Rescission of an LLC Deal and the Attorney Fee Award Aftermath
The right to contractual attorney fees for parties “prevailing” in litigation is covered by a deep body of case law.
So is the concept of rescission — a remedy by which a contract is eliminated and treated as if it never existed, with the parties entitled to restoration of the status quo ante (a “give-back” of the consideration provided pursuant to contract).
An opinion recently filed by California’s Sixth Appellate District — Hakim-Baba v. Desai — provides a quirky example of the interplay between these two legal doctrines. While the opinion is unpublished and therefore not binding precedent, it still provides a useful guidepost.
Facts: LLC deal falls apart and the knives come out; eventually the case resolves by acceptance of a section 998 offer with attorney fees left unresolved
Plaintiff Yaghoob Hakim-Baba signed an agreement to purchase a membership interest in I&P Brothers, LLC. He claimed he was persuaded to do so by defendants Hitesh Desai, Jayesh Desai, and Mohammad Rezai. Hakim-Baba paid a portion of the required purchase price ($3.9 million), and the defendants used part of this money to buy a property on Carmel Valley Road in Monterey County.
Hakim-Baba came to regret the deal, claiming he was wrongfully induced into entering the deal based on misleading spreadsheet calculations. The parties could not agree on an exit, and Hakim-Baba sued.
Hakim-Baba’s lawsuit alleged claims for: rescission (seeking a return of his $3.9 million payment, the economic costs he incurred to procure those funds, and prejudgment interest at 7%); quiet title (seeking title to the Carmel Valley Road property); and various tort claims including financial elder abuse.
In their answer, defendants admitted Hakim-Baba’s payment and stated they had offered to pay the money back. Defendants also filed a cross-complaint alleging Hakim-Baba breached the agreement by failing to pay the full purchase price.
After two years of litigation, the case was resolved when defendants accepted Hakim-Baba’s settlement offer under Code of Civil Procedure section 998. Pursuant to the terms of the accepted 998 offer, judgment was entered in Hakim-Baba’s favor and against defendants, the agreement was rescinded, and Hakim-Baba was awarded restitution of the $3.9 million he had contributed. The judgment also awarded Hakim-Baba prejudgment interest on that amount, but only at 3.5%.
Unlike the typical section 998 offer where attorney fees and costs are waived, the 998 here expressly reserved the trial court’s jurisdiction to address prevailing party attorney fees and costs after the entry of judgment.
Trial court: motion for attorney fees denied
Hakim-Baba filed a motion seeking recovery of over $800,000 in attorney fees based on a broad “prevailing party” attorney fee provision in the LLC’s operating agreement, which applied to any disputes between the parties “with respect to the Company or this Agreement[.]”
The trial court denied the motion, holding that the settlement did not result in Hakim-Baba “completely prevailing on all contract claims” and that “neither party obtained a greater recovery even though both recovered something under the restitution obtained.”
Hakim-Baba appealed.
Court of Appeal: affirmed
The Court of Appeal affirmed.
The court first rejected Hakim-Baba’s contention that he won a “simple, unqualified” victory through the accepted 998 offer. The court noted that Hakim-Baba’s complaint sought: (1) rescission of the agreement and restitution of his $3.9 million; (2) damages in the form of costs incurred in procuring those funds; and (3) prejudgment interest at 7%. Through the settlement, Hakim-Baba “achieved some, but not all” of those objectives. He obtained restitution of the amount paid, but only recovered 3.5% prejudgment interest and none of the costs of procuring the funds. The court concluded: “this is a mixed result.”
The court also held that the trial acted within its discretion in ruling that neither party recovered “greater relief.” The fact that the defendants recovered nothing on their contractual cross-claim while Hakim-Baba recovered something on his claims was not determinative because the trial court “could reasonably conclude that the practical purpose of defendant’s contractual cross-claim was to defend against Hakim-Baba’s tort claims by deterring him from pursuing them, thereby encouraging him to settle for rescission.” The court noted other case authorities holding that a defendant can be deemed a prevailing party “where both parties assert contract claims, neither recovers anything, and the defendant’s contract claim is ‘essentially defensive in nature.'”
The court also found that, given the broad language in the contract’s attorney fee clause, the relative success on Hakim-Baba’s tort claims could be considered, and he recovered nothing on those claims.
Last, the court held that the trial court acted reasonably in determining that in the “unique circumstances of this litigation” neither side obtained greater recovery. Both sides, through pleadings and declarations, demonstrated they were amenable to rescission. Only the repayment terms were disputed, and the settlement reflected a mixed result as to the repayment terms sought and achieved.
Lesson
The Hakim-Baba opinion confirms the trial court’s broad discretion with attorney fee awards, including in cases involving rescission. Where the results achieved through the litigation are a mixed bag, the trial court can deny the recovery of fees.