Filed 3/2/18 Preferred Auto Dealers Self Insurance Program v. Anderson Enterprises CA1/4
NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR


PREFERRED AUTO DEALERS SELF INSURANCE PROGRAM, INC.,
Plaintiff and Appellant,
v.
ANDERSON ENTERPRISES, INC. et al.,
Defendants and Appellants.

A148518, A149294, A149446

(Contra Costa County
Super. Ct. No. MSC12-00902)



I. INTRODUCTION
These consolidated appeals pertain to the administration of a group self-insurance plan that secured the workers’ compensation liabilities of group members from 2003 until 2009. In late 2009, the Department of Industrial Relations (DIR) determined that this self-insured group (SIG) lacked sufficient assets to cover its liabilities and ordered the group self-insurer, Preferred Auto Dealers Self Insurance Program, Inc. (PADSIP), to take corrective action. In 2011, PADSIP resolved to raise funds by imposing an “assessment” on all former group members. After several former members refused to pay their invoices, PADSIP filed the underlying action for breach of contract.
Following a bench trial, the court found that PADSIP failed to prove that defendants breached a contract with PADSIP. In a post-judgment order, the trial court also denied motions by several defendants to recover attorney fees under Civil Code section 1717 and/or Code of Civil Procedure section 2033.420.
PADSIP appeals the judgment, contending the trial court mischaracterized the contractual rights and obligations of these parties and failed to give proper credit to the damages evidence. A set of defendants identified as the Anderson group appeal the post-judgment order, contending they are entitled to attorney fees under Civil Code section 1717 and Code of Civil Procedure section 2033.420. Finally, defendant Simi Management Corp. (Simi Management) filed a separate appeal, contending it is entitled to attorney fees under Civil Code section 1717. We affirm the judgment and post-judgment order.
II. WORKERS’ COMPENSATION SECURITY
These parties became affiliated in order to satisfy a statutory requirement that every employer (except the state) secure the payment of compensation. (Lab. Code, § 3700.) Therefore, we preface our review with a brief overview of this key component of California’s workers’ compensation system.
Section 3700 “establishes the duty of the private employer to provide compensation security by either (1) carrying insurance with an authorized company (subd. (a)) or (2) securing from the director [of the DIR] a certificate of consent to self-insure which may be furnished upon satisfactory proof of ability to self-insure and pay compensation that may become due (subd. (b)).” (Self-Insurers’ Security Fund v. Esis, Inc. (1988) 204 Cal.App.3d 1148, 1156, italics omitted.)
An employer electing to self-insure may secure a certificate to self-insure either as “an individual employer, or as one employer in a group of employers.” (§ 3700, subd. (b).) To obtain this certificate, the employer must post a security deposit sufficient to cover an estimate of future compensation plus claims administration costs for the following year. Each year, the employer must either renew the prior year’s security deposit or make a new deposit of security. (§ 3701, subd. (a); see generally, 2 Witkin, Summary of Cal. Law (11th ed. 2017) Workers Compensation, § 160, p. 994.) The self-insured employer must also file an annual report, providing information to enable the director to verify that the amount of the security deposit is sufficient to secure the employer’s workers’ compensation liability. (§ 3702.2.)
Employers “who have ceased to be self-insured employers” have a continuing obligation to secure “the payment of workers’ compensation that accrued during the period of self-insurance.” (§ 3702.8, subd. (a).) To meet this obligation, the employer must: continue to file annual reports as requested by the director (§ 3702.8, subd. (a)(1)); secure its “accrued liability for the payment of any workers’ compensation that may become due” by either posting a security deposit or obtaining a special excess insurance policy (§ 3702.8, subds. (a)(2) & (c)); and continue to make contributions to the Self-Insurers’ Security Fund for a specified period (§ 3702.8, subd. (a)(3)).
The DIR has broad authority to implement and administer the statutory requirement that employers secure the payment of compensation, which includes making rules and regulations. (§ 3702.10.) DIR regulations pertaining to self-insurance plans are set forth in title 8 of the California Code of Regulations (8 CCR). (Cal. Code Regs., tit. 8, § 15200, et seq.) These regulations are administered by the DIR’s Office of Self-Insurance Plans (OSIP). (Cal. Code Regs., tit. 8, § 15201.)
Several OSIP regulations address issues specific to group self-insurance, including, for example, the requirements for forming a group self-insurer as a private nonprofit corporation, the respective obligations of the group self-insurer and its members, and the termination of membership in a self-insured group. (Cal. Code Regs., tit. 8, § 15470, et seq.) Three regulations are particularly relevant to this appeal.
First, the board of trustees of a group self-insurer must take precautions to protect the assets of the SIG by appointing a third party group administrator “to administer the financial affairs and normal day-to-day operations of the group self insurer and ensure that there are no conflicts of interest or potential conflicts of interest involving the Board of Trustees, the Group Administrator, or any service providers utilized by the group self insurer . . . .” (Cal. Code Regs., tit. 8, § 15475, subd. (d)(1).)
Second, each member of a SIG must execute an “Indemnity Agreement and Power of Attorney Form,” that contains, in substance, five provisions. (Cal. Code Regs., tit. 8, § 15479.) The first provision must contain “(1) An agreement under which each member of a group self-insurer agrees to assume and discharge, jointly and severally, any compensation liability under Labor Code Section 3700–3705 of any and all other employers that are parties to the group self-insurer indemnity agreement.” (Cal. Code Regs., tit. 8, § 15479, subd. (b)(1).) The other four required provisions of the form are: (2) an agreement acknowledging that the group self-insurer and the DIR have independent rights to enforce the indemnity agreement, (3) a provision requiring that the group self-insurer appoint a group administrator with the power to accept service and act on behalf of the group self-insurer and the group members in all transactions arising out of the daily operations of the SIG, (4) an acknowledgement of the director’s authority to substitute a conservator for the group administrator, and (5) a provision granting the group member’s full power of attorney to the group administrator. (Cal. Code Regs., tit. 8, § 15479, subds. (b)(2)–(5).)
Third, each group member has a right to withdraw from the group “at the end of a program year after obtaining alternative coverage and providing written notice to the Group Administrator of its intent to voluntarily end its participation in the group self-insurer.” (Cal. Code Regs., tit. 8, § 15480, subd. (f).) After a member’s coverage is terminated, whether the termination is voluntary or involuntary, the SIG “shall remain liable for all compensation liabilities of the group member resulting from any claim with a date of injury during the period of membership in the group self-insurer,” and the terminated group member “shall remain responsible for all contributions and assessments for the period of membership in the private group self-insurer . . . .” (Cal. Code Regs., tit. 8, § 15480, subd. (b).)
With this regulatory scheme in mind, we turn to the facts of the present case.
III. BACKGROUND
A. PADSIP’s Lawsuit
In April 2012, PADSIP filed a judicial council form complaint against more than 50 named defendants and 100 doe defendants, seeking damages and attorney fees according to proof. In an attachment to the complaint, PADSIP alleged the following facts:
PADSIP operated as a group self-insurer from 2003 until early 2009, when it “discontinued providing coverage.” Each named defendant completed an application and was accepted as a group member of PADSIP. As part of the application process, each defendant executed “an ‘Indemnity and Power of Attorney’ agreement” pursuant to which it agreed to specific terms outlined in the CCR, including that it would “ ‘assume and discharge, jointly and severally, any compensation liability under Labor Code Section 3700–3705 of any and all other employers that are parties to the group self insurer indemnity agreement.’ ” In 2011, PADSIP “was compelled, by the State, to adopt a Corrective Action Plan or face conservatorship” because of “a shortfall in assets sufficient to discharge the workers compensation liabilities of members and to meet financial requirements” imposed by the DIR. In April 2011, PADSIP adopted a corrective action plan that called for a special assessment in the total amount of $8,897,499. PADSIP allocated the assessment among all “members in the program,” pursuant to its authority under the regulations to address shortfalls and remedy inequities by re-evaluating past contribution rates of group members. However, defendants either refused to pay any amount of the assessment, or made some but not all their monthly payments.
PADSIP incorporated these factual allegations into one cause of action alleged against all defendants for breach of a written contract. PADSIP did not attach a copy of the contract to its complaint, but it did attach a document listing the balance allegedly due from each defendant, which ranged from $4,388 to $410,094.
In November 2015, PADSIP filed a supplement to its complaint in which it alleged that it was “required to continue the assessment through 2014.” By the time this supplemental complaint was filed, 17 defendants remained in the case, and PADSIP provided updated numbers as to the amounts these defendants allegedly owed. For every remaining defendant, the amount was approximately double what PADSIP had claimed was due in the original complaint. The allegedly unpaid charges ranged from $14,015 to $440,657.
B. Trial Evidence
The parties stipulated to a court trial, which was held in November and December of 2015. From the trial evidence, we discern the following facts about PADSIP, group membership in PADSIP, and the special assessment that precipitated this litigation (hereafter, the 2011 assessment).
1. PADSIP
In December 2002, PADSIP was established as a private nonprofit mutual benefit corporation for the sole purpose of providing workers’ compensation insurance to its members. PADSIP’s bylaws state that participating employer members “contractually agree, in accordance with appropriate state laws, rules and regulations, to assume the workers’ compensation liabilities of each associated member,” and that “[a]ll members are deemed jointly and severally liable for all workers’ compensation obligations incurred by [PADSIP].” These bylaws also incorporate procedures for a member to voluntarily resign and terminate membership in the SIG.
In May 2003, PADSIP applied to the DIR for a certificate of consent to self-insure workers’ compensation liabilities as a group self-insurer for “new auto dealers.” At that time, PADSIP had 12 proposed member employers, reported that its plan would cover 859 employees, and anticipated that the number of covered employees would increase by 7,000 within the next year.
In September 2003, PADSIP secured a certificate of consent to self-insure and began operation as a group self-insurer. MATRIX Absence Management Inc. served as PADSIP’s third-party administrator, responsible for administering workers’ compensation claims by employees of the group members. Compensation Risk Mangers (CRM) was retained as the group administrator, to administer the financial affairs and normal day-to-day operations of the SIG.
On January 8, 2009, PADSIP notified the DIR of its intention to cease operations and requested cancellation of its certificate of consent to self-insure. In a notice to members explaining this decision, PADSIP stated that the carrier that posted its security in the past was no longer providing the type of bond PADSIP needed, and it was unlikely PADSIP could find a replacement security.
On March 1, 2009, PADSIP terminated its policies, and its members obtained coverage elsewhere. However, the program continued to operate in order to administer and pay outstanding workers’ compensation claims.
2. Membership
Each trial defendant was a group member of PADSIP for some period less than the entire period that PADSIP offered group coverage for workers’ compensation. For example, Anderson Enterprises, Inc. was a group member from January 1, 2004 to January 1, 2006, while Simi Management was a member from January 1, 2005 to August 28, 2007.
When defendants became group members of PADSIP, they executed two documents: (1) a form that was captioned as an “Indemnity Agreement and Power of Attorney” in the “Matter of the Certificate of [PADSIP] A Group Self Insurer” (the PADSIP indemnity document), and (2) a “Resolution of Joint and Several Liabilities” (the member resolution).
The PADSIP indemnity document was designed to conform to the requirements of 8 CCR section 14579. Thus, for example, it contains a statement acknowledging the joint and several liability of the group self-insurer and its group members for the worker’s compensation liabilities of the SIG and its group members. The member resolution that was executed by PADSIP group members contains an additional set of acknowledgments, including that the group member reviewed the PADSIP indemnity document, which “pledges” the group member “as jointly and severally liable for the workers’ compensation liabilities of all group members.”
3. The 2011 Assessment
In September 2009, the DIR determined that PADSIP’s liabilities exceeded its assets, a fact that PADSIP failed to self report. The Chief of OSIP, James Ware, sent a letter to CRM demanding that PADSIP submit a proposed plan to correct the deficiency within 10 days. CRM submitted a proposed corrective action plan, which OSIP approved. But that plan was never implemented.
In early 2011, PADSIP retained Affinity Group Administrators (Affinity) to replace CRM as its group administrator. Affinity quickly concluded that PADSIP’s deficit was attributable to mismanagement by CRM, and it retained James Marta, an accountant with expertise in group insurance matters, to evaluate the financial condition of the program. (RT 85, 377, 421)~
Meanwhile, in February 2011, Chief Ware sent PADSIP another demand for a corrective action plan. In his demand letter, Ware stated that PADSIP’s program was “perilously low on cash to fund claims,” and demanded a board approved “deficit reduction plan” addressing specific matters that concerned the OSIP. For example, Ware advised that PADSIP was required to submit a program year accounting that broke down financial data on a yearly basis and included “an allocation of shortfalls or excess funds by participating member in each year.”
By mid-April 2011, Affinity had received CRM’s files for the PADSIP program, which included boxes of payment files, individual files for each member (sometimes referred to as underwriting files), and whatever “claims information that CRM had.” According to Affinity President Clay Jackson, “a lot of their files that might have indicated that [CRM] had done anything wrong were suspiciously missing.” The available information led Affinity to conclude that CRM had consistently underfunded PADSIP’s plan, and that it also gave group members improper discounts and rebates. Affinity determined that PADSIP needed an influx of additional funds to correct its plan deficit.
James Marta testified that he “designed” a plan for PADSIP, which required it to obtain additional funding of $8,897,449 to cover the SIG’s deficit, and $3,675,998 to increase the SIG’s security deposit. Marta based these calculations on numbers pulled from PADSIP financial statements, notwithstanding his concerns about their accuracy. Marta’s analysis did not include consideration of when during the period of PADSIP’s operation the deficit(s) were incurred because accounting data specific to any program year was not available. Marta testified that completing a program year accounting is standard practice for SIGs in California, and that Affinity gathered data to start a program year accounting for PADSIP, but that analysis was never completed.
Affinity recommended that PADSIP fund its corrective action plan by requiring all former group members to pay a special assessment. According to the trial evidence, there are two recognized methods for allocating an assessment among members of a SIG. The “silo” method requires calculating the group’s deficit for each program year and then charging each member a portion of that deficit based on the member’s contribution for that program year. By contrast, an “aggregated” method (sometimes referred to as a “programmatic” method), charges each member a percentage of the total assessment that corresponds to its pro rata contribution to the SIG.
One consequence of using the aggregated method to allocate an assessment among employers who were members of the SIG during different time periods is that a member or former member could be charged for a deficit that occurred during a year that it was not a member of the SIG. Nevertheless, Affinity recommended using the aggregated method in this case. Affinity created a spreadsheet to document how it planned to allocate the 2011 assessment. At trial, Clay Jackson testified that the spreadsheet listed every former member of the SIG, and the total dollar value of contributions that member had made. Affinity added all the contribution figures together and calculated a percentage for each member, which became that member’s “percentage of the whole.” Then Affinity used that percentage to calculate the member’s share of the proposed assessment.
On April 22, 2011, PADSIP passed a resolution to adopt a “Corrective Action Plan . . . to assess the Members of PADSIP, in regular monthly amounts, to satisfy the deficits, by a date certain, following the approval of the Plan by DIR-OSIP.” PADSIP’s board resolved that the “assessment component” of the plan “will assess each PADSIP Member a monthly assessment, based on each Member’s share of total prior contributions to PADSIP, so that the total monthly assessments equal $646,899 to fund the Plan until the full amount of the deficit in the PADSIP financial statements and security deposit are paid and approved by DIR-OSIP.”
On April 22, 2011, Clay Jackson sent a letter to Chief Ware outlining the “Specifics” of PADSIP’s corrective action plan, which included the following measures: “PADSIP will implement the Plan set forth in the Resolution and assess its Members a total of $8,897,449, over an eighteen (18) month period, with monthly installments of $646,899. This is in addition to funding an additional $500,000 toward the Security Deposit, which amount will be paid in the Liberty Mutual Bond, in the amount of $6,505,282, that is currently in effect.”
In his April 22, 2011 letter, Jackson stated that Affinity would provide OSIP with financial analyses and reports supporting the proposed plan, which would include a “Program year accounting for each year of operations evaluated at the end of each year, which will include an allocation of shortfalls or excess funds, by participant member, in each year.” Jackson requested that the DIR approve PADSIP’s plan so that Affinity could begin implementing it.
The first time Ware reviewed PADSIP’s proposed plan, he did not have a substantive objection to it, but he did advise Affinity that additional materials needed to be submitted. At trial, Ware could not recall having any discussion with Affinity about the method that “PADSIP was going to use to collect from members[.]” Ware recalled that he was “generally aware” that PADSIP intended to “spread back the assessment to members based on their total contributions for all years,” and confirmed that was an “acceptable” method. The only concern about that approach that Ware recalled discussing with Affinity was that some of the employers were no longer in business.
Ware testified that when he reviewed a corrective action plan in his capacity as Chief of OSIP, “the main thing [he] gave consideration to was that the assessment would collect sufficient funds.” “After that,” he also wanted to be sure that the assessment was fair and that it concurred with the regulations. When Ware reviewed PADSIP’s proposed plan, he believed that it complied with the regulations.
On May 31, 2011, Jackson sent Ware an e-mail in which he stated that PADSIP had scheduled a board meeting for later that day, and “need[ed] to know” whether the DIR approved PADSIP’s plan. Ware received this e-mail after he had been given notice that he was going to be replaced as Chief of OSIP. Ware felt as though he was a “lame duck” and could not take any further official action. Accordingly, Ware responded to Jackson’s e-mail by advising that he could not approve the plan prior to the PADSIP board meeting, but he would discuss the matter with his replacement, Jon Wroten. Ware also stated: “I recommend to the board that they take action to correct the deficit regardless of our approval.”
On June 1, 2011, the DIR imposed a penalty on PADSIP for failing to maintain the required level of security deposit to cover its estimated liabilities. On June 8, 2011, Jackson sent an e-mail to Ware objecting to the penalty. Jackson also stated that PADSIP was “moving forward” with its corrective action plan based on Ware’s “provisional approval,” as communicated to Jackson during a conversation the previous day. At trial, Ware confirmed that he did give Affinity his verbal provisional approval of the 2011 corrective action plan, after consulting with Jon Wroten.
4. Allocation of the 2011 Assessment
At trial, James Marta testified as a percipient witness and an accounting expert. Marta testified that in developing a funding plan to address PADSIP’s deficit, he started from the premise that all former group members were jointly and severally responsible, explaining that “[i]t can go basically to all the members or it can go to any individual, but they are all jointly and severally responsible.” Despite this premise, Marta did not recommend using an aggregated method rather than a silo method to allocate the 2011 assessment. Rather, he discussed the pertinent factors with Affinity’s Chief Financial Officer Gene Axtell, who made the decision to use an aggregated method.
Axtell testified that the PADSIP financial records that were delivered to Affinity when it took over for CRM were “very limited.” He would like to have received “a complete electronic accounting” for the plan that could “easily translate into [Affinity’s] accounting system,” but CRM did not provide that information to Affinity. Axtell also testified that the PADSIP files Affinity had did not include a “separate record . . . showing amounts paid by individual member[s],” and Axtell admitted that there was no way for Affinity to calculate those contributions because it did not have the records. Therefore, Affinity “didn’t go to the member level to determine what was actually paid.”
Instead, Affinity used what Axtell called “quote sheets” as the starting point for allocating the assessment. Axtell described the quote sheet as a document presented to each member every year that the member was in the program, which outlined the member’s estimated payroll and estimated contribution for that year. Axtell testified that the quote sheets were “fairly consistently available in the files, although in many of the files there were two or three versions of those sheets.” For some members, Affinity had and used additional data, such as payroll summaries, audit billings, and audit “worksheet[s].” In other instances, there was only one file for several group members who joined the SIG as affiliates. In these cases, Axtell used the available data to calculate one contribution figure for that subgroup. Also, Affinity received “outside information beyond what was in the agency underwriting files” in cases in which it was “unclear in the file what was going on.”
On July 1, 2011, PADSIP began issuing monthly invoices to former group members in order to collect the 2011 assessment. After the first set of invoices were issued, some members produced additional information, which Affinity took “under advisement,” and, if the information was credible, Affinity made additions or changes to the member’s invoices.
In 2012, 2014, and 2015, the PADSIP board resolved to continue imposing the 2011 assessment in the form of monthly charges to all former group members due to ongoing liabilities.
At trial, PADSIP presented evidence of the invoices issued to each trial defendant in connection with the 2011 assessment, and the amounts that were not paid and are allegedly due. Those amounts ranged from $114,959 (Anderson Enterprises, Inc.) to $440,657 (Putnam Automotive, Inc. and affiliates).
C. The Statement of Decision and Judgment
On December 22, 2015, the trial court heard argument and announced a detailed tentative decision to enter judgment against PADSIP. The court directed counsel for defendants facing the largest assessments to prepare a proposed statement of decision. On March 24, 2016, the court filed a final statement of decision, which set forth findings on nine issues.
First, PADSIP claimed that its contract with each defendant consisted of the PADSIP indemnity document and the member resolution that each group member executed when it joined the SIG. The court disagreed, finding that the member resolution was not a contract, and that the PADSIP indemnity document “defines the obligations of the former PADSIP members, including defendants herein.”
Second, PADSIP claimed that it had the contractual right to assess former members for liabilities “arising from any program year, including liabilities from program years in which a member had not been a participant . . . .” The court found that PADSIP failed to prove this claim. Rather, the PADSIP indemnity document provided that each member of the SIG was jointly and severally liable “only for compensation liabilities that arise from occurrences during the program years in which they participate as a member.” The court also found the extrinsic evidence was consistent with this conclusion.
Third, PADSIP contended that it acted within its authority by using an “aggregated assessment method” to calculate each defendant’s joint and several liability for shortfalls in the fund. The court rejected this contention, finding that PADSIP was required to assess members “by what the parties during trial referred to as ‘siloing’ claims by program year and that such siloing claims requires program year accounting.”
Fourth, PADSIP claimed that the DIR authorized PADSIP to use an aggregated assessment method to calculate defendants’ joint and several liability in this case. The court found that former Chief Ware approved the corrective action plan PADSIP proposed in 2011, but he did not approve PADSIP’s assessment method.
Fifth, PADSIP argued that the unpaid portion of the 2011 assessment constituted damages resulting from the defendants’ breach of contract. The court found that PADSIP failed to provide admissible evidence of these alleged damages in that (1) there was no evidence establishing the total contribution amount that PADSIP sought to recover from former members, (2) the documents PADSIP used to calculate the defendants’ shares of the 2011 assessment were inadmissible hearsay, and (3) PADSIP made arithmetical errors when calculating the contribution amounts assigned to at least two defendants, and therefore those demands were wrong even under PADSIP’s methodology.
Sixth, the court found that even if there was actual damage, the amount of damage was not reasonably ascertainable because PADSIP failed to establish that there was a reasonable basis for its accounting method and/or damages calculations.
Seventh, defendants claimed that PADSIP failed to establish that it performed its contractual obligations to them. The court disagreed, finding that the evidence showed that workers’ compensation claims were paid, and that PADSIP was now in a position to refund surplus funds to its former members.
Eighth, defendants claimed that any future calculation of their outstanding liabilities must include a credit for overpayments made by former members who actually paid their invoices relating to the 2011 assessment. The trial court found that this claim was not supported by law, and was also factually unreasonable in that it would encourage group members to avoid payment obligations for as long as possible.
Finally, the trial court refused to make any finding regarding the propriety of future assessments, stating: “The Court expresses no opinion on whether PADSIP may prepare proper assessments and demand payment. The Court does not say PADSIP has that right, nor that PADSIP does not have that right. This Court is not deciding these Defendants are free from any assessment; just that PADSIP is not entitled to recover the assessment that is sought here.”
On March 24, 2016, the trial court filed a judgment after court trial, ordering that PADSIP “shall take nothing from Defendants in this action,” and that claims for post judgment attorney fees would be addressed via post judgment motions. That same day, an electronic notification service gave the parties e-mail notice of entry of judgment.
D. Attorney Fees
On March 12, 2016, the Anderson group filed a motion to recover attorney fees and costs under Code of Civil Procedure section 2033.420. On May 26, 2016, the Anderson group filed a separate motion to recover attorney fees and costs under Civil Code section 1717. On May 26, 2016, Simi Management filed a separate motion to recover its attorney fees under Civil Code section 1717.
On July 14, 2016, the court held a hearing on “defendants’ various motions for attorney fees and costs,” and then took the matters under submission. On July 20, 2016, the court filed an order denying all of the attorney fee motions.
IV. APPEAL FROM THE JUDGMENT
A. Issues Presented
PADSIP contends that “[t]he primary issue in this appeal is whether a SIG in crisis . . . is allowed under the regulations and state-mandated form contract to assess all members for the deficit, on a pro rata formula, based on all contributions made during the life of the SIG.” We disagree with this contention for two related reasons.
First, we do not need to determine the limits of PADSIP’s authority under the regulations because these appeals arise out of the trial of a private lawsuit for breach of contract. The regulatory scheme implementing California’s workers’ compensation law is relevant to the extent that the alleged contract was mandated by that scheme. However, our review is limited to the trial court’s findings that PADSIP failed to prove its cause of action for breach of contract.
Second, PADSIP confuses the facts by referring to its former group members as interchangeable group members. When PADSIP implemented the 2011 assessment, the defendants were not group members of a SIG. They were former members, each of whom joined and terminated their membership at different times. If PADSIP’s membership role had been constant throughout the period it operated as a SIG, this would be a very different case.
Thus, the issue presented by this appeal is not whether PADSIP had the authority under the regulatory scheme to use an assessment like the 2011 assessment to correct its plan deficits, but whether defendants breached a contractual obligation by refusing to pay the invoices implementing the 2011 assessment pursuant to the “aggregated” method that Affinity used to allocate responsibility for the program deficit to the former group members. With these clarifications, we turn to PADSIP’s claims of error.
B. The Joint and Several Liability Theory
PADSIP contends that the trial court committed an error of law by rejecting PADSIP’s theory that defendants are jointly and severally liable for all of PADSIP’s workers’ compensation liabilities, no matter when those liabilities were incurred. This ruling was significant because it deprived PADSIP of its primary justification for using the aggregated method to allocate the 2011 assessment among all former members of PADSIP without having to demonstrate how or when the deficit(s) occurred.
The crux of PADSIP’s appellate argument is that the trial court misinterpreted the PADSIP indemnity document. “We review issues of contract interpretation de novo unless there is an issue on which extrinsic evidence was properly admitted and there is a conflict in that evidence, in which case we review the trial court’s interpretation under the substantial evidence standard. [Citation.]” (Taylor v. Nu Digital Marketing, Inc. (2016) 245 Cal.App.4th 283, 288.)
1. Background—The PADSIP Indemnity Document
The PADSIP indemnity document was executed by only one party, the individual employer applying for group membership. But the document stated that both the applicant for group membership and PADSIP acknowledged and agreed that the issuance of their respective certificates to self-insure by the DIR was subject to several conditions. Those conditions were set forth under separately numbered provisions of the PADSIP indemnity document.
Provision I stated: “I. The Group Self Insurer and each of its Group Members are jointly and severally liable for paying and securing liabilities of the Group Self Insurer and its Group Members for the payment of any and all compensation liability required by Labor Code Sections 3700 through 3705 of any and all employees of any Group Member of the Group Self Insurer and/or of the Group Self Insurer itself, provided the compensation liability results from an occurrence with a date of injury during the period of membership in said Group Self Insurer[.]”
Provision II of the PADSIP indemnity document stated that PADSIP “shall have authority to enforce this Indemnity Agreement against each and every one of its Group Members or former Group Members.” Provision II further provided that the DIR had an independent right to enforce the indemnity agreement “against any and all of the Group Members or former Group Members for the payment of all compensation liabilities, and all liabilities of the Group Members for any delinquent contribution and/or assessments[.]”
The remaining provisions in the PADSIP indemnity document contained acknowledgements of the following: a requirement that PADSIP’s board appoint a group administrator with power to accept process and act on behalf of the SIG and its members with respect to daily operations; a requirement that PADSIP provide the OSIP with notice of any change in the identity of the group administrator; an acknowledgment of the DIR’s authority to appoint a conservator to act in place of the group administrator in specified circumstances; and an acknowledgment that the group administrator “shall act as the true and lawful attorney-in-fact” of the SIG and its members.
2. Analysis
PADSIP’s trial theory was that provision I quoted above constitutes an unqualified agreement that each defendant is jointly and severally liable for all workers’ compensation liabilities incurred by the SIG. The trial court found that the joint and several liability obligation described in this provision was limited to compensation liabilities incurred while the defendant was a group member of the SIG.
These two interpretations of provision I stem from a disagreement about the meaning of the last clause of the provision, which states: “provided the compensation liability results from an occurrence with a date of injury during the period of membership” in the SIG. The trial court found that “this language means that a member may be jointly and severally liable, but only for compensation liabilities that arise from occurrences during the program years in which they participate as a member.” By contrast, PADSIP contends that the function of this language is to clarify the meaning of a covered claim, i.e., to confirm that the SIG only covered claims by employees who were injured while their employer was a member of the SIG. Under PADSIP’s interpretation, this clause limits the overall liability of the SIG (by limiting coverage to claims of employees who were injured while their employer was a group member), but it does not limit in any way the group member’s obligation to be jointly and severally liable for all compensation liabilities incurred by the SIG.
Preliminarily, it is important to clarify that provision I does not constitute a contract between the group member and the SIG. Rather, it constitutes an acknowledgment by both of them that the DIR issued their self-insurance certificates in consideration of their respective agreements to be jointly and severally liable for the workers’ compensation liabilities of their group. Importantly, provision II also contains a relevant acknowledgment, i.e., that the group self-insurer has the authority to enforce the member’s liability obligation. Thus, the PADSIP indemnity document is evidence that group members of PADSIP agreed to be jointly and severally liable for the workers’ compensation liabilities of other group members, and that PADSIP may enforce this agreement.
We agree with the trial court’s interpretation of provision I. In reaching our conclusion we are not persuaded that the agreement referenced in this document holds each former group member jointly and severally liable for all of PADSIP’s workers’ compensation liabilities. The language of the final clause of provision I is not ambiguous —it defines a compensation liability as an injury incurred by an employee of a group member. However, we find nothing in the language of provision I that indicates this definition of a compensation liability applies only to the overall liabilities of the SIG and thus does not also define the scope of the liability obligations of each member. By the same token, even if we accept PADSIP’s contention that the final clause of provision I was not intended to apply to group members, the other language in provision I describing the group members’ joint and several liability agreement does not state that a former group member is jointly and severally liable for compensation liabilities incurred by the SIG during periods when the former member was not a group member.
Furthermore, PADSIP’s interpretation of provision I fails to account for the fact that this provision constitutes an acknowledgement of an obligation that the group member assumed by accepting a certificate to self-insure. On appeal, PADSIP concedes that the agreement described in provision I is the same agreement required by the regulations. However, it ignores language in those regulations that restricts the scope of a former member’s joint and several liability.
Our conclusion also is consistent with regulatory law. As noted earlier, 8 CCR section 15470 requires that group members of a SIG agree to be jointly and severally liable for the compensation liabilities of other group members, but it does not directly address the obligations of former group members. This issue is addressed in the Labor Code, which provides that a self-insured employer has the statutory right to cease to be a self-insured employer, although it must continue to secure compensation liabilities that accrued during “the period of self-insurance.” (§ 3702.8, subd. (a), italics added.) Furthermore, this right to terminate self-insured status and thereby cap one’s obligations as a self-insurer does not disappear if the employer is a member of a SIG. In that situation, both the terminating member and the SIG itself retain parallel ongoing but limited obligations. (Cal. Code Regs., tit. 8, § 15480, subd. (b).) The SIG remains liable for compensation liabilities of the member with respect to injuries that occurred during the period of membership, and the former member remains liable for “all contributions and assessments for the period of membership” in the SIG. (Ibid.)
PADSIP insists these provisions do not limit a group member’s joint and several liability to the period of membership without actually explaining why this is so. It does contend, however, that the OSIP agreed with its interpretation, and it argues that this court must defer to the agency’s interpretation of its own regulations. (Citing In re Cabrera (2012) 55 Cal.4th 683, 688.)
OSIP’s Chief, Jon Wroten, testified that the regulations impose joint and several liability on a group member of a SIG for compensation liabilities that accrued during the program years that the member participated in the SIG, but not for years that the member did not participate in the program. Former Chief Ware also testified that when he was chief, the agency’s position was that a group member’s joint and several liability was limited to the period of membership. Thus, our analysis is consistent with OSIP’s interpretation of its own regulations.
Considering all these circumstances, we conclude that the agreement described and acknowledged in the PADSIP indemnity document holds the group member jointly and severally liable for workers’ compensation liabilities incurred by the SIG during the period that the group member is a member of the SIG. This conclusion is consistent with both the text of the PADSIP indemnity document and the pertinent regulations. Thus, the trial court did not commit an error of law by rejecting PADSIP’s claim that defendants agreed to be jointly and severally liable for all workers’ compensation liabilities incurred by the SIG, regardless when those liabilities were incurred.
C. PADSIP’s Alternative Theory
1. Issue Presented
PADSIP contends that even if defendants did not agree to be liable for workers’ compensation liabilities that were incurred outside their membership term, they had a contractual obligation to pay the invoices because the method that Affinity used to allocate the 2011 assessment was authorized by 8 CCR section 15477.
As support for this theory, PADSIP relies on provisions in its bylaws that (1) authorize PADSIP to collect and receive money and property “due to” PADSIP, and (2) authorize the group administrator to “collect all applicable group member payments, contributions, and assessments,” and to “determine and bill for all appropriate expenses, all security deposit costs, all applicable assessments or taxes, all financial audit and actuary expenses, and claims administration fees incurred by the Group.” PADSIP interprets these provision as an agreement that defendants will pay all legitimate fees and charges associated with the operation of the SIG. Thus, PADSIP contends that it proved that defendants have a contractual obligation to pay the specific charges allocated to them because the allocation method that Affinity used was authorized by law.
2. Background—8 CCR Section 15477
8 CCR section 15477 is titled “Surplus or Insufficient Funding.” Subdivision (a) is not relevant here as it addresses options available to a group self-insurer that collected “surplus contributions . . . in excess of the amount necessary to fund all obligations for any given program year.” PADSIP relies on subdivision (b) of this regulation (Cal. Code Regs., tit. 8, §15477, subd. (b)), which addresses the situation when a SIG does not have sufficient assets to fund its estimated future liabilities and expenses.
8 CCR section 15477, subdivision (b) states: “If at the end of any program year member funds collected and investment income associated with any program year are insufficient to completely fund all estimated future claim liabilities and expenses at the required confidence level for any program year, unfunded amounts by program year shall be immediately reported to the Chief, along with a proposed plan to achieve correction of the deficiency. Any plan to correct the deficiency shall be subject to approval by the Chief. The plan may include, but is not limited to, any or all of the following:
“(1) Reallocation of surplus group self insurer funds collected in other program years that are unnecessary for the payment of claims or expenses for the program year collected;
“(2) Reallocation of investment earnings associated with other program years that are not necessary for the payment of claims or expenses in the program year in which the earnings are associated;
“(3) One or more special assessments of all group self insurer members participating in the program year or years in which the deficiency exists to make up the funding insufficiency;
“(4) Re-evaluation of past group member contribution rates and the projected plan for future contributions from members to properly collect past rating shortfalls, and/or a revised current and future contribution rating plan for group members for any period of time necessary to correct past and present rate inequities.
“(5) Prohibition of the addition of new members into the group; suspension of any distribution of over-collected contributions or assessments and any earnings on investments; or, the immediate collection of all assessments or any portion of such assessments until the group self insurer is deemed by the Chief to be adequately capitalized in accordance with this section;
“(6) An examination and restructuring of the group self insurer's operations, contracts with vendors, and finances by an outside qualified professional acceptable to the Chief;
“(7) Any other action the Chief may determine appropriate to promptly correct the group’s funding deficiency.”
3. Analysis
PADSIP contends that 8 CCR section 15477, subdivision (b) “govern[s] the legal issue in this case” because it establishes that PADSIP had broad authority to choose among multiple options to correct its deficit, and that PADSIP properly exercised that authority by using the 2011 assessment to adjust retroactively the rates previously charged to former members in accordance with 8 CCR section 15477, subdivision (b)(4). Thus, PADSIP posits that 8 CCR section 15477, subdivision (b)(4) “provides an independent basis for the assessment method adopted here.” We reject this argument for at least three reasons.
First, PADSIP cannot invoke 8 CCR section 15477, subdivision (b) absent proof that it complied with its own obligations under that regulation. As best we can determine, PADSIP did not comply because it did not make a determination at the end of each program year as to whether its assets were sufficient to “completely fund all estimated future claim liabilities and expenses” for that program year, “immediately” report unfunded amounts to the Chief of OSIP, or “immediately” propose a plan to correct that deficiency. (Cal. Code Regs., tit. 8, § 15477, subd. (b).)
Second, 8 CCR section 15477, subdivision (b)(4) does not expressly or implicitly expand a group member’s liability to include workers’ compensation claims that accrued outside the membership period. Thus, this provision did not authorize PADSIP to retroactively adjust past contribution rates to hold former members responsible for liabilities they did not actually have.
Third, the method Affinity used to allocate the 2011 assessment conflicts with 8 CCR section 15477, subdivision (b)(3), which authorizes imposing “special assessments of all group self insurer members participating in the program year or years in which the deficiency exists to make up the funding insufficiency.” The record evidence suggests that PADSIP was unable to implement this corrective measure because it did not estimate its overall compensation liabilities at the end of each program year in violation of its own obligations under 8 CCR section 15477, subdivision (b).
PADSIP insists that the 2011 assessment was a retroactive adjustment of each former group member’s actual liabilities. It explains that the trial evidence demonstrated that this adjustment was necessary for two reasons. First, workers’ compensation liabilities are by nature fluid and unpredictable. Second, in this particular case, an across-the-board adjustment was necessary due to the endemic mismanagement of the program by PADSIP’s former group administrator.
Even if PADSIP could prove that CRM’s mismanagement was the source of the deficit addressed by the 2011 corrective action plan, that does not prove that defendants are liable for breach of contract. The pertinent factual issue is whether PADSIP actually undertook the re-evaluation necessary to make a retroactive adjustment of the past contribution rates under 8 CCR section 15477, subdivision (b)(4). Here, the trial court found that “[t]here is no evidence that a reevaluation of past group member contribution rates was done.” As the court explained, “[n]o one looked at the contribution rates to see if they were sufficient in the years assesses. The . . . assessment made by PADSIP was simply a cut through the problem, whether accurate or not, to charge everyone who had ever been a member without regard to whether the contribution rates were adequate during the period of their membership. Mr. Jackson called this a programmatic assessment. Neither he nor anybody else testified that it was a reevaluation of past contribution rates.”
PADSIP does not challenge the sufficiency of the evidence supporting these findings of fact. Therefore, we need not and do not decide whether mismanagement by a group administrator could justify a retroactive adjustment of past contribution rates over the life of a group self-insurance program.
Taking a different tack, PADSIP contends that its allocation method was authorized under 8 CCR section 15477, subdivision (b)(7) as an action that former Chief Ware determined was “appropriate to promptly correct the group’s funding deficiency.” Again though, the trier of fact concluded otherwise. Specifically, the court found that PADSIP’s 2011 corrective action plan “was approved by the DIR but that such approval did not include scrutiny of the assessment method.” PADSIP disputes this finding but the trial evidence summarized above substantially supports it.
For all of these reasons, we affirm the trial court’s finding that PADSIP failed to prove that the method of allocation Affinity used to implement the 2011 assessment was authorized by 8 CCR section 15477, subdivision (b).
D. Damages
Finally, PADSIP challenges the trial court’s finding that it failed to prove damages with reasonable certainty. According to PADSIP, the data Affinity used to allocate the 2011 assessment among the former group members is proof of PADSIP’s damages.
1. Background
At trial, James Marta testified about the formulas Affinity used to calculate the amount PADSIP needed to fund its corrective action plan. But Marta did not participate in the allocation of the 2011 assessment among former group members. As discussed above, that task fell to Affinity’s Chief Financial Officer Gene Axtell. The data Axtell used to calculate the contribution rates that he assigned to each member was compiled in a binder that was offered into evidence at trial as Exhibit 61. Defendants objected that this evidence was hearsay and PADSIP failed to establish that the business record exception to the hearsay rule applied. The trial court ruled that it would admit Exhibit 61 for “a very limited purpose which is simply to evidence what Mr. Axtell used.” But the court explicitly stated that “I’m not accepting it for the truth of any of the information. I’m not accepting it to validate any of the information in the spreadsheet.”
2. Analysis
PADSIP contends that the “quote sheets” Affinity used to allocate the 2011 assessment constitute reasonable proof of the damages caused by defendants’ breach of their obligation to pay the assessment. As support for this argument, PADSIP invokes the principle that “[w]here the fact of damages is certain, the amount of damages need not be calculated with absolute certainty. [Citations.]” (GHK Associates v. Mayer Group, Inc. (1990) 224 Cal.App.3d 856, 873, italics omitted.)
“ ‘To be entitled to damages for breach of contract, a plaintiff must plead and prove (1) a contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach, and (4) damage to plaintiff. [Citations.]’ [Citation.] Implicit in the element of damage is that the defendant’s breach caused the plaintiff's damage.” (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1352, italics omitted.) Here, PADSIP’s failure to establish that defendants’ failure to pay the invoices constituted a breach of contract precludes PADSIP from using those unpaid charges to establish the damages element of its breach of contract claim.
Furthermore, even if PADSIP had proved the other elements of its breach of contract claim, it did not prove each member was actually charged a percentage of the total assessment that corresponded to its pro rata contribution to the SIG over the six-year period of the plan’s operation. As discussed, the documentary evidence PADSIP offered to prove this fact was not admitted for its truth because the records were hearsay and PADSIP did not attempt to demonstrate that the business record exception to the hearsay rule applied. PADSIP did not object to this hearsay ruling in the trial court. Nor does it challenge that ruling in its appellate briefs.
PADSIP argues that it was not required to show that the documents Affinity used to allocate the 2011 assessment constituted business records because the defendants’ obligation to pay the assessment did not derive from the documents themselves, but rather from the regulations requiring PADSIP to impose and collect an assessment in order to correct its plan deficit. This is a private breach of contract action, not a proceeding before the DIR. The theory PADSIP attempted to prove at trial was that defendants breached a contractual obligation to pay a part of the 2011 assessment that reflected their pro rata contributions over the life of plan. To establish the damages element of this theory, PADSIP had to prove that Affinity actually used that formula to allocate the assessment. PADSIP failed to establish this element of its claim because the data Affinity used to calculate each member’s bill was not admitted into evidence at trial.
V. ATTORNEY FEES
A. Code of Civil Procedure Section 2033.420
The Anderson group of defendants appeals from the post-judgment order denying them attorney fees under section 2033.420 of the Code of Civil Procedure (CCP section 2033.420), which permits a party to recover costs incurred to prove a matter that should have been admitted during discovery.
1. Background
During discovery, defendant Putnam Automotive, Inc. (Putnam) served a request for admissions on PADSIP, which included the following specific requests:
“REQUEST NO. 7: [¶] Admit that [Putnam] has no contractual obligation to pay for COMPENSATION LIABILITIES of any other MEMBER, incurred during a time period when [Putnam] was not a MEMBER.
“REQUEST NO. 8: [¶] Admit that [Putnam] has no liability for COMPENSATION LIABILITIES of any other MEMBER, incurred during a time period when [Putnam] was not a MEMBER.
“[¶] . . . [¶]
“REQUEST NO. 11: [¶] Admit that Section II of the ‘INDEMNITY AGREEMENT’ does not authorize YOU to assess [Putnam] for COMPENSATION LIABILITIES resulting from an occurrence date with a date of injury during a time period when [Putnam] was not a MEMBER.”
PADSIP denied each of these requests.
After judgment was entered in favor of defendants, Putnam and other members of the Anderson group filed a motion for attorney fees under section 2033.420, which states in part: “(a) If a party fails to admit the . . . truth of any matter when requested to do so under this chapter, and if the party requesting that admission thereafter proves the . . . truth of that matter, the party requesting the admission may move the court for an order requiring the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney’s fees.”
The trial court denied the Anderson group’s CCP section 2033.420 motion because it found that PADSIP had a reasonable ground to believe that it would prevail on the issues addressed in the Putnam requests for admissions when it denied them. (Code Civ. Proc., § 2033.420, subd. (b)(3).)
2. Analysis
The costs of proving a matter denied in a discovery request for an admission are not recoverable under CCP section 2033.40 “if the party who denied the request for admission ‘held a reasonably entertained good faith belief [it] would prevail on the issue at trial.’ [Citation.]” (Miller v. American Greetings Corp. (2008) 161 Cal.App.4th 1055, 1066.) The denial of fees under CCP section 2033.420 is reviewed for abuse of discretion. (Laabs v. City of Victorville (2008) 163 Cal.App.4th 1242, 1275–1276.) The Anderson group fails to demonstrate that the trial court abused its discretion in this case.
The trial court reasoned as follows: The three Putnam requests quoted above sought the same basic admission—that PADSIP’s case had no legal merit. Putnam “was seeking an admission of law rather than fact,” and that legal issue went to the heart of this case. However, PADSIP’s legal theory of liability was based on a plausible interpretation of the regulations and supported by evidence that Chief Ware approved its plan. Thus, although its theory was erroneous, it was not unreasonable. Furthermore, PADSIP held a good faith belief in the validity of its case. These considerations amply support the trial court’s discretionary decision to deny this motion.
The Anderson group contends that a discovery request for an admission cannot be objected to on the ground that it asks for a conclusion of law. (Citing Burke v. Superior Court of Sacramento County (1969) 71 Cal.2d 276, 282.) Therefore, the Anderson group argues that the trial court should not have denied its fee motion simply because the Putnam requests asked PADSIP to concede an issue of law. As explained, the trial court did not base its ruling on the fact that the requests sought admissions of law, but rather on the fact that PADSIP had a reasonable good-faith belief that it could prove the legal theory upon which its claim was based.
PADSIP identifies an independent ground for affirming the CCP section 2033.420 ruling as to all defendants in the Anderson group except for Putnam. CCP section 2033.420 authorizes a party whose request for an admission should not have been denied to recover its costs of proof under specified circumstances. But it says nothing about other parties in the litigation. The Anderson group does not cite any authority authorizing an award of fees under this statute to a party other than the party who propounded the request for an admission that was denied.
The Anderson group contends that a party who does not itself seek discovery may nevertheless seek sanctions for an opponent’s improper response to another party’s discovery request. (Citing Trail v. Cornwell (1984) 161 Cal.App.3d 477, 483.) The Anderson group argues that the same reasoning applies here and urges us to hold that they may use PADSIP’s responses to Putnam’s discovery as the basis for their fee claim. We decline this invitation.
CCP section 2033.420 is not a penalty or a discovery sanction for misuse of the discovery process, but rather a procedural mechanism intended to expedite trial by reducing the number of triable issues that must be adjudicated. (City of Glendale v. Marcus Cable Associates, LLC (2015) 235 Cal.App.4th 344, 354.) “[U]nlike sanctions for discovery misconduct, costs of proof under [CCP] section 2033.420 are awarded after trial; therefore, an award of such costs is not a device used by trial courts to control pretrial proceedings.” (Id. at p. 354.) “Instead, the expenses recoverable under [CCP] section 2033.420 reimburse the party that propounded the request for admission for the attorney fees and costs incurred in proving at trial the genuineness or truth of a document or matter covered by the request.” (Id. at p. 359) Here, Putnam was the party that propounded the requests upon which this motion was based. The other defendants in the Anderson group did not establish any basis for recovering their fees under this statute.
B. Civil Code Section 1717
The Anderson group and Simi Management (collectively, cross-appellants) contend the trial court erred by denying them attorney fees under Civil Code section 1717. Cross-appellants contend that if PADSIP had prevailed, it would have recovered attorney fees from defendants and, therefore, Civil Code section 1717 mandates that fees be awarded to them.
1. Background
As discussed, the April 2012 complaint alleged a single cause of action for breach of contract and sought damages and attorney fees according to proof. Although PADSIP did not incorporate a contract into its complaint, the only contract that was alleged was the indemnity agreement contained in the PADSIP indemnity document. PADSIP did not allege that this agreement or any other contract contained an attorney fee provision.
In July 2012, the PADSIP board passed a resolution to levy an assessment upon all former group members who had refused to pay the 2011 assessment, in order to cover collection costs (including attorney and litigation fees), and as an administrative penalty that would not be charged to paying members (the 2012 resolution). Apparently, this additional assessment was never implemented. And, on the first day of trial, PADSIP’s counsel expressly stated that the question whether the 2012 resolution was effective was “not something we will be litigating during this case.”
After PADSIP failed to prove their case at trial, cross-appellants filed post-judgment motions to recover their attorney fees under Civil Code section 1717, which states in part: “(a) In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”
Cross-appellants argued that Civil Code section 1717 gave them a reciprocal right to recover attorney fees under the 2012 resolution. The trial court found that Civil Code section 1717 did not apply under the circumstances of this case.
2. Analysis
“A party may not recover attorney fees unless expressly authorized by statute or contract. [Citations.] In the absence of a statute authorizing the recovery of attorney fees, the parties may agree on whether and how to allocate attorney fees. [Citation.] . . . [¶] To ensure mutuality of remedy, however, [Civil Code] section 1717 makes an attorney fee provision reciprocal even if it would otherwise be unilateral either by its terms or in its effect. [Citations.]” (Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 818 (Brown Bark III); see also Santisas v. Goodin (1998) 17 Cal.4th 599, 610.)
Whether a legal basis exists for an award of attorney fees is an issue of law, which we review de novo. (Brown Bark III, supra, 219 Cal.App.4th at p. 821.) In this case, there is no attorney fee provision in the PADSIP indemnity document or the member resolution, the two documents upon which PADSIP based their cause of action for breach of contract. PADSIP did not allege otherwise in its complaint. Nor did it attempt to prove at trial that it had a contractual right to recover attorney fees. Thus, the trial court did not err by denying cross-appellants’ motions for fees under Civil Code section 1717.
Cross-appellants argue Civil Code section 1717 does apply because the only cause of action alleged in the complaint was for breach of contract and the prayer included a request for attorney fees. Cross-appellants reason that PADSIP “perfected its prayer” by passing the 2012 resolution to impose an additional assessment on defendants in order to recoup their attorney fees and costs, and that this “maneuver[]” triggered Civil Code section 1717.
The fact that a complaint for breach of contract seeks attorney fees is not sufficient by itself to trigger Civil Code section 1717. This statute only applies in actions “ ‘where the theory of the case is breach of contract, and where the contract sued upon itself specifically provides for an award of attorney fees incurred to enforce that contract . . . .’ [Citation.]” (Brown Bark III, supra, 219 Cal.App.4th at p. 820, italics omitted.) Here, the theory of PADSIP’s case was not that defendants breached the 2012 resolution. That resolution was not a contract and PADSIP never alleged otherwise.
Cross-appellants rely on Linear Technology Corp. v. Tokyo Electron Ltd. (2001) 200 Cal.App.4th 1527 (Linear). In that case, a manufacturer of computer hardware sued its suppliers for breach of a statutory warranty incorporated into their contracts. The plaintiff alleged that the contracts were purchase orders, which contained attorney fee provisions, and it prayed for an award of contractual attorney fees. (Id. at pp. 1535–1536.) After a jury concluded that the defendants did not breach a statutory warranty, the trial court awarded attorney fees to the defendants under Civil Code section 1717, finding that if the plaintiff had succeeded in proving its pleaded theory, it could have recovered fees for the alleged breach of the purchase orders. (Id. at p. 1537.)
Cross-appellants contend that there is no difference between the purchase orders in Linear and the 2012 resolution. Not true; the differences are obvious and material. The Linear plaintiff (1) sued for breach of the purchase orders, (2) requested an award of attorney fees pursuant to an attorney fee provision in the purchase orders, and (3) sought to prove that it had a contractual right to those fees at trial. (Linear, supra, 200 Cal.App.4th at pp. 1535–1536.) Here, by contrast, PADSIP did not sue defendants for breaching the 2012 resolution, did not request an award of fees pursuant to the 2012 resolution, and did not attempt to prove that it had a contractual right to recover attorney fees from defendants.
Cross-appellants argue that Civil Code section 1717 is an equitable doctrine that does not require an actual document containing an attorney fee provision, but can also apply when a party uses the threat of attorney fees as a litigation tactic. This argument is not consistent with the language of Civil Code section 1717 and is not supported by any case authority.
Cross-appellants insist their theory of recovery is valid because the phrase “action on a contract” in Civil Code section 1717 is construed liberally. (See Brown Bark III, supra, 219 Cal.App.4th at p. 821.) This phrase is construed liberally in the sense that Civil Code section 1717 fees may be available in a case that “involves” a contract, even if the plaintiff did not allege a cause of action for breach of contract containing an attorney fees clause. (Brown Bark III, at p. 821; see also Eden Township Healthcare Dist. v. Eden Medical Center (2013) 220 Cal.App.4th 418, 426.) Courts construing this phrase have held that “[a]n action (or cause of action) is ‘on a contract’ for purposes of [Civil Code] section 1717 if (1) the action (or cause of action) ‘involves’ an agreement, in the sense that the action (or cause of action) 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.” (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc., (2012) 211 Cal.App.4th 230, 241–242.)
The action at issue in this appeal arose out of an alleged agreement to pay the 2011 assessment. No part (or alleged part) of that agreement contained an attorney fees clause. This action did not arise out of the 2012 resolution, was not based upon the 2012 resolution, and did not relate to the 2012 resolution. Furthermore, that resolution is not an agreement and does not contain an attorney fees clause. Thus, Civil Code section 1717 does not apply in this case as a matter of law.
VI. DISPOSITION
The judgment and post-judgment order are affirmed. The parties are ordered to bear their own costs on appeal.








_________________________
RUVOLO, P. J.


We concur:


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STREETER, J.


_________________________
SCHULMAN, J.*




















* Judge of the Superior Court of California, County of San Francisco, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.