Opinion
B325110
06-18-2024
KATHRYN CROOYMANS et al., Plaintiffs and Appellants, v. ERIC L. FOUMBERG, as Trustee, etc., Defendant and Respondent.
Nemecek & Cole, Frank W. Nemecek, Daniel L. Reback and Claudia L. Stone for Plaintiffs and Appellants. Law Offices of Daniel B. Spitzer and Daniel B. Spitzer for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County, Los Angeles County Super. Ct. No. 21SMCV01157 H. Jay Ford III, Judge. Reversed and remanded with directions.
Nemecek & Cole, Frank W. Nemecek, Daniel L. Reback and Claudia L. Stone for Plaintiffs and Appellants.
Law Offices of Daniel B. Spitzer and Daniel B. Spitzer for Defendant and Respondent.
EGERTON, J.
Plaintiffs Kathryn Crooymans and David King appeal an order awarding contractual attorney fees under Civil Code section 1717 to defendant Eric L. Foumberg. Foumberg is not a party to the contract containing the attorney fee clause, and plaintiffs did not sue Foumberg on a claim involving the contract. Accordingly, Foumberg was not entitled to an award of attorney fees under section 1717. We reverse and remand with directions to enter an order denying Foumberg's attorney fee motion.
Statutory references are to the Civil Code, unless otherwise designated.
BACKGROUND
The claims in this case are part of plaintiffs' efforts to enforce a judgment against their late-father's tax planning attorney, Bruce Givner. In an earlier action, plaintiffs filed an arbitration claim against Givner, alleging he committed legal malpractice by failing to provide effective estate planning representation, which caused plaintiffs to incur otherwise avoidable estate taxes. (Crooymans v. Givner (Sept. 7, 2021, B305916) [nonpub. opn.] (Crooymans I).) After obtaining a favorable arbitration award, plaintiffs moved for attorney fees under a prevailing party clause in their engagement agreement with Givner. The arbitrator issued an updated award, finding plaintiffs were the prevailing party on the legal malpractice claim and awarding them more than $1.7 million in attorney fees and costs under the engagement agreement. On April 6, 2020, the trial court in Crooymans I confirmed the arbitration award and entered judgment in favor of plaintiffs and against Givner for $2,571,595.23. As of July 2, 2021, when plaintiffs filed their complaint against Foumberg in this action, the judgment remained "largely unsatisfied."
The fee clause provides: "All non-fee disputes related to our agreement shall be subject to binding arbitration ....This includes, but is not limited to, all tort or contract causes of action, claims based on breach of contract, unjust enrichment, legal malpractice, breach of fiduciary duty, constructive fraud, negligent misrepresentation and fraud.... The prevailing party at the arbitration shall be entitled to attorneys' fees, expenses of litigation and/or arbitration, including expert witnesses, and costs, related to obtaining and collecting any judgment and/or arbitration award, and any other relief to which that party may be entitled."
Plaintiffs sued Foumberg in his capacity as the trustee for two qualified personal residence trusts (the QPRTs) that Givner had created for himself and his wife. Upon forming the QPRTs, the Givners granted each trust a one-half interest in their Bel Aire residence (the Residence).
A QPRT is a tax savings mechanism through which a parent may transfer a residence to a child at a dramatically reduced tax cost. With a QPRT, the grantor or" 'term holder'" transfers a residence to the QPRT and retains the right to live in and use the residence for a specified term of years. (In re Ferrante (B.A.P. 9th Cir., Aug. 26, 2015, Nos. CC-14-1222, CC-14-1223-KiTaPa) 2015 WL 5064087, at *1.) Among other requirements, a QPRT may not hold any assets other than one personal residence, it must be irrevocable, and the trust instrument must prohibit the trust from selling or transferring the residence, directly or indirectly, to the grantor, the grantor's spouse, or an entity controlled by the grantor or the grantor's spouse during the retained term interest of the trust. (Id. at *1-2; see 26 C.F.R. § 25.2702-5(c)(9) (1997).)
According to the operative first amended complaint, between 2011 and 2013, Foumberg and the Givners engaged in two sets of transactions whereby Foumberg, in his capacity as trustee, transferred title to the Residence to the Givners, who in turn refinanced the existing mortgage and then transferred the Residence back to Foumberg, restoring title to the property in the QPRTs. Based on these allegations, plaintiffs asserted a cause of action for declaratory relief, seeking a judicial determination that the QPRTs had been revoked, that the Givners held true legal title to the Residence, and that Foumberg held title to the Residence as a constructive trustee.
Plaintiffs asserted a second cause of action against Foumberg, again in his trustee capacity, to add the QPRTs as a judgment debtor under Code of Civil Procedure section 187.The complaint alleges the Givners "dominate and control the QPRTs"; Foumberg is "merely a figure head and order taker"; and the Givners "instructed Foumberg" to transfer title to the Residence out of the QPRTs and to the Givners in violation of the QPRT instruments and relevant federal regulations. Based on these allegations, plaintiffs asked the court to "disregard the fiction that the QPRTs are separate and independent" of the Givners and "exercise its equitable powers and add Foumberg, in his capacity as Trustee of the QPRTs, as a debtor subject to the [Crooymans I] Judgment."
Code of Civil Procedure section 187 authorizes the trial court to amend a judgment to add additional judgment debtors. (Greenspan v. LADT LLC (2010) 191 Cal.App.4th 486, 508.) As an alternative to filing a post-judgment motion under the statute, "the judgment creditor may file an independent action on the judgment, alleging that the proposed judgment debtor was an alter ego of an original judgment debtor." (Highland Springs Conference & Training Center v. City of Banning (2016) 244 Cal.App.4th 267, 288.)
Foumberg challenged the pleading by demurrer, arguing the probate court had exclusive jurisdiction to adjudicate claims concerning the internal affairs of a trust; plaintiffs lacked standing to challenge the QPRTs; and the complaint's factual allegations were insufficient to state a cause of action. The trial court sustained the demurrer without leave to amend on jurisdictional and substantive grounds and entered a judgment of dismissal in Foumberg's favor.
The court's order stayed entry of dismissal for 60 days to allow plaintiffs to file "the appropriate petition in the probate court." The record shows plaintiffs filed separate petitions for declaratory relief against each QPRT in the probate court, albeit apparently after the court entered the judgment of dismissal.
After serving notice of entry of judgment, Foumberg moved for an award of attorney fees under section 1717. Although the QPRTs were not parties to the engagement agreement, Foumberg argued section 1717's mutuality principle nonetheless mandated a fee award. Because plaintiffs had sought to impose "alter ego liability" for the Crooymans I judgment against the QPRTs, and the judgment contained an award of "attorney fees based on the attorney-fee clause in the written Engagement Agreements," Foumberg maintained he had been sued "on a contract claim" and he was therefore entitled to fees under the statute.
The trial court granted the motion and awarded Foumberg $70,635 in attorney fees. The court determined plaintiffs' action sought to "bind Foumberg [to] the Engagement Agreement through the [Crooymans I] Judgment" insofar as the action sought to add Foumberg to the judgment "as an alter ego of [the Givners]." Had plaintiffs prevailed, the court reasoned, "Foumberg would essentially have been a party to the [Crooymans I] action in which the judgment was entered, and Plaintiffs would have obtained a fee award against Foumberg under the Engagement Agreement." Thus, under section 1717's mutuality principle, the court concluded Foumberg was entitled to a fee award under the engagement agreement, notwithstanding his "nonsignatory" status.
Foumberg served notice of entry of the order. Plaintiffs filed a timely notice of appeal.
DISCUSSION
1. Governing Law and Standard of Review
"A party may not recover attorney fees unless expressly authorized by statute or contract." (Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 818 (Brown Bark), citing Code Civ. Proc., § 1021.) In the absence of an authorizing statute, parties may agree by contract on whether and how to allocate attorney fees. (Brown Bark, at p. 818.) "They may agree the prevailing party will be awarded all the attorney fees incurred in any litigation between them, limit the recovery of fees only to claims arising from certain transactions or events, or award them only on certain types of claims. The parties may agree to award attorney fees on claims sounding in both contract and tort." (Ibid.)
To ensure mutuality of remedy, "section 1717 makes an attorney fee provision reciprocal even if it would otherwise be unilateral either by its terms or in its effect." (Brown Bark, supra, 219 Cal.App.4th at pp. 818-819, citing Santisas v. Goodin (1998) 17 Cal.4th 599, 610 (Santisas); Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128 (Reynolds).) The statute provides: "In any action on a contract, where the contract specifically provides that attorney[ ] 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[ ] fees in addition to other costs." (§ 1717, subd. (a).)
Section 1717 makes an otherwise unilateral attorney fee provision reciprocal in at least two distinct situations. The first "is 'when the contract provides the right to one party but not to the other.'" (Santisas, supra, 17 Cal.4th at pp. 610-611.) "In this situation, the effect of section 1717 is to allow recovery of attorney fees by whichever contracting party prevails, 'whether he or she is the party specified in the contract or not.'" (Id. at p. 611, quoting § 1717, subd. (a).) The second situation is when a person "sued on a contract" containing a prevailing party fee provision successfully defends the claim by arguing the" 'inapplicability, invalidity, unenforceability, or nonexistence of the same contract.'" (Santisas, at p. 611.) "Because these arguments are inconsistent with a contractual claim for attorney fees under the same agreement," the right to attorney fees "would be effectively unilateral," if section 1717 did not apply. (Santisas, at p. 611.)
The second situation commonly arises when a nonsignatory defeats a signatory's efforts to enforce the contract. (See Brown Bark, supra, 219 Cal.App.4th at p. 819.) As our Supreme Court explained in Reynolds, to ensure the statute's primary purpose is met, section 1717 must be interpreted to 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[ ] fees should he prevail in enforcing the contractual obligation against the defendant." (Reynolds, supra, 25 Cal.3d at p. 128; see Real Property Services Corp. v. City of Pasadena (1994) 25 Cal.App.4th 375, 382 (Real Property Services) ["[I]n cases involving nonsignatories to a contract with an attorney fee provision, the following rule may be distilled from the applicable cases: A party is entitled to recover its attorney fees pursuant to a contractual provision only when the party would have been liable for the fees of the opposing party if the opposing party had prevailed."].)
"[T]o invoke section 1717 and its reciprocity principles a party must show (1) he or she was sued on a contract containing an attorney fee provision; (2) he or she prevailed on the contract claims; and (3) the opponent would have been entitled to recover attorney fees had the opponent prevailed." (Brown Bark, supra, 219 Cal.App.4th at p. 820, citing Santisas, supra, 17 Cal.4th at pp. 610-611; Reynolds, supra, 25 Cal.3d at pp. 128-129; Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 706 (Exxess).) The court must disregard any noncontract claims when determining whether section 1717 applies. (Brown Bark, at p. 820, citing Santisas, at p. 615; Exxess, at p. 708.)
We review the trial court's" 'determination of the legal basis for an award of attorney fees de novo as a question of law.'" (Brown Bark, supra, 219 Cal.App.4th at p. 821.)
2. Plaintiffs Did Not Sue Foumberg on the Engagement Agreement and Plaintiffs Would Not Have Been Entitled to Their Attorney Fees under the Agreement Had They Prevailed
As a nonsignatory seeking to recover attorney fees under section 1717, Foumberg was required to show (1) plaintiffs sued him on a contract containing an attorney fee clause; (2) he prevailed on whatever claims were based on the contract; and (3) plaintiffs would have been entitled to their attorney fees under the contract had they prevailed on the claims. (Brown Bark, supra, 219 Cal.App.4th at p. 821; Real Property Services, supra, 25 Cal.App.4th at p. 382.) Because plaintiffs' claims did not involve or seek to enforce the engagement agreement, we conclude neither party was entitled to an award of fees under the agreement or section 1717 for prevailing in the action.
By its terms, section 1717 applies to "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." (§ 1717, subd. (a), italics added.) The phrase" '[o]n a contract' does not mean only traditional breach of contract causes of action. Rather, 'California courts "liberally construe 'on a contract' to extend to any action '[a]s long as an action "involves" a contract....'" '" (Mitchell Land &Improvement Co. v. Ristorante Ferrantelli, Inc. (2007) 158 Cal.App.4th 479, 486.) Thus, "to the extent that the action in fact is an action to enforce -or avoid enforcement of-the specific contract," fees are available to the prevailing party under section 1717. (Shadoan v. World Savings & Loan Assn. (1990) 219 Cal.App.3d 97, 107-108.) "To determine whether an action is on the contract, we look to the complaint and focus on the basis of the cause of action." (Brown Bark, supra, 219 Cal.App.4th at p. 821; see also Hyduke's Valley Motors v. Lobel Financial Corp. (2010) 189 Cal.App.4th 430, 435 [courts may also look to "any additional evidence submitted on the motion in order to identify the legal basis of the prevailing party's recovery"].)
The allegations of the operative first amended complaint, like those in plaintiffs' original pleading, concern only the formation of the QPRTs and the two sets of transactions in which the Givners and Foumberg transferred the Residence into and out of and back into the QPRTs. None of the allegations refers to or involves the engagement agreement between plaintiffs and Givner that contains the fee clause. On the face of the pleadings, neither of the claims asserted in this action involves the engagement agreement, let alone seeks to enforce the contract. (Cf. Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC (2008) 162 Cal.App.4th 858, 865-866, 895 [cross-complaint alleging nonsignatory was signatory's agent by virtue of nonsignatory's third-party beneficiary claim under commission agreement was "on the contract" under section 1717 where cross-complaint referred to agreement "no fewer than 14 times" and "attache[d] a copy of the agreement and incorporate[d] it by reference"].)
Foumberg maintains the absence of a direct allegation about the engagement agreement is irrelevant because, in his view, the relief sought necessarily involved the contract. He emphasizes both causes of action sought to enforce the Crooymans I judgment, which he insists was "based on" the engagement agreement. Specifically, Foumberg argues enforcement of the judgment involves enforcement of the agreement because the judgment "include[d] the award of attorney fees based on the attorney-fees clause in the written Engagement Agreement[ ]." The argument is inconsistent with the merger doctrine that governs the enforcement of judgments rendered on a contract.
When a party recovers a judgment for breach of contract, all contractual rights and obligations are "merged into the judgment." (Tomaselli v. Transamerica Ins. Co. (1994) 25 Cal.App.4th 1766, 1770-1771.) Entry of the judgment thus "absolves the defendant of any further contractual obligations, and the judgment for damages replaces the defendant's duty to perform the contract." (Id. at p. 1770, citing Coughlin v. Blair (1953) 41 Cal.2d 587, 598.) Likewise, upon "entry of judgment, all further contractual rights are extinguished, and the plaintiff's rights are thereafter governed by the rights on the judgment, not by any rights which might have been held to have arisen from the contract." (Tomaselli, at p. 1770.) Thus, with respect to contractual attorney fees, "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.'" (Jaffe v. Pacelli (2008) 165 Cal.App.4th 927, 934 (Jaffe); accord Nash v. Aprea (2023) 96 Cal.App.5th 21, 28 (Nash), review den. Jan. 17, 2024, S282670.)
The reviewing court in Chelios v. Kaye (1990) 219 Cal.App.3d 75 (Chelios) (abrogated by statute, see post) applied the merger doctrine in rejecting an argument (like the one Foumberg makes here) that section 1717 authorized the recovery of attorney fees incurred to enforce a judgment that included an award of "prejudgment attorney's fees incurred to enforce the [underlying] contract." (Chelios, at p. 79, italics omitted.) The Chelios court decided the case under the former version of Code of Civil Procedure section 685.040, which entitled a judgment creditor to recover" 'the reasonable and necessary costs of enforcing a judgment,'" but directed that" '[a]ttorney's fees incurred in enforcing a judgment'" were" 'not [to be] included in costs collectible . . . unless otherwise provided by law.'" (Chelios, at p. 79, quoting former Code Civ. Proc., § 685.040, italics added.) The judgment creditors in Chelios argued they fell within the" 'otherwise provided by law' exception" by virtue of section 1717, "because the judgment they sought to enforce was premised on an underlying contract which included a unilateral attorney's fees clause." (Chelios, at p. 79.) The Chelios court rejected the argument, reasoning section 1717 had "no operation" in the case because the creditors' fees "were not incurred to enforce the provisions of the contract (as required [under] . . . section 1717), but were instead expended to enforce the judgment." (Chelios, at p. 79.) The court explained:
"Civil Code section 1717 does not create a right to attorney's fees. Instead, its sole purpose is to transform a contractually unilateral right to fees into a reciprocal right to fees [citation], and its applicability is predicated on the existence of a contractual right to attorney's fees. [Citations.] [¶] In this case there was no extant contractual attorney's fees clause to trigger the application of Civil Code section 1717. When, as here, a lawsuit on a contractual claim has been reduced to a final, nonappealable judgment, all of the prior contractual rights are merged into and extinguished by the monetary judgment, and thereafter the prevailing party has only those rights as are set forth in the judgment itself. [Citations.] The contract, having merged into the judgment, has no remaining vitality: 'Merger is the substitution of rights and duties under the judgment or the decree for those under the agreement or cause of action sued upon. [Citations.]' [Citation.] In short, the judgment extinguished all further contractual rights of the [judgment creditors], including the contractual attorney's fees clause." (Id. at pp. 79-80, citing Coughlin v. Blair, supra, 41 Cal.2d at p. 598; Flynn v. Flynn (1954) 42 Cal.2d 55, 58.)
After Chelios, the Legislature amended Code of Civil Procedure section 685.040 to provide that a "judgment creditor" is entitled to recover attorney fees incurred "in enforcing a judgment . . . if the underlying judgment includes an award of [contractual] attorney's fees to the judgment creditor." The amendment was designed to abrogate Chelios to the extent it held the statute's former version "did not authorize awarding a judgment creditor attorney fees for enforcement despite an underlying judgment allowing such fees pursuant to a contract provision." (Conservatorship of McQueen (2014) 59 Cal.4th 602, 609.) Critically, "[t]he amendment did not abrogate Chelios's holding that contractual rights merge into the judgment." (Gray1 CPB, LLC v. SCC Acquisitions, Inc. (2015) 233 Cal.App.4th 882, 890; accord Conservatorship of McQueen, at pp. 609-610.) Rather, as the Jaffe court explained, under the current version of Code of Civil Procedure section 685.040, "the award of postjudgment attorney fees is not based on the survival of the contract, but is instead based on the award of attorney fees and costs in the trial judgment. [Citation.] This is in accord with the extinction by merger analysis providing that postjudgment rights are governed by the rights in the judgment and not by any rights arising from the contract." (Jaffe, supra, 165 Cal.App.4th at p. 935, italics added.)
As amended, Code of Civil Procedure section 685.040 provides: "The judgment creditor is entitled to the reasonable and necessary costs of enforcing a judgment. Attorney's fees incurred in enforcing a judgment are not included in costs collectible under this title unless otherwise provided by law. Attorney's fees incurred in enforcing a judgment are included as costs collectible under this title if the underlying judgment includes an award of attorney's fees to the judgment creditor pursuant to subparagraph (A) of paragraph (10) of subdivision (a) of Section 1033.5." Code of Civil Procedure section 1033.5, subdivision (a)(10)(A) makes contractually authorized attorney fees an item of allowable costs.
As Chelios and Jaffe teach, upon entry of the Crooymans I judgment, plaintiffs' rights under the engagement agreement merged into the judgment and were extinguished. Thus, contrary to Foumberg's premise, plaintiffs had no right under the agreement's fee clause to recover the attorney fees they incurred in this judgment enforcement action. (See Chelios, supra, 219 Cal.App.3d at pp. 79-80; Jaffe, supra, 165 Cal.App.4th at pp. 934-935.) And, for that reason, because section 1717's "sole purpose is to transform a contractually unilateral right to fees into a reciprocal right," Foumberg likewise had no right under the extinguished fee clause or section 1717's mutuality principle to recover the fees he incurred in successfully defeating plaintiffs' judgment enforcement efforts. (Chelios, at p. 79, italics added; Brown Bark, supra, 219 Cal.App.4th at p. 821 [to recover fees under section 1717, a nonsignatory must show, among other things, that opponent "would have been entitled to its attorney fees [under the fee clause] had it prevailed on the breach of contract claims"].)
Plaintiffs may nonetheless have been entitled to their attorney fees as judgment creditors-not under the engagement agreement, but under Code of Civil Procedure section 685.040. As amended, the statute entitles a "judgment creditor" to recover fees incurred in enforcing a "judgment [that] includes an award of [contractual] attorney's fees to the judgment creditor." (Code Civ. Proc., § 685.040, italics added; see Jaffe, supra, 165 Cal.App.4th at p. 935 [statute authorizes fees despite "extinction by merger" of contractual attorney fee clause]; Berti v. Santa Barbara Beach Properties (2006) 145 Cal.App.4th 70, 77 ["A judgment does not act as a merger and a bar to statutory fees."]; MSY Trading Inc. v. Saleen Automotive, Inc. (2020) 51 Cal.App.5th 395, 401-402 (MSY Trading) ["Unlike Civil Code section 1717, which ensures contractual fee provisions apply to both parties, Code of Civil Procedure section 685.040 is a one-way street."]; but see Nash, supra, 96 Cal.App.5th at p. 32 [holding merger doctrine extinguishes contractual limitation on recoverable attorney fees, but expressing "reservations" about "whether section 685.040 supports an attorneys' fees award against a nonparty to a contract"].)
Foumberg acknowledges that plaintiffs' contractual right to attorney fees under the engagement agreement was "extinguished by merger" into the Crooymans I judgment, but he argues the merger doctrine is "ultimately irrelevant" to his right to recover the fees he incurred in this action. Because plaintiffs' action "sought to impose alter ego liability on Foumberg, as trustee of the QPRTs, for the [Crooymans I] judgment," Foumberg maintains plaintiffs' theory of recovery necessarily treated him as though he "was a party to the original lawsuit" before the judgment extinguished the right to fees under the engagement agreement. (Italics added.) He relies on the mutuality principle for nonsignatory alter egos articulated in Reynolds, as applied by the reviewing court in MSY Trading. The cases are inapposite.
In Reynolds, the plaintiff sued two nonsignatories to recover on certain promissory notes, alleging the nonsignatories were liable as the alter egos of the corporation that signed the notes. (Reynolds, supra, 25 Cal.3d at p. 127.) The nonsignatories defeated the action by showing they were not the corporation's alter egos and therefore the plaintiff could not enforce the notes against them. Our Supreme Court held the nonsignatories were entitled to recover their attorney fees because the plaintiff would have been entitled to recover its fees had it succeeded in enforcing the notes against the nonsignatories. (Id. at p. 129.)
In MSY Trading, the plaintiffs obtained a judgment for breach of contract against certain entities in a separate lawsuit. (MSY Trading, supra, 51 Cal.App.5th at pp. 398-399.) The plaintiffs then filed an independent enforcement action against the defendants-a company and its CEO-alleging they were liable on the judgment as alter egos of the judgment debtors. (Id. at pp. 398-400.) Neither of the defendants was a party to the contract containing the fee clause. The trial court ruled the CEO was not the judgment debtors' alter ego and awarded him the fees he incurred in defeating the action under the fee clause and section 1717. (MSY Trading, at pp. 399-400.) The plaintiffs challenged the fee award on appeal, arguing the contract and the fee clause had been extinguished by merger into the judgment. (Id. at pp. 399, 401.)
The MSY Trading court rejected the merger argument, concluding, "All of the considerations that led Reynolds Metals to permit an alleged alter ego to claim attorney fees under a contract are equally applicable to a postjudgment, independent action to establish alter ego liability." (MSY Trading, supra, 51 Cal.App.5th at p. 403.) And this was "true," the reviewing court held, notwithstanding the extinction by merger doctrine. (Ibid.) The MSY Trading court explained: "The 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. [Citation.] To give effect to the principles inherent in Reynolds Metals and Civil Code section 1717, we employ a similar analysis for a prevailing alleged alter ego: it is as though the alleged alter ego was a party to the original lawsuit, and prevailed. Consequently, a postjudgment, independent action to establish alter ego liability for a judgment on a contract is itself an action on the contract." (Ibid.)
There are at least two dispositive distinctions between this case and MSY Trading (and Reynolds) that compel a different conclusion. First, the alter ego claim in MSY Trading sought to employ "traditional veil piercing" to hold the CEO liable on the theory that he, as an alter ego of the judgment debtors, breached the relevant contract. (Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, 220-221 (Curci); MSY Trading, supra, 51 Cal.App.5th at pp. 399-400.) In contrast, plaintiffs' claims in this case sought to employ "reverse veil piercing," which allows a creditor to reach an entity's assets to satisfy claims against a debtor on the theory that the debtor improperly used the entity to shield his assets from collection. (Curci, at p. 221; Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, 1523 (Postal Press).)
"Reverse veil piercing is similar to traditional veil piercing in that when the ends of justice so require, a court will disregard the separation between an individual and a business entity. [Citation.] But, the two serve unique purposes and are used in different contexts. Rather than seeking to hold an individual responsible for the acts of an entity, reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider." (Curci, supra, 14 Cal.App.5th at p. 221, italics added.) The issue "reverse piercing seeks to address is not the misuse of the corporate form to shield the shareholder from personal liability. Rather, the issue addressed by outside reverse piercing is the shareholder's transfer of personal assets to the corporation to shield the assets from collection by a creditor of the shareholder." (Postal Press, supra, 162 Cal.App.4th at p. 1523.)
Unlike the traditional alter ego claim asserted in MSY Trading, plaintiffs did not allege Givner used the QPRTs to shield himself from liability for the legal malpractice claim at issue in the Crooymans I arbitration. Just the opposite: the Crooymans I judgment held that Givner-not the QPRTs- was liable for committing malpractice, such that there was no need for plaintiffs to pierce the veil of the QPRTs to hold Givner responsible for this misconduct. Thus, we cannot say, as the MSY Trading court held, that plaintiffs sued Foumberg "as though [he or the QPRTs] was a party to the original lawsuit." (MSY Trading, supra, 51 Cal.App.5th at p. 403.) Plaintiffs' claim in this judgment enforcement action is not that the QPRTs committed malpractice; rather, plaintiffs allege Givner improperly used the QPRTs to shield his assets from plaintiffs' collection efforts. (See Postal Press, supra, 162 Cal.App.4th at p. 1523.) The MSY Trading court's reasoning for disregarding the merger doctrine is not applicable to plaintiffs' reverse veil piercing claim in this case. (See, e.g., Wells Fargo Bank, N.A. v. Weinberg (2014) 227 Cal.App.4th 1, 7 [alleged "alter ego conduct was a separate and distinct harm from the law corporation's breach of contract"; "motion to add [alter ego] to the judgment sought a remedy, not for breach of contract, but for [alter ego's] exercise of control over the law corporation that deprived [judgment creditor] of the ability to collect the judgment against the law corporation for breach of contract"-these "are separate and distinct wrongs"].)
Even if we could treat Foumberg as a party to the Crooymans I action under the reasoning of MSY Trading, there is still another distinction that precludes an award of contractual attorney fees in this case. The judgment in MSY Trading was based on the judgment debtors' breach of contract. (MSY Trading, supra, 51 Cal.App.5th at pp. 399-400.) In contrast, Givner was sued and found liable in Crooymans I for legal malpractice-a tort. The distinction makes a dispositive difference.
" '[S]ection 1717 does not apply to tort claims; it determines which party, if any, is entitled to attorney[ ] fees on a contract claim only. [Citations.] As to tort claims, the question of whether to award attorney[ ] fees turns on the language of the contractual attorney[ ] fee provision, i.e., whether the party seeking fees has "prevailed" within the meaning of the provision and whether the type of claim is within the scope of the provision. [Citation.] This distinction between contract and tort claims flows from the fact that a tort claim is not "on a contract" and is therefore outside the ambit of section 1717.'" (Brown Bark, supra, 219 Cal.App.4th at pp. 827-828.) "The parties to a contract are free to agree that one or more of them shall recover their attorney fees if they prevail on a tort or other noncontract claim, but the right to recover those fees depends solely on the contractual language. [Citations.] Section 1717 does not make a unilateral fee provision reciprocal on tort or other noncontract claims." (Id. at p. 820, italics added, citing Gil v. Mansano (2004) 121 Cal.App.4th 739, 742-743; Exxess, supra, 64 Cal.App.4th at p. 708; Moallem v. Coldwell Banker Com. Group, Inc. (1994) 25 Cal.App.4th 1827, 1831-1832 (Moallem).)
In Brown Bark, a lender sued a borrower's successor in interest for breach of contract, conversion, and fraud on a successor liability theory. (Brown Bark, supra, 219 Cal.App.4th at pp. 815-817, 827.) The successor prevailed in the action and moved for attorney fees under section 1717 based on unilateral provisions in the line of credit contracts entitling "the 'Lender' or 'Secured Party' to recover from the 'Borrower' or 'Debtor' all attorney fees incurred in any dispute relating to the interpretation, enforcement, or performance of any of the Line of Credit Contracts." (Brown Bark, at pp. 816-818, 828.) Although the successor was a "nonsignatory," the Brown Bark court held it was nevertheless entitled to recover the attorney fees it incurred successfully defending the breach of contract claims under section 1717 and the reciprocity principle for alter ego defendants articulated in Reynolds. (Brown Bark, at p. 823, citing Reynolds, supra, 25 Cal.3d at pp. 128-129.)
However, with respect to the conversion and fraud claims, the Brown Bark court held the successor could not recover its fees under the unilateral fee provisions because section 1717 and its reciprocity principles did "not apply to [the lender's] tort claims." (Brown Bark, supra, 219 Cal.App.4th at p. 828.) And this was so notwithstanding the fact that the fee provisions were "broad enough to cover tort claims." (Ibid.) The court explained: "[T]he type of claims the fee provisions cover is only half of the analysis. The fee provisions also must identify [the successor] as a party entitled to the benefit of those provisions.... Even the 'sharp quillets of the law' will not permit [the successor] to invoke section 1717 and make the unilateral fee provisions reciprocal as to the tort claims." (Id. at pp. 828-829, quoting Shakespeare, Henry VI, pt. 1, act II, scene 4, line 17; see also Moallem, supra, 25 Cal.App.4th at pp. 1831-1832 [although fee clause's language was broad enough to cover borrower's tort claims, where clause limited right to recover attorney fees to broker only, borrower could not rely on section 1717's reciprocity principles to make the unilateral fee provision reciprocal].)
The law and reasoning set forth in Brown Bark are entirely applicable to this case. Plaintiffs brought an arbitration claim against Givner for legal malpractice in breach of his professional duty of conduct. The fee clause in their engagement agreement provided for an award of attorney fees to the "prevailing party at the arbitration" on "all tort or contract causes of action, claims based on breach of contract, unjust enrichment, legal malpractice, breach of fiduciary duty, constructive fraud, negligent misrepresentation and fraud." Although the fee clause was broad enough to cover plaintiffs' malpractice claim against Givner, Foumberg was not a signatory to the engagement agreement nor was he the prevailing party at the arbitration. Thus, even if we could treat Foumberg as a party to the legal malpractice claim by virtue of the alter ego allegations, section 1717's reciprocity principles would not apply, and Foumberg still would not be entitled to attorney fees under the engagement agreement. (Brown Bark, supra, 219 Cal.App.4th at pp. 828-829; cf. Reynolds, supra, 25 Cal.3d at pp. 127, 129 [allegation that nonsignatories breached promissory notes as corporation's alter ego was a claim on the contract subject to section 1717's reciprocity principles]; Lerner v. Ward (1993) 13 Cal.App.4th 155, 158-159, 160-161 [signatories to written purchase agreement permitting recovery of attorney fees to the prevailing party" '[i]n any action or proceeding arising out of this agreement'" entitled to attorney fees]; Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1342-1343 [real estate agent entitled to attorney fees incurred in defeating tort causes of action under clause in purchase agreement entitling the prevailing party" 'including Agent'" to its fees in "any 'lawsuit or other legal proceeding' "]; Santisas, supra, 17 Cal.4th at pp. 608-609, 622 [citing Lerner and Xuereb, holding signatories to real estate purchase agreement entitled to attorney fees for non-contract claims voluntarily dismissed before trial].)
DISPOSITION
The order is reversed and vacated. On remand, the trial court is directed to enter a new order denying the motion for attorney fees. Plaintiffs Kathryn Crooymans and David King are entitled to costs.
We concur: LAVIN, Acting P. J., ADAMS, J.