Award of Attorney Fees Affirmed Where Mediation Requested after Suit Filed
In an action by the seller of real estate against the seller’s broker, the Court of Appeal (Fifth Appellate District) in an unpublished opinion affirmed the trial court’s award of attorney fees to the seller where the seller sought mediation after filing suit and notice of pendency of action against the broker and others, and where the mediation condition in the listing agreement requires pre-dispute mediation to recover attorney fees. This opinion further clarifies the meaning and significance of enforceability of pre-dispute mediation language in what is probably the most frequently used listing agreement between California real estate brokers and their clients.
Huene v. Guarantee Financial Real Estate Company, etc et al., 2006 Cal. App. Unpub. LEXIS 9607, Court of Appeal of California, Fifth Appellate Dist., October 25, 2006. Not Certified for publication.
What follows is an excerpt of the opinion.
Plaintiffs owned a parcel of real estate in Fresno. They entered into a listing agreement with defendant Guarantee Financial Real Estate Company, Inc. (Guarantee), through its agent, defendant James Phillips. The agreement contemplated immediate construction of improvements on the parcel, provided for payments to the seller by the buyer at five stages of that construction, and provided that the seller would subordinate its purchase money financing to buyer’s construction financing. Phillips made representations to plaintiffs as to buyer’s positive history as a developer. After escrow opened the title company discovered that buyer had liens filed against him for unpaid taxes and child support. The title company notified buyer and Phillips. Buyer requested that his son be substituted as buyer. Phillips then represented to plaintiff that buyer wanted this substitution because buyer was in a lower tax bracket. Seller agreed and escrow closed.
Plaintiffs subordinated their loan to a construction loan. Buyer defaulted. The construction lender conducted a foreclosure sale from which plaintiff received a small sum. Plaintiff sued buyers, the construction lender, Guarantee and Phillips. Plaintiff served and recorded a notice of pendency of action (Code Civ. Proc., sec 405.2 et seq) against buyers and the construction lender. Thereafter, plaintiffs requested mediation from defendants Guarantee and Phillips, who declined mediation precisely because the parties against whom the notice of pendency was filed were unavailable to participate in mediation.
At trial, the jury found for plaintiff and against defendants Guarantee and Phillips on causes of action for breach of contract, breach of fiduciary duty and negligent misrepresentation. This appeal is only by defendants Guarantee and Phillips.
The listing agreement between plaintiff and defendant Guarantee was a standard form created by the California Association of Realtors. That form provides for attorney fees: “In any action . . . between Seller and Broker regarding the obligation to pay compensation under this agreement, the prevailing Seller or Broker shall be entitled to reasonable attorney fees and costs . . .” The listing agreement also contains a “Dispute Resolution” provision which provides that a party who “commences an action without first attempting to resolve the matter through mediation . . . shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such action.” And, “The filing of a court action to enable the recording of a notice of pending action . . . shall not constitute a violation of the mediation . . . provisions.”
Plaintiff filed an action and recorded a notice of pendency of action before requesting mediation with defendants. Defendants objected to an award of attorney fees on the basis that the request for mediation was not sent before commencement of the action. They contended that the listing agreement’s exception for litigation commenced to enable filing of a notice of pendency is inapplicable in this case because the notice did not name, and had nothing to do with, defendants.
The Court of Appeal concluded the following: The mediation requirement acts as a forfeiture of the right to attorney fees “even if they would otherwise be available to that party in any such action,” as phrased in the listing agreement. Forfeiture provisions in contracts are strictly construed (citations omitted). “Our holding in this case is limited: Where a seller files an action against the buyer and the real estate broker to enable the recording of a notice of pending action against the buyer, the mediation condition of the listing agreement is met when the seller requests mediation of its dispute with the broker within a reasonable time after filing the action.” Here, plaintiffs offered to mediate the dispute almost immediately after filing the complaint and notice of pendency.
Significance of this opinion:
Is this a message from the Court of Appeal to trial judges and attorneys that it’s getting harder to say no to mediation and successfully object to attorney fees awarded to the side which has requested mediation?
Is this opinion, albeit unpublished, a sign of a trend? Sign of a cultural change?
Is there an overarching message from the Court of Appeal? The culture of California trial courts has, over a period of many years, moved from a trial court system to a case management system largely through encouraging, if not requiring, mediation of litigated cases. (The other successful case management tool used by trial courts is granting dispositive motions in appropriate cases, where courts had been more reluctant to do so in the past.) Is this case a barometer of the sentiment of the Court of Appeal? Or merely the (quiet) voice (in an unpublished opinion) of one appellate district?
Will other Courts of Appeal apply the concept in this limited opinion more broadly in the future? IE. In applying “mandatory pre-dispute mediation provision” to non-broker-client agreements?
What are best practices for counsel representing parties to pre-litigation conflict where the other party has requested mediation and there is a “mandatory pre-dispute mediation provision” in an underlying contract between the parties, meaning a party must mediate before filing an action or demand in arbitration in order to recover attorney fees? Where there is a pre-dispute mediation provision, what are the circumstances where counsel can safely advise their client to not mediate? What are the benefits in not mediating in light of the risk of having to pay the other party’s attorney fees in trial if the other party is successful?