. (Rideau v. Stewart
Title of California., Inc. (2015) 235 Cal. App. 4th 1286, 1295 (Rideau).)
C. Forfeiture
There is one other preliminary issue. As explained post, we conclude the court
erroneously interpreted the third party indemnity provision in the Agreement to provide a
right to prevailing party attorney fees in an action between the parties to the Agreement
for breach. In the opening brief, plaintiffs do not make this argument, instead asserting
the court erred in awarding fees without first adjudicating the merits of Hedgeworks's
cross-complaint for indemnity.
Generally, issues not raised in the opening brief are forfeited. (See Reyes v. Kosha
(1998) 65 Cal. App. 4th 451, 466, fn. 6.) However, "[i]t is important to remember . . . that
the purpose of this general rule is to give the trial court and parties an opportunity to
correct an error that could be corrected by some means short of an opposite outcome in
the trial court." (Woodward Park Homeowners Assn., Inc. v. City of Fresno (2007) 150
Cal. App. 4th 683, 712 (Woodward Park).) Thus, as an exception to this general rule, the
appellate court has discretion to consider an issue raised for the first time on appeal
where the relevant facts are undisputed and could not have been altered by the
presentation of additional evidence in the trial court. (Tsemetzin v. Coast Federal
Savings & Loan Assn. (1997) 57 Cal. App. 4th 1334, 1341, fn. 6.) "It makes no difference
33
that the issue was first raised on appeal by the court rather than the parties, as long as the
parties have been given a reasonable opportunity to address it." (Ibid.)
The attorney fee issue we are now considering falls within this exception. The
question is whether the Agreement provides for an award of attorney fees to the
prevailing party in an action for breach between the parties to the Agreement. As noted,
here this is an issue of law. (Genetech, supra, 43 Cal.4th at p. 395.) Plaintiffs' failure to
raise this issue in their opening brief "does not bar our consideration of it if the parties
have had a fair opportunity to present their positions." (Woodward Park, supra, 150
Cal.App.4th at p. 714.) Before oral argument, we asked the parties to submit
supplemental briefs on this issue, which we have considered.
D. The Indemnity Provision Is Not an Attorney Fee Clause
"Generally, indemnity is defined as an obligation of one party to pay or satisfy the
loss or damage incurred by another party." (Rideau, supra, 235 Cal.App.4th at p. 1294.)
"A contractual indemnity provision may be drafted either to cover claims between the
contracting parties themselves, or to cover claims asserted by third parties." (Ibid.)
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 . . . ." (Civ.
34
Code,12 § 1636.) The intention of the parties is to be ascertained from the "clear and
explicit" contract language. (§ 1638.)
Generally, 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. (Rideau, supra, 235 Cal.App.4th at p. 1298.) Courts look to
several indicators to distinguish third party 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 that contains the
words "indemnify" and "hold harmless" generally obligates the indemnitor to reimburse
the indemnitee for any damages the indemnitee becomes obligated to pay third persons—
that is, it relates to third party claims, not attorney fees incurred in a breach of contract
action between the parties to the indemnity agreement itself. (Carr, supra, 166
Cal.App.4th at p. 20.)
Courts also examine the context in which the language appears. Generally, if the
surrounding provisions describe third party liability, the clause will be construed as a
standard third party indemnification provision. (Myers, supra, 13 Cal.App.4th at p. 970.)
The court 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 . . . .'" (Ibid.; see also Rideau, supra, 235
Cal.App.4th at p. 1298 ["The general rule is that the specification of attorney fees as an
12 All statutory references are to the Civil Code unless otherwise specified.
35
item of loss in a third party claim indemnity provision . . . 'does not constitute a
provision for the award of attorney 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 . . . arising
from any cause or for any reason whatsoever" (Building Maintenance Service Co. v. AIL
Systems, Inc. (1997) 55 Cal. App. 4th 1014, 1022) does not provide for attorney fees in an
action between the parties for breach of contract. (Id. at p. 1030.) In such circumstances,
"there is no language . . . which reasonably can be interpreted as addressing the issue of
an action between the parties on the contract." (Ibid.)
Similarly, an indemnification clause in which one party promised to "indemnify"
the other from "'any, all, and every claim' which arises out of 'the performance of the
contract'" (Myers, supra, 13 Cal.App.4th at p. 974) deals only with third party claims, and
cannot support an award of attorney fees in an action for breach of contract between the
parties to the agreement. (Ibid.) The Myers court held that considering the ordinary
meaning of the words "indemnify" and the context of the provisions, the contract could
not be construed as separately providing for attorney fees in an action between the
parties. (Ibid.) The Myers court determined the indemnity provision there did not afford
a right to attorney fees incurred in breach of contract litigation between the parties to the
agreement, even though, as here, the contract provided the indemnity agreement was to
be enforced "[t]o the fullest extent permitted by law." (Id. at pp. 963-964.)
Carr, supra, 166 Cal. App. 4th 14 is also instructive. There, the parties disputed
whether the following provisions provided a right to attorney fees incurred in enforcing
36
the agreement: "'[Carr] shall indemnify and hold harmless [Chowchilla] . . . from and
against all claims , damages, losses and expenses including attorney fees arising out of
the performance of the work described herein . . . .'" (Id. at p. 19.) The Carr court
reviewed three cases (Myers, supra, 13 Cal. App. 4th 949; Meininger v. Larwin-Northern
California, Inc. (1976) 63 Cal. App. 3d 82 (Meininger) & Campbell v. Scripps Bank
(2000) 78 Cal. App. 4th 1328 (Campbell)) that considered whether an indemnification
agreement requiring reimbursement of legal fees "arising out of" or "related to" the
performance of certain duties extended to legal fees incurred in enforcing the agreement
itself. In all three decisions, the courts concluded the agreements did not allow recovery
of attorney fees incurred in enforcing the contract. (Carr, supra, 166 Cal.App.4th at pp.
20-22.)
The Carr court contrasted those decisions with Baldwin Builders v. Coast
Plastering Corp. (2005) 125 Cal. App. 4th 1339 and Continental Heller Corp. v. Amtech
Mechanical Services, Inc. (1997) 53 Cal. App. 4th 500 (Continental), which held such fees
were recoverable where the contract included express language for "'"attorney's fees
incurred in enforcing [the] indemnity agreement."'" (Carr, supra, 166 Cal.App.4th at pp.
22-23, italics omitted.)
The Carr court concluded the language of the indemnity provision under
consideration "more closely parallel[ed] the language found in Myers, Meininger, and
Campbell than the language at issue in Baldwin and Continental. Unlike Baldwin, there
is no express language authorizing recovery of fees in an action to enforce the contract."
(Carr, supra, 166 Cal.App.4th at p. 23.)
37
Here, the critical provisions in the Agreement's indemnity clause are virtually
identical to the terms in Carr and in Myers. The Agreement states Alki Partners will
"indemnify" Hedgeworks for all losses, including attorney fees "resulting in any way
from the performance or non-performance of [Hedgeworks's] duties hereunder." This
language is indistinguishable from the provision considered in Carr, where the
indemnitor promised to indemnify "'against all claims, damages, losses and expenses
including attorney fees arising out of the performance of the work described herein.'"
(Carr, supra, 166 Cal.App.4th at p. 19, italics omitted.) It is also indistinguishable from
the indemnity provision in Myers, which indemnified "every claim" arising "out of the
performance of the contract." (Myers, supra, 13 Cal.App.4th at p. 974.) Furthermore, as
in Carr, there is nothing in the indemnity provision between Alki Partners and
Hedgeworks that extends the right to recover attorney fees to actions seeking to enforce
the Agreement itself. Accordingly, the same conclusion reached by the courts in Carr
and Myers also applies here: The indemnity provision does not provide a right to recover
attorney fees incurred in breach of contract litigation between the parties to the
Agreement.
Other portions of the indemnity provision in the Hedgeworks Agreement further
supports the conclusion the parties intended the indemnity agreement to only apply to
third party claims, and not in an action on the contract between themselves. The last
clause of the indemnity provision states Alki Partners will indemnify Hedgeworks for all
costs, including attorney fees "and in the case of criminal proceedings, unless
[Hedgeworks] had reasonable cause to believe its actions unlawful . . . ." Thus, the
38
Agreement itself characterizes such criminal proceedings as a subset of third party claims
in general. This further supports the conclusion the parties intended this to be a standard
third party indemnity provision, and not a prevailing party attorney fee clause in an action
between the parties to the Agreement for its breach.
In its respondent's brief, Hedgeworks relies on three cases where attorney fees
were awarded in direct actions between the parties to the contract under an indemnity
clause—Zalkind v. Ceradyne, Inc. (2011) 194 Cal. App. 4th 1010 (Zalkind); Dream
Theater, Inc. v. Dream Theater (2004) 124 Cal. App. 4th 547 (Dream Theater); and
Wilshire-Doheny Associates, Ltd. v. Shapiro (2000) 83 Cal. App. 4th 1380 (Wilshire-
Doheny). However, each of these cases is materially distinguishable.
In Zalkind, one party agreed to indemnify the other for losses "'whether or not they
have arisen from or were incurred in or as a result of any demand, claim, action, suit,
assessment or other proceeding or any settlement or judgment. . . .'" (Zalkind, supra, 194
Cal.App.4th at p. 1028.) The Zalkind court found this language was "not limited to third
party claims." (Ibid.) No similar language appears in the Agreement.
Dream Theater, supra, 124 Cal. App. 4th 547, is also distinguishable. There, the
contract provided indemnity against all losses "'whether or not arising out of third party
Claims.'" (Id. at p. 556.) This language clearly states the indemnification provision
applied to claims other than third party claims, namely claims asserted by one party
against the other. The Agreement here contains no such language.
In Wilshire-Doheny, supra, 83 Cal. App. 4th 1380, the court considered whether
particular indemnity provisions were limited to third party claims. In that case, a
39
corporation agreed to indemnify two of its corporate officers with respect to any claims
or action brought against them in their capacity as corporate officers. (Id. at pp. 1387,
1394-1395.) The corporation sued the two officers arising out of their conduct as
corporate officers. (Id. at pp. 1385-1386.) The indemnity provision specifically applied
to an "'action or suit by or in the right of the corporation to secure a judgment in its
favor.'" (Id. at p. 1395.) Noting this language in particular, the Wilshire-Doheny court
held the provision afforded a right to attorney fees in an action on the contract. (Id. at pp.
1396-1397.) Significantly, the language in the Agreement here contains no similar
language providing for a right to recover attorney fees.
In its supplemental brief, Hedgeworks contends "Section 5 is no mere third party
indemnity clause." Hedgeworks notes the paragraph is entitled "Standard of Care,"
which governs the relationship between Hedgeworks and Alki Partners, and not third
parties. Hedgeworks asserts the first sentence in section 5 concerns duties owed by
Hedgeworks to Alki Partners, and the second sentence "symmetrically covers everything
else," stating that in the absence of willful misconduct, gross negligence, fraud or
dishonesty, Hedgeworks would be made whole by Alki Partners for any and all costs.
Hedgeworks argues, "Read as a coherent whole, Section 5 functions to hold
Hedgeworks responsible if (and only if) it breaches the agreed-upon standard of care, and
to protect it from any and all costs if it complies with the same standard. There is no
reason to imagine that, although the title of the section and the first sentence both clearly
cover the issue of liability between the parties, the second sentence should be read as
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shifting gears, breaking the symmetry of the section's structure, and relating only to third
parties."
We disagree with Hedgeworks' interpretation of section 5 as it relates to a right to
attorney fees between the parties to the contract in an action for breach of the agreement.
To begin with, if the parties intended to provide a right to prevailing party attorney fees
in an action for breach of the Agreement, there could hardly be a more obtuse way of
doing so than the language in section 5. It would have been simple for the parties to
provide: If any action is commenced to enforce or interpret the terms of this agreement,
the prevailing party shall be entitled to recover reasonable attorney fees. But section 5
does not even contain the phrase "prevailing party" or refer to an action between the
parties for breach of the agreement. Courts will not infer 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 . . . .'"
(Myers, supra, 13 Cal.App.4th at p. 970.)
Moreover, Hedgeworks is incorrect in asserting, "there is no reason to imagine"
that the second sentence, dealing with indemnification, relates only to third party claims.
Section 1641 requires the contract to be construed as a whole, "each clause helping to
interpret the other."13 Ordinarily, "where specific words follow general words in a
contract, 'the general words are construed to embrace only things similar in nature to
13 Section 1641 provides: "The whole of a contract is to be taken together, so as to
give effect to every part, if reasonably practicable, each clause helping to interpret the
other."
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those enumerated by the specific words.'" (Nygard, Inc. v. Uusi-Kerttula (2008) 159
Cal. App. 4th 1027, 1045.)
The last clause of the second sentence in section 5 deals exclusively with a
particular type of third party claims, those arising out of criminal prosecution. This
provision states: "[Alki Partners] shall indemnify [Hedgeworks] . . . against any and all
costs . . . and in the case of criminal proceedings, unless [Hedgeworks] had reasonable
cause to believe its actions unlawful . . . ." (Italics added.) The general words in section
5 that Alki Partners "shall indemnify" Hedgeworks are properly construed to embrace
"only things similar in nature" to the specific words—that is, third party claims. (See
Nybard, supra, 159 Cal.App.4th at p. 1045.)
In its supplemental brief, and again at oral argument, Hedgeworks contends Hot
Rods, LLC v. Northrup Grumman Systems Corp. (2015) 242 Cal. App. 4th 1166 (Hot
Rods, LLC) supports interpreting the indemnity provision in the Agreement as affording
prevailing party attorney fees in an action between the parties for breach. However the
indemnity provision in Hot Rods, LLC is significantly different from the one in the
Agreement. In Hot Rods, LLC, the provision purported to indemnify from any "claim"
and defined "claim" as "any claim or demand by any Person for any alleged liabilities,
whether based in contract, tort, implied or express warranty . . . ." (Id. at p. 1181.) The
indemnity provision there also defined "person" broadly, so that combining the definition
of "claim" and "person" encompassed "both first and third party claims." (Id. at p. 1181.)
No such language appears in the Alki Partners-Hedgeworks indemnity provision.
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Moreover, the court in Hot Rods, LLC noted that under the indemnity provision
there, Hot Rods was required to give Northrup notice of any environment actions, but
was not required to give similar notice for personal injury or property damage claims.
The court concluded that "[t]he reasonable inference is that the second type of claim was
not intended to be limited to third party claims, but contemplated claims from Hot Rods
as well." (Hot Rods, LLC, supra, 242 Cal.App.4th at p. 1182.) The Agreement here
contains no similar distinction.
In sum, section 5, entitled "Standard of Care," applies the same standard of care in
two different applications. First, the standard governs potential liability between
Hedgeworks and Alki Partners. Second, it applies the same standard as to Alki Partners'
obligation to indemnify Hedgeworks for third party claims.
To find a right to attorney fees in a direct action under an ordinary indemnity
provision, as here, would invest every agreement containing a standard third party
indemnity clause with a prevailing party attorney fee clause. This is particularly
inappropriate because section 1717, subdivision (a), which governs the award of
contractual attorney fees, applies only when the contract "specifically provides that
attorney's fees and costs, which are incurred to enforce that contract, shall be awarded
either to one of the parties or to the prevailing party . . . ." The indemnity clause here
does not "specifically" refer either to actions to enforce the contract or to the prevailing
party. Rather, it is a third party indemnity clause. The court erred in construing it
otherwise.
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As a fall-back position, Hedgeworks contends that even if an attorney fee award
under section 5 is limited to defense of third party claims, the award should be affirmed
because Hedgeworks incurred the fees in defending against not only Alki Partners'
claims, but also against identical claims by a third party, Bullfrog.
This argument is unavailing because in the trial court, Hedgeworks took the exact
opposite position. In its motion for attorney fees, Hedgeworks told the trial court, "It is
important that the Court understand at the outset what Hedgeworks is not seeking by this
motion. Hedgeworks is not herein seeking fees incurred solely to defend claims brought
against it by . . . Bullfrog, which are third parties to the [Agreement]. . . . Put simply, by
this motion, Hedgeworks seeks only to recover the attorneys' fees it spent defending
against the claims unsuccessfully brought against it by its contractual counterparty, Alki
LP. Hedgeworks reserves the right to seek some or all of those fees by appropriate
procedures at a later time." Hedgeworks may not repudiate these representations now.
(Planned Protective Services, Inc. v. Gorton (1988) 200 Cal. App. 3d 1, 12-13 [theory of
trial rule applied to attorney fee motion], disapproved on other grounds in Martin v. Szeto
(2004) 32 Cal. 4th 445, 451, fn. 7.)
DISPOSITION
The "Amended and Final Judgment" entered May 1, 2015, is reversed insofar as it
awards DB Fund Services, LLC, attorney fees, and the trial court is directed to enter a
new order denying Hedgeworks motion for attorney fees. In all other respects, the
amended and final judgment entered May 1, 2015, is affirmed.
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In the interest of justice, each party is to bear its own costs.
NARES, J.
WE CONCUR:
HUFFMAN, Acting P. J.
HALLER, J.
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