Thompson v. Flynn Riley Bailey & Pasek CA1/4 ( 2021 )

Filed 12/30/21 Thompson v. Flynn Riley Bailey & Pasek CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not
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IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION FOUR
PAUL AND KATHLEEN
THOMPSON,
Plaintiffs and Appellants, A161238
v. (Marin County
FLYNN RILEY BAILEY & Super. Ct. No. CIV170608)
PASEK, LLP, et al.,
Defendants and
Respondents.
Paul and Kathleen Thompson (the Thompsons) brought
this legal malpractice action after defendants failed to timely
appeal from a judgment against the Thompsons in an action
related to the foreclosure of property (the underlying case). The
underlying case consisted of two consolidated lawsuits. As is
relevant here, after a bench trial in the underlying case, the court
found against the Thompsons on (1) their cross-complaint for
breach of a deed of trust against trustee T.D. Service Company
(TDS), and (2) their claim against TDS for breach of a services
agreement, which they asserted as assignees of the lender,
Luther Burbank Services (LBS). With the judgment wholly in
favor of TDS, the trial court in the underlying case granted TDS
1
approximately $400,000 in prevailing party attorney fees under
Civil Code1 section 1717.
Defendants filed an untimely notice of appeal as to the
underlying judgment against the Thompsons, but a timely notice
of appeal as to the fee award, which resulted in an affirmance.
The Thompsons then settled with TDS and brought a malpractice
case against defendants based on defendants’ failure to timely file
the appeal from the underlying judgment.
The trial court in this malpractice action found that, if
defendants had timely filed an appeal in the underlying case,
TDS would have prevailed on the cross-complaint, but the
Thompsons ultimately would have prevailed on the assigned
claim for breach of the services agreement. The court issued a
judgment for the Thompsons, including damages consisting of:
(1) the amount they would have recovered on the breach of
services agreement claim, as well as prevailing party attorney
fees they would have incurred to prosecute that claim on remand;
and (2) attorney fees the Thompsons paid to TDS for the untimely
appeal that they would not have had to pay had the appeal been
timely filed.
The sole question in this appeal is whether the trial court
in the malpractice action erred in failing to award the Thompsons
additional damages to compensate them for the full amount of
attorney fees they paid to TDS in the underlying case. The
parties agree that the answer to this question, in turn, depends
1All further references are to the Civil Code unless
otherwise specified.
2
wholly on the answer to the question of whether TDS could have
been awarded prevailing party attorney fees under section 1717
on the Thompsons’ cross-complaint. Because the court correctly
concluded that TDS could have been awarded prevailing party
attorney fees on the cross-complaint under section 1717, we
affirm the judgment.
BACKGROUND
I. The Underlying Real Estate Transaction and
Proceedings
Luther Burbank Savings (LBS) loaned 620 Third Street,
LLC (the LLC) $3,945,100 to purchase real property (the
property) in Sonoma County. The loan was evidenced by a
promissory note dated January 3, 2007, as modified in March
2008 (collectively, the Note), and secured by a deed of trust to the
property (the Deed of Trust). Paul Thompson was the manager of
PK Property LLC, which was the sole member of the LLC. The
Thompsons executed a repayment guarantee for the loan (the
Guaranty).
A. LBS’s Complaint, the Foreclosure Proceedings, and the
Thompsons’ Cross-Complaint
In early 2009, the LLC defaulted on the loan, and the
Thompsons did not repay it. LBS sued the LLC and the
Thompsons seeking judicial foreclosure and damages for breach
of the Guaranty.
Thereafter, LBS substituted TDS as the trustee under the
Deed of Trust. A services agreement governed the relationship
between LBS and TDS, and TDS agreed therein to indemnify
3
LBS for attorney fees incurred by LBS “to the extent caused by
[TDS’s] breach of this Agreement or by the negligence or willful
misconduct of [TDS].” TDS initiated nonjudicial foreclosure
proceedings under the Deed of Trust, and a foreclosure sale was
set for December 2009. Due to a mistake on TDS’s part, TDS
made an opening bid on behalf of LBS for approximately
$4,476,028, which represented the total outstanding
indebtedness on the Note, instead of the $1,767,000 bid that LBS
had authorized. TDS prepared a trustee’s deed upon sale, but it
did not record the deed. LBS notified TDS of the mistaken bid
amount, and TDS determined the sale was invalid. TDS
rescinded the sale, and, over the Thompsons’ objections, set a new
foreclosure sale. At the second sale, TDS bid $1,767,000 for the
property on LBS’s behalf, and LBS was declared the high bidder.
LBS thereafter amended its complaint to sue the
Thompsons only to recover the deficiency under the Guaranty.
The LLC and the Thompsons filed a cross-complaint against TDS
asserting claims for breach of the Deed of Trust and violation of
nonjudicial foreclosure statutes.2 The Thompsons’ claims were
premised on allegations that the first foreclosure sale could not
be rescinded, and that TDS had violated its contractual and
statutory duty to sell the property to the highest bidder. The
Thompsons alleged that they “incurred and will continue to incur
expenses in the form of attorneys’ fees, court costs, and other
litigation expenses to defend against the [LBS] Complaint, and
2The cross-complaint also asserted claims for bid chilling,
but those claims were dismissed before trial.
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are entitled to recover such fees (including any fees awarded
against them and in favor of [LBS]) . . . from . . . [TDS].”
In August 2011, LBS and the Thompsons settled, and LBS
assigned to the Thompsons its claims against TDS arising from
the processing of the foreclosure.
B. The Thompsons’ Complaint and the Consolidation
In December 2012, as LBS’s assignees, the Thompsons filed
a complaint against TDS for breach of the services agreement,
express contractual indemnity, and breach of the implied
covenant of good faith and fair dealing.
In September 2013, the Sonoma County Superior Court
consolidated the Thompsons’ cross-complaint from the first suit
and their complaint in the second suit. In 2014, the parties
stipulated to a bifurcated trial with the first phase to proceed as a
court trial of certain legal issues based on stipulated facts. In its
statement of decision from this phase, the trial court found that
the Thompsons and the LLC did not have standing to bring the
cross-complaint against TDS. The Thompsons did not have
standing to sue TDS under the Note or Deed of Trust because
they were “guarantors only,” not the borrowers, and the court
could not identify any obligations that TDS owed them and
breached. The LLC did not have standing because its corporate
status was cancelled, and, even if it was a viable entity, it
sustained no damages as a result of TDS’s mistake because it
could not be subject to a deficiency judgment. The court also
found that TDS had the right to rescind the first foreclosure sale
after its mistake.
5
With regard to the Thompsons’ complaint, the court found
that LBS did not have valid causes of action for breach of contract
or negligence that could be assigned to the Thompsons because
“the second sale appears on its face to have obtained for LBS all
of the benefits that LBS intended to achieve by means of the
foreclosure.” The court also found LBS did not validly assign
claims to the Thompsons because the services agreement
prohibited assignments without the consent of TDS, who did not
consent. The court entered judgment in favor of TDS.
TDS moved for attorney fees under section 1717 and “the
terms of the applicable agreements.” The court granted the
motion, although it was not clear whether the court based its
award on TDS prevailing on the cross-complaint, complaint, or a
combination of the two. The Thompsons appealed from the
judgment and the order granting attorney fees, but their appeal
from the judgment was dismissed as untimely.
On appeal from the attorney fees award, the Thompsons
argued that section 1717 did not apply because the cross-
complaint sought fees as damages, not costs; TDS was not
entitled to attorney fees incurred defending against the cross-
complaint under the terms of the Deed of Trust, Note, Guaranty,
or the services agreement; and the court failed to properly
apportion fees and awarded duplicative fees. A panel from
Division Five of this court assumed without deciding that section
1717 attorney fees were not available under the cross-complaint,
but affirmed the fee award in any event. It found that, even if
TDS was only entitled to prevailing party fees under the services
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agreement, the trial court did not abuse its discretion by failing
to apportion the fees. The Thompsons thereafter settled the
attorney fees award with TDS for $600,000.
II. The Legal Malpractice Action
In the first phase of the Thompsons’ malpractice action
against defendants, the trial court, acting as an appellate court,
determined how a timely appeal of the judgment in the
underlying case would have been resolved. The court addressed
stipulated issues, including whether the Thompsons lacked
standing to pursue their cross-claims against TDS, and whether
they obtained a valid assignment of claims from LBS. The court
found that the Thompsons were not parties to the Deed of Trust
or Note, nor were they third-party beneficiaries thereof, so they
lacked standing to bring the cross-complaint. But contrary to the
court in the underlying case, the trial court in the malpractice
action determined that LBS had validly assigned its claims
against TDS to the Thompsons.3
In the second phase of the malpractice action, the trial
court tried the “remanded” breach of services agreement claim
against TDS on stipulated facts. The trial court found that TDS
breached the services agreement with LBS, and the Thompsons
(as LBS’s assignees) would have received a judgment for
3 The other stipulated issues were whether TDS had the
right to rescind the first trustee sale and whether the Thompsons’
statutory claim failed because the acts of TDS were privileged
under section 47. The trial court found that TDS had authority
to rescind the first sale, the question of immunity under section
47 was moot, and TDS had immunity under section 47 in any
event.
7
$340,340.80 in damages for this breach. The parties then
stipulated to the remaining issues that required resolution,
including whether the Thompsons should receive interest on the
breach of contract judgment and/or prevailing party attorney fees
and costs, and “whether the attorney’s fees and costs in favor of
[TDS]” in the underlying case should be “reversed.”
After briefing and a hearing, the trial court issued a post-
trial order. As to the issue of “reversal” of the TDS attorney fees
award, the court observed that the question was whether the
Thompsons were entitled to this amount as damages from
defendants’ malpractice. It found the Thompsons were entitled to
a portion of the $600,000 they had paid to TDS, specifically the
$105,320 they had paid TDS in connection with the untimely
appeal. As for the remainder, the court found that the
Thompsons had not proven to a “legal certainty” that TDS would
not have been entitled to recover attorney fees under section 1717
on the Thompsons’ cross-complaint. First, the court observed
that the fact that the cross-complaint prayed for fees as damages,
not costs, was not dispositive because contractual attorney fees
may be awarded regardless of whether they were pled. Next, the
court found that the Thompsons relied on the Guaranty to assert
their contract claims against TDS, and they challenged the
foreclosure sale asserting they had standing based on the loan
documents, including the Guaranty. The Guaranty contained an
attorney fee provision, so “a court could conclude that [TDS] was
a prevailing party on a contract entitled to fees under the
8
reciprocity of [section] 1717.” The court entered judgment for the
Thompsons for $673,924.42 on September 25, 2020.
The Thompsons brought a motion to vacate the judgment,
arguing that the court’s finding that TDS could have been
awarded attorney fees on the cross-complaint under section 1717
was not supported by the facts or law. The Thompsons asked for
a new judgment awarding them the entire $600,000 they had
paid to TDS. The court denied the motion. It again rejected the
argument that section 1717 attorney fees could not be awarded
on the cross-complaint because the Thompsons did not plead
entitlement to these costs. The court stated that the theory of the
Thompsons’ case was breach of contract, and the Thompsons
“asserted that theory by using the Guaranty of the loan that was
secured by the Deed of Trust, all subject to attorney’s fees
provisions.” Had the Thompsons prevailed on their theory, the
court concluded, they could have recovered attorney fees. As a
result, TDS could have recovered these fees as well. The
Thompsons timely appealed.
DISCUSSION
The sole question in this appeal is whether the trial court
correctly determined that TDS could have recovered prevailing
party attorney fees under section 1717 on the breach of contract
claim in the Thompsons’ cross-complaint. Defendants contend
that we should review the trial court’s determination for
substantial evidence, but it is well established that we review de
novo the question of whether there is a legal basis for awarding
9
attorney fees. (Brown Bark III, L.P. v. Haver (2013)
219 Cal.App.4th 809, 821 (Haver).)
Section 1717 provides, in relevant part: “In any action on a
contract, where 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,
then the party who is determined to be the party prevailing on
the contract, whether he or she is the party specified in the
contract or not, shall be entitled to reasonable attorney’s fees in
addition to other costs.” (§ 1717, subd. (a); see Code Civ. Proc.,
§§ 1032, subd. (b) [prevailing party shall recover costs], 1033.5,
subds. (a)(10)(A) [attorney fees awarded under statute or contract
are allowable costs].) Section 1717 makes reciprocal an otherwise
unilateral attorney fee provision in an action on the contract
when the contract provides the right to one party but not the
other. (Santisas v. Goodin (1998) 17 Cal.4th 599, 610–611.) It
also applies when a party litigant prevails in an action on a
contract by establishing that the contract is invalid, inapplicable,
unenforceable, or nonexistent; in that situation, section 1717
permits that party’s recovery of attorney fees whenever the
opposing party would have been entitled to attorney fees under
the contract had he or she prevailed. (Id. at p. 611.)
Generally, attorney fees are awarded only when the
contract action is between signatories to the contract containing
the fee provision, but, in some circumstances, section 1717’s
reciprocity principles apply in actions with nonsignatories.
(Reynolds Metal Co. v. Alperson (1979) 25 Cal.3d 124, 128
10
(Reynolds).) Our Supreme Court first applied reciprocity
principles to a nonsignatory in Reynolds. There, the plaintiff
sued the defendants for the contractual debt of two corporations,
alleging the defendants were alter egos of the corporations.
(Id. at p. 127.) The plaintiff lost on its alter ego theory, but the
trial court awarded the prevailing defendant nonsignatories
attorney fees under the contracts the plaintiff had attempted to
enforce. (Ibid.) Our Supreme Court affirmed, holding that
section 1717 must be “interpreted to further provide a reciprocal
remedy for a nonsignatory defendant, sued on a contract as if he
were a party to it, when a plaintiff would clearly be entitled to
attorney’s fees should he prevail in enforcing the contractual
obligation against the defendant.” (Id. at p. 128.) Section 1717
“would fall short of th[e] goal of full mutuality of remedy if its
benefits were denied to parties who defeat contract claims by
proving that they were not parties to the alleged contract or that
it was never formed.” (Hsu v. Abbara (1995) 9 Cal.4th 863, 870.)
In assessing whether the plaintiff would have been entitled
to attorney fees under section 1717 had it prevailed, the merit of
the theory used to assert the nonsignatory defendant’s
contractual liability “is irrelevant.” (Haver, supra,
219 Cal.App.4th at p. 827.) In Haver, the plaintiff sued a
nonsignatory defendant for breach of agreements related to a line
of credit, asserting successor liability against the defendant.
(Id. at pp. 816–817.) The trial court found against the plaintiff on
the breach of contract claims, but it denied the defendant
prevailing party attorney fees on those claims, finding the
11
defendant would not have been liable for the plaintiff’s attorney
fees had the plaintiff prevailed. (Id. at p. 827.) The trial court’s
rationale was that the plaintiff’s successor liability theory
“clearly” lacked merit. (Ibid.) The appellate court reversed.
“Regardless of the [plaintiff’s] theory’s merit, [plaintiff] sued
[defendant] on that theory and forced [defendant] to incur
attorney fees to defend against it through trial. ‘[T]he pertinent
inquiry for purposes of . . . section 1717 is whether [plaintiff]
would have been entitled to attorney fees in a hypothetical
situation in which [it] did prevail on its claim[s].’ ” (Ibid.) There,
had the plaintiff succeeded in proving the defendant was a
successor, it could have recovered attorney fees. Accordingly, the
defendant was entitled to its fees. (Ibid.; see also Reynolds,
supra, 25 Cal.3d at p. 129 [“Had plaintiff prevailed on its cause of
action claiming defendants were in fact the alter egos of the
corporation [citation], defendants would have been liable on the
notes”].)
We conclude that the trial court in the malpractice action
correctly found that TDS was entitled to fees on the Thompsons’
cross-complaint under the rule that a prevailing party is entitled
to recover its attorney fees pursuant to a contract provision if the
opposing party would have been entitled to attorney fees had it
prevailed. In their cross-complaint, the Thompsons sued TDS for
breach of contract. Their legal theory was that they had standing
to sue for breach because they, along with TDS, were parties to
the loan transaction documents, including the Deed of Trust and
Note. More specifically, their theories were that the Deed of
12
Trust, Note, and Guaranty were one integrated contract (§ 1642),
and the Deed of Trust contained and expressly incorporated the
Guaranty, making the Thompsons and TDS parties thereto.4
Alternatively, the Thompsons claimed to be third-party
beneficiaries of the Note and Deed of Trust.
Under section 1642, several papers relating to the same
subject matter and executed as parts of substantially one
transaction are to be construed together as one contract. (Nevin
v. Salk (1975) 45 Cal.App.3d 331, 338 [“a note, mortgage and
agreement of sale constitute one contract where they are part of
the same transaction”].) “When there are several contracts
between the parties as a part of a single interrelated relationship
or transaction, commonly referred to as an integrated agreement,
and only one contract contains an attorney’s fees provision, the
several documents may be construed together and the attorney’s
fees provision applied to any litigation involving any one, or all,
of the several agreements.” (12 Miller & Starr, Cal. Real Estate
(4th ed. 2021) § 40:70.) Further, “where there are two or more
separate, independent contracts as part of the same transaction,
and one agreement incorporates a second agreement by reference,
the party enforcing the incorporating document may recover fees
based upon the fee provision in the incorporated document.”
4The incorporation theory was that the Deed of Trust
contained the Guaranty and that it incorporated the Guaranty
through its definition and use of the term “Loan Documents,”
which meant “the Note, this Deed of Trust . . . all guaranties . . .
and any other documents now or in the future executed by
Trustor, any guarantor or any other person in connection with
the loan evidenced by the Note . . . .”
13
(Ibid.) Both the Guaranty and the Note contain attorney fee
provisions.5 The trial court rejected the Thompsons’ theory of an
overarching agreement, but, had the Thompsons succeeded in
convincing the court that they were parties to an overarching
agreement represented by the Deed of Trust and Guaranty, or
the Deed of Trust, Note, and Guaranty, that agreement would be
subject to an attorney fee provision.6
Seeking to avoid this result, the Thompsons argue they did
not sue to enforce the Note or Guaranty, so the fee provisions
therein are inapplicable. This argument ignores the “one
contract” and incorporation theories the Thompsons used to
pursue their breach of contract claim. “Where a contract provides
for attorney’s fees . . . that provision shall be construed as
5 The Guaranty states, “The undersigned shall pay to
Lender all attorneys’ fees and costs incurred by Lender in seeking
to enforce any of the liabilities or obligations of the undersigned
under this Guaranty.” The Note states, “If an action is brought
for collection of this note, or if proceedings are commenced to
foreclose upon the security given for this note, I promise to pay
all costs and expenses incurred including reasonable attorney’s
fees.”
6 The question we address is not the propriety of a finding
that the agreements could be read as one. Rather, because we
must assume that the Thompsons would have prevailed on their
claims against TDS in order to determine whether TDS was
entitled to fees for defeating the cross-complaint, we focus instead
on whether the Thompsons could have recovered attorney fees
had they prevailed on their theories—regardless of whether those
theories had any substantive merit. (Haver, supra,
219 Cal.App.4th at p. 827 [the merit of the theory used to assert
the nonsignatory defendant’s contractual liability “is
irrelevant”].)
14
applying to the entire contract . . . .”7 (§ 1717, subd. (a); Harbor
View Hills Community Assn. v. Torley (1992) 5 Cal.App.4th 343,
348–349 [explaining this language was added to overrule
Sciarrotta v. Teaford Custom Remodeling, Inc. (1980)
110 Cal.App.3d 444, 446, which held that parties could limit an
attorney’s fee clause to specific contract provisions or actions on
the contract].) Thus, irrespective of the merits of the Thompsons’
theories for how they were parties to an overarching contract
including all the loan documents, had they prevailed with these
theories in enforcing a contractual obligation against TDS, they
could have recovered attorney fees under section 1717. (See Boyd
v. Oscar Fisher Co. (1989) 210 Cal.App.3d 368, 378–381 [invoices
with provision allowing for attorney fees for manufacturer’s
collection efforts were read as part of dealership agreement, and
limited attorney fee clause applied to entire agreement];
12 Miller & Starr, Cal. Real Estate (4th ed. 2021) § 40:70.)8
Accordingly, the trial court in the malpractice action did not err
7 This general rule of construction applies “unless each
party was represented by counsel in the negotiation and
execution of the contract, and the fact of that representation is
specified in the contract.” (§ 1717, subd. (a).) The agreements at
issue do not contain language that would except them from
section 1717’s general rule of construction.
8 Citing Raffetto v. CIT Business Lending (E.D. Cal. March
8, 2010) No. CIV S-08-392, 2010 WL 891615, *5, the Thompsons
also argued they could enforce the Deed of Trust as third-party
beneficiaries of the Note and Deed of Trust. Given our
disposition, we need not address whether the Thompsons would
have been entitled to attorney fees if they had succeeded in
enforcing the Deed of Trust as third-party beneficiaries.
15
in holding that the Thompsons had failed to prove TDS could not
have recovered attorney fees on the cross-complaint.
Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th
541, upon which the Thompsons rely, does not convince us
otherwise. Super 7 is distinguishable because it did not involve a
contract claim under section 1717. Rather, where the purchaser
of real estate sued a broker for fraud, the court in Super 7 held
that section 1717 and its reciprocity principles were inapplicable
to the fraud claim. (Id. at pp. 546–547.) The court further held
that the broker could not recover fees for defense of the tort claim
under the terms of the purchase agreement at issue because the
broker was not a party or third-party beneficiary thereto, and,
even if he were a third-party beneficiary, the fee provision did not
evidence an intent to benefit third parties. (Id. at pp. 549–550.)
Finally, there is no merit to the Thompsons’ assertion that
TDS could not have recovered fees under section 1717 because
they sought attorney fees in the cross-complaint only as damages,
and not pursuant to that statute. Even accepting that the
Thompsons alleged a right to recover from TDS the attorney fees
they incurred in the litigation with LBS as an aspect of their
damages, the trial court correctly observed that attorney fees as
costs can now be recovered through a noticed motion under Code
of Civil Procedure section 1033.5. (Allstate Ins. Co. v. Loo (1996)
46 Cal.App.4th 1794, 1797–1798.)
In sum, the trial court correctly found that the Thompsons
had failed to establish that TDS could not have recovered
prevailing party attorney fees under section 1717 for its
16
successful defense of the contract claim in the Thompsons’ cross-
complaint. The trial court therefore did not err in denying the
Thompsons’ request for damages in the full amount of the
attorney fees they paid to TDS.9
DISPOSITION
The judgment is affirmed.
BROWN, J.
WE CONCUR:
POLLAK, P. J.
ROSS, J.
Thompson et al. v. Flynn Riley Bailey & Pasek, LLP (A161238)
9 In the earlier appeal of the fee award, Division Five of this
court assumed that the trial court in the underlying case
awarded TDS approximately $400,000 in attorney fees on the
breach of services agreement claim, and that fees were not
recoverable under the cross-complaint. It nonetheless held that
the trial court “could reasonably find the activities TDS
undertook to defend against the cross-claims were
‘ “ ‘ inextricably intertwined’ ” ’ with the activities it undertook to
defend against the complaint, ‘making it “impracticable, if not
impossible, to separate the multitude of conjoined activities into
compensable or noncompensable time units.” ’ ” This ruling
supports the converse conclusion that the roughly $400,000 in
attorney fees awarded by the trial court in the underlying case
could have been based on successful defense of the cross-
complaint alone.

Judge of the Superior Court of California, City and
County of San Francisco, assigned by the Chief Justice pursuant
to article VI, section 6 of the California Constitution.
17