Q: I am a partner in a partnership. Because of what I contend were
misdeeds and mismanagement by the managing partner, I filed suit to
dissolve the partnership and for damages. I immediately filed a motion to
have a receiver appointed to run the partnership business and safeguard
the partnership assets during litigation. Unfortunately, the judge denied
my motion because she stated receiverships are harsh and costly remedies
and that at such an early stage in the proceeding a receivership was
premature. My partner has now filed a motion seeking attorney’s fees based
on his defeating my motion. Can he do that? I thought each party is
responsible for their own attorney’s fees.
A: Generally, you are correct. Under what is called the “American
Rule,” each side in litigation is responsible for their own attorney’s
fees. See Cargill, Inc. v. Souza, 201 Cal.App. 4th 962, 966 (2011).
However, as with everything in life, there are exceptions. The major
exception in California is Civil Code § 1717, which provides, in summary,
in an action on a contract, which has an attorney’s fees clause in it, the
court, on notice and motion, shall determine who is the prevailing party,
whether or not suit proceeds to final judgment, and the prevailing party
is entitled to reasonable attorney’s fees. Courts have “discretion in
determining which party has prevailed on the contract, or that no party
has.” Disputesuite.com LLC v. Scoreinc.com, 2 Cal. 5th 968, 973
(2017).While, unfortunately, many motions
to appoint receivers are denied, because courts may feel receiverships are
costly and burdensome remedies, other remedies might be cheaper or more
effective (i.e. injunctions), it is too early in the proceeding, or an
insufficient basis has been shown (even where a contract provides a
receivership remedy), we often don’t consider that there may be liability
for bringing and losing a receivership motion. Depending on the underlying
contract, however, there might be.
A recent unreported case involving a motion to
appoint a receiver illustrates the potential liability. Levine v.
Levine, 2019 WL 459967 (Cal.App. 2019), involves a brother and a
sister who were co-trustees of their parents’ trusts. The trusts contained
many assets, including income producing properties, some of which were
co-owned with third parties. When Larry determined that his sister Leslie
had withdrawn $137,000 from one of the trusts, he filed a probate
petition. Eventually they settled. The settlement agreement required Larry
to take a number of actions administering the trusts, including filing an
amended inventory, distributing gifts, and transferring and selling
certain properties. Some of this required the properties to be appraised,
so distributions could be equalized and so estate tax returns could be
filed. After a while, Leslie filed a motion to enforce the settlement and
appoint a receiver because, she contended, Larry was not doing what the
settlement agreement required. Larry opposed the motion stating the
settlement had not been breached and that the trust administration was
proceeding according to probate custom and practice. In particular, the
amount of estate tax could not be determined until all the properties were
appraised, he didn’t know which properties to sell to pay estate taxes
until he knew what the tax liability would be, and the tax returns weren’t
due for another five months. The court’s initial tentative was to grant
Leslie’s motion. However, the court deferred ruling based on the fact
appraisers had been hired, had completed their inspections, and would be
filing their reports in a few weeks. The court ordered Larry to proceed
expeditiously and, if there were a hint of further delay, it would appoint
a receiver. While there were further delays, the appraisals were
eventually finished and the tax returns were filed. The court, at a
continued hearing, therefore denied the receivership motion without
prejudice. Larry then filed a motion for attorney’s fees of $74,349.00,
based on a provision in the settlement agreement allowing attorney’s fees
to the prevailing party in the event of a dispute arising from the
agreement.
The court granted Larry’s motion. While the court
acknowledged its tentative ruling was to grant Leslie’s motion, the court
noted that appointing a receiver is a disfavored remedy and based on its
“holistic review of the pleadings, and focusing on the relief requested
and denied.” found Larry to be the prevailing party. The Court of Appeals
affirmed, based on Civil Code § 1717 and the trial court’s discretion to
determine who is the prevailing party. Movants, therefore, need to be
circumspect in bringing receivership motions if the underlying contract
has an attorney’s fees clause and the motion is based on breach of
contract; which may often be the case in cases involving promissory note
defaults (i.e., rents, issues and profits cases), and settlement or
partnership agreement disputes.
One interesting practice note from the case
involved the fees actually awarded by the court. Larry had requested
$74,349.00. The court only awarded $25,412.00. This was due, in large
part, because Larry redacted the bills supporting his motion, to avoid
waiving the attorney- client privilege or revealing tactical decisions.
While the court found the practice understandable and permitted and
“likely required,” the result was the court couldn’t determine whether the
redacted services related to the motion to enforce the settlement. Based
on the court’s reduction, Larry filed a motion for reconsideration, where
he waived the attorney-client privilege and resubmitted the bills with
fewer redactions. The court denied the reconsideration motion, finding
there was nothing new to consider since Larry always had the information.
The Court of Appeals affirmed this, finding Larry’s decision to waive the
privilege following the ruling did not constitute new or different
evidence.
*Peter A. Davidson is a Partner of Ervin Cohen & Jessup LLP a
Beverly Hills Law Firm. His practice includes representing Receivers and
acting as a Receiver in State and Federal Court.
|