Unpublished Disposition, 937 F.2d 611 (9th Cir. 1983)

MEMORANDUM^* 

This second appeal stems from Richard and Margaret Breton's agreement to sell a leasehold on real property to Central Pacific Supply Corporation ("CPS"), for use as a Tile Mart store. In our earlier decision, we invalidated the contract based on the Bretons' failure to provide marketable title, and remanded for calculation of damages. The Bretons appeal from the district court's award of improvement damages and attorney fees, and CPS cross-appeals, contending that the district court failed to award sufficient prejudgment interest. We affirm the interest award but reverse the fee and damage awards at issue.

FACTUAL AND PROCEDURAL BACKGROUND

The facts of the case are stated in our previous decision on the merits, Central Pacific Supply Corp. v. Breton, No. 88-1737, rev'd mem. 869 F.2d 1496 (1989) (table). On remand, the district court calculated CPS' damages at $102,959, including $37,357 for improvements to the property. In addition, it awarded attorney fees of $41,304 as authorized by the contract and Haw.Rev.Stat. Sec. 607-17. Finally, it awarded prejudgment interest from the date of the 1989 Ninth Circuit decision. The Bretons appeal the grant of "improvement damages," contending that the amounts awarded are for removable trade fixtures and noncompensable ordinary repairs. They also claim that the award of attorney's fees was erroneous, since CPS sought and received rescission. CPS cross-appeals the interest award, contending that prejudgment interest should have commenced in 1983. We address the cross-appeal first.

DISCUSSION

CPS argues that prejudgment interest should have been awarded from 1983 when the agreement was terminated, under Haw.Rev.Stat. Secs. 478-2, 636-16. We review prejudgment interest awards for abuse of discretion. Locricchio v. Legal Services Corp., 833 F.2d 1352, 1360 (9th Cir. 1987). Under Hawaii law, the trial judge has the discretion to designate any date for the commencement of prejudgment interest, "provided that ... in cases arising by breach of contract, it may be the date when the breach first occurred." Haw.Rev.Stat. Sec. 636-16 (emphasis added).

The district court did not abuse its discretion in selecting the 1989 date. It cited eight factors in support of its dcision, and emphasized the Bretons' good faith and reasonableness throughout the dispute. For example, it noted that the Bretons offered to allow CPS to remain on the premises rent-free, that they diligently attempted to obtain the subdivision approval, and that the encroachment was a pre-existing, unforeseen problem which they did not create. Such factors are relevant and may be considered under Hawaii law. See Jenkins v. Whittaker Corp., 785 F.2d 720, 737 n. 42, 738 n. 44 (9th Cir. 1986).

CPS speculates that the court's decision was based on "personal displeasure" and implies that the Bretons' state court litigation was in bad faith. However, neither allegation is supported by the record. The case was a close one, and the court specifically found that both sides acted reasonably throughout the litigation. CPS "has failed to convince us that the [trial] court abused its discretion." Azer v. Myers, 8 Haw.App. 86, ----, 793 P.2d 1189, 1211, rev'd in part on other grounds, 71 Haw. 506, 795 P.2d 853 (1990).

The district court awarded $37,357 to CPS in reimbursement for painting, roof repairs and tile displays which it left behind when it vacated the building. Whether these items are reimbursable depends on whether they constitute permanent improvements. This is a question of law subject to de novo review. Galindo v. Stoody Co., 793 F.2d 1502, 1516 (9th Cir. 1986). The Bretons argue that the tile displays were removable trade fixtures, and that the painting and roof repairs were ordinary, nonreimbursable repairs incurred in the course of the tenancy. In Hawaii,

The elements in determining whether an item is a fixture are (1) degree of annexation to realty or something appurtenant thereto; (2) adaptability or application as affixed to the use for which the real estate is appropriated; and (3) intention to make the chattel a permanent accession to the freehold.

In re Waipuna Trading Co., Inc. 41 Bankr. 812, 815 (D. Haw. 1984).

The district court erred in failing to analyze the claimed improvements under this standard. The evidence indicates that the tile displays were removable trade fixtures, not permanent improvements. They were non-functional, could be updated and replaced at will to advertise new styles, were normally removed when a store closed or relocated, and would be useless to any tenant except another tile store.

As for the painting and roof repairs, neither activity was extensive enough to constitute a permanent improvement. CPS did not replace the roof or install a new drainage system; the repairs did not fully solve the leakage problem. In addition, while the Agreement was in effect, it made CPS responsible for all ordinary maintenance.

Instead of applying the legal test for improvements, the district court relied on its finding that a breach had occurred to award broad "make-whole" damages under the contract. This finding was also in error. The district court stated "as directed by the majority of the Ninth Circuit panel that the Bretons breached the Agreement on May 15, 1983 when they failed to obtain subdivision approval for the easement ..." However, our prior opinion did not "direct" a finding of breach, but merely addressed the encumbrance and marketability issues and remanded for reconsideration of the contract claims.¹ 

CPS' original complaint did allege that the Bretons had breached the Agreement, but the only remedy sought was rescission and "reimbursement" for amounts spent in reliance on the contract. CPS formally announced its intention to rescind the Agreement by letter in April 1983. Thus, CPS cannot now enforce the very same Agreement which it successfully rescinded. See Azer v. Myers, 71 Haw. 506, ----, 795 P.2d 853, 857 (1990); Burgess v. Arita, 5 Haw.App. 581, ----, 704 P.2d 930, 938 (1985). As a result, CPS is entitled only to equitable restitution, not to contractual damages for breach. See 5 Corbin on Contracts Sec. 1112; cf. Ferreira v. Honolulu Star-Bulletin, 44 Haw. 567, 356 P.2d 651, 655 (1960) (absent rescission, make-whole damages available for breach). We therefore direct that the sum of $37,357 be deducted from the damages award.

Finally, the Bretons also contend that the attorney fee award was improper. They assert that Hawaii law forbids such an award where the contract itself has been rescinded rather than enforced, citing Burgess v. Arita, 5 Haw.App. 581, ----, 704 P.2d 930, 938 (1985). Again, we agree.

Burgess construed Haw.Rev.Stat. Sec. 607-17, which provides for attorney fees of up to 25% of the judgment in any action "on a promissory note or other contract in writing which provides for an attorney's fee [.]" In Burgess, which also involved an agreement to sell real estate, the trial court found the agreement containing the fee provision unenforceable, but awarded damages and attorney fees based on breach of a second contract which did not include a fee provision. The Appeals Court held that the first agreement could not simultaneously be invalidated on the merits and enforced as to the fee provision. Id. Instead, it awarded fees based on the lesser rate provided for actions in assumpsit by Haw.Rev.Stat. Sec. 607-14. Id.

Here, the Agreement of Sale clearly provided for attorney fees to CPS in the event of the Bretons' breach, but the contractual fee provision is unenforceable because the contract was rescinded. See id. Azer v. Myers, 71 Haw. 506, 795 P.2d 853 (1990), involved a similar situation. There, a contract specifically allowed attorney fees for its enforcement, but the plaintiff instead claimed breach of a fiduciary duty. The court strictly construed the fee provision to exclude any award of fees for the fiduciary duty lawsuit.

In addition, the general rule in Hawaii is that fees are not available in contract actions seeking equitable relief, such as rescission, unlike actions seeking damages for breach. See Civic Realty, Inc. v. Development, Inc., 3 Haw.App. 101, 641 P.2d 1361 (1982) (no fees in action for reformation); Smothers v. Renander, 2 Haw.App. 400, ----, 633 P.2d 556, 561 (1981) (no fees in suit for specific performance). Therefore, we reverse the award of attorney fees under Haw.Rev.Stat. Sec. 607-17.

CONCLUSION

The limited award of prejudgment interest is AFFIRMED, but REMANDED for recalculation based on a reduced damage award. The damage award is REVERSED and the matter remanded for a determination in accord with this disposition. The award of attorney's fees is REVERSED. Each party shall bear its own costs on appeal.