SURETY WINS…BUT LOSES

By Larry A. Rothstein

In 1986, Donald Trump, then the owner of the USFL's New Jersey Generals, brought a $1.6 billion lawsuit against the NFL for anti-trust violations.  He claimed the NFL conspired with the networks to deprive the USFL of an opportunity to compete with it.

The trial lasted 42 days and Frank Rothman, representing the NFL, made Trump his star witness.  The jury hated his arrogance and lying.  But he won.  Sort of.  The jury found in favor the USFL & awarded it $1.00 in damages.  Under anti-trust law, that amount was trebled and then interest was added to bring the actual judgment up to $3.76.  Thanks to Trump's failed legal gambit, the USFL went out of business and never played another game.

What does this have to do with surety law?  In City of Los Angeles Department of Airports v. U.S. Specialty Insurance Company, 2022 WL 2156119, the City brought a $3.4 million claim against John Russo Industrial Sheetmetal, Inc. & its performance bond surety U.S. Specialty for breach of contract between it and Russo and breach of U.S. Specialty's performance bond.  The jury found for the City on all contract claims asserted by the parties and awarded it $1.00 in damages.

Both the City and U. S. Specialty brought motions for attorney's fees.  The trial denied both motions, but in an earlier unpublished opinion, the First District Court of Appeal reversed, finding that the trial court had misconstrued a portion of the contract as an indemnification clause rather than an attorney's fee clause subject to Civil Code §1717.  On remand, the trial court once again denied both sides' motions for attorney's fees.  The present appeal (the fourth in all) followed.

The facts appear straightforward.  Russo contracted with the City to build four airport firefighting trucks.  U.S. Specialty issued a performance bond in favor of the City guaranteeing Russo's performance of its contract.

The City paid for and accepted the first two trucks, but then terminated the contract and refused to pay for the remaining trucks before they were delivered.  The City claimed the first two trucks “had problems” and were not timely delivered.  The City sued Russo for breach of contract and U.S. Specialty on the performance bond and sought return of monies paid for the first two trucks.  Russo likewise sued the City for breach of contract.  The cases were consolidated.

“To determine whether there is a prevailing party for purposes of §1717, the court must compare the relative success of each party in achieving its litigation objectives, as shown in the parties' pleadings, trial briefs, and similar sources.”  Hsu v. Abbara (1995) 9 Cal. 4^th 863, 876; DisputeSuite.com, LLC v. Scoreinc.com (2017) 2 Cal. 5^th 968, 974.

Elsewhere, again quoting Hsu, the Court states, “…[T]rial courts must exercise their discretion to determine which party prevailed only after examining the parties' pleadings, determining their litigation objectives, comparing the relief awarded, and considering any relevant equitable factors.”  Hsu, supra, 9 Cal. 4^th at 876-877. (Emph. Added.)

The court found U.S. Specialty had three litigation objectives: (1) that the City breached its contract; (2) that Russo did not breach his contract; and (3) that U.S. Specialty had no liability to the City for damages.  “The fact that these contentions are essentially defensive in nature, rather than affirmative claims for relief, does not matter – they are still contentions for purposes of determining whether U.S. Specialty achieved its objectives.”  The court completely misses the mark here.  Is there any doubt that U.S. Specialty (and Russo) was elated by the verdict?  Or that the City was totally disappointed?  I cannot think of a single instance where a defendant exposed to $3.4 million in potential damages would not declare victory when it was found liable for $1.00.  Think Trump was happy “winning” $3.76?  Think the City was happy “prevailing” on its contract claims?

Nowhere in the opinion does the amount of attorney's fees sought appear.  Given that this case went to a full blown jury and there were four separate appeals, one can imagine they were substantial. 

In affirming the trial court's denial of fees to U.S. Specialty, the  First District states, “In comparing the parties' relative success, the trial court reasonably concluded that they fought to a draw.”  In the words of John McEnroe, “You cannot be serious!”  The Court of Appeal admits so much a few sentences later.  U.S. Specialty…”technically lost on damages although not to a meaningful degree.  The City obtained a pyrrhic victory: it won a judgment on liability and avoided a loss, but it received only nominal damages.  The outcome was mixed.  The trial court's conclusion was well within the bounds of reason.”

This case was entirely about money, not winning pyrrhic victories.  Think Trump was high fiving after the USFL verdict?  Think the NFL was disappointed?  If a pyrrhic victory connotes a victory that is tantamount to defeat, negating any true achievement, then surely one could characterize U.S. Specialty's defeat as a pyrrhic defeat.

Citing de la Cuesta v. Benham (2011) 193 Cal. App. 4^th 1287, the court acknowledged that it may be an abuse of discretion to deny attorney's fees to a party winning a lobsided victory.   In de la Cuesta, a landlord won repossession of premises and 70% of the damages he sought.  The trial court denied him attorney's fees, but the court of appeal held that the trial court had abused its discretion and that the landlord clearly prevailed.  In U.S. Specialty, the City won 0.00000029411 of the damages it sought, but the court found that the outcome was “mixed.”  Both the trial court and the Court of Appeal failed to take into account “relevant equitable factors” as Hsu instructs.

De la Cuesta askes, “How lobsided must the results be before it is an abuse of discretion not to acknowledge that one side has clearly prevailed?”  This is the right question.  Unfortunately, here both the trial court and the First District (San Mateo) answered it incorrectly.  Under de la Cuesta, if U.S. Specialty had defensed 70% ($2,380,000.00) of the City's damages, it could have been awarded attorney's fees.  That would certainly never occur.  But here, U.S. Specialty defensed 99.99997058% of the City's damages!  And the outcome was “mixed”?

One can only hope this case is an anomaly.  Under all the cases U.S. Specialty relies on – Hsu, DisputeSuite, and de la Cuesta -- U.S. Specialty would have almost certainly been awarded its attorney's fees.  This writer is of the opinion that the trial court abused its discretion in not awarding U.S. Specialty its fees and the Court of Appeal should have reversed and remanded.

Might there be a double standard for sureties?  Last year, in Karton v. Ari Design & Construction, Inc. (2021) 61 Cal. App. 5^th 734, the 2^nd District awarded $90,000.00 in attorney's fees against a Contractor's License Bond surety on a statutory $12,500.00 penal limit bond.  (Good thing the trial court cut Karton's fees from $271,530.00 to $90,000.00 because of the plaintiff's incivility.)  I wrote then roundly criticizing the Court's decision in that case.  I now do the same with U.S. Specialty.