Business Law by Tom Ramsey
February 26th, 2013 – Most contemporary written agreements contain an attorney fee provision by which the losing party in any litigation involving the agreement must pay the winning party’s attorney fees incurred in that litigation. The amount of the award is determined by the trial judge. It is commonly believed that the inclusion of such a provision in an agreement will result in serious thought being given before running off to the courthouse.
Additionally, some statutes provide for the award of attorney fees if litigation is initiated to enforce their provisions. The statutory fee award concept is not covered in this installment. As illustrated below, such a provision in an agreement should be the basis of serious thought before initiating a lawsuit.
During the frenzy to refinance real estate loans, many property owners were induced to act under rather questionable circumstances. According to the decision of the Court of Appeal outlined in this installment, the evidence introduced in the trial court demonstrated that Zak Khan, acting as agent for a mortgage brokerage firm, used a number of unethical tactics to persuade the property owners “to refinance, including misrepresenting the terms of the loans and failing to disclose various loan features, including payments the brokerage firm would receive. He also induced some of them to make payments to his telemarketing company, although he was not entitled to them, and in two cases forged the signatures of borrowers.”
Escrows were opened at Ticor Title Company of California.
Once the loans were made and the plaintiffs discovered what had happened, they sued several entities, including Ticor, alleging a conspiracy to fraudulently induce them to take out these loans.
The claim against Ticor was that it facilitated the loans put together by Khan’s fraud by permitting Khan to obtain the plaintiffs’ signatures on the loan documents, rather than requiring the signings to occur under Ticor’s supervision. Ticor introduced evidence showing that the process used by it was permitted by the escrow instructions and was not unusual.
The jury in the trial court awarded $530,596 damages against Khan. However, with a minor exception, the jury in the trial court found in Ticor’s favor: The minor exception did not result in the award of any damages to any of the plaintiffs.
Armed with this victory, Ticor filed a motion seeking over $2,000,000 in attorney fees pursuant to an attorney fee provision in the loan documents. In response, the plaintiffs agreed that Ticor was entitled to attorney fees, but that any award was limited to reasonable attorney fees, specifically $884,036.62, still a serious amount. The plaintiffs also argued that, additionally, any award of attorney fees should take into consideration the plaintiffs’ ability to pay them.
The trial court chose the lesser amount, stating that the $2,000,000 was “astonishing in [its] audacity” and “unreasonable by any measure in terms of time claimed to be devoted and the redundancy of effort.” The trial court also noted that the full amount “would be individually and collectively ruinous to the plaintiffs.” The trial court determined that it had the authority to reduce the award.
Although the resulting appeal also dealt with other issues, this installment will be limited to the matter of the attorney fee award.
Each side appealed the trial court’s award of attorney fees. On the one hand, the plaintiffs claimed that insufficient weight was given to the financial impact of the award. On the other hand, Ticor contended that the trial court abused its discretion when it even considered the financial impact at all.
The Court of Appeal stated that contractual attorney fee awards are not judged as damages. Equitable factors come into play. However, one factor not to be considered is the losing party’s financial status.
Contractual attorney fees are voluntarily incurred. The possibility of an award of contractual attorney fees exists because the parties chose to enter into an agreement containing such a provision. The award of attorney fees is a business risk assigned as a matter of mutual agreement by the parties. As a result, contractual attorney fees cannot fairly be characterized as a punishment. The risk of such an award has been undertaken in return for the benefits of the contract.
The trial court’s ruling on the award of contractual attorney fees was vacated. The matter was remanded (returned) to the trial court for further proceedings consistent with the decision of the Court of Appeal.
The case is entitled Walker v. Ticor Title Company of California. It was decided in 2012.
(Tom Ramsey is a Long Beach attorney who has specialized in business law for more than 40 years. He may be reached at firstname.lastname@example.org.)