ASHMANN-GERST, J.
This appeal follows an order sustaining a demurrer without leave to amend brought by defendants and respondents Marshall & Steven, Inc. (Marshall), Kevin R. Hanson (Hanson),
Applying the appropriate standards of review, we conclude that Chapman failed to state a claim against defendants. Accordingly, we affirm the order sustaining defendants' demurrer to Chapman's FAC. Thus, Chapman's challenge to the order granting the appraiser defendants' motion to compel judicial reference is moot. Last, we find that the referee's award of attorney fees does not constitute an abuse of discretion.
SMC is a California limited liability company with its principal place of business in Los Angeles. Its primary asset is an automobile dealership in Santa Monica. Sullivan is the managing member of SMC. Sullivan owns a 70 percent membership interest in SMC, and Chapman, who was an SMC employee, owns a 2.5 percent membership interest in SMC.
SMC and its members, including Sullivan, Chapman, and several others, are bound by an operating agreement.
Article 7 of the operating agreement provides a mechanism by which SMC members can purchase the profits interest of any member whose membership interest in the company ends. Specifically, paragraph 7.1(a) provides, in relevant part: "Upon the dissolution, death, insanity, bankruptcy, withdrawal or resignation of a Member or, with respect to . . . Chapman . . ., the termination of such Person's services to the [car dealership] (whether voluntarily or involuntarily), such Member shall be treated as a `Former Member,' and the [dealership and/or the remaining Members . . . shall have the right . . . to purchase, and, if such right is exercised, the Former Member shall sell, all or any portion of the Former Member's Interest as provided in this Article 7."
Paragraph 7.3 continues: "The purchase price for the Former Member's Interest shall be the fair market value of the Former Member's Interest as determined pursuant to
At paragraph 12.5, the operating agreement provides, in relevant part: "Any controversy, dispute or claim arising out of or relating to this Agreement or the breach thereof shall be resolved by a general reference pursuant to California Code of Civil Procedure Section 638 . . . . [¶] . . . The prevailing party in the reference shall be entitled to receive as part of the judgment in its favor an award of its reasonable attorneys' fees, costs and expenses incurred with respect to the reference."
Although it is not spelled out in the FAC, something occurred that caused SMC and Sullivan to inform Chapman that they would treat him as a former member of SMC. They "appointed Louis Yorey [(Yorey)], an ASA credentialed appraiser from [Marshall] to appraise [Chapman's] interest in SMC under the Operating Agreement." Chapman appointed Kurt Goeppner (Goeppner), an ASA credentialed appraiser, to appraise his interest in SMC. Ultimately, SMC and Sullivan valued Chapman's share as worth between zero and $15,000; they based this valuation on a first appraisal report signed by Hanson, a non-ASA credentialed appraiser, and a second appraisal report signed by a different Marshall appraiser with an "alleged ASA certification." Goeppner valued Chapman's shares at not less than $550,000.
When the appraisers could not agree on the value of Chapman's interest, Chapman initiated this litigation on July 24, 2008, by filing a complaint in superior court against defendants. In response, defendants filed a motion to compel judicial reference. They argued that pursuant to the terms of the operating agreement, SMC, Sullivan, and Chapman were required to resolve any dispute arising out of or relating to the operating agreement before a judicial referee. Moreover, because the appraiser defendants were involved in this dispute by virtue of their participation in the valuation process prescribed in the operating agreement, and they did not object to a general reference, the trial court should compel the general reference of all disputes between Chapman and defendants.
Conceding that the operating agreement contains a judicial reference, Chapman did not oppose the motion with respect to SMC and Sullivan. However, because the appraiser defendants are not parties to the operating agreement, Chapman argued that he could not be compelled to resolve his dispute with them via a judicial reference.
After entertaining oral argument, the trial court granted defendants' motion to compel judicial reference. Chapman filed a petition for writ of mandate, which the Court of Appeal summarily denied.
Thereafter, the parties stipulated that the Honorable Haley J. Fromholtz (retired) would serve as referee for all purposes.
Defendants demurred to Chapman's complaint, and the referee sustained their demurrer with leave to amend.
Chapman then filed the FAC, alleging breach of contract, declaratory relief, fraudulent misrepresentation, and breach of fiduciary duty against SMC and Sullivan, and negligent misrepresentation and fraudulent misrepresentation against the appraiser defendants. According to the FAC, SMC and Sullivan breached the operating agreement by (1) not appointing an appraiser who was in good standing of the ASA; (2) causing an appraisal by Marshall at less than fair market value; and (3) submitting a sham second appraisal report, which is not permitted under the terms of the operating agreement. His alleged damages included the payment of the full fee of an ASA certified appraiser and costs associated with a new appraisal.
His declaratory relief cause of action sought various declarations of Chapman's rights, including, inter alia, (1) the interpretation of various terms of the operating agreement; (2) the allocation of costs and fees of the appraisal process; (3) "a declaration . . . that the value of his SMC membership interest shall be fixed and determined by the current appraisal process initiated by SMC and [Sullivan] . . . without any right of SMC and [Sullivan] to reinitiate the appraisal process"; and (4) "an additional declaration of his rights that SMC and [Sullivan's] appraisal report was contractually invalid, and that SMC and [Sullivan] must resubmit a new appraisal report."
In the fraudulent misrepresentation cause of action, Chapman alleged that SMC and Sullivan misrepresented Chapman's interest in SMC and misrepresented that they would utilize Yorey to appraise Chapman's interest in SMC. SMC and Sullivan "damaged [Chapman] by causing [him] to pay the full fee of an ASA certified appraiser with the contractually required experience in small business valuations to appraise his asset. If [Chapman] knew that SMC and [Sullivan] would game the appraisal process, he would not have spent $10,000 on Mr. Goeppner's ASA appraisal." Chapman also allegedly suffered damages as a result of the invalid appraisal because he would now incur the costs of a third appraisal.
The breach of fiduciary cause of action mirrors the prior claims. Sullivan and SMC allegedly breached their fiduciary duties to Chapman by retaining Hanson, who is not a member of the ASA, to appraise Chapman's interest and by submitting an improper report.
As against the appraiser defendants, the FAC alleged that they negligently misrepresented the value of Chapman's interest in SMC and that they had no reasonable grounds for believing that the value of his interest was between zero and $15,000.
Defendants demurred to the FAC.
After hearing oral argument, the referee sustained defendants' demurrer to the FAC without leave to amend. As is relevant to this appeal, the referee found that in connection with the first cause of action, Chapman "failed in the FAC to allege any acts or omissions of Sullivan that constitute a breach of the identified contract. In addition, [Chapman] failed to allege that he suffered any damages as a result of any of the alleged acts of SMC or Sullivan." With respect to the third cause of action, Chapman "failed to allege that he justifiably relied on any of the alleged representations of SMC or Sullivan, or that any of the alleged representations of SMC or Sullivan was a substantial factor in causing [Chapman's] damages." As for the fourth cause of action, Chapman "failed to allege acts or omissions of Sullivan or SMC that constitute a breach of a fiduciary duty. [Chapman] also failed to allege acts or omissions of SMC or Sullivan that were a substantial factor in causing [Chapman's] damages."
The claims against the appraiser defendants were defective as well. Regarding the fifth cause of action for negligent misrepresentation, the referee found that Chapman "failed to allege facts that would give rise to a duty running from [Marshall] or Hanson to [Chapman]. Further, [Chapman] failed to allege that he justifiably relied on any of the alleged representations of [the appraiser defendants] or that any of the alleged representations of [the appraiser defendants] was a substantial factor in causing [Chapman's] alleged damages." Likewise, the sixth cause of action for fraudulent misrepresentation failed because Chapman "failed to allege that [either of the appraiser defendants] made a false statement of fact to [Chapman], that [Chapman] justifiably relied on any of the alleged representations of [the appraiser defendants], or that any of the alleged representations of [the appraiser defendants] was a substantial factor in causing [Chapman's] damages."
Chapman then pursued a motion for leave to file a second amended complaint. His proposed pleading set forth one cause of action for specific performance against SMC and Sullivan only.
The referee denied Chapman's motion, reasoning: "[Chapman] failed to provide any legal authority that would support the validity of [his] purported cause of action for specific performance under the circumstances of this case, in which [Chapman] seeks a determination of a sales price, but has not requested that the Referee order the sale at the determined price. Indeed, [Chapman] cannot request, and the Referee cannot order, a sale of [Chapman's] interest at any price, as Defendants, among others, have an option, but not an obligation, to purchase [Chapman's] interest under the Operating Agreement."
The referee concluded that the relief Chapman actually sought was declaratory relief, but that claim had been adjudicated against Chapman when the referee sustained SMC and Sullivan's demurrer without leave to amend. "Furthermore, the relief requested by [Chapman] cannot be specifically compelled by the Court because it is contrary to the terms set forth in the Operating Agreement."
The referee recommended that the matter be dismissed, and the trial court entered judgment for defendants.
Defendants filed a motion for attorney fees. They argued that they were the prevailing parties and thus entitled to recoup all attorney fees, including those incurred in connection with the motion to compel judicial reference, the demurrers, and Chapman's motion for leave to amend. They sought $170,655 in attorney fees.
Chapman opposed their motion. He argued, inter alia, that the appraiser defendants lacked any basis for an attorney fee award because they were not parties to the operating agreement. He also asserted that defendants could not recover fees for defending noncontract claims. Finally, he contended that the fees requested were unreasonable.
Defendants filed a reply brief.
After entertaining oral argument, the referee denied the appraiser defendants' request for attorney fees, thereby reducing defendants' fee request by $30,000. He also reduced SMC and Sullivan's fee request, reasoning: "While defendants' counsel's work was uniformly excellent, based on the Referee's knowledge and experience the hourly rates charged are at the high end of the Los Angeles market, especially in these parlous times for this type of case. Accordingly, another $7,000.00, 5% of the remaining request, is deducted." The referee further deducted $5,000 from defendants' fee request because inadequate evidence had been supplied. Ultimately, the referee awarded SMC and Sullivan attorney fees in the amount of $128,655.
Judgment was entered on January 22, 2010, and Chapman's timely appeal ensued.
"Our Supreme Court has set forth the standard of review for ruling on a demurrer dismissal as follows: `On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, the standard of review is well settled. The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. [Citations.] The court does not, however, assume the truth of contentions, deductions or conclusions of law. [Citation.] The judgment must be affirmed "if any one of the several grounds of demurrer is well taken. [Citations.]" [Citation.] However, it is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. [Citation.] And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment. [Citation.]' [Citations.]" (Payne v. National Collection Systems, Inc. (2001) 91 Cal.App.4th 1037, 1043-1044.)
"The elements of an action for breach of contract which must be pleaded are (1) the contract; (2) performance or excuse for nonperformance; (3) breach; [and] (4) damage." (Smith v. Royal Mfg. Co. (1960) 185 Cal.App.2d 315, 325.)
Chapman's claim cannot proceed against either SMC or Sullivan because he has not alleged any damages. His first theory of damages is that he paid $10,000 to retain an appraiser. Pursuant to the operating agreement, Chapman was required to retain an appraiser; thus, he was going to incur this expense regardless of any breach by SMC and/or Sullivan. These monies cannot constitute damages as a matter of law.
According to his appellate brief, Chapman's second category of alleged damages includes his attorney fees and judicial referee fees. While Chapman failed to raise this theory below, we considered it on appeal. (Alfaro v. Community Housing Improvement System & Planning Assn., Inc. (2009) 171 Cal.App.4th 1356, 1396-1397 ["an appellant challenging the sustaining of a general demurrer may change his or her theory on appeal [citation], and an appellate court can affirm or reverse the ruling on new grounds. [Citations.] After all, we review the validity of the ruling and not the reasons given"].) We conclude that Chapman has failed to demonstrate that he is entitled to attorney fees and judicial reference fees as damages, as opposed to costs.
"Under Code of Civil Procedure section 1033.5, subdivision (a)(10), attorney fees, when authorized by contract, statute, or law, are recoverable as an element of costs." (Allstate Ins. Co. v. Loo (1996) 46 Cal.App.4th 1794, 1797; see also Code Civ. Proc., § 1033.5, subd. (c)(5); Civ. Code, § 1717, subd. (a).) Because only a prevailing party may recover costs (Code Civ. Proc., § 1032, subd. (b)), it follows that only the prevailing party may recoup contractual attorney fees. Attorney fees incurred are not damages.
As Chapman implicitly concedes, the same analysis and conclusion applies to Chapman's request for judicial reference costs.
In urging us to reverse, Chapman argues that the referee erred in finding that SMC and Sullivan did not breach the operating agreement; he asserts that they breached the operating agreement by submitting a contractually defective appraisal report. While that may be true, the problem that Chapman neglects to address is how that alleged breach caused him damage and what those damages are.
The next question is whether the referee abused his discretion in denying Chapman leave to amend. Despite having failed to allege a proper cause of action in both his original complaint and FAC, Chapman claims that he can now do so based upon defendants' alleged devaluation of his shares. We are not convinced.
According to the terms of the operating agreement, Chapman and SMC/Sullivan are to each designate an appraiser, who will submit their appraisals of Chapman's interest in SMC. If they are unable to agree on the fair market value of Chapman's interest and the appraisals are not within 20 percent of each other (as was the case here), then the operating agreement provides a process for the selection of a third appraiser. The third appraiser performs his or her own appraisal and the fair market value is based upon an average of the two appraisals that are closest in value.
Thus, if Chapman's $550,000 appraisal is correct, then the third appraisal will presumably be closer to $550,000 than to SMC and Sullivan's appraisal of between zero and $15,000. And, the value of Chapman's shares will be based upon an average of his appraisal and the third appraisal; SMC and Sullivan's appraisal will have no bearing on the fair market value at all.
On the other hand, if SMC and Sullivan's appraisal turns out to be correct and the third appraisal is closer in value to their appraised value, Chapman still has no claim. After all, paragraph 7.1 provides that SMC and the remaining members have the option to purchase a former member's shares. If no one elects to purchase Chapman's shares, then he could not have suffered any damages.
One day, if Chapman is forced to sell his shares after a third party appraisal, after a valuation of his shares, and after an election by SMC or another member to complete the sale at a deliberately devalued price, then Chapman would have a claim for damages. Until that time, Chapman's claim for breach of contract damages is premature. Thus, the referee properly denied Chapman's request for leave to amend.
The referee sustained SMC and Sullivan's demurrer to the second cause of action for declaratory relief without leave to amend. Chapman does not address this portion of the referee's order, thereby waiving any argument on appeal. (Benach v. County of Los Angeles (2007) 149 Cal.App.4th 836, 852 ["When an appellant fails to raise a point, or asserts it but fails to support it with reasoned argument and citations to authority, we treat the point as waived"].)
To properly state a claim for fraud, Chapman must allege: (1) a misrepresentation by the defendant; (2) the defendant's knowledge of its falsity; (3) the defendant's intent to defraud; (4) the plaintiff's justifiable reliance; and (5) resulting damages. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 974.)
Chapman's fraud claim fails for the same reasons as his breach of contract claim. He has not pled a proper request for damages. And, as set forth above, Chapman has failed to explain how this defect can be cured. Thus, the referee rightly sustained defendants' demurrer without leave to amend.
In his FAC, Chapman purports to state a claim for breach of fiduciary duty against both SMC and Sullivan. The referee sustained SMC and Sullivan's demurrer without leave to amend. Because Chapman does not address that portion of the referee's order sustaining SMC's demurrer, he has waived this challenge on appeal. (Benach v. County of Los Angeles, supra, 149 Cal.App.4th at p. 852.)
With respect to Chapman's claim against Sullivan, it too fails. The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) breach of that duty; and (3) damage proximately caused by the breach. (Stanley v. Richmond (1995) 35 Cal.App.4th 1070, 1086.) For the reasons set forth above, Chapman neglects to allege any actionable damage. His "costs" are just that—costs. (Code Civ. Proc., §§ 1032, 1033.5.) And, pursuant to the plain language of the operating agreement, Chapman would have been forced to incur the appraisal fees regardless of any breach of fiduciary duty by Sullivan.
In his appellate brief, Chapman argues that Sullivan threatened and attempted to coerce him into selling his shares in SMC for a reduced value. But, Chapman does not explain how he was damaged by Sullivan's allegedly threatening conduct. Nor could he. The operating agreement sets forth the procedure for valuating a former member's interest in SMC, and Chapman does not claim that he actually was forced to sell his interest to SMC, Sullivan, or anyone else in any way other than as specified by the operating agreement.
Chapman asserts claims for fraud and negligent misrepresentation against the appraiser defendants. The elements of a cause of action for fraud are a misrepresentation, the defendant's knowledge of its falsity, intent to induce reliance, the plaintiff's justifiable reliance on the misrepresentation, and resulting damage. (Okun v. Morton (1988) 203 Cal.App.3d 805, 828.) The elements of a claim for negligent misrepresentation are similar: (1) an assertion of an untrue fact, (2) by one who has no reasonable ground for believing it to be true, (3) made with the intent to induce the recipient to alter his position, (4) on which the recipient justifiably relies, and (5) damages suffered by the recipient. (B.L.M. v. Sabo & Deitsch (1997) 55 Cal.App.4th 823, 834.)
At the risk of sounding redundant, both of these claims against the appraiser defendants fail because Chapman failed to allege damages. Again, his damages are alleged to consist of "costs and appraisal fees." As set forth above, those do not constitute damages as a matter of law. Thus, we readily conclude that the referee properly sustained the appraiser defendants' demurrer.
Chapman argues that the referee abused his discretion in denying his request for leave to file a second amended complaint with a single cause of action for specific performance against SMC and Sullivan only.
Specific performance and damages are separate, alternative remedies for breach of contract. (Rogers v. Davis (1994) 28 Cal.App.4th 1215, 1220.) "To obtain specific performance after a breach of contract, a plaintiff must generally show: `(1) the inadequacy of his legal remedy; (2) an underlying contract that is both reasonable and supported by adequate consideration; (3) the existence of a mutuality of remedies; (4) contractual terms which are sufficiently definite to enable the court to know what it is to enforce; and (5) a substantial similarity of the requested performance to that promised in the contract. [Citations.]' [Citations.]" (Real Estate Analytics v. Vallas, LLC (2008) 160 Cal.App.4th 463, 472.)
In the second amended complaint, Chapman sought an order compelling SMC and Sullivan to purchase his interest in SMC for $550,000, the amount determined by his appraiser. But that is not what the operating agreement prescribes. By attempting to contravene the express procedure set forth in the operating agreement, Chapman's request for specific performance is improper. Thus, the referee did not err in denying his request for leave to amend.
For this reason, Chapman's reliance upon De Anza Enterprises v. Johnson (2002) 104 Cal.App.4th 1307 (De Anza) is misplaced. In De Anza, the appellate court affirmed a judgment directing specific performance of an appraisal procedure under the provisions of the parties' agreement. (Id. at pp. 1321-1322.) What Chapman sought in the proposed second amended complaint is not consistent with the procedure set forth in the operating agreement.
Chapman argues that the trial court erred in granting the appraiser defendants' motion to compel the matter to a general reference. We need not resolve this issue. As set forth above, we have reviewed the FAC de novo and concluded that the referee did not err in sustaining defendants' demurrer. Thus, even if the trial court erred in granting the appraiser defendants' motion to compel judicial reference, there has been no miscarriage of justice requiring reversal. (Cal. Const., art. VI, § 13.)
Determining the amount of attorney fees reasonably necessary to compensate a party for his or her expense lies within the sound discretion of the trial court. The award will be disturbed on appeal only where there has been a manifest abuse of discretion. (Serrano v. Priest (1977) 20 Cal.3d 25, 49; City of Oakland v. McCullough (1996) 46 Cal.App.4th 1, 9.)
In general terms, "[t]he appropriate test for abuse of discretion is whether the [lower] court exceeded the bounds of reason." (Shamblin v. Brattain (1988) 44 Cal.3d 474, 478.) In addition, with respect specifically to attorney fees, there has been a manifest abuse of discretion when "`"the amount [is] so large (or so small) as to `shock the conscience' and suggest that passion and prejudice influenced the determination."' [Citation.]" (Iverson v. Spang Industries, Inc. (1975) 45 Cal.App.3d 303, 312.)
The reason for this standard of review is well-established. "The `experienced trial judge is the best judge of the value of professional services rendered in his court, and while his judgment is of course subject to review, it will not be disturbed unless the appellate court is convinced that it is clearly wrong.' [Citations.]" (Serrano v. Priest, supra, 20 Cal.3d at p. 49.)
In determining the reasonableness of the requested fees, the court considers such factors as the nature of the litigation, the difficulty of the litigation, the amount of money involved, the level of skill required and employed in the handling of the litigation, the attention given to the issues, the success of the attorney's efforts, and time consumed. (Clayton Development Co. v. Falvey (1988) 206 Cal.App.3d 438, 447.)
An abuse of discretion must be established affirmatively; this court may not substitute its own judgment for that of the lower court. (In re Marriage of Gonzalez (1976) 57 Cal.App.3d 736, 749.) Hence, if two or more inferences reasonably may be drawn from the facts, this court must defer to those accepted by the lower court. (Shamblin v. Brattain, supra, 44 Cal.3d at pp. 478-479.)
Keeping the appropriate standard of review in mind, we conclude that the referee did not abuse his discretion in awarding $128,655 in attorney fees to SMC and Sullivan. As evidenced by his amended statement of decision, the referee carefully considered defendants' motion for attorney fees. He struck the appraiser defendants' request for attorney fees entirely. Although he found that defendants' counsel's work was "uniformly excellent," he noted that the hourly rate charged was "at the high end of the Los Angeles market," and reduced the fee request by 5 percent. And, he struck an additional $5,000 in fees because defendants had not adequately supported their request. Under these circumstances, we find no abuse of discretion.
Chapman's arguments urging reversal are not compelling. He claims that "the [r]eferee erred in refusing to apply the mandatory `lodestar' analysis of attorney[] fee awards." While the referee may not have used the word "lodestar," it appears that that is the method he employed: he accepted a calculation based on the number of hours defense counsel expended multiplied by a reasonable rate. Regardless, even if the referee did not utilize the lodestar methodology, Chapman neglects to explain how the procedure used by the referee resulted in prejudicial error.
Chapman next asserts that the fee award is so high that it amounts to a penalty. His characterization stems from a comparison of the fee award ($128,655) to the amount of damages he claims he sought in his FAC (allegedly $10,000). But, in his appellate brief, Chapman understates the amount of damages he pled; he requested $10,000 plus costs and fees associated with the appraisal process. And, Chapman neglects the fact that he was seeking $550,000, the amount at which his appraiser valued his interest in SMC.
Finally, Chapman contends that the referee improperly awarded SMC and Sullivan attorney fees incurred in connection with his tort claims. As those claims arose out of the operating agreement, SMC and Sullivan are entitled to attorney fees pursuant to Code of Civil Procedure section 1021. (Adam v. DeCharon (1995) 31 Cal.App.4th 708, 712.)
The judgment of the trial court is affirmed. Defendants are entitled to costs on appeal.
We concur:
BOREN, P. J.
CHAVEZ, J.
