Under fee-shifting statutes, a trial judge must award fees to the prevailing party regardless if the prevailing party will actually be responsible for paying the fees. In Cell-Crete v. Federal Insurance Co. (2022) WL 4103354, the surety on a construction project argued that it was owed attorney fees and costs under the fee-shifting statute even though it did not actually pay any of the fees or costs. The Court of Appeals agreed and reversed the trial court's order to deny the surety's requests for those fees.

Background Facts

Granite Construction Company and the County of Riverside entered into a written contract in 2013 wherein Granite agreed to perform certain construction services on Airport Boulevard (Avenue 56) at Grapefruit Boulevard (Highway 111) and Union Pacific Railroad Grade Separation project in Thermal, California. In 2014 Cell-Crete entered into an agreement with Granite to furnish and install lightweight concrete as part of the project. Granite was the principal on the project and executed a payment bond with Federal Insurance Company as surety. Federal required Granite to defend, indemnify and hold harmless against any" loss, damage or expense including costs and attorney fees" as a condition of their agreement.

Granite and Cell-Crete ended up having several disputes during the construction of the project. Cell-Crete filed a demand for arbitration with the American Arbitration Association in late 2016. It demanded $309,557 for the performance of work and delay costs. Granite counter-sued Cell Crete and hired an attorney to represent it during the arbitration. Both businesses were awarded damages, but in the end the amounts they owed one another almost broke even with Granite owing Cell Crete $130.82. The arbitrator did not award attorney fees or costs to either party. Federal was not involved or a party to the arbitration.

In addition to requesting arbitration, Cell Crete also filed a claim against Granite in Riverside Superior Court. Granite also countersued that action. In the superior court case, Cell Crete also added Federal as a defendant and requested recovery under the payment bond. Federal centered its defense on the contract between it and Granite in which Granite had agreed to indemnify and defend Federal from any claims. Federal tendered its defense to Granite pursuant to its indemnity agreement. Granite hired counsel and paid the fees. The firm appeared on behalf of Granite as well as Federal on several occasions. After the agreed-upon arbitration award was confirmed by the trial court, Federal filed a motion for attorney fees and costs along with a memorandum of costs. The law firm retained by Granite continued to represent Federal after the arbitration award was confirmed during post-dismissal filings and drafted Federal's opposition to Cell-Crete's motion to strike or tax costs and Federal's motion for attorney fees and costs. Federal contended that it was entitled to recover attorney fees and costs even if it did not submit any payment for these costs under the indemnity agreement.

The trial court granted Federal's motion for attorney fees and costs, but not without caveat. The court stated, "As the prevailing party, Federal is entitled to recover its costs, including attorney fees as authorized by Civil Code section 9564. However, Federal incurred no such expenses. Instead, all such costs were borne by Granite …. and therefore, Federal has suffered no loss and may not recover compensation for costs it did not incur." This appeal ensued.

Allocation of Costs

Code of Civil Procedure section 1032, subdivision(b), provides that "A prevailing party is entitled as a matter of right to recover costs in any action or proceeding." In addition, the Code of Civil Procedure section 1033.5, subdivision (c)(1) states, "costs are allowable if incurred, whether paid or not paid." The leading case law in this area found that a party who did not incur the costs may still recover for them. In Litt v. Eisenhower Medical Center, (2015) 237 Cal.App.4th 1217, 1221, the court found that "The actual payor is irrelevant. Under the code's cost-shifting provisions, there is no requirement that a party claiming costs must have personally incurred the obligations enumerated in the memorandum." The Litt court continued, "Defendants may incur legal liability to pay the cost of litigation even though some other party may have agreed to reimburse them or to pay all expenses of the litigation." The court in the current case found the facts and issue here analogous to that in Litt.

By signing the bond for payment, Federal agreed to incur legal liability to pay litigation costs even though in the agreement Granite agreed to defend and indemnify Federal. For this reason, Federal was entitled to recovery for attorney fees and costs even if it did not expend any funds in the actual payment of those fees and costs.

Attorney Fees

Civil Code section 9564, subdivision(c) requires an attorney fee award to the prevailing party in an action to enforce the liability on a payment bond and does so without condition. The general rule is that the court should award reasonable attorney fees to the prevailing party even if they are not obligated to pay the fees. The statute does not require that the prevailing party incurred or paid the attorney fees in order to be entitled to a recovery of them. "In general, awards of attorney fees where authorized are not obviated by the fact that individual plaintiffs are not obligated to compensate their counsel." Lolley v. Campbell (2002) 28 Cal.4th 367… The Lolley court went on to say, "California courts have routinely awarded fees to compensate for legal work performed on behalf of a party pursuant to an attorney-client relationship, although the party did not have a personal obligation to pay for such services out of his or her own assets." Id.

Here Federal had an attorney-client relationship with the law firm. The firm prepared the motion to stay the case pending arbitration, a petition to conform the arbitration award, demurrers, and a motion for summary adjudication. It also appeared as Federal's counsel at numerous hearings. Federal was responsible for paying the legal costs for this representation as the prevailing party under Section 9564(c). Cell-Crete argues that Federal was never responsible for the legal costs because Granite supplied their defense from the start. In response, the court quoted the Lolley case, stating "It has been generally agreed that a party may incur attorney fees even if the party is not personally obligated to pay such fees. A party's entitlement to fees is not affected by the fact that the attorneys for whom fees are being claimed were funded by governmental or charitable sources or agreed to represent the party without charge." Lolley, supra, 28 Cal.4th at p. 373.

Therefore, the trial court's conclusion was found to be incorrect. The applicable fee-shifting provision at hand only required that the court award a reasonable attorney fee to the prevailing party and did not have to determine whether costs were incurred. The court determined, "So long as the fee award is limited to attorney fees incurred defending Federal against the cause of action Cell-Crete brought against them in the superior court, the award will do the work the Legislature intended by directing the courts to award fees to prevailing parties." Therefore, the order of the trial court was reversed and Federal's motion for attorney fees and the order granting Cell Crete's motion to tax costs was remanded to determine whether the fees and costs were within reason.

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