Tort Claims Against an Alter Ego May Be Considered an Action “On a Contract” for the Purposes of an Attorneys’ Fees Award under California Civil Code section 1717
By: Tony Carucci
California Civil Code section 1717 entitles the prevailing party to attorneys’ fees “[i]n any action on a contract,” where the contract provides for an award of attorneys’ fees to the prevailing party, regardless of whether the prevailing party is the party specified in the contract or not. But what about an action that alleges tort causes of action against an alter ego of a contracting party but that does not include a breach of contract claim against the alter ego? This was the question facing the California Court of Appeal in 347 Group, Inc. v. Philip Hawkins Architect, Inc. (2020) 58 Cal.App.5th 209.
In that case, the plaintiff 347 Group sued and obtained a default judgment for breach of contract against defendant Philip Hawkins Architect, Inc. Id. at 211–12. 347 Group had also sued Philip Hawkins individually as well as Design-Build, Inc., the company Hawkins founded after putting Philip Hawkins Architect, Inc. into bankruptcy. Id. at 212. 347 Group originally alleged claims for breach of contract, fraudulent conveyance, and conspiracy against Hawkins and Design-Build, seeking to establish that Hawkins and Design-Build were the alter egos of the contracting party, Philip Hawkins Architect, Inc., but later dismissed the breach of contract claim. Id. Hawkins and Design-Build eventually prevailed on the tort causes of action, and moved for attorneys’ fees. Id.
The trial court denied the motion for attorneys’ fees on the grounds that an award of attorneys’ fees would be improper given the fact that 347 Group dismissed its breach of contract cause of action and the remaining tort claims did not allow for an award of attorneys’ fees. Id. The Court of Appeal reversed on the grounds that the alleged alter egos (i.e., Hawkins and Design-Build) would have been liable for attorneys’ fees under the contract if 347 Group had prevailed because California courts “‘liberally construe ‘on a contract’ to extend to any action ‘[a]s long as an action ‘involves’ a contract and one of the parties would be entitled to recover attorney fees under the contract if that party prevails in its lawsuit . . . .” Id. at 213 (citation omitted); see also id. at 215. In reaching this conclusion, the Court of Appeal relied on well-established precedent from the California Supreme Court that recognizes that a party sued as an alter ego is entitled to attorneys’ fees in a breach of contract action. Id. at 214 (citing Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 127–29)17171717. The court also relied heavily on the recent decision in MSY Trading Inc. v. Saleen Automotive, Inc. (2020) 51 Cal.App.5th 395, which expanded an alter ego’s entitlement to attorneys’ fees to instances in which the alter ego isn’t sued for breach of contract but the claims are nevertheless still “on a contract” within the meaning of Civil Code section 1717. Id. at 214–15. The Court of Appeal reasoned the fraudulent conveyance and conspiracy claims were “on a contract” because they were based upon the underlying contractual relationship between 347 Group and Philip Hawkins Architect, Inc., and considered it immaterial that 347 Group had dismissed its breach of contract claim. Id. at 215.
A plaintiff or cross-complainant considering whether to allege alter ego liability should be mindful of the result in 347 Group and the fact that the claims could end in an award of attorneys’ fees if the tort claims are ultimately deemed to be “on a contract” within the meaning of California Civil Code section 1717.