Jones v. Goodman ( 2020 )

Filed 11/17/20
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
TREVOR JONES, D075907
Plaintiff and Respondent,
v. (Super. Ct. No. 37-2016-
00016836-CU-BT-CTL)
PAUL GOODMAN et al.,
Defendants and Appellants.
APPEAL from an order of the Superior Court of San Diego County,
Eddie C. Sturgeon, Judge. Affirmed.
Kuznetsky Law Group, Michael David Kuznetsky, Gregory M.
Garrison, and Mark David Kesten, for Defendants and Appellants.
Murtaugh Treglia Stern & Deily, Michael James Murtaugh, R. Casey
Hannegan, and Devin E. Murtaugh for Plaintiff and Respondent.
Trevor Jones contended he was entitled to a percentage of the
successful Pura Vida bracelet business established with his former friends
and colleagues Paul Goodman and Griffin Thall. He claimed the parties had
formed a partnership regarding a bracelet business and sued Goodman and
Thall (Defendants) seeking (among other things) a partnership buyout under
Corporations Code section 16701.1 Defendants denied Jones’s claims and
prevailed at trial. After trial, Defendants sought to recover attorney fees
pursuant to section 16701, which authorizes an equitable award of attorney
and expert fees “against a party that the court finds acted arbitrarily,
vexatiously, or not in good faith.” (§ 16701, subd. (i).) The trial court denied
Defendants’ motion on two grounds: (1) the motion was untimely under
applicable rules (Cal. Rules of Court, rule 3.1702), and (2) on the merits, the
court declined to find that Jones acted arbitrarily, vexatiously, or not in good
faith.
Defendants appeal from the court’s denial of their section 16701 fee
motion. They contest the court’s sua sponte determination the motion was
untimely, and they further challenge the court’s refusal to find Jones acted
arbitrarily, vexatiously, or not in good faith. We reject Defendants’ claims of
error and affirm the order.
FACTS
Trevor Jones, Paul Goodman, and Griffin Thall were college friends
turned entrepreneurs. Jones and Thall owned and operated a website called
OUTnSD, and Goodman and Thall owned and operated a bracelet company
called Pura Vida. Jones claimed that, in or around 2010, the three men
agreed to an “equity swap,” wherein Jones received five percent ownership in
Pura Vida in exchange for five percent of OUTnSD. According to Goodman
and Thall, the men discussed Jones’s proposal but did not agree to it.
OUTnSD went out of business in 2013, but Pura Vida grew into a successful
business.
1 Unless otherwise specified, statutory citations are to the Corporations
Code.
2
In May 2016, Jones sued Goodman, Thall, and Creative Genius, Inc.
d/b/a Pura Vida Bracelets, and he subsequently dismissed Creative Genius
Inc., d/b/a Pura Vida Bracelets from the lawsuit. In his operative amended
complaint, Jones claimed the parties “agreed . . . to work together as partners
in [two business] ventures” (OUTnSD and Pura Vida), the parties’ agreement
was memorialized in a written agreement, he was entitled to a five percent
“partnership interest” in Pura Vida under the partnership agreement, and
the parties’ intent to form a partnership was “subsequently confirmed by
[their] conduct” in working together to make both business ventures
successful. Jones asserted claims for breach of the partnership agreement,2
breach of fiduciary duties,3 accounting, determination of partnership buyout
under section 16701, and declaratory relief.4 Jones asserted that Defendants
breached the partnership agreement “by taking distributions from Pura Vida
for themselves only, without informing [Jones] and to his exclusion.” On his
2 The elements of a cause of action for breach of a partnership agreement
are: (1) the partnership agreement; (2) plaintiff’s performance or excuse for
nonperformance; (3) defendant’s breach; and (4) the resulting damages to
plaintiff. (See Agam v. Gavra (2015) 236 Cal.App.4th 91, 104.)
3 The elements of a cause of action for breach of fiduciary duty are:
(1) the existence of a fiduciary duty; (2) breach of that duty; and (3) damage
proximately caused by the breach. (See Jameson v. Desta (2013)
215 Cal.App.4th 1144, 1164.) “The fiduciary duties a partner owes to the
partnership and the other partners are the duty of loyalty and the duty of
care . . . .” (§ 16404, subd. (a).)
4 Jones’s causes of action for an accounting, determination of partnership
buyout, and declaratory relief all represent relief requested in the event
Jones prevailed on his substantive claims. At trial, Jones demanded five
percent of the value of the bracelet business, which he valued at over
$30 million.
3
breach of partnership agreement claim, Jones asserted he was “damaged in
an amount equal to his share of the distributions taken by the Defendants.”
Defendants denied all of Jones’s allegations. Prior to trial, Defendants
made an offer to compromise of over $300,000 under Code of Civil Procedure
section 998. Jones declined the offer. Also prior to trial, Defendants moved
for summary judgment but were unable to defeat Jones’s claims. The parties
participated in two rounds of mediation but were not successful in resolving
their dispute. The case proceeded to a bench trial in August 2018.
At trial, Jones, Goodman, and Thall each testified, as did dueling
business valuation experts. Jones testified that he, Thall, and Goodman had
been friends when they attended college together. He and Thall worked
together on an internet-based business they created called OUTnSD. When
the three of them (and one other friend) traveled to Costa Rica together
during the summer of 2010, Goodman and Thall came up with the idea for
Pura Vida bracelets; Goodman and Thall arranged to purchase 100 bracelets
to import and sell back home.
The three friends (who were also roommates at the time) discussed an
equity swap proposal that would give Jones a small stake in Pura Vida and
Goodman a small stake in OUTnSD. Jones said Goodman and Thall thought
it was “an amazing idea” that would allow all three of them to participate in
the two businesses together because, before the equity swap, only Thall was
involved in both businesses. Jones wrote and emailed a proposed agreement.
Jones testified the three men signed the agreement around February 2011
just before they made a second trip to Costa Rica, but backdated it to
November 2010, and agreed to keep the arrangement a secret because
another friend and Goodman’s sister were also working on Pura Vida, but
only as salaried employees.
4
Jones introduced as evidence an “Equity (or Equities) Exchange
Proposal” agreement dated November 24, 2010, which purported to be signed
by all three men. The agreement identifies the “[p]artners” and purpose of
their agreement, including “new ideas, new perspective, . . . better
operations,” and the opportunity to “learn twice as much, diversifying our
risk.” (Capitalization omitted.) OUTnSD is referred to as “Company 1” and
Pura Vida as “Company 2,” and the parties set forth the anticipated benefits
to each business and the expected contributions of the partners. 5 In the
agreement, Jones gave Goodman a five percent “ownership” in OUTnSD and
Goodman gave Jones a five percent “ownership” in Pura Vida. The
agreement further provides that “[p]ayout is not necessary unless money is
being taken or exchanged for whatever reason.”
Jones testified that the three men (and another friend) then began
working on a third venture together, Flex Watches. Jones focused efforts on
Flex Watches, while Goodman and Thall focused on Pura Vida. Jones
testified that Goodman had previously offered to swap his 16 percent interest
in Flex Watches for Jones’s five percent interest in Pura Vida, but Jones
refused. Jones later bought out Goodman and Thall’s interests in Flex
Watches.
On cross-examination, Jones admitted he never invested any money
into the Pura Vida business and never requested an accounting of Pura
Vida’s profits. He never discussed Pura Vida’s tax liability with his
purported partners or anyone else. There was no documentation to show that
Pura Vida was a partnership. Jones never received stock certificates in “Pura
Vida Bracelets” or Creative Genius, Inc. He also did not share five percent of
5 Goodman and Jones would “[h]elp in business operations, bring new
ideas to the table, [and] handle business operations.”
5
his OUTnSD salary with Goodman. Jones explained that he understood the
agreement to require the sharing of an “end-of-the-year-type profit, not
salaries,” but he acknowledged the terms “distribution” and “salary” were not
in the written agreement.
Goodman and Thall denied signing the purported partnership
agreement, but Thall acknowledged the signatures looked like his and
Goodman’s. Counsel tried to show that the signatures on the agreement did
not match other, known signatures of the two men. Neither party presented
a handwriting expert to testify.
Goodman testified that he recalled discussing the potential “equity
swap” with Thall and Jones, but decided not to enter into the agreement after
Thall told him that Jones “didn’t really hold his weight in OUTnSD.”
Goodman did not think Jones would contribute positively to a partnership.
He recalled telling Jones he was not interested in having Jones participate in
Pura Vida and did not recall discussing the subject further after that.
Evidence showed that Pura Vida was the fictitious business name for a
corporation called Creative Genius, Inc. Articles of incorporation were filed
for Creative Genius, Inc. on or about September 21, 2010.6 Goodman and
Thall signed stock certificates for Creative Genius, Inc. on November 24,
2010, with the company’s shares split evenly between the two men. Jones
was never a stockholder in Creative Genius, Inc. Jones testified that he
6 There was testimony regarding the incorporation date and the articles
of incorporation were admitted as evidence during trial, but the exhibits were
not transmitted to this court. We take judicial notice of the articles of
incorporation for Creative Genius, Inc. from the California Secretary of
State’s website. (Evid. Code, § 452, subd. (c); Friends of Shingle Springs
Interchange, Inc. v. County of El Dorado (2011) 200 Cal.App.4th 1470, 1484,
fn. 12 [taking judicial notice of articles of incorporation filed with California
Secretary of State on appellate court’s own motion].)
6
knew Goodman and Thall “had a company called Creative Genius, Inc.”
However, Jones had no recollection of being told there was a company
incorporated to do business as Pura Vida before they discussed and entered
into their partnership agreement. The three friends frequently discussed
their businesses, but not the “legal structure” for the businesses. Goodman
testified that he did not recall discussing the incorporation of Creative
Genius, Inc. with Jones. Thall testified that, in November 2010, Thall and
Goodman went out of town to sign some papers to “finalize Creative Genius,
Inc.”; he believes “there was a mention” of this plan in Jones’s presence, but
there was no other time that he discussed the incorporation of Creative
Genius, Inc. with Jones.
After trial, the court entered judgment in Defendants’ favor and
against Jones. The court found that Jones’s claim that Pura Vida Bracelets
was both a corporation and a partnership was “a legal impossibility,” and
based on the evidence before it, the company could not be both a partnership
and a corporation at the same time. The court additionally found “there was
no partnership.” More specifically: “there was no evidence that the parties
agreed to form a partnership,” “there was no evidence that a partnership
existed,” and “there was no evidence that a partnership operated as a going
concern, including no K-1s, no partnership formation documents, no balance
sheets, and no profit and loss statements.” The court further found that
Jones failed to prove the signatures on the purported written partnership
agreement belonged to Goodman and Thall, and failed to prove any purported
partnership had monetary value to support his damages claim.7
7 The court noted it “found Plaintiff’s expert valuation of CGI as a
partnership asset was unsupported by any facts or law.”
7
After judgment was entered in Defendants’ favor on October 12, 2018,
Defendants served notice of entry of judgment on October 22, 2018.
On December 21, 2018, Defendants moved for attorney fees under
section 16701, subdivision (i), on the ground that Jones had demanded a
partnership buyout pursuant to that code section, and had done so
“arbitrarily, vexatiously, and not in good faith,” and, as such, equity
supported a fee award. Defendants sought an award of $315,279.40 incurred
for defense counsel and trial counsel.
On January 11, 2019, Defendants filed an amended fee motion under
section 16701, subdivision (i), now seeking fees in the amount of $349,339.60,
incurred for defense counsel, trial counsel, and Defendants’ valuation
expert.8
Jones opposed Defendants’ fee motion, arguing he had “probable cause”
to pursue enforcement of the written contract and claiming his arguments
were not so frivolous as to justify an equitable fee award. If a fee award was
justified it should be limited to fees relating to the partnership buyout issue,
not for all fees incurred in the case. Jones did not object that the amended
motion was untimely filed.
In a tentative ruling issued prior to hearing, the court indicated it was
inclined to deny Defendants’ section 16701 motion. At the hearing,
Defendants urged the court to award fees, arguing they had incurred
substantial bills to defend against claims that, after trial, were determined to
8 It appears the total requested amount was derived from a
miscalculation of the total fees incurred for counsel ($244,059.40), trial
counsel ($67,720.00), and Defendants’ valuation expert ($34,060.20), which
totals $345,839.60. Like the initial motion, Defendants’ amended motion
included a notice of motion, a memorandum of points and authorities, and
numerous supporting declarations and exhibits.
8
have no legal or factual merit, and they urged the court to find that Jones’s
behavior in continuing to pursue the claims through trial was arbitrary and
not in good faith. Jones argued the case had survived two demurrers and
summary judgment and ultimately was decided only after trial. He
maintained that a claim decided on disputed evidence is not the same as a
claim brought arbitrarily, vexatiously, or not in good faith. The trial court
commented, “I listen to this. I make a determination of whether it was
capricious, whether it was arbitrary, whether it was in bad faith. And in the
big scheme of listening to every part of this trial, because it was a fascinating
trial too, I learned a lot. It wasn’t capricious.”
After the hearing, the court confirmed its tentative decision to deny
Defendants’ motion for attorney fees, ruling as follows: “The amended motion
was untimely as it raised grounds for recovery of attorney’s fees not set forth
in the original motion. . . . The amended motion was filed after the time set
forth under California Rules of Court, rule 3.1702. There is no stipulation on
file to expand the scope of the fees. Even if the amended motion was not
untimely, the court exercises its discretion and denies the motion. The court
does not find plaintiff Trevor Jones acted arbitrarily, vexatiously, or not in
good faith.”
DISCUSSION
Defendants appeal the trial court’s denial of their section 16701
attorney fee motion. They assert reversal is warranted because “as a matter
of law,” Jones acted arbitrarily in pursuing claims for which the court
ultimately found no evidentiary support. They further assert the trial court
erred in finding the motion was untimely filed. We reject Defendants’ claim
that reversal is warranted and we affirm the trial court’s order.
9
I.
Statutory Scheme Regarding Partnerships
“The [California Revised Uniform Partnership Act (UPA)], adopted in
1996, applies to all partnerships as of 1999. (§ 16111, subd. (b).).” (Corrales
v. Corrales (2011) 198 Cal.App.4th 221, 226.) “[T]he association of two or
more persons to carry on as coowners a business for profit forms a
partnership, whether or not the persons intend to form a partnership.”
(§ 16202, subd. (a).) However, “[a]n association formed under a statute other
than this chapter, a predecessor statute, or a comparable statute of another
jurisdiction is not a partnership under this chapter.” (§ 16202, subd. (b).)
A partnership agreement can be written, oral, or implied (§ 16101,
subd. (10)), and “[t]he burden of proving the existence of a partnership lies
upon the party asserting its existence.” (Mercado v. Hoefler (1961)
190 Cal.App.2d 12, 16 (Mercado).) The terms of a partnership are controlled
by the partnership agreement, or by the UPA if the agreement is silent on an
issue. (§ 16103, subd. (a) [“[R]elations among the partners and between the
partners and the partnership are governed by the partnership agreement. To
the extent the partnership agreement does not otherwise provide, this
chapter governs relations among the partners and between the partners and
the partnership.”]; Holmes v. Lerner (1999) 74 Cal.App.4th 442, 457 (Holmes)
[once partnership is established, “other provisions of the UPA and the
conduct of the parties supply the details of the agreement”].)
Section 16601, subdivision (a) provides for the dissociation of a partner
upon “[t]he partnership’s having notice of the partner’s express will to
withdraw as a partner or on a later date specified by the partner.” Under
section 16701, subdivision (a), the partnership must buy out the dissociated
10
partner’s interest in the partnership. Section 16701, subdivision (b) sets
forth the process for valuing the partner’s interest.9
In connection with a buyout dispute, “[t]he court may assess reasonable
attorney’s fees and the fees and expenses of appraisers or other experts for a
party to the action, in amounts the court finds equitable, against a party that
the court finds acted arbitrarily, vexatiously, or not in good faith.” (§ 16701,
subd. (i).) The statute provides one example of the type of conduct that may
justify a fee award: “the partnership’s failure to tender payment or an offer
to pay or to comply with” (ibid.) its disclosure obligations for any buyout
offer.10
II.
Governing Legal Principles and Standard of Review
“California follows what is commonly referred to as the American rule,
which provides that each party to a lawsuit must ordinarily pay his own
attorney fees.” (Trope v. Katz (1995) 11 Cal.4th 274, 278; Code Civ. Proc.,
§ 1021 [“[e]xcept as attorney’s fees are specifically provided by statute, the
measure and mode of compensation of attorneys . . . is left to the agreement,
9 Section 16701, subdivision (b), provides: “The buyout price of a
dissociated partner’s interest is the amount that would have been
distributable to the dissociating partner under subdivision (b) of
Section 16807 if, on the date of dissociation, the assets of the partnership
were sold at a price equal to the greater of the liquidation value or the value
based on a sale of the entire business as a going concern without the
dissociated partner and the partnership was wound up as of that date.”
10 The partnership’s buyout offer must be accompanied by various
financial documents, including a statement of partnership assets and
liabilities and a balance sheet and income statement, and “[a]n explanation of
how the estimated amount of the payment was calculated.” (§ 16701,
subd. (g).)
11
express or implied, of the parties”].) Corporations Code section 16701
establishes an exception to the American rule—authorizing the trial court to
award attorney fees when it determines that a party in a partnership
dissociation and buyout action has “acted arbitrarily, vexatiously, or not in
good faith.” (Corp. Code, § 16701, subd. (i).)
In interpreting this statute, we apply well established principles.
“Issues of statutory interpretation are subject to our independent review.
[Citation.] ‘A court’s overriding purpose in construing a statute is to
ascertain legislative intent and to give the statute a reasonable construction
conforming to that intent. [Citation.] In interpreting a statute to determine
legislative intent, a court looks first to the words of the statute and gives
them their usual and ordinary meaning. [Citation.] Statutes must be given a
fair and reasonable interpretation, with due regard to the language used and
the purpose sought to be accomplished.’ ” (Leader v. Cords (2010)
182 Cal.App.4th 1588, 1596.)
“Generally, a trial court’s . . . award of fees and costs[] is reviewed for
abuse of discretion.” (Goodman v. Lozano (2010) 47 Cal.4th 1327, 1332;
Castro v. Superior Court (2004) 116 Cal.App.4th 1010, 1017 [“the propriety or
amount of an attorney fees award is reviewed using the abuse of discretion
standard”].) However, the standard may change depending on the particular
issue under review. “ ‘We independently review any legal issue regarding the
appropriate criteria for a fee award. But once those criteria are identified, we
defer to the trial court’s discretion in determining how they are to be
exercised. [Citation.] In fashioning an equitable remedy, the trial court is in
the best position to determine whether the criteria for a fee award have been
met. We will not disturb its judgment on this issue unless we are convinced
the court abused its discretion. [Citation.] A trial court abuses its discretion
12
only where its action is clearly wrong and without reasonable basis.’ ”
(Powell v. Tagami (2018) 26 Cal.App.5th 219, 236-237 (Powell).) To the
extent a trial court’s ruling is based on factual determinations, we review the
record for substantial evidence. (Carpenter & Zuckerman, LLP v. Cohen
(2011) 195 Cal.App.4th 373, 378.) “ ‘We look at the evidence in support of the
trial court’s finding, resolve all conflicts in favor of the respondent and
indulge in all legitimate and reasonable inferences to uphold the finding.’ ”
(Ibid.) “We consider the question of whether a statute provides for a
mandatory award of attorney fees under the de novo standard of review.”
(James L. Harris Painting & Decorating, Inc. v. West Bay Builders, Inc.
(2015) 239 Cal.App.4th 1214, 1218.)
III.
Attorney Fees Request
Pursuant to section 16701, subdivision (i), “[t]he court may assess
reasonable attorney’s fees and the fees and expenses of appraisers or other
experts for a party to the action, in amounts the court finds equitable, against
a party that the court finds acted arbitrarily, vexatiously, or not in good faith.
The finding may be based on the partnership’s failure to tender payment or
an offer to pay or to comply with subdivision (g).” (§ 16701, subd. (i).) There
is no case law defining “arbitrarily, vexatiously, or not in good faith” under
this fee shifting statute. As discussed post, we conclude that (1) the statutory
terms (“arbitrarily, vexatiously, or not in good faith”) are disjunctive and each
may provide a basis for a fee award; (2) attorney fees may be warranted
based on claims that objectively lack legal merit or are subjectively pursued in
13
bad faith (or both); and (3) the decision to award fees is not mandatory, but
rather lies within the broad discretion of the trial court. 11
“The ‘ “ordinary and popular” ’ meaning of the word ‘or’ is well settled.
[Citation.] It has a disjunctive meaning: ‘In its ordinary sense, the function
of the word “or” is to mark an alternative such as “either this or that.” ’ ” (In
re Jesusa V. (2004) 32 Cal.4th 588, 622.) We see no basis to depart from this
rule of statutory construction, and thus conclude attorney fees may be
awarded when any of the three statutory criteria is established.
The parties premise their claims on different aspects of the statutory
criteria. Defendants primarily focus on the “arbitrarily” language,
contending Jones acted arbitrarily “as a matter of law” by bringing a baseless
legal claim lacking in evidentiary support, even if the claim was not brought
with “maliciousness or ill will.” Jones, on the other hand, primarily focuses
11 As previously noted, section 16701 applies to actions by a “dissociated
partner,” which is what Jones claimed to be, against the “partnership,” which
Jones claimed was comprised of himself and the defendants Goodman and
Thall. Section 16405, subdivision (b)(2)(B) allows the partner to maintain an
action against the partnership for legal or equitable relief to have the
partner’s interest in the partnership purchased. The parties do not dispute
that section 16701 applies here, in Jones’s action as a dissociated partner,
despite Jones’s ultimate failure at trial to prove the existence of a
partnership. We assume without deciding that the court could award
attorney fees under the statute—if it had concluded Jones acted arbitrarily,
vexatiously, or not in good faith—even if a partnership was not formed. (Hsu
v. Abbara (1995) 9 Cal.4th 863, 870 [“It is now settled that a party is entitled
to attorney fees under [Civil Code] section 1717 ‘even when the party prevails
on grounds the contract is inapplicable, invalid, unenforceable or nonexistent,
if the other party would have been entitled to attorney’s fees had it
prevailed.’ ”]; but see SC Manufactured Homes, Inc. v. Canyon View Estates,
Inc. (2007) 148 Cal.App.4th 663, 675-676 [authorizing fee award only in cases
“arising under” the Mobilehome Residency Law (MRL); “[i]t is not sufficient
that the case ‘relates to’ the MRL”].)
14
on the “good faith” language, contending the trial court acted well within its
discretion in finding that Jones did not act in bad faith.
“ ‘If possible, significance should be given to every word, phrase,
sentence and part of an act in pursuance of the legislative purpose.’
[Citation.] ‘[A] construction making some words surplusage is to be
avoided.’ ” (People v. Black (1982) 32 Cal.3d 1, 5.) “ ‘While the interpretation
of similar words in other statutes is not controlling, such interpretation is
helpful in arriving at the legislative intent. [Citations.] . . . ’ [Citations.]
Under general rules of statutory construction, we may consider the judicial
interpretation of similar words used in another statute dealing with
analogous subject matter.” (Estate of Maron (1986) 183 Cal.App.3d 707, 712.)
Because the terms “arbitrarily,” “vexatiously,” and “not in good faith” are not
defined in section 16701, we look to other attorney fees statutes containing
comparable language for guidance.
In Gemini Aluminum Corp. v. California Custom Shapes (2002)
95 Cal.App.4th 1249 (Gemini), this court construed the fee shifting provisions
in Civil Code section 3426.4 for trade secret misappropriation claims brought
in “bad faith.”12 We “conclude[d] that ‘bad faith’ for purposes of [Civil Code]
section 3426.4 requires objective speciousness of the plaintiff’s claim, as
opposed to frivolousness, and its subjective bad faith in bringing or
maintaining the claim.” (Gemini, at p. 1262, italics added.) The Gemini
court further recognized that “[a]n award of attorney fees for bad faith
12 The statute provides: “If a claim of misappropriation is made in bad
faith, a motion to terminate an injunction is made or resisted in bad faith, or
willful and malicious misappropriation exists, the court may award
reasonable attorney’s fees and costs to the prevailing party.” (Civ. Code,
§ 3426.4.)
15
constitutes a sanction [citation], and the trial court has broad discretion in
ruling on sanctions motions.” (Ibid.)
Similarly, this court in Powell, supra, 26 Cal.App.5th 219 construed
Probate Code section 17211, subdivision (a), as containing both objective and
subjective criteria for the recovery of attorney fees.13 We concluded that
“[r]easonable cause is evaluated under an objective standard of whether any
reasonable person would have tenably filed and maintained the objection.”
(Powell, at p. 234.) By contrast, we held that “[b]ad faith involves a
subjective determination of the contesting party’s state of mind—specifically,
whether he or she acted with an improper purpose.” (Ibid.)14
The Court of Appeal in Smith v. Selma Community Hospital (2010)
188 Cal.App.4th 1, 7 (Smith) reached a similar conclusion regarding the
13 Probate Code section 17211, subdivision (a) provides: “If a beneficiary
contests the trustee’s account and the court determines that the contest was
without reasonable cause and in bad faith, the court may award against the
contestant the compensation and costs of the trustee and other expenses and
costs of litigation, including attorney’s fees, incurred to defend the account.”
(Italics added.)
14 With respect to the standard of review on appeal, we found that a
finding of bad faith is reviewed under the deferential substantial evidence
standard and, “[i]f there is no dispute as to what facts were known at the
time the contest was initiated or maintained, the existence of reasonable
cause is a question of law.” (Powell, supra, 26 Cal.App.5th at p. 234.)
16
attorney fees provision in Business and Professions Code section 809.9.15
The statutory language there referred to conduct that was “frivolous,
unreasonable, without foundation, or in bad faith.” (Bus. & Prof. Code,
§ 809.9.) The court concluded that “the terms ‘frivolous,’ ‘unreasonable,’ and
‘without foundation’ are objective standards that might overlap,” and “the
term ‘bad faith’ is a subjective standard concerned with a defendant’s motives
for defending or litigating a lawsuit.” (Smith, at p. 7.) The court further
concluded that “the question whether a party’s conduct in litigating a suit
was ‘without foundation’ is an issue that the courts must decide as a matter
of law under an objective test,” and was therefore subject to independent
review on appeal. (Id. at p. 31; see id. at pp. 27-28 [because the plain
language of the statute provided for a mandatory award of attorney fees
when the statutory criteria were met, the appellate court “will subject
questions of law to an independent review,” and “review findings of fact
under the substantial evidence test, except where those findings can be made
as a matter of law”].)
Like the Gemini, Powell, and Smith courts, we conclude the statute
here contains both objective and subjective criteria that may trigger an
award of attorney fees. Black’s Law Dictionary defines “arbitrary” as “of,
relating to, or involving a determination made without consideration of or
regard for facts, circumstances, fixed rules, or procedures.” (Black’s Law
15 Business and Professions Code section 809.9 provides in relevant part:
“In any suit brought to challenge an action taken or a restriction imposed
which is required to be reported pursuant to Section 805, the court shall, at
the conclusion of the action, award to a substantially prevailing party the
cost of the suit, including a reasonable attorney’s fee, if the other party’s
conduct in bringing, defending, or litigating the suit was frivolous,
unreasonable, without foundation, or in bad faith.”
17
Dict. (11th ed. 2019) p. 129, col. 1.) A “vexatious suit” is defined as “[a]
lawsuit instituted maliciously and without good grounds, meant to create
trouble and expense for the party being sued.” (Id., p. 1876, col. 2.) And
“acting in good faith” is defined as “[b]ehaving honestly and frankly, without
any intent to defraud or to seek an unconscionable advantage.” (Id., p. 33,
col. 1.) “Bad faith” in turn is defined as “[d]ishonesty of belief, purpose, or
motive.” (Id., p. 171, col. 2.) These definitions, and the common
understanding of these terms, supports our conclusion that the statute
contains both objective and subjective criteria. We review the objective
criteria under a de novo standard of review, to the extent we are examining
whether a claim lacks legal merit, and we review a court’s factual findings
regarding the subjective criteria under a deferential substantial evidence
standard of review.16
16 There may be some overlap in the statutory criteria, but whether a
party acts “arbitrarily” is best evaluated under an objective standard and
whether a party acts “vexatiously” and “not in good faith,” is best evaluated
under a subjective standard. (See Powell, supra, 26 Cal.App.5th at p. 234
[“reasonable cause” is evaluated under an objective standard but “bad faith”
is evaluated under a subjective standard]; Halaco Engineering Co. v. South
Central Coast Regional Com. (1986) 42 Cal.3d 52, 79 [“ ‘The award of
attorney’s fees under Government Code section 800 is allowed only if the
actions of a public entity or official were wholly arbitrary or capricious. The
phrase “arbitrary or capricious” encompasses conduct not supported by a fair
or substantial reason [citation], a stubborn insistence on following
unauthorized conduct [citation], or a bad faith legal dispute [citation]. The
determination of whether an action is arbitrary or capricious is essentially
one of fact, within the sound discretion of the trial court.’ ”]; see also Corbett
v. Hayward Dodge, Inc. (2004) 119 Cal.App.4th 915, 920-921 [courts have
interpreted the Consumers Legal Remedies Act provision authorizing an
award of attorney fees to a prevailing defendant when plaintiff’s action is
“ ‘not in good faith’ ” (Civ. Code, § 1780, subd. (d)) to require a finding of
subjective bad faith on the part of the plaintiff].)
18
In both instances, however, the ultimate determination of whether an
attorney fee award is warranted is left to the trial court’s discretion based on
the plain language of section 16701. Unlike the fee shifting statute at issue
in Smith, supra, 188 Cal.App.4th 1,17 the assessment of fees under
section 16701 is discretionary, as the statute provides that the court “may
assess” fees, but is not required to do so. (Corp. Code, § 16701, subd. (i).)
Courts construing comparable statutory language have reached the same
conclusion. (See, e.g., Bustos v. Wells Fargo Bank, N.A. (2019)
39 Cal.App.5th 369, 381 [“[Civil Code s]ection 2924.12, subdivision (h) merely
authorizes a trial court to award attorney fees and costs to a prevailing
borrower. Such an award is discretionary, not mandatory.”].)18 The
Legislature knows how to adopt mandatory fee shifting statutes when it
desires. For example, the California Public Records Act includes a
mandatory fee-shifting statute, providing that “[t]he court shall award court
costs and reasonable attorney’s fees to the requester should the requester
prevail in litigation filed pursuant to this section.” (Gov. Code, § 6259,
subd. (d).) “An award of costs and attorney fees pursuant to this provision is
mandatory if the plaintiff prevails.” (Filarsky v. Superior Court (2002)
28 Cal.4th 419, 427.) A prevailing defendant on an anti-SLAPP motion “shall
be entitled to recover his or her attorney’s fees and costs.” (Code Civ. Proc.,
§ 425.16, subd. (c)(1).) The statutory provision is mandatory. (Cabral v.
Martins (2009) 177 Cal.App.4th 471, 490.) Civil Code section 5975 deals with
the enforceability of covenants and restrictions in a common interest
17 See footnote 15, ante.
18 Civil Code section 2924.12, subdivision (h) states in relevant part that
“[a] court may award a prevailing borrower reasonable attorney’s fees and
costs in an action brought pursuant to this section.” (Italics added.)
19
development’s governing document and provides in relevant part that “[i]n an
action to enforce the governing documents, the prevailing party shall be
awarded reasonable attorney’s fees and costs.” (Civ. Code, § 5975, subd. (c).)
“Reviewing courts have found that this provision of the Davis-Stirling Act
‘ “reflect[s] a legislative intent that [the prevailing party] receive attorney
fees as a matter of right (and that the trial court is therefore obligated to
award attorney fees) whenever the statutory conditions have been
satisfied.” ’ ” (Almanor Lakeside Villas Owners Assn. v. Carson (2016)
246 Cal.App.4th 761, 773.) We find no comparable reflection of legislative
intent to impose a mandatory obligation on trial courts considering attorney
fee requests under Corporations Code section 16701. We apply the plain
meaning of the statute and conclude the trial court may, but is not required
to, award attorney fees when the statutory requirements are met.
Applying these principles, we conclude the trial court did not err when
it exercised its discretion to deny Defendants’ request for attorney fees under
section 16701, subdivision (i).
We first consider Jones’s actions under an “objective standard of
whether any reasonable person would have tenably filed and maintained” a
claim for a buyout of his interest in a purported partnership. (Powell, supra,
26 Cal.App.5th at p. 234.) Under the Corporations Code, “the association of
two or more persons to carry on as coowners a business for profit forms a
partnership, whether or not the persons intend to form a partnership.”
(§ 16202, subd. (a).) Jones’s claims survived summary judgment and
proceeded to trial, indicating the parties’ dispute was a factual question of
whether the parties had agreed to carry on as coowners the Pura Vida
business of selling bracelets for profit, and if so, whether their agreement was
legally enforceable. There was no dispute that the parties discussed some
20
type of business arrangement involving OUTnSD and Pura Vida, and Jones
proposed a written agreement documenting their discussions. The parties
simply disputed the nature and existence of their business relationship. The
written agreement used the terms “partners” and described the objectives
and expected contributions from the parties. The written agreement further
provided that Jones gave Goodman a five percent “ownership” in OUTnSD
and Goodman gave Jones a five percent “ownership” in Pura Vida, and that
“[p]ayout is not necessary unless money is being taken or exchanged for
whatever reason.” Jones testified that he was actively involved in the Pura
Vida bracelet business, including design, marketing, sales, and promotional
efforts, and the parties assisted one another in their respective business
endeavors. (See Greene v. Brooks (1965) 235 Cal.App.2d 161, 165-166 [“The
ultimate test of the existence of a partnership is the intention of the parties
to carry on a definite business as coowners. Such intention may be
determined from the terms of the parties’ agreement or from the surrounding
circumstances.”]; Holmes, supra, 74 Cal.App.4th at p. 454 [“the rules to
establish the existence of a partnership . . . should be viewed in the light of
the crucial factor of the intent of the parties revealed in the terms of their
agreement, conduct, and the surrounding circumstances when determining
whether a partnership exists”]; Mercado, supra, 190 Cal.App.2d at p. 17 [“the
mere fact that [one party] contributed labor and skill rather than capital does
not preclude the existence of a partnership”].) Although a corporation—
Creative Genius, Inc., d/b/a Pura Vida—was incorporated prior to the alleged
21
formation of their partnership,19 Jones explained he was not aware of the
details involving Creative Genius, Inc.’s incorporation or its status and
relation to what he viewed as the Pura Vida bracelet business venture. Jones
thus sought a determination that the parties had entered into an enforceable
partnership agreement that encompassed the Pura Vida business. We agree
with the trial court’s assessment that Jones’s claims in this case were “very
unique.” There is certainly ample support for the trial court’s conclusion that
no partnership was formed and that Jones’s claim regarding the existence of
a partnership lacked legal merit based on the evidence introduced at trial.
But that is not the question before us. Despite the defects in Jones’s claims,
19 Under the Corporations Code, unless persons associated to do business
together establish a formal entity like a corporation, the association is
deemed to be a partnership regardless of the parties’ intent. (See § 16202,
subd. (a) [“Except as otherwise provided in subdivision (b), the association of
two or more persons to carry on as coowners a business for profit forms a
partnership, whether or not the persons intend to form a partnership.”],
italics added; id., subd. (b) [“An association formed under a statute other
than this chapter, a predecessor statute, or a comparable statute of another
jurisdiction is not a partnership under this chapter.”].)
22
we cannot say that no reasonable attorney would have advanced a similar
argument.20
We next consider Jones’s subjective good faith in bringing his claims.
The trial court’s comments at the fee motion hearing indicate the court
believed that Jones pursued the action in subjective good faith, based on his
honest but mistaken belief that the men had agreed to share the Pura Vida
and OUTnSD businesses when they were living and working together
simultaneously on their entrepreneurial endeavors. The court remarked that
it had listened to all the evidence presented at trial, “learned a lot,” and
believed “[i]t wasn’t capricious.” The trial court, which observed the parties
throughout the litigation, was in the best position to determine whether
20 The trial court concluded that Jones’s claim that Pura Vida was both a
corporation and a partnership was “a legal impossibility,” and based on the
evidence before it, the company could not be both a partnership and a
corporation at the same time. We do not disagree with the trial court’s
ultimate conclusion, but we note that Jones’s counsel contended he was not
arguing that one entity could be both a corporation and a partnership at the
same time. For example, Jones’s counsel stated: “So you’ve got one separate
legal entity. You’ve got the owners, the stockholders, who are not fictions.
They’re real people and they’re separate and apart from the corporation. And
those people are in partnership with a third person. [¶] So it’s—they’re very
much joined at the hip, but it’s not that the corporation is also a partnership.
It’s that the corporate owners are in partnership with a third person.” (See
B.K.K. Co. v. Schultz (1970) 7 Cal.App.3d 786, 796 [an agreement among
three individuals that they would associate themselves in business for profit
and have equal ownership interests made them joint venturers or partners,
even though they contemplated eventual use of corporate form]; Headfirst
Baseball LLC v. Elwood (D.D.C. 2016) 168 F.Supp.3d 236, 244, fn. 5 [“[A]
reasonable jury could . . . find that the alleged partnership was in the
business of expanding whatever business [the initial LLC] operated.”]; but
see Eng v. Brown (2018) 21 Cal.App.5th 675, 694 [“An association organized
as another entity (e.g., a corporation) is not a partnership. (§ 16202,
subd. (b).) Absent unusual circumstances, this principle holds even if the
corporation began as a partnership.”].)
23
Jones acted with a subjective state of mind that warranted imposition of
attorney fees. Based upon its observations and credibility determinations,
the trial court specifically concluded it “does not find plaintiff Trevor Jones
acted arbitrarily, vexatiously, or not in good faith.” There was substantial
evidence supporting this conclusion.21
We reject Defendants’ claim that Jones’s actions were arbitrary “as a
matter of law” based on the trial court’s findings in the judgment, rather than
its findings following the hearing on Defendants’ fee request. The trial
court’s ruling on Defendants’ fee request is not inconsistent with its
conclusion that Jones failed to establish his claims by a preponderance of the
evidence at trial. Defendants contend Jones pursued an action which was
“ ‘unsupported by substantial evidence’ and/or ‘fair or substantial reason.’ ”
But as previously noted, a fee award under section 16701 is not mandatory.
Even if Jones’s claims objectively lacked legal merit and were clearly
erroneous, the trial court could exercise its discretion to conclude that—based
on its consideration of the totality of circumstances and the objective and
subjective statutory criteria in section 16701—a fee award was not justified
here. (See Summers v. City of Cathedral City (1990) 225 Cal.App.3d 1047,
1073 [“a trial court is entitled to infer from the utter lack of merit that the
21 The trial court did not find Jones engaged in any improprieties in the
case. Although the court concluded there was insufficient evidence that
Goodman and Thall signed the purported partnership agreement, the court
did not conclude the document was forged. The court noted that a
handwriting expert did not testify, although either party was able to present
such expert testimony, and concluded that Jones simply had not met his
burden of proof on this issue. There similarly was no other evidence that
Jones engaged in any acts of dishonesty or otherwise fraudulent conduct.
The parties participated in two mediation sessions, further demonstrating
their good faith efforts to reach a compromise, but were unable to resolve
their dispute without the trial court’s assistance.
24
party knew that it lacked such merit, and yet continued to pursue the action
for some ulterior motive . . . , but it is not mandatory that it do so”]; Indian
Springs v. Palm Desert Rent Review Bd. (1987) 193 Cal.App.3d 127, 137 [“An
erroneous interpretation of the law does not per se suggest that the action of
the public entity or an officer thereof was arbitrary or capricious.”]; Byrnes v.
Riles (1984) 157 Cal.App.3d 1170, 1182 [“The trial court’s ruling that certain
findings and determinations were not supported by the record does not, in
itself, constitute evidence of arbitrary and capricious conduct by the hearing
officer.”]; see also Guillemin v. Stein (2002) 104 Cal.App.4th 156, 168 [it was
an abuse of discretion to find a legal argument frivolous when it was at least
“arguable”]; Reis v. Biggs Unified School Dist. (2005) 126 Cal.App.4th 809,
823 [“ ‘ “Attorney’s fees may not be awarded [citation] simply because the
administrative entity or official’s action was erroneous, even if it was ‘clearly
erroneous.’ ” ’ ”].) After listening to all the evidence and arguments from both
sides, the trial court rejected Jones’s claims on the merits, but found that he
did not pursue them arbitrarily, vexatiously, or not in good faith.
In sum, we conclude the trial court did not abuse its discretion in
declining to grant discretionary attorney fees under section 16701,
subdivision (i). Jones’s claims lacked objective legal merit, but we cannot say
that no reasonable attorney would have pursued similar relief, and there is
substantial evidence in the record to support the trial court’s finding that
Jones’s subjective state of mind did not evince a lack of good faith.
IV.
Timeliness of Motion
“A notice of motion to claim attorney’s fees for services up to and
including the rendition of judgment in the trial court—including attorney’s
fees on an appeal before the rendition of judgment in the trial court—must be
25
served and filed within the time for filing a notice of appeal under rules 8.104
and 8.108 in an unlimited civil case . . . .” (Cal. Rules of Court,
rule 3.1702(b)(1).) The parties may stipulate to extend the time for filing the
motion. (Id., subd. (b)(2).) “For good cause, the trial judge may extend the
time for filing a motion for attorney’s fees in the absence of a stipulation . . . .”
(Id., subd. (d).) Under Rule 8.104, a notice of appeal must be filed within
60 days after the service of the notice of entry of judgment. (Cal. Rules of
Court, rule 8.104(a)(1)(B).)22
Defendants here served notice of entry of judgment on October 22,
2018, so time to appeal from this judgment expired on December 21, 2018,
60 days after service of the notice of entry of judgment. (Cal. Rules of Court,
rule 8.104(a)(1)(B).) Defendants filed their initial section 16701 fee motion
(seeking attorney fees only) on December 21, 2018, in compliance with
rule 3.1702(b)(1). (Highland Springs Conference & Training Center v. City of
Banning (2019) 42 Cal.App.5th 416, 429 [“Under rule 3.1702(b)(1), . . . fee
motions were required to be served and filed within 60 days after notice of
entry of the . . . judgment was served . . . .”].) However, Defendants filed
their amended motion (seeking both attorney and expert fees) on January 11,
2019—more than 60 days after notice of entry of the judgment was served.
The amended motion—which added a new request for expert fees on top of
the preexisting request for attorney fees—was untimely under California
Rules of Court, rule 3.1702(b)(1).
22 Rule 8.108, not applicable here, extends the time to appeal under
specified circumstances, for example, if any party files and serves a motion
for new trial, a motion to vacate judgment, a motion for judgment
notwithstanding the verdict, or a motion to reconsider. (Cal. Rules of Court,
rule 8.108(a)-(e).)
26
Defendants contend the trial court lacked authority to deny the
amended motion as untimely because they filed their initial motion within
the rule’s deadline, which is not jurisdictional; substantial compliance with
the rule is all that is required; and the amended motion should be deemed to
“relate back” to the initial motion, just as an amended pleading might relate
back to the filing of the original pleading.23 Defendants further contend
Jones waived any objection to the motion’s untimeliness by failing to raise
the issue, which would have caused Defendants’ counsel to explain why good
cause existed to allow the amendment. They claim that, rather than denying
the amended motion sua sponte, the court should have disregarded the added
request for expert fees and entertained the initial request for attorney fees
only.
Defendants’ arguments are not well taken. Their initial motion—which
sought only attorney fees—was timely filed. However, their amended
motion—which added a request for expert fees in addition to attorney fees—
was filed after the time provided in rule 3.1702(b)(1) expired. Recognizing
the late filing was not a jurisdictional bar to the motion’s consideration (Cal.
Rules of Court, rule 3.1702(d); see Haley v. Casa Del Rey Homeowners
Association (2007) 153 Cal.App.4th 863, 880 [recognizing that time
23 “Under the relation-back doctrine, an amendment relates back to the
original complaint if the amendment (1) rests on the same general set of
facts; (2) involves the same injury; and (3) refers to the same
instrumentality.” (Pointe San Diego Residential Community, L.P. v.
Procopio, Cory, Hargreaves & Savitch, LLP (2011) 195 Cal.App.4th 265, 276.)
A motion is not a complaint, or any other type of pleading. (Code Civ. Proc.,
§ 422.10 [“The pleadings allowed in civil actions are complaints, demurrers,
answers, and cross-complaints.”].) Defendants provide no authority for the
proposition that the relation-back doctrine applies to anything other than
pleadings.
27
limitations pertaining to a memorandum of costs are not jurisdictional]), the
court acknowledged that the amended motion was untimely filed, yet
nonetheless considered it on the merits.24 The order denying the motion
indicates the trial court “exercise[d] its discretion” and declined to find that
Jones “acted arbitrarily, vexatiously, or not in good faith.” (§ 16701,
subd. (i).) Thus, even assuming the trial court erred in finding the amended
motion was untimely, the assumed error was not prejudicial because the trial
court alternatively decided the motion on the merits. (Cal. Const., art. VI,
§ 13 [no reversal unless “error complained of has resulted in a miscarriage of
justice”].)
24 Defendants have failed to show the court made either an express or
implied finding that good cause justified the delay. (Cal. Rules of Court,
rule 3.1702(d).)
28
DISPOSITION
The order is affirmed. Respondent is entitled to his costs on appeal.
GUERRERO, J.
WE CONCUR:
HALLER, Acting P. J.
DATO, J.
29