Tort Claims Against an Alter Ego May Be Considered an Action “On a Contract” for the Purposes of an Attorneys’ Fees Award under California Civil Code section 1717

Tony Carucci | Real Estate Litigation Blog

California Civil Code section 1717 entitles the prevailing party to attorneys’ fees “[i]n any action on a contract,” where the contract provides for an award of attorneys’ fees to the prevailing party, regardless of whether the prevailing party is the party specified in the contract or not. But what about an action that alleges tort causes of action against an alter ego of a contracting party but that does not include a breach of contract claim against the alter ego? This was the question facing the California Court of Appeal in 347 Group, Inc. v. Philip Hawkins Architect, Inc. (2020) 58 Cal.App.5th 209.

In that case, the plaintiff 347 Group sued and obtained a default judgment for breach of contract against defendant Philip Hawkins Architect, Inc. Id. at 211–12. 347 Group had also sued Philip Hawkins individually as well as Design-Build, Inc., the company Hawkins founded after putting Philip Hawkins Architect, Inc. into bankruptcy. Id. at 212. 347 Group originally alleged claims for breach of contract, fraudulent conveyance, and conspiracy against Hawkins and Design-Build, seeking to establish that Hawkins and Design-Build were the alter egos of the contracting party, Philip Hawkins Architect, Inc., but later dismissed the breach of contract claim. Id. Hawkins and Design-Build eventually prevailed on the tort causes of action, and moved for attorneys’ fees. Id.

The trial court denied the motion for attorneys’ fees on the grounds that an award of attorneys’ fees would be improper given the fact that 347 Group dismissed its breach of contract cause of action and the remaining tort claims did not allow for an award of attorneys’ fees. Id. The Court of Appeal reversed on the grounds that the alleged alter egos (i.e., Hawkins and Design-Build) would have been liable for attorneys’ fees under the contract if 347 Group had prevailed because California courts “‘liberally construe ‘on a contract’ to extend to any action ‘[a]s long as an action ‘involves’ a contract and one of the parties would be entitled to recover attorney fees under the contract if that party prevails in its lawsuit . . . .” Id. at 213 (citation omitted); see also id. at 215. In reaching this conclusion, the Court of Appeal relied on well-established precedent from the California Supreme Court that recognizes that a party sued as an alter ego is entitled to attorneys’ fees in a breach of contract action. Id. at 214 (citing Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 127–29)17171717. The court also relied heavily on the recent decision in MSY Trading Inc. v. Saleen Automotive, Inc. (2020) 51 Cal.App.5th 395, which expanded an alter ego’s entitlement to attorneys’ fees to instances in which the alter ego isn’t sued for breach of contract but the claims are nevertheless still “on a contract” within the meaning of Civil Code section 1717. Id. at 214–15. The Court of Appeal reasoned the fraudulent conveyance and conspiracy claims were “on a contract” because they were based upon the underlying contractual relationship between 347 Group and Philip Hawkins Architect, Inc., and considered it immaterial that 347 Group had dismissed its breach of contract claim. Id. at 215.

A plaintiff or cross-complainant considering whether to allege alter ego liability should be mindful of the result in 347 Group and the fact that the claims could end in an award of attorneys’ fees if the tort claims are ultimately deemed to be “on a contract” within the meaning of California Civil Code section 1717.

“Source of Duty,” Tort, and Contract, Oh My!

Christopher G. Hill | Construction Law Musings

Here at Construction Law Musings, I have discussed the general rule in Virginia that tort and contract do not mix.  I have also discussed a few narrow exceptions.  A Virginia Supreme Court case from October of 2019 lays out both sides of this issue in one glorious opinion.

In Tingler v. Graystone Homes, Inc., a summary of the facts and lawsuit(s) are as follows:  Water leaks developed after the home was built. Graystone’s post-construction efforts to repair the leaks and remediate mold were unsuccessful. The Tinglers and their children abandoned the home after developing mold-related medical problems.  The Tinglers and their children sued Graystone in tort for personal injury, property damage, and economic loss. In other litigation that will not be discussed in this post, but that is described in the opinion linked above, Belle Meade sued Graystone in contract for property damage and economic losses. George and Crystal Tingler filed a separate complaint alleging the same contract claims.

In regard to the tort claims, the circuit court sustained a demurrer by Graystone Homes based upon the source of duty rule.  The circuit court held that all of the claims arose from Graystone Homes’ allegedly poor contract performance and therefore the tort claims must be dismissed.  Needless to say, the Tinglers appealed this ruling. 

On appeal, the Virginia Supreme Court affirmed the Circuit Court in part and reversed it in part.  After a good discussion of the law relating to such claims and stating the general rule that the source of duty will determine if a claim should sound in tort or contract, the Court divided the allegations by the Tinglers into two categories: construction of the house and post-construction repairs.  The Court determined that most of the allegations by the Tinglers (for “improper” construction or faulty construction) would not have been available to them absent the contract and therefore the allegations relating to the original construction of the home were properly contract and not tort claims.  The Virginia Supreme Court affirmed the ruling of the Circuit Court as to these claims.

However, the Court reversed the circuit court and allowed the claims relating to the post-construction actions by Graystone Homes and allowed these claims to move forward in tort to the extent that Graystone Homes’ attempted repairs, or more properly failed repairs, made the mold situation worse.  In doing so, the Court stated:

These allegations of misfeasance, along with the reasonable inferences therefrom, assert viable claims for negligent repairs because they reasonably suggest that Graystone either increased the level of mold exposure to the home’s inhabitants or extended the duration of the mold’s presence and, by doing either, aggravated preexisting mold-exposure injuries suffered by the Tingler family. Graystone could be liable, if the evidence substantiates these inferences, for this aggravation – but not for any preexisting injuries resulting from conditions created by Graystone’s nonfeasance during the construction phase of the contract[.]

In short, where Graystone Builders’ alleged negligent repairs post-construction made the situation worse and where the Tinglers’ damages arose from the worsened situation, the Court allowed the case to move forward.

This case provides a great overview of the complex intersections of tort and contract (not to mention a good discussion of third party beneficiary law when discussing the contract litigation) and I recommend it as reading for any construction professional or construction attorney.  Of course, consultation with an experienced Virginia construction lawyer will help in the analysis of your particular fact situation to determine where on the spectrum described in Tingler your claim may sit.

Yet Another Reminder that Tort and Contract Don’t Mix

Christopher G. Hill | Construction Law Musings

I have stated on numerous occasions here at Musings that in Virginia, contract claims and tort claims (read fraud) don’t mix.  A recent case from the Federal District Court for the Eastern District of Virginia presents another example of this principle.  In Itility LLC v. The Staffing Resource Group, Judge Ellis of the Alexandria Division, considered ITility’s claims of fraud and breach of contract against SRG and one of its officers based upon SRG’s alleged violation of its duties under a teaming agreement.  The claim by ITility was that TSRG provided false and misleading resumes and thus damaged ITility.  SRG filed a Motion to Dismiss and the Court was therefore required to resolve the following issues: (1) whether plaintiff’s fraud claim is barred by Virginia’s “source of duty” rule; (2) whether plaintiff’s claim for tortious interference with a business expectancy is barred by SRG’s participation in the business expectancy, and (3) whether the teaming agreement between the parties bars plaintiff’s claims for consequential and punitive damages.

Unsurprisingly, the Court determined for the defendant, SRG on all three points.  On the question of whether a fraud count could be sustained by ITility, the Court rejected ITility’s argument that the Teaming Agreement didn’t require SRG to provide any representations or warranties regarding its performance under the Teaming Agreement and therefore the fraud claim was outside of the contract.  The Court further fleshed out its ruling on this point as follows:

The question raised by a source of duty analysis is not whether the contract obligated the defendant to certify its performance or not to commit fraud. Rather, the source of duty rule asks whether the alleged tort is based on the defendant’s performance of a contractual duty. Here, SRG had a contractual duty to provide resumes and certifications, and failed in that duty. Therefore, plaintiff’s sole remedy is contract.

The Court then went on to reject the tortious interference and punitive damages claims because SRG was not a third party that could interfere with the contract and punitive damages are not available in contract respectively.

This case continues the long legal history in Virginia that with few exceptions, where a contract exists fraud will not be an available cause of action.  As always, be sure to consult with an experienced Virginia construction attorney to determine if your case may meet one of these exceptions.