California Supreme Court Clarifies Whether Pleading A Contract as an Affirmative Defense Can Trigger an Attorney’s Fees Clause

Mountain Air Ent. v. Sundowner Towers 7/31/17 SC

Under the American rule, the prevailing party in litigation cannot recover attorney’s fees against the losing party, absent an exception. One exception is when the parties have a contract with an attorney’s fees clause. If one party sues on the contract, the prevailing party will be awarded attorney’s fees. But what happens when the the party who initiates the lawsuit doesn’t sue on the contract with the attorney’s fees clause, but instead the defendant asserts that contract as an affirmative defense? In Mountain Air the trial court held that wasn’t good enough to trigger the attorney’s fees clause. The appellate court disagreed: inserting a contract by affirmative defense was comparable to initiating an action on the contract. Held: The Supreme Court held that the assertion of the contract as an affirmative defense is not an action on the contract and does not trigger a right to attorney’s fees.

In Mountain Air, two sophisticated parties entered into a multi-million dollar real estate deal. Their deal included a repurchase agreement and a subsequently executed option agreement. Both contracts contained attorney’s fees clauses, and the later option agreement had an “integration” clause. The integration clause stated the option agreement “expressly supersedes all previous or contemporaneous agreements, understandings, representations, or statements between the parties respecting this matter.” That didn’t deter Plaintiff, who sued to enforce the repurchase agreement (it wanted to return the property to defendant and get its money back). The defendant of course saw things differently: Claiming that the option agreement extinguished the repurchase agreement, defendant asserted the option agreement as an affirmative defense.

After a court trial, the trial court found in favor of defendant: It held that the repurchase agreement was illegal (citing esoteric rules concerning a violation of the subdivision map laws) and the option agreement acted as a novation of the repurchase agreement. However, the trial court denied defendant’s motion for attorney’s fees, because the repurchase agreement was illegal (and therefore not a valid basis to support an award of attorney’s fees); the trial court also rejected the notion that defendant’s assertion of an affirmative defense is equivalent to bringing an action for purposes of whether the attorney’s fees clause was triggered. On appeal, the appellate court in Los Angeles reversed, holding instead that defendant was entitled to fees because defendant’s reliance on the option agreement in its answer triggered the attorney’s fees clause. The California Supreme Court upheld the award of attorney’s fees, but on different grounds than those relied on by the appellate court.

Here are the two main points from the case:

The filing an answer with affirmative defenses is part of the action, but doesn’t mean that the defendant thereby brought an action that triggers attorney’s fees. Some lower courts had come to a different conclusion (Windsor Pacific LLC v. Samwood Co.), and the Supreme Court disapproved of Windsor case on that basis.
However, unlike the trial court and the DCA, the Supreme Court held that the option agreement relied on by a defendant in its answer could still support a claim for attorney’s fees, because of the broad language in that contract.

Here is the attorney’s fees clause in the option agreement, broken down line by line:

If any legal action or any other proceeding,
including arbitration or an action for declaratory relief
is brought
- for the enforcement of this Agreement or
- because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this Agreement,
the prevailing party shall be entitled to recover

reasonable attorney fees,

- expert fees and
- other costs
- incurred in that action or proceeding,
- in addition to any other relief to which the prevailing party may be entitled.” (Italics added.)

According to the majority opinion, plaintiff’s action was “brought” “because of” a “dispute” in “connection” with a “provision” of the (option) “agreement,” namely the integration clause.

The three justices who dissented felt that the language of the attoreney’s fees clause required something more: “This language requires a particular kind of connection between plaintiff’s suit and the option agreement, and that connection has not been established here.”

My opinion: I think the majority generally has the better argument in cases where there are multiple legal agreements between the parties. The meaning and effect of each contract is, in law and reality, necessarily “connected” to each other agreement. One party may of course want the court to look only at the one contract that favors him, but that’s not fair or realistic. In this sense, multiple agreements between the parties will be “connected.” BUT, this case is different: The repurchase agreement was illegal and therefore unenforceable. The option agreement and its integration clause were totally and necessarily irrelevant to that determination. And saying that the illegal agreement is unenforceable because of the integration clause in a subsequent agreement, doesn’t really make sense — an illegal agreement is unenforceable because it is illegal. In this case at least, plaintiff’s action to enforce the illegal agreement was not “connected” to the option agreement.

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