Hjelm v. Prometheus Real Estate Group, Inc. – First District Court of Appeals Instructs on the Importance of Following the Rules

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The opinion of the First District Court of Appeals in Hjelm v. Prometheus Real Estate Group, Inc. reads like a lecture to Prometheus and its counsel. It reviewed the history of the dispute between the parties – from the execution of improperly drafted lease, through the vacating of a mismanaged property, through an over-litigated case (with two motions for summary adjudication on the single issue of entitlement to fees), which culminated in a partially untimely appeal. Hjelm teaches important lessons to property managers and attorneys on how to avoid being penalized for not following the rules.

The trial court found that the Hjelms signed a residential lease for a rental unit in San Mateo. They did not have an opportunity to negotiate their lease, which was mailed to them out of state for their signature. The family vacated a little over a year after moving in, following a persistent and unaddressed bedbug problem. At trial, management personnel testified that they had no real policy for dealing with bedbugs and that high turnover prevented new employees from effectively taking on existing problems.

The appeal sought to review the judgment itself, as well as a healthy award of $326,475.00 in attorneys’ fees (accrued in obtaining damages of only about $70,000.00). However, only the award of attorneys’ fees was properly before the Court because the appeal of the verdict was untimely.

The deadline to appeal a judgment is jurisdictional. Following the entry of judgment upon jury verdict, the judgment was later amended to include the award of attorneys’ fees, and counsel for Prometheus apparently calendared their time to appeal on the later judgment, but they filed their appeal after the deadline running from the earlier entry of judgment. Therefore, they were timely to appeal the award of attorneys’ fees, but not the underlying basis for awarding them.

However, The First District was not about to let a late appeal stop it from tearing apart the appellate brief. The Court actually deemed the argument – that the verdict was not supported by substantial evidence – waived for the failure of Prometheus to “provide a summary of the significant facts”. Instead of providing a balanced summary, Prometheus attempted to reargue the facts of the case and ignored “the precept that all evidence must be viewed most favorably to the Hjelms and in support of the verdict”.

Moving on to the question that was properly before it, the Court upheld the award of attorneys’ fees. It noted that the standard Prometheus lease agreement contained several different provisions for a one-sided award to Prometheus. One-sided fee provisions are lawful in some contexts (e.g., tort claims). However, Section 1717 of the California Civil Code indicates a policy “to establish mutuality of remedy when a contractual provision makes recovery of attorneys fees available to only one party, and to prevent the oppressive use of one-sided attorneys fee provisions” reflecting a “legislative intent that equitable considerations must prevail over both the bargaining power of the parties and the technical rules of contractual construction”.

Section 1717 only applies to contract claims, so this portion of the appeal tracked three arguments by Prometheus:
(1) The Hjelms asserted no contract claims, so section 1717 did not apply;
(2) The Hjelms elected – and accepted – a distinctive tort remedy (i.e., emotional distress damages), so their action was not ‘on a contract’ under section 1717; and
(3) The Lease contained three narrow attorney fee provisions that did not apply to the Hjelms’ noncontract claims.

The Court disagreed on all three points. It found that the Hjelms sued “on a contract”. Breach of the warranty of habitability may be pled as a tort claim, but it can also be pled in a variety of other ways, including as “a contract action with contract damages”.

The Court also disagreed that the Hjelms had elected tort remedies by receiving an award of emotional distress damages. It noted that the lawyers argued, and the jury was instructed on, contract claims. It also considered that “whether an action is based on contract or tort depends upon the nature of the right sued upon, not the form of the pleading or relief demanded. If based on breach of promise it is contractual; if based on breach of a noncontractual duty it is tortious”.

Finally, while the various fee provisions applied (to Prometheus’ benefit) in fairly narrow circumstances, Section 1717 will generally apply such provisions to the entire contract. While Prometheus attempted to evade one specific provision (applying to unlawful detainers) on the basis that holdover actions are tort-based, the Court traversed the nuance of unlawful detainers as occasionally arising from contract (e.g., where the suit is based on breach of a lease term).

The First District Court of Appeals was generally displeased with Prometheus’ standard lease agreement, their management practices, their litigation strategy and their appellate briefing – calling their reliance on some authority “astonishing” and their argument about fees “fatuous”. Ultimately, however, Prometheus was wrong on several points of well-settled law, so this outcome may have been inevitable, even if they had followed the rules.

The Hjelms will also recover their fees on appeal.