that is factually or legally frivolous. Ferrell argued Peake's claims were factually and
legally frivolous because the undisputed evidence showed Ferrell had fulfilled his
statutory and common law disclosure duties, and Peake had actual notice of facts
disclosing prior problems with the subfloors. Peake declined to dismiss the action during
the statutory safe harbor period, and instead amended her complaint to add claims similar
to claims she had previously dismissed.
After a hearing, the court found Ferrell met his burden to show Peake's claims
were "without legal or evidentiary support" and Peake's continued maintenance of the
lawsuit demonstrated "objective bad faith" warranting section 128.7 sanctions. As
sanctions, the court dismissed Peake's claims against Ferrell and ordered Peake and her
attorney to pay Ferrell $60,000 for his attorney fees incurred in defending the action.
On appeal, Peake and Shaw (collectively appellants) challenge these sanctions.
We determine the court acted within its discretion in awarding the section 128.7
1 Peake also sued Ferrell's brokerage firm, Dunn Real Estate & Development Co., Inc., dba Prudential Dunn Realtors. We refer collectively to Ferrell and his brokerage firm as Ferrell. 2
sanctions. The record supports that no reasonable attorney would have concluded Peake's
statutory and common law claims against Farrell were factually and legally supported. In
particular, the facts admitted by Peake show that during escrow Ferrell provided Peake
with photographs and reports disclosing problems with the residence's subflooring,
satisfying his legal obligations to the buyer. Having provided this information, Ferrell—
who served only as the sellers' listing agent—did not owe the buyer any additional
statutory or common law duties, and there was nothing in Ferrell's communications that
would have misled a reasonable buyer.
In affirming the sanctions order, we do not intend to suggest sanctions should be
routinely awarded. Our adversary system requires that attorneys and litigants be
provided substantial breathing room to develop and assert factual and legal arguments.
However, as we shall explain, the court's exercise of discretion was justified for several
reasons particular to this case, including that Peake's claims were inconsistent with the
admitted facts and well-settled law, and the record reflects that Peake's trial counsel had
no honest or reasonable belief in the validity of the claims.
In the unpublished portion of the opinion, we reject Peake's separate appellate
argument that the court erred in awarding the Underwoods prevailing party attorney fees
after the court granted the Underwoods' motion to compel arbitration and Peake then
dismissed her action against the Underwoods.
3
FACTUAL AND PROCEDURAL SUMMARY
Complaint
In 2007, the Underwoods purchased a home and were represented by real estate
agent Ferrell in the transaction. About one year later, the Underwoods sold this home to
Peake. The Underwoods were again represented by Ferrell, and Peake was represented
by her own real estate agent (Tiffany Kilcoyne).
Two years later, in February 2010, Peake sued the Underwoods, Ferrell, Kilcoyne,
the termite inspector, and the home inspector. Peake alleged "a water intrusion incident
whereby standing water was caused to wick into the foundation" had previously occurred,
"causing the foundation and attached flooring structures to deteriorate." She alleged she
"only became aware of the extent of the [water-intrusion] damage when her son's foot
recently went through a bathroom floor."
Peake alleged the Underwoods had been aware of the unrepaired water damage
and the deteriorated floor structure at the time of the sale but failed to disclose these facts.
She further alleged the Underwoods knew or should have known, and failed to disclose,
that the repairs performed on the property "were not proper and did not comply with
applicable building standards and codes." Peake asserted claims against the Underwoods
for breach of contract, fraud, concealment, negligent misrepresentation, and negligence.
With regard to Ferrell, Peake alleged he "fail[ed] to conduct a competent and
diligent inspection" and "fail[ed] to disclose information about the true condition of the
[residence] including water damage" that he knew or should have known. Peake also
alleged that Ferrell owed her "a duty to fully and completely disclose all known material
4
defects, failures and deficiencies" concerning the residence. Based on these allegations,
Peake asserted causes of action against Ferrell for: (1) breach of statutory duties (Civ.
Code, §§ 2079, 1102 et seq.); (2) negligence; (3) breach of fiduciary duty; and (4)
constructive fraud.2
A few months after she filed her complaint, Peake stipulated to strike all of her
claims against Ferrell except her statutory claim. Ferrell's counsel then sent numerous
emails to Peake's counsel (Shaw), explaining the legal and factual deficiencies of Peake's
statutory claim and encouraging Shaw to consult with a real estate standard-of-care
expert. In the emails, Ferrell's counsel emphasized that Ferrell had provided Peake with
all the information in his possession, including documents showing possible problems
with the subflooring, and noted an agent's statutory duties are limited to a visual
inspection. Ferrell's counsel reminded Shaw of his ongoing duty to reevaluate the merits
of Peake's claim, and warned that if Peake did not dismiss her claim, Ferrell would seek
sanctions from Peake and Shaw under section 128.7.
Shaw did not take any action in response to these emails, and conducted no
affirmative discovery after filing the complaint.
Ferrell's Sanctions Motion Served on Peake and Her Counsel
About one year after the complaint was filed, in March 2011, Ferrell served Peake
and her attorney with a section 128.7 sanctions motion. In the motion, Ferrell contended
that Peake's sole claim asserted against him (the statutory cause of action) had no factual
2 All undesignated statutory references are to the Civil Code except for the sanctions statute (Code Civ. Proc., § 128.7) or as otherwise specified. 5
or legal basis, and was objectively frivolous. Ferrell argued that the cited statutes
(sections 2079 and 1102) required that a real estate agent disclose only visible defects and
the subfloor water intrusion problem was not visible on a reasonable inspection. He also
argued that he went beyond his limited statutory duties by providing Peake with all
relevant reports that would have disclosed problems with the subfloors and identified
case law providing that the statutes did not require a seller's agent or broker to
independently verify a seller's representations.
In support of his sanctions motion, Ferrell submitted several documents.
First, he submitted the three-page statutory transfer disclosure statement provided
to Peake during escrow (Transfer Disclosure statement). In the form, the Underwoods
checked a box indicating they were not aware of any "[f]looding, drainage or grading
problems" on the property, and signed at the bottom of this page. However, this portion
of the document stated: "THE[SE] . . . ARE REPRESENTATIONS MADE BY THE
SELLER(S) AND ARE NOT THE REPRESENTATIONS OF THE AGENT(S), IF
ANY." On the third page of this document, Ferrell signed the section involving a seller's
agent's disclosures. In that section, Ferrell indicated that Peake should see his "Visual
Inspection Checklist" and the "reports and disclosures" from the previous owner. (Some
capitalization omitted.)
Second, Ferrell submitted a copy of the referenced Visual Inspection Checklist.
On this document, next to the preprinted entry for "LANDSCAPING," Ferrell wrote
"SEE DISCLOSURES ON DRAINAGE UPGRADES BY PREVIOUS OWNER." And
next to the entry for "FOUNDATION/SLAB," Ferrell wrote that he observed a "SOFT
6
SPOT IN SUBFLOOR IN ONE BEDROOM." Next to the form's "OTHER" entry,
Ferrell wrote "SEE PAST INSPECTION REPORTS, DRAINAGE UPGRADE REPORT
AND WORK BY CIVIL ENGINEER, KENNETH DISCENZA [phone number] AND
BOND CONSTRUCTION. DRAINAGE IMPROVEMENTS WERE PERFORMED IN
TWO SEPARATE PROJECTS."
Third, Ferrell submitted Peake's acknowledgement that she had received numerous
documents provided to the Underwoods in the previous escrow. These documents
included a January 4, 2007 physical inspection report, known as the 2007 Focus report. It
is undisputed that this report disclosed substantial problems and decay in the subflooring
of the home. Peake concedes for purposes of this appeal that she received this 2007
Focus report during the escrow period.
Ferrell also proffered excerpts of Peake's deposition testimony. In this testimony,
Peake acknowledged that during the escrow period she was aware the home had prior
drainage problems and that extensive repairs to the drainage system had been performed.
She testified that she and her own real estate agent had discussed Ferrell's disclosure "that
there had been . . . drainage work done, and there was an invoice from the construction
company that the work had been done." She said that she did not inquire further about
this disclosure "because I had . . . two [other] inspection reports [by her own retained
inspection experts] that said that . . . everything was fine; so I assumed the work done
was fine." Peake further acknowledged that before escrow closed, the Underwoods
provided her with a "Seller's Additional Disclosures" document stating that an "extensive
drainage system is installed and it was added on before [the Underwoods] purchased the
7
property" at a cost of approximately $13,000. Peake stated that she remembered that she
and her agent "looked at the plans from Bond, the architect, and saw that all that work
had been done."
Although she did not specifically recall reviewing the 2007 Focus report before
escrow closed, Peake acknowledged at her deposition that this report "show[s] damage
under the floor." She also said she noticed there was some "sponginess" on one bedroom
floor during her walk-through of the property before the sale closed. Peake additionally
said she was aware there was a sump pump at the back of the property, and she
understood the purpose of a sump pump is to "take water out, if there is any excess water,
in a basement."
In addition to the real estate documents and deposition testimony submitted in
support of his sanctions motion, Ferrell discussed Peake's complete lack of offensive
discovery, and her counsel's disregard for the numerous cautionary emails urging him to
reevaluate Peake's claim.
Peake's Amendments to Complaint in Response to Sanctions Motion
After Ferrell served the sanctions motion, he did not immediately file the motion
because of the statutory 21-day safe harbor requirement.3 During this safe harbor period,
Peake did not dismiss her statutory claim against Ferrell and instead she moved for leave
3 Before filing a section 128.7 sanctions motion, a party must first serve the motion on the opposing party and provide the party 21 days to withdraw the offending pleading. (§ 128.7, subd. (c)(1).) This safe harbor period permits a party to withdraw a questionable pleading without penalty. (Day v. Collingwood (2006) 144 Cal.App.4th 1116, 1127.) 8
to amend her complaint to reassert the three common law claims (negligence, breach of
fiduciary duty, and constructive fraud) she had previously stricken by stipulation, and to
add new causes of action for intentional fraud and negligent concealment against Ferrell.
The trial court denied Peake's motion to amend regarding the previously stricken
claims because they were based on the same facts and legal theories, but allowed the
amendments as to the intentional fraud and negligent concealment claims. The facts
alleged in these new claims were similar to the facts alleged in the three dismissed
claims, but they also included allegations that Ferrell had actual knowledge of the
defective subfloors and that he made affirmative misrepresentations to Peake regarding
the condition of the floors.
Filed Sanctions Motions and Opposition Arguments
After these amendments were permitted and several months after the safe harbor
period expired, Ferrell filed his sanctions motion. The motion was essentially identical to
the version initially served on Peake and did not address the new fraud and negligent
concealment claims.
As the centerpiece of their opposition papers, Peake and Shaw stated that Peake
"is pursuing her cause of action based on [Civil Code sections] 1102 and 2079 because
the Transfer Disclosure Statement signed by Paul Ferrell made an affirmative
representation that the property had no drainage problems." (Italics added.) Specifically,
Peake argued that "Ferrell knew there were flooding and drainage problems with the
property and yet he inexplicably checked the 'No' box on the Transfer Disclosure
Statement when asked about drainage problems." Based on this argument, Peake
9
contended that "when a real estate professional makes a clearly false statement on the
Transfer Disclosure Statement, there is no basis for that real estate agent to be awarded
sanctions" under section 128.7.4
In support of their assertion that Ferrell knew about undisclosed problems and
inadequate repairs before escrow closed, appellants submitted Peake's declaration stating:
"Several months after purchasing my home, my son's foot went through the floor. It became apparent to me for the first time that the floor was suffering from significant rotting. [¶] . . . When I told Paul Ferrell [that my son's foot went through the floor] and asked him [in a phone conversation] about earlier repairs and improvements to the property[,] I asked why the floor was rotted. He responded by saying that when the Underwoods initially purchased the home, they planned on making extensive improvements and repairs. However, shortly after purchasing the home, Mr. Underwood, who was a professional football player with the NFL was injured and lost his income. Mr. Ferrell explained that since Mr. Underwood lost his income, the Underwoods were unable to complete the improvements to the drainage system and repairs to the floor."
In her declaration, Peake also stated that although she was "given various written
disclosures" before escrow closed, she "was never told the drainage repairs were not
completed prior to purchasing the home, nor was [she] told the floor needed significant
repairs but the Underwoods could not afford to complete them." Peake said:
"[A]t no time prior to purchasing the house did Paul Ferrell ever tell me that the Underwoods needed to make additional repairs to the property, but stopped doing so because Mr. Underwood lost his income. Had I know that some repairs were made to the drainage
4 As discussed, this argument was factually inaccurate because the Underwoods, and not Ferrell, made the representation regarding the lack of drainage problems. The form stated the representations were made solely by the seller and were not endorsed by the seller's agent. 10
system, but that the repairs were not completed, I would not have bought the property."
Peake and Shaw further supported their opposition with an expert declaration from
Richard Snyder, an experienced realtor and property manager. Snyder stated he was
retained to provide an opinion on whether Ferrell met the standard of care under section
2079, and that he concluded Ferrell acted below the applicable standard because Ferrell
did not "red-flag[ ] the drainage issue by disclosing in writing that repairs were not
completed." Snyder based this opinion on several assumed facts. First, Snyder stated
that in the Transfer Disclosure statement, Ferrell had responded " 'No' " to the "question
whether . . . Ferrell was aware of any flooding, draining or grading problems." (Italics
added.) Second, Snyder relied on the fact that in his Visual Inspection Checklist, Ferrell
mentioned the prior drainage repair work performed by engineer Discenza and contractor
Bond Construction. Third, Snyder relied on Peake's version of her telephone
conversation with Ferrell. He said "Given the facts that 1) Paul Ferrell was an agent
involved in two sales of the property in 12 months and 2) Paul Ferrell knew the
Underwoods ran out of money before fixing the problems, Paul Ferrell should have red-
flagged the drainage issue by disclosing in writing that repairs were not completed."
Snyder acknowledged that he did not review the numerous reports provided to Peake
during escrow (including the 2007 Focus report), but said the content of those disclosures
would not have altered his opinion regarding what Ferrell should have disclosed to Peake.
He said: "Ferrell is essentially taking the position that he could provide a buyer with a
series of reports regarding drainage problems to the property, and withhold the fact that
11
the previous owner could not afford to complete the necessary repairs. In my opinion, it
is a breach of the statutory and professional standard of care for a listing agent to provide
a series of reports without disclosing the crucial fact: the repairs were never properly
completed."
In reply, Ferrell raised the factual error in appellants' opposition brief and Snyder's
declaration: appellants and Snyder had both claimed Ferrell prepared and endorsed the
relevant portion of the Transfer Disclosure statement, but in fact it was the Underwoods
who had signed this statement. Appellants thereafter conceded the error and Snyder
amended his declaration to correct that discrepancy.
Ferrell also submitted his own declaration in which he denied Peake's version of
the phone call after her son's foot went through the bathroom floor. Ferrell additionally
stated that before the Underwoods purchased the property, the seller had completed all
the drainage improvements recommended by engineer Discenza. Ferrell acknowledged
that the property had prior flooding and drainage problems, but said these issues were
fully disclosed to Peake during the escrow through his references to the drainage and
engineering work and in the documents provided to Peake from the prior escrow.
Ferrell also lodged nine additional cautionary communications sent to attorney
Shaw after serving the sanctions motion. Attached to one of them was a declaration from
Peake's own real estate agent, who declared that Peake was given "all [the] disclosures
and other transaction paperwork" provided by Ferrell and that Peake reviewed all of it.
12
Court's Ruling
After considering the submissions, the court issued a minute order tentatively
granting Ferrell's sanctions motion, stating it found "plaintiff and her attorneys'
maintenance of her complaint against [Ferrell was] baseless and utterly lacking in legal
merit." In a lengthy explanation, the court said the evidence established that "at the close
of escrow, [Peake] had all the information necessary and that the brokers satisfied all
their duty by supplying all reports" and "there is nothing that plaintiff or her counsel can
point to establishing that Mr. Ferrell failed in his Civil Code §§ 1102 and 2079 inspection
disclosure duties." The court also emphasized that Peake had more than one year to
investigate her claims, and Ferrell's counsel had sent Shaw repeated admonitions
regarding the specific factual and legal flaws in Peake's claims. The court concluded that
Shaw's implied certification of legal and factual merit under section 128.7 "was without
legal or evidentiary support and that the continued maintenance of th[e] meritless lawsuit
admitted at her deposition that during the escrow period she was aware of some
22
"sponginess" in the floor of one bedroom and acknowledges that Ferrell specifically
noted this fact in his Visual Inspection Checklist. Peake further admitted that she
reviewed the work by the contractor who performed repairs to the drainage system.
These facts would have put any reasonable person on inquiry notice of the need to
conduct further investigation regarding the subfloors and whether any issues remained
after the drainage systems had been repaired. (See Pagano v. Krohn (1997) 60
Cal.App.4th 1, 9 [once seller's agent discloses existence of possible water intrusion, no
duty to elaborate or disclose further details].)
This record indisputably establishes that Ferrell provided Peake with disclosures
and reports disclosing the existence of prior drainage issues and damage to the subfloors.
These were the essential facts regarding the residence's condition, and they were not only
within Peake's "diligent attention," they were actually known to her prior to the close of
escrow. Thus, Peake's intentional and negligent concealment claims against the listing
agent were without any arguable merit.
In their appellate briefs, appellants suggest that Ferrell could be held liable for
intentional fraud by a half-disclosure, i.e., by affirmatively representing that repairs had
been made to the drainage system, leading Peake to believe the problems with the
subfloors had been fixed. Appellants argue that when Ferrell disclosed in the Visual
Inspection Checklist that engineer Discenza and contractor Bond made drainage
improvements, Ferrell should also have disclosed that the subfloors remained unrepaired.
However, appellants presented no evidence that Peake actually interpreted Ferrell's
statements in this manner. Moreover, it is not reasonable to infer that because drainage
23
improvements were made, this gave rise to an expectation that the subfloor must also
have been repaired. Peake admits that before the transaction closed she was in
possession of the 2007 Focus report that disclosed substantial defects in the subfloors and
appellants concede in their reply brief that "[n]owhere . . . did the record from the work
by Discenza or Bond Construction indicate that the subfloors had been repaired or
addressed as a result of any prior flooding or water intrusion." Moreover, Peake testified
that she reviewed contractor Bond's plans and saw the work that had been performed.
Thus, Peake would have known from the 2007 Focus report that the subfloor was
damaged, and would have seen from the Discenza and Bond records the extent to which
the subfloor had or had not been repaired. In short, Peake had constructive knowledge of
problems with the subflooring and thus was on inquiry notice.
Appellants also rely on their expert's declaration to establish their claims had
factual and legal merit. However, as appellants concede, Snyder erroneously assumed
that Ferrell had signed the relevant portions of the statutory transfer disclosure statement
when, in fact, it was the Underwoods who did so. And although Snyder corrected this
erroneous information, Snyder never stated or indicated that his conclusions remained
unchanged after the correction of this significant fact. Further, Snyder's opinions
regarding the applicable standard of care are directly at odds with well-settled case law,
and therefore are unpersuasive. Additionally, Snyder conceded he did not review the
numerous written disclosures given to Peake during the escrow period. In a case that
hinges on the adequacy of written disclosures, the trial court could properly have
24
disregarded the opinion of an expert who failed to review those disclosures. (See
Bushling v. Fremont Medical Center (2004) 117 Cal.App.4th 493, 510-511.)
Appellants alternatively contend the sanctions order must be reversed on the
common law claims because the court did not consider these claims in awarding
sanctions.
This contention is unsupported by the record. In their opposition to the sanctions
motion, appellants specifically discussed the case law underlying Peake's common law
claims and Ferrell referred to these claims at least twice in his reply brief in the
proceedings below. Additionally, at the hearing on the sanctions motion, Peake's
attorney raised the common law claims, and the court responded by expressly
acknowledging these claims and indicating it would consider the claims when it took the
matter under submission. Consistent with this assurance, the court issued a broad ruling
finding the evidence established "that at the close of escrow, plaintiff had all the
information necessary and that the brokers satisfied all their duty by supplying all
reports." This ruling is sufficient to show the court addressed Peake's claims under both
statutory and common law. Absent an indication to the contrary, we are required to
presume a court was aware of, and followed, the applicable law and considered all the
relevant facts and arguments. (Evid. Code, § 664, see Whyte v. Schlage Lock Co. (2002)
101 Cal.App.4th 1443, 1451; GGIS Ins. Services, Inc. v. Superior Court (2008) 168
Cal.App.4th 1493, 1504, fn. 1.)
On our own motion, we requested the parties to provide supplemental briefing on
the issue whether Ferrell was required to file a separate motion and provide a second safe
25
harbor period after Peake added the common law claims in response to Ferrell's sanctions
motion. Although the statutory language does appear to support the need for an
additional safe harbor period after an amended pleading is filed (see § 128.7, subd.
(c)(1)), we conclude the lack of a new motion and safe harbor period did not preclude the
court from awarding sanctions under the circumstances here.
First, appellants never raised the issue below or in their appellate briefs; therefore
the issue is waived. Second, it appears that any additional safe harbor period would have
been futile because it was clear that appellants would not have dismissed their common
law claims. Peake responded to the served sanctions motion by adding these claims that
were based on essentially the same facts as the claims that had been previously
dismissed. Additionally, Peake's defense of her common law and statutory claims were
based on the same factual and legal assertions. Further, the claims are flawed for the
same essential reason—before escrow closed Peake had actual or constructive knowledge
of the defective subfloors and Ferrell had no duty to provide additional disclosures to the
buyer.
3. Sanctions Were Appropriate Under the Circumstances of This Case
Our conclusion that the court properly found Peake's statutory and common law
claims were without merit, and there was no arguable factual or legal basis for asserting
those claims, does not necessarily answer the question whether sanctions were
appropriate under the circumstances of the case.
As with Rule 11 sanctions, section 128.7 sanctions should be "made with restraint"
(Schlaifer Nance & Co. v. Estate of Warhol (2d Cir. 1999) 194 F.3d 323, 334), and are
26
not mandatory even if a claim is frivolous. (Kojababian v. Genuine Home Loans, Inc.,
supra, 174 Cal.App.4th at p. 422; Perez v. Posse Comitatus (2d. Cir. 2004) 373 F.3d 321,
325.) Further, when determining whether sanctions should be imposed, the issue is not
merely whether the party would prevail on the underlying factual or legal argument.
Instead, courts should apply an objective test of reasonableness, including whether "any
reasonable attorney would agree that [the claim] is totally and completely without merit."
(In re Marriage of Flaherty, supra, 31 Cal.3d at p. 650; Guillemin, supra, 104
Cal.App.4th at p. 168; see Fahrenz v. Meadow Farm Partnership (4th Cir. 1988) 850
F.2d 207, 210.) Thus, the fact that a plaintiff fails to provide a sufficient showing to
overcome a demurrer or to survive summary judgment is not, in itself, enough to warrant
the imposition of sanctions. (See Guillemin, supra, 104 Cal.App.4th at p. 168; Segen v.
Buchanan Gen. Hosp., Inc. (W.D.Va. 2007) 552 F.Supp.2d 579, 585; see Miltier v.
Downes (4th Cir. 1991) 935 F.2d 660, 664-665.)
Because our adversary system requires that attorneys and litigants be provided
substantial breathing room to develop and assert factual and legal arguments, sanctions
should not be routinely or easily awarded even for a claim that is arguably frivolous.
Courts must carefully consider the circumstances before awarding sanctions.
With these principles in mind and considering the entire record, we conclude the
court did not abuse its discretion in awarding sanctions. The record before us presents an
appropriate case for sanctions because: (1) under well-settled law Peake's substantive
claims are clearly without merit; (2) appellants did not present any colorable legal or
factual argument to the trial court supporting an extension of existing law to establish
27
liability in this case; (3) before and during the safe harbor period, Ferrell's counsel set
forth the specific factual and legal grounds supporting his position that Peake's claims
were without merit; and (4) appellants engaged in conduct supporting the conclusion that
they did not reasonably or honestly believe the claims had any merit.
With respect to the latter point, when establishing a claim is factually or legally
without merit under section 128.7, it is not necessary to show the party acted with an
improper motive or subjective bad faith. But the fact that a party does not actually
believe in the merits of his or her claim is relevant to the issue whether sanctions are
warranted in the particular case. Peake's conduct demonstrated she (and/or her attorney)
did not in fact consider her claims to have any valid basis.
First, shortly after filing the lawsuit, Peake dismissed her common law claims
against Ferrell (breach of fiduciary duty, negligence, and constructive fraud). In these
claims, Peake alleged liability based on Ferrell's failure "to disclose the material defects,
failures and deficiencies with the [property] which were known and/or should have been
known." The logical inference from the dismissal of these claims is that Peake (or her
attorney) recognized those claims were without merit. However, in response to the
sanctions motion, appellants immediately sought to reassert the identical claims Peake
had previously dismissed and to add two legal theories that were essentially the same as
prior fraud allegations. Appellants have never provided an explanation for the earlier
dismissal of these same claims. On this record, it is reasonable to infer that Peake added
these claims without any honest belief that they were legally and factually supported.
28
Additionally, Peake failed to engage in any affirmative discovery against Ferrell
after more than one year of filing the lawsuit. Appellants argue that the lack of discovery
had nothing to do with the merits of Peake's case, and instead reflected only Peake's
desire to reduce litigation costs and her tactical decision that discovery was unnecessary
because the case could be litigated based on the documents in her possession. However,
the trial court had an ample basis to reject these assertions and determine the lack of
discovery reflected appellants' recognition that the claims were without merit and the
lawsuit was primarily a vehicle to extract a settlement from Ferrell. Although the court
did not specifically make a finding of subjective bad faith, Peake's failure to seek
discovery or otherwise prosecute her claims against Ferrell supports a finding that she
and her attorney did not have a good faith belief in their validity and thus that the claims
had no actual factual or legal basis.
Further, appellants asserted arguments in their opposition briefs below that
incorrectly characterized a significant and critical fact: the identity of the parties signing
the statutory transfer disclosure statement. As a centerpiece of Peake's opposition to the
sanctions motion, appellants asserted that Ferrell was liable under a statutory and/or fraud
theory because he signed the portion of the Transfer Disclosure statement affirmatively
indicating there had been no flooding or drainage problems. Peake's expert also initially
made the same factual assertion. However, the undisputed evidence shows (and
appellants now admit) that Ferrell never signed this portion of the Transfer Disclosure
statement or made these affirmative representations. Moreover, appellants concede that
under California law a listing agent has no duty to a buyer to independently verify the
29
seller's representations. (Robinson, supra, 57 Cal.App.4th at p. 643.) By relying on this
critical factual misconception in opposing the sanctions motion and in submitting their
expert declaration, appellants highlighted the absence of a reasonable factual basis
underlying their claims.
The trial court did not abuse its discretion in imposing sanctions.5
II. Order Awarding Underwoods' Prevailing Party Attorney Fees
Peake contends the court erred in awarding the Underwoods section 1717
prevailing party attorney fees after she voluntarily dismissed her claims against them.
A. Factual Background6
Peake asserted causes of action against the Underwoods for breach of contract,
fraud, concealment, negligent misrepresentation, and negligence. In August 2010, the
Underwoods moved to compel arbitration based on the purchase agreement's arbitration
provision. Peake opposed the motion. In April 2011, the court granted the Underwoods'
motion and provided a mechanism for selecting the arbitrator. When the parties still had
not agreed on an arbitrator three months later, the court appointed one.
Soon after the court appointed the arbitrator, Peake voluntarily dismissed her
claims against the Underwoods based on her understanding that the Underwoods were
5 We deny Ferrell's request for sanctions on appeal. We deny the California Association of Realtors' application to file an amicus curiae brief. We grant appellants' judicial notice request regarding attorney Shaw's reporting the sanctions award to the California State Bar.
6 We grant respondent Marviel Underwood's motion to augment the record to include certain documents that were before the trial court on the attorney fees motion. 30
insolvent. About two months later, the Underwoods moved to recover their attorney fees
under the purchase agreement's attorney fees provision, which states: "In any action,
proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the
prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the
non-prevailing Buyer or Seller. . . ."
The Underwoods argued they were prevailing parties under section 1717 because
they prevailed on their motion to compel arbitration, which—by virtue of Peake's
subsequent voluntary dismissal—was the only contract claim the court adjudicated.
Peake responded that section 1717, subdivision (b)(2), bars an award of attorney fees
when an action is voluntarily dismissed, and further contended that merely prevailing on
an interim procedural motion is insufficient to establish prevailing party status.
The court found the Underwoods were the prevailing parties and awarded them
nearly $60,000 in attorney fees.
B. Applicable Legal Principles
"Except as otherwise expressly provided by statute, a prevailing party is entitled as
a matter of right to recover costs in any action or proceeding." (Code Civ. Proc., § 1032,
subd. (b).) Attorney fees are "allowable as costs under Section 1032" when they are
1072 [provision awarding attorney fees to the prevailing party in " 'any action or other
7 We deny respondents' request that we take judicial notice of the JAMS administrator's declaration. The declaration was not before the trial court and Mr. Underwood has identified no exceptional circumstances justifying our consideration of it. (Haworth v. Superior Court (2010) 50 Cal.4th 372, 379, fn. 2.)
34
proceeding arising out of this Sublease' " is "broad enough to encompass noncontract
claims"].) So do we. Accordingly, the Underwoods were entitled to prevailing party
attorney fees incurred in defending against Peake's tort claims.
Although the trial court's order awarding fees to the Underwoods does not
specifically rely on this analysis, it does cite Santisas. Moreover, on appeal the
Underwoods advanced the Santisas rationale in their briefs. The Santisas rationale fully
supports the trial court's ruling and we affirm on that basis. (See California Aviation, Inc.
v. Leeds (1991) 233 Cal.App.3d 724, 731 ["[T]he trial court's stated reasons for its ruling
do not bind us. We review the ruling, not its rationale."].)
Under Santisas, the Underwoods are entitled to recover attorney fees incurred
defending Peake's tort claims, but not her contract claim. While the trial court's ruling
does not apportion fees between those claims, "fees need not be apportioned when
incurred for representation on an issue common to both a cause of action in which fees
are proper and one in which they are not allowed." (Reynolds Metals Co. v. Alperson
(1979) 25 Cal.3d 124, 129-130.) The court had before it the Underwoods' relevant legal
bills, and could have reasonably concluded that Peake's contract and tort claims were "so
interrelated that it would have been impossible to separate them into claims for which
attorney fees are properly awarded and claims for which they are not." (Akins v.
Enterprise Rent-A-Car Co. (2000) 79 Cal.App.4th 1127, 1133.) That determination is a
matter of discretion for the trial court, which we will not disturb unless the court's ruling
" ' " ' "exceeds the bounds of reason, all of the circumstances before it being
considered." ' " ' " (Amtower v. Photon Dynamics, Inc. (2008) 158 Cal.App.4th 1582,
35
1604 [affirming trial court's award of fees, without allocation, where contract and
misrepresentation claims arose from same operative facts].) More important, Peake does
not challenge the amount of the attorney fees award, or the lack of allocation between tort
and contract claims. The trial court did not abuse its discretion in awarding the
Underwoods the full amount of their fee request without apportionment.
Finally, Peake contends the Underwoods failed to timely file their motion for
attorney fees if one starts the clock on the date the court granted the Underwoods' motion
to compel arbitration (i.e., the date on which the Underwoods claim they were deemed
the prevailing party on the contract). But it was not until Peake dismissed her claims
against the Underwoods that the Underwoods became the prevailing parties.
Accordingly, we reject Peake's argument that the Underwoods' motion was untimely.
DISPOSITION
The judgment is affirmed. Appellants to pay respondents' costs on appeal.
HALLER, J. WE CONCUR:
MCCONNELL, P.J.
MCINTYRE, J.
36
AI Brief
AI-generated · verify before citing
Holding. The court held that the trial court did not abuse its discretion in awarding sanctions under Code of Civil Procedure section 128.7 because the plaintiff's claims against the real estate agent were factually and legally frivolous. The record demonstrated that the agent had satisfied his disclosure duties and that the plaintiff's counsel persisted in maintaining the action despite evidence refuting the claims.
Issues
Whether the trial court abused its discretion in awarding sanctions under Code of Civil Procedure section 128.7.
Whether the plaintiff's statutory and common law claims against the real estate agent were factually and legally frivolous.
Disposition. Affirmed.
Quotations verified verbatim against the opinion
“The record supports that no reasonable attorney would have concluded Peake's statutory and common law claims against Farrell were factually and legally supported.”