Peake v. Underwood ( 2014 )

Filed 7/17/14 (unmodified opn. attached)
CERTIFIED FOR PARTIAL PUBLICATION*
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
JOANNE PEAKE, et al., D061267
Plaintiffs and Appellants, (Super. Ct. No. 37-2010-00085519-
CU-OR-CTL)
v.
ORDER MODIFYING OPINION
MARVIEL UNDERWOOD, et al., AND DENYING REQUEST FOR
REHEARING
Defendants and Respondents.
[NO CHANGE IN JUDGMENT]
THE COURT:
Appellants' petition for rehearing is DENIED.
It is ordered that the opinion filed herein on June 25, 2014, be modified as follows:
1. On page 3, the third sentence of the second paragraph is deleted and
replaced with the following sentence:
However, as we shall explain, the court's exercise of discretion was
justified for several reasons particular to this case, including that Peake's claims
were inconsistent with the admitted facts and well-settled law, and the record
* Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for
publication with the exception of Discussion part II.
reflects that Peake's trial counsel had no reasonable belief in the validity of the
claims.
2. The second sentence of the second paragraph commencing on page 27 and
continuing to page 28 is deleted and replaced with the following sentence:
The record before us presents an appropriate case for sanctions because:
(1) under well-settled law Peake's substantive claims are clearly without merit; (2)
appellants did not present any colorable legal or factual argument to the trial court
supporting an extension of existing law to establish liability in this case; (3) before
and during the safe harbor period, Ferrell's counsel set forth the specific factual
and legal grounds supporting his position that Peake's claims were without merit;
and (4) appellants engaged in conduct supporting the conclusion that they did not
reasonably believe the claims had any merit.
3. The last sentence in the second complete paragraph on page 28 is deleted
and replaced with the following sentence:
On this record, it is reasonable to infer that Peake added these claims
without any reasonable belief that they were legally and factually supported.
There is no change in judgment.
MCCONNELL, P. J.
Copies to: All parties
2
Filed 6/25/14 (unmodified version)
CERTIFIED FOR PARTIAL PUBLICATION*
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
JOANNE PEAKE et al., D061267
Plaintiffs and Appellants,
v. (Super. Ct. No. 37-2010-00085519-
CU-OR-CTL)
MARVIEL UNDERWOOD et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of San Diego County, Joel
Pressman, Judge. Affirmed.
Boudreau Williams and Jon R. Williams for Plaintiffs and Appellants.
Wolfgang F. Hahn + Associates and Wolfgang F. Hahn for Defendant and
Respondent Marviel Underwood.
Stavros & Associates and Mark D. Stavros for Defendants and Respondents Dunn
Real Estate & Development Co., Inc. and Paul Ferrell.
Joanne Peake purchased a home from Marviel and Deanna Underwood. About
two years later, Peake brought an action against the Underwoods and the Underwoods'
* Pursuant to California Rules of Court, rule 8.1110, this opinion is certified for
publication with the exception of Discussion part II.
real estate agent, Paul Ferrell.1 Peake sought to recover damages for defendants' alleged
failure to disclose defective subfloors in the home.
After the case had been pending for more than one year, Ferrell moved for
terminating and monetary sanctions against Peake and her counsel Norman Shaw under
Code of Civil Procedure section 128.7 (section 128.7). Section 128.7 provides a trial
court with the discretionary authority to impose sanctions when a party files a pleading
that is factually or legally frivolous. Ferrell argued Peake's claims were factually and
legally frivolous because the undisputed evidence showed Ferrell had fulfilled his
statutory and common law disclosure duties, and Peake had actual notice of facts
disclosing prior problems with the subfloors. Peake declined to dismiss the action during
the statutory safe harbor period, and instead amended her complaint to add claims similar
to claims she had previously dismissed.
After a hearing, the court found Ferrell met his burden to show Peake's claims
were "without legal or evidentiary support" and Peake's continued maintenance of the
lawsuit demonstrated "objective bad faith" warranting section 128.7 sanctions. As
sanctions, the court dismissed Peake's claims against Ferrell and ordered Peake and her
attorney to pay Ferrell $60,000 for his attorney fees incurred in defending the action.
On appeal, Peake and Shaw (collectively appellants) challenge these sanctions.
We determine the court acted within its discretion in awarding the section 128.7
1 Peake also sued Ferrell's brokerage firm, Dunn Real Estate & Development Co.,
Inc., dba Prudential Dunn Realtors. We refer collectively to Ferrell and his brokerage
firm as Ferrell.
2
sanctions. The record supports that no reasonable attorney would have concluded Peake's
statutory and common law claims against Farrell were factually and legally supported. In
particular, the facts admitted by Peake show that during escrow Ferrell provided Peake
with photographs and reports disclosing problems with the residence's subflooring,
satisfying his legal obligations to the buyer. Having provided this information, Ferrell—
who served only as the sellers' listing agent—did not owe the buyer any additional
statutory or common law duties, and there was nothing in Ferrell's communications that
would have misled a reasonable buyer.
In affirming the sanctions order, we do not intend to suggest sanctions should be
routinely awarded. Our adversary system requires that attorneys and litigants be
provided substantial breathing room to develop and assert factual and legal arguments.
However, as we shall explain, the court's exercise of discretion was justified for several
reasons particular to this case, including that Peake's claims were inconsistent with the
admitted facts and well-settled law, and the record reflects that Peake's trial counsel had
no honest or reasonable belief in the validity of the claims.
In the unpublished portion of the opinion, we reject Peake's separate appellate
argument that the court erred in awarding the Underwoods prevailing party attorney fees
after the court granted the Underwoods' motion to compel arbitration and Peake then
dismissed her action against the Underwoods.
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FACTUAL AND PROCEDURAL SUMMARY
Complaint
In 2007, the Underwoods purchased a home and were represented by real estate
agent Ferrell in the transaction. About one year later, the Underwoods sold this home to
Peake. The Underwoods were again represented by Ferrell, and Peake was represented
by her own real estate agent (Tiffany Kilcoyne).
Two years later, in February 2010, Peake sued the Underwoods, Ferrell, Kilcoyne,
the termite inspector, and the home inspector. Peake alleged "a water intrusion incident
whereby standing water was caused to wick into the foundation" had previously occurred,
"causing the foundation and attached flooring structures to deteriorate." She alleged she
"only became aware of the extent of the [water-intrusion] damage when her son's foot
recently went through a bathroom floor."
Peake alleged the Underwoods had been aware of the unrepaired water damage
and the deteriorated floor structure at the time of the sale but failed to disclose these facts.
She further alleged the Underwoods knew or should have known, and failed to disclose,
that the repairs performed on the property "were not proper and did not comply with
applicable building standards and codes." Peake asserted claims against the Underwoods
for breach of contract, fraud, concealment, negligent misrepresentation, and negligence.
With regard to Ferrell, Peake alleged he "fail[ed] to conduct a competent and
diligent inspection" and "fail[ed] to disclose information about the true condition of the
[residence] including water damage" that he knew or should have known. Peake also
alleged that Ferrell owed her "a duty to fully and completely disclose all known material
4
defects, failures and deficiencies" concerning the residence. Based on these allegations,
Peake asserted causes of action against Ferrell for: (1) breach of statutory duties (Civ.
Code, §§ 2079, 1102 et seq.); (2) negligence; (3) breach of fiduciary duty; and (4)
constructive fraud.2
A few months after she filed her complaint, Peake stipulated to strike all of her
claims against Ferrell except her statutory claim. Ferrell's counsel then sent numerous
emails to Peake's counsel (Shaw), explaining the legal and factual deficiencies of Peake's
statutory claim and encouraging Shaw to consult with a real estate standard-of-care
expert. In the emails, Ferrell's counsel emphasized that Ferrell had provided Peake with
all the information in his possession, including documents showing possible problems
with the subflooring, and noted an agent's statutory duties are limited to a visual
inspection. Ferrell's counsel reminded Shaw of his ongoing duty to reevaluate the merits
of Peake's claim, and warned that if Peake did not dismiss her claim, Ferrell would seek
sanctions from Peake and Shaw under section 128.7.
Shaw did not take any action in response to these emails, and conducted no
affirmative discovery after filing the complaint.
Ferrell's Sanctions Motion Served on Peake and Her Counsel
About one year after the complaint was filed, in March 2011, Ferrell served Peake
and her attorney with a section 128.7 sanctions motion. In the motion, Ferrell contended
that Peake's sole claim asserted against him (the statutory cause of action) had no factual
2 All undesignated statutory references are to the Civil Code except for the sanctions
statute (Code Civ. Proc., § 128.7) or as otherwise specified.
5
or legal basis, and was objectively frivolous. Ferrell argued that the cited statutes
(sections 2079 and 1102) required that a real estate agent disclose only visible defects and
the subfloor water intrusion problem was not visible on a reasonable inspection. He also
argued that he went beyond his limited statutory duties by providing Peake with all
relevant reports that would have disclosed problems with the subfloors and identified
case law providing that the statutes did not require a seller's agent or broker to
independently verify a seller's representations.
In support of his sanctions motion, Ferrell submitted several documents.
First, he submitted the three-page statutory transfer disclosure statement provided
to Peake during escrow (Transfer Disclosure statement). In the form, the Underwoods
checked a box indicating they were not aware of any "[f]looding, drainage or grading
problems" on the property, and signed at the bottom of this page. However, this portion
of the document stated: "THE[SE] . . . ARE REPRESENTATIONS MADE BY THE
SELLER(S) AND ARE NOT THE REPRESENTATIONS OF THE AGENT(S), IF
ANY." On the third page of this document, Ferrell signed the section involving a seller's
agent's disclosures. In that section, Ferrell indicated that Peake should see his "Visual
Inspection Checklist" and the "reports and disclosures" from the previous owner. (Some
capitalization omitted.)
Second, Ferrell submitted a copy of the referenced Visual Inspection Checklist.
On this document, next to the preprinted entry for "LANDSCAPING," Ferrell wrote
"SEE DISCLOSURES ON DRAINAGE UPGRADES BY PREVIOUS OWNER." And
next to the entry for "FOUNDATION/SLAB," Ferrell wrote that he observed a "SOFT
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SPOT IN SUBFLOOR IN ONE BEDROOM." Next to the form's "OTHER" entry,
Ferrell wrote "SEE PAST INSPECTION REPORTS, DRAINAGE UPGRADE REPORT
AND WORK BY CIVIL ENGINEER, KENNETH DISCENZA [phone number] AND
BOND CONSTRUCTION. DRAINAGE IMPROVEMENTS WERE PERFORMED IN
TWO SEPARATE PROJECTS."
Third, Ferrell submitted Peake's acknowledgement that she had received numerous
documents provided to the Underwoods in the previous escrow. These documents
included a January 4, 2007 physical inspection report, known as the 2007 Focus report. It
is undisputed that this report disclosed substantial problems and decay in the subflooring
of the home. Peake concedes for purposes of this appeal that she received this 2007
Focus report during the escrow period.
Ferrell also proffered excerpts of Peake's deposition testimony. In this testimony,
Peake acknowledged that during the escrow period she was aware the home had prior
drainage problems and that extensive repairs to the drainage system had been performed.
She testified that she and her own real estate agent had discussed Ferrell's disclosure "that
there had been . . . drainage work done, and there was an invoice from the construction
company that the work had been done." She said that she did not inquire further about
this disclosure "because I had . . . two [other] inspection reports [by her own retained
inspection experts] that said that . . . everything was fine; so I assumed the work done
was fine." Peake further acknowledged that before escrow closed, the Underwoods
provided her with a "Seller's Additional Disclosures" document stating that an "extensive
drainage system is installed and it was added on before [the Underwoods] purchased the
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property" at a cost of approximately $13,000. Peake stated that she remembered that she
and her agent "looked at the plans from Bond, the architect, and saw that all that work
had been done."
Although she did not specifically recall reviewing the 2007 Focus report before
escrow closed, Peake acknowledged at her deposition that this report "show[s] damage
under the floor." She also said she noticed there was some "sponginess" on one bedroom
floor during her walk-through of the property before the sale closed. Peake additionally
said she was aware there was a sump pump at the back of the property, and she
understood the purpose of a sump pump is to "take water out, if there is any excess water,
in a basement."
In addition to the real estate documents and deposition testimony submitted in
support of his sanctions motion, Ferrell discussed Peake's complete lack of offensive
discovery, and her counsel's disregard for the numerous cautionary emails urging him to
reevaluate Peake's claim.
Peake's Amendments to Complaint in Response to Sanctions Motion
After Ferrell served the sanctions motion, he did not immediately file the motion
because of the statutory 21-day safe harbor requirement.3 During this safe harbor period,
Peake did not dismiss her statutory claim against Ferrell and instead she moved for leave
3 Before filing a section 128.7 sanctions motion, a party must first serve the motion
on the opposing party and provide the party 21 days to withdraw the offending pleading.
(§ 128.7, subd. (c)(1).) This safe harbor period permits a party to withdraw a
questionable pleading without penalty. (Day v. Collingwood (2006) 144 Cal.App.4th
1116, 1127.)
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to amend her complaint to reassert the three common law claims (negligence, breach of
fiduciary duty, and constructive fraud) she had previously stricken by stipulation, and to
add new causes of action for intentional fraud and negligent concealment against Ferrell.
The trial court denied Peake's motion to amend regarding the previously stricken
claims because they were based on the same facts and legal theories, but allowed the
amendments as to the intentional fraud and negligent concealment claims. The facts
alleged in these new claims were similar to the facts alleged in the three dismissed
claims, but they also included allegations that Ferrell had actual knowledge of the
defective subfloors and that he made affirmative misrepresentations to Peake regarding
the condition of the floors.
Filed Sanctions Motions and Opposition Arguments
After these amendments were permitted and several months after the safe harbor
period expired, Ferrell filed his sanctions motion. The motion was essentially identical to
the version initially served on Peake and did not address the new fraud and negligent
concealment claims.
As the centerpiece of their opposition papers, Peake and Shaw stated that Peake
"is pursuing her cause of action based on [Civil Code sections] 1102 and 2079 because
the Transfer Disclosure Statement signed by Paul Ferrell made an affirmative
representation that the property had no drainage problems." (Italics added.) Specifically,
Peake argued that "Ferrell knew there were flooding and drainage problems with the
property and yet he inexplicably checked the 'No' box on the Transfer Disclosure
Statement when asked about drainage problems." Based on this argument, Peake
9
contended that "when a real estate professional makes a clearly false statement on the
Transfer Disclosure Statement, there is no basis for that real estate agent to be awarded
sanctions" under section 128.7.4
In support of their assertion that Ferrell knew about undisclosed problems and
inadequate repairs before escrow closed, appellants submitted Peake's declaration stating:
"Several months after purchasing my home, my son's foot went
through the floor. It became apparent to me for the first time that the
floor was suffering from significant rotting. [¶] . . . When I told Paul
Ferrell [that my son's foot went through the floor] and asked him [in
a phone conversation] about earlier repairs and improvements to the
property[,] I asked why the floor was rotted. He responded by
saying that when the Underwoods initially purchased the home, they
planned on making extensive improvements and repairs. However,
shortly after purchasing the home, Mr. Underwood, who was a
professional football player with the NFL was injured and lost his
income. Mr. Ferrell explained that since Mr. Underwood lost his
income, the Underwoods were unable to complete the improvements
to the drainage system and repairs to the floor."
In her declaration, Peake also stated that although she was "given various written
disclosures" before escrow closed, she "was never told the drainage repairs were not
completed prior to purchasing the home, nor was [she] told the floor needed significant
repairs but the Underwoods could not afford to complete them." Peake said:
"[A]t no time prior to purchasing the house did Paul Ferrell ever tell
me that the Underwoods needed to make additional repairs to the
property, but stopped doing so because Mr. Underwood lost his
income. Had I know that some repairs were made to the drainage
4 As discussed, this argument was factually inaccurate because the Underwoods,
and not Ferrell, made the representation regarding the lack of drainage problems. The
form stated the representations were made solely by the seller and were not endorsed by
the seller's agent.
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system, but that the repairs were not completed, I would not have
bought the property."
Peake and Shaw further supported their opposition with an expert declaration from
Richard Snyder, an experienced realtor and property manager. Snyder stated he was
retained to provide an opinion on whether Ferrell met the standard of care under section
2079, and that he concluded Ferrell acted below the applicable standard because Ferrell
did not "red-flag[ ] the drainage issue by disclosing in writing that repairs were not
completed." Snyder based this opinion on several assumed facts. First, Snyder stated
that in the Transfer Disclosure statement, Ferrell had responded " 'No' " to the "question
whether . . . Ferrell was aware of any flooding, draining or grading problems." (Italics
added.) Second, Snyder relied on the fact that in his Visual Inspection Checklist, Ferrell
mentioned the prior drainage repair work performed by engineer Discenza and contractor
Bond Construction. Third, Snyder relied on Peake's version of her telephone
conversation with Ferrell. He said "Given the facts that 1) Paul Ferrell was an agent
involved in two sales of the property in 12 months and 2) Paul Ferrell knew the
Underwoods ran out of money before fixing the problems, Paul Ferrell should have red-
flagged the drainage issue by disclosing in writing that repairs were not completed."
Snyder acknowledged that he did not review the numerous reports provided to Peake
during escrow (including the 2007 Focus report), but said the content of those disclosures
would not have altered his opinion regarding what Ferrell should have disclosed to Peake.
He said: "Ferrell is essentially taking the position that he could provide a buyer with a
series of reports regarding drainage problems to the property, and withhold the fact that
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the previous owner could not afford to complete the necessary repairs. In my opinion, it
is a breach of the statutory and professional standard of care for a listing agent to provide
a series of reports without disclosing the crucial fact: the repairs were never properly
completed."
In reply, Ferrell raised the factual error in appellants' opposition brief and Snyder's
declaration: appellants and Snyder had both claimed Ferrell prepared and endorsed the
relevant portion of the Transfer Disclosure statement, but in fact it was the Underwoods
who had signed this statement. Appellants thereafter conceded the error and Snyder
amended his declaration to correct that discrepancy.
Ferrell also submitted his own declaration in which he denied Peake's version of
the phone call after her son's foot went through the bathroom floor. Ferrell additionally
stated that before the Underwoods purchased the property, the seller had completed all
the drainage improvements recommended by engineer Discenza. Ferrell acknowledged
that the property had prior flooding and drainage problems, but said these issues were
fully disclosed to Peake during the escrow through his references to the drainage and
engineering work and in the documents provided to Peake from the prior escrow.
Ferrell also lodged nine additional cautionary communications sent to attorney
Shaw after serving the sanctions motion. Attached to one of them was a declaration from
Peake's own real estate agent, who declared that Peake was given "all [the] disclosures
and other transaction paperwork" provided by Ferrell and that Peake reviewed all of it.
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Court's Ruling
After considering the submissions, the court issued a minute order tentatively
granting Ferrell's sanctions motion, stating it found "plaintiff and her attorneys'
maintenance of her complaint against [Ferrell was] baseless and utterly lacking in legal
merit." In a lengthy explanation, the court said the evidence established that "at the close
of escrow, [Peake] had all the information necessary and that the brokers satisfied all
their duty by supplying all reports" and "there is nothing that plaintiff or her counsel can
point to establishing that Mr. Ferrell failed in his Civil Code §§ 1102 and 2079 inspection
disclosure duties." The court also emphasized that Peake had more than one year to
investigate her claims, and Ferrell's counsel had sent Shaw repeated admonitions
regarding the specific factual and legal flaws in Peake's claims. The court concluded that
Shaw's implied certification of legal and factual merit under section 128.7 "was without
legal or evidentiary support and that the continued maintenance of th[e] meritless lawsuit
[against Ferrell] demonstrates objective bad faith warranting CCP § 128.7 sanctions."
During the hearing, Peake's counsel focused on the evidence showing Ferrell had
actual notice that the subfloor repairs had allegedly not been performed (or had not been
properly performed) and that Ferrell failed to disclose this information and/or that his
partial disclosures regarding repairs were misleading. Peake's counsel also reminded the
court that he had amended the complaint to add two common law claims. The court
responded: "I'll take this under submission. [¶] And I do appreciate your pointing out
those two causes of action."
13
After the hearing, the court adhered to its prior conclusion that Ferrell met his
burden to show Peake's claims were "utterly lacking in legal merit" and appellants'
continued maintenance of the claims warranted sanctions under section 128.7. The court
dismissed Peake's claims against Ferrell and sanctioned Peake and Shaw, jointly and
severally, in the amount of $60,000, reflecting Ferrell's attorney fees incurred in
defending the action.
On a separate issue and as explained below, the court had previously granted the
Underwoods' motion to compel arbitration under an arbitration provision in the purchase
agreement. Shortly after, Peake dismissed her case against the Underwoods based on her
understanding that the Underwoods were insolvent. After the dismissal, the Underwoods
successfully moved for section 1717 prevailing party attorney fees against Peake.
On appeal, Peake and Shaw challenge the sanctions order and Peake challenges
the attorney fees award to the Underwoods.
DISCUSSION
I. Sanctions Award
A. Legal Principles Governing Section 128.7 Sanctions
Under section 128.7, a court may impose sanctions for filing a pleading if the
court concludes the pleading was filed for an improper purpose or was indisputably
without merit, either legally or factually. (Guillemin v. Stein (2002) 104 Cal.App.4th
156, 168 (Guillemin).) The court here imposed sanctions based on its finding that the
claims were legally and factually frivolous. A claim is factually frivolous if it is "not
well grounded in fact" and it is legally frivolous if it is "not warranted by existing law or
14
a good faith argument for the extension, modification, or reversal of existing law." (Id. at
p. 167.) In either case, to obtain sanctions, the moving party must show the party's
conduct in asserting the claim was objectively unreasonable. (Ibid.) A claim is
objectively unreasonable if "any reasonable attorney would agree that [it] is totally and
completely without merit." (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650;
Guillemin, supra, at p. 168.)
The Legislature enacted section 128.7 based on Rule 11 of the Federal Rules of
Civil Procedure (28 U.S.C.), as amended in 1993 (Rule 11). (Musaelian v. Adams (2009)
45 Cal.4th 512, 518, fn. 2; Guillemin, supra, 104 Cal.App.4th at p. 167.) Therefore,
federal case law construing Rule 11 is persuasive authority on the meaning of section
128.7 (Guillemin, supra, 104 Cal.App.4th at p. 167.)
Under Rule 11, even though an action may not be frivolous when it is filed, it may
become so if later-acquired evidence refutes the findings of a prefiling investigation and
the attorney continues to file papers supporting the client's claims. (See Childs v. State
Farm Mut. Auto. Ins. Co. (9th Cir. 1994) 29 F.3d 1018, 1025.) Thus, a plaintiff's attorney
cannot "just cling tenaciously to the investigation he had done at the outset of the
litigation and bury his head in the sand." (Ibid.) Instead, "to satisfy [the] obligation
under [section 128.7] to conduct a reasonable inquiry to determine if his [or her] client's
claim was well-grounded in fact," the attorney must "take into account [the adverse
party's] evidence." (Ibid.)
Section 128.7 provides for a 21-day period during which the opposing party may
avoid sanctions by withdrawing the offending pleading or other document. (§ 128.7,
15
subd. (c)(1); see Li v. Majestic Industry Hills LLC (2009) 177 Cal.App.4th 585, 590-591.)
By providing this safe harbor period, the Legislature designed the statute to be "remedial,
not punitive." (Li, supra, 177 Cal.App.4th at p. 591.) When a party does not take
advantage of the safe harbor period, the "statute enables courts to deter or punish
frivolous filings which disrupt matters, waste time, and burden courts' and parties'
resources." (In re Mark B. (2007) 149 Cal.App.4th 61, 76.)
A court has broad discretion to impose sanctions if the moving party satisfies the
elements of the sanctions statute. (See Kojababian v. Genuine Home Loans, Inc. (2009)
174 Cal.App.4th 408, 421.) However, the sanctions statute " 'must not be construed so as
to conflict with the primary duty of an attorney to represent his or her client zealously.
Forceful representation often requires that an attorney attempt to read a case or an
agreement in an innovative though sensible way. Our law is constantly evolving, and
effective representation sometimes compels attorneys to take the lead in that evolution.' "
(Guillemin, supra, 104 Cal.App.4th at pp. 167-168.) Moreover, a sanction "shall be
limited to what is sufficient to deter repetition of [the improper] conduct or comparable
conduct by others similarly situated." (§ 128.7, subd. (d).)
We review a section 128.7 sanctions award under the abuse of discretion standard.
(Guillemin, supra, 104 Cal.App.4th at p. 167.) We presume the trial court's order is
correct and do not substitute our judgment for that of the trial court. (Shelton v. Rancho
Mortgage & Investment Corp. (2002) 94 Cal.App.4th 1337, 1345.) To be entitled to
relief on appeal, the court's action must be sufficiently grave to amount to a manifest
miscarriage of justice. (Kurinij v. Hanna & Morton (1997) 55 Cal.App.4th 853, 867.)
16
B. Analysis
When the court ruled on the sanctions motion, Peake's complaint asserted both
statutory (sections 2079 and 1102) and common law (fraud and negligent concealment)
claims against Ferrell. Peake and Shaw contend the court erred in concluding that both
sets of claims were factually and legally unsupported and were objectively unreasonable.
These contentions are unavailing.
1. Statutory Claim
Peake's statutory cause of action is based on sections 2079 and 1102. Section
2079 imposes on a seller's agent the duty "to conduct a reasonably competent and diligent
visual inspection of the property offered for sale and to disclose to [the] prospective
purchaser all facts materially affecting the value or desirability of the property that an
investigation would reveal. . . ." (§ 2079, subd. (a).) "The inspection to be performed
pursuant to this article does not include or involve an inspection of areas that are
reasonably and normally inaccessible . . . ." (§ 2079.3.) Accordingly, a seller's real estate
agent has a statutory duty to disclose only visible defects, i.e., to disclose only what a
"reasonably competent and diligent visual inspection of the property" would reveal.
(§ 2079, subd. (c); Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th
298, 308 (Wilson).) Section 1102 et seq. imposes these same limited duties, and requires
that all disclosures "be made in good faith." (§§ 1102.7, 1102.1, subd. (a), 1102.6; see
Robinson v. Grossman (1997) 57 Cal.App.4th 634, 642-643 (Robinson).)
Peake alleged that Ferrell breached these statutory duties by failing to disclose the
defective condition of the subfloors. However, it is undisputed that this alleged defect
17
was not visible and would not have been apparent during a reasonable property
inspection. Thus, as a matter of law, Ferrell did not breach his statutory duties under
sections 2079 and 1102 et seq. (See Wilson, supra, 15 Cal.App.4th at p. 308.)
Peake and Shaw do not challenge this conclusion under existing authority, but
suggest it was objectively reasonable to seek an expansion of the statutes to require real
estate brokers to "fully disclose facts which the broker knows, whether or not those facts
could be revealed by a simple visual inspection" and thus "to affirmatively disclose
everything they knew about a specific property which may materially affect the value or
desirability of that property." Appellants characterize this argument as a "functional
interpretation" of the statute, rather than a "mechanical" one. They argue section 2079's
disclosure requirements should include a duty to disclose "all information" that Ferrell
knew regarding the status of the repairs to the subflooring.
This argument—raised for the first time on appeal—is not properly before us.
Because a trial court has broad discretion in ruling on a sanctions motion, it is incumbent
on the party opposing the motion to proffer all factual and legal theories showing the
party's challenged assertions were not frivolous and had a least some merit. By failing to
raise this theory before the trial court, the trial court was not provided the opportunity to
evaluate the theory as part of its exercise of discretion. Thus, the point is forfeited.
In any event, appellants' argument is not founded on any reasonable legal
principles. In interpreting a statute, a court is bound by the words of the statute and must
give those words a plain and commonsense meaning. (Los Angeles County Metropolitan
Transportation Authority v. Alameda Produce Market, LLC (2011) 52 Cal.4th 1100,
18
1106-1107.) "If the statutory language is unambiguous, 'we presume the Legislature
meant what it said, and the plain meaning of the statute governs.' [Citation.]" (Whaley v.
Sony Computer Entertainment America, Inc. (2004) 121 Cal.App.4th 479, 485; accord
Moreno v. Quemuel (2013) 219 Cal.App.4th 914, 918.)
Section 2079, subdivision (a) states that a seller's agent's duties are limited to
disclosing defects that are apparent from a "visual" inspection, and section 2079.3 makes
clear that this duty does not "include or involve an inspection of areas that are reasonably
and normally inaccessible to [such] an inspection." Thus there is no room in these
statutes for seeking to expand the statutory duties to cover the factual circumstances
present in this case.
Appellants' discussion of the legislative history underlying section 2079's
enactment is not helpful. "[I]t is the role of the judiciary to simply ascertain and declare
what is in terms or in substance contained in the statute, not to insert what has been
omitted or omit what has been included. . . . [T]he courts 'may not, under the guise of
construction, rewrite the law or give the words an effect different from the plain and
direct import of the terms used.' [Citation.]" (People v. Massicot (2002) 97 Cal.App.4th
920, 925.)
In any event, there is nothing in the legislative history supporting appellants'
proposed statutory interpretation. The Legislature's stated intent in enacting section 2079
was to clarify the scope of a real estate agent's disclosure duties and thus to "facilitate the
issuance of professional liability insurance" coverage for real estate licensees.
(§ 2079.12, subd. (a); see Robinson, supra, 57 Cal.App.4th at pp. 640-642.) Appellants'
19
broad "functional" interpretation is inconsistent with this legislative intent to clarify and
limit a seller's agent's duties to a buyer. Appellants' reliance on Robinson, supra, 57
Cal.App.4th 634 is unavailing. The Robinson court confirmed the limited nature of the
listing agent's statutory disclosure duties under section 2079 and specifically rejected the
plaintiff's argument that this duty includes an obligation to independently verify or
disclaim the accuracy of the seller's representations.
Appellants' argument regarding the proper interpretation of sections 2079 and
1102 is not well founded in law or fact. The trial court acted within its discretion in
concluding that Peake's claims under these statutes were objectively unreasonable.
2. Common Law Fraud Claims
Peake and Shaw alternatively argue that the court erred in concluding that Peake's
common law intentional and negligent concealment claims were objectively unreasonable
and thus warranted sanctions.
In asserting the common law concealment claims in her amended complaint,
Peake alleged Ferrell knew the residence "contained areas of severe water intrusion
damage" when the Underwoods purchased the property and knew the Underwoods had
not repaired the water-damaged subfloor areas of the home. Peake alleged Ferrell failed
to disclose these facts and that Ferrell affirmatively misrepresented that he "knew of no
water intrusion and/or other damage to the [property]."
On appeal, appellants do not suggest there are any facts showing Ferrell made
affirmative misrepresentations regarding the defective subfloors, but argue there was a
20
reasonable basis to conclude he may be held liable for fraudulent concealment for failing
to disclose his knowledge regarding the subfloors' unrepaired condition.
In enacting section 2079, the Legislature did not intend to preclude a real estate
agent's liability for fraud. (§§ 1102.8, 2079.12; see Williams v. Wells & Bennett Realtors
(1997) 52 Cal.App.4th 857, 859-865.) However, because a seller's agent has no fiduciary
relationship with a buyer, the courts have strictly limited the scope of an agent's
disclosure duties under a fraudulent concealment theory. " 'In the context of a real estate
transaction, "it is now settled in California that where the seller knows of facts materially
affecting the value or desirability of the property . . . and also knows that such facts are
not known to, or within the reach of the diligent attention and observation of the buyer,
the seller is under a duty to disclose them to the buyer. [Citations.]". . .' " (Assilzadeh v.
California Federal Bank (2000) 82 Cal.App.4th 399, 410 (Assilzadeh); Shapiro v.
Sutherland (1998) 64 Cal.App.4th 1534, 1544; see Lingsch v. Savage (1963) 213
Cal.App.2d 729, 735; see also San Diego Hospice v. County of San Diego (1995) 31
Cal.App.4th 1048, 1055.) This duty applies to the seller or the seller's agent. (Holmes v.
Summer (2010) 188 Cal.App.4th 1510, 1518-1519.)
Peake and Shaw contend they presented evidence showing Ferrell knew the
defective condition of the subfloors through Ferrell's prior representation of the
Underwoods. In support, they discuss that Ferrell was the agent when the Underwoods
purchased the property and the fact that the prior owner had disclosed the existence of
substantial water/drainage problems at the time of that prior sale. They also cite Ferrell's
statement in the Visual Inspection Checklist in the "OTHER" category, stating: "See past
21
inspection reports, drainage upgrade report and work by civil engineer, Kenneth Discenza
. . . and Bond Construction. Drainage improvements were performed in two separate
projects." Appellants also rely on Peake's declaration describing her telephone
conversation with Ferrell, in which she stated that Ferrell responded to her inquiry
regarding the incident with her son's foot falling through the bathroom floor by stating
that the Underwoods ran out of money to complete necessary repairs.
Taken together, these facts arguably support an inference that Ferrell was aware
there were problems with the subfloors when Peake purchased the property. However,
even assuming this awareness, a seller's agent has no affirmative duty to disclose latent
defects unless the agent "also knows that such facts are not known to, or within the reach
of the diligent attention and observation of the buyer." (Holmes v. Summer, supra, 188
Cal.App.4th at p. 1518, italics added; Assilzadeh, supra, 82 Cal.App.4th at p. 410.)
The undisputed evidence shows Peake had notice of the prior problems with the
subfloors caused by a water intrusion incident and was aware that repairs to the drainage
systems had been made (including the addition of french drains and sump pumps). The
theory of Peake's case was that although the drainage system repairs may have fixed the
drainage problem, they did not address (or negligently addressed) the damage to the
subflooring caused by the water intrusion. However, Peake admits that she was provided
the 2007 Focus report during the escrow period and acknowledges that this report
disclosed the damaged subfloors. As her counsel noted at the sanctions hearing, the 2007
Focus report contains photographs " 'that shows the rotted wood.' " Additionally, Peake
admitted at her deposition that during the escrow period she was aware of some
22
"sponginess" in the floor of one bedroom and acknowledges that Ferrell specifically
noted this fact in his Visual Inspection Checklist. Peake further admitted that she
reviewed the work by the contractor who performed repairs to the drainage system.
These facts would have put any reasonable person on inquiry notice of the need to
conduct further investigation regarding the subfloors and whether any issues remained
after the drainage systems had been repaired. (See Pagano v. Krohn (1997) 60
Cal.App.4th 1, 9 [once seller's agent discloses existence of possible water intrusion, no
duty to elaborate or disclose further details].)
This record indisputably establishes that Ferrell provided Peake with disclosures
and reports disclosing the existence of prior drainage issues and damage to the subfloors.
These were the essential facts regarding the residence's condition, and they were not only
within Peake's "diligent attention," they were actually known to her prior to the close of
escrow. Thus, Peake's intentional and negligent concealment claims against the listing
agent were without any arguable merit.
In their appellate briefs, appellants suggest that Ferrell could be held liable for
intentional fraud by a half-disclosure, i.e., by affirmatively representing that repairs had
been made to the drainage system, leading Peake to believe the problems with the
subfloors had been fixed. Appellants argue that when Ferrell disclosed in the Visual
Inspection Checklist that engineer Discenza and contractor Bond made drainage
improvements, Ferrell should also have disclosed that the subfloors remained unrepaired.
However, appellants presented no evidence that Peake actually interpreted Ferrell's
statements in this manner. Moreover, it is not reasonable to infer that because drainage
23
improvements were made, this gave rise to an expectation that the subfloor must also
have been repaired. Peake admits that before the transaction closed she was in
possession of the 2007 Focus report that disclosed substantial defects in the subfloors and
appellants concede in their reply brief that "[n]owhere . . . did the record from the work
by Discenza or Bond Construction indicate that the subfloors had been repaired or
addressed as a result of any prior flooding or water intrusion." Moreover, Peake testified
that she reviewed contractor Bond's plans and saw the work that had been performed.
Thus, Peake would have known from the 2007 Focus report that the subfloor was
damaged, and would have seen from the Discenza and Bond records the extent to which
the subfloor had or had not been repaired. In short, Peake had constructive knowledge of
problems with the subflooring and thus was on inquiry notice.
Appellants also rely on their expert's declaration to establish their claims had
factual and legal merit. However, as appellants concede, Snyder erroneously assumed
that Ferrell had signed the relevant portions of the statutory transfer disclosure statement
when, in fact, it was the Underwoods who did so. And although Snyder corrected this
erroneous information, Snyder never stated or indicated that his conclusions remained
unchanged after the correction of this significant fact. Further, Snyder's opinions
regarding the applicable standard of care are directly at odds with well-settled case law,
and therefore are unpersuasive. Additionally, Snyder conceded he did not review the
numerous written disclosures given to Peake during the escrow period. In a case that
hinges on the adequacy of written disclosures, the trial court could properly have
24
disregarded the opinion of an expert who failed to review those disclosures. (See
Bushling v. Fremont Medical Center (2004) 117 Cal.App.4th 493, 510-511.)
Appellants alternatively contend the sanctions order must be reversed on the
common law claims because the court did not consider these claims in awarding
sanctions.
This contention is unsupported by the record. In their opposition to the sanctions
motion, appellants specifically discussed the case law underlying Peake's common law
claims and Ferrell referred to these claims at least twice in his reply brief in the
proceedings below. Additionally, at the hearing on the sanctions motion, Peake's
attorney raised the common law claims, and the court responded by expressly
acknowledging these claims and indicating it would consider the claims when it took the
matter under submission. Consistent with this assurance, the court issued a broad ruling
finding the evidence established "that at the close of escrow, plaintiff had all the
information necessary and that the brokers satisfied all their duty by supplying all
reports." This ruling is sufficient to show the court addressed Peake's claims under both
statutory and common law. Absent an indication to the contrary, we are required to
presume a court was aware of, and followed, the applicable law and considered all the
relevant facts and arguments. (Evid. Code, § 664, see Whyte v. Schlage Lock Co. (2002)
101 Cal.App.4th 1443, 1451; GGIS Ins. Services, Inc. v. Superior Court (2008) 168
Cal.App.4th 1493, 1504, fn. 1.)
On our own motion, we requested the parties to provide supplemental briefing on
the issue whether Ferrell was required to file a separate motion and provide a second safe
25
harbor period after Peake added the common law claims in response to Ferrell's sanctions
motion. Although the statutory language does appear to support the need for an
additional safe harbor period after an amended pleading is filed (see § 128.7, subd.
(c)(1)), we conclude the lack of a new motion and safe harbor period did not preclude the
court from awarding sanctions under the circumstances here.
First, appellants never raised the issue below or in their appellate briefs; therefore
the issue is waived. Second, it appears that any additional safe harbor period would have
been futile because it was clear that appellants would not have dismissed their common
law claims. Peake responded to the served sanctions motion by adding these claims that
were based on essentially the same facts as the claims that had been previously
dismissed. Additionally, Peake's defense of her common law and statutory claims were
based on the same factual and legal assertions. Further, the claims are flawed for the
same essential reason—before escrow closed Peake had actual or constructive knowledge
of the defective subfloors and Ferrell had no duty to provide additional disclosures to the
buyer.
3. Sanctions Were Appropriate Under the Circumstances of This Case
Our conclusion that the court properly found Peake's statutory and common law
claims were without merit, and there was no arguable factual or legal basis for asserting
those claims, does not necessarily answer the question whether sanctions were
appropriate under the circumstances of the case.
As with Rule 11 sanctions, section 128.7 sanctions should be "made with restraint"
(Schlaifer Nance & Co. v. Estate of Warhol (2d Cir. 1999) 194 F.3d 323, 334), and are
26
not mandatory even if a claim is frivolous. (Kojababian v. Genuine Home Loans, Inc.,
supra, 174 Cal.App.4th at p. 422; Perez v. Posse Comitatus (2d. Cir. 2004) 373 F.3d 321,
325.) Further, when determining whether sanctions should be imposed, the issue is not
merely whether the party would prevail on the underlying factual or legal argument.
Instead, courts should apply an objective test of reasonableness, including whether "any
reasonable attorney would agree that [the claim] is totally and completely without merit."
(In re Marriage of Flaherty, supra, 31 Cal.3d at p. 650; Guillemin, supra, 104
Cal.App.4th at p. 168; see Fahrenz v. Meadow Farm Partnership (4th Cir. 1988) 850
F.2d 207, 210.) Thus, the fact that a plaintiff fails to provide a sufficient showing to
overcome a demurrer or to survive summary judgment is not, in itself, enough to warrant
the imposition of sanctions. (See Guillemin, supra, 104 Cal.App.4th at p. 168; Segen v.
Buchanan Gen. Hosp., Inc. (W.D.Va. 2007) 552 F.Supp.2d 579, 585; see Miltier v.
Downes (4th Cir. 1991) 935 F.2d 660, 664-665.)
Because our adversary system requires that attorneys and litigants be provided
substantial breathing room to develop and assert factual and legal arguments, sanctions
should not be routinely or easily awarded even for a claim that is arguably frivolous.
Courts must carefully consider the circumstances before awarding sanctions.
With these principles in mind and considering the entire record, we conclude the
court did not abuse its discretion in awarding sanctions. The record before us presents an
appropriate case for sanctions because: (1) under well-settled law Peake's substantive
claims are clearly without merit; (2) appellants did not present any colorable legal or
factual argument to the trial court supporting an extension of existing law to establish
27
liability in this case; (3) before and during the safe harbor period, Ferrell's counsel set
forth the specific factual and legal grounds supporting his position that Peake's claims
were without merit; and (4) appellants engaged in conduct supporting the conclusion that
they did not reasonably or honestly believe the claims had any merit.
With respect to the latter point, when establishing a claim is factually or legally
without merit under section 128.7, it is not necessary to show the party acted with an
improper motive or subjective bad faith. But the fact that a party does not actually
believe in the merits of his or her claim is relevant to the issue whether sanctions are
warranted in the particular case. Peake's conduct demonstrated she (and/or her attorney)
did not in fact consider her claims to have any valid basis.
First, shortly after filing the lawsuit, Peake dismissed her common law claims
against Ferrell (breach of fiduciary duty, negligence, and constructive fraud). In these
claims, Peake alleged liability based on Ferrell's failure "to disclose the material defects,
failures and deficiencies with the [property] which were known and/or should have been
known." The logical inference from the dismissal of these claims is that Peake (or her
attorney) recognized those claims were without merit. However, in response to the
sanctions motion, appellants immediately sought to reassert the identical claims Peake
had previously dismissed and to add two legal theories that were essentially the same as
prior fraud allegations. Appellants have never provided an explanation for the earlier
dismissal of these same claims. On this record, it is reasonable to infer that Peake added
these claims without any honest belief that they were legally and factually supported.
28
Additionally, Peake failed to engage in any affirmative discovery against Ferrell
after more than one year of filing the lawsuit. Appellants argue that the lack of discovery
had nothing to do with the merits of Peake's case, and instead reflected only Peake's
desire to reduce litigation costs and her tactical decision that discovery was unnecessary
because the case could be litigated based on the documents in her possession. However,
the trial court had an ample basis to reject these assertions and determine the lack of
discovery reflected appellants' recognition that the claims were without merit and the
lawsuit was primarily a vehicle to extract a settlement from Ferrell. Although the court
did not specifically make a finding of subjective bad faith, Peake's failure to seek
discovery or otherwise prosecute her claims against Ferrell supports a finding that she
and her attorney did not have a good faith belief in their validity and thus that the claims
had no actual factual or legal basis.
Further, appellants asserted arguments in their opposition briefs below that
incorrectly characterized a significant and critical fact: the identity of the parties signing
the statutory transfer disclosure statement. As a centerpiece of Peake's opposition to the
sanctions motion, appellants asserted that Ferrell was liable under a statutory and/or fraud
theory because he signed the portion of the Transfer Disclosure statement affirmatively
indicating there had been no flooding or drainage problems. Peake's expert also initially
made the same factual assertion. However, the undisputed evidence shows (and
appellants now admit) that Ferrell never signed this portion of the Transfer Disclosure
statement or made these affirmative representations. Moreover, appellants concede that
under California law a listing agent has no duty to a buyer to independently verify the
29
seller's representations. (Robinson, supra, 57 Cal.App.4th at p. 643.) By relying on this
critical factual misconception in opposing the sanctions motion and in submitting their
expert declaration, appellants highlighted the absence of a reasonable factual basis
underlying their claims.
The trial court did not abuse its discretion in imposing sanctions.5
II. Order Awarding Underwoods' Prevailing Party Attorney Fees
Peake contends the court erred in awarding the Underwoods section 1717
prevailing party attorney fees after she voluntarily dismissed her claims against them.
A. Factual Background6
Peake asserted causes of action against the Underwoods for breach of contract,
fraud, concealment, negligent misrepresentation, and negligence. In August 2010, the
Underwoods moved to compel arbitration based on the purchase agreement's arbitration
provision. Peake opposed the motion. In April 2011, the court granted the Underwoods'
motion and provided a mechanism for selecting the arbitrator. When the parties still had
not agreed on an arbitrator three months later, the court appointed one.
Soon after the court appointed the arbitrator, Peake voluntarily dismissed her
claims against the Underwoods based on her understanding that the Underwoods were
5 We deny Ferrell's request for sanctions on appeal. We deny the California
Association of Realtors' application to file an amicus curiae brief. We grant appellants'
judicial notice request regarding attorney Shaw's reporting the sanctions award to the
California State Bar.
6 We grant respondent Marviel Underwood's motion to augment the record to
include certain documents that were before the trial court on the attorney fees motion.
30
insolvent. About two months later, the Underwoods moved to recover their attorney fees
under the purchase agreement's attorney fees provision, which states: "In any action,
proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the
prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the
non-prevailing Buyer or Seller. . . ."
The Underwoods argued they were prevailing parties under section 1717 because
they prevailed on their motion to compel arbitration, which—by virtue of Peake's
subsequent voluntary dismissal—was the only contract claim the court adjudicated.
Peake responded that section 1717, subdivision (b)(2), bars an award of attorney fees
when an action is voluntarily dismissed, and further contended that merely prevailing on
an interim procedural motion is insufficient to establish prevailing party status.
The court found the Underwoods were the prevailing parties and awarded them
nearly $60,000 in attorney fees.
B. Applicable Legal Principles
"Except as otherwise expressly provided by statute, a prevailing party is entitled as
a matter of right to recover costs in any action or proceeding." (Code Civ. Proc., § 1032,
subd. (b).) Attorney fees are "allowable as costs under Section 1032" when they are
"authorized by . . . [c]ontract." (Code Civ. Proc., § 1033.5, subd. (a)(10.) "Thus,
recoverable litigation costs . . . include attorney fees, but only when the party entitled to
costs has a legal basis, independent of the cost statutes and grounded in an agreement . . .
upon which to claim recovery of attorney fees." (Santisas v. Goodin (1998) 17 Cal.4th
599, 606 (Santisas).)
31
A "prevailing party" includes, among others, "a defendant in whose favor a
dismissal is entered." (Code Civ. Proc., § 1032, subd. (a)(4).) In an action on a contract
containing an attorney fees provision, the prevailing party on the contract is "the party
who recovered a greater relief in the action on the contract." (§ 1717, subd. (b)(1).) But
when a plaintiff dismisses an action containing contract claims, there can be no
prevailing party—and, therefore, no attorney fee recovery—on those contract claims.
(§ 1717, subd. (b)(2) ["Where an action has been voluntarily dismissed . . . , there shall be
no prevailing party for purposes of this section."].) "This bar, however, applies only to
causes of action that are based on the contract and are therefore within the scope of
section 1717." (Santisas, supra, 17 Cal.4th at p. 617.) Thus, "[i]f the voluntarily
dismissed action also asserts causes of action that do not sound in contract, those causes
of action are not covered by section 1717, and the attorney fee provision, depending upon
its wording, may afford the defendant a contractual right, not affected by section 1717, to
recover attorney fees incurred in litigating those causes of action." (Ibid.)
"Code of Civil Procedure section 581 allows a plaintiff to voluntarily dismiss, with
or without prejudice, all or any part of an action before the 'actual commencement of
trial.' " (Gogri v Jack in the Box Inc. (2008) 166 Cal.App.4th 255, 261.)
" '[C]ommencement of trial' under section 581 is not restricted to only jury or court trials
on the merits, but also includes pretrial procedures that effectively dispose of the case."
(Id. at p. 262.) But " 'pretrial procedures not determinative of the case do not preclude
voluntary dismissal. . . .' " (Ibid.) Accordingly, even when a court has granted a motion
to compel arbitration, the plaintiff still retains her absolute right to dismiss her case so
32
long as trial has not commenced—either in the formal sense or in the informal sense of an
inevitable adverse determination on the merits. (Cardiff Equities, Inc. v. Superior Court
(2008) 166 Cal.App.4th 1541, 1549.)
"We review de novo a determination of an award of attorney fees under a
contractual provision where, as here, no extrinsic evidence has been offered to interpret
the contract, and the facts are not in dispute." (Kangarlou v. Progressive Title Co., Inc.
(2005) 128 Cal.App.4th 1174, 1177.)
C. Analysis
The Underwoods moved for attorney fees based on their contention they were the
prevailing party on the contract under section 1717 because they prevailed on their
motion to compel arbitration. However, as Peake correctly asserts, the Underwoods
could not have been the prevailing party on the contract under a section 1717 analysis.
Although section 1717 permits a prevailing party to recover fees, it specifically provides
that where a contract action is voluntarily dismissed, there is no prevailing party.
(§ 1717, subd. (b)(2).) Peake's amended complaint asserted a breach of contract claim
against the Underwoods. By virtue of her voluntary dismissal of that claim, section 1717,
subdivision (b)(2), prevented the trial court from finding a prevailing party on the
contract. The Underwoods do not cite any evidence establishing that Peake was not
entitled to dismiss her claims when she did—that is, either that trial had commenced or
that the judge or arbitrator issued any rulings that would have substantively disposed of
33
Peake's claims.7 Therefore, Peake was entitled to voluntarily dismiss her claims against
the Underwoods, which precluded a finding that the Underwoods were the prevailing
party on the contract. (§ 1717, subd. (b)(2).)
This section 1717 analysis, however, applies only to Peake's contract claim. With
respect to her tort claims, Peake's voluntary dismissal established the Underwoods were
the prevailing parties on those claims. (Code Civ. Proc., § 1032, subd. (a)(4).) Thus, if
the Purchase Agreement's attorney fees provision is sufficiently broad to include Peake's
tort claims, the Underwoods are entitled to recover attorney fees incurred in defending
against those claims. (Santisas, supra, 17 Cal.4th at p. 617.)
The Purchase Agreement's attorney fees provision reads as follows: "In any
action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement,
the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from
the non-prevailing Buyer or Seller. . . ." Other courts—including our Supreme Court—
have found similar provisions broad enough to include tort claims. (Santisas, supra, 17
Cal.4th at p. 608 [a provision covering claims "arising out of the execution of the
agreement or th[e] sale" is broad enough to "embrace[] all claims, both tort and breach of
contract"]; Drybread v. Chipain Chiropractic Corp. (2007) 151 Cal.App.4th 1063, 1071-
1072 [provision awarding attorney fees to the prevailing party in " 'any action or other
7 We deny respondents' request that we take judicial notice of the JAMS
administrator's declaration. The declaration was not before the trial court and Mr.
Underwood has identified no exceptional circumstances justifying our consideration of it.
(Haworth v. Superior Court (2010) 50 Cal.4th 372, 379, fn. 2.)
34
proceeding arising out of this Sublease' " is "broad enough to encompass noncontract
claims"].) So do we. Accordingly, the Underwoods were entitled to prevailing party
attorney fees incurred in defending against Peake's tort claims.
Although the trial court's order awarding fees to the Underwoods does not
specifically rely on this analysis, it does cite Santisas. Moreover, on appeal the
Underwoods advanced the Santisas rationale in their briefs. The Santisas rationale fully
supports the trial court's ruling and we affirm on that basis. (See California Aviation, Inc.
v. Leeds (1991) 233 Cal.App.3d 724, 731 ["[T]he trial court's stated reasons for its ruling
do not bind us. We review the ruling, not its rationale."].)
Under Santisas, the Underwoods are entitled to recover attorney fees incurred
defending Peake's tort claims, but not her contract claim. While the trial court's ruling
does not apportion fees between those claims, "fees need not be apportioned when
incurred for representation on an issue common to both a cause of action in which fees
are proper and one in which they are not allowed." (Reynolds Metals Co. v. Alperson
(1979) 25 Cal.3d 124, 129-130.) The court had before it the Underwoods' relevant legal
bills, and could have reasonably concluded that Peake's contract and tort claims were "so
interrelated that it would have been impossible to separate them into claims for which
attorney fees are properly awarded and claims for which they are not." (Akins v.
Enterprise Rent-A-Car Co. (2000) 79 Cal.App.4th 1127, 1133.) That determination is a
matter of discretion for the trial court, which we will not disturb unless the court's ruling
" ' " ' "exceeds the bounds of reason, all of the circumstances before it being
considered." ' " ' " (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582,
35
1604 [affirming trial court's award of fees, without allocation, where contract and
misrepresentation claims arose from same operative facts].) More important, Peake does
not challenge the amount of the attorney fees award, or the lack of allocation between tort
and contract claims. The trial court did not abuse its discretion in awarding the
Underwoods the full amount of their fee request without apportionment.
Finally, Peake contends the Underwoods failed to timely file their motion for
attorney fees if one starts the clock on the date the court granted the Underwoods' motion
to compel arbitration (i.e., the date on which the Underwoods claim they were deemed
the prevailing party on the contract). But it was not until Peake dismissed her claims
against the Underwoods that the Underwoods became the prevailing parties.
Accordingly, we reject Peake's argument that the Underwoods' motion was untimely.
DISPOSITION
The judgment is affirmed. Appellants to pay respondents' costs on appeal.
HALLER, J.
WE CONCUR:
MCCONNELL, P.J.
MCINTYRE, J.
36