By Glen Hansen

In Silver Creek, LLC v. Blackrock Realty Advisors, Inc. (May 20, 2009) 173 Cal.App.4th 1533, the California Court of Appeal for the Fourth Appellate District held that the trial court abused its discretion when it decided there was no prevailing party on a contract for purposes of awarding attorney’s fees under Civil Code section 1717, subdivision (b), because the record clearly revealed that one party obtained greater relief on the contract in this mixed result case.

Blackrock Realty Advisors, Inc. (“Blackrock”) executed agreements to purchase two commercial properties owned by Silver Creek, LLC and Griffin Properties, LLC (collectively, “Silver Creek”) for a total purchase price of $29.75 million and deposited a total of $1.13 million into escrow accounts. The agreements specified that, among other things, Blackrock would assume existing loans on the properties, the loan assumption agreements had to be satisfactory to Silver Creek and the sale transactions would close no later than July 1, 2005. During escrow, a dispute arose between the parties regarding the terms of the loan assumption agreements. Shortly after the deadline for closing, Silver Creek notified Blackrock that it considered the agreements and escrow terminated for failure to comply with the closing deadline and failure to obtain satisfactory loan assumption agreements. Silver Creek filed an action for declaratory relief seeking a declaration that it validly terminated the agreements and was entitled to retain the deposit. Blackrock filed a cross-complaint alleging that Silver Creek had breached its obligation to act reasonably in approving a loan release and thus its purported termination of the agreements was invalid. Blackrock sought damages and the return of its deposit for Silver Creek’s alleged breach of the agreements or, alternatively, specific performance.

The trial court noted that the primary issue before it was whether Silver Creek was in default of the agreements when it gave notice of the termination, and the secondary issue was the proper disposition of the deposit. The trial court found in favor of Silver Creek on the complaint and Blackrock on the cross-complaint. The trial court awarded the return of the deposit to Blackrock.

Silver Creek filed a motion for attorney’s fees claiming it was the prevailing party on the contract under Section 1717 and the agreements. The trial court found that Silver Creek did not  win an "unqualified victory” because Blackrock was entitled to the return of the deposit. Thus, the trial court concluded that it could not  determine that one party had obtained greater relief than the other.  The Court of Appeal reversed.

The Court of Appeal explained the basic rules that determine which party is the prevailing party for purposes of awarding attorneys’ fees under Section 1717. When a party obtains a “‘simple, unqualified win’” by completely prevailing on, or defeating, the contract claims in the action and the contract contains a provision for attorney’s fees, the successful party is entitled to attorney’s fees as a matter of right, eliminating the trial court’s discretion to deny fees under Section 1717. But if neither party achieves a complete victory on all the contract claims, it is within the broad 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. The trial court has the power to identify the party obtaining “a greater relief” by examining the results of the action in relative terms: the general term “greater” includes “[l]arger in size than others of the same kind” as well as “principal” and “[s]uperior in quality.” The trial court should compare 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. Additionally, in determining litigation success, courts should respect substance rather than form, and to this extent should be guided by “equitable considerations.” For example, a party who is denied direct relief on a claim may nonetheless be found to be a prevailing party if it is clear that the party has otherwise achieved its main litigation objective.

In this case, the Court of Appeal first held that Silver Creek was not entitled to an award of attorney’s fees as a matter of right because it did not obtain a  simple, unqualified win.  However, the Court of Appeal also held that the trial court abused its discretion by finding neither party had obtained greater relief. The trial court not only ignored the fact that the main litigation objective for the parties was disposition of the properties and that the deposit issue was secondary, but it also oversimplified its duties by counting the number of contract claims presented and essentially declaring a tie because each party won one of the claims presented for resolution. The record indisputably showed that Silver Creek obtained the greater relief on the contract. The property issue was most important to the parties and “greater” in terms of monetary value—about $29.75 million at issue for the properties versus about $1.13 million at issue for the deposit. Thus, Silver Creek achieved its main litigation objective, while Blackrock clearly failed to accomplish its desired goal even though it obtained the return of its deposit. Accordingly, the trial court abused its discretion by finding neither party achieved greater relief on the contract and denying Silver Creek its attorney’s fees under Section 1717.

The Court of Appeal further rejected Blackrock’s argument that because there was no evidence it had acted improperly, the trial court furthered equity by refusing to “punish” it by awarding attorney’s fees. Equitable considerations must be connected to litigation success on the claims presented; a trial court should not consider the fault of the parties or their litigation motives in making a prevailing party determination under Section 1717. Thus, a trial court’s discretion in a mixed results case is broad, but not unlimited.

Glen C. Hansen is a senior associate at Abbott & Kindermann, LLP.  For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.