Judge: Curtis A. Kin, Case: BC711605, Date: 2022-12-29 Tentative Ruling
Case Number: BC711605 Hearing Date: December 29, 2022 Dept: 72
MOTION FOR ATTORNEY FEES
Date: 12/29/22
(8:30 AM)
Case: Anthony Grillo et al. v.
Marcum, LLP et al. (BC711605)
TENTATIVE RULING:
Cross-Defendant Michael Colaco’s Motion for Attorney Fees is DENIED.
Cross-complainants Marcum LLP and Steve Rapattoni’s evidentiary objection is OVERRULED.
Cross-defendant Michael Colaco moves for an award of attorney fees in the amount of $150,796.83, based on cross-complainants’ dismissal of the Second Amended Cross-Complaint.
Colaco cites to an attorney fee provision in an Engagement Agreement between cross-complainant Marcum LLP and cross-defendant Frost VP Early Stage Fund II, L.P. (“Fund II”). (Outwater Decl. ¶ 13 & Ex. 9.) This provision states: “In any litigation brought by either the Firm or the Fund, the prevailing party shall be entitled to an award of its reasonable attorneys’ fees and costs incurred, including through all appeals.” (Outwater Decl. ¶ 13 & Ex. 9 at 6.)
Even though Colaco was not a party to the Engagement Agreement, Colaco maintains that he is entitled to attorney fees under Civil Code § 1717(a), which states: “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.” (Civ. Code § 1717(a).)
“An action (or cause of action) is ‘on a contract’ for purposes of section 1717 if (1) the action (or cause of action) ‘involves’ an agreement, in the sense that the action (or cause of action) arises out of, is based upon, or relates to an agreement by seeking to define or interpret its terms or to determine or enforce a party’s rights or duties under the agreement, and (2) the agreement contains an attorney fee clause.” (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc. (2012) 211 Cal.App.4th 230, 241-42.) “[S]ection 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.” (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128.)
Neither the First Amended Cross-Complaint (“FACC”), in which Colaco was first named as a cross-defendant, nor the Second Amended Cross-Complaint (“SACC”) were “on a contract.” Cross-complainants Marcum LLP and Steve Rapattoni alleged that Colaco owed duties of care and fiduciary duties as a member of the general partner entity of Fund II and a member of Fund II’s Investment Committee. (SACC ¶¶ 6, 25, 26, 32-34; FACC ¶¶ 21, 30, 31.)
Cross-complainants set forth duties under the Engagement Agreement. (SACC ¶ 13; FACC ¶ 9.) However, cross-complainants alleged that Frost VP Seed LLC (“Seed Fund”) and Fund II (collectively, “Funds”) and their management, “including Colaco on behalf of Fund II,” agreed to the specified provisions. (SACC ¶ 13; FAC ¶ 9.) Cross-complainants never alleged that Colaco individually owed duties under the Engagement Agreement. Indeed, in the first cause of action for Contractual Indemnity, cross-complainants named Seed Fund and Fund II, the entities that signed engagement agreements, as cross-defendants in this cause of action, not Colaco. (SACC ¶¶ 11, 51, 52; FACC ¶¶ 4, 33, 34.) Further, cross-complainants never alleged that Colaco was an alter ego of Fund II, such that Colaco could be considered a party to the Engagement Agreement. (SACC ¶ 46 [allegation that Colaco is alter ego of general partner entity of Fund II].)
The causes of action asserted against Colaco – the eighth cause of action for Equitable Indemnity, the ninth cause of action for Comparative Implied Indemnity, the tenth cause of action for Declaratory Relief, and the eleventh cause of action for Negligence – were not based on the Engagement Agreement, but rather the fiduciary duties and duties of care that Colaco allegedly owed to Fund II as a member of its general partner. (SACC ¶¶ 88, 97; cf. FACC ¶¶ 68-84 [no reference to Engagement Agreement].)
For the foregoing reasons, the rights that cross-complainants sought to enforce against Colaco were not under the Engagement Agreement. Accordingly, the FACC and SACC were not actions “on a contract” through which Colaco could potentially recover fees under Civil Code § 1717.
Although cross-complainants prayed for attorney fees (Prayer for Relief ¶ 6), such fees were not necessarily based on the Engagement Agreement. Cross-complainants allege that, due to Colaco’s alleged concealment of the wrongdoing of Stuart Frost regarding mismanagement of the Funds, plaintiffs would not have sued Marcum and cross-complainants would not have incurred fees to defend against plaintiffs’ claims. (SACC ¶¶ 31, 88.) “A person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney's fees, and other expenditures thereby suffered or incurred.” (Prentice v. North Am. Title Guaranty Corp., Alameda Division (1963) 59 Cal.2d 618, 620.) Because Colaco’s duties as alleged in the FACC and SACC did not arise from the Engagement Agreement, cross-complainants could have potentially recovered fees against Colaco based on the “tort of another” doctrine.
Colaco maintains that, in response to his demurrers to the FACC and SACC, as well as in discovery responses, cross-complainants argued that Colaco’s duties arose from the Engagement Agreement and that Colaco failed to comply with the terms of the Engagement Agreement. To the extent that cross-complainants asserted that Colaco owed duties to Marcum under the terms of its Engagement Agreement by Fund II, this was only because cross-complainants maintained that Colaco was a member of the general partner entity that managed Fund II and that Colaco was part of Fund II’s governance. (See, e.g., Outwater Decl. ¶ 8 & Ex. 3 at 5:19-22 [“Finally, Marcum has alleged that because Colaco was a member of Fund II's management and governance, he owed and breached a duty owed to Marcum, under the terms of its engagement by Fund II, to disclose to Marcum all facts of which he was aware….”]; Outwater Decl. ¶ 12 & Ex. 8 at 98:16-23 [“If Plaintiffs’ contention that Marcum is liable for failing to disclose related-party transactions…then those transactions would be material, related-party transactions, and the Funds’ and their management’s (including Propounding Party on behalf of Fund II) knowing misrepresentations and/or concealments…were in violation of the obligations and promises in the Engagement Agreements that complete and accurate information would be…provided to Marcum in connection with Marcum’s audits….”].)
For the reasons stated above, based on the allegations of the FACC and SACC, cross-complainants are not attempting to enforce any obligation arising from the Engagement Agreement against Colaco. Indeed, in connection with Colaco’s demurrer to the SACC, the Court found that, based on the allegations of the SACC, because the Engagement Agreement was between Marcum and the Funds, not Colaco, no duty of care arose from the Engagement Agreement. (Ludeke Decl. ¶ 8 & Ex. E at 2.) Colaco had argued in the demurrer to the SACC that “Colaco was not a party to the Audit Engagement Agreement and therefore owed no contractual duty to Marcum.” (Ludeke Decl. ¶ 6 & Ex. C at 8:18-19.) Because Colaco prevailed in his argument regarding lack of contractual duty in the demurrer to the SACC, Colaco is judicially estopped from arguing that cross-complainants’ action against Colaco is “on a contract.” (Owens v. County of Los Angeles (2013) 220 Cal.App.4th 107, 121 [“The [judicial estoppel] doctrine prohibits a party from asserting a position in a legal proceeding that is contrary to a position he or she successfully asserted in the same or some earlier proceeding”].)
Because the cross-complaints against Colaco were not “on a contract,” Colaco is not entitled to attorney fees under Civil Code § 1717. The motion is DENIED.