M&C Products Analysis Technology v. Bertik

Filed 10/19/06 M&C Products Analysis Technology v. Bertik CA2/6

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 977(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 977(b). This opinion has not been certified for publication or ordered published for purposes of rule 977.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

Appellant prevails on virtually all of its claims and successfully defends against the cross-complaint brought by respondent. In ruling in appellant's favor, the trial court finds respondent to have been deceitful and disloyal and that appellant had the right to terminate respondent for his acts of bad faith while in its employ. Nonetheless, the trial court denied appellant's motion for attorney fees, finding that it was not a prevailing party under Civil Code section 1717[1] and Labor Code section 218.5. Appellant appeals from the order denying its motion for attorney fees. We reverse.

STATEMENT OF FACTS AND PROCEDURAL HISTORY

Appellant M&C Products Analysis Technology, Inc. (M&C) hired respondent Robert Bertik as its chief executive officer in July 1997. The parties signed an employment agreement containing the following language: "In the event that litigation is brought for the purpose of enforcing rights and duties created under this Agreement, the prevailing party in the litigation shall be entitled to the recovery of reasonable attorneys' fees." The agreement had a termination date of December 31, 2000.

In October 2000, M&C terminated Bertik's employment on the ground that he breached several provisions of the agreement. M&C filed a complaint on November 1, 2000, alleging breach of contract and breach of fiduciary duty.[2] Both causes of action were based on alleged misconduct by Bertik as follows:

"(a) betrayed the trust placed in him as 'the principal executive officer' of M&C by engaging in secret self-dealing transactions and placing his own interests ahead of those of M&C;

"(b) secretly devoted substantial efforts and business time and attention to his own business affairs, including, without limitation, the affairs of M&C Products USA, RDB & Associates, Inc., and Environmental Alliance Group;

"(c) secretly disclosed to persons, other than persons employed by M&C, . . . confidential information of a business, financial, and technical nature without the prior written consent of M&C; and

"(d) secretly engaged in business endeavors directly competitive with those of M&C."

M&C alleged damages in both causes of action "in excess of $1 million, including, without limitation, substantial bonuses and other amounts paid by M&C to [Bertik] pursuant to the Employment Agreement during the period of his disloyalty, secret profits taken by [Bertik], and lost profits."

In addition, in the second cause of action, M&C alleged that Bertik "acted with malice, oppression, and fraud ... [and] should be assessed and required to pay punitive damages according to proof at trial."

The complaint prayed for compensatory damages, prejudgment interest, and costs of suit including reasonable attorney fees pursuant to the employment agreement.

Bertik filed a cross-complaint against M&C and several individuals, containing 10 causes of action, as follows: breach of contract, breach of the implied covenant of good faith and fair dealing, nonpayment of wages in violation of Labor Code section 201, waiting time penalties pursuant to Labor Code section 203, violation of Business and Professions Code section 17200, wrongful termination in violation of public policy--nonpayment of wages, intentional interference with an economic relationship, slander per se, intentional infliction of emotional distress and negligent infliction of emotional distress.

After a demurrer and motion for summary judgment filed by M&C, only four counts of the cross-complaint remained for trial: breach of contract, breach of the implied covenant of good faith and fair dealing, nonpayment of wages (Lab. Code, § 201), and waiting-time penalties (Lab. Code, § 203).

Following a bench trial, the trial judge found for M&C on the breach of contract and breach of fiduciary duty counts in the complaint. M&C also prevailed on all four counts of the cross-complaint. The court awarded damages to M&C in the amount of $127,749.32, but declined to award prejudgment interest or punitive damages.

M&C filed motions to tax costs and for attorney fees. The trial court granted in part and denied in part the motion to tax costs and denied the attorney fee motion. The court determined that M&C was not a "prevailing party" for purposes of a section 1717 attorney fee award.

On appeal, M&C asserts the trial court abused its discretion in finding that it was not a prevailing party and denying its request for attorney fees.

DISCUSSION

Standard of Review

A finding of no prevailing party is reviewed for abuse of discretion. (Deane Gardenhome Assn. v. Denktas (1993) 13 Cal.App.4th 1394, 1397.) The trial court "'"'is given wide discretion in determining which party has prevailed on its causes(s) of action . . . .'"'" (Sears v. Baccaglio (1998) 60 Cal.App.4th 1136, 1158.) A trial court's exercise of discretion is abused only when its ruling "'"exceeds the bounds of reason, all of the circumstances before it being considered."'" (Gonzales v. Personal Storage, Inc. (1997) 56 Cal.App.4th 464, 479.) "'"'[T]he discretion of a trial judge is not a whimsical, uncontrolled power, but a legal discretion, which is subject to the limitations of legal principles governing the subject of its action, and to reversal on appeal where no reasonable basis for the action is shown. . . .'" . . . The scope of discretion always resides in the particular law being applied, i.e., in the "legal principles governing the subject of [the] action."'" (Ibid., citations omitted.)

Who Is a Prevailing Party under Section 1717?

Section 1717, subdivision (a) provides that a party who "prevails[s] on the contract [with an attorney fee provision] . . . shall be entitled to reasonable attorney's fees . . . ." Subdivision (b)(1) defines the "prevailing party" as "the party who recovered a greater relief in the action on the contract."

In determining whether a party has prevailed, the trial court "compare[s] the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. (Hsu v. Abbara (1995) 9 Cal.4th 863, 876.)

The prevailing party determination is to be made only upon final resolution of the contract claims and only by a comparison of the extent to which each party has succeeded and failed to succeed in its contentions. (Hsu v. Abbara, supra, 9 Cal.4th at p. 876.) When the results of the litigation are "mixed," the trial court may determine that no party has prevailed on the contract. (See Hilltop Investment Associates v. Leon (1994) 28 Cal.App.4th 462, 468-469 [no abuse of discretion in denying attorney fees where the result was "a draw"]; see also id. at pp. 465-468.) "If neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees." (Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1109.) "'Typically, a determination of no prevailing party results when both parties seek relief, but neither prevails, or when the ostensibly prevailing party receives only a part of the relief sought.'" (Hsu, at p. 875, quoting Deane Gardenhome Assn. v. Denktas, supra, 13 Cal.App.4th at p. 1398.) In other words, the judgment is "'considered good news and bad news as to each of the parties.'" (Nasser v. Superior Court (1984) 156 Cal.App.3d 52, 60.)

The trial court found in favor of M&C on both causes of action of its complaint. M&C also prevailed completely on the cross-complaint. Through a demurrer and summary judgment motion, M&C defeated six of the ten causes of action in the cross-complaint. After trial, the court found for M&C on the remaining four causes of action.

In the Statement of Decision, the trial court identified the "principal controverted issues" and enumerated M&C's successes, as follows:

"1. Bertik falsely represented in the . . . employment contract . . . that he was under no contractual or other restriction inconsistent with the performance by him of his duties. His concealment of EAG [Environmental Alliance Group] and the Land [Land Combustion] distributor contract and his failure to disclose these facts at a time when he entered upon his duties as the full time principal executive officer for plaintiff M&C was fraudulent[.] . . .

"2. Bertik breached his duty of undivided loyalty to his employer plaintiff M&C by failing to disclose his interest in the EAG/Land distributorship contract and by actively participating in the business of EAG[.] . . .

"3. Bertik failed to adequately account for and justify various expenses as ones appropriately charged to plaintiff M&C[.] . . .

"4. Plaintiff M&C fulfilled the contractual requirements for terminating Bertik on notice and did not waive any grounds for termination[.] . . .

"5. Plaintiff M&C is entitled to recover from Bertik EAG's net profits for the period July 1, 1997 through October 31, 2000[.] . . .

"8. Plaintiff M&C did not breach the employment agreement when it failed to pay Bertik compensation for 2000[.] . . .

"9. The employment agreement provisions terminating plaintiff M&C's contractual obligations to pay compensation are consistent with the general rule that disloyalty of an agent will work a forfeiture of wages otherwise due[.] . . .

"10. Plaintiff M&C did not violate Labor Code § 201 and incur penalties pursuant to Labor Code § 203 by failing to pay Bertik compensation upon his termination[.]"

Notwithstanding M&C's "complete victory" on all causes of action, the trial court denied attorney fees because it found "M&C did not achieve its monetary litigation goals in this matter as it did not recover all categories of damages it contended were appropriate." (Emphasis omitted.) The court pointed out that M&C asked for but did not receive (1) all of Bertik's salary ($519,000), (2) lost profits ($2,900,000), (3) profits realized by Bertik's company ($308,000). The court also noted that M&C did not achieve the litigation objective of a finding that M&C and Bertik's company were direct competitors. The trial court concluded, "[I]t would be inappropriate to award fees to a party who prevailed on a minor 'battle' but lost the 'war' (the main issue(s) in the action)."

"[T]he trial court's decisions on the merits and on the issue of attorney fees cannot be reconciled." (Sokolow v. County of San Mateo (1989) 213 Cal.App.3d 231, 247.) We agree with M&C that the trial court misinterpreted Hsu v. Abarra, supra, 9 Cal.4th 863. The court appears to have read Hsu as permitting a denial of attorney fees in any case where there was not a "'simple, unqualified victory.'" Cases from the Supreme Court and Courts of Appeal interpreting Hsu do not support this view.

In Scott Co. v. Blount, Inc., supra, 20 Cal.4th at page 1109, plaintiff sought to prove more than $2 million in damages but succeeded in establishing only about $440,000 in damages. The Supreme Court upheld an award of attorney fees. The court reasoned: "Although plaintiff here did not achieve all of its litigation objectives, and thus is not automatically a party prevailing on the contract for purposes of section 1717, the trial court did not abuse its discretion in implicitly concluding that on balance plaintiff prevailed on the contract for purposes of section 1717." (Ibid.)

In Sears v. Baccaglio, supra, 60 Cal.App.4th 1136, the plaintiff brought an action against the defendant building owner for breach of a lease guaranty seeking to recover $112,000 plaintiff had paid on the guaranty. The trial court found that plaintiff was liable under the guaranty and, in the damages phase, found that plaintiff was entitled to recover over $67,000 he had paid under the guaranty based on amounts defendant had recovered from the estate of the bankrupt lessee and other sources. The court found that the defendant was the prevailing party notwithstanding the plaintiff's recovery and awarded attorney fees pursuant to a provision in the guaranty. (Id. at pp. 1141-1142, 1155-1156.)

The Court of Appeal affirmed the award of fees to defendant, recognizing that "where there is evidence of other success, such as in this case by collection of a portion of the funds at issue, whether by settlement or through a collateral action, the court is entitled to take such recovery into account when calculating which side prevailed." (Sears v. Baccaglio, supra, 60 Cal.App.4th at p. 1156; see also Arias v. Katella Townhouse Homeowners Assn., Inc. (2005) 127 Cal.App.4th 847, 852-853 [plaintiff was the prevailing party even though damages awarded were far less than requested].)

M&C relies on Gonzales v. Personal Storage, Inc., supra, 56 Cal.App.4th 464 to support its claim for attorney fees. In that case plaintiff entered into a lease with defendant storage company containing an attorney fee provision. Gonzales was tardy in making lease payments and the storage company advertised a sale of her property and permitted a third party to remove Gonzales's property from the facility. Gonzales filed a complaint alleging breach of the lease agreement, conversion and infliction of emotional distress. The storage company filed a cross-complaint and denied any liability. The trial court entered judgment on the jury's verdict awarding Gonzales damages for emotional distress suffered as a result of the conversion of her personal property. The court denied relief on the cross-complaint. Gonzales was awarded $59,559 out of the $196,000 in contract damages sought in the complaint.

Gonzales filed a motion for attorney fees. The trial court denied her request in its entirety, finding that the attorney fee provision in the lease gave it discretion to deny fees. The Court of Appeal concluded that Gonzales was successful as a matter of law on her liability claims and largely successful on her contentions with respect to damages. The court reasoned: "Thus, this is not a case where it can be said both parties were partially successful and therefore, notwithstanding a fee agreement, no fee award would be appropriate. [Citation.] Rather the trial court's judgment was an unqualified victory for Gonzales." (Gonzales v. Personal Storage, Inc., supra, 56 Cal.App.4th at p. 481.)

These cases demonstrate that a party can prevail for purposes of receiving section 1717 attorney fees even though achieving only partial success on its complaint. Moreover, a defendant who successfully defends a contract action is the prevailing party even though, as the defendant, it obtains no affirmative relief. (Foothill Properties v. Lyon/Copley Corona Associates (1996) 46 Cal.App.4th 1542, 1555.) In the trial court's words: "M&C achieved a 'simple, unqualified victory'[] on Mr. Bertik's cross-complaint for the purpose of awarding attorneys fees pursuant to contract."

The degree of success achieved by M&C in the litigation entitles it to an attorney fee award as the prevailing party under section 1717.

Attorney Fees Under Labor Code Section 218.5

The trial court also erred in not awarding attorney fees under Labor Code section 218.5. That section provides in part: "In any action brought for the nonpayment of wages, fringe benefits, or health and welfare or pension fund contributions, the court shall award reasonable attorney's fees and costs to the prevailing party if any party to the action requests attorney's fees and costs upon the initiation of the action." In this case, Bertik's cross-claim under Labor Code section 218.5 failed in its entirety. Unlike section 1717, there is nothing on the face of Labor Code section 218.5 that gives the trial court the discretion to find that neither party has been the prevailing party.

The trial court stated that it denied attorney fees because M&C had not provided billing records differentiating between prosecuting the complaint and defending against the cross-complaint. Our review of the file, however, shows that M&C did identify time spent on the Labor Code issues.

In determining a reasonable attorney fee on remand, the court may take into account M&C's failure to achieve all the relief it requested. (See PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1090-1098; see also Akins v. Enterprise Rent-A-Car Co. (2000) 79 Cal.App.4th 1127, 1133-1134; and see Sokolow v. County of San Mateo, supra, 213 Cal.App.3d at pp. 247-248.)

The order denying attorney fees is reversed and the matter is remanded for a determination of the amount of attorney fees to be awarded M&C for legal services in the trial court and on appeal. (See Security Pacific National Bank v. Adamo (1983) 142 Cal.App.3d 492, 498.) Appellant is to recover costs on appeal.

NOT TO BE PUBLISHED.

PERREN, J.

We concur:

YEGAN, Acting P.J.

COFFEE, J.

Thomas J. Hutchins, Judge

Superior Court County of Ventura

______________________________

Hughes Hubbard & Reed LLP, Rita M. Haeusler, Michael P. Barbee, Claudia Kloss for Plaintiff and Appellant.

Law Offices of Richard A. Hofman, Richard A. Hofman for Defendant and Respondent.

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Analysis and review provided by Poway Property line Lawyers.

[1] All statutory references are to the Civil Code unless otherwise stated.

[2] The complaint also alleged aiding and abetting breach of fiduciary duty against several other defendants not parties to this appeal.