Chhatrala Investments, LLC v. Elajou Investment Group, L.P. CA4/1 ( 2021 )

Filed 1/21/21 Chhatrala Investments, LLC v. Elajou Investment Group, L.P. CA4/1
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COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
CHHATRALA INVESTMENTS, LLC, D074840 & D076341
Plaintiff and Appellant,
v.
(Super. Ct. No. 37-2016-
ELAJOU INVESTMENT GROUP, L.P. 00038312-CU-BC-CTL)
et al.,
Defendants and Respondents.
APPEALS from a judgment and an order of the Superior Court of San
Diego County, Joan M. Lewis, Ronald F. Frazier, Judges. Judgment
affirmed. Postjudgment attorney fees order affirmed in part and reversed in
part.
Vivoli Saccuzzo, Michael W. Vivoli and Jason P. Saccuzzo for Plaintiff
and Appellant.
Law Office of Christopher T. Wright and Christopher T. Wright for
Defendants and Respondents Elajou Investment Group, L.P., Juma Elajou
and Broadway87CDev, LLC.
Procopio, Cory, Hargreaves & Savitch, Kendra J. Hall, S. Todd Neal
and Zagros S. Bassirian for Defendant and Respondent Zephyr Partners-RE,
LLC.
Chhatrala Investments, LLC (Chhatrala), a real estate investor, sued
several other investors seeking the return of about $1.79 million of its funds
and to recover a profit share from the sale of a large downtown San Diego
commercial parcel.1 Chhatrala claimed its agent had invested these funds
without authority, and this agent later entered into a settlement agreement
with defendants (or their related entities) without Chhatrala’s knowledge or
consent.
In its third amended complaint, Chhatrala alleged eight causes of
action, asserting contractual, tort, common count, and equitable theories as
grounds for its claimed right to a monetary recovery. The court sustained
defendants’ demurrers without leave to amend, and entered judgment in
defendants’ favor. The court later granted defendants’ attorney fees motions
under fee provisions in a settlement agreement and an attached promissory
note. Chhatrala appealed from the judgment and then appealed from the
attorney fees order. We consolidated those appeals.
We affirm the judgment. Chhatrala has not alleged a viable cause of
action against defendants and thus the court properly sustained the
demurrer. We reject Chhatrala’s contentions the court abused its discretion
in denying it leave to amend and in temporarily staying discovery.
On attorney fees, the court awarded defendant Zephyr $227,734.32,
and awarded the remaining defendants $75,262.32. We reverse the attorney
fees order as to Zephyr because Chhatrala’s claims against Zephyr were not
“on a contract” or within the scope of the attorney fees provision. We affirm
1 Defendants are Elajou Investment Group, L.P., and its managing
member Juma Elajou; Zephyr Partners-RE, LLC (Zephyr); and Broadway
87CDev, LLC (Broadway). Chhatrala also named Elajou Group, LLC (Elajou
Group), but did not serve this party.
2
the order as to all other defendants because Chhatrala unsuccessfully sought
to enforce a contract against these defendants (and/or their principals or
agents) and the contract contained an attorney fees provision.
FACTUAL AND PROCEDURAL BACKGROUND
We base our factual summary on Chhatrala’s third amended complaint,
the incorporated documents, and judicially noticed matters. (McBride v.
Smith (2018) 18 Cal.App.5th 1160, 1172-1173.) We disregard factual
assertions in the parties’ briefs that are based on sources outside this rule.
We assume the truth of the alleged facts, unless they are contradicted by
information in the current or prior pleadings. (Ibid.; Banis Restaurant
Design, Inc. v. Serrano (2005) 134 Cal.App.4th 1035, 1044-1045 (Banis).)
Facts Alleged in Third Amended Complaint
This matter arose from real estate investments in a downtown San
Diego parcel referred to as the Waterfall Property (between Broadway, C
Street, Seventh Avenue, and Eighth Avenue). Defendant Elajou Investment
Group previously owned or controlled this property. Defendant Mr. Elajou
was Elajou Investment Group’s managing member and allegedly its alter ego.
When we refer to Elajou Investment Group we include Mr. Elajou unless the
context provides otherwise.2
2 Defendants contend Elajou Group owned the Waterfall Property, and
not Elajou Investment Group. Elajou Group was named as a defendant late
in the proceedings, but was never served. For purposes of demurrer analysis,
we assume the truth of Chhatrala’s assertions and accept that although
Elajou Group may have been the legal title owner, Elajou Investment Group
had indirect ownership interests through its relationship with Elajou Group.
This fact was essentially admitted by defendants Elajou Investment Group
and Mr. Elajou, when they alleged in their cross-complaint filed in this case
that they, “through a sister entity, Elajou Group, LLC, owned that certain
real estate development project called the ‘Waterfall [Property].’ ” (Boldface
and italics added.) For purposes of this opinion, references to Elajou
3
At some point before 2014, Jenish Patel (a relative of Chhatrala’s
managing member) invested “substantial sums” (the complaint does not
identify the amount) in Elajou Investment Group. The funds belonged to
Chhatrala and they were invested without Chhatrala’s knowledge or consent.
Elajou Investment Group knew Chhatrala was the source and owner of these
funds, and that Patel lacked authority to bind Chhatrala to any agreement.
At the time, Elajou Investment Group was having financial problems and the
funds were “instrumental in saving [its] interest in the Waterfall Property”
pending a sale of the property.
During this time, Elajou Investment Group (through its “sister” entity,
Elajou Group) signed separate contracts with two different parties to sell the
Waterfall Property: defendant Zephyr and TRX Holdings, LLC (TRX). TRX
is Chhatrala’s investment partner. TRX then sued Elajou Group and Zephyr
seeking an order compelling the property to be sold to TRX rather than
Zephyr. Chhatrala was not a party to that lawsuit.
On June 10, 2014, Elajou Group (identified as the “Seller” of the
Waterfall Property) entered into a written settlement agreement (Settlement
Agreement) with three other parties: TRX, Zephyr, and Chhatrala. The
Settlement Agreement identified the TRX lawsuit and the fact the four
parties had “various other claims against each other relating to the
[Waterfall] Property” (these claims were collectively defined as “the Dispute”)
and that the purpose of the Settlement Agreement was “to resolve the
Dispute” under specified terms.
These terms included: (1) the TRX purchase contract shall terminate
and TRX shall dismiss its lawsuit with prejudice; (2) Zephyr or its designee
Investment Group include Elajou Group, unless the context indicates
otherwise.
4
shall purchase the Waterfall Property; and (3) “through a combination of
cash, check and a secured note, [Elajou Group] shall return to TRX and
Chhatrala the sum of $3,343,291, representing all but $40,000 of the TRX
Disbursements, plus an additional $250,000 to compensate TRX and
Chhatrala for their lost profits . . . .”
On the latter term, the parties agreed Chhatrala would be compensated
through a promissory note written to “Chhatrala or its designee.” (Italics
added.) The Settlement Agreement stated the note amount would be the
difference between $3,343,291 and the “Cash Proceeds,” defined as the
amount of cash received from the Zephyr purchase. With respect to this
promissory note, paragraph 7 of the Settlement Agreement states:
“Delivery of Note to Chhatrala or Designee. Upon the
execution of this Agreement, Seller shall cause El Ajou (or,
if requested by Chhatrala, Elajou Investment Group . . . ) to
execute the [attached] Secured Note . . . in favor of
Chhatrala or its designee. The principal amount of the
Note shall be the sum of (i) the difference between
$3,343,291 and the Cash Proceeds [defined as the cash
amount owed by Zephyr to Elajou Group on closing], plus
(ii) . . . $250,000. The Note shall bear interest at 10% per
annum, and be due and payable in one lump sum on the
earlier of (i) the second anniversary of the Closing Date or
(ii) the date a construction loan is recorded against the
Property.” (Italics added.)
The attached five-page note (Note) identified Falcon Financial, LLC as
the sole “Payee” on the note, and Elajou Investment Group as the “Maker” of
the Note. The Note began:
“T[his] . . . Note is entered into as of [June 10, 2014] by and
between Elajou Investment Group . . . (‘Maker’) and Falcon
Financial, LLC, a Wyoming limited liability company with
a business address of . . . (‘Payee’) . . . .
5
“A. Payee has elected to carry back proceeds resulting from
the sale of [the Waterfall Property] to Maker in exchange
for Maker’s agreement to pay Payee . . . $1,314,291.
[¶] . . . [¶]
“1. Payments. Maker shall pay to Payee . . . the unpaid
principal balance owing under this Note [with accrued
interest] no later than . . . the earlier of (i) June 10, 2016 or
(ii) the date a construction loan is recorded against [the
Waterfall Property].”
Although the Note identified $1,314,291 as the amount owed, the Settlement
Agreement provided for adjustments to this amount depending on the specific
amount of received Cash Proceeds. The Note stated Elajou Investment
Group would execute a deed of trust on identified residential property as
security for the payment of the Note.
The Settlement Agreement had a broad “Release” provision releasing
each party (and their affiliates) from liability on all matters “arising out of or
related to the Dispute,” including “any matters relating to (i) the [Waterfall]
Property . . . and (ii) any other agreement or transaction between or among
any of the Parties concerning matters arising out of or relating to the
Property or against each other.” The Agreement provided the “scope of this
release does not include claims arising from” the following:
“(1) any breach by a Party of this Agreement; (2) any
breach by the obligor(s) under the Note or Deed of Trust;
(3) any disputes between or among TRX, Jenish Patel
and/or Chhatrala (or any of their related entities,
representatives, owners, members, partners, employees,
agents, and affiliates) whether or not related to the
Property; (4) any representations, warranties, covenants or
indemnities between the parties to the Zephyr [sales
agreement]; and (5) any joint venture or partnership
between Zephyr and Seller or their affiliates with respect to
development of the Property.”
6
The Settlement Agreement contained a Civil Code section 1542 waiver,
stating in part that “this Agreement constitutes a full settlement of the
Dispute and a release of each Party’s future claims that may arise from the
Dispute, whether such claims are currently known, unknown, foreseen or
unforeseen.” The Agreement also had an integration clause, providing the
“Agreement constitutes the entire agreement and understanding among the
Parties regarding its subject matter and supersedes and replaces all prior
negotiations, proposed agreements and agreements, whether written or oral.”
The Agreement also stated amendments must be in writing and signed by all
parties.
The Note (with Falcon Financial, LLC (Falcon) as the identified
“Payee”) and the deed of trust were attached as exhibits to, and incorporated
within, the Settlement Agreement. As detailed below, both the Settlement
Agreement and the Note contained a prevailing-party attorney fees clause.
A representative of each of the four parties (Elajou Group, TRX,
Zephyr, and Chhatrala) signed the Settlement Agreement. Patel signed the
agreement on behalf of Chhatrala. The Agreement stated Patel “is the duly
appointed and authorized agent and signer on behalf of Chhatrala.”
In its pleadings, Chhatrala alleged Patel was “not authorized to sign on
[its] behalf . . . .” Chhatrala claimed Elajou Investment Group and Mr.
Elajou knew Patel lacked the authority to bind Chhatrala to any agreement
or to sign any note, “yet [they] conspired with [Patel] to misappropriate
[Chhatrala’s] funds.”
Two days after the Settlement Agreement was signed, Mr. Elajou, on
behalf of “Elajou Investment Group,” signed the Note, which was identical to
the version attached to the Settlement Agreement except the amount was for
7
$1,797,982 (reflecting the specified adjustments). Mr. Elajou also signed the
deed of trust on which Falcon was the named beneficiary.
Thereafter, Elajou Investment Group conveyed the Waterfall Property
to Zephyr. Zephyr then allegedly failed to pay Elajou Investment Group the
full amount owed, knowing this would prevent Elajou Investment Group from
meeting its payment obligations to Chhatrala. Zephyr also allegedly
withheld funds and “misrepresented the terms of its [later] sale of the
[Waterfall] Property to a third party,” also allegedly causing Elajou
Investment Group to be unable to pay its debts to Chhatrala.
Chhatrala alleged it was unaware of the “foregoing facts and
circumstances giving rise to this lawsuit . . . until approximately January of
2016.” Chhatrala alleged that “thereafter, [Elajou Investment Group] . . .
made representations to [Chhatrala] that were designed to induce, and did
induce, [Chhatrala] not to file suit because of promised benefits Defendants
had no intentions of remitting.” Specifically (and as discussed in more detail
below), Chhatrala alleged that on April 19, 2016, Mr. Elajou told Hemant
Chhatrala, Chhatrala’s managing member, that Elajou Investment Group
would “share with [Chhatrala], on a 50/50 basis, all profits received by
[Elajou Investment Group] from [its] ownership of the Waterfall Property and
[its] joint venture with Zephyr” involving the development and resale of the
Waterfall Property to a third party.
Summary of Pleadings and Court Rulings
About six months after this alleged oral representation, in October
2016, Chhatrala brought a lawsuit against Elajou Investment Group, Mr.
Elajou, and Zephyr.
8
The first two causes of action were against Elajou Investment Group
and Mr. Elajou and sought to enforce the Note and foreclose on the
underlying security, claiming Chhatrala was owed $1,797,982.
The third cause of action (fraudulent transfer) was against all three
defendants, alleging they fraudulently conveyed the Waterfall Property to a
third party “for the express purpose of attempting to render [the Elajou
defendants] judgment proof, or at least to insulate them from liability for the
damages suffered by [Chhatrala].”
The fourth cause of action alleged Elajou Investment Group orally
promised to pay Chhatrala 50 percent of the profits earned from the
Waterfall Property transactions with third parties, in exchange for
Chhatrala’s agreement to invest the funds with Elajou Investment Group to
“save” its interest in the property.
The fifth cause of action was a “common count” for money had and
received, seeking to recover $1,797,982 plus one-half of the profits earned
“from the disposition of the Waterfall Property . . . .”
The complaint (and all subsequent complaints) contained alter ego and
agency allegations, asserting the named defendants and Doe defendants were
agents, employees, and/or or alter egos of one another.
Zephyr demurred to the complaint, and instead of opposing the
demurrer, Chhatrala filed a first amended complaint in March 2017
containing the same causes of action.
9
Shortly after, in May 2017, Elajou Investment Group and Mr. Elajou
filed a cross-complaint against Zephyr.3 They alleged Zephyr had paid them
“a mere $4.9 million” for the Waterfall Property and had wrongfully held
back $600,000 from the sales transaction. They alleged that “[b]y so
squeezing [them] and depriving them of the $600,000 distribution . . . , the
Elajous could not negotiate a satisfactory resolution of the [Note] and [the
Note] continues to accrue interest . . . .” They further alleged that Zephyr’s
breach in “failing and refusing to provide [them] their $600,000” has caused
them “damages including impact to the ability to service the [Note] . . . .”
This cross-complaint was later referred to arbitration.
After the court sustained demurrers to Chhatrala’s first amended
complaint with leave to amend, Chhatrala filed a second amended complaint.
This complaint contained the same causes of action, but also included three
additional claims against Zephyr: intentional interference with contract,
intentional interference with prospective economic relations, and unjust
enrichment (labeled a “common count”).
All three defendants (Elajou Investment Group, Mr. Elajou, and
Zephyr) demurred to this complaint. The court sustained the demurrers
without leave to amend on the causes of action for breach of the Note,
foreclosure of the security, and fraudulent transfer. The court overruled the
demurrers on the common counts (claims for money had and received and
unjust enrichment). The court granted Chhatrala leave to amend on its
claims for breach of oral agreement and intentional interference.
3 Respondent Broadway was also a cross-complainant. Chhatrala later
added Broadway as a Doe defendant after filing the third amended
complaint. Because Broadway’s alleged liability was based only on alter ego
allegations, our conclusions regarding Elajou Investment Group and Mr.
Elajou apply equally to this defendant.
10
In March 2018, Chhatrala filed its third amended complaint retaining
all eight prior causes of action, including the ones for which the court had
sustained the demurrers. After defendants objected to Chhatrala reasserting
the dismissed claims, the parties stipulated the sole purpose of doing so was
to create a clear record for appeal.
Zephyr and the Elajou parties (Elajou Investment Group and Mr.
Elajou) then each filed a demurrer. The court sustained both demurrers
without leave to amend. The court based its ruling mainly on the release
provisions in the Settlement Agreement; the fact Chhatrala was not a
beneficiary or intended beneficiary of the Note; and that there was no
enforceable contract or other economic relationship between the Elajou
defendants and Chhatrala to support the interference claims. Although it
had previously overruled the demurrers to the same common count claims
(money had and received and unjust enrichment), the court reconsidered and
concluded these causes of action were also barred by the Settlement
Agreement.
As to defendant Broadway, the court stated that Broadway was
“brought into the case as an alter ego,” and because “the Court has concluded
that no cause of action has been stated as to the named Defendants,”
Broadway has “no liability in this case.”
The court denied Chhatrala’s request for leave to amend, stating: “The
Court has previously afforded [Chhatrala] two separate opportunities to
amend and attempt to clarify why its claims are not precluded. Having failed
to do so by way of the [third amended complaint], the Court concludes leave
to amend should be denied.” The court later awarded defendants attorney
fees in a separate order.
11
DISCUSSION
I. Review Standards
A demurrer tests the sufficiency of a pleading as a matter of law. It is
therefore “error for the trial court to sustain a demurrer if the plaintiff has
stated a cause of action under any possible legal theory . . . .” (California
Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242, 247.) We
apply a de novo standard in evaluating whether the complaint states a cause
of action, and therefore we are not bound by, and need not consider, the trial
court’s reasoning. (Saterbak v. JPMorgan Chase Bank, N.A. (2016) 245
Cal.App.4th 808, 813.)
“[W]e assume the truth of all facts properly pleaded in the complaint
and its exhibits or attachments, as well as those facts that may fairly be
implied or inferred from the express allegations. [Citation.] ‘We do not,
however, assume the truth of contentions, deductions, or conclusions of fact
or law.’ ” (Cobb v. O’Connell (2005) 134 Cal.App.4th 91, 95.) Facts contained
“in exhibits attached to a complaint will . . . be accepted as true and will be
given precedence over any contrary allegations in the pleadings.” (Banis,
supra, 134 Cal.App.4th at pp. 1044-1045.)
In reviewing the court’s refusal to permit an amendment, we are
governed by an abuse-of-discretion standard. (Schifando v. City of Los
Angeles (2003) 31 Cal.4th 1074, 1081.) The court abuses its discretion if
there is a reasonable possibility an amendment would cure the defects.
(Campbell v. Regents of University of California (2005) 35 Cal.4th 311, 320.)
It is appellant’s burden to identify specific facts showing the complaint can be
amended to state a viable cause of action. (Baldwin v. AAA Northern
California, Nevada & Utah Ins. Exchange (2016) 1 Cal.App.5th 545, 559
(Baldwin).)
12
Under these review standards, we first consider each cause of action to
determine whether the court properly sustained defendants’ demurrers. We
then address Chhatrala’s claims concerning the court’s denial of leave to
amend and a discovery order. In the final section, we evaluate Chhatrala’s
challenges to the court’s attorney fees order.
II. Breach of Promissory Note and Foreclosure of Collateral
In the first two causes of action, Chhatrala sought to enforce the $1.79
million Note and its underlying deed of trust against Elajou Investment
Group (and its principal, Mr. Elajou).
Chhatrala contends the court erred in finding these claims were barred
by the Settlement Agreement’s release provisions because the release
specifically excluded breaches of the Settlement Agreement, the Note, and
the deed of trust. We agree with this argument. The Settlement Agreement
did not bar the Note payee from bringing an action if the Note was not paid
or its terms were otherwise breached.
But we find the court’s ruling dismissing the claim was correct on
another ground: Chhatrala had no standing to enforce the Note or its
security because it was not a party to the Note. The Note was between
Elajou Investment Group and Falcon, identified as the “Payee.”
A nonparty to a promissory note has no standing to enforce the note.
(See Berclain America Latina v. Baan Co. (1999) 74 Cal.App.4th 401, 404-
405.) To the extent Chhatrala believes it should have been the payee on the
Note, Chhatrala does not identify any contractual basis for this belief.
Neither the Note nor the Settlement Agreement provides Chhatrala with any
right to enforce the Note terms.
In its reply brief, Chhatrala suggests it was a proper party to enforce
the Note because it was a third party beneficiary of the Note. It relies on the
13
Settlement Agreement’s provision that the Note would be made “in favor of
Chhatrala or its designee.” Assuming Chhatrala did not forfeit this
argument by failing to raise it in the opening brief and/or by arguing
inconsistently in its attorney fees appeal,4 we find the argument to be
without merit.
Third party beneficiary status provides a noncontracting party with
rights to enforce a contract intended for its benefit. (Civ. Code, § 1559.)
Generally to establish third party beneficiary status, the party must show the
contract was “ ‘ “one in which it clearly appears that he [or she] was a
beneficiary.” ’ ” (Levy v. Only Cremations for Pets, Inc. (2020) 57 Cal.App.5th
203, 212.) The “contracting parties’ intent to make the obligation inure to
[their party’s benefit] must have been ‘clearly manifested.’ ” (Schauer v.
Mandarin Gems of Cal., Inc. (2005) 125 Cal.App.4th 949, 957-958.)
The parties did not manifest an intent to make Chhatrala the
beneficiary of the Note. The Settlement Agreement stated the payee on the
Note would be Chhatrala or its designee. Once the Note was prepared to
designate Falcon—and not Chhatrala—as the payee, and this designation
was attached to and incorporated within the Settlement Agreement, Falcon
became the sole beneficiary with the exclusive right to enforce the note.
Without additional facts such as an assignment or transfer of the Note,
there is no basis to infer the parties intended two different payees on the
same note. Falcon, and not Chhatrala, was the express and intended
beneficiary of the Note.
4 In its brief challenging the attorney fees award in this case, Chhatrala
asserts it “was not a third-party beneficiary to the Falcon Note and had no
rights under it.”
14
For these reasons, we conclude the court properly sustained the
demurrer on the first two causes of action (“Breach of Promissory Note” and
“Foreclosure of Collateral”).
III. Breach of Oral Contract
In the third cause of action, Chhatrala alleged a breach of oral contract
claim against Elajou Investment Group and Mr. Elajou.
A. Summary of Claim
The factual basis of Chhatrala’s oral agreement claim changed from the
original complaint to the third amended complaint. In its initial pleadings,
Chhatrala alleged an oral agreement between Patel (allegedly on Chhatrala’s
behalf) and the Elajou Investment Group that in exchange for Patel’s
investment of Chhatrala’s funds, Elajou Investment Group and Chhatrala
would share “on a 50/50 basis, all profits received by” Elajou Investment
Group pertaining to its sale of the Waterfall Property.5
In the second amended complaint, Chhatrala alleged a similar factual
scenario to support the oral agreement claim, but added that the funds would
be due “within a reasonable time after a sale of the Waterfall Property.” In
its demurrer, Elajou Investment Group argued the Settlement Agreement’s
release and integration clauses barred the enforcement of any alleged
promises made before the written settlement agreement.
At the demurrer hearing, Chhatrala’s counsel said he could amend the
pleading to allege that an oral promise was made after the Settlement
Agreement was executed. Counsel said that when Mr. Chhatrala “found out
about all this” (apparently referring to the Settlement Agreement) he went to
Mr. Elajou, and Mr. Elajou allegedly responded, “Don’t worry. You have a
5 Although the complaint did not identify Patel, Chhatrala’s counsel later
clarified the factual basis of this claim in a letter to opposing counsel.
15
promissory note. We will honor the promissory note. And yes, we’ve agreed
to give you one-half of the profit that we get out of this venture.”
After considering this proffer, the court granted Chhatrala leave to
amend the oral agreement claim. The court’s written order stated: “Plaintiff
to plead, if possible, (1) the date when the alleged oral contract was made and
breached; and (2) who from Chhatrala was a party to [the] contract.”
In its third amended complaint, Chhatrala retained some of the
allegations referring to the earlier alleged oral agreement, but also alleged
that on April 19, 2016 (two years after the Settlement Agreement), Mr.
Elajou told Hemant Chhatrala, Chhatrala’s managing member, that “within
a reasonable time” after “Zephyr and the Elajou defendants (as part of their
joint venture)” sold the Waterfall Property to a third party, the Elajou
defendants “would share with [Chhatrala], on a 50/50 basis, all profits
received by [Elajou Investment Group] . . . in recognition of the fact
[Chhatrala’s] funds were instrumental in saving their interest in the
Waterfall Property and in allowing it to participate in a joint venture with
Zephyr on the development and resale of the Waterfall Property.”
Chhatrala alleged it “fulfilled its end of the agreement when its funds
were provided to the [Elajou] Defendants, enabling them to maintain their
interest in the Waterfall Property, and by refraining from suing the [Elajou]
Defendants after learning its funds had been received by and retained by
them, subject to their promise to return the funds in the future. However,
despite continuing promises to the contrary the Elajou Defendants have
breached their promise to remit one-half of the profit earned by them through
their share of any funds received for the sale of the Waterfall Property . . . .
[The Elajou] Defendants breached their promises . . . in or about late
September or early October 2016.” (Italics added.)
16
The court sustained Elajou Investment Group’s demurrer without leave
to amend on this cause of action based primarily on its conclusion “the
integration and amendments clauses . . . of the Settlement Agreement and
Release bar this oral agreement.”
B. Analysis
Chhatrala contends the court erred in concluding the breach of oral
contract claim was barred by the Settlement Agreement because (1)
Chhatrala was not bound by the Settlement Agreement as the agreement
was signed by an agent without authority; and (2) even if it is bound by the
Settlement Agreement, the oral agreement occurred after the Settlement
Agreement and was supported by independent consideration.
As explained below, these arguments are without merit.
1. Chhatrala was Bound by Settlement Agreement
Generally, an agent has the power to bind a principal if the agent has
apparent or ostensible authority to do so. (See Blanton v. Womancare, Inc.
(1985) 38 Cal.3d 396, 403.) Apparent or ostensible authority depends on
whether the third party reasonably believed the actor had authority to act on
the principal’s behalf. (Valentine v. Plum Healthcare Group, LLC (2019) 37
Cal.App.5th 1076, 1087.) If a third party was on notice or had actual
knowledge that the agent did not have authority, the principal is not bound
by the agent’s acts.
Applying these principles to the allegations of the third amended
complaint, Chhatrala would not be bound by the Settlement Agreement
because it alleged Patel had no authority to sign the agreement and Elajou
Investment Group had actual knowledge that Patel lacked this authority.
But this does not end the analysis because this agency rule does not
apply if the principal later ratifies the agreement. “Ratification is the
17
voluntary election by a person to adopt in some manner as his own an act
which was purportedly done on his behalf by another person, the effect of
which . . . is to treat the act as if originally authorized by him. [Citations.]
[¶] A purported agent’s act may be adopted expressly or it may be adopted by
implication based on conduct of the purported principal . . . .” (Rakestraw v.
Rodrigues (1972) 8 Cal.3d 67, 73.)
Elajou Investment Group contends Chhatrala ratified the Settlement
Agreement by filing claims against it seeking to enforce the portion of the
Settlement Agreement pertaining to the Note.
We agree. A principal ratifies an agent’s unauthorized act by bringing
an action seeking to enforce or otherwise benefit from the act. (See Navrides
v. Zurich Ins. Co. (1971) 5 Cal.3d 698, 704 (Navrides); Price v. McConnell
(1960) 184 Cal.App.2d 660, 665 (Price); see also Alvarado Community Hosp.
v. Superior Court (1985) 173 Cal.App.3d 476, 482 (Alvarado); Rest.3d,
Agency, § 4.01, com. h.) This rule derives from the principle that a single or
indivisible transaction must be completely affirmed; the principal may not
ratify the beneficial parts and refuse to affirm the rest. (Civ. Code, § 2311;
Navrides, at p. 704; Price, at p. 666; see NORCAL Mut. Ins. Co. v. Newton
(2000) 84 Cal.App.4th 64, 81.)
Chhatrala argues this rule is inapplicable because it never asserted a
right under the Settlement Agreement or the Note in its lawsuit. Chhatrala
says its claim that Elajou Investment Group owed the $1.79 million was
“independent of ” these agreements. This argument is unsupported.
In its first and second causes of action, Chhatrala specifically sought to
enforce the Note and deed of trust against Elajou Investment Group. The
first cause of action, titled “BREACH OF PROMISSORY NOTE,” alleges that
Elajou Investment Group “breached the Note by failing and refusing to make
18
payment, despite [Chhatrala’s] demands,” and sought attorney fees
“[p]ursuant to Paragraph 13 of the Note.” (Italics added.) Chhatrala also
alleged the “Note” stated the amount was due “on the earlier of June 12,
2016, or the date a construction loan is recorded,” and “as such” payment was
due on June 12, 2016 because the property was conveyed before a
construction loan was issued.
The second cause of action, titled “FORECLOSURE ON
COLLATERAL,” alleges Elajou Investment Group “defaulted on the
Note . . . by failing and refusing to make the payments due . . . . The Note
provides that the Collateral . . . will serve as security for the Note and the
independent obligation evidenced by the Note, and that upon a default . . .
the unpaid balance and all other amounts due under the Note shall become
due and payable and enforceable against the Collateral. [¶] Plaintiff hereby
seeks a judgment enforcing its rights against [Elajou Investment Group] for
the sums evidenced by the Note against the Collateral, including an order of
sale of the Collateral to pay the Note . . . .” (Italics added.)
In attempting to avoid the conclusion it was seeking to enforce the Note
and its underlying security interest, Chhatrala relies on other statements in
its third amended complaint denying it was bringing a claim under the
Settlement Agreement or Note. For example, Chhatrala cites to its
allegations that it attached the Settlement Agreement to the complaint
“purely for background factual information, and not as evidence of an
agreement by Plaintiff ” and that it “does not contend by the filing of this
complaint, that its right to repayment of the funds evidenced by [the
Settlement Agreement] exists because of [the Settlement Agreement].
Rather, Defendants’ obligation to return [Chhatrala’s] funds existed—and
currently exists—entirely independent of [the Settlement Agreement].”
19
We disregard these allegations because they reflect contentions and
legal conclusions rather than asserted facts. (McBride v. Smith, supra, 18
Cal.App.5th at p. 1173.) Moreover, the allegations are undermined by the
express language of the first and second causes of action, which plainly seek
to enforce the Note and the accompanying deed of trust. Further, the fact
that Chhatrala also claimed an entitlement to the $1.79 million on
independent equitable grounds does not negate the conclusion that it ratified
the Settlement Agreement by seeking to enforce it in the first two causes of
action. Chhatrala cites no authority supporting that bringing other claims in
addition to a claim seeking to enforce an alleged unauthorized agreement
creates an exception to the ratification rule.
Chhatrala alternatively argues no ratification occurred because it did
not receive the benefits of the Note. Chhatrala contends actual receipt of
benefits by the principal is necessary to support a finding of ratification.
The argument is unsupported by applicable law. The courts have long
held a party’s bringing a claim in a lawsuit seeking to recover a monetary
amount based on an alleged unauthorized settlement establishes the plaintiff
intended to accept the benefits of the settlement, and have never suggested
the plaintiff must also show the actual receipt of benefits. As our high court
stated almost 100 years ago, “The law is well settled that, in case a principal
seeks to recover upon a contract in which the agent exceeds his authority, he
must take the contract as a whole.” “[B]y demanding performance of the
contract, [a party] [therefore] assumes responsibilities for . . . the
representations, promises and conditions” in the contract. (First National
Bank v. Reed (1926) 198 Cal. 252, 260, italics added.) In Price, the court
likewise observed, “ ‘One of the most unequivocal methods of showing
ratification of an agent’s act is the bringing of an action at law based upon
20
the validity of such act. The bringing of such an action manifests very clearly
a determination to abide by the act, to regard it as valid, [and] to enforce its
performance.’ ” (Price, supra, 184 Cal.App.2d at p. 666, italics added; accord
Navrides, supra, 5 Cal.3d at p. 704.)
The facts in Navrides illustrate this principle. (Navrides, supra, 5
Cal.3d 698.) There, an attorney falsely told his client’s insurer that she
authorized a monetary settlement on her claims against the insurer. (Id. at
p. 701.) The attorney then signed the insurer’s settlement check, cashed the
check, signed a request for dismissal of the client’s claims, and retained the
settlement funds. (Id. at pp. 701-702) When the client learned of this
conduct, she sued the insurer seeking the settlement amount. (Id. at p. 702.)
The California Supreme Court held the client’s claim was barred because she
ratified the attorney’s actions by bringing the lawsuit seeking the settlement
amount and “by so doing she necessarily approved” the insurer’s delivery of
the draft to her attorney. (Id. at p. 703.) The court thus found ratification
despite that the plaintiff did not, and would not, receive any benefits of the
settlement, unless and until she successfully brought suit against the third
party wrongdoer (the attorney).
Chhatrala’s reliance on Alvarado for a contrary conclusion is
misplaced. Alvarado represents a second—and independent—ground for
establishing ratification: a party’s obtaining benefits from the unauthorized
agreement. (Alvarado, supra, 173 Cal.App.3d at pp. 480-484.) The Alvarado
plaintiff had sued a hospital for her son’s wrongful death, and without her
knowledge or consent, her attorney forged her signature on a settlement
agreement for $15,000. (Id. at p. 479) The attorney then obtained the court’s
dismissal with prejudice of the action as to the hospital. (Ibid.) After the
attorney kept the money, the plaintiff filed a claim with the State Bar’s
21
client-security fund. (Id. at p. 480.) The State Bar paid the plaintiff $9,000
which represented her portion of the settlement. (Ibid.) The plaintiff then
successfully moved to set aside the unauthorized dismissal and proceed with
the lawsuit. (Ibid.)
The hospital petitioned for a writ of mandate, and this court held the
“client’s acceptance of money from [the client security fund] operate[d] as a
ratification of the settlement,” and therefore barred the client from seeking to
reopen the lawsuit. (Alvarado, supra, 173 Cal.App.3d at p. 479, italics
added.) But on fairness principles, we declined to apply this rule to the case,
and instead allowed the plaintiff to pursue the lawsuit seeking to set aside
the settlement on the condition she return the $9,000. (Id. at pp. 483-484.)
Alvarado applied the “well-settled rule of agency that a principal will
be held to have ratified the agent’s actions where he voluntarily accepts the
benefits of the unauthorized transaction.” (Alvarado, supra, 173 Cal.App.3d
at p. 481.) But the court did not hold this is the sole basis for a ratification,
and expressly recognized the existence of other avenues (including seeking to
enforce an obligation) for establishing ratification. In so doing, Alvarado
observed that “unlike Navrides, [the plaintiff] did not sue [the defendant] to
enforce the [unauthorized] settlement agreement,” and instead sought to
administratively obtain the settlement benefits, and then she sought to have
the dismissal set aside. (Ibid.) The court explained that, “[w]here an
attorney purports to accept a settlement offer without his client’s consent, the
client has two options. First, the client may decide the unauthorized
settlement was nonetheless a beneficial bargain and seek to ratify his
attorney’s acceptance. Alternatively, the client may determine the
settlement was not beneficial, seek to disavow it and proceed with a lawsuit.”
(Id. at p. 480.) The court found that the plaintiff had erroneously taken both
22
courses of action, stating the plaintiff could have “simply moved to set aside
the dismissal. In such case, she would have still possessed her cause of
action against [the hospital] but she would not have been entitled to the
$9,000. Instead, however, she [first] obtained the $9,000 from the [State Bar]
‘to which [she] would not be entitled unless the [settlement] were
[affirmed]. . . .’ (Rest.2d Agency § 98, p. 252).” (Id. at p. 482, italics added.)
Under these principles, Chhatrala would not have ratified the
Settlement Agreement if it brought a claim to rescind the agreement based
on the allegation that its “rogue” agent conspired with Elajou Investment
Group to enter into the settlement without Chhatrala’s knowledge or
approval. But it did not take this approach. Instead, it expressly ratified the
Settlement Agreement when it sought to enforce the Note and deed of trust
for its own benefit. The fact it was unsuccessful in doing so does not change
the fact of ratification. Any remedy now lies against its agent or any other
third party alleged to have engaged in wrongful conduct.
2. Settlement Agreement Barred Oral Contract Claim
Chhatrala alternatively argues that even if it was bound by the
Settlement Agreement, its breach of oral contract claim is not barred by the
agreement’s release provisions because the claim fell outside the scope of the
release. We disagree. The release broadly applies to “any matters relating to
(i) the [Waterfall] Property . . . and (ii) any other agreement or transaction
between or among any of the Parties . . . arising out of or relating to the
[Waterfall] Property or against each other.” The Settlement Agreement
further provided the release “shall remain in effect notwithstanding the
discovery or existence of any additional or different facts or the occurrence of
any such future events, circumstances or conditions.” (Italics added.)
23
Under these provisions, Chhatrala’s cause of action seeking to enforce
the alleged oral agreement is barred. The alleged agreement pertained
directly to Chhatrala’s claim it was entitled to be paid for its investment in
Elajou Investment Group for the purpose of assisting this entity’s financial
position in the Waterfall Property, the same claim that was the subject of the
Settlement Agreement. The claim was thus barred by the release provisions
covering all matters “any Party may now have or hereafter have . . . arising
out of or relating to” the Waterfall Property or any of the claims pertaining to
that property. (Italics added.)
And the alleged oral agreement does not fall within any of the
exceptions to the release provision. Chhatrala did not allege the oral
agreement concerned a breach of the Settlement Agreement; a breach of the
Note or deed of trust; a dispute among TRX, Patel, and/or Chhatrala; a
dispute among the parties to Zephyr’s purchase agreement; or a dispute
between Zephyr and the seller about the property development.
Additionally, the oral agreement claim is also barred by the Settlement
Agreement’s “Amendments” clause, which provides: “This Agreement may
not be modified, changed, contradicted, added to, or altered in any way by
any previous written or oral agreements or any subsequent oral agreements.
This Agreement may be modified or amended only pursuant to an instrument
in writing, executed and delivered on behalf of each Party.”
The alleged oral agreement requiring Elajou Investment Group to pay
Chhatrala a profit share constituted a modification of the promise in the
Settlement Agreement that Elajou Investment Group execute a promissory
note to Chhatrala or its designee for $1.79 million (with no profit share), and
therefore was required to be in writing. In challenging this conclusion,
Chhatrala argues that the Amendments provision does not apply “to a
24
subsequent oral promise, supported by new consideration, completely
independent of the Note itself.” Chhatrala does not cite to any language in
the Amendments provision limiting its reach to amendments unsupported by
new consideration, or explain how the alleged oral agreement is
“independent” of the Note. Nor does Chhatrala identify any legal authority
supporting this argument. Because the alleged oral agreement concerns and
amends the Settlement Agreement’s terms, the requirement that
amendments must be in writing and signed by all parties bars this claim.6
IV. Intentional Interference Claims
In its fifth and sixth causes of action, Chhatrala alleged two
interference claims against Zephyr: (1) intentional interference with
contract; and (2) intentional interference with prospective economic
advantage.
A. Allegations
On the intentional interference with contract claim, Chhatrala alleged
Zephyr was aware of Chhatrala’s written and oral contracts with Elajou
Investment Group concerning its obligation to return Chhatrala’s invested
funds and to pay Chhatrala one-half of the profits “from [its] joint venture
with Zephyr to redevelop and re-sell for a profit the Waterfall Property.”
Despite this awareness, Zephyr allegedly “withheld sums due and owing” to
6 Based on this conclusion, we do not reach the parties’ arguments
whether the alleged forbearance agreement constitutes adequate
consideration for the alleged agreement or whether Chhatrala sufficiently
alleged causation and damages from the alleged breach of this agreement.
We note also that Elajou Group, rather than Elajou Investment Group,
was the party to the Settlement Agreement. However, Chhatrala does not
challenge Elajou Investment Group’s right to assert the agreement’s release
provisions. This is presumably because the release rights expressly applied
to a party’s principals, agents, and affiliates.
25
Elajou Investment Group, resulting in Elajou Investment Group being unable
to “fulfil[ ] (in whole or in part) . . . [its] contracts with” Chhatrala.
On its interference with prospective economic relations claim,
Chhatrala alleged it had a “legitimate expectation of a tangible economic
advantage” based on Elajou Investment Group’s agreement to return its
investment and Mr. Elajou’s oral agreement to pay one-half the profits
received from Elajou Investment Group’s joint venture with Zephyr.
Chhatrala further alleged Zephyr knew of these expectations, but
intentionally engaged in tortious conduct that was independently wrongful by
committing fraud and breaching its fiduciary duties toward Elajou
Investment Group, including by withholding $600,000 from Elajou
Investment Group, improperly conditioned on its obtaining a release from
Chhatrala.
B. Analysis
In its appellate briefs, Chhatrala challenges the demurrer based
primarily on its argument that the Settlement Agreement’s release
provisions did not bar these tort claims.
We agree the Settlement Agreement did not preclude these claims.
Civil Code section 1668 provides: “All contracts which have for their object,
directly or indirectly, to exempt anyone from responsibility for his own fraud,
or willful injury to the person or property of another, or violation of law,
whether willful or negligent, are against the policy of the law.” This code
section prohibits predispute attempts to shield defendants from future
liability for intentional torts, including intentional interference claims. (See
Farnham v. Superior Court (1997) 60 Cal.App.4th 69, 74; McQuirk v.
Donnelley (9th Cir. 1999) 189 F.3d 793, 796-797; Spy Phone Labs LLC v.
26
Google Inc. (N.D.Cal., Oct. 14, 2016, No. 15-CV-03756-KAW) 2016 WL
6025469, at *11.)
However, the claims are not viable on a separate ground asserted in
Zephyr’s demurrer: Chhatrala did not allege the required predicate element
of an enforceable contract between itself and a third party or the likelihood of
a prospective economic advantage.
To establish tort liability for interference with a contract, there must be
an existing enforceable contract. (Bed, Bath & Beyond of La Jolla, Inc. v. La
Jolla Village Square Venture Partners (1997) 52 Cal.App.4th 867, 879.)
Chhatrala did not adequately allege this required fact, nor could it. As
discussed, there was no binding, enforceable contract for Elajou Investment
Group to pay Chhatrala the amounts under the Note and/or one-half the
profits from the alleged joint venture between Elajou Investment Group and
Zephyr. Under the Settlement Agreement and the attached Note, Falcon—
and not Chhatrala—was the named payee and was the sole entity entitled to
enforce the Note. The alleged oral agreement was not enforceable because it
was barred by the release provisions and the written-amendment
requirement of the Settlement Agreement.
We reach a similar conclusion on Chhatrala’s tortious interference with
prospective economic advantage claim. Although this claim does not require
a legally binding contract (Ixchel Pharma, LLC v. Biogen, Inc. (2020) 9
Cal.5th 1130, 1141), the plaintiff must plead and prove the defendant
knowingly interfered with an “ ‘ “economic relationship between the plaintiff
and some third party, [which carries] the probability of future economic
benefit to the plaintiff ” ’ ” (Korea Supply Co. v. Lockheed Martin Corp. (2003)
29 Cal.4th 1134, 1153).
27
Chhatrala alleged it had an expectation of economic advantage because
Elajou Investment Group orally promised to pay it one-half of the profits from
its joint venture with Zephyr. Because this alleged agreement is
unenforceable, Chhatrala did not have a legitimate expectation of economic
advantage. In its appellate briefs, Chhatrala does not identify any ground to
support a probability of future economic benefit under circumstances where it
failed to allege a viable written or oral contract.
V. Money Had and Received Claim
Chhatrala’s seventh cause of action was titled “Common Count No. 1:
Money Had and Received.” (Capitalization and boldface omitted.) Chhatrala
alleged Elajou Investment Group and Zephyr “became indebted to
[Chhatrala] in the amount of $1,797,892.00, plus prejudgment interest and
one-half of their profit from the disposition of the Waterfall Property in
exchange for their respective receipt of [Chhatrala’s] funds or the benefits
afforded them by [Chhatrala’s] funds, which were provided at [Elajou
Investment Group’s] request. Zephyr and [Elajou Investment Group] have
[not paid the amounts owed]. . . . [¶] As such, [Chhatrala] is entitled to
judgment against Defendants . . . in a sum exceeding $1,797,982.00 plus
interest . . . .”
Generally, a party states a viable money had and received claim by
alleging the defendant “is indebted to the plaintiff in a certain sum ‘for money
had and received by the defendant . . . .’ ” (Schultz v. Harney (1994) 27
Cal.App.4th 1611, 1623.) However, as with the Breach of Promissory Note
cause of action, this claim is barred by the Settlement Agreement. In this
cause of action, Chhatrala seeks funds to which it contends it was entitled
based on its investment in Elajou Investment Group. This claim was
28
resolved in the Settlement Agreement, which contained a broad release of
claims pertaining to this same subject.
We reject Chhatrala’s contention the court erred because it overruled
the demurrer to the second amended complaint on this identical claim. The
court’s prior ruling was not a final order and thus was subject to change.
(Darling, Hall & Rae v. Kritt (1999) 75 Cal.App.4th 1148, 1156.) A trial court
retains the authority to change its decision any time before judgment is
entered. (Ibid.)
VI. Unjust Enrichment
Chhatrala’s eighth cause of action is against only Zephyr and is labeled
“Common Count No. 2: Mistaken Receipt Resulting in Unjust Enrichment.”
(Capitalization and boldface omitted.) It alleges that Chhatrala paid Elajou
Investment Group “money by fraud and mistake, which was then transferred
to Zephyr. [¶] Zephyr did not have a right to that money and was aware of
[Chhatrala’s] funds having been provided to [Elajou Investment Group], and
that [these] funds . . . served to maintain [its] interest in the Waterfall
Property, from which Zephyr later benefitted to the tune of millions of dollars
in profits in which it knew [Chhatrala] was entitled to share. [¶] [Chhatrala]
reasonably expected to receive the return of the sums [Elajou Investment
Group] owed to [Chhatrala] upon the successful sale of the Waterfall
Property by Zephyr . . . . [¶] By [this] conduct . . . Zephyr has unjustly
enriched itself to [Chhatrala’s] detriment by retaining funds it knows
[Chhatrala] is entitled to have repaid to it, including profits that Zephyr
caused not to be distributed to [Chhatrala] because of Zephyr’s fraud and
breach of fiduciary duties.”
Even assuming an unjust enrichment claim can be based on this
alleged indirect receipt of benefits, this claim is not viable because it is barred
29
by the Settlement Agreement. A plaintiff may be entitled to recover
restitution under an unjust enrichment theory if the defendant was enriched
at the plaintiff ’s expense. (Durrell v. Sharp Healthcare (2010) 183
Cal.App.4th 1350, 1370; McBride v. Boughton (2004) 123 Cal.App.4th 379,
389.) But recovery is not permitted under this theory if the parties have an
enforceable express contract. (Durrell, at p. 1370.)
Chhatrala entered into a written settlement agreement with Zephyr
settling claims pertaining to Chhatrala’s investments relating to the
Waterfall Property. We have found Chhatrala ratified the agreement by
seeking to enforce and obtain the benefits of the agreement. Thus, as a
matter of law, Chhatrala’s unjust enrichment claim cannot succeed.
Although Chhatrala alleges conduct that allegedly occurred after the
Settlement Agreement was signed (withholding of monetary sums to Elajou
Investment Group), the allegations pertain to the same claims that were
settled and released in the Agreement. And, as with the money had and
received claim, the court did not err in reconsidering its prior ruling
overruling the demurrer on this cause of action.
VII. Fraudulent Transfer
On the remaining cause of action, “Fraudulent Transfer,” Chhatrala
alleged it is a “creditor” of Zephyr and Elajou Investment Group, and these
defendants are “debtors” under the Uniform Fraudulent Conveyance Act (see
Civ. Code, §§ 3439.01, subds. (c) & (d), 3439.07), and therefore it is entitled to
an order that the Waterfall Property be attached for its benefit (even though
the property has been conveyed to a third party).
The court sustained a demurrer to this claim based on its finding
Chhatrala is not a creditor within the meaning of the applicable statutes. In
its opening brief, Chhatrala does not specifically challenge this ruling.
30
In its reply brief, Chhatrala argues the court erred in sustaining the
demurrer on this cause of action because it ruled improperly on other
unspecified claims. We reject this contention because we have found the
court’s rulings on the other claims were proper. Additionally, Chhatrala cites
no authority to support its arguments, nor does it identify the legal elements
of its fraudulent conveyance claim or explain how the alleged facts support
each of the elements. It has thus forfeited any challenge to the court’s ruling.
When an appellant raises an issue “ ‘ “but fails to support it with reasoned
argument and citations to authority, we treat the point as waived.” ’ ” (Save
Agoura Cornell Knoll v. City of Agoura Hills (2020) 46 Cal.App.5th 665, 704,
fn. 14.)
VIII. Court’s Order Granting Zephyr’s Motion to Stay Discovery
Chhatrala next contends the court erred in granting Zephyr’s motion to
stay discovery.
A. Factual Background
In December 2017, after filing its demurrer to the second amended
complaint, Zephyr moved to stay discovery until after the court ruled on this
demurrer. Zephyr argued it would incur significant costs in responding to
the discovery sought by Chhatrala; there was a substantial likelihood it
would prevail on the demurrer; and Chhatrala would not be prejudiced by a
brief stay pending resolution of the demurrer. Zephyr said that staying
discovery would be “ ‘in the interests of justice’ because any possible benefit
from [the discovery] before the resolution of the [demurrers] is clearly
outweighed by the excessive burden, expense, and intrusiveness of that
discovery.”
Over Chhatrala’s opposition, the court granted the motion. Because
Chhatrala has not cited to the court’s order, nor have we been able to locate it
31
in the 2,228-page record, we do not know the court’s precise reasoning for the
order.
B. Analysis
Generally, a party is entitled to conduct discovery to obtain facts to
support a pleading amendment. (See Mattco Forge, Inc. v. Arthur Young &
Co. (1990) 223 Cal.App.3d 1429, 1436, fn. 3.) However, a court retains broad
discretion to impose limitations on the timing and scope of discovery. (See
Pratt v. Union Pacific Railroad Co. (2008) 168 Cal.App.4th 165, 181.) Thus,
after granting leave to amend, a court may limit discovery if there is a strong
likelihood defendants will be dismissed from the action and the discovery
sought is burdensome and may become unnecessary. (See Terminals Equip.
Co. v. City and County of San Francisco (1990) 221 Cal.App.3d 234, 247.) A
court may make discovery orders to protect a party from “undue burden and
expense” and to promote the “interests of justice.” (Code Civ. Proc,
§§ 2031.060, 2017.020, subds. (a), (b).)
“ ‘ “Management of discovery lies within the sound discretion of the
trial court.” ’ ” (O&C Creditors Group, LLC v. Stephens & Stephens XII, LLC
(2019) 42 Cal.App.5th 546, 561.) Thus, appellate review is highly deferential.
If “ ‘ “there is a basis for the trial court’s ruling and the evidence supports it,
a reviewing court will not substitute its opinion for that of the trial court.
[Citation.]” [Citation.] The trial court’s determination will be set aside only
when it has been established that there was no legal justification for the
order granting or denying the discovery in question.’ ” (Ibid.)
Under these authorities, the court did not abuse its discretion. Shortly
before the court granted Chhatrala’s motion for leave to file an amended
complaint, Chhatrala’s counsel assured the court it could do so without any
additional discovery. Chhatrala then changed its position and sought to
32
conduct discovery before the court ruled on the demurrers. In response to
Zephyr’s motion, the court temporarily stayed the discovery until the court
had the opportunity to rule on the demurrers.
Chhatrala argues the court abused its discretion because Chhatrala
was “kept in the dark” about its “rogue consultant” and it needed the
discovery to respond to defendants’ arguments that Chhatrala ratified the
Settlement Agreement, despite Patel’s alleged unauthorized conduct.
However, Chhatrala does not explain why it could not have conducted this
discovery earlier or how discovery against Zephyr would have provided
necessary information about Patel’s actions. Additionally, Chhatrala’s
ratification was based primarily on Chhatrala’s own action in filing the
complaint seeking to enforce the Settlement Agreement and the attached
Note and deed of trust. Chhatrala does not state how information from
Zephyr was needed to allege additional relevant facts on this issue.
Chhatrala also directs us to the court’s statement at the demurrer
hearing that it was ruling on a demurrer and therefore it did not “want to
hear anything outside” the pleading and the matters judicially noticed. This
statement does not show trial court error. The court’s statement reflected a
proper observation that its review was limited to evaluating the pleadings
and matters that could be judicially noticed.
The court did not abuse its broad discretion in imposing a limited stay
on discovery, and Chhatrala has not shown prejudice resulting from the stay.
IX. Leave to Amend
An appellate court must reverse a judgment sustaining a demurrer if
there is a reasonable possibility the defect can be cured by amendment.
(Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126.) An appellant
has the burden to show it can amend the complaint to remedy the deficiencies
33
in the existing complaint. (Savea v. YRC Inc. (2019) 34 Cal.App.5th 173,
178.) To meet this burden, the appellant must “ ‘ “ ‘clearly and specifically set
forth . . . [the] factual allegations’ ” ’ ” that will establish a viable cause of
action. (Baldwin, supra, 1 Cal.App.5th at p. 559; accord, Aghaji v. Bank of
America, N.A. (2016) 247 Cal.App.4th 1110, 1118-1119.)
Chhatrala has not met this burden. In its opening brief, it did not
identify any new factual allegations it could add to overcome the pleading
deficiencies. In its reply brief, Chhatrala argues leave to amend was
improperly denied as to Elajou Investment Group because its counsel
“informed the trial court” at the final demurrer hearing that “[Mr.] Elajou’s
deposition testimony established alter ego as to each and every one of the
Elajou [p]arties named in the case.” However, Chhatrala does not explain
how this deposition testimony materially adds to its allegations given that
the alter ego allegations already exist in the third amended complaint. The
fact that Chhatrala could establish “alter ego as to each and every one of the
Elajou Parties” would not change the conclusion that Chhatrala cannot allege
a viable claim.
Regarding its claims against Zephyr, Chhatrala contends it was
“significantly hamstrung by the actions of its rogue agent,” in attempting to
plead a viable claim and complains about the temporary discovery stay, but
again does not identify any facts it could plead to overcome the deficiencies in
the current pleading. It states only that the court “refused [to provide it
with] any opportunity to amend, including after . . . deposing [Mr.] Elajou
and advising the trial court Chhatrala could prove alter ego as a matter of
law based on [Mr. Elajou’s testimony].” It also argues that “Given the
opportunity to present its claims and evidence to a jury, Chhatrala is
confident it will recover against each of the Respondents on all claims
34
asserted.” But again Chhatrala does not identify any facts it could add to its
pleading that would show a viable claim.
X. Attorney Fees Order
After entry of judgment, the court awarded attorney fees of $227,734.32
to Zephyr and $75,262.51 to the Elajou parties (Elajou Investment Group,
Mr. Elajou, and Broadway). The court found these parties were entitled to
prevailing party attorney fees under Civil Code section 1717 (section 1717)
based on fee provisions in the Settlement Agreement and the Note.
On appeal, Chhatrala contends defendants were not entitled to
attorney fees under the contract provisions. We reject these arguments as to
the Elajou parties. But we reverse the award as to Zephyr because the
claims against Zephyr were not “on a contract” or within the scope of the
relevant attorney fees provision.7
A. Background Summary
The Settlement Agreement’s attorney fees provision states:
“If litigation is commenced to enforce any of the provisions
of this Agreement or to recover damages for breach of any
of the provisions of this Agreement, the prevailing Party
shall be entitled to recover attorneys’ fees actually
incurred.”
The Note’s attorney fees provision states:
“In the event it should become necessary to employ counsel
to enforce this Note, [Elajou Investment Group] agrees to
pay the reasonable attorneys’ fees and costs of the Payee
[defined in the Note as Falcon], irrespective of whether suit
is brought, including, without limitation, any and all pre-
judgment and post-judgment attorneys’ fees and costs
7 Because Chhatrala did not clearly raise the scope issue in its opening
appellate brief, we provided Zephyr the opportunity to file a supplemental
brief on this issue. We have considered this brief in reaching our conclusions.
35
incurred . . . . In addition [Elajou Investment Group]
agrees to pay for all of Payee’s other out-of-pocket costs
incurred in connection with the enforcement of [the] Note.”
After judgment was entered in their favor, both Zephyr and the Elajou
parties moved for attorney fees under these provisions and section 1717. In
opposing the motions, Chhatrala argued it had not sought to enforce either
contract against defendants; no authorized representative had signed the
Settlement Agreement; it was not a named party on the Note; and the
amount of the requested fees was unreasonable. As to Zephyr, Chhatrala
also argued that none of its claims were “ ‘on the contract’ ” because it
brought only noncontract claims against Zephyr and did not seek to enforce
the Note or Settlement Agreement against Zephyr. Chhatrala also
maintained that Zephyr’s assertion of a defense based on the Settlement
Agreement did not trigger a right to contractual attorney fees.
At the hearing on the motion, Chhatrala’s counsel focused solely on
Zephyr’s attorney fees request, arguing Zephyr was not entitled to recover
fees because Chhatrala “did not sue Zephyr on the contract in any respect.”
Counsel said Chhatrala did not assert any claims “that trigger any fee right
under [the] Settlement Agreement and certainly not the [N]ote. . . . [I]t is not
even a close call.” Zephyr’s counsel responded that Zephyr had “litigated this
case by enforcing [its] rights under [the Settlement Agreement and Note].
And according to the case law, that is on the contract.”
After considering the parties’ arguments, the court (Judge Ronald
Frazier8) granted both motions. Quoting from Judge Lewis’s minute order
sustaining the demurrers, Judge Frazier found the claims against defendants
8 Judge Frazier presided over the motions because Judge Lewis had
since retired.
36
were “on a contract” because “ ‘all causes of action—notwithstanding their
label—are claims pursuant to the promissory note and subject to the
settlement agreement.’ ” The court also found apportionment was not
required because the claims as to each party were so “intertwined” that it
would not be practical or possible to separate the time into compensable and
noncompensable units. As to amounts, the court found Zephyr was entitled
to $227,734.32 (reducing its claimed fees by about $50,739) and the Elajou
parties were entitled to their claimed fees of $75,262.71.
B. Analysis
1. General Principles
We review the propriety or amount of an attorney fees award for abuse
of discretion. (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC
(2017) 3 Cal.5th 744, 751 (Mountain Air)). But we independently review
whether there is a legal basis for an attorney fees award. (Ibid.)
Zephyr and the Elajou parties relied exclusively on section 1717 as the
basis for their attorney fees request. Section 1717 governs contractual
prevailing-party attorney fees, and provides that a contractual attorney fees
clause is reciprocal, meaning the prevailing party has a right to attorney fees
even if the contract identifies only the other party as the party entitled to
fees. (PLCM Group v. Drexler, Inc. (2000) 22 Cal.4th 1084, 1090-1091.)
Although generally only signatories are subject to an attorney fees provision,
under certain circumstances (as discussed below) a party may enforce an
attorney fees provision against a nonsignatory. (See Real Property Services
Corp. v. City of Pasadena (1994) 25 Cal.App.4th 375, 382 (Real Property).)
Section 1717 broadly applies when an action is brought “on a contract”
containing an attorney fees provision. (§ 1717, subd. (a).) However,
“ ‘[b]efore section 1717 comes into play, it is necessary to determine
37
whether’ ” the contractual claims fall within “ ‘the scope of the attorney fee
agreement.’ ” (Mountain Air, supra, 3 Cal.5th at p. 752.) In doing so, courts
apply traditional contract interpretation rules, and glean the parties’
intentions mainly from the language of the provision. (Ibid.) Once
interpreted, the court must determine whether the plaintiff ’s claims fall
within the contractual provision by considering “ ‘the pleaded theories of
recovery, the theories asserted and the evidence produced at trial, if any, and
also any additional evidence submitted on the motion . . . .’ ” (Id. at pp. 760-
761.) In conducting the latter analysis, a court should not “take an overly
formalistic approach” and instead the court should seek to determine whether
as a practical matter a claim comes within the scope of the attorney fees
provision. (Id. at p. 760.)
2. Elajou Parties
Chhatrala brought two contract-based claims against the Elajou
parties: “Breach of Promissory Note” and “Foreclosure of Collateral” (the first
two causes of action). These claims were brought against Elajou Investment
Group and Mr. Elajou, and sought to enforce the Note (which was attached
to, and incorporated within, the Settlement Agreement), and to enforce its
underlying security.
These claims fell squarely within the Note’s attorney fees provision.
The Note stated that a party was entitled to attorney fees if “it should become
necessary to employ counsel to enforce this Note . . . .” (Italics added.)
Because we have found the breach of contract and enforcement of the
collateral claims were attempts to enforce the Note, these claims fall within
the scope of the attorney fees clause. Chhatrala argues that it did not bring a
breach of contract claim for enforcement of the Note because these documents
were identified in its pleadings merely as evidence to support its claims. We
38
rejected the same argument in Part III.B.1 above. As explained, contrary to
Chhatrala’s assertions, the claims against Elajou Investment Group and Mr.
Elajou plainly sought to enforce the Note and the accompanying deed of trust.
Chhatrala alternatively contends the attorney fees award was improper
as to the Elajou parties because Chhatrala did not authorize the signing of
the Settlement Agreement and was not a party to, and did not sign, the Note.
With respect to the Settlement Agreement, we have concluded that even
assuming Chhatrala did not authorize the signing of the agreement, it is
bound by the agreement under a ratification theory.
With respect to the Note, Chhatrala is correct that it was not a
signatory. The parties to this agreement were Elajou Investment Group (as
the “Maker” of the Note) and Falcon (as “Payee” on the Note). However, the
courts have held a nonsignatory plaintiff who unsuccessfully seeks to enforce
a contract against a signatory defendant can be liable under an attorney fees
clause if the plaintiff “would have been entitled to its fees” if it had prevailed.
(See Real Property, supra, 25 Cal.App.4th at p. 382; Sessions Payroll Mgmt.
Inc. v. Noble Construction Co (2000) 84 Cal.App.4th 671, 674, 678-680
(Sessions).)
This condition was satisfied here. In opposing the demurrers,
Chhatrala maintained it had a right to enforce the Note because it was the
true or actual Payee and/or it was a third party beneficiary. Under either
theory, it would have been entitled to fees if it had prevailed.
In arguing it could not have recovered attorney fees if it had prevailed,
Chhatrala relies on Sessions, supra, 84 Cal.App.4th 671. In Sessions, the
trial court awarded the defendant attorney fees against a nonsignatory
plaintiff who unsuccessfully attempted to enforce a contract against the
defendant based on its claim it was a third party beneficiary of the contract.
39
(Id. at p. 674.) The Court of Appeal reversed, finding the plaintiff could not
have recovered fees had it prevailed on this theory. (Ibid.) The court
reasoned that the contractual language reflected the parties’ intent to include
only the contracting parties as potential beneficiaries of the attorney fees
clause. (Id. at pp. 674, 680-681.) Noting the attorney fees provision
permitted recovery “ ‘[i]n the event it becomes necessary for either party to
enforce the provisions of this Agreement,’ ” the court found “ ‘[e]ither’ refers
only to the two parties to the contract . . . ” and that if the parties had
“wanted to include someone else, their contract would have referred to ‘any’
party.” (Id. at p. 681.) The court also found it significant that the contract
specifically stated “ ‘[e]xcept as specifically prescribed herein, this Agreement
shall not create any rights of or confer benefits upon, third parties.’ ” (Id. at
p. 680.)
This case is different. Most important, Chhatrala did not seek to
enforce the Note solely on a third party beneficiary theory. It claimed it was
the actual payee with rights to enforce the Note because it was the party that
allegedly invested the funds with the Elajou parties. Had Chhatrala
prevailed on its claim that it was the party eligible for payment under the
Note, it would have been entitled to contractual fees as the party that
enforced the Note. Additionally, unlike Sessions, the Note’s attorney fees
clause did not manifest the parties’ intentions to exclude nonsignatories from
recovering attorney fees. To the contrary, the Note stated it applied “In the
event it should become necessary to employ counsel to enforce this Note,”
without naming the particular parties that would be required to employ
counsel to trigger coverage.
Chhatrala also suggests the Elajou parties’ attorney fees award was
improper because Chhatrala did not reassert the contract claims after the
40
court sustained the demurrer to the second amended complaint. Even if this
were true, the record reflects Chhatrala vigorously litigated the propriety of
these causes of action through the time of the court’s order on the second
amended complaint. On appeal, Chhatrala does not contend the court should
have limited the fees only to this time period. Thus, any argument on this
ground is forfeited. (Cahill v. San Diego Gas & Electric Co. (2011) 194
Cal.App.4th 939, 956.)
3. Zephyr
Chhatrala did not name Zephyr as a party in its contract claims
seeking to enforce the Note or its underlying security. Chhatrala instead
asserted three tort causes of action (fraudulent conveyance and the two
intentional interference claims) and the two common-count causes of action
(money had and received and unjust enrichment).9 In these causes of action,
Chhatrala sought to recover from Zephyr the funds it allegedly invested with
the Elajou parties plus other amounts allegedly promised to Chhatrala by the
Elajou Investment Group and/or Mr. Elajou.
By its terms, section 1717 applies only to actions “on a contract” and to
fees “which are incurred to enforce that contract.” (§ 1717; see Santisas v.
Goodin (1998) 17 Cal.4th 599, 615 (Santisas); Exxess Electronixx v. Heger
Realty Corp. (1998) 64 Cal.App.4th 698, 708 (Exxess Electronixx) [“section
1717 . . . makes clear that a tort claim does not ‘enforce’ a contract”]; Windsor
Pacific LLC v. Samwood Co., Inc. (2013) 213 Cal.App.4th 263, 273 (Windsor
Pacific) [“section 1717 is inapplicable . . . to noncontract claims”].)
9 For a very brief period, Chhatrala also asserted the breach of oral
agreement against Zephyr, but then dismissed this claim. Chhatrala’s
fraudulent conveyance claim can also be viewed as a statutory (rather than a
tort) cause of action, but the same fees analysis applies under either theory.
41
In determining whether a claim is “on a contract,” the label on the
claim is not dispositive, and instead the court must look to the substance of
the cause of action. (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc.
(2012) 211 Cal.App.4th 230, 240-241 (Barnhart); see Hyduke’s Valley Motors
v. Lobel Financial Corp. (2010) 189 Cal.App.4th 430, 436.) In Barnhart, this
court surveyed the existing authority and articulated rules to assist in
evaluating whether a noncontract claim was “on a contract” for purposes of
section 1717. Specifically, we stated a claim is “ ‘on a contract’ ” if “(1) [the
claim] ‘involves’ an agreement, in the sense that [the claim] arises out of, is
based upon, or relates to an agreement by seeking to define or interpret its
terms or to determine or enforce a party’s rights or duties under the
agreement, and (2) the agreement contains an attorney fees clause.”
(Barnhart, at pp. 241-242.) Applying these principles, the Barnhart court
found a promissory estoppel claim asserted as an alternative to a contract
cause of action was not “on the contract,” reasoning that “unlike contract law,
which enforces promises because the parties have bargained for and agreed to
be bound by them, promissory estoppel is an ‘alternative theory of recovery’
that enforces promises because . . . equity demands enforcement to avoid
injustice.” (Id. at p. 243).
In this case, Chhatrala did not assert a contract claim against Zephyr
based on the Settlement Agreement or Note, but sought to obtain a similar
result in asserting its tort and common count claims (recovery of the $1.79
million identified in the Note) plus additional profit-sharing amounts. These
claims were not on a contract. Neither the Note nor the Settlement
Agreement was the factual predicate for Chhatrala’s claims against Zephyr.
Zephyr was not a party to the Note, and the Settlement Agreement was not
part of Chhatrala’s affirmative claims against Zephyr. Chhatrala instead
42
brought these claims on the ground that even if Chhatrala could not enforce
the Note, it was entitled to recover its investment based on alternate legal
theories (e.g., tort, common count, equitable, statutory). As with the
promissory estoppel claim in Barnhart, Chhatrala’s alternate theories of
recovery were not “on the contract.” Had Chhatrala been successful against
Zephyr on one of these theories, it would not have been entitled to attorney
fees against Zephyr.10
We find unpersuasive Zephyr’s reliance on Eden Township Healthcare
Dist. v. Eden Medical Center (2013) 220 Cal.App.4th 418 and Turner v.
Schultz (2009) 175 Cal.App.4th 974. Each of those decisions involved a
plaintiff who unsuccessfully brought a lawsuit seeking to invalidate the
contract through a declaratory relief action, and both courts found attorney
fees were properly awarded because the plaintiff ’s action specifically sought
to enforce (or avoid enforcement of) the contract. (Eden Township, at pp. 420-
421, 426-428; Turner, at pp. 976, 979-980.) Chhatrala did not sue Zephyr to
obtain a declaration that the Note or Settlement Agreement was valid or
invalid. It instead brought noncontract claims against Zephyr in seeking to
hold Zephyr responsible for Elajou Investment Group’s failure to pay funds to
which it believed it was entitled. Unlike Eden and Turner, these claims were
not “on a contract” under section 1717, nor (as explained below) did they
10 We note that if a contractual attorney fees provision is phrased broadly
enough, it can support an attorney fees award for prevailing on a tort claim,
although the claim would not be governed by section 1717. (Santisas, supra,
17 Cal.4th at pp. 608, 615; Exxess Electronixx, supra, 64 Cal.App.4th at
p. 708.) Zephyr relied only on section 1717 in seeking fees, and did not
contend the attorney fees provisions governed tort claims. In any event, we
would reject the argument because (as explained below) the language of the
fees provision is limited to contract actions (actions seeking to enforce the
contracts or to obtain damages for a breach of the Settlement Agreement).
43
come within the attorney fees provisions permitting fee recovery for the
enforcement of the contracts.
In a separate argument, Zephyr contends it is entitled to recover its
fees because it successfully demurred to the pleadings by relying on
provisions in the Settlement Agreement (including the release, integration,
and written-amendment clauses). The issue whether a defense based on a
contract triggers an entitlement to contractual attorney fees depends on the
specific language of the attorney fees provision. (Mountain Air, supra, 3
Cal.5th at pp. 751-761.) Before examining Zephyr’s argument in the context
of the attorney fees provision in the Settlement Agreement, it is helpful to
summarize how California courts have interpreted similar attorney fees
provisions. (See Mountain Air, supra, 3 Cal.5th 744; Exxess Electronixx,
supra, 64 Cal.App.4th 698.)
In Exxess Electronixx, a commercial tenant sued its broker alleging the
broker failed to disclose defects in the building. (Exxess Electronixx, supra,
64 Cal.App.4th at pp. 702-704.) After a dismissal, the broker moved for
attorney fees under a lease provision permitting an attorney fees award if a
party or broker “brings an action or proceeding to enforce the terms hereof or
declare rights hereunder . . . .” (Id. at p. 702, italics added.) As one of its
arguments, the broker maintained it was entitled to recover under this
provision because it prevailed on the tenant’s tort claims (fraud and breach of
fiduciary duty) and the contractual fee provision was triggered because its
defense to the tenant’s claims was based on an as-is provision in the parties’
contract. (Id. at pp. 711-712) The Court of Appeal rejected this argument,
finding this defense did not come within the language of the attorney fees
clause. The court explained: “While the ‘as is’ defense may have had the
effect of ‘enforc[ing] the terms’ of the lease or ‘declar[ing] rights [there]under,’
44
[the broker] did not ‘bring[ ] an action or proceeding’ to accomplish those
goals. Under any reasonable interpretation of the attorneys’ fee provision, we
cannot equate raising a ‘defense’ with bringing an ‘action’ or ‘proceeding.’ By
asserting a defense [to the plaintiff’s claims, the broker] did not bring an
action or proceeding to enforce the lease or to declare rights under it.” (Id. at
p. 712, italics added; accord Gil v. Mansano (2004) 121 Cal.App.4th 739, 741
(Gil).)
Several years later, another Court of Appeal reached a different
conclusion in interpreting a similar attorney fees provision. (Windsor Pacific,
supra, 213 Cal.App.4th at pp. 273-276.) The Windsor Pacific court held “an
attorney fee clause providing for a fee award to the prevailing party in ‘any
action or proceeding to enforce or interpret’ a contract applies not only where
the plaintiff ’s allegations in the complaint seek to enforce or interpret the
contract, but also where the defendant seeks to do so by asserting an
affirmative defense raised in its answer.” (Id. at p. 266, italics added.)
Four years later, the California Supreme Court noted the conflict
between Exxess Electronixx and Windsor Pacific and resolved the split in
favor of Exxess Electronixx, expressly disapproving Windsor Pacific’s contrary
language. (Mountain Air, supra, 3 Cal.5th at pp. 750-751, 756, fn. 3.)
In Mountain Air, the plaintiff (a seller) brought an action against the
defendant (a prospective purchaser) seeking to enforce a repurchase
agreement, and the defendant successfully relied on a second agreement (the
option agreement) to establish it was not required to purchase the property.
(Mountain Air, supra, 3 Cal.5th at pp. 748-749.) The defendant sought
attorney fees under an attorney fees provision in the option agreement that
stated in relevant part, “ ‘If any legal action or any other proceeding . . . is
brought for the enforcement of this Agreement . . . , the prevailing party shall
45
be entitled to recover reasonable attorney fees . . . .’ ” (Id. at p. 752.) The
defendant agreed the plaintiff ’s action was not “brought for the enforcement”
of the option agreement because the agreement would have precluded the
plaintiff ’s claims. (Id. at p. 757.) But the defendant argued it was entitled to
recover attorneys fees under the option contract’s clause because it had
successfully defended the action based on a provision in the option contract
and its affirmative defense constituted a “legal action . . . ‘brought for the
enforcement’ of the option agreement.” (Id. at p. 757, italics added.)
In rejecting this argument, the California Supreme Court applied
traditional contract interpretation rules, and determined that the word
“ ‘action’ is synonymous with a lawsuit” and that although “an affirmative
defense is a ‘real part of any action’ [citation], it does not, in and of itself,
constitute an ‘action’ for purposes of recovering attorney fees.” (Mountain
Air, supra, 3 Cal.5th at p. 753.) The court also emphasized “[t]he inclusion of
the word ‘brought’ is . . . consistent with a narrow reading” of the clause, to
mean that the parties intended the provision to apply to a plaintiff ’s filing of
an action rather than a defendant’s “plead[ing], assert[ing], or rais[ing]” an
affirmative defense in the action.11 (Id. at pp. 754-755.)
Consistent with Exxess Electronixx and Mountain Air, Chhatrala’s
claims against Zephyr did not come within the scope of the attorney fees
11 The Mountain Air attorney fees provision additionally contained a
clause stating it also applied if a legal action is brought “because of an alleged
dispute, breach, default, or misrepresentation in connection with any
provision of this Agreement . . . .” (Mountain Air, supra, 3 Cal.5th at p. 752,
italics omitted.) Over a dissent, the majority found the defendant was
entitled to attorney fees under this second clause because the plaintiff
brought its action “ ‘because of an alleged dispute . . . in connection with’ the
option agreement.” (Id. at p. 759.) This holding is inapplicable here because
the governing fees provisions do not contain a similar second clause.
46
provision in the Settlement Agreement. Similar to those cases, the attorney
fees clause in the Settlement Agreement provides for prevailing party
attorney fees “[i]f litigation is commenced to enforce any of the provisions of
this Agreement . . . .” (Italics added.) “Commenced” is analogous to the
terms “brought” or “bring” interpreted in Mountain Air and Excess
Electronixx, and similarly requires the party to have filed or started the
litigation or action. By asserting a defense to Chhatrala’s tort and common
counts claims, Zephyr did not file or start “the litigation” to compel
compliance with the Settlement Agreement. (Italics added.) Likewise, as in
Mountain Air, Chhatrala did not seek to enforce the documents with the
attorney fees provisions (Settlement Agreement or the Note) against Zephyr.
In its supplemental brief, Zephyr contends “Chhatrala commenc[ed]
litigation to enforce recovery under the . . . Note,” which was the “primary
benefit of the Settlement Agreement” and “Chhatrala’s complaint . . . alleged
facts regarding whether [the Note] was operative and enforceable . . . .” This
contention applies to Chhatrala’s claims against the Elajou parties, but it is
inapplicable to Chhatrala’s claims against Zephyr. Chhatrala did not
commence litigation against Zephyr to enforce the terms of the Note or
Settlement Agreement. Zephyr does not cite to any authority supporting that
a party’s claims against one defendant that fall within an attorney fees
provision triggers a codefendant’s right to recover fees merely by its status as
a codefendant.
In this regard, we find unhelpful Zephyr’s reliance on an allegation in
Chhatrala’s complaint that all defendants are agents and/or alter egos of
Elajou Investment Group and Mr. Elajou. Zephyr argues that “[i]f Chhatrala
had prevailed on its claim that Zephyr was the alter ego of the [Elajou
parties], it would have been entitled to recover its fees from Zephyr arising
47
from the allegations relating to the [Elajou parties’] breaches of the
Settlement Agreement and . . . Note.” In support Zephyr cites Reynolds
Metals Co. v. Alperson (1979) 25 Cal.3d 124 (Reynolds Metals) and decisions
applying its principles.
These cases are materially distinguishable. In Reynolds Metals, the
unsuccessful plaintiff had brought an action against nonsignatories based on
their status as alter egos of the contracting party. (Reynolds Metals, supra,
25 Cal.3d at p. 127.) The high court held these nonsignatory defendants were
entitled to attorneys fees because “[h]ad plaintiff prevailed on its cause of
action claiming defendants were in fact the alter egos of the [contracting
party] [citation], defendants would have been liable on the [contract].” (Id. at
p. 129.)
Under Reynolds Metals, if Chhatrala had brought a breach of contract
claim against Zephyr on an alter ego basis, and Zephyr had prevailed, Zephyr
would be entitled to attorney fees. This is because if Chhatrala had
prevailed, it would have been entitled to obtain attorney fees against Zephyr
as the alter ego of the contracting party. But this situation did not occur.
Critically, Chhatrala did not allege a breach of contract action against Zephyr
on an alter ego theory or any other ground. Absent such claim, Reynolds
Metals’s holding and reasoning are inapplicable.
Several days before oral argument, Zephyr alerted us to new authority
on the alter ego issue filed several days earlier. (347 Group, Inc. v. Philip
Hawkins Architect, Inc. (2020) 58 Cal.App.5th 209 (347 Group).) At oral
argument, Zephyr’s counsel relied on this case to support Zephyr’s attorney
fees claim. This decision is inapposite.
In 347 Group, the plaintiff brought a contract claim against a corporate
entity (Architect, Inc.) seeking to recover amounts owed under the parties’
48
contract. (347 Group, supra, 58 Cal.App.5th at p. 212.) The plaintiff also
sued Philip Hawkins “seeking to establish Hawkins . . . [was an] alter ego[ ]
of Architect, Inc. and liable under [the plaintiff’s] contract with Architect,
Inc.” (Ibid., italics added.)
After Architect Inc. declared bankruptcy and defaulted, the plaintiff
alleged four causes of action against Hawkins: breach of contract, common
counts, fraudulent conveyance, and conspiracy. (347 Group, supra, 58
Cal.App.5th at p. 212.) A default judgment was entered against Architect
Inc., and the parties then stipulated to dismiss plaintiff’s contract causes of
action against Hawkins. (Ibid.) “Following trial, the court ruled
Hawkins . . . [was] not liable as [an] alter ego[ ] to pay the amount owing
under the contract between Architect, Inc. and 347 Group under either a
fraudulent conveyance or conspiracy theory.” (Ibid., italics added.) The trial
court then denied Hawkins’s attorney fees motion, finding it prevailed only
on tort claims.
The Court of Appeal reversed, relying on a recent decision (MSY
Trading Inc. v. Saleen Automotive, Inc. (2020) 51 Cal.App.5th 395) that
upheld an attorney fees award in an action by a plaintiff that unsuccessfully
sought to hold the nonsignatory defendant liable for a breach of contract
under an alter ego theory. (347 Group, supra, 58 Cal.App.5th at pp. 214-215.)
In MSY Trading, the issue was procedural: does Reynolds Metals apply to
support a section 1717 attorney fees award to a party alleged to be liable for
contract damages under an alter ego theory if the alter ego claim is brought
in a later action, rather than in the initial action? (MSY Trading, at pp. 401-
404.) The court answered this question in the affirmative, finding if “the rule
were otherwise, wasteful proceedings would be incentivized.” (Id. at p. 403.)
49
The 347 Group court “quote[d] heavily from the [MSY Trading] opinion
to explain why Hawkins [was] entitled to attorney fees.” (347 Group, supra,58 Cal.App.5th at p. 214.) After this lengthy quote, the 347 Group court
concluded that the fact the plaintiff’s alter ego claim was asserted in a
proceeding after the default judgment against Architect Inc. did not alter the
general rule that a defendant is entitled to attorney fees upon prevailing on
an alter ego theory that sought to hold that party liable for a signatory
party’s breach of contract. (Id. at p. 215.) The court explained: “[A]
postjudgment . . . action to establish alter ego liability for a judgment on a
contract is itself an action on the contract, regardless of which procedural
vehicle the plaintiff employs. (MSY Trading[,] . . . supra, 51 Cal.App.5th at
p. 403.) [¶] Accordingly, because [the plaintiff’s] alter ego action was on the
contract and Architect, Inc., the party Hawkins was alleged to be the alter
ego of, was liable for attorney fees under the contract, Hawkins is entitled to
attorney fees under the contract.” (347 Group, at p. 215; see Brown Bark III,
L.P. v. Haver (2013) 219 Cal.App.4th 809, 823.)
This case is different. Chhatrala did not allege Zephyr was liable under
the Note as an alter ego of the Elajou Investment Group or Mr. Elajou. 347
Group and MSY Trading extended Reynolds Metals’ reasoning to the
situation where the alter ego claim was brought later, after entry of the
judgment against the contracting party. But they do not support an
extension of Reynolds Metals to a situation where the defendant was never
alleged to be the alter ego of the contracting party on the breach of contract
cause of action. Although the 347 Group plaintiff brought tort claims to
support its alter ego theory, the court made clear that the crux of the action
was that after the corporate defendant’s default, the plaintiff sought to
establish Hawkins was an “alter ego[ ] of Architect, Inc., and liable under the
50
contract with Architect, Inc.” (347 Group, supra, 58 Cal.App.5th at p. 212,
italics added.) A similar claim was not made in this case. Further, the 347
Group court never explained or discussed whether the fraudulent conveyance
claim was “on the contract”; instead it focused on the substance of the alter
ego allegations that defendant was liable on the contract and the timing of
those claims. A case is not authority for a proposition not considered.
(Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1134.)
Taking a different tack, Zephyr contends Chhatrala forfeited its right
to argue its claims did not fall under the Settlement Agreement’s attorney
fees provision because Chhatrala did not raise the “scope” issue in the trial
court proceedings. On our review of the record, we are satisfied Chhatrala
did raise this issue below. Although it did not refer to Mountain Air in its
trial court briefs, Chhatrala cited to Exxess Electronixx and strenuously
argued its claims against Zephyr were not “on the contract” and did not fall
under the contractual attorney fees provision. Additionally, contrary to
Zephyr’s contentions, the fact the trial court did not specifically rule on this
scope issue is immaterial because our review is de novo. (See Mountain Air,
supra, 3 Cal.5th at p. 751.) There were no disputed factual issues regarding
the language of the attorney fees provisions or the nature of the claims
Chhatrala asserted against Zephyr. We thus conduct an independent review
and are not required to defer to the trial court’s express or implied findings.
(Ibid.)
In raising its forfeiture argument, Zephyr also notes Chhatrala has
never argued its claims did not fall within the second part of the attorney fees
provisions (“If litigation is commenced . . . to recover damages for breach of
any of the provisions of this Agreement,” italics added). However, it is clear
that Chhatrala did not seek damages against Zephyr for breach of the
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Settlement Agreement, and Zephyr has never suggested otherwise.
Therefore the fact that Chhatrala did not specifically raise this issue does not
constitute a forfeiture of its contention the court erred in awarding attorney
fees.
Applying the plain meaning of the terms in the Settlement Agreement’s
attorney fees provision, neither Chhatrala’s claims against Zephyr nor
Zephyr’s assertion of its contract defenses satisfied the requirement that the
litigation was “commenced to enforce any of the provisions of [the Settlement]
Agreement.” (See Mountain Air, supra, 3 Cal.5th at pp 751-756; Exxess
Electronixx, supra, 64 Cal.App.4th at p. 712; Gil, supra, 121 Cal.App.4th at
p. 741.)
DISPOSITION
Judgment affirmed. The May 16, 2019 attorney fees order is affirmed
in part and reversed in part. The order is affirmed as to the attorney fees
awarded to defendants Elajou Investment Group LLC, Juma Elajou, and
Broadway 87CDev, LLC (Elajou parties). The order is reversed as to
defendant Zephyr Partners-RE, LLC (Zephyr). The court is directed to enter
a new order denying Zephyr’s motion for attorney fees. The court should
reflect this ruling in the final judgment that was amended to include the
court’s May 16, 2019 rulings.
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Appellant is ordered to pay the costs borne by the Elajou parties.
Appellant and Zephyr to bear their own costs.
HALLER, J.
WE CONCUR:
BENKE, Acting P. J.
IRION, J.
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