Monday, December 29, 2014
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C.A. Rejects Effort to Avoid Reciprocal Fees Statute
Panel Says Party That Lost Arbitration Cannot Dismiss Related Suit to Avoid Civil Code §1717
By KENNETH OFGANG, Staff Writer
A party that seeks damages in an arbitration proceeding, while simultaneously seeking injunctive relief in court based on the same causes of action, cannot avoid an attorney fee award under Civil Code §1717 by voluntarily dismissing the court action, the Fourth District Court of Appeal has held.
Ruling in what it said was “a context not yet addressed in the case law,” Div. Two Tuesday reinstated a lawsuit between two groups of investors in a Newport Beach land deal, reversing the trial court’s order denying the defendants’ motion to vacate the plaintiffs’ purported voluntary dismissal without prejudice.
The investors purchased two adjacent parcels containing private golf and tennis clubs about 20 years ago. A 50 percent interest was obtained by two companies controlled by Robert O Hill, and the other 50 percent by a group that included Mesa Shopping Center-East LLC and Mira Mesa Shopping Center-West, LLC.
Agreements between the parties designated one of the O Hill companies as the managing owner of the properties, and provided that any disputes among them be resolved by arbitration at the Orange County offices of JAMS. The agreements also stated that the arbitration clause would not preclude any party from seeking injunctive relief or a receivership through a court of law, and contained an attorney fees clause specifically applicable to any dispute, whether resolved by arbitration or in court.
Declaratory Action
In 2011, the Mesa investors sued the O Hill companies for declaratory and injunctive relief, claiming that the defendants had spent plaintiffs’ money for unauthorized purposes, repeatedly ignored plaintiffs’ objections to how the properties were being managed, and failed to provide sufficient access to financial records.
The complaint also referenced the arbitration agreements and said the suit was “ancillary to an anticipated” arbitration proceeding before JAMS.
After the plaintiffs moved for a preliminary injunction, the parties stipulated that all proceedings, other than on the motion, be stayed pending arbitration of the plaintiffs’ claims for damages. An Orange Superior Court judge subsequently denied the motion, saying the plaintiffs failed to show irreparable harm.
While the motion was pending, the Mesa investors filed their demand for arbitration with JAMS, and the O Hill companies served a response and counterclaims, seeking damages along with a declaration that a notice purporting to terminate the managing owner was invalid.
After nine days of hearings, the arbitrator issued an “interim award,” rejecting all of the Mesa investors’ claims, finding all of them to be barred by the time limitations stated in the contract and/or to be without substantive merit. As to the counterclaim, the arbitrator agreed that there was no cause to remove the managing owner, but rejected the O Hill companies’ claims that the Mesa investors had breached the contracts.
The arbitrator said the O Hill companies were the prevailing parties and eligible for attorney fees and costs. The O Hill investors then applied for an award of their fees and costs for both the arbitration and the judicial proceedings.
The arbitrator awarded more than $800,000 as costs and fees incurred in the arbitration, but denied fees and costs incurred in the court action, saying the court “would be in a better position to decide how much, if any, fees and costs would be reasonable.”
Request for Dismissal
In between the rendering of the interim and final arbitration awards, the Mesa investors filed a request for voluntary dismissal of their court action, and the clerk entered the dismissal on the day the request was filed. After the final award was rendered, the O Hill investors moved to set aside the dismissal, to confirm the arbitration award, and to obtain an award of attorney fees and costs incurred in opposing the preliminary injunction motion in the trial court.
Denying the motion, Orange Superior Court Judge Linda Marks said the plaintiffs had an “absolute right to dismiss…prior to commencement of trial” and that the arbitration had no relevance to the issue because it was a separate proceeding. Nor, she said, did the O Hill companies show that the arbitrator’s decision necessarily precluded the Mesa investors from prevailing in the lawsuit.
Thus, Marks reasoned, the O Hill investors were not “part[ies] prevailing on the contract” within the meaning of §1717.
Justice Raymond Ikola, writing for the Court of Appeal, disagreed.
“Having submitted the merits of the dispute to the arbitrator, the Mesa Investors lost. The Agreements specifically stated that the prevailing party in ‘an arbitration proceeding or a court action for injunctive relief’ was entitled to recover attorney fees. At this point, the court action became a forum with only downside for the Mesa Investors (i.e., confirmation of the arbitral award followed by an award of additional attorney fees to the O Hill Investors). This is why the Mesa Investors dismissed the action, as they essentially admitted in a brief filed with the arbitrator....
“In sum, the arbitration and this action were, in essence, one action split in two to obtain separate remedies. The court erred in concluding they had nothing to do with each other.”
Because the proceedings were “one action,” Ikola elaborated, the arbitration hearing was a “trial” for purposes of the voluntary dismissal statute, so the Mesa investors no longer had a right to voluntarily dismiss once the arbitration hearing began. He cited cases holding that a voluntary dismissal is untimely where filed after a small claims hearing but before a trial de novo, after the plaintiff obtains an unfavorable result in judicial arbitration, or after a referee has conducted an evidentiary hearing and submitted findings to the court.
The case is Mesa Shopping Center-East LLC v. O Hill, 14 S.O.S. 5860.
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