The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A California appellate court has held that a lender could not recover its attorney’s fees against a sublessor for breach of the settlement agreement because the lender failed to introduce its invoices or to authenticate them under the “business records” exception to the hearsay rule. [Copenbarger vs. Morris Cerullo World Evangelism, Inc., 2018 Westlaw 5921229 (Cal.App.).]
Facts: A sublessor of commercial property filed an unlawful detainer action against the sublessee, thus imperiling a lender’s security interest in the underlying sublease. The lender and the sublessor entered into a settlement agreement, under which the sublessor promised to dismiss the unlawful detainer action.
The sublessor delayed dismissing the unlawful detainer action for three years. The lender brought a breach of contract action against the sublessor due to that delay, claiming that it had incurred substantial damages in the form of attorney’s fees in the interim.
After a four-day bench trial, the trial court ruled in favor of the lender, awarding damages for breach of contract in an amount equal to the attorney’s fees incurred by the lender.
Reasoning: On appeal, the sublessor first argued that attorney’s fees cannot be awarded as damages for breach of contract but instead must be awarded as costs in a post-trial motion. Noting a split of authority in the California case law, the court disagreed, holding that attorney’s fees could theoretically have been awarded to the lender as damages, since the lender would not have incurred those fees but for the sublessor’s delay in dismissing the unlawful detainer action. However, the court reversed the trial court’s award of fees due to a failure of proof. The court noted that the trustee acting on behalf of the lender testified that he had the invoices from his attorneys but did not bring them to court and had never reviewed them. The court then held that his testimony about the fees incurred were inadmissible hearsay:
An invoice itself is hearsay, and is not admissible to prove the work or services reflected in the invoice were performed, unless a foundational showing is made of an exception to the hearsay rule . . . . If the proper foundation is laid, invoices are admissible as business records to prove the occurrence of the act, condition, or event recorded in the business record.
Here, however, the lender failed to introduce the invoices into evidence and failed to establish the “business records” exception to the hearsay rule. In addition to the hearsay problem, the lender failed to provide any detail concerning the services rendered by its attorneys:
[The lender] did not present any evidence to substantiate the amount of attorney fees incurred in the [unlawful detainer] Action. [The lender] easily could have done so. [The lender’s trustee] had possession of the invoices and they could have been made admissible quite easily as business records. In addition, or in the alternative, the attorneys who represented the [lender] in the [unlawful detainer] Action could have testified about their hourly rates, the work performed, and the amount of time spent on various tasks. Such evidence is required when a prevailing party requests attorney fees by motion. No less is required when attorney fees are sought as damages.
Author’s Comment: (First, a disclosure: several years ago, I served as an expert witness on behalf of a third party in a related action but was not involved in the case at bar.)
The court’s analysis of the lender’s failure of proof is right on target. Rather than relying on the lay client to authenticate the invoices, it would have been preferable to have the attorneys for the lender substantiate the fees incurred. If that is not possible, then the party seeking fees must ensure that the witness testifying on behalf of the prevailing party produces the invoices, is familiar with the requirements of the business records exception, and is well-prepared to authenticate the invoices.
Having said all of that, I am somewhat surprised that the court did not just remand the case to permit the lender to provide the missing proof. Instead, the court absolutely reversed the verdict, holding that the failure of proof completely defeated the lender’s claim against the sublessor. This may be procedurally correct, but it seems very harsh.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.