Assignment Of Breach Of Contract Claim In California

Second District Affirms Fee Award Against Both Assignor and Assignee Based on California Wholesale and the Assignor’s Surety Status.

            One of the time-honored principles in assignment law is that assignee’s voluntary acceptance of benefits normally means consent to bear the burdens from the assignment.  Civil Code sec. 1589.   However, the assignor normally still remains liable to the promisee. These tenets were fully at play in the next case, where both the assignor and assignee where assessed with an adverse $1.4 million fee award which was affirmed by the Second District, Division Four on appeal.

            In New York Times Company v. Click2Boost, Inc., Case No. B195419 (2d Dist., Div. 4 June 20, 2008) (unpublished), plaintiff assignee asserted both contract and tort claims against defendant, which in turn cross-claimed for breach of contract against assignor.  The trial court granted summary judgment in defendant’s favor on assignee’s complaint, issuing a substantial fee award of $1,430,754.50 (out of a sought-after $1,732,298) against both assignee and assignor.  The trial judge also observed that even if defendant won its cross-complaint in the future, he would be careful to not allow a “double dipping” as far as fee recovery in the cross-action.  Assignor appealed, with Justice Manella affirming on behalf of a 3-0 panel consisting of Presiding Justice Epstein and Justice Willhite. 

            At the outset, Justice Manella addressed the appealability issue even though the appellant failed to discuss it (although a statement of appealability is required in appellate briefs).  Because the award directed the payment of money, and appellant assignor was a guarantor of the fee award against assignee, it was a final determination on an issue collateral to the litigation between defendant and assignor.  (Slip Opn., at p. 4, fn. 7.)

            The appellate court then summarized the standards of review governing fee awards:  (1) the section 1717 prevailing party determination is examined for abuse of discretion, Sears v. Baccaglio, 60 Cal.App.4th 1136, 1158 (1998); (2) a party’s contractual entitlement to a fee award is reviewed de novo unless there are factual disputes, Exxess Electronixx v. Heger Realty Corp., 64 Cal.App.4th 698, 705 (1998); and (3) factual findings made in the award, expressed or implied, are examined under the substantial evidence rule, Federal Home Loan Mortg. Corp. v. La Conchita Ranch Co., 68 Cal.App.4th 856, 860 (1998).  (Slip Opn., at p. 5, fn. 8.)  Good primer on review standards.

            With jurisdictional and review standards out of the way, Justice Manella got to the crux of the matter quickly, determining that the lower court did not err in concluding that assignee was liable for defendant’s fees under Civil Code section 1717 by virtue of assignor’s assignment of rights under a contract between assignor and defendant with a fees clause.  Relying on California Wholesale Material Supply, Inc. v. Norm Wilson & Sons, Inc., 96 Cal.App.4th 598, 608 (2002), the appellate court found that a signatory defendant has fee entitlement where the nonsignatory plaintiff, if it had won, would have been entitled to a fee recovery under section 1717.  In essence, application of the mutuality principle underlying section 1717 was determinative.  Even though assignee had asserted a fraud claim, the Second District, Division Four sustained the trial court’s implied finding that any work on it was “inextricably intertwined” with issues arising under the covered contractual claims.  (Slip Opn., at pp. 6-7 & p. 7, fn. 9.)

            With respect to assignor’s liability for the defense fees in the assignee-defendant litigation, Justice Manella determined that the assignee’s assumption of an obligation does not necessarily discharge the assignor’s responsibilities regarding the same obligation.  A novation is required from the promisee, with the assignor remaining secondarily liable as a surety or guarantor, citing Witkin’s Summary of California Law treatise on “Contracts.”  This surety reasoning also found support in two fee recovery cases, Erickson v. R.E.M. Concepts, Inc., 126 Cal.App.4th 1073, 1086-1087 (2005) and Cutting Packing Co. v. Packers’ Exch., 86 Cal. 574, 577 (1890).  (BLOG OBSERVATION—See, who says older cases are not instructive?)

            Defendant, as a creditor, could sue both the principal (assignee) and surety (assignor), and did not have to exhaust remedies against assignee first.  (Slip Opn., at p. 11.)  The Court of  Appeal then rejected assignor’s due process argument, finding that assignor had notice that defendant sought a fee award on a surety basis—with ample opportunity to respond to defendant’s request.  (Slip Opn., at pp. 11-12.)

            Click2Boost is a sobering lesson to assigning parties that fee awards can be issued against them jointly and severally.  Assignors are well advised to think carefully before making an assignment of a contract with a fees clause.  In California, section 1717 will render the clause reciprocal in operation such that nonsignatory plaintiffs face exposure if they would have been entitled to a fee award under the contractual clause.

326.Assignment Contested

[Name of plaintiff] was not a party to the original contract. However,

[name of plaintiff] may bring a claim for breach of the contract if [he/

she/it] proves that [name of assignor] transferred [his/her/its] rights

under the contract to [name of plaintiff]. This transfer is referred to as

an “assignment.”

[Name of plaintiff] must prove that [name of assignor] intended to

transfer [his/her/its] contract rights to [name of plaintiff]. In deciding

[name of assignor]’s intent, you should consider the entire transaction

and the conduct of the parties to the assignment.

[A transfer of contract rights does not necessarily have to be made in

writing. It may be oral or implied by the conduct of the parties to the

assignment.]

New February 2005

Directions for Use

The bracketed third paragraph should be used only in cases involving a transfer

that may be made without a writing.

Sources and Authority

• Oral Assignments. Civil Code section 1052.

•“While no particular form of assignment is required, it is essential to the

assignment of a right that the assignor manifest an intention to transfer the

right.” (Sunburst Bank v. Executive Life Insurance Co. (1994) 24 Cal.App.4th

1156, 1164 [29 Cal.Rptr.2d 734], internal citations omitted.)

• “The burden of proving an assignment falls upon the party asserting rights

thereunder. In an action by an assignee to enforce an assigned right, the

evidence must not only be sufficient to establish the fact of assignment when

that fact is in issue, but the measure of sufficiency requires that the evidence of

assignment be clear and positive to protect an obligor from any further claim by

the primary obligee.” (Cockerell v. Title Insurance & Trust Co. (1954) 42

Cal.2d 284, 292 [267 P.2d 16], internal citations omitted.)

• “The accrued right to collect the proceeds of the fire insurance policy is a chose

in action, and an effective assignment thereof may be expressed orally as well

as in writing; may be the product of inference; and where the parties to a

transaction involving such a policy by their conduct indicate an intention to

transfer such proceeds, the courts will imply an assignment thereof. In making

such a determination, substance and not form controls.” (Greco v. Oregon

Mutual Fire Insurance Co. (1961) 191 Cal.App.2d 674, 683 [12 Cal.Rptr. 802],

internal citations omitted.)

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