Judge: Daniel S. Murphy, Case: 18STCV01201, Date: 2022-08-08 Tentative Ruling

Case Number: 18STCV01201    Hearing Date: August 8, 2022    Dept: 32

BACKGROUND

In October 2018, AMAG, Inc. (“Plaintiff”) commenced this action against Marc Anthony Cubas, et al. (“Defendants”), asserting causes of action for creditor’s suit, fraudulent conversion, and declaratory relief. The lawsuit stems from an underlying judgment wherein Vlaze was found liable to AMAG for unpaid loans. Marc Cubas was Vlaze’s CEO, and he allegedly made several fraudulent transfers of real and personal property to other Defendants to avoid debt collection. By this action, AMAG sought to unwind these transfers and to apply these assets to the unpaid balance of the money judgment. The operative complaint is the First Amended Complaint (“FAC”) filed August 4, 2020, alleging fraudulent conversion and declaratory relief.

On October 28, 2021, the Court granted Defendants’ motion for summary judgment as to all Defendants except Omar Zambrano and the Zambrano Law Corporation. On February 2, 2022, default was entered against Vlaze pursuant to a November 11, 2021 court order striking its answer. Judgment was entered on February 4, 2022.

On June 20, 2022, Defendants filed the instant motion for attorneys’ fees pursuant to the reciprocity provisions of Civil Code section 1717, on the grounds that the underlying loan agreement contains an attorneys’ fees provision.  

LEGAL STANDARD

When authorized by contract, statute or law, reasonable attorney fees are allowable costs. (Code Civ. Proc, § 1033.5, subd. (a)(10)(A).) “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties . . . .” (Code Civ. Proc., § 1021.) “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, subd. (a).)

DISCUSSION

            An action is “on a contract” for purposes of Civil Code section 1717 if it involves or relates to an agreement by seeking to define or interpret its terms or to determine a party’s rights or duties under the agreement. (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc. (2012) 211 Cal.App.4th 230, 241-42.) In this case, Defendants’ reliance on Civil Code section 1717 is misplaced. The present action for fraudulent transfer is not “on a contract” because it does not seek to interpret the loan agreement or to define any party’s rights or obligations under the agreement. Rather, Plaintiff sought to unwind certain transfers allegedly made by Marc Cubas to avoid fulfilling the court judgment entered in the underlying case. The action “on a contract” was the underlying action for breach of contract, in which Plaintiff already prevailed. The loan agreement is immaterial to the present action except to provide the context for why Plaintiff has a judgment to collect on in the first place. Other than that, the merits of Plaintiff’s fraudulent transfer claim are completely independent of the terms of the loan agreement.

            Defendants rely on MSY Trading, Inc. v. Saleen Automotive, Inc. (2020) 51 Cal.App.5th 395 for the proposition that “[a] post-judgment action to add a party as an alter ego on a judgment is itself an action ‘on a contract’ for purposes of Civil Code section 1717, entitling the business owner who defeated the alter ego claim to prevailing party attorneys’ fees.” (Mtn. 10:5-13.) However, “[t]he reason an alter ego can be added to a judgment is because, in the eyes of the law, the alter ego was a party, albeit by a different name.” (MSY Trading, supra, 51 Cal.App.5th at p. 403.) Recognizing that there is no substantive difference between suing a defendant for breach of contract in the first instance and filing a subsequent action to establish that defendant as an alter ego judgment debtor, the court held that a subsequent alter ego action is “on a contract.” (Id. at pp. 402-03.) By contrast, the present action for fraudulent transfer did not seek to add any alter ego judgment debtor to the underlying judgment. None of the Defendants in this action were at risk of being held liable on the contract, as alter egos or otherwise. Rather, Plaintiff sought to unwind transfers allegedly made to the Defendants.

            The court in MSY Trading actually reiterated the general rule that “when a judgment is rendered in a case involving a contract that includes an attorney fees and costs provision, the judgment extinguishes all further contractual rights, including the contractual attorney fees clause.” (MSY Trading, supra, 51 Cal.App.5th at p. 403.) Such is the case here, where Plaintiff already obtained a judgment in its favor in the underlying breach of contract action. The narrow exception for alter ego does not apply to a subsequent action for fraudulent transfer.

            Defendants also rely on Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124 for the proposition that “post-judgment ‘collection’ efforts are deemed a continuation of the underlying contract case and an ‘action on the contract.’” (Reply 3:14-22.) However, Defendants read Reynolds too broadly. The court in Reynolds merely acknowledged that a defendant who is not a signatory to the contract may nonetheless recover attorneys’ fees under the reciprocity provisions of Section 1717 when that non-signatory defendant is sued as if he were a party to the agreement. (Reynolds, supra, 25 Cal.3d at p. 128-29.) As in MSY Trading, the plaintiff in Reynolds sought to hold the defendants liable as alter egos. (Id. at p. 127.) Again, that is inapplicable to the present situation, where Plaintiff’s subsequent lawsuit sought to unwind alleged fraudulent transfers rather than hold any Defendant liable under the contract.   

            Because the present action for fraudulent transfer in no way involves interpreting the terms of the underlying loan agreement or determining any party’s rights and duties under the agreement, it is not an action “on a contract.” (See Douglas E. Barnhart, Inc., supra, 211 Cal.App.4th at pp. 241-42.) Accordingly, Defendants are not entitled to attorneys’ fees under Civil Code section 1717.

            Lastly, Defendants point out that the loan agreement’s attorneys’ fees provision stated that it applies to “any collection efforts.” (Reply 3:10-13.) However, the “collection effort” was Plaintiff’s underlying action for breach of contract, wherein Plaintiff already prevailed. There is no authority for the proposition that a subsequent lawsuit for fraudulent transfer falls under such a provision. (See MSY Trading, supra, 51 Cal.App.5th at p. 403 [contractual right to attorneys’ fees is extinguished when the contract case ends in judgment].)

CONCLUSION

            Defendants’ motion for attorneys’ fees is DENIED.