Will Contractor's Forged Signatures Allow Attorney's Fees?

In the recent case of Andrade v. Western Riverside Council of Governments, SanJuana Andrade appealed the trial court’s order denying an award of attorney’s fees pursuant to Civil Code section 1717.

Andrade claimed that contracts with defendant Western Riverside Council of Governments (Council) contained fee provisions that, when broadened by operation of section 1717, entitled her to recover her attorney’s fees.

The appellate court agreed that section 1717 renders the fee provisions applicable and remanded to the trial court to determine whether Andrade is “the party prevailing on the contract” and thus entitled to fees.

Andrade filed the lawsuit against the Council and others, claiming that she had been fraudulently enrolled in a Property Assessed Clean Energy (PACE) program.

She alleged that contractors forged her signature on PACE loan agreements with the Council, resulting in a lien on her home and greatly increased property tax assessments she had not agreed to.

Andrade’s first amended complaint, which added the Council as a party, sought to plead 12 causes of action, including multiple theories for rescission of the Council loan agreements.

On her contractual causes of action, Andrade sought rescission of the loan agreements, restitution, “damages,” and declarations that the agreements were unenforceable in whole or in part.

Following an investigation by the state Department of Financial Protection and Innovation (DFPI), which confirmed the contractors’ fraud, the Council released its assessment and the lien on Andrade’s property.

In 2021, it reimbursed Andrade for property tax payments she had been made toward the increased assessment.

In 2022, Andrade filed a motion for attorney’s fees and costs.

Among other theories, Andrade relied on section 1717, which provides "In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs."

Where a contract provides for attorney’s fees, that provision shall be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract.

The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. The party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section.

Andrade pointed to identical provisions in the two loan agreements that provide for attorney’s fees.

The trial court denied Andrade’s motion. Although the court agreed the case was an action “on a contract” for purposes of section 1717, it concluded that the contractual fee provisions were limited in scope and did not entitle Andrade to attorney’s fees because they concerned fees for a judicial foreclosure action.

The court found that the Council had not pursued judicial foreclosure and that Andrade had not set forth a clear case that Council even could pursue judicial foreclosure. Accordingly, the court denied the request for fees under section 1717.

As an initial matter, the appellate court agreed with the trial court that this was an “action on a contract” within the meaning of the statute.

It was undisputed that Andrade’s claims principally concerned whether the loan agreements were valid and enforceable.

California courts liberally construe “on a contract” to extend to any action as long as an action "involves" a contract and one of the parties would be entitled to recover attorney fees under the contract if that party prevails in its lawsuit.

Under this standard, Andrade’s action, which applies contractual principles as to whether a contract is valid and enforceable, is an action “on a contract.”

The Council argued to the contrary, contending that Andrade sought to invalidate the contract rather than enforce it. But it has long been settled that a party is entitled to attorney fees under section 1717 even when the party prevails on grounds the contract is inapplicable, invalid, unenforceable or nonexistent, if the other party would have been entitled to attorney’s fees had it prevailed.

The Council also argued that section 1717 covers only contract actions, where the theory of the case is breach of contract.

As an initial matter, that argument conflicts with the plain language of section 1717, which merely requires an “action on a contract,” not an action for breach of contract. It is also inconsistent with the weight of California authority.

Fraud and negligence claims seeking to avoid obligations under a promissory note constitute action “on a contract".

A party’s entitlement to attorney fees under section 1717 turns on the fact that the litigation was about the existence and enforceability of the contract, not on the presence of particular contractual claims or a request for specific performance.

Actions for a declaration of rights based upon an agreement are "on the contract".

Whenever a party seeks to invalidate a supposed contract on grounds that an enforceable agreement never existed, and the party opposing such a claim implicitly contends there is a valid contract, the essential premise for section 1717 is satisfied.

The appellate court held it would seem incongruously artificial to permit the award of attorney’s fees under section 1717 in situations where a party affirmatively sought to enforce a contract, but deny them where the same party made the same argument in a defensive posture.

The trial court held that the fee provisions in the loan agreements only concern judicial forfeiture and thus do not apply here.

Under section 1717, subdivision (a), however, a fee provision must be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract.

This portion of the statute was added by the Legislature in response to a Court of Appeal decision permitting contracting parties to limit an attorney’s fee clause to specific provisions of the agreement or a certain type of action.

The purpose of the amendment was to clarify to either party to any contract that provided for attorney’s fees” that they may not limit the forms of action to which attorney’s fees are applicable.

Following this amendment, parties may not limit recovery of attorney fees to a particular type of claim unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract.

The Legislature thus expanded the statute to further its fundamental goal of ensuring a mutuality of remedy.

The circumstances of this case fall squarely within the purpose of the amended statute.

The loan agreements provide that the Council could recover its fees in an action to enforce its rights through a judicial foreclosure proceeding.

Throughout the action, Andrade sought to contest her obligations under the alleged agreements, thereby avoiding potential default and foreclosure. Limiting the fee provisions to foreclosure proceedings would be the precise kind of lopsided arrangement that section 1717 prohibits.

Finally, the appellate court considered whether Andrade was “the party prevailing on the contract” for purposes of section 1717.

Although both parties appeared to contend the trial court found that she was, the record did not support this conclusion as a matter of law.

The court’s reasoning makes clear that it found Andrade was a “prevailing party” for purposes of awarding costs under Code of Civil Procedure section 1032.

“Prevailing party” is specifically defined in that statute to include the party with a net monetary recovery.

The court found that Andrade qualified as the party with the "net monetary recovery".

The court did not, however, determine that Andrade was “the party prevailing on the contract” for purposes of section 1717.

Section 1717 does not use the phrase “prevailing party” or incorporate the definition used in the costs statute.

Rather, “the party prevailing on the contract” for purposes of section 1717 is “the party who recovered a greater relief in the action on the contract.”

In the event of a simple, unqualified decision, courts may determine that a party prevailed on the contract as a matter of law.

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.

It is for the trial court, in the first instance, to determine whether there is a “party prevailing on the contract” by comparing 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.

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 ha[s] succeeded and failed to succeed in its contentions.

In determining litigation success, the trial court should respect substance rather than form, and to this extent should be guided by equitable considerations.

LESSONS:

1.         California courts liberally construe “on a contract” to extend to any action as long as an action "involves" a contract and one of the parties would be entitled to recover attorney fees under the contract if that party prevails in its lawsuit.

2.         A party’s entitlement to attorney fees under section 1717 turns on the fact that the litigation was about the existence and enforceability of the contract, not on the presence of particular contractual claims or a request for specific performance.

3.         Actions for a declaration of rights based upon an agreement are "on the contract".

4.         Fraud and negligence claims seeking to avoid obligations under a promissory note constitute action “on a contract".

5.         Actions for a declaration of rights based upon an agreement are "on the contract".