Opinion
B326252
07-30-2024
MICHAEL COLACO, Plaintiff and Appellant, v. MARCUM LLP et al., Defendants and Respondents
Outwater & Pinckes, David E. Outwater and Randi E. Pinckes for Plaintiff and Appellant. Garrett &Tully, Stephen J. Tully, Ryan C. Squire, Brian W. Ludeke, and John C. Tully for Defendants and Respondents.
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. BC711605. Curtis A. Kin, Judge.
Outwater & Pinckes, David E. Outwater and Randi E. Pinckes for Plaintiff and Appellant.
Garrett &Tully, Stephen J. Tully, Ryan C. Squire, Brian W. Ludeke, and John C. Tully for Defendants and Respondents.
ASHMANN-GERST, J.
After he lost his investment with certain investment funds, plaintiff and appellant Michael Colaco (Colaco) brought this action against Marcum LLP, the accounting firm that the funds had retained to audit the investments, and its partner, Steve Rapattoni (collectively Marcum). Marcum later filed a crossaction against Colaco. Marcum successfully moved for summary judgment of Colaco's complaint and then voluntarily dismissed its cross-complaint. The trial court entered judgment in favor of Marcum.
Colaco thereafter moved for attorney fees pursuant to Civil Code section 1717, arguing that he was the prevailing party on the cross-complaint and as such was entitled to fees as set forth in the engagement agreements between the investment funds and Marcum. The trial court denied his motion, and Colaco appeals.
All further statutory references are to the Civil Code unless otherwise indicated.
We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
The investments and engagement to audit financial statements
This litigation concerns two investment funds: the Frost VP Early Stage Fund II, LP (Fund II) and the Frost VP Seed, LLC (Seed Fund). In 2013, Colaco invested in Fund II.
We sometimes refer to the Seed Fund and Fund II as the Frost Funds.
In or around October 2014, the Frost Funds engaged Marcum pursuant to two written engagement agreements to audit their respective financial statements. As is relevant to the issues on appeal, each agreement contains a broad attorney fee clause that provides, in relevant part: "In any litigation brought by either [Marcum] or the Fund, the prevailing party shall be entitled to an award of its reasonable attorneys' fees and costs incurred, including through all appeals." (Italics omitted.)
The complaint
On June 26, 2018, Colaco and other investors filed the instant lawsuit for negligent misrepresentation against Marcum. The operative pleading is the third amended complaint. As summarized by the trial court: "Plaintiffs, including . . . Colaco . . ., are investors who invested in three investment entities called the Frost Funds. [Citation.] Defendant Marcum is a large accounting firm that issued audit opinions for the financial statements of the Frost Funds for each of the years ending 2012 through 2015. [Citation.] In making and maintaining their investments with the Frost Funds, Plaintiffs examined and/or relied on these financial statements. [Citation.] The gravamen of this action is that [the Frost Funds'] financial statements contained certain negligent omissions and representations and that, had Marcum not been negligent in the [examination] of the statements, Plaintiffs would have become aware of the issues with the Frost Funds and would not have lost their investments. [Citation.]
"The Frost Funds were started by non-party Stuart Frost. [Citation.] Frost used the Frost Funds to found and capitalize several companies that used big data to solve problems and generate profit. [Citation.] These companies, the Portfolio Companies, were directly or indirectly controlled by Mr. Frost. [Citation.]
"Mr. Frost had a separate incubator entity called Frost Data Capital, LLC .... [Citation.] Mr. Frost directed the Portfolio Companies to hire the Frost Incubator to provide shared advisory and support services to the Portfolio Companies. [Citation.] The Portfolio Companies paid the Frost Incubator monthly fees for these services. [Citation.]
"From Plaintiffs' perspective, the problem with these transactions is that Mr. Frost was on all sides of them." "Because Mr. Frost was on all sides of these transactions, they were 'related party transactions' under generally accepted accounting principles (GAAP). Under GAAP, when a firm such as Marcum conducts an audit of companies such as the Portfolio Companies, the audit sheets must include detailed information about any related party transactions. [Citation.]" But, "Marcum's audit sheets lacked any reference to any party transactions," prompting Colaco and the other allegedly damaged investors to sue Marcum and its partner, Steve Rapattoni, "for negligently misrepresenting that the audit sheets were prepared in accordance with GAAP, which in fact Marcum failed to disclose known related party transactions on any of the Frost Funds' audit sheets for each of the years ending 2012 through 2015. [Citation.]"
Original cross-complaint
On or about August 12, 2019, Marcum filed a crosscomplaint against the Frost Funds, alleging seven causes of action (contractual indemnity, equitable indemnity, comparative implied indemnity, declaratory relief, negligence, negligent misrepresentation, and promissory estoppel). "The gravamen of the original Cross-Complaint was that the Funds had agreed to make various disclosures to Marcum which they did not make, and that the Funds had further agreed to indemnify Marcum for known misrepresentations to Marcum."
Attached to the original cross-complaint were copies of the engagement agreements.
First amended cross-complaint (FACC)
Thereafter, Marcum claims that it learned that Colaco allegedly knew of and failed to investigate and disclose the underlying fraud. Accordingly, it sought and was granted leave to file the FACC, adding Colaco as a cross-defendant. In addition to the seven causes of action alleged against the Frost Funds in the original cross-complaint, the FACC added four causes of action against Colaco: equitable indemnity, comparative indemnity, declaratory relief, and negligent failure to disclose. Second amended cross-complaint (SACC)
Following Colaco's successful demurrer, Marcum filed the operative SACC. As against Colaco, the SACC alleged four causes of action: equitable indemnity, comparative implied indemnity, declaratory relief, and negligence (failure to disclose). Colaco successfully demurred to the eleventh cause of action (negligence), leaving only the two claims for indemnity and one cause of action for declaratory relief.
Marcum's motion for summary judgment
Meanwhile, Marcum moved for summary judgment of Colaco's negligent misrepresentation claim alleged in his third amended complaint. In March 2021, the trial court granted that motion. The claims in the cross-action remained pending.
Colaco appealed the judgment. (Colaco v. Marcum LLP, B324097.) On April 16, 2024, we ordered the two appeals consolidated for purposes of oral argument.
Dismissal of SACC and judgment
Marcum filed a proposed judgment, which included a voluntary dismissal of its SACC. The trial court entered judgment on August 22, 2022.
Colaco's motion for attorney fees
On October 20, 2022, Colaco filed a motion for attorney fees against Marcum. He argued that Marcum's claims against him arose out of the engagement agreements; because his claims were "'on a contract,'" pursuant to section 1717, he was entitled to recoup his attorney fees.
Marcum opposed the motion.
Trial court order
After entertaining oral argument, the trial court denied Colaco's motion, finding that Marcum's claims against Colaco were not "on a contract"; therefore, Colaco was not entitled to attorney fees pursuant to section 1717.
Appeal
Colaco's timely appeal ensued. The thrust of his argument on appeal is identical to the argument raised in the trial court: He is entitled to attorney fees under section 1717, subdivision (a), because the SACC asserted claims that "were 'on a contract' for purposes of liberal and broad application of" the statute.
On January 31, 2024, we asked the parties to submit supplemental briefs on whether section 1717, subdivision (b), bars Colaco from recovering attorney fees in this matter. (Gov. Code, § 68081.) The parties submitted their respective briefs on February 7, 2024.
In his supplemental brief, Colaco asserts that this issue has been forfeited on appeal because Marcum did not raise it either below or on appeal. We agree that Marcum did not sufficiently raise this issue in its respondent's brief, which is why we asked for supplemental briefing. It should go without saying that we are not bound by the forfeiture doctrine.
DISCUSSION
I. Standard of review "On review of an award of attorney fees after trial, the normal standard of review is abuse of discretion. However, de novo review of such a trial court order is warranted where the determination of whether the criteria for an award of attorney fees and costs in this context have been satisfied amounts to statutory construction and a question of law. [Citations.]" (Carver v. Chevron U.S.A., Inc. (2002) 97 Cal.App.4th 132, 142; see also Connerly v. State Personnel Bd. (2006) 37 Cal.4th 1169, 1175.) Thus, as to the issue of whether Marcum's claims against Colaco were "on a contract," which is a pure question of law, the proper standard of review is de novo. (See Snyder v. Marcus & Millichap (1996) 46 Cal.App.4th 1099, 1102 ["We exercise independent review over this appeal from the trial court's order because it raises a pure issue of law regarding the entitlement to fees"].)
It is axiomatic that we "'review the trial court's order, not its reasoning, and affirm an order if it is correct on any theory apparent from the record.' [Citation.]" (City of Claremont v. Kruse (2009) 177 Cal.App.4th 1153, 1164, fn. 3.)
II. Relevant law
"'A party may not recover attorney fees unless expressly authorized by statute or contract.... [T]he parties may agree to award attorney fees on claims sounding in both contract and tort.' [Citation.]" (Hom v. Petrou (2021) 67 Cal.App.5th 459, 464 (Hom).)
Section 1717, subdivision (a), provides: "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." Thus, if a cause of action is "on a contract," and the contract provides that the prevailing party shall recover attorney fees incurred to enforce the contract, then attorney fees must be awarded on the contract claim in accordance with section 1717. (Santisas v. Goodin (1998) 17 Cal.4th 599, 615-617.)
"When a party seeks to enforce a contractual fees provision and requests fees related to litigation of claims 'on a contract,' Civil Code section 1717 makes the attorney's fees provision reciprocal." (Hom, supra, 67 Cal.App.5th at p. 465, fn. omitted.) Aside from mandating reciprocity, section 1717 also addresses how to determine which party is the prevailing party for purposes of a request for fees in an action on a contract. (§ 1717, subd. (b).) As is relevant here, subdivision (b)(2) provides that "[w]here an action has been voluntarily dismissed . . . there shall be no prevailing party for purposes of this section." Consequently, an award of attorney fees is not permitted where an action "on a contract" has been dismissed. (Santisas v. Goodin, supra, 17 Cal.4th at p. 617.)
Because section 1717 only applies to an action "on a contract," the statute and its reciprocity rules do not apply to claims for fees for tort or other noncontract claims. (Hom, supra, 67 Cal.App.5th at p. 465; Santisas v. Goodin, supra, 17 Cal.4th at p. 602; see also Parrott v. Mooring Townhomes Assn., Inc. (2003) 112 Cal.App.4th 873, 877-878 [section 1717 does not bar a fee award when the right to recover attorney fees arose under an independent fee-shifting statute and the prevailing party would be entitled to fees under that statute without a contractual fee provision].) For such claims, the question of whether to award attorney fees turns on the language of the contractual attorney fee provision. (Hom, supra, at p. 465.) Because there is no requirement of reciprocity for noncontract claims, a provision that awards fees for such claims to only one party will be enforced according to its terms, regardless of any apparent unfairness. (Ibid.; see also Moallem v. Coldwell Banker Com. Group, Inc. (1994) 25 Cal.App.4th 1827, 1832-1833.)
III. The trial court properly denied Colaco's motion
Applying these legal principles, we conclude that the trial court did not err in denying Colaco's motion for attorney fees. "Courts have uniformly held that the party moving for statutory attorney fees . . . has the burden of proof." (Corbett v. Hayward Dodge, Inc. (2004) 119 Cal.App.4th 915, 926.) Thus, Colaco had the burden of proving that he is entitled to fees. He attempted to do so through his steadfast contention, both in the trial court and on appeal, that Marcum's claims against him were "on a contract." Assuming without deciding that Colaco is correct, section 1717 applies. Marcum voluntarily dismissed its SACC against Colaco. Pursuant to section 1717, subdivision (b), Colaco is not a prevailing party and is not entitled to attorney fees.
Urging us to conclude otherwise, Colaco contends that Marcum is bound by its alleged judicial admissions that its claims against him sounded in tort. We agree with Colaco that "'[a]s a general rule, theories not raised in the trial court cannot be asserted for the first time on appeal; appealing parties must adhere to the theory (or theories) on which their cases were tried. This rule is based on fairness-it would be unfair, both to the trial court and the opposing litigants, to permit a change of theory on appeal.' [Citation.]" (P&D Consultants, Inc. v. City of Carlsbad (2010) 190 Cal.App.4th 1332, 1344.) While Colaco accuses Marcum of doing just that, it is actually Colaco who has now shifted gears. Colaco does not explain why Marcum should be bound by its alleged judicial admissions, but he is excused from the same requirement-even though he was the moving party.
Colaco also fails to explain how Marcum's statements in its respondent's brief constitute judicial admissions. (See The Travelers Indemnity Co. of Connecticut v. Navigators Specialty Ins. Co. (2021) 70 Cal.App.5th 341, 360-361 ["A judicial admission is '"a waiver of proof of a fact by conceding its truth, and it has the effect of removing the matter from the issues."' [Citation.] 'To be considered a binding judicial admission, the declaration or utterance must be one of fact and not a legal conclusion, contention, or argument.' [Citation.]"].)
The fact that Colaco prevailed by demurrer as to one cause of action in the SACC does not compel a different result. Colaco has not demonstrated that the contractual fees provision applies to him, a nonsignatory, i.e., as a third party beneficiary (Hom, supra, 67 Cal.App.5th at pp. 470-471) or because Marcum would have been entitled to collect attorney fees from him (Real Property Services Corp. v. City of Pasadena (1994) 25 Cal.App.4th 375, 382). Nor does he explain how he is somehow entitled to an apportionment of attorney fees pertaining to that one cause of action.
We agree with Colaco that the attorney fee provision is broad and could arguably cover attorney fees for tort claims. (Santisas v. Goodin, supra, 17 Cal.4th at p. 603; Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1341.) But he fails to explain how that principle would apply here.
DISPOSITION
The order is affirmed. Marcum is entitled to costs on appeal.
We concur: LUI P. J., CHAVEZ J.