Thompson v. Flynn Riley Bailey & Pasek CA1/4

Filed 12/30/21 Thompson v. Flynn Riley Bailey & Pasek CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not

certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not

been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

PAUL AND KATHLEEN

THOMPSON,

Plaintiffs and Appellants, A161238

v. (Marin County

FLYNN RILEY BAILEY & Super. Ct. No. CIV170608)

PASEK, LLP, et al.,

Defendants and

Respondents.

Paul and Kathleen Thompson (the Thompsons) brought

this legal malpractice action after defendants failed to timely

appeal from a judgment against the Thompsons in an action

related to the foreclosure of property (the underlying case). The

underlying case consisted of two consolidated lawsuits. As is

relevant here, after a bench trial in the underlying case, the court

found against the Thompsons on (1) their cross-complaint for

breach of a deed of trust against trustee T.D. Service Company

(TDS), and (2) their claim against TDS for breach of a services

agreement, which they asserted as assignees of the lender,

Luther Burbank Services (LBS). With the judgment wholly in

favor of TDS, the trial court in the underlying case granted TDS

1

approximately $400,000 in prevailing party attorney fees under

Civil Code1 section 1717.

Defendants filed an untimely notice of appeal as to the

underlying judgment against the Thompsons, but a timely notice

of appeal as to the fee award, which resulted in an affirmance.

The Thompsons then settled with TDS and brought a malpractice

case against defendants based on defendants’ failure to timely file

the appeal from the underlying judgment.

The trial court in this malpractice action found that, if

defendants had timely filed an appeal in the underlying case,

TDS would have prevailed on the cross-complaint, but the

Thompsons ultimately would have prevailed on the assigned

claim for breach of the services agreement. The court issued a

judgment for the Thompsons, including damages consisting of:

(1) the amount they would have recovered on the breach of

services agreement claim, as well as prevailing party attorney

fees they would have incurred to prosecute that claim on remand;

and (2) attorney fees the Thompsons paid to TDS for the untimely

appeal that they would not have had to pay had the appeal been

timely filed.

The sole question in this appeal is whether the trial court

in the malpractice action erred in failing to award the Thompsons

additional damages to compensate them for the full amount of

attorney fees they paid to TDS in the underlying case. The

parties agree that the answer to this question, in turn, depends

1All further references are to the Civil Code unless

otherwise specified.

2

wholly on the answer to the question of whether TDS could have

been awarded prevailing party attorney fees under section 1717

on the Thompsons’ cross-complaint. Because the court correctly

concluded that TDS could have been awarded prevailing party

attorney fees on the cross-complaint under section 1717, we

affirm the judgment.

BACKGROUND

I. The Underlying Real Estate Transaction and

Proceedings

Luther Burbank Savings (LBS) loaned 620 Third Street,

LLC (the LLC) $3,945,100 to purchase real property (the

property) in Sonoma County. The loan was evidenced by a

promissory note dated January 3, 2007, as modified in March

2008 (collectively, the Note), and secured by a deed of trust to the

property (the Deed of Trust). Paul Thompson was the manager of

PK Property LLC, which was the sole member of the LLC. The

Thompsons executed a repayment guarantee for the loan (the

Guaranty).

A. LBS’s Complaint, the Foreclosure Proceedings, and the

Thompsons’ Cross-Complaint

In early 2009, the LLC defaulted on the loan, and the

Thompsons did not repay it. LBS sued the LLC and the

Thompsons seeking judicial foreclosure and damages for breach

of the Guaranty.

Thereafter, LBS substituted TDS as the trustee under the

Deed of Trust. A services agreement governed the relationship

between LBS and TDS, and TDS agreed therein to indemnify

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LBS for attorney fees incurred by LBS “to the extent caused by

[TDS’s] breach of this Agreement or by the negligence or willful

misconduct of [TDS].” TDS initiated nonjudicial foreclosure

proceedings under the Deed of Trust, and a foreclosure sale was

set for December 2009. Due to a mistake on TDS’s part, TDS

made an opening bid on behalf of LBS for approximately

$4,476,028, which represented the total outstanding

indebtedness on the Note, instead of the $1,767,000 bid that LBS

had authorized. TDS prepared a trustee’s deed upon sale, but it

did not record the deed. LBS notified TDS of the mistaken bid

amount, and TDS determined the sale was invalid. TDS

rescinded the sale, and, over the Thompsons’ objections, set a new

foreclosure sale. At the second sale, TDS bid $1,767,000 for the

property on LBS’s behalf, and LBS was declared the high bidder.

LBS thereafter amended its complaint to sue the

Thompsons only to recover the deficiency under the Guaranty.

The LLC and the Thompsons filed a cross-complaint against TDS

asserting claims for breach of the Deed of Trust and violation of

nonjudicial foreclosure statutes.2 The Thompsons’ claims were

premised on allegations that the first foreclosure sale could not

be rescinded, and that TDS had violated its contractual and

statutory duty to sell the property to the highest bidder. The

Thompsons alleged that they “incurred and will continue to incur

expenses in the form of attorneys’ fees, court costs, and other

litigation expenses to defend against the [LBS] Complaint, and

2The cross-complaint also asserted claims for bid chilling,

but those claims were dismissed before trial.

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are entitled to recover such fees (including any fees awarded

against them and in favor of [LBS]) . . . from . . . [TDS].”

In August 2011, LBS and the Thompsons settled, and LBS

assigned to the Thompsons its claims against TDS arising from

the processing of the foreclosure.

B. The Thompsons’ Complaint and the Consolidation

In December 2012, as LBS’s assignees, the Thompsons filed

a complaint against TDS for breach of the services agreement,

express contractual indemnity, and breach of the implied

covenant of good faith and fair dealing.

In September 2013, the Sonoma County Superior Court

consolidated the Thompsons’ cross-complaint from the first suit

and their complaint in the second suit. In 2014, the parties

stipulated to a bifurcated trial with the first phase to proceed as a

court trial of certain legal issues based on stipulated facts. In its

statement of decision from this phase, the trial court found that

the Thompsons and the LLC did not have standing to bring the

cross-complaint against TDS. The Thompsons did not have

standing to sue TDS under the Note or Deed of Trust because

they were “guarantors only,” not the borrowers, and the court

could not identify any obligations that TDS owed them and

breached. The LLC did not have standing because its corporate

status was cancelled, and, even if it was a viable entity, it

sustained no damages as a result of TDS’s mistake because it

could not be subject to a deficiency judgment. The court also

found that TDS had the right to rescind the first foreclosure sale

after its mistake.

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With regard to the Thompsons’ complaint, the court found

that LBS did not have valid causes of action for breach of contract

or negligence that could be assigned to the Thompsons because

“the second sale appears on its face to have obtained for LBS all

of the benefits that LBS intended to achieve by means of the

foreclosure.” The court also found LBS did not validly assign

claims to the Thompsons because the services agreement

prohibited assignments without the consent of TDS, who did not

consent. The court entered judgment in favor of TDS.

TDS moved for attorney fees under section 1717 and “the

terms of the applicable agreements.” The court granted the

motion, although it was not clear whether the court based its

award on TDS prevailing on the cross-complaint, complaint, or a

combination of the two. The Thompsons appealed from the

judgment and the order granting attorney fees, but their appeal

from the judgment was dismissed as untimely.

On appeal from the attorney fees award, the Thompsons

argued that section 1717 did not apply because the cross-

complaint sought fees as damages, not costs; TDS was not

entitled to attorney fees incurred defending against the cross-

complaint under the terms of the Deed of Trust, Note, Guaranty,

or the services agreement; and the court failed to properly

apportion fees and awarded duplicative fees. A panel from

Division Five of this court assumed without deciding that section

1717 attorney fees were not available under the cross-complaint,

but affirmed the fee award in any event. It found that, even if

TDS was only entitled to prevailing party fees under the services

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agreement, the trial court did not abuse its discretion by failing

to apportion the fees. The Thompsons thereafter settled the

attorney fees award with TDS for $600,000.

II. The Legal Malpractice Action

In the first phase of the Thompsons’ malpractice action

against defendants, the trial court, acting as an appellate court,

determined how a timely appeal of the judgment in the

underlying case would have been resolved. The court addressed

stipulated issues, including whether the Thompsons lacked

standing to pursue their cross-claims against TDS, and whether

they obtained a valid assignment of claims from LBS. The court

found that the Thompsons were not parties to the Deed of Trust

or Note, nor were they third-party beneficiaries thereof, so they

lacked standing to bring the cross-complaint. But contrary to the

court in the underlying case, the trial court in the malpractice

action determined that LBS had validly assigned its claims

against TDS to the Thompsons.3

In the second phase of the malpractice action, the trial

court tried the “remanded” breach of services agreement claim

against TDS on stipulated facts. The trial court found that TDS

breached the services agreement with LBS, and the Thompsons

(as LBS’s assignees) would have received a judgment for

3 The other stipulated issues were whether TDS had the

right to rescind the first trustee sale and whether the Thompsons’

statutory claim failed because the acts of TDS were privileged

under section 47. The trial court found that TDS had authority

to rescind the first sale, the question of immunity under section

47 was moot, and TDS had immunity under section 47 in any

event.

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$340,340.80 in damages for this breach. The parties then

stipulated to the remaining issues that required resolution,

including whether the Thompsons should receive interest on the

breach of contract judgment and/or prevailing party attorney fees

and costs, and “whether the attorney’s fees and costs in favor of

[TDS]” in the underlying case should be “reversed.”

After briefing and a hearing, the trial court issued a post-

trial order. As to the issue of “reversal” of the TDS attorney fees

award, the court observed that the question was whether the

Thompsons were entitled to this amount as damages from

defendants’ malpractice. It found the Thompsons were entitled to

a portion of the $600,000 they had paid to TDS, specifically the

$105,320 they had paid TDS in connection with the untimely

appeal. As for the remainder, the court found that the

Thompsons had not proven to a “legal certainty” that TDS would

not have been entitled to recover attorney fees under section 1717

on the Thompsons’ cross-complaint. First, the court observed

that the fact that the cross-complaint prayed for fees as damages,

not costs, was not dispositive because contractual attorney fees

may be awarded regardless of whether they were pled. Next, the

court found that the Thompsons relied on the Guaranty to assert

their contract claims against TDS, and they challenged the

foreclosure sale asserting they had standing based on the loan

documents, including the Guaranty. The Guaranty contained an

attorney fee provision, so “a court could conclude that [TDS] was

a prevailing party on a contract entitled to fees under the

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reciprocity of [section] 1717.” The court entered judgment for the

Thompsons for $673,924.42 on September 25, 2020.

The Thompsons brought a motion to vacate the judgment,

arguing that the court’s finding that TDS could have been

awarded attorney fees on the cross-complaint under section 1717

was not supported by the facts or law. The Thompsons asked for

a new judgment awarding them the entire $600,000 they had

paid to TDS. The court denied the motion. It again rejected the

argument that section 1717 attorney fees could not be awarded

on the cross-complaint because the Thompsons did not plead

entitlement to these costs. The court stated that the theory of the

Thompsons’ case was breach of contract, and the Thompsons

“asserted that theory by using the Guaranty of the loan that was

secured by the Deed of Trust, all subject to attorney’s fees

provisions.” Had the Thompsons prevailed on their theory, the

court concluded, they could have recovered attorney fees. As a

result, TDS could have recovered these fees as well. The

Thompsons timely appealed.

DISCUSSION

The sole question in this appeal is whether the trial court

correctly determined that TDS could have recovered prevailing

party attorney fees under section 1717 on the breach of contract

claim in the Thompsons’ cross-complaint. Defendants contend

that we should review the trial court’s determination for

substantial evidence, but it is well established that we review de

novo the question of whether there is a legal basis for awarding

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attorney fees. (Brown Bark III, L.P. v. Haver (2013)

219 Cal.App.4th 809, 821 (Haver).)

Section 1717 provides, in relevant part: “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.” (§ 1717, subd. (a); see Code Civ. Proc.,

§§ 1032, subd. (b) [prevailing party shall recover costs], 1033.5,

subds. (a)(10)(A) [attorney fees awarded under statute or contract

are allowable costs].) Section 1717 makes reciprocal an otherwise

unilateral attorney fee provision in an action on the contract

when the contract provides the right to one party but not the

other. (Santisas v. Goodin (1998) 17 Cal.4th 599, 610–611.) It

also applies when a party litigant prevails in an action on a

contract by establishing that the contract is invalid, inapplicable,

unenforceable, or nonexistent; in that situation, section 1717

permits that party’s recovery of attorney fees whenever the

opposing party would have been entitled to attorney fees under

the contract had he or she prevailed. (Id. at p. 611.)

Generally, attorney fees are awarded only when the

contract action is between signatories to the contract containing

the fee provision, but, in some circumstances, section 1717’s

reciprocity principles apply in actions with nonsignatories.

(Reynolds Metal Co. v. Alperson (1979) 25 Cal.3d 124, 128

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(Reynolds).) Our Supreme Court first applied reciprocity

principles to a nonsignatory in Reynolds. There, the plaintiff

sued the defendants for the contractual debt of two corporations,

alleging the defendants were alter egos of the corporations.

(Id. at p. 127.) The plaintiff lost on its alter ego theory, but the

trial court awarded the prevailing defendant nonsignatories

attorney fees under the contracts the plaintiff had attempted to

enforce. (Ibid.) Our Supreme Court affirmed, holding that

section 1717 must be “interpreted to further provide a reciprocal

remedy for a nonsignatory defendant, sued on a contract as if he

were a party to it, when a plaintiff would clearly be entitled to

attorney’s fees should he prevail in enforcing the contractual

obligation against the defendant.” (Id. at p. 128.) Section 1717

“would fall short of th[e] goal of full mutuality of remedy if its

benefits were denied to parties who defeat contract claims by

proving that they were not parties to the alleged contract or that

it was never formed.” (Hsu v. Abbara (1995) 9 Cal.4th 863, 870.)

In assessing whether the plaintiff would have been entitled

to attorney fees under section 1717 had it prevailed, the merit of

the theory used to assert the nonsignatory defendant’s

contractual liability “is irrelevant.” (Haver, supra,

219 Cal.App.4th at p. 827.) In Haver, the plaintiff sued a

nonsignatory defendant for breach of agreements related to a line

of credit, asserting successor liability against the defendant.

(Id. at pp. 816–817.) The trial court found against the plaintiff on

the breach of contract claims, but it denied the defendant

prevailing party attorney fees on those claims, finding the

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defendant would not have been liable for the plaintiff’s attorney

fees had the plaintiff prevailed. (Id. at p. 827.) The trial court’s

rationale was that the plaintiff’s successor liability theory

“clearly” lacked merit. (Ibid.) The appellate court reversed.

“Regardless of the [plaintiff’s] theory’s merit, [plaintiff] sued

[defendant] on that theory and forced [defendant] to incur

attorney fees to defend against it through trial. ‘[T]he pertinent

inquiry for purposes of . . . section 1717 is whether [plaintiff]

would have been entitled to attorney fees in a hypothetical

situation in which [it] did prevail on its claim[s].’ ” (Ibid.) There,

had the plaintiff succeeded in proving the defendant was a

successor, it could have recovered attorney fees. Accordingly, the

defendant was entitled to its fees. (Ibid.; see also Reynolds,

supra, 25 Cal.3d at p. 129 [“Had plaintiff prevailed on its cause of

action claiming defendants were in fact the alter egos of the

corporation [citation], defendants would have been liable on the

notes”].)

We conclude that the trial court in the malpractice action

correctly found that TDS was entitled to fees on the Thompsons’

cross-complaint under the rule that a prevailing party is entitled

to recover its attorney fees pursuant to a contract provision if the

opposing party would have been entitled to attorney fees had it

prevailed. In their cross-complaint, the Thompsons sued TDS for

breach of contract. Their legal theory was that they had standing

to sue for breach because they, along with TDS, were parties to

the loan transaction documents, including the Deed of Trust and

Note. More specifically, their theories were that the Deed of

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Trust, Note, and Guaranty were one integrated contract (§ 1642),

and the Deed of Trust contained and expressly incorporated the

Guaranty, making the Thompsons and TDS parties thereto.4

Alternatively, the Thompsons claimed to be third-party

beneficiaries of the Note and Deed of Trust.

Under section 1642, several papers relating to the same

subject matter and executed as parts of substantially one

transaction are to be construed together as one contract. (Nevin

v. Salk (1975) 45 Cal.App.3d 331, 338 [“a note, mortgage and

agreement of sale constitute one contract where they are part of

the same transaction”].) “When there are several contracts

between the parties as a part of a single interrelated relationship

or transaction, commonly referred to as an integrated agreement,

and only one contract contains an attorney’s fees provision, the

several documents may be construed together and the attorney’s

fees provision applied to any litigation involving any one, or all,

of the several agreements.” (12 Miller & Starr, Cal. Real Estate

(4th ed. 2021) § 40:70.) Further, “where there are two or more

separate, independent contracts as part of the same transaction,

and one agreement incorporates a second agreement by reference,

the party enforcing the incorporating document may recover fees

based upon the fee provision in the incorporated document.”

4The incorporation theory was that the Deed of Trust

contained the Guaranty and that it incorporated the Guaranty

through its definition and use of the term “Loan Documents,”

which meant “the Note, this Deed of Trust . . . all guaranties . . .

and any other documents now or in the future executed by

Trustor, any guarantor or any other person in connection with

the loan evidenced by the Note . . . .”

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(Ibid.) Both the Guaranty and the Note contain attorney fee

provisions.5 The trial court rejected the Thompsons’ theory of an

overarching agreement, but, had the Thompsons succeeded in

convincing the court that they were parties to an overarching

agreement represented by the Deed of Trust and Guaranty, or

the Deed of Trust, Note, and Guaranty, that agreement would be

subject to an attorney fee provision.6

Seeking to avoid this result, the Thompsons argue they did

not sue to enforce the Note or Guaranty, so the fee provisions

therein are inapplicable. This argument ignores the “one

contract” and incorporation theories the Thompsons used to

pursue their breach of contract claim. “Where a contract provides

for attorney’s fees . . . that provision shall be construed as

5 The Guaranty states, “The undersigned shall pay to

Lender all attorneys’ fees and costs incurred by Lender in seeking

to enforce any of the liabilities or obligations of the undersigned

under this Guaranty.” The Note states, “If an action is brought

for collection of this note, or if proceedings are commenced to

foreclose upon the security given for this note, I promise to pay

all costs and expenses incurred including reasonable attorney’s

fees.”

6 The question we address is not the propriety of a finding

that the agreements could be read as one. Rather, because we

must assume that the Thompsons would have prevailed on their

claims against TDS in order to determine whether TDS was

entitled to fees for defeating the cross-complaint, we focus instead

on whether the Thompsons could have recovered attorney fees

had they prevailed on their theories—regardless of whether those

theories had any substantive merit. (Haver, supra,

219 Cal.App.4th at p. 827 [the merit of the theory used to assert

the nonsignatory defendant’s contractual liability “is

irrelevant”].)

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applying to the entire contract . . . .”7 (§ 1717, subd. (a); Harbor

View Hills Community Assn. v. Torley (1992) 5 Cal.App.4th 343,

348–349 [explaining this language was added to overrule

Sciarrotta v. Teaford Custom Remodeling, Inc. (1980)

110 Cal.App.3d 444, 446, which held that parties could limit an

attorney’s fee clause to specific contract provisions or actions on

the contract].) Thus, irrespective of the merits of the Thompsons’

theories for how they were parties to an overarching contract

including all the loan documents, had they prevailed with these

theories in enforcing a contractual obligation against TDS, they

could have recovered attorney fees under section 1717. (See Boyd

v. Oscar Fisher Co. (1989) 210 Cal.App.3d 368, 378–381 [invoices

with provision allowing for attorney fees for manufacturer’s

collection efforts were read as part of dealership agreement, and

limited attorney fee clause applied to entire agreement];

12 Miller & Starr, Cal. Real Estate (4th ed. 2021) § 40:70.)8

Accordingly, the trial court in the malpractice action did not err

7 This general rule of construction applies “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.” (§ 1717, subd. (a).) The agreements at

issue do not contain language that would except them from

section 1717’s general rule of construction.

8 Citing Raffetto v. CIT Business Lending (E.D. Cal. March

8, 2010) No. CIV S-08-392, 2010 WL 891615, *5, the Thompsons

also argued they could enforce the Deed of Trust as third-party

beneficiaries of the Note and Deed of Trust. Given our

disposition, we need not address whether the Thompsons would

have been entitled to attorney fees if they had succeeded in

enforcing the Deed of Trust as third-party beneficiaries.

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in holding that the Thompsons had failed to prove TDS could not

have recovered attorney fees on the cross-complaint.

Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th

541, upon which the Thompsons rely, does not convince us

otherwise. Super 7 is distinguishable because it did not involve a

contract claim under section 1717. Rather, where the purchaser

of real estate sued a broker for fraud, the court in Super 7 held

that section 1717 and its reciprocity principles were inapplicable

to the fraud claim. (Id. at pp. 546–547.) The court further held

that the broker could not recover fees for defense of the tort claim

under the terms of the purchase agreement at issue because the

broker was not a party or third-party beneficiary thereto, and,

even if he were a third-party beneficiary, the fee provision did not

evidence an intent to benefit third parties. (Id. at pp. 549–550.)

Finally, there is no merit to the Thompsons’ assertion that

TDS could not have recovered fees under section 1717 because

they sought attorney fees in the cross-complaint only as damages,

and not pursuant to that statute. Even accepting that the

Thompsons alleged a right to recover from TDS the attorney fees

they incurred in the litigation with LBS as an aspect of their

damages, the trial court correctly observed that attorney fees as

costs can now be recovered through a noticed motion under Code

of Civil Procedure section 1033.5. (Allstate Ins. Co. v. Loo (1996)

46 Cal.App.4th 1794, 1797–1798.)

In sum, the trial court correctly found that the Thompsons

had failed to establish that TDS could not have recovered

prevailing party attorney fees under section 1717 for its

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successful defense of the contract claim in the Thompsons’ cross-

complaint. The trial court therefore did not err in denying the

Thompsons’ request for damages in the full amount of the

attorney fees they paid to TDS.9

DISPOSITION

The judgment is affirmed.

BROWN, J.

WE CONCUR:

POLLAK, P. J.

ROSS, J.

Thompson et al. v. Flynn Riley Bailey & Pasek, LLP (A161238)

9 In the earlier appeal of the fee award, Division Five of this

court assumed that the trial court in the underlying case

awarded TDS approximately $400,000 in attorney fees on the

breach of services agreement claim, and that fees were not

recoverable under the cross-complaint. It nonetheless held that

the trial court “could reasonably find the activities TDS

undertook to defend against the cross-claims were

‘ “ ‘ inextricably intertwined’ ” ’ with the activities it undertook to

defend against the complaint, ‘making it “impracticable, if not

impossible, to separate the multitude of conjoined activities into

compensable or noncompensable time units.” ’ ” This ruling

supports the converse conclusion that the roughly $400,000 in

attorney fees awarded by the trial court in the underlying case

could have been based on successful defense of the cross-

complaint alone.



Judge of the Superior Court of California, City and

County of San Francisco, assigned by the Chief Justice pursuant

to article VI, section 6 of the California Constitution.

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