Mountain Air Enterprises, LLC v. Sundowner Towers, LLC

In this complex real estate purchase transaction, the seller brought a breach

of contract action against the buyers for failing to purchase the subject property.

The defendant buyers asserted an affirmative defense of novation, arguing that

they were not liable under the purchase agreement because it had been superseded

by the parties‟ option agreement; that option agreement granted them the exclusive

right, but not the obligation, to purchase the property. The trial court agreed.

The question we must answer is whether the defendants‟ assertion of the

option agreement as an affirmative defense triggers the attorney fees provision in

that agreement. For reasons that follow, we conclude that it does not. However,

as we also explain, defendants are nonetheless entitled to attorney fees under that

provision.

2

FACTUAL AND PROCEDURAL BACKGROUND

Like the Court of Appeal, we draw most of the underlying facts from the

trial court‟s over-40-page final statement of decision. (See Chapala Management

Corp. v. Stanton (2010) 186 Cal.App.4th 1532, 1535.)

The principals to this dispute are Steven Scarpa of Mountain Air

Enterprises (Mountain Air) and Bijan Madjlessi of Sundowner Towers

(Sundowner), both of whom are described as experienced real estate investors and

developers. In early 2004, Madjlessi explored possible real estate investments

outside of California. Madjlessi discovered the subject single parcel of real

property located at 450 Arlington Avenue, in Reno, Nevada (Property). The

improvements consisted of the “North Tower,” the “Casino Building,” and the

“South Tower.” As relevant here, the Property remained a single parcel until

February 17, 2006, when it was separated into three parcels, the North Tower, the

South Tower, and the Casino Building.

On or about December 12, 2005, when the Property was still a single

parcel, Scarpa and Sundowner entered into two separate agreements: (1) an

agreement wherein Sundowner agreed to sell the South Tower to Scarpa for $7

million (the purchase agreement); and (2) an agreement whereby Sundowner

agreed to later repurchase the South Tower from Scarpa for $7 million plus an

“inflation factor” of 12 percent (the repurchase agreement). Madjlessi and Glenn

Larsen, a business associate of Madjlessi‟s and a member of Sundowner,

guaranteed Sundowner‟s obligations under the repurchase agreement. Scarpa

subsequently assigned his rights under both agreements to Mountain Air.

On or about April 25, 2006 — just days before Sundowner transferred the

South Tower to Mountain Air — Mountain Air as seller, and Larsen and Madjlessi

individually, as buyers, executed a written option agreement whereby Mountain

Air granted Larsen and Madjlessi the exclusive right to purchase (or rather

3

repurchase) the South Tower during the option period (the option agreement).

Larsen and Madjlessi personally guaranteed their obligations under the option

agreement. On April 27, 2006, Sundowner, after acquiring the South Tower from

a third party, concurrently transferred it to Mountain Air pursuant to the purchase

agreement. However, Sundowner never repurchased the South Tower as agreed to

in the repurchase agreement, and Mountain Air filed suit.

In its operative second amended complaint, Mountain Air alleged three

causes of action: (1) specific performance of the repurchase agreement; (2) breach

of the guaranty of the repurchase agreement; and (3) breach of the repurchase

agreement. The first and third causes of action were asserted against all three

defendants. The second cause of action was alleged against Madjlessi and Larsen,

as the guarantors. In response, defendants raised numerous affirmative defenses,

two of which are relevant here: (1) the second affirmative defense stated that the

option agreement, which included an integration clause stating that the agreement

“expressly supersedes all previous or contemporaneous agreements,

understandings, representations, or statements between the parties respecting this

matter,” was a novation that extinguished the repurchase agreement; (2) the fourth

affirmative defense stated that the repurchase agreement was illegal, and therefore

void and unenforceable.

After a 13-day bench trial, the trial court ruled in defendants‟ favor. It

found the repurchase agreement “void, illegal and unenforceable” because the

agreement did not require either party to prepare or record a parcel map in

accordance with the subdivision map laws of Nevada and California. The trial

court also concluded the option agreement was a novation and extinguished the

repurchase agreement and any obligation defendants had under it. It entered

judgment in favor of defendants.

4

As the prevailing parties, defendants filed a motion for an award of attorney

fees in the amount of $774,141 under both the repurchase agreement and the

option agreement. The motion stated the following grounds: (1) because the

action sounded in contract and the repurchase agreement contained an attorney

fees provision, they were entitled to an award of attorney fees under Civil Code

section 1717; (2) based on their assertion of the option agreement as an affirmative

defense, which also included an attorney fees provision, defendants were entitled

to such fees under Code of Civil Procedure section 1021, to the extent the

litigation involved the affirmative defense.

The trial court denied defendants‟ attorney fees motion. Based on the

illegality of the repurchase agreement and “to prevent defendants from profiting

by their knowing involvement in the illegal transaction,” the trial court determined

that attorney fees were unavailable under that agreement. The court also found

that defendants could not recover attorney fees under the option agreement, which

authorized fees to the prevailing party if a “legal action” or “proceeding” “is

brought for the enforcement of this Agreement or because of an alleged dispute,

breach, default, or misrepresentation in connection with any provision of this

Agreement.” It explained that defendants had not “brought” an action for the

enforcement of the agreement. Moreover, even though the trial court considered

whether the option agreement was intended as a novation to the repurchase

agreement, it ultimately concluded that “none of the provisions in the Option

Agreement were actually „in dispute.‟ ”

The Court of Appeal majority reversed the trial court‟s judgment in part. It

agreed with the trial court that the repurchase agreement was “entirely void and

unenforceable” because it failed to comply with the subdivision map laws of both

Nevada and California. Like the trial court, the majority concluded that attorney

fees were unavailable under the repurchase agreement.

5

The Court of Appeal majority, however, held that defendants were entitled

to attorney fees under the option agreement. The majority determined that

defendants‟ assertion of the option agreement and the affirmative defense of

novation fell within the broad definition of “proceeding,” which may refer to a

“ „ “ mere procedural step that is part of the larger action or special

proceeding.” ‟ ” (Quoting Zellerino v. Brown (1991) 235 Cal.App.3d 1097, 1105.)

In addition, though not strictly necessary to its holding, the majority concluded

that the affirmative defense also constituted a “legal action”1 based mainly on the

reasoning of Windsor Pacific LLC v. Samwood Co., Inc. (2013) 213 Cal.App.4th

263, 274-275 (Windsor Pacific). As discussed further below, Windsor Pacific

rejected the contrary holdings of Exxess Electronixx v. Heger Realty Corp. (1998)

64 Cal.App.4th 698 (Exxess) and Gil v. Mansano (2004) 121 Cal.App.4th 739

(Gil), to conclude: “To the extent that either Exxess or Gil suggests, or can be read

to support the proposition, that the word „action‟ does not encompass a defense,

we disagree.” (Windsor Pacific, supra, 213 Cal.App.4th at p. 276; see Gil, supra,

121 Cal.App.4th at p. 747 (dis. opn. of Armstrong, J.).)

Relying on Windsor Pacific and Justice Armstrong‟s dissent in Gil, the

Court of Appeal majority concluded that “ „[r]aising . . . an affirmative defense is

legally the same as bringing an “action” to enforce it.‟ ” The majority explained

that by raising the option agreement as a novation, “defendants sought to enforce

the integration clause and by doing so to accomplish a material purpose of the

option agreement: the extinguishment of the repurchase agreement.” Further, the

majority found the fee provision‟s language — “in connection with” — to be



1 The opinion uses “action” and “legal action” interchangeably. Any gloss

on the word “legal” does not impact the issues in this case.

6

“broad enough” to encompass a dispute over the effect of the option agreement‟s

integration clause.

In rejecting Mountain Air‟s urging to distinguish Windsor Pacific, the

majority below did not find significant either the absence or presence of the words

“brought” or “brings”: “To hold that attorney fees clauses referring to „ “action[s]

brought to enforce” ‟ (Gil, supra, 121 Cal.App.4th at p. 742) have a materially

different meaning from those referring to „ “action[s] . . . to enforce” ‟ (Windsor

Pacific, supra, 213 Cal.App.4th at p. 268, fn. 1) elevates form over substance and

fiction over reality.”

We granted review to resolve this split of authority.

DISCUSSION

A. 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.‟ ” (Connerly v. State Personnel Bd. (2006) 37

Cal.4th 1169, 1175, quoting Carver v. Chevron U.S.A., Inc. (2002) 97 Cal.App.4th

132, 142.) In other words, “it is a discretionary trial court decision on the

propriety or amount of statutory attorney fees to be awarded, but a determination

of the legal basis for an attorney fee award is a question of law to be reviewed de

novo.” (Carver v. Chevron U.S.A., Inc., at p. 142; see Connerly v. State

Personnel Bd., at p. 1175 [“Under some circumstances, this may be a mixed

question of law and fact and, if factual questions predominate, may warrant a

deferential standard of review.”].) In this case, where the material facts are largely

not in dispute, our review is de novo.

7

B. Background

Under the American rule, each party to a lawsuit ordinarily pays its own

attorney fees. (Tract 19051 Homeowners Assn. v. Kemp (2015) 60 Cal.4th 1135,

1142.) Code of Civil Procedure section 1021, which codifies this rule, provides:

“Except as attorney‟s fees are specifically provided for by statute, the measure and

mode of compensation of attorneys and counselors at law is left to the agreement,

express or implied, of the parties . . . .” In other words, section 1021 permits

parties to “ „contract out‟ of the American rule” by executing an agreement that

allocates attorney fees. (Trope v. Katz (1995) 11 Cal.4th 274, 279; see Santisas v.

Goodin (1998) 17 Cal.4th 599, 607, fn. 4 (Santisas) [Code Civ. Proc., § 1021“does

not independently authorize recovery of attorney fees”].) Thus, “ „[p]arties may

validly agree that the prevailing party will be awarded attorney fees incurred in

any litigation between themselves, whether such litigation sounds in tort or in

contract.‟ ” (Santisas, supra, 17 Cal.4th at p. 608, quoting Xuereb v. Marcus &

Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1341.)

If such litigation does sound in contract, however, an agreement allocating

attorney fees may be “within the scope of [Civil Code] section 1717” and subject

to its restrictions.

2 (Santisas, supra, 17 Cal.4th at p. 617.) “Before section 1717

comes into play, it is necessary to determine whether the parties entered an

agreement for the payment of attorney fees, and if so, the scope of the attorney fee



2 Civil Code 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.”

The provision defines “the party prevailing on the contract” as “the party who

recovered a greater relief in the action on the contract.” (Id., subd. (b)(1).)

8

agreement.” (Maynard v. BTI Group, Inc. (2013) 216 Cal.App.4th 984, 990.)

This determination requires us to apply traditional rules of contract interpretation.

(Santisas, supra, 17 Cal.4th at p. 608.)

Accordingly, we first consider the mutual intention of the parties at the time

the contract providing for attorney fees was formed. (Civ. Code, § 1636.) Our

initial inquiry is confined to the writing alone. (Id., § 1639; see Santisas, supra,

17 Cal.4th at p. 608.) “ „The “clear and explicit” meaning of these provisions,

interpreted in their “ordinary and popular sense,” unless “used by the parties in a

technical sense or a special meaning is given to them by usage” ([Civ. Code],

§ 1644), controls judicial interpretation. (Id., § 1638.) Thus, if the meaning a

layperson would ascribe to contract language is not ambiguous, we apply that

meaning.‟ [Citations.]” (Santisas, supra, 17 Cal.4th at p. 608; see Harris v. Klure

(1962) 205 Cal.App.2d 574, 577-578.) At the same time, we also recognize the

“interpretational principle that a contract must be understood with reference to the

circumstances under which it was made and the matter to which it relates. (Civ.

Code, § 1647).” (Xuereb v. Marcus & Millichap, Inc., supra, 3 Cal.App.4th at p.

1344.)

C. Is the Assertion of an Affirmative Defense an Action or

Proceeding?

The option agreement here contained the following attorney fees provision:

“Litigation Costs. If any legal action or any other proceeding, including

arbitration or an action for declaratory relief[,] is brought for the enforcement of

this Agreement or because of an alleged dispute, breach, default, or

misrepresentation in connection with any provision of this Agreement, the

prevailing party shall be entitled to recover reasonable attorney fees, expert fees

and other costs incurred in that action or proceeding, in addition to any other

relief to which the prevailing party may be entitled.” (Italics added.) We begin

9

with the meaning of “action.” The parties here agree that an “action” is

synonymous with a lawsuit (see Code Civ. Proc. § 22), and includes the assertion

of any affirmative defenses. (See Palmer v. Agee (1987) 87 Cal.App.3d 377, 387

[“defenses raised in the answer to the complaint are a real part of any action”]; see

also Nassif v. Municipal Court (1989) 214 Cal.App.3d 1294, 1298 [“action is not

limited to the complaint but refers to the entire judicial proceeding at least through

judgment”].) They diverge, however, on the implications of this conclusion.

Emphasizing the word‟s broad and inclusive meaning, defendants reason

that because an action includes the assertion of an affirmative defense, the asserted

defense, therefore, constitutes an action. (See Windsor Pacific, supra, 213

Cal.App.4th at pp. 275-276.) In that regard, the Court of Appeal majority below

reasoned that “ „[r]aising . . . an affirmative defense is legally the same as bringing

an “action” to enforce it.‟ ” Mountain Air, however, counters that the assertion of

an affirmative defense is a discrete procedural event within a lawsuit and is not

itself a separate action or proceeding; thus, it is erroneous to equate an affirmative

defense with an action or proceeding. (See Gil, supra, 121 Cal.App.4th at p. 744

[“assertion of a defense does not constitute the bringing of an action to accomplish

that goal”]; Exxess, supra, 64 Cal.App.4th at p. 712 [“we cannot equate raising a

„defense‟ with bringing an „action‟ or „proceeding‟ ”].)

We first address the underlying supposition that the assertion of an

affirmative defense equates to or constitutes an action because it is encompassed

within the latter. We cannot agree with this reasoning. Even though an action

may refer to the “entire judicial proceeding” (Nassif v. Municipal Court, supra,

214 Cal.App.3d at p. 1298), this does not mean that each individual occurrence

within this process is itself an “action.” In this attorney fees context, “courts

generally treat the term „action,‟ as defined by Code of Civil Procedure section 22,

as referring to the whole of a lawsuit rather than to discrete proceedings within a

10

lawsuit.” (Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206

Cal.App.4th 515, 527, fn. 6, italics added [petition to compel arbitration is not

independent of other contract claims in lawsuit]; see Salawy v. Ocean Towers

Housing Corp. (2004) 121 Cal.App.4th 664, 672 [“ „an action to enforce‟ does not

refer to specific pleadings or steps within the action or a defense”]; see also

Cornette v. Department of Transp. (2001) 26 Cal.4th 63, 76 [affirmative defense

of design immunity was “ „part and parcel of the pending action‟ ”].) In other

words, while an affirmative defense is a “real part of any action” (Palmer v. Agee,

supra, 87 Cal.App.3d at p. 387, italics added), it does not, in and of itself,

constitute an “action” for purposes of recovering attorney fees.

Alternatively, defendants maintain that the attorney fees provision

nonetheless applies here because it extends not just to an “action,” but also to “any

other proceeding,” a term the Court of Appeal below found “suggests something

broader.” The word “proceeding” can take on “different meanings in different

contexts.” (Zellerino v. Brown, supra, 235 Cal.App.3d at p. 1105 [discovery

demand is a proceeding for purposes of obtaining relief under Code Civ. Proc., §

473].) For example, “proceeding” has been construed narrowly as “an action or

remedy before a court,” and, as broadly as “ „[a]ll the steps or measures adopted in

the prosecution or defense of an action‟ ” (Zellerino v. Brown, at p. 1105).

Defendants argue that asserting an affirmative defense falls squarely within an

expansive definition of a “proceeding.”

While the word “proceeding” can generally refer to “ „a mere procedural

step that is part of the larger action or special proceeding‟ ” (Zellerino v. Brown,

supra, 235 Cal.App.3d at p. 1105), we conclude that it is used here in a narrower

sense, similar to “an action . . . before a court.” (Ibid.) In this provision, the term

“any other proceeding” is immediately followed by the phrase “including

arbitration or an action for declaratory relief,” which both refer to the entirety of a

11

case and not individual procedural steps within a case. This suggests that

“proceeding” is likewise used in a limited sense. (See Kleffman v. Vonage

Holdings Corp. (2010) 49 Cal.4th 334, 343 [word‟s meaning “takes color from the

other words listed in the same provision”].)

To the extent that the meaning of “proceeding” is comparable to a “legal

action,” this does not render either term superfluous because “legal action” is

listed as an example of an “other proceeding.” “ „Where general words follow

specific words in a [contractual provision] the general words are construed to

embrace only objects similar in nature to those objects enumerated by the

preceding specific words. Where the opposite sequence is found, i.e., specific

words following general ones, the doctrine is equally applicable, and restricts

application of the general terms to things that are similar to those enumerated.‟ ”

(Barrett v. Superior Court (1990) 222 Cal.App.3d 1176, 1190 [ejusdem generis

doctrine is “ „an attempt to reconcile an incompatibility between specific and

general words‟ ” so all words may be “ „construed together, and no words will be

superfluous‟ ”]; see Nyard, Inc. v. Uusi-Kerttula (2008) 159 Cal.App.4th 1027,

1045 & fn. 4 [applying ejusdem generis doctrine to interpret contractual

provision].) Here, the general word “proceeding” both follows the specific term

“legal action,” and also precedes the specific words “arbitration” and “an action

for declaratory relief.

The inclusion of the word “brought” is also consistent with a narrow

reading of this fees provision. “[W]ords in a contract are to be understood in their

usual sense. (Civ. Code, § 1644.)” (Xuereb v. Marcus & Millichap, Inc., supra, 3

Cal.App.4th at p. 1344.) As Mountain Air points out, affirmative defenses are

generally pleaded, asserted, or raised, but typically not “brought” by a party. (See

1 Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter

Group 2016) ¶ 6:431; Harris v. City of Santa Monica (2013) 56 Cal.4th 203, 239;

12

see also Bruns v. E-Commerce Exchange Inc. (2011) 51 Cal.4th 717, 723.)

Contrary to defendants‟ suggestion, we do not adopt a technical reading of the

word “brought” as referring only to the initiation of a lawsuit. Instead, “brought”

simply supplies further context to the relevant phrase “brought for the enforcement

of this Agreement or because of an alleged dispute.” (See Gil, supra, 121

Cal.App.4th at p. 745 & fn. 4 [under fee provision‟s “very narrowly drawn”

language, “ „action brought to enforce the terms‟ of the release . . . contemplates

the bringing of a court action”]; Exxess, supra, 64 Cal.App.4th at p. 712 [“we

cannot equate raising a „defense‟ with bringing an „action‟ or „proceeding‟ ”].)

A broad interpretation of “proceeding” would likewise mean that court

rulings on pleadings filed in a legal action — not just with respect to an

affirmative defense asserted in an answer — could each be considered a new

“proceeding.” Applying such an interpretation of “proceeding” in order to place

affirmative defenses within its reach could theoretically authorize multiple fee

awards in a single case, a result inconsistent with the conventional understanding

of how contractual attorney fees are awarded. (See Frog Creek Partners, LLC v.

Vance Brown, Inc., supra, 206 Cal.App.4th at p. 546 [rejecting view that “party

who succeeded on any dispute related to contract‟s enforcement could claim fees,

even if the party was not the prevailing party at trial”]; see also DisputeSuite.com,

LLC v. Scoreinc.com (2017) 2 Cal.5th 968, 977 [Civ. Code, § 1717 attorney fees

available to party who “prevailed on the contract overall, not to a party who

prevailed only at an interim procedural step”].) We decline to read the provision

so broadly without a clear indication of such intent. (See Civ. Code, § 1644.)

“[I]n construing a contract the court‟s function is not merely to import all of

the possible definitions or even the broadest definition, but to glean the meaning of

the words from the context and usage of the words in the contract itself.”

(Mirpad, LLC v. California Ins. Guarantee Assn. (2005) 132 Cal.App.4th 1058,

13

1069.) Mindful of that function, we conclude that while alternative definitions of

the words “action,” “proceeding,” or “brought” may lend support to defendants‟

position, the most natural reading of this provision, considering the words in

context and the provision as a whole, is that the assertion of an affirmative defense

is not contemplated as an “action” or a “proceeding.”

3

We address defendants‟ remaining arguments on this issue. They assert

that a narrow interpretation of the words “action” or “proceeding” — one that

excludes an “affirmative defense” from their meaning — ignores the “inherent

similarities” between claims and affirmative defenses. On that note, they maintain

that whether a claim is raised by an affirmative defense or alleged in a crosscomplaint,

a defendant must prove the same facts and address the same arguments

in each instance. They further argue that there is “no logical reason” why a party

would “choose a form for raising its argument that would foreclose any possible

recovery of attorney fees, when there is another form that would permit them.”

We recognize that there are similar pleading and proof requirements for

raising a claim in a complaint or cross-complaint, and asserting an affirmative

defense. (See 5 Witkin, Cal. Procedure (5th ed. 2008) Pleading, § 1082, p. 515

[“An affirmative defense must be pleaded in the same manner as if the facts were

set forth in a complaint.”]; 1 Weil & Brown, Cal. Practice Guide: Civil Procedure

Before Trial, supra, ¶ 6:431 [“any issue on which defendant bears the burden of

proof at trial is „new matter‟ and must be specially pleaded in the answer”]; id.,

¶ 6:435.) However, as Mountain Air points out, a defendant who pleads an

affirmative defense cannot be liable for malicious prosecution, no matter how



3 We disapprove Windsor Pacific LLC v. Samwood Co., Inc., supra, 213

Cal.App.4th 263, to the extent it is inconsistent with the views expressed in this

opinion.

14

meritless the defense (see Triplett v. Farmers Ins. Exchange (1994) 24

Cal.App.4th 1415, 1424); in contrast, a malicious prosecution action may lie if a

defendant seeks relief by filing a nonmeritorious cross-complaint (Bertero v.

National General Corp. (1974) 13 Cal.3d 45, 50-53). Thus, there may be certain

situations where a defendant would prefer not to raise a claim by way of a crosscomplaint,

but instead raise such new matter by asserting an affirmative defense.

Contrary to defendants‟ suggestion, these pleading alternatives do not amount to

an unusual arrangement requiring specific language in an attorney fees provision

(see Civ. Code, § 1644), much less constitute an absurdity requiring us to reject

such an interpretation (see id., § 1638).

D. Other Basis to Recover Attorney Fees

Though we conclude that defendants‟ assertion of the option agreement as

an affirmative defense does not constitute either an “action” or “proceeding,” we

next consider whether defendants may otherwise recover fees under that

agreement‟s attorney fees provision. As set out above (see ante, at p. 8), the fee

provision stated: “Litigation Costs. If any legal action or any other proceeding,

including arbitration or an action for declaratory relief [,] is brought for the

enforcement of this Agreement or because of an alleged dispute, breach, default,

or misrepresentation in connection with any provision of this Agreement, the

prevailing party shall be entitled to recover reasonable attorney fees, expert fees

and other costs incurred in that action or proceeding, in addition to any other relief

to which the prevailing party may be entitled.” (Italics added.)

Neither side challenges that Mountain Air‟s suit for specific performance

and breach of the repurchase agreement was an “action” for purposes of the

attorney fees provision. Moreover, it cannot be said that Mountain Air‟s action

was “brought for the enforcement” of the option agreement, which gave

15

defendants the exclusive right, but not the obligation, to repurchase the South

Tower. Instead, the issue is whether Mountain Air‟s action on the repurchase

agreement was “brought . . . because of an alleged dispute . . . in connection with

any provision of” the option agreement. The provision at issue is the “integration”

clause, which states the option agreement “expressly supersedes all previous or

contemporaneous agreements, understandings, representations, or statements

between the parties respecting this matter.” Clearly, the parties dispute whether

the option agreement reflects an intent to extinguish the repurchase agreement.

We begin with the meaning of the relevant phrases, “because of,” “an alleged

dispute,” and “in connection with.”

“ „Because of‟ is a term in common usage. It connotes a causal link . . . .”

(In re M.S. (1995) 10 Cal.4th 698, 717 [discussing language of causation in Pen.

Code, §§ 422.6, 422.7]; see also Gross v. FBL Financial Services, Inc. (2009) 557

U.S. 167, 176 [dictionary definition of “because of” means “ „by reason of: on

account of‟ ”].) Next, the word “dispute” is a “general term that includes any

conflict or controversy . . . [and] includes a conflict giving rise to an action.”

(Thompson v. Miller (2003) 112 Cal.App.4th 327, 337 [clause provided attorney

fees to “prevailing party in any dispute under this Agreement”].) A “dispute

under” an agreement can extend to the agreement‟s “effect” or “validity.” (Ibid.)

Next, the primary definition of the word “alleged,” which qualifies “dispute,”

means “asserted to be true or to exist.” (Webster‟s 3d New Internat. Dict. (2002)

p. 55.) Finally, the term “in connection with” is broad, and has been interpreted to

extend to both contract and tort claims in a contractual attorney fees provision.

(Cruz v. Ayromloo (2007) 155 Cal.App.4th 1270, 1277 [“the lease contemplated

recovery of attorneys‟ fees for all claims in any civil action in connection with the

lease”]; see Maynard v. BTI Group, Inc., supra, 216 Cal.App.4th at p. 993

[broadly construing term “any dispute” in attorney fees clause to mean “in

16

connection with”].) With these definitions in mind, we turn to the facts of this

case.

Mountain Air‟s action on the repurchase agreement sought to compel

defendants to buy back the South Tower. Defendants countered that the parties‟

option agreement expressly superseded the repurchase agreement, and, as a result,

they had the exclusive right to repurchase the South Tower without any obligation

to do so. In short, the repurchase agreement and option agreement both concerned

the transfer of the same property between the same parties,4 but provided alternate

and conflicting versions of the parties‟ rights and responsibilities. As the Court of

Appeal majority emphasized, “[t]here can be no doubt here that Mountain Air and

defendants disputed the meaning and effect of the option agreement, including its

integration clause,” and whether it extinguished defendants‟ obligations under the

repurchase agreement. We conclude that Mountain Air‟s action involved an

“alleged dispute . . . in connection with” the option agreement, as required under

the attorney fees provision.

The question remains, did Mountain Air bring its action “because of” an

“alleged dispute . . . in connection with” the option agreement? Mountain Air‟s

second amended complaint focused on the repurchase agreement (and underlying

guaranty), and did not otherwise reference the option agreement. Defendants

subsequently raised the option agreement as a novation defense in their answer.

Mountain Air argues that the enforcement or interpretation of the option



4 The trial court found that “Mountain Air is wholly owned and controlled by

Scarpa, and Sundowner is the alter ego of Madjlessi and Larsen.” Thus, even

though Madjlessi and Larsen signed the option agreement but not the repurchase

agreement, the court concluded it was a “technical distinction,” and did not impact

whether the option agreement superseded the repurchase agreement as a novation.

Likewise, this distinction does not affect the issues on appeal here.

17

agreement was not the declared purpose of its lawsuit, and that the question of the

agreement‟s validity did not cause Mountain Air to file suit. While Mountain

Air‟s argument has superficial appeal, we conclude that it does not withstand

scrutiny.

Though the meaning of “because of” involves a “causal link” (In re M.S.,

supra, 10 Cal.4th at p. 717), we need not decide its precise contours or “the kind

or degree of causation required” here. (Harris v. City of Santa Monica, supra, 56

Cal.4th at pp. 215, 217 [explaining “but for,” “substantial factor,” “motivating

factor” as plausible meanings of “because of” under Gov. Code, § 12940,

subd. (a)].) Once Mountain Air filed suit to compel defendants to repurchase the

South Tower, the action necessarily implicated the validity of both the repurchase

agreement and the option agreement. (See IMO Development Corp. v. Dow

Corning Corp. (1982) 135 Cal.App.3d 451, 463 [promissory note and sales

agreement were “inextricably intertwined” because borrower “alleged invalidity of

[sales agreement‟s] waiver as an affirmative defense to the cross-complaint” for

collection on note].) The parties were forced to litigate which of these competing

and inconsistent agreements was, in the words of the trial court, the “sole

agreement controlling the rights of the parties.” Under these circumstances, we

conclude that Mountain Air‟s action to enforce the repurchase agreement was

brought “because of an alleged dispute . . . in connection with” the option

agreement.

We are not persuaded by Mountain Air‟s argument that attorney fees are

not available because the pertinent fees clause appears in the option agreement,

and not the repurchase agreement on which it brought suit. In determining

whether a contract contains an applicable attorney fees provision, courts have

“construe[d] together several documents concerning the same subject and made as

part of the same transaction [citations] even though the documents were not

18

executed contemporaneously [citation] and do not refer to each other.” (Boyd v.

Oscar Fisher Co. (1989) 210 Cal.App.3d 368, 378; see Civ. Code, § 1642.)

Moreover, contrary to the dissent‟s suggestion (see dis. opn. of Kruger, J., post, at

p. 7), merely construing these two agreements together would not undermine the

trial court‟s finding of novation. “While it is the rule that several contracts

relating to the same matters are to be construed together (Civ. Code, sec. 1642), it

does not follow that for all purposes they constitute one contract.” (Malmstedt v.

Stillwell (1930) 110 Cal.App. 393, 398.) “ „[J]oint execution would require the

court to construe the two agreements in light of one another; it would not merge

them into a single written contract.‟ ” (Pankow Const. Co. v. Advance Mortg.

Corp. (9th Cir.1980) 618 F.2d 611, 616.)

In addition, as a practical matter, it is unclear how a court could determine

the parties‟ obligations in this purchase transaction without construing these

inherently conflicting agreements together. In fact, the trial court here undertook a

comprehensive analysis comparing the terms of the repurchase agreement and the

option agreement, both of which concerned “the identical topic, the purchase of

the South Tower.” After carefully analyzing how these agreements were similar

and how they materially differed, the court rejected Mountain Air‟s claim that the

option to repurchase the South Tower was “complementary” or “parallel” to the

repurchase agreement. It instead found “convincing evidence” that the parties

believed the “Option Agreement was the sole operative agreement of the parties

and that the Repurchase Agreement had been cancelled.” Indeed, the very nature

of defendants‟ defense of novation, the validity of which is not before us, required

determining whether the option agreement superseded and replaced the terms and

conditions of the repurchase agreement. (See Producers’ Fruit Co. v. Goddard

(1925) 75 Cal.App. 737, 754 [“agreement is itself evidence evincive of an

intention by both parties that it should constitute a novation”; subsequent

19

agreement was “widely divergent or different in terms” from original contract].)

“Whether the new contract was intended as a substitute for the old may be inferred

where the terms of the new contract differ widely from those of the old, especially

where the two are entirely inconsistent and cannot be operative at the same time.”

(14A Cal.Jur.3d (2008) Contracts, § 302, fns. omitted.) Accordingly, construing

the repurchase agreement in light of the option agreement was necessary.

In that regard, the dissent overstates the import of the word “alleged,”

which simply means “asserted to be true or to exist.” (Webster‟s 3d New Internat.

Dict., supra, p. 55; see ante, at p. 15.) Fairly read, the term “alleged dispute”

means a purported controversy, one that is “in connection with” the option

agreement. Here, the parties had a dispute about whether Sundowner was

obligated to repurchase the South Tower. Asserting its side of the dispute,

Mountain Air brought its action to enforce the repurchase agreement against

defendants. The dispute was closely connected to the option agreement because

under that agreement — which contained an integration clause making it the

parties‟ sole binding agreement in this transaction — Sundowner had the option,

but not the obligation, to repurchase the South Tower. Mountain Air‟s action was

thus “brought . . . because of an alleged dispute . . . in connection with” the option

agreement.

As the dissent points out, Mountain Air‟s second amended complaint did

not explicitly mention the option agreement, much less allege any connection with

it. However, such an allegation was not required under the attorney fees

provision. Even giving maximum value to the word “alleged,” the provision

merely required that the dispute be alleged and that the dispute also be “in

connection with” the option agreement. As discussed above, both are true here.

In sum, we decline to take an overly formalistic approach to deciding

whether a prevailing party is entitled to contractual attorney fees. Certainly, any

20

inquiry begins with the language of the attorney fees provision itself. (See

Santisas, supra, 17 Cal.4th at pp. 607-608.) However, as this case illustrates, a

complicated and difficult set of facts may sometimes obscure whether a claim on

which attorney fees are incurred is within the scope of a fees provision. (See id. at

p. 602; see also Xuereb v. Marcus & Millichap, Inc., supra, 3 Cal.App.4th at

p. 1344 [none of the various tortious causes of action was “ „quite independent of

the basic contractual arrangement‟ ”].) Thus, if the facts in future cases warrant it,

courts “should consider the pleaded theories of recovery, the theories asserted and

the evidence produced at trial, if any, and also any additional evidence submitted

on the motion in order to identify the legal basis of the prevailing party‟s

recovery.” (Boyd v. Oscar Fisher Co., supra, 210 Cal.App.3d at p. 377.)

Based on the foregoing, we affirm the Court of Appeal‟s judgment reversing the trial court‟s denial of an award of attorney fees.