Andrew Gallegos and Joan Gallegos v. James Lloyd, Julie Lloyd, et al.

1 Appellants James Lloyd and Julie Lloyd (the Lloyds) appeal
the trial court's award of attorney fees to Appellees Andrew
Gallegos and Joan Gallegos (the Gallegoses). We reverse.

BACKGROUND

2 On August 6, 2004, the Gallegoses filed a complaint against
the Lloyds for trespass, negligence, and quiet title, alleging
that the Lloyds built their home on property that belonged to the
Gallegoses. The Lloyds conceded that their home encroached upon
the Gallegoses' property; however, they disputed "the nature and
amount[] of damages." After discovery and about six weeks prior
to trial, the trial court granted the Gallegoses' motion to amend
their complaint to make an additional claim for punitive damages
against the Lloyds based on allegations that the Lloyds were
reckless in building their home and willfully disregarded the
Gallegoses' property rights.

3 After a two-day bench trial, the court awarded compensatory
damages to the Gallegoses in the amount of $72,053.31. The trial
court also concluded that "[n]o award of punitive damages should
be made in this matter." Finally, on its own motion, the trial
court determined that the Gallegoses were entitled to attorney
fees either as consequential damages or, alternatively, pursuant
to Utah Code section 78-27-56 because "the Lloyds' defense . . .
was without merit and not asserted in good faith." A final
judgment memorializing this ruling and the court's findings of
fact and conclusions of law were entered on July 19, 2006. On
that same day, the Gallegoses moved for attorney fees and costs
pursuant to rules 73(a) and 54(d) of the Utah Rules of Civil
Procedure, see Utah R. Civ. P. 73(a), 54(d), and based on the
trial court's bench ruling and subsequent judgment.

4 During a hearing on November 2, 2006, the trial court
granted the Gallegoses' motion for attorney fees and costs. And
on November 16, 2006, the court entered a Supplemental Judgment
for Attorneys Fees and Costs, which awarded $56,798 in attorney
fees and $9398.17 in costs to the Gallegoses. The Lloyds now
appeal the supplemental judgment awarding attorney fees to the
Gallegoses.

ISSUES AND STANDARDS OF REVIEW

5 The Lloyds first argue that the trial court erred when it
awarded attorney fees as consequential damages to the Gallegoses.
Generally, "[w]hether attorney fees should be awarded is a legal
issue that we review for correctness." Gardiner v. York, 2006 UT
App 496, 5, 153 P.3d 791 (citing Valcarce v. Fitzgerald, 961
P.2d 305, 315 (Utah 1998)).

6 The Lloyds' second argument is that the trial court erred
when it awarded attorney fees to the Gallegoses under Utah Code
section 78-27-56. See Utah Code Ann. § 78-27-56(1) (2002). We
review a trial court's grant of attorney fees under section 78-
27-56 as a mixed question of law and fact. Before awarding
attorney fees to a plaintiff under section 78-27-56, the trial
court must conclude that the defendant's defense "was without
merit," id., and we review this legal conclusion for correctness.
See Coalville City v. Lundgren, 930 P.2d 1206, 1211 (Utah Ct.
App. 1997). In addition, the trial court must make a factual
finding--based on the defendant's subjective intent--that the
defendant did "not br[ing] or assert[ the defense] in good
faith," Utah Code Ann. § 78-27-56(1), which we review under a
clearly erroneous standard. See Still Standing Stable, LLC v.
Allen, 2005 UT 46, 8, 122 P.3d 556; see also Valcarce, 961 P.2d
at 316 ("The wide variety of circumstances that might support a
finding of such intent requires that we give a trial court
relatively broad discretion in concluding that bad faith has been
shown.").

ANALYSIS

I. Attorney Fees as Consequential Damages

7 The Lloyds claim that, in Utah, a party cannot recover
attorney fees as consequential damages in a tort case unless
provided for by statute. To decide otherwise in this case, they
argue, would be contrary to the rule that Utah courts have
consistently followed. See Morganroth & Morganroth v. DeLorean,
213 F.3d 1301, 1318 (10th Cir. 2000). We agree.

8 Utah follows the traditional American rule, which states
that "attorney fees are not recoverable by a prevailing party
unless authorized by statute or contract." Faust v. Kai Techs.,
2000 UT 82, 17, 15 P.3d 1266. There are, however, exceptions
to this general rule. See, e.g., Utahns For Better Dental
Health-Davis, Inc. v. Rawlings, 2007 UT 97, 5, 593 Utah Adv.
Rep. 36 (private attorney general doctrine); Lewiston State Bank
v. Greenline Equip., LLC, 2006 UT App 446, 21-22, 147 P.3d 951
(third-party tort rule); Macris & Assocs., Inc. v. Neways, Inc.,
2006 UT App 33, 4 n.1, 131 P.3d 263 (same); see also, e.g.,
Heslop v. Bank of Utah, 839 P.2d 828, 840-41 (Utah 1992)
(employer's breach of the covenant of good faith and fair
dealing); see also Macris & Assocs., Inc. v. Neways, Inc., 2002
UT App 406, 13 n.8, 60 P.3d 1176 (listing additional
exceptions). The present case does not fall under any of the
previously-recognized exceptions to the general rule against
awarding attorney fees in tort cases.1 See Gardiner, 2006 UT App
496, 7-8 ("'The award of attorney fees as consequential
damages, outside the context of statutory and contractual
authorization, should be limited to . . . two situations . . . :
insurance contracts and the third-party exception.'" (omissions
in original) (emphasis omitted) (quoting Collier v. Heinz, 827
P.2d 982, 984 (Utah Ct. App. 1992))). The Gallegoses ask us to
adopt a new exception, an invitation we decline. Therefore, we
hold that the trial court erred in awarding attorney fees as
consequential damages.

II. Attorney Fees Under Section 78-27-56(1)

9 As an alternative to awarding attorney fees in the form of
consequential damages, the trial court awarded attorney fees to
the Gallegoses under Utah Code section 78-27-56. Section 78-27-
56(1) states: "In civil actions, the court shall award
reasonable attorney's fees to a prevailing party if the court
determines that the action or defense to the action was without
merit and not brought or asserted in good faith . . . ." Utah
Code Ann. § 78-27-56(1). "According to the plain language of
section 78-27-56, three requirements must be met before the court
shall award attorney fees: (1) the party must prevail, (2) the
claim asserted by the opposing party must be without merit, and
(3) the claim must not be brought or asserted in good faith."
Hermes Assocs. v. Park's Sportsman, 813 P.2d 1221, 1225 (Utah Ct.
App. 1991) (citing Cady v. Johnson, 671 P.2d 149, 151 (Utah
1983)). We address each of these elements in turn.

A. The Gallegoses Were the Prevailing Party on
Compensatory but Not Punitive Damages

10 A substantial portion of the trial was focused on evidence
concerning the Lloyds' state of mind during the construction of
the encroaching home. While the Lloyds claimed that the trespass
was a mistake caused by their reliance on others, the Gallegoses
asserted that the Lloyds willfully built on their property to
improve their view, driveway grade, and cost of construction. The
Lloyds denied that their conduct was willful, and thus argued
that punitive damages were not warranted. See Hatanaka v.
Struhs, 738 P.2d 1052, 1054 (Utah Ct. App. 1987) ("[B]efore
punitive damages may be awarded [in a trespass case], the
plaintiff must prove conduct that is willful and malicious, or
that manifests a knowing and reckless indifference and disregard
toward the rights of others." (internal quotation marks
omitted)). According to the Gallegoses, the Lloyds contested
"the intentional element of the Gallegos[es]' trespass claim,"
and therefore proof of intent was required to prevail on both
their claim for punitive damages and their claim for compensatory
damages for trespass. We disagree.

11 Damages are awarded on a successful trespass claim whether
or not the defendant intentionally entered the plaintiff's
property. See generally Walker Drug Co. v. La Sal Oil Co., 972
P.2d 1238, 1243 (Utah 1998) ("The essential element of trespass
is physical invasion of the land . . . ."). It was therefore
necessary for the Lloyds to contest the intent element to prevail
on the issue of punitive damages, while intent was irrelevant to
the underlying trespass claim. See Farr v. Swigart, 13 Utah 150,
44 P. 711, 713 (1896) ("In actions of trespass, where the injury
has been wanton and malicious, or gross and outrageous, courts
permit juries to add [to] the measured compensation of the
plaintiff, which he would have been entitled to recover had the
injury been inflicted without design or intention, something
further, by way of punishment or example . . . ." (emphasis
added)). The Restatement of Torts explains this concept as
follows:

In order to be liable for a trespass on land
under the rule stated in § 158, it is
necessary only that the actor intentionally
be upon any part of the land in question. It
is not necessary that he intend to invade the
possessor's interest in the exclusive
possession of his land and, therefore, that
he know his entry to be an intrusion.

Restatement (Second) of Torts § 164 cmt. a (1965).2

3. Indeed, the trial court alluded to the Lloyds' success in
defending against the Gallegoses' claim in its ruling from the
bench: "I don't know how much in terms of punitive damages
you've saved your client, Mr. Davis, but conceivably a lot by
your arguments today. I think they've been good arguments and
they've been persuasive on that issue . . . ."

4. Because we conclude that the Gallegoses did not prevail on
their punitive damages claim, we need not address whether the
Lloyds' defense of that claim lacked merit or was brought in bad
faith. See Utah Code Ann. § 78-27-56(1) (2002); Hermes Assocs.
v. Park's Sportsman, 813 P.2d 1221, 1225 (Utah Ct. App. 1991)
("Park was not 'the prevailing party' at any stage in the
litigation; therefore, we do not need to consider whether the
remaining requirements[, without merit and bad faith,] were
met.").

12 The trial court ruled that the Gallegoses did not meet their
burden of proving willfulness by clear and convincing evidence.3
See Mueller v. Allen, 2005 UT App 477, 39, 128 P.3d 18 ("Under
Utah law, punitive damages can be awarded only if 'it is
established by clear and convincing evidence that the acts or
omissions of the tortfeasor are the result of willful and
malicious or intentionally fraudulent conduct, or conduct that
manifests a knowing and reckless indifference toward, and a
disregard of, the rights of others.'" (quoting Utah Code Ann.
§ 78-18-1(1)(a) (Supp. 2005))). Therefore, the trial court
dismissed the claim for punitive damages and the Gallegoses did
not prevail on that claim.4

13 As explained above, the Lloyds conceded trespass but tried
the issue of the appropriate amount of damages. Before trial,
the Gallegoses claimed damages of $127,999.36 and the Lloyds
admitted damages of $10,607. Ultimately, the trial court awarded
$72,053.31 in damages to the Gallegoses, a figure slightly more
than halfway between the positions asserted by the parties. The
trial court also concluded that the Gallegoses were the
prevailing parties at trial and awarded them attorney fees under
Utah Code section 78-27-56. See Utah Code Ann. § 78-27-56(1)
(2002). Trial courts apply a "flexible and reasoned" approach to
the determination of who prevailed at trial. See A.K. & R.
Whipple Plumbing & Heating v. Guy, 2004 UT 47, 11, 94 P.3d 270;
Mountain States Broad. Co. v. Neale, 783 P.2d 551, 557 (Utah Ct.
App. 1989). Furthermore, we defer to the trial court's
application of that approach. See Lunceford v. Lunceford, 2006
UT App 266, 10, 139 P.3d 1073 ("[T]he district court's
determination as to the identity of the prevailing party is
reviewed for abuse of discretion."). Consequently, we affirm the
trial court's conclusion that the Gallegoses prevailed on the
compensatory damages claim.

14 Although the Gallegoses were successful on part, but
not all, of their damages theory, they may recover attorney
fees if they otherwise satisfy the remaining elements of section
78-27-56. See Utah Code Ann. § 78-27-56(1); Ault v. Holden, 2002
UT 33, 48, 44 P.3d 781 ("To be a prevailing party, a party must
obtain at least some relief on the merits of the party's claim or
claims." (internal quotation marks omitted)); Valcarce v.
Fitzgerald, 961 P.2d 305, 317-19 (Utah 1998) ("[A] trial court's
award of attorney fees must distinguish between those fees
incurred in connection with successful and unsuccessful claims,
as must the evidence submitted by the prevailing party, or the
reviewing court will be precluded from making an independent
determination."); Coalville City v. Lundgren, 930 P.2d 1206, 1211
(Utah Ct. App. 1997) (stating that defendant's success on a
collateral issue did not preclude an award of attorney fees under
section 78-27-56). We therefore consider the bad faith and
without merit elements of the statute.

B. The Lloyds Acted in Bad Faith

15 Before the Gallegoses, as the prevailing parties, may
recover attorney fees under section 78-27-56, the trial court
must make a factual finding that the Lloyds asserted their
defense in bad faith. See Cady v. Johnson, 671 P.2d 149, 151-52
(Utah 1983) (explaining that the terms "bad faith" and "lack of
good faith," for the purposes of section 78-27-56, are
synonymous). A finding of bad faith must be based on at least
one of the following three factors: "(i) The party lacked an
honest belief in the propriety of the activities in question;
(ii) the party intended to take unconscionable advantage of
others; or (iii) the party intended to or acted with the
knowledge that the activities in question would hinder, delay, or
defraud others." Valcarce, 961 P.2d at 316 (citing Cady, 671
P.2d at 151). We defer to the trial court's factual finding of
bad faith unless it is clearly erroneous. See Topik v. Thurber,
739 P.2d 1101, 1104 & n.5 (Utah 1987); Jeschke v. Willis, 811
P.2d 202, 204 (Utah Ct. App. 1991).

16 Here, the Gallegoses asserted that the Lloyds intentionally
built their house on the Gallegoses' property. Although the
trial court was unable to conclude that the Lloyds had willfully
built on the Gallegoses' property by the clear and convincing
standard of proof necessary to award punitive damages, it was "by
the slimmest of margin" that it did not make such a finding.
Indeed, the trial court did find intentional conduct by a
preponderance of the evidence, stating:

5. The Lloyds also claim that the trial court erroneously based
its bad faith finding on their prelitigation conduct. See Faust
v. Kai Techs., 2000 UT 82, 16, 15 P.3d 1266 ("It is not enough
that [defendant] did not promptly pay . . . the amounts it
acknowledged were owing in the settlement letter or that
[defendant] may have acted in bad faith at times in the
settlement negotiations. [Section 78-27-56(1)] simply does not
extend to such conduct."); see also Morganroth & Morganroth v.
DeLorean, 213 F.3d 1301, 1318 (10th Cir. 2000) ("We conclude that
Utah would follow the general rule, rather than substantially
abridge the American rule by permitting its courts to award
attorney's fees for bad faith conduct not related to the
litigation process itself."). However, the trial court
specifically found that "[Mr. Lloyd's] conduct after the
litigation commenced was also in bad faith . . . . [H]e came to
court and testified, in [its] opinion, totally without
credibility." (Emphasis added.) Consequently, we do not address
the issue of whether prelitigation conduct could ever satisfy the
bad faith prong of section 78-27-56(1).

6. We note that there is no indication in the transcript or the
trial court's findings of fact and conclusions of law that
counsel for the Lloyds had any complicity in his client's
decision to testify falsely.

I see a difference in the standard between
punitive damages and a bad faith finding, and

I think the punitive damages requires clear
and convincing, I found before, and I would
reiterate that I didn't feel the evidence
rose to that level. However, I did feel that
the evidence rose to a preponderance level
and that would be adequate in my opinion
. . . [to] justify the award of damages for
bad faith in the litigation process.

(Emphasis added.)

17 The trial court based its finding--that the Lloyds brought
the defense to the action in bad faith--on its belief that Mr.
Lloyd "came to court and testified, in [its] opinion, totally
without credibility."5 Because Mr. Lloyd "lacked an honest
belief in the propriety of the activities in question," see
Valcarce, 961 P.2d at 316, the trial court found that the bad
faith element of section 78-27-56(1) was met.6 We agree that the
trial court's belief that Mr. Lloyd testified untruthfully is
sufficient to support that finding and we will not disturb it on
appeal. See Wardley Better Homes & Gardens v. Cannon, 2002 UT
99, 29, 61 P.3d 1009 ("Wardley automatically lacked an honest
belief in the propriety of bringing a suit to collect a
commission under a fraudulently-obtained listing agreement.");
Topik, 739 P.2d at 1104 (noting that defendant's false testimony
claiming that his signature was a forgery supported the finding
that his defense to enforcement of a letter agreement was brought
in bad faith).

C. The Lloyds' Defense to Compensatory Damages
Was Not Without Merit

18 The most difficult part of our analysis focuses on the issue
of whether Mr. Lloyd's untruthful testimony at trial also
satisfies section 78-27-56's requirement that the defense be
without merit.7 While the Gallegoses contend that it does, the
Lloyds argue that their defense cannot be without merit because
it was successful in reducing the compensatory damages claimed by
the Gallegoses by over forty percent. The Lloyds defended
against the amounts the Gallegoses claimed in compensatory
damages by asserting that such amounts were "inflated" and caused
by a failure to mitigate. The trial court partially agreed with
this defense, stating that not all of the storage fees were
"legitimate" and that some of the architectural drawings were not
"justified." Typically, mitigation of damages "is a legitimate
issue that can hardly be characterized as frivolous or as having
no basis in law or fact." Broadwater v. Old Republic Sur., 854
P.2d 527, 534 (Utah 1993).

19 A meritless claim is defined as "frivolous," or "of little
weight or importance having no basis in law or fact." Cady, 671
P.2d at 151 (internal quotation marks omitted). The Lloyds argue
that their defenses did not lack merit because they "fully or
substantially succeeded in [them]." We agree that the Lloyds
were partially successful in their defense, significantly
reducing the amount of damages awarded to the Gallegoses.

Nevertheless, the Gallegoses argue that the trial court's finding
that Mr. Lloyd's trial testimony was "totally without
credibility" is enough to satisfy both the bad faith and the
without merit requirements of the statute. Under the facts of
this case, we disagree.

20 Prior decisions from the Utah Supreme Court suggest that the
use of false testimony may, under some circumstances, be enough
to support a finding that a defense was asserted without merit.
In Topik v. Thurber, 739 P.2d 1101 (Utah 1987), the Utah Supreme
Court upheld an award of attorney fees under section 78-27-56(1).

See id. at 1104. The supreme court explained that the trial
court's finding "that defendant attempted to avoid liability by
testifying falsely" was sufficiently supported, and upheld the
award of attorney fees under section 78-27-56 without
distinguishing between lack of merit and bad faith. See id.

21 Subsequently, in Valcarce v. Fitzgerald, 961 P.2d 305 (Utah
1998), the Utah Supreme Court specifically recognized that "the
Valcarces' claims may have had some basis in law." Id. at 315.
Nevertheless, it held that the defense was meritless, stating:

We conclude that the trial court properly
found the [defendant]s' claims and defenses
to be meritless. . . . [T]he trial court
found [the defendant's] testimony to be
"incredible" . . . . We held in Topik v.
Thurber that a finding that a party has
attempted to avoid liability by testifying
falsely will support a decision to award
attorney fees if combined with a finding of
bad faith. Thus, the case makes clear that
testifying falsely is not a legitimate mode
of defense. Because his defense was without
merit, [the defendant] can be held
responsible for those attorney fees that were
incurred after he was joined as a party if we
find that his actions were taken in bad
faith.

Id. (citation omitted) (second and third emphases added); see
also Wardley, 2002 UT 99, 30 (concluding that a claim "clearly
had no legal basis for recovery" because it "was based on
fraudulently-altered [documents]" (internal quotation marks
omitted)); Jeschke v. Willis, 811 P.2d 202, 204 (Utah Ct. App.
1991) (determining that plaintiff's purposeful misrepresentations
evidence both that the action was brought in bad faith and that
it was without merit).

22 The Utah Supreme Court has since cautioned against
conflating the issues of merit and bad faith. See, e.g., Still
Standing Stable, LLC v. Allen, 2005 UT 46, 10, 16-17, 122 P.3d
556; In re Sonnenreich, 2004 UT 3, 49, 86 P.3d 712.
Consequently, we examine the without merit element of section 78-
27-56 independently of the bad faith requirement.

23 Here, the trial court specifically found that the Lloyds'
testimony regarding their intent was not credible:

8. As we have discussed, once the Lloyds admitted that their
home encroached on the Gallegoses' property, the only issue
before the court was the proper amount of damages.

[Their] assertion . . . that they were not
aware of any potential encroachment onto Lot
102, is not credible. Likewise, [their]
assertion that they relied upon other
professionals to properly stake their[] home
or notify them that their home was not
located according to the Lot 106 Site Plan,
is not credible.

The Lloyds offered this incredible testimony as part of their
defense to the Gallegoses' claim for punitive damages.8 The
challenges to the amount of compensatory damages requested by the
Gallegoses were not dependent upon the Lloyds' state of mind.
Thus, the false testimony was actually related to the punitive
damages claim on which the Lloyds prevailed and not to the amount
of actual damages caused to the Gallegoses as a result of the
trespass.

24 The prior Utah cases that have found untruthful testimony
enough to make a defense without merit each involved incredible
testimony directly related to liability. In Valcarce, the trial
court concluded that Mr. Valcarce testified falsely that he did
not damage the irrigation canal or dams that were the subject of
the Fitzgeralds' claim for damages resulting from the Valcarces'
interference with their water rights. See 961 P.2d at 315. Mr.
Valcarce's defense to the interference claim was that he did not
do it, yet numerous witnesses testified to seeing him removing
damming devices and plowing dirt into the canal. See id. at 310.

The trial court concluded that the Valcarces' defense was based
on an untruthful denial. See id. at 315. Thus the defense to
the damages claim, which was false, was without merit. See id.
Likewise, in Jeschke v. Willis, 811 P.2d 202 (Utah Ct. App.
1991), the plaintiff lied about prior and subsequent accidents as
well as the cause of his injuries. The untruthful statements
went directly to his personal injury claim, thereby rendering it
without merit. Id. at 204; see also Wardley Better Homes &
Gardens v. Cannon, 2002 UT 99, 30, 61 P.3d 1009 (concluding
that plaintiff's claim, which was entirely based on a
fraudulently-altered document, lacked merit); Topik, 739 P.2d at
1102, 1104 (affirming the trial court's finding that defendant
testified untruthfully, which testimony related directly to the
claim that defendant agreed but failed to honor an assignment of
personal injury proceeds).

9. To recover attorney fees under section 78-27-56, the movant
must be the "prevailing party." See Utah Code Ann. § 78-27-56(1)
(2002); Hermes Assocs. v. Park's Sportsman, 813 P.2d 1221, 1225
(Utah Ct. App. 1991).

25 Unlike these cases, the incredible testimony offered by the
Lloyds was not relevant to the claim on which the Gallegoses
prevailed.9 The defenses offered by the Lloyds to the
Gallegoses' claim for compensatory damages were partially
successful and resulted in a significant reduction in the amount
of damages awarded. Although we hold that the trial court did
not exceed its discretion in finding that the Lloyds acted in bad
faith by offering false testimony for any purpose, we hold that
the trial court was not correct in ruling that the defense
against the compensatory damages claimed was without merit.

* * *

http://www.utcourts.gov/opinions/appopin/gallegos021408.pdf

¶26 We conclude that the trial court erred in awarding attorney
fees as consequential damages. The Gallegoses did not prevail on
their claim for punitive damages, and therefore the trial court's
award of attorney fees under Utah Code section 78-27-56(1) should
not have included fees related to that issue. Although the trial
court did not exceed its discretion in finding that the Lloyds
acted in bad faith, it was incorrect in awarding the Gallegoses
section 78-27-56(1) attorney fees incurred in pursuing
compensatory damages caused by the Lloyds' trespass because their
defenses to those damages were not without merit. Each party
shall bear its own attorney fees incurred in this appeal.

¶27 Reversed.

Unknown

Unknown

None