Filed 1/24/00

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

After entering a judgment in favor of respondents in this construction defect dispute, the trial court granted respondents’ request for prejudgment interest, expert fees, and attorney fees. Appellant Mountain Cascade, Inc. (Mountain Cascade) contends these post-judgment awards were error, arguing: (1) the trial court should have applied recent case law retroactively to bar respondents’ award of prejudgment interest; (2) the trial court should have deducted respondent First Nationwide Bank’s (FNB) attorney fees from the total attorney fee award because it was not entitled to recover fees under the contractual attorney fees provision; and (3) the trial court should have refused to award expert witness fees to respondents because they are expressly disallowed by statute.

We disagree with Mountain Cascade’s first contention, but we are persuaded by its second and third points. Accordingly, we affirm the prejudgment interest award and reverse the award of attorney fees and expert witness fees. The attorney fees matter is remanded to the trial court with instructions to apportion the fees between FNB and Southampton Company, and award attorney fees solely to the latter in a manner consistent with this opinion.

FNB owned land in Benicia, California, that was the site for a subdivision project called "The Villas." The developer for the project was respondent Alma Associates dba Southampton Company (Southampton). Southampton entered into a contract with Mountain Cascade to install a storm drain and a corporation stop at The Villas. Under the heading "Progress Payments," this contract contained the following provision: "Based upon applications for payment submitted to the Owner by the Contractor, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below . . . . Should Owner fail to pay Contractor the monies called for under this agreement when they become due, then such unpaid sum shall bear interest at the maximum legal rate until payment in full has been received. In the event that it becomes necessary for Contractor, by lien or other action, to enforce collection of any amount, payable by Owner hereunder, Owner agrees to pay Contractor all necessary expenses, including attorney’s fees, incurred by Contractor in the institution and prosecution of such action."

After the project was completed, the owners of The Villas townhouses filed suit against FNB and Southampton alleging damage to their units caused by severe differential soil settlement. FNB repurchased the units from the owners, and arranged to have the soil re-engineered and re-compacted so that new townhouses could be constructed on the site. Thereafter, the homeowners settled their claims with FNB, and assigned any further rights they might have to recover under their sales agreements to FNB.

On November 22, 1993, Southampton filed a cross-complaint against Mountain Cascade and certain other contractors, asserting causes of action for express indemnity, breach of contract, implied contractual indemnity, breach of implied warranties, equitable indemnity, contribution, declaratory relief, breach of warranty, and negligence. The next day, FNB filed a cross complaint against the same entities asserting claims for comparative equitable indemnity and declaratory relief.

Approximately three years before trial, FNB and Southampton decided to employ the services of the same counsel to prosecute their cross-complaints.

On May 22, 1998, the jury returned a special verdict in favor of respondents based on the following theories: (1) negligence; (2) breach of contract, and (3) breach of warranty. The jury awarded respondents $1,875,000 in damages, and determined that Mountain Cascade was responsible for 97% of these damages. The remaining 3% was apportioned to another cross-defendant who is not a party to this appeal.

On May 26, 1998, judgment on the cross-complaints was entered in favor of respondents. The judgment awarded costs to respondents in an amount to be determined after respondents submitted a memorandum of costs. On June 9, 1998, respondents filed a timely memorandum of costs which included a request for prejudgment interest. The next day, North Oakland Medical Clinic v. Rogers (1999) 65 Cal.App.4th 824 (North Oakland) appeared in the advance sheets of the legal newspaper, the Daily Journal. In North Oakland, a panel from this Division determined that a cost bill is not the appropriate vehicle for requesting prejudgment interest. (Id. at p. 830.)

By letter dated June 11, 1998 and served on all parties, respondents requested clarification and instructions from the trial court regarding the impact of North Oakland on their request for prejudgment interest. The court responded on June 26, 1998, stating that, in light of the absence of any correspondence or objection from Mountain Cascade’s counsel, it had decided to accept respondents’ request for prejudgment interest despite their failure to follow the procedure announced in North Oakland. It also advised the parties that if there was an objection "to the interest as calculated, an appropriate motion may be filed and the court will entertain arguments on all sides of the question."

On July 7, 1998, Mountain Cascade filed a motion to tax costs in which it moved to strike the request for prejudgment interest. On July 22, 1998, respondents filed a motion to recover attorney fees and expert costs associated with the litigation. The court denied Mountain Cascade’s motion to tax costs on December 10, 1998, and granted respondents’ motion for attorney fees and expert costs. The court entered an amended judgment awarding respondents $345,126 in attorney fees, $561,416.60 in prejudgment interest, $59,111.27 in expert fees, and $25,092 in court costs. This appeal challenging the award of attorney fees, prejudgment interest, and expert fees followed.

Mountain Cascade contends the trial court should have applied the holding of North Oakland, supra, 65 Cal.App.4th 824 retroactively, and refused to award respondents prejudgment interest based on their failure to follow the procedure outlined in that opinion. We disagree.

In North Oakland, we held that a successful plaintiff must seek an award of prejudgment interest either by motion prior to entry of judgment, or by a timely motion for a new trial based on inadequate damages. (North Oakland, supra, 65 Cal.App.4th at pp. 829-831.) The court expressly rejected the argument that a cost bill is an appropriate vehicle for requesting prejudgment interest. (Id. at p. 830.)

This holding was applied retroactively to the North Oakland plaintiffs based on their "egregious conduct together with the extreme lateness of [their] request . . . ." (North Oakland, supra, 65 Cal.App.4th at p. 831.) The North Oakland court described this egregious conduct as follows: "After the verdict in their favor, plaintiffs did not move for an award of interest before entry of judgment. Nor did they seek an award of prejudgment interest at any of the post judgment proceedings which followed. They never sought interest in their request for an award of costs. Rather, at virtually the last minute, plaintiffs inserted an interest award in the order awarding costs which they presented to the court, in clear violation of Roger’s due process right to notice and an opportunity for hearing. [Citations.]" (Ibid.)

Thus, the court explained: "Because no statute, rule of court, or case authority has heretofore established a particular procedure or time frame for requesting an award of prejudgment interest after the jury returns a verdict for the plaintiff and because the existing state of the law indicated the request might follow entry of judgment, in other circumstances we might conclude it unfair to penalize plaintiffs for failing to make their request in accordance with the procedure we adopt in this case. However, under the circumstances here, we are convinced the uncertain state of the law concerning the appropriate timing and procedure for requesting prejudgment interest did not contribute significantly to plaintiffs’ lapse and warrant retroactive application of the rule we adopt." (North Oakland, supra, 65 Cal.App.4th at p. 831.)

Unlike the plaintiffs in North Oakland, however, respondents in this case neither engaged in egregious conduct, nor presented an untimely prejudgment interest request. Instead, shortly after the judgment was entered, they requested prejudgment interest via a timely, duly-noticed memorandum of costs. Had the North Oakland opinion been available at that time, respondents could have complied with the procedure outlined therein, because the time had not yet passed to submit a timely motion for new trial. (§ 659.) Moreover, once the North Oakland opinion appeared in the advance sheets, respondents diligently sought clarification from the trial court to determine how to proceed, and were reassured by the trial court that their request for prejudgment interest contained in the cost memorandum was still valid. By the time Mountain Cascade filed its motion to tax costs, the opportunity to assert the right to prejudgment interest in a timely motion for new trial had passed.

Given these circumstances, we conclude that respondents’ failure to follow the procedure outlined in North Oakland was caused by the uncertain state of the law concerning the appropriate timing and procedure for requesting prejudgment interest, rather than any lack of diligence on their part. Accordingly, the trial court correctly determined that it would be unfair to apply North Oakland retroactively to bar respondents from obtaining an award of prejudgment interest.

The contract between Mountain Cascade and Southampton provided that Mountain Cascade would be entitled to attorney fees if Mountain Cascade was forced to file suit in order to obtain payment for work performed under the agreement. The parties do not dispute that, pursuant to section 1717 of the Civil Code, this attorney fees provision became reciprocal, thereby entitling Southampton to attorney fees incurred in prosecuting its cross-complaint against Mountain Cascade. However, Mountain Cascade argues that the trial court’s $345,126 attorney fees award in favor of FNB and Southampton was erroneous because the trial court failed to recognize that FNB was not entitled to attorney fees. Instead, Mountain Cascade contends the trial court should have deducted any attorney fees attributable to prosecuting FNB’s cross-complaint from the attorney fees award because, unlike Southampton, FNB’s cross-complaint was not based on the contract. Mountain Cascade is correct.

Section 1717, subdivision (a), 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." (Italics added.) Because this section is expressly limited to "action[s] on a contract," courts have held that it applies only to actions that contain at least one contract claim. (See, e.g., Stout v. Turney (1978) 22 Cal.3d 718, 730 [section 1717 inapplicable because tort action for fraud arising out of a contract is not an action on a contract]; Artesia Medical Development Co. v. Regency Associates Ltd. (1989) 214 Cal.App.3d 957 [section 1717 inapplicable because unlawful detainer action is not an action on a contract]; Plemon v. Nelson (1983) 148 Cal.App.3d 720 [section 1717 inapplicable because negligence claim is not an action on a contract].)

Here, FNB’s cross-complaint sought equitable indemnity and a judicial declaration that it was entitled to equitable indemnity. These were equitable claims based on FNB’s right "to obtain partial indemnity from other concurrent tortfeasors on a comparative fault basis," not contractual claims. (American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 599; see also Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 713-716 [reversing attorney fee award because causes of action for equitable indemnification and contribution were noncontract claims that neither sought to enforce the terms of the contract, nor declare the parties’ rights under the contract].) The causes of action asserted in FNB’s cross-complaint failed to even reference the contract between Mountain Cascade and Southampton, much less assert contractual causes of action such as breach of warranty or breach of contract that would have brought them within the purview of section 1717.

Notwithstanding FNB’s election to filed a cross-complaint asserting only equitable tort-based claims, FNB argues that it was entitled to attorney fees under section 1717 because: (1) it was represented by the same trial counsel as Southampton; (2) "all Respondents pursued their claims as a single action on the contract;" and (3) the special verdict indicated that the judgment in favor of Southampton and FNB was based on breach of contract and breach of warranty, as well as negligence. We are not persuaded.

Respondents’ first two arguments are belied by the record. FNB and Southampton filed two separate cross-complaints alleging significantly different causes of action. Although FNB subsequently opted to obtain legal representation from the same attorney representing Southampton, FNB failed to amend its cross-complaint to assert the contractual claims alleged by Southampton before, during, or after the trial through a motion to amend the complaint to conform with the evidence. Given the distinctions between their respective cross-complaints, FNB and Southampton’s joint representation at trial is insufficient to demonstrate that FNB abandoned its separately-asserted equitable indemnification claims in favor of litigating this matter with Southampton as a "single action on the contract."

Finally on this point, we note that the special verdict is insufficient to establish that the jury concluded FNB was entitled to judgment under a breach of contract or breach of warranty theory. Instead, the special verdict asked the jury to answer the following questions "Did any of the [cross-defendants] breach their contract with any of the [cross-complainants]" and "Did any of the [cross-defendants] breach their warranty to any of the [cross-complainants]?" The jury responded "Yes" after Mountain Cascade’s name. All we can glean from this special verdict is that at least one of the cross-complainants prevailed against Mountain Cascade on a theory of breach of contract and/or breach of warranty. Since only Southampton asserted these contractual theories, the imprecise language of the special verdict falls far short of establishing that FNB prevailed on breach of contract and breach of warranty claims that it never alleged in its cross-complaint.

Accordingly, we reverse the $345,126 attorney fees award in favor of FNB and Southampton based on our conclusion that FNB’s cross-complaint was not "an action on the contract" as required by section 1717. This matter is remanded to the trial court for further proceedings. The trial court is directed to apportion the total attorney fees incurred between FNB and Southampton. Once the attorney fees have been apportioned, the trial court shall deduct the portion of the fees attributable to FNB from the total fee award, and enter an appropriate attorney fees award solely in favor of Southampton.

Mountain Cascade contends the trial court erred by awarding expert witness fees to respondents. We agree.

Under section 1033.5, subdivision (b)(1), of the Code of Civil Procedure parties may not recover expert witness fees as costs "except when expressly authorized by law." Such express authorization exists in instances when the expert is court-appointed (Code Civ. Proc., § 1033.5, subd. (a)(8)) or when the judgment awarded is lower than a rejected settlement offer (Code Civ. Proc, § 998, subds. (c), (d)).

Respondents argue that, although this expert witness fee award was not expressly authorized by statute, it was nevertheless proper under the precedent set forth in Bussey v. Affleck (1990) 225 Cal.App.3d 1162 (Bussey). In Bussey, Division Four of this district held that when a contract includes an attorney fees and costs provision, the court may award disbursements of counsel to the prevailing party as attorney fees pursuant to a post-judgment cost memorandum as long as these expenses are ordinarily billed separately to the client. (Id. at p. 1166.) The Bussey court reasoned that to hold otherwise would impair the effectiveness of contractual fees and costs provisions and prevent the prevailing party from being made whole. (Ibid.) The court concluded "The provisions of section 1033.5 do not dictate a contrary result. . . . Insofar as the disbursements are for [expert witness fees] that are not allowable under section 1033.5, subdivision (b), unless ‘expressly authorized by law,’ the requisite authority is found in the statutes that authorize contracting parties to stipulate for the payment of attorney[] fees and costs. (See Code Civ. Proc., §1021 [leaving ‘the measure and mode of compensation of attorneys’ to ‘the agreement, express or implied, of the parties’]; Civ. Code, § 1717 [prevailing party on contract providing for attorney[] fees and costs entitled to reasonable attorney[] fees ‘in addition to other costs’]; and cf. Ecco-Phoenix Electric Corp. v. Howard J. White, Inc. (1969) 1 Cal.3d 266, 274 [cost award to be governed by prevailing party statute where contract provision was ‘inapplicable.’].)" (Id. at p. 1167.)

The holding in Bussey was convincingly criticized by a panel from the Third District in Ripley v. Pappadopoulos (1994) 23 Cal.App.4th 1616 (Ripley) as an unwarranted departure from the plain language of section 1033.5, subdivision (b)(1). The Ripley court reasoned "In Bussey the court attempted to avoid the statutory prohibition against the inclusion of expert witness fees in a cost award by equating expert witness fees and other nonallowable costs of litigation with attorney fees and by concluding that such costs may be included in an award of contractual attorney fees. We cannot adhere to that approach. In the absence of some specific provision of law otherwise, attorney fees and the expenses of litigation, whether termed costs, disbursements, outlays, or something else, are mutually exclusive, that is, attorney fees do not include such costs and costs do not include attorney fees. [Citations.]" (Id. at pp. 1625-1626.)

To the extent that the Bussey court bolstered its conclusions by pointing to the parties’ contractual provision covering both attorney fees and costs, the Ripley court rejected this reasoning. The court explained: "[W]e are here concerned with the items of expense which may be included in a cost award after judgment and are not concerned with contractual remedies. Special contract damages are subject to pleading and proof in the main action and cannot be recovered by mere inclusion in a memorandum of costs. [Citations.] As an exception to this rule, the Legislature has chosen to provide for the recovery of contractual attorney fees in a cost award. (Civ. Code, § 1717; Code Civ. Proc., § 1033.5, subd. (a)(10)(A); see Stats. 1990, ch. 804, § 2.) But the Legislature has declined to adopt that procedure for the recovery of expert witness fees. (Code Civ. Proc., § 1033.5, subd. (b)(1).) Accordingly, assuming expert witness fees may be recovered under a contractual provision, they must be specially pleaded and proven at trial rather than included in a memorandum of costs. Since plaintiffs did not specially plead and prove their right to recover expert witness fees under an appropriate provision of their contract, they were not entitled to such fees and it was error to include such fees in the cost award." (Ripley, supra, 23 Cal.App.4th at p. 1627.) Because of this failure in the plaintiffs’ pleading and proof, the Ripley court concluded "It is unnecessary here to consider whether recovery may be permitted, and the contractual language that would be required to support recovery, of litigation expenses that are not allowable as costs when such damages are specially pleaded and proven at trial." (Id. at p. 1627, fn. 18.)

In Davis v. KGO-T.V., Inc. (1998) 17 Cal.4th 436, 446, footnote 5 (Davis), our Supreme Court held that the prevailing party in a Fair Employment and Housing Act action was not entitled to recover expert witness fees for privately-retained experts. The high court acknowledged the intra-district conflict evidenced by Bussey and Ripley, but declined to resolve the issue. Instead, the court noted, "Our present analysis, which involves statutory construction, may not be dispositive in a matter involving the effect of a contractual agreement for shifting litigation costs, which turns on the intentions of the contracting parties." (Ibid.)

Recently, a panel from the Fifth Division of this district refused to follow Bussey for "all the reasons stated in Ripley, . . . ." (Robert L. Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1154 (Cloud).) Based on "the Legislature’s express prohibition against inclusion of expert witness fees within a cost award (Code Civ. Proc., § 1033.5, subd. (b)(1)" (ibid.), the Cloud court concluded it was error to include expert witness fees in a postjudgment award of attorney fees and costs under section 1717.

Respondents urge us to follow Bussey and reject Ripley and Cloud. Alternatively, they argue that the expert witness fee award was proper either as an element of the attorney fees award, or under the broad language of the contract which authorized the recovery of all "necessary expenses," as well as attorney fees. We disagree.

The Bussey court’s conclusion that expert witness fees may be included in an award of contractual attorney fees was persuasively criticized in Ripley. We join the Ripley and Cloud courts in holding that Bussey was incorrectly decided. Costs and attorney fees are mutually exclusive, and the statutory prohibition contained in Code of Civil Procedure section 1033.5, subdivision (b)(1), cannot be avoided by characterizing costs as an element of attorney fees. (See also West Virginia University Hospitals, Inc. v. Casey (1991) 499 U.S. 83 [statutory authorization for award of attorney fees in a civil rights action does not include award of expert witness fees].)

As for respondents’ second argument, we follow Ripley and conclude that the expert witness fees award in this case were not properly awarded under the "necessary expenses" portion of the contract because such "[s]pecial contract damages are subject to pleading and proof in the main action and cannot be recovered by mere inclusion in a memorandum of costs. [Citations.]" (Ripley, supra, 23 Cal.App.4th at p. 1627.) Before judgment, Southampton made no attempt to plead or prove its entitlement to expert witness fees under this contractual theory. Moreover, FNB failed to assert any contractual claims whatsoever, thereby foregoing any entitlement to the reciprocal application of the attorney fees and necessary expenses contractual provision. (See discussion ante at pp. 6-9.)

As the Ripley court explained, "[T]he Legislature has chosen to provide for the recovery of contractual attorney fees in a cost award (Civ. Code, § 1717; Code Civ. Proc., § 1033.5, subd. (a)(10)(A); see Stats. 1990, ch. 804, § 2.)," but "declined to adopt that procedure for the recovery of expert witness fees. (§ 1033.5, subd. (b)(1).)" (Ripley, supra, 23 Cal.App.4th at p. 1627.) While Code of Civil Procedure section 1033.5, subdivision (b)(1)’s prohibition on the recovery of expert witness fees in a post-judgment cost award does not demonstrate "any legislative intent to prevent sophisticated parties from freely choosing a broader [contractual] standard" governing the recovery of expert witness fees (Arntz Contracting Co. v. St. Paul Fire & Marine Ins. Co. (1996) 47 Cal.App.4th 464, 491), plaintiffs proceeding under such a theory must specially plead and prove their right to recover expert witness fees under an appropriate provision of their contract. (Ripley, supra, 23 Cal.App.4th at p. 1627.)

The reasons for this pleading and proof requirement are readily apparent. As our Supreme Court observed in Davis, the proper interpretation of a contractual agreement for shifting litigation costs is a question of fact that "turns on the intentions of the contracting parties." (Davis, supra, 17 Cal.4th at 447, fn. 5.) Where the contractual provision is ambiguous, extrinsic evidence may be warranted. Adverse parties must be put on notice through the pleadings that this contractual theory will be asserted, and the issue must be submitted to the trier of fact for resolution pursuant to a prejudgment evidentiary proceeding, not a summary post-judgment motion. Because Southampton and FNB waited until well after the rendition of judgment to assert their theory that they were entitled to recover expert witness fees under the "necessary expenses" provision of the contract, and the "necessary expenses" provision did not apply reciprocally to FNB, they were not entitled to such fees and it was error to include such fees in the cost award. Accordingly, we conclude the $59,111.27 expert fee award was erroneous, and must be reversed.

The $561,416.60 award of prejudgment interest is affirmed. The $59,111.27 award of expert fees is reversed. The $345,126 award of attorney fees in favor of FNB and Southampton is reversed, and the matter is remanded to the trial court. On remand, the trial court shall apportion the fees between FNB and Southampton, and award attorney fees solely to Southampton in a manner consistent with this opinion.

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Haerle, J.

We concur:

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Kline, P.J.

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Lambden, J.

Trial Court: Superior Court of Solano County

Trial Judge: Hon. James F. Moelk

Attorneys for Appellants Richard Capella

Deborah Broom

Knopfler & Robertson

Attorneys for Respondents Kevin J. Senn

Michael J. Kerins

Senn, Palumbo, Meulemans, LLP

A085802, First Nationwide Bank, et al. v. Mountain Cascade, Inc.