Charton v. Harkey

to those that are incurred by the prevailing party, reasonably necessary to that party’s conduct of the litigation, and reasonable in amount. When less than all of a group of jointly represented parties prevail, these limitations require the trial court to apportion the costs among the jointly represented parties based on the reason for incurring each cost and whether the cost was reasonably necessary to the conduct of the litigation on behalf of the prevailing parties. The court may not make an across-the-board reduction based on the number of jointly represented parties because doing so fails to consider the reason for incurring the costs and whether they were reasonably necessary for the prevailing party.

Here, the trial court made an improper across-the-board reduction, awarding Harkey 25 percent of the defense costs because she was one of four jointly represented defendants. We therefore reverse and remand for the trial court to determine the proper cost allocation among the jointly represented defendants.

Facts and Procedural History

Defendant National Financial Lending, LLC (National Financial), was a limited liability company in the mortgage lending business. Defendant Point Center Financial, Inc. (Point Center), was National Financial’s sole manager and Harkey’s husband, Dan Harkey, was Point Center’s principal shareholder, president, chief executive officer, and director. Plaintiffs invested in National Financial by purchasing membership interests in a public offering.

In November 2008, Plaintiffs filed this action to recover damages they suffered based on their investments. Plaintiffs named National Financial, Point Center, Harkey, and her husband as defendants. Plaintiffs alleged claims for breach of fiduciary duty, breach of operating agreement, breach of promissory note, negligent misrepresentation, intentional misrepresentation, rescission, failure to produce records, unfair business practices, securities law violations, elder abuse, and declaratory relief. As against Harkey, Plaintiffs only alleged claims for aiding and abetting, fraudulent conveyance, and declaratory relief.

The trial court conducted a jury trial on Plaintiffs’ claims seeking monetary damages and a bench trial on their fraudulent conveyance and declaratory relief claims. During trial, Plaintiffs dismissed their aiding and abetting claim against Harkey. The jury returned a special verdict against Harkey’s husband and Point Center, awarding Plaintiffs more than $12.5 million in compensatory and punitive damages on the breach of fiduciary duty and elder abuse

entities. She did not make representations to [Plaintiffs]. She did not participate in any loan servicing activity. She did not solicit investments from any of [Plaintiffs]. She did not have a unity of interest that was specifically the same as that of the other named defendants. Therefore the court awards [Harkey] her costs in proportion to her participation in the litigation with . . . [her husband], Point Center Financial and [National Financial], which amounts to 25 [percent].”

The court also set an evidentiary hearing on which specific cost items identified in the cost memorandum were recoverable under the governing statutes, and invited the parties to meet and confer to identify which items they agreed were recoverable and which were not. Before that hearing, the parties submitted a stipulation stating the total amount of recoverable costs was $150,504.99, and Plaintiffs reserved the right to dispute Harkey’s entitlement to any costs. Based on the parties’ stipulation, the court awarded Harkey $37,626.25, representing 25 percent of the total recoverable costs. This appeal followed.

Discussion

A. Basic Legal Principles Regarding Recovery of Costs

“The right to recover any of the costs of a civil action ‘is determined entirely by statute.’ ” (Anthony v. City of Los Angeles (2008) 166 Cal.App.4th 1011 , 1014 [ 83 Cal.Rptr.3d 306 ] (Anthony).) “ ‘[I]n the absence of an authorizing statute, no costs can be recovered by either party.’ ” (Davis v. KGO-T.V., Inc. (1998) 17 Cal.4th 436 , 439 [ 71 Cal.Rptr.2d 452 , 950 P.2d 567 ], disapproved and superseded by statute on other grounds as stated in Williams v. Chino Valley Independent Fire Dist. (2015) 61 Cal.4th 97 , 105-107 & fn. 1 [ 186 Cal.Rptr.3d 826 , 347 P.3d 976 ].) “Section 1032 governs the award of costs of trial court litigation.” (Acosta v. SI Corp. (2005) 129 Cal.App.4th 1370 , 1375 [ 29 Cal.Rptr.3d 306 ] (Acosta).)

Under section 1032, subdivision (b), a “prevailing party” is entitled to recover costs “as a matter of right” unless otherwise provided by statute. Section 1032, subdivision (a)(4), defines who is a prevailing party entitled to costs. The first sentence of that subdivision describes four categories of litigants who automatically qualify as prevailing parties. It reads: “ ‘ “Prevailing party” includes [1] the party with a net monetary recovery, [2] a defendant in whose favor a dismissal is entered, [3] a defendant where neither plaintiff nor defendant obtains any relief, and [4] a defendant as against those

ordered by the court; investigation expenses; and postage, telephone, and certain copying charges. Section 1033.5, subdivision (c)(4), grants the trial court discretion to award a cost item that is neither allowed under subdivision (a) nor prohibited under subdivision (b).

All costs awarded to a prevailing party must be (1) incurred by that party, whether or not paid; (2) “reasonably necessary to the conduct of the litigation rather than merely convenient or beneficial to its preparation”; and (3) reasonable in amount. (§ 1033.5, subd. (c)(1)-(3); see El Dorado Meat Co. v. Yosemite Meat & Locker Service, Inc. (2007) 150 Cal.App.4th 612 , 616 [ 58 Cal.Rptr.3d 590 ] (El Dorado Meat).)

Whether a party falls within one of the four categories authorizing the recovery of costs as a matter of right is a question of law we review de novo. (Wakefield, supra, 145 Cal.App.4th at p. 978; Acosta, supra, 129 Cal.App.4th at p. 1374.) We otherwise review a trial court’s cost award for abuse of discretion. (Wakefield, at p. 978; El Dorado Meat, supra, 150 Cal.App.4th at p. 617.) For example, we review a trial court’s determination on which costs are reasonably necessary and reasonable in amount under the abuse of discretion standard. (Seever v. Copley Press, Inc. (2006) 141 Cal.App.4th 1550 , 1556-1557 [ 47 Cal.Rptr.3d 206 ].)

B. A Prevailing Party Is Entitled to Recover Costs as a Matter of Right Even If That Party Joined with Nonprevailing Defendants in Resisting the Plaintiffs ’ Claims

Plaintiffs do not dispute Harkey satisfied the statutory definition of a prevailing party entitled to recover costs as a matter of right because she was a defendant in whose favor a dismissal was entered and a defendant against whom Plaintiffs did not recover any relief. (§ 1032, subd. (a)(4).) Plaintiffs nonetheless contend the trial court abused its discretion in awarding Harkey costs because the unity of interest exception allowed the court to deny Harkey the prevailing party status to which she otherwise was entitled. According to Plaintiffs, the trial court applied the wrong factors to determine Harkey did not share a unity of interest with the nonprevailing defendants. We affirm the trial court’s decision Harkey was a prevailing party entitled to recover costs as a matter of right without deciding whether she shared a unity of interest with the nonprevailing defendants.

The unity of interest exception arose from the prior version of section 1032. (Zintel Holdings, LLC v. McLean (2012) 209 Cal.App.4th 431 , 441 [ 147 Cal.Rptr.3d 157 ] (Zintel); Wakefield, supra, 145 Cal.App.4th at p. 984.) Subdivision (b) of former section 1032 provided costs were “allowed of course” to a defendant “upon a judgment in his [or her] favor” in certain

p. 1335.) As explained above, the current version of section 1032 provides for recovery of costs as a matter of right if the party fits one of the four prevailing party definitions listed in section 1032, subdivision (a)(4). The current statute no longer focuses on the nature of the lawsuit to distinguish between parties who are entitled to costs as a matter of right and those who may recover costs in the court’s discretion. Instead, section 1032 now focuses on the nature of the prevailing party’s victory—the party with a net recovery, a defendant in whose favor a dismissal is entered, a defendant when neither party obtains any relief, and a defendant against those plaintiffs who did not recover any relief against that defendant. If a party satisfies one of these four definitions of a prevailing party, the trial court lacks discretion to deny prevailing party status to that party. (Wakefield, supra, 145 Cal.App.4th at p. 975; Nelson, supra, 72 Cal.App.4th at p. 129.) Most significantly, the current version of section 1032 eliminated the language regarding several defendants who are not united in interest and asserted separate defenses by separate answers.

“As a general rule, in construing statutes, ‘[w]e presume the Legislature intends to change the meaning of a law when it alters the statutory language [citation], as for example when it deletes express provisions of the prior version [citation].’ ” (People v. Mendoza (2000) 23 Cal.4th 896 , 916 [ 98 Cal.Rptr.2d 431 , 4 P.3d 265 ]; see DeCastro West Chodorow & Burns, Inc. v. Superior Court (1996) 47 Cal.App.4th 410 , 418 [ 54 Cal.Rptr.2d 792 ] [“a substantial change in the language of a statute by an amendment indicates an intention to change its meaning”].) The “Legislature’s repeal of [a] prior statute ‘together with its enactment of a new statute on the same subject . . . with significant differences in language, strongly suggests the Legislature intended to change the law.’ ” (Goodman, supra, 47 Cal.4th at p. 1337.) In construing a statute, we are “not authorized to create an exception not contained in the statutory language.” (University of Southern California v. Superior Court (1996) 45 Cal.App.4th 1283 , 1290 [ 53 Cal.Rptr.2d 260 ]; see Conde v. City of San Diego (2005) 134 Cal.App.4th 346 , 351 [ 36 Cal.Rptr.3d 54 ]; Crib Retaining Walls, Inc. v. NBS/Lowry, Inc. (1996) 47 Cal.App.4th 886 , 890 [ 54 Cal.Rptr.2d 850 ] [“ ‘one should not read into the statute allowing costs a restriction which has not been placed there’ ”].)

The 1986 repeal and reenactment of section 1032 substantially changed the statutory framework for determining which parties are entitled to recover costs as a matter of right. The new statute provides no exception to a party’s right to recover costs when the party satisfies any of the four statutory definitions of a prevailing party. In doing so, the new statute eliminated any basis to apply the unity of interest exception found in the repealed version. Consequently, we conclude the Legislature intended to eliminate the unity of interest exception as a basis for denying costs to a prevailing defendant who otherwise is entitled to recover costs as a matter of

right. (See Zintel, supra, 209 Cal.App.4th at p. 442 [explaining in dicta, “Whether the Legislature intended the continued use of [the unity of interest exception] seems doubtful . . . since it created four categories of litigants that automatically qualify as prevailing parties [citation], provided an award of costs must be made to those litigants ‘[e]xcept as otherwise expressly provided by statute’ [citation], and eliminated the language in the prior version of section 1032 upon which the unity of interest [exception] was based”].)

Although the right to recover costs is entirely statutory (Anthony, supra, 166 Cal.App.4th at p. 1014), Plaintiffs identify no statutory basis for the continued viability of the unity of interest exception after the 1986 repeal and reenactment of section 1032. Instead, Plaintiffs rely on a small handful of cases that have applied the exception despite the Legislature’s action. (See Benson v. Kwikset Corp. (2007) 152 Cal.App.4th 1254 , 1278 [ 62 Cal.Rptr.3d 284 ] (Benson); Wakefield, supra, 145 Cal.App.4th at pp. 984-985; Textron Financial Corp. v. National Union Fire Ins. Co. (2004) 118 Cal.App.4th 1061 , 1075-1076 [ 13 Cal.Rptr.3d 586 ] (Textron), disapproved on other grounds in Zhang v. Superior Court (2013) 57 Cal.4th 364 , 382 [ 159 Cal.Rptr.3d 672 , 304 P.3d 163 ]; Webber v. Inland Empire Investments, Inc. (1999) 74 Cal.App.4th 884 , 920 [ 88 Cal.Rptr.2d 594 ] (Webber); Slavin v. Fink (1994) 25 Cal.App.4th 722 , 725-726 [ 30 Cal.Rptr.2d 750 ] (Slavin).) We decline to follow these cases because they fail to explain how the unity of interest exception remained viable after the Legislature’s reenactment of section 1032 omitted the language from the former statute that supported the exception.

Three of the cases Plaintiffs rely on applied the unity of interest exception without acknowledging the Legislature repealed the statutory basis for the exception. (Benson, supra, 152 Cal.App.4th at p. 1278; Textron, supra, 118 Cal.App.4th at p. 1075; Webber, supra, 74 Cal.App.4th at p. 920.) The fourth case acknowledged “the statutory language has changed,” but concluded “the underlying precept . . . continues to apply” without providing any analysis or explanation to support that conclusion. (Wakefield, supra, 145 Cal.App.4th at p. 985.) The final case similarly acknowledged the statutory language had changed, but nonetheless applied the unity of interest exception to deny a prevailing defendant costs without explaining how the exception survived the 1986 repeal and reenactment of section 1032. (Slavin, supra, 25 Cal.App.4th at p. 726 & fn. 2.)

We also note Slavin is internally inconsistent and misapplies section 1032. In one paragraph the court stated “[t]here is no doubt but that appellant has a right to recover costs incurred for his benefit because he was the prevailing party,” but in the next paragraph the court denied the recovery. (Slavin, supra, 25 Cal.App.4th at pp. 725-726, italics added.) Slavin summarily concluded

“the circumstances of this case do not fall within the specific situations specified in . . . section 1032, subdivision (a)(4),” because the underlying action was consolidated with another action and “appellant and [a nonprevail-ing defendant] were united in interest and shared the same counsel.” (Slavin, at p. 726.) Slavin provided no explanation how the appellant can be both a prevailing party entitled to recover costs as a matter of right, but not fall within any of the four definitions of a prevailing party entitled to recover costs as a matter of right. The fourth category of section 1032, subdivision (a)(4), states a prevailing party includes “a defendant as against those plaintiffs who do not recover any relief against that defendant.” The appellant in Slavin was a defendant against whom the plaintiff did not recover any relief and nothing in section 1032’s plain language removed the Slavin appellant from that category merely because the underlying actions were consolidated and the appellant shared counsel and was united in interest with another defendant who did not prevail.

We therefore conclude the trial court did not err in refusing to apply the unity of interest exception and properly determined Harkey was a prevailing party entitled to recover costs as a matter of right. We next consider whether any interest Harkey shared with the nonprevailing defendants allowed the trial court to deny Harkey specific cost items.

C. The Trial Court Erred by Allocating Costs Based Solely on the Number of Jointly Represented Parties

Plaintiffs also contend the unity of interest Harkey shared with the nonprevailing defendants allowed the trial court to deny some or all of the costs she sought because she did not incur the costs for her own benefit and were not reasonably necessary to the conduct of her defense. We agree in part and remand for the trial court to determine which specific costs Harkey incurred and whether they were reasonably necessary to her defense.

As explained above, all costs awarded to a prevailing party must be incurred by that party, must be “reasonably necessary to the conduct of the litigation rather than merely convenient or beneficial to its preparation,” and must be reasonable in amount. (§ 1033.5, subd. (c)(1)-(3).) These limitations apply whether the costs are awarded as a matter of right or in the court’s discretion. (Perko’s Enterprises, Inc. v. RRNS Enterprises (1992) 4 Cal.App.4th 238 , 244-245 [ 5 Cal.Rptr.2d 470 ] (Perko’s).) The Legislature added section 1033.5’s limitations on recoverable costs to the Code of Civil Procedure at the same time the Legislature repealed and reenacted section 1032. (Perko’s, at p. 244.)

“ ‘When a prevailing party has incurred costs jointly with one or more other parties who are not prevailing parties for purposes of an award of costs,

the judge must apportion the costs between the parties [based on the reason the costs were incurred and whether they were reasonably necessary to the conduct of the litigation by the jointly represented party who prevailed].’ ” (Wakefield, supra, 145 Cal.App.4th at p. 986; see Ducoing Management, Inc. v. Superior Court (2015) 234 Cal.App.4th 306 , 315 [ 183 Cal.Rptr.3d 548 ] (Ducoing); Fennessy v. Deleuw-Cather Corp. (1990) 218 Cal.App.3d 1192 , 1196-1197 [ 267 Cal.Rptr. 772 ] (Fennessy).)

For example, in Fennessy, six jointly represented defendants moved for summary judgment, but only one prevailed and obtained a judgment in his favor. That defendant then sought to recover all costs incurred by the jointly represented defendants, including the nonprevailing defendants. The trial court denied the plaintiffs motion to tax costs. (Fennessy, supra, 218 Cal.App.3d at p. 1194.) The Court of Appeal reversed, explaining the prevailing defendant may recover only those costs actually incurred by that defendant or on his behalf in defending the case. All other costs could not be recovered at that point because it could not be shown those costs were incurred by and were reasonably necessary to the prevailing party’s conduct of the litigation. The court noted it could not determine which additional costs could be recovered until the entire action was resolved as to the other jointly represented defendants. (Id. at pp. 1196-1197.)

Fennessy is factually distinguishable because the action remained pending against a majority of the jointly represented defendants, but here the case has concluded. This distinction, however, affects only how the court applies the underlying principle to particular cost items; it does not change the underlying principle. A prevailing party who is represented by the same counsel as a nonprevailing party may only recover those costs the prevailing party incurred and were reasonably necessary to the prevailing party’s conduct of the litigation, not the other jointly represented parties’ conduct of the litigation. (Ducoing, supra, 234 Cal.App.4th at p. 315; Fennessy, supra, 218 Cal.App.3d at pp. 1196-1197; Wakefield, supra, 145 Cal.App.4th at p. 986.) Whether to award costs that were incurred by both the prevailing party and the nonprevailing party, and were reasonably necessary to the conduct of the litigation for both the prevailing and nonprevailing party, is left to the trial court’s sound discretion based on the totality of the circumstances. (Wakefield, at p. 986; Slavin, supra, 25 Cal.App.4th at p. 726 [trial court did not abuse discretion by allocating nearly all costs incurred by jointly represented defendants to nonprevailing defendant because that defendant’s conduct was basis for claims against jointly represented defendants].)

In allocating costs between jointly represented parties, however, the trial court may not make an across-the-board reduction based on the number of

jointly represented parties because such an allocation fails to consider the necessity or reasonableness of the costs as required by section 1033.5, subdivision (c). (Nelson, supra, 72 Cal.App.4th at p. 130.) Instead, when allocating costs between jointly represented parties, the court must examine the reason each cost was incurred, whether the cost was reasonably necessary to the conduct of the litigation on behalf of the prevailing party, and the reasonableness of the cost. {Ibid, [court must “distinguish between costs incurred as a result of the actions or tactics of [the prevailing jointly represented party] as opposed to [the nonprevailing jointly represented party]”].)

Here, the trial court made an across-the-board allocation based on the number of jointly represented defendants, awarding Harkey 25 percent of all costs defendants incurred because she was one of four jointly represented defendants. The court erred because it failed to apply the proper legal standards in making the allocation. (Perko’s, supra, 4 Cal.App.4th at p. 245 [“When a trial court is mistaken about the scope of its discretion, even if the mistake is reasonable, an action taken in accord with that mistaken view is error”].) We therefore reverse and remand for the trial court to allocate costs based on the foregoing principles.

Ill

Disposition

The order is affirmed as to the trial court’s determination Harkey is a prevailing party entitled to recover costs as a matter of right. The order is reversed as to the trial court’s across-the-board reduction in the amount of costs based on the number of jointly represented defendants. The matter is remanded to the trial court to allocate costs among the jointly represented defendants based on the principles discussed in this opinion. In the interest of justice, the parties shall bear their own costs on appeal.

Moore, Acting P. J., and Fybel, J., concurred.