Monday, January 31, 2011
Last week, California's 6th District Court of Appeals issued its decision in Smith v. First Principle Church. The problem facing the court was somewhat messy. Plaintiff Russell Smith and his brother, I.M. Nome, founded the Church in the 1970's. Smith served as the Church's minister until he retired in 1995. The following year, it appears that he entered into an agreement with his brother, purportedly acting on behalf of the Church, to provide Smith and his wife Helga with a pension. The Church paid pension benefits until 2003 and then stopped, after having paid over $260,000, arguing that there was no consideration for the payments. The Smiths sued for breach of contract and promissory estoppel, and the Church cross-claimed for recovery of its earlier payments.
The trial court rejected Smith's claims, agreeing with the Church that there was no consideration for the payments and finding that Nome had no authority to authorize the pension agreement. The court found that reliance on such a promise to pay was unreasonable and thus also rejected Smith's promissory estoppel claim. The trial court found the counterclaims time-barred, a ruling that was reversed in part on appeal.
But here's where it gets interesting. The written agreement relating to the pension contained the following clause that was at issue in the case:
If the Church refuses to honor the terms of this contract at any time and Russell Smith must take legal action to enforce this contract, all reasonable court and attorney’s fees incurred by him shall be borne by the Church.
That clause caught my eye, because I litigated a similar clause in an executive compensation case a few years back. Such clauses seem a bad idea to me, as they are an invitation to a law suit, but it appears that they are -- or once were -- quite common. However, as both my own experience and this case indicate, they don't always work. But when they don't work, they are even worse, because they entice people to sue and then saddle them with double costs.
After trial, the Church filed a motion for over $500,000 in attorneys' fees. California has a statute, Civil Code Section 1717, that makes one-sided attorneys' fees provisions reciprocal. Just an aside here -- the amount of the attorneys' fees in relation to the amount in controversy suggests more than a bit of hard feelings on both sides. The trial court gave the Church a bit of a haircut, but still awarded fees in excess of $400,000.
There were lots of difficult issues on appeal. The appellate court focused on the issue of whether there was a prevailing party in the litigation and whether the counterclaims at issue were contracts claims within the ambit of the agreement. The court concluded that, as the Church had prevailed on the contract issue, it was entitled to its fees, even if those fees were incurred prosecuting claims that the trial court found to be time-barred and which the appellate court found not be contracts claims. The court did not address the question of why it should enforce an attorneys' fees provision in a contract that has been found to be unenforceable, and it does not seem that the parties focused on that issue. Perhaps that point is already settled in California.