Filed 6/1/15 Mills Potoczak & Co. v. Habersham Funding CA3
                                           NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.




              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
                                      THIRD APPELLATE DISTRICT
                                                     (Sacramento)
                                                            ----




MILLS POTOCZAK & COMPANY et al.,

                   Cross-complainants and Respondents,                                       C074955

         v.                                                                          (Super. Ct. No.
                                                                               34200900056531CUPOGDS)
HABERSHAM FUNDING LLC,

                   Cross-defendant and Appellant.


         Appellant Habersham Funding LLC (Habersham) challenges the denial of its
motion for contractual attorney fees and costs based on a fee-shifting clause in an escrow
agreement for which respondent Mills, Potoczak, & Company (Mills) served as escrow
agent. The trial court denied the motion on grounds the escrow agreement was not
implicated in the cross-complaint filed by Mills against Habersham. Thus, the trial court
concluded Habersham had no basis for claiming contractual attorney fees and costs after
Mills dismissed its cross-complaint.




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       On appeal, Habersham contends (1) the escrow agreement was the subject of
Mills’s cross-complaint, (2) Habersham is the prevailing party in this case, and (3) Mills
failed to adequately challenge the motion for attorney fees and costs in the trial court.
Under the same contractual fee shifting provision, Habersham requests its attorney fees
on appeal.
       We affirm the denial of Habersham’s motion for attorney fees and costs because
the causes of action asserted in Mills’s cross-complaint did not implicate the escrow
agreement. The escrow handled by Mills closed without complaint by any party to the
escrow agreement. Thus, we also deny Habersham’s request for contractual attorney fees
on appeal based on the same agreement.
                      FACTUAL AND PROCEDURAL HISTORY
                           The 2006 Ferree Escrow Agreement
       This case arises out of investor purchases of “viatical life settlements,” which are
fractionalized interests in life insurance policies sold by individuals owning policies
insuring the lives of elderly or terminally ill individuals. Investors bought their interests
at a discount from the face value of the life insurance policies based, in large part, on the
estimated life expectancy of elderly or terminally ill individuals. One such purchase
involved a sale by Robert and Edward Ferree, who were beneficiaries of a policy insuring
the life of Sarah J. Ferree. The sale was carried out by a 2006 escrow agreement (2006
Ferree escrow agreement) signed by Robert and Edward Ferree (collectively as viator),
Habersham (as purchaser of the life insurance policy), and Mills (as the escrow agent for
the transaction).
       The 2006 Ferree escrow agreement recited that “Viator and Purchaser wish to
establish an escrow with an independent escrow agent pursuant to which the funds due
from the Purchaser to the Viator for the sale of the Policy (the ‘Purchase Price’) shall be




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escrowed and, if all conditions are met, distributed to the Viator.” Under the escrow
agreement, Mills’s role consisted of verifying the life insurance policy belonging to the
Ferrees, receiving funds from Habersham, and transmitting those funds to the Ferrees
once all life insurance documents from the Ferrees were completed and transferred to
Mills. Paragraph 8 of the escrow agreement expressly limited Mills’s duties by
providing: “With respect to the Escrow Agent’s duties and rights as Escrow Agent, it is
agreed as follows. [¶] 8.1. The Escrow Agent undertakes to perform only such duties as
are expressly set forth herein. [¶] 8.2. In performing its duties hereunder, Escrow Agent
shall not incur liability to Purchaser or to the Viator for any damages, losses or expenses
which either party may sustain or incur, unless the same is a direct result of the gross
negligence or intentional misconduct of Escrow Agent. . . . The Viator understands that
Escrow Agent is not representing either party in this transaction, is not rendering any
legal advice or services to either party, and has no responsibility with regard to this
transaction other than to comply with the terms of this Escrow.” Paragraph 13 of the
escrow agreement provides attorney fees as follows: “If this Escrow is made the subject
of litigation, the prevailing party shall be entitled to reasonable attorneys’ fees and costs
from the other party.”
       The Ferrees, Habersham, and Mills performed their duties as required under the
escrow agreement. Thus, the Ferrees received the purchase funds for the life insurance
policy, Habersham received the policy, and escrow closed in April 2006.
           Plaintiffs’ Complaint and Mills’s First Amended Cross-complaint
       The investors who bought the viatical settlements did not realize their expected
gains because the insured lived longer than estimated at the time of the sale of the life
insurance policies. More than 70 purchasers of the viatical settlements filed a complaint
against various defendants. As the trial court recounted, Mills “was among the various




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defendants named in the lawsuit and filed its own cross-complaint against various others,
including [Habersham], seeking relief based on theories of equitable indemnity, tort of
another and negligence. [Mills] alleges that [Habersham] was involved in four of the 13
life policies purchased by plaintiffs and had selected or purchased the life expectancy
reports for those policies.”1
                                 Habersham’s Demurrer
       Habersham demurred to Mills’s first amended cross-complaint. The demurrer
asserted the plaintiffs’ complaint was based on allegations they had purchased viatical
settlements due to fraudulent information from Assured Benefits Corp. (Assured) and
Provident Capital Indemnity, Ltd. (Provident). Plaintiffs asserted Assured, in particular,
issued marketing materials based on the evaluations of a person who was not even a
physician. Plaintiffs also alleged Assured and Mills failed to warn the investors about
risks involved in the viatical settlement investments. Mills was also alleged to have
collected insufficient funds to pay the premiums that needed to be paid during the
insureds’ lifetimes.
       Mills cross-complained against Habersham for equitable indemnity, tort of
another, and negligence. According to Habersham’s demurrer, the first amended cross-
complaint rested entirely on a theory that all cross-defendants aided and abetted each
other in a scheme to wrong the plaintiffs. Habersham objected that it “played no part in
the sale and marketing of the policies from Assured and Provident to Plaintiffs, nor did it
play any part in Mills[’s] own alleged misconduct following the sale of the policies to
Plaintiffs.” (Italics changed.) In Habersham’s view, “Seeking to obfuscate the existence



1      As did the trial court, we refer to the first amended cross-complaint, which was the
operative cross-complaint against Habersham before Mills dismissed its action. The
appellate record does not contain the original cross-complaint.


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of this fundamental impediment, the Cross Complaint lumps Habersham (and the other
cross-defendants) into a grand marketing and sale scheme of the policies to Plaintiffs by
speaking in sweeping and conclusory group-based allegations of conspiracy, agency and
aiding and abetting.” Habersham’s demurrer reiterated that “all the allegations against
Habersham are improper, ‘group’ allegations made against multiple cross-defendants at
one time.” Thus, Habersham denied the negligence claim on grounds that “[w]ithout any
allegation of a representation made to Mills by any of the ‘Sellers,’ including Habersham,
the negligence claim fails to establish that any duty existed between Mills and
Habersham upon which a negligence claim could give rise.”
       The trial court sustained the demurrer as to the cause of action for negligence, and
Mills chose not to replead the negligence claim.
                   Habersham’s Motion for Attorney Fees and Costs
       As a result of mediation, Mills settled plaintiffs’ claims in the underlying
complaint. Mills then dismissed its cross-complaint against Habersham. After Mills
dismissed its cross-complaint, Habersham filed a motion for contractual attorney fees and
costs. The only contractual fee-shifting provision cited by Habersham was that in the
2006 Ferree escrow agreement. Mills opposed the motion on grounds the Ferree escrow
agreement did not provide contractual attorney fees for the causes of action asserted in
the first amended cross-complaint, and the claimed fees were excessive. The trial court
denied the motion, concluding the operative cross-complaint did not implicate the 2006
Ferree escrow agreement. The trial court further found, in any event, Habersham claimed
an excessive amount of attorney fees.
       From the denial of the motion, Habersham timely filed a notice of appeal.




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                                        DISCUSSION
             Contractual Attorney Fees under the 2006 Escrow Agreement
       Habersham contends it is entitled to contractual attorney fees under the 2006
Ferree escrow agreement. We are not persuaded.
                                              A.
                                     Standard of Review
       “Attorney fees are not recoverable as costs unless a statute or contract expressly
authorizes them.” (Sessions Payroll Management, Inc. v. Noble Const. Co., Inc. (2000)
84 Cal.App.4th 671, 677.) The corollary is that a prevailing party may recover attorney
fees in an action on a contract containing an attorney fee shifting provision. (Civ. Code,
§ 1717, subd. (a); Hsu v. Abbara (1995) 9 Cal.4th 863, 871-872.) We review the
question of whether an action is on a contract with a fee shifting provision de novo as a
question of law. (Sessions Payroll Management at p. 677.)
                                              B.
            The Scope of Fee-shifting in the 2006 Ferree Escrow Agreement
       “[T]he question of whether to award fees on other noncontract claims depends
upon the scope of the contractual attorneys’ fee provision.” (Exxess Electronixx v. Heger
Realty Corp. (1998) 64 Cal.App.4th 698, 713.) To answer this question, we apply the
traditional rules of contract interpretation to the attorney fee provision in the contract.
(Id. at p. 709.) The fact that Mills’s first amended cross-complaint included a cause of
action for negligence requires us to consider whether the 2006 Ferree escrow agreement
supports fee shifting even for tort claims. “If a contractual attorney fee provision is
phrased broadly enough, . . . it may support an award of attorney fees to the prevailing
party in an action alleging both contract and tort claims: ‘[P]arties may validly agree that
the prevailing party will be awarded attorney fees incurred in any litigation between




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themselves, whether such litigation sounds in tort or in contract.’ ” (Santisas v. Goodin
(1998) 17 Cal.4th 599, 608 (Santisas), quoting Xuereb v. Marcus & Millichap, Inc.
(1992) 3 Cal.App.4th 1338, 1341.) In any event, “the mutual intention of the parties at
the time the contract is formed governs interpretation.” (Santisas, at p. 608.)
       The 2006 Ferree escrow agreement states that “[i]f this Escrow is made the subject
of litigation, the prevailing party shall be entitled to reasonable attorneys’ fees and costs
from the other party.” The recital of agreement defines “ ‘Escrow’ ” to mean the
“Escrow Agreement” between the Ferrees, Habersham, and Mills. Thus, the escrow
agreement constrains attorney fee shifting to litigation involving the reciprocal rights and
duties articulated in the escrow agreement. The consequence of this constraint is that
attorney fee shifting is limited to litigation between the Ferrees, Habersham, and Mills.
Thus, Habersham cannot rely on the Ferree escrow agreement to recover attorney fees
incurred in defending against claims arising out of viatical settlement purchases other
than the policy for which Sarah J. Ferree was the insured.
       Even as to litigation related to purchase of the Ferree life insurance policy, the
2006 escrow agreement limits attorney fees to the duties arising under that agreement.
The Ferree escrow agreement required Mills to act as escrow agent, the Ferrees to
provide documents, and Habersham to tender funds. Habersham does not dispute escrow
closed in April 2006 or that each party to the agreement properly performed the
obligations under the agreement. The cross-complaint did not seek to vindicate any
rights or obligations in the 2006 escrow agreement but to assert indemnity for torts
committed that were unrelated to the escrow of the Ferree life insurance purchase. As
Habersham’s own demurrer asserted, Mills’s first amended cross-complaint was based on
an aiding and abetting theory that cross-defendants made fraudulent marketing
representations to the investors in the viatical settlements. As a judicial admission in its




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pleading, Habersham may not attempt to recast its characterization of the first amended
cross-complaint. (Valerio v. Andrew Youngquist Construction (2002) 103 Cal.App.4th
1264, 1271; Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 746.) Thus,
the legal theory underlying the cross-complaint focused on alleged torts unrelated to the
escrow services provided by Mills or the obligation to tender funds by Habersham.
Whether or not the cross-defendants conveyed misleading marketing materials to the
plaintiffs, the obligation to refrain from engaging in such fraud arises out of tort law
independent of the duties enumerated in the 2006 Ferree escrow. Thus, Mills’s cross-
complaint did not implicate the fee-shifting provision in the 2006 Ferree escrow
agreement.
       Habersham emphasizes that the first amended cross-complaint refers to “certain
life settlement investments” that “were designed, created, marketed, and sold in the State
of California” by cross-defendants, including Habersham. Asserting the Ferree life
insurance purchase was among these life settlement investments, Habersham reasons the
2006 Ferree escrow agreement (along with its fee-shifting clause) must be the subject of
the cross-complaint. Under Habersham’s reasoning any litigation concerning the Ferree
life insurance policy would be subject to the fee-shifting provision of the 2006 escrow
agreement. We disagree. The cross-complaint focused on duties imposed by California
law to refrain from committing torts of deceit and fraud on plaintiff investors. The cross-
complaint did not allege any violation of any duty specified in the 2006 Ferree escrow
agreement. The 2006 Ferree escrow agreement expressly limited Mills’s duties to those
of escrow agent and Habersham as purchaser of the viatical settlement. Mills had no duty
under the agreement to check the accuracy of any representation regarding life
expectancy of the insured nor any marketing materials issued by Habersham.




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Consequently, the trial court correctly concluded the cross-complaint did not implicate
the 2006 Ferree escrow agreement.
       Habersham argues Mills signaled the availability of contractual attorney fees by
claiming attorney fees in the first amended cross-complaint. Contrary to Habersham’s
assertion, the first amended cross-complaint does not make any claim for contractual
attorney fees. Instead, the first amended cross-complaint claimed attorney fees as part of
the measure of tort damages. “ ‘Under California law, it is a well-established principle
that attorney fees incurred through instituting or defending an action as a direct result of
the tort of another are recoverable damages. (Prentice v. North Amer. Title Guar. Corp.
[(1963)] 59 Cal.2d [618,] 620–621.)’ (Sindell [v. Gibson, Dunn, & Crutcher (1997)] 54
Cal.App.4th [1457,] 1470.) Attorney fees in this context are to be distinguished from
‘attorney’s fees qua attorney’s fees,’ such as those the plaintiff incurs in suing the
tortfeasor defendant. (Brandt v. Superior Court (1985) 37 Cal.3d 813, 817.) Rather,
when a defendant’s tortious conduct requires the plaintiff to sue a third party, or defend a
suit brought by a third party, attorney fees the plaintiff incurs in this third party action
‘are recoverable as damages resulting from a tort in the same way that medical fees
would be part of the damages in a personal injury action.’ (Sooy v. Peter (1990) 220
Cal.App.3d 1305, 1310; see also Brandt v. Superior Court, supra, 37 Cal.3d at p. 817.)”
(Third Eye Blind, Inc. v. Near North Entertainment Insurance Services, LLC (2005) 127
Cal.App.4th 1311, 1324-1325.) Thus, Mills’s claim for attorney fees as part of tort
damages does not establish the availability of contractual attorney fees.
       Habersham next argues the 2006 Ferree escrow agreement was implicated by an
affirmative defense raised by Habersham. Habersham’s answer asserted the pertinent
affirmative defense as follows: “Cross-Defendant alleges on information and belief that
as a result of the Cross-Complaint it has been required to retain the undersigned counsel




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to whom they are obligated to pay a reasonable fee, for which Cross-Defendant, if it
prevails, is entitled to recover pursuant to its contract with Cross-Plaintiffs.” Relying on
this assertion of an affirmative defense, Habersham now argues that “[e]ven if
Habersham had only defended against [Mills’s] Cross-Complaint by pointing to the
Agreement, Habersham would still be entitled to its attorneys’ fees . . . .” In so arguing,
Habersham quotes a decision in which the California Supreme Court confirmed the
availability of contractual attorney fees “when a person sued on a contract containing a
provision for attorney fees to the prevailing party defends the litigation ‘by successfully
arguing the inapplicability, invalidity, unenforceability, or nonexistence of the same
contract.’ ” (Santisas, supra, 17 Cal.4th at p. 611, quoting in part North Associates v. Bell
(1986) 184 Cal.App.3d 860, 865.) We are not persuaded.
       Habersham did not defend against the causes of action in the first amended cross-
complaint by asserting the 2006 Ferree escrow agreement as negating liability or
excusing performance of any duty alleged in Mills’s cross-complaint. Instead,
Habersham defended on grounds Mills’s cross-complaint wrongly lumped together all of
the cross-defendants in a grand scheme to defraud the plaintiff investors. Contrary to
Habersham’s argument, merely “pointing to” the 2006 Ferree escrow agreement does not
trigger the agreement’s fee-shifting clause. As Santisas holds, contractual attorney fees
are available only to the extent allowed by the language of the fee shifting provision.
(Santisas, supra, 17 Cal.4th 599, 608.) Here, the 2006 Ferree escrow agreement fee-
shifting provision cannot be read to encompass the causes of action in Mills’s first
amended cross-complaint because the cross-action focused on tort law that is separate
from the parties’ obligations in the escrow process.
       We reject Habersham’s reliance on this court’s decision in Thompson v. Miller
(2003) 112 Cal.App.4th 327. Thompson involved an action by minority shareholders




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who claimed the majority shareholder had defrauded them by withholding information
about the company when offering to repurchase shares. (Id. at pp. 330-332.) The
minority shareholders received $.16 per share about a year before the company was
bought by a larger company for $7 per share. (Id. at p. 332.) The majority shareholder
prevailed at trial and sought attorney fees under the share purchase agreement each of the
plaintiffs had signed. (Id. at p. 333.) Plaintiffs argued, and the trial court agreed, the
share purchase agreement was not implicated in their action. (Id. at p. 334-335.) This
court reversed on grounds the majority shareholder had relied on the share purchase
agreement in defending based on language disclaiming that the minority shareholders
relied on any representations about the company by the majority shareholder. (Id. at pp.
336-337.) Here, by contrast, the 2006 Ferree escrow agreement does not provide
Habersham with a defense against the causes of action in the first amended cross-
complaint. The first amended cross-complaint did not mention the Ferree escrow
agreement, and Habersham’s answer mentioned only the attorney fee provision in the
escrow agreement. The “affirmative defense” alleged by Habersham constituted an
assertion of entitlement to fees rather than a defense to the allegations in Mills’s cross-
complaint.
       Our conclusion that the attorney fee provision in the 2006 Ferree escrow
agreement was not triggered by Mills’s cross-complaint or Habersham’s answer obviates
the need to consider whether (1) Habersham was the prevailing party for purposes of
attorney fees, (2) Mills properly challenged the time and activities for which attorney fees
where claimed, or (3) whether the amount of fees claimed by Habersham was reasonable.
We deny Habersham’s request for attorney fees on appeal on the basis of the 2006 Ferree
escrow agreement’s fee shifting clause. Habersham, not being entitled to its trial court




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attorney fees, is not entitled to its appellate court attorney fees under the 2006 Ferree
escrow agreement.
                                       DISPOSITION
       The order denying attorney fees and costs is affirmed. Mills, Potoczak, &
Company shall recover its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1) & (2).)



                                                         HOCH          , J.



We concur:



      RAYE         , P. J.



      ROBIE         , J.




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