Unpublished Disposition, 940 F.2d 667 (9th Cir. 1989)

MEMORANDUM^* 

Appellants Chan, et al ("Investors") appeal the district court's order granting two motions for summary judgment. One motion, by Cessna and Chase, sought dismissal of the Investors' numerous affirmative claims based on alleged fraud, misrepresentations or omissions by Cessna and Chase. The other motion, by Chase alone, sought collection of the debt for which the Investors had assumed liability. We affirm the district court's granting of both motions. Cross-Appellant Chase appeals the district court's award of attorneys' fees. We vacate the district court's fee award and remand for further consideration.

Background

The Investors invested in a limited partnership which was to purchase and operate a Cessna airplane and serve as a tax shelter. One Madalo was to act as general partner and manage the business (ferrying skiers from California to Idaho and Utah). Madalo has been adjudicated bankrupt and is no longer a party to this action.

The airplane was purchased from Cessna and financed by a loan from Chase, for which all investors signed as guarantors. Both Cessna and Chase participated in the initial presentation where the investments were solicited. The representations made at that presentation, and the subsequent structuring of the financing of the operation, form the basis for this lawsuit.

Shortly after this business venture was formed, it failed. The Investors tendered the airplane back to Chase, which sold it for less than the amount of the loan. The Investors brought numerous claims charging that Cessna and Chase had participated in, and were liable for, a variety of misrepresentations and omissions that led to the loss of the Investors' tax benefits and to their liability for the loan.¹  Chase brought a counterclaim against the Investors for the balance of the loan.

The district court's summary judgment against the Investors' affirmative claims was based on a number of rulings. As to the alleged state and federal securities violations, the district court ruled that the Investors' had not invested in a "security" and, thus, neither federal nor California securities statutes applied. The basis for this ruling was the court's finding that "the partnership agreement in the case at bar gave plaintiffs the power to engage in essential managerial efforts." Order of Jan. 12, 1989, ER 282 at 11 n. 6 ("Order"). As to the fraud and negligent misrepresentation claims, the district court made several findings requiring dismissal, including: that Chase, as lender, had no investors as guarantors, that the loss was not caused by defendants because Investors did not rely on the alleged misrepresentation, and that Chase had given all necessary notice to at least one partner, which was imputed to all partners. Finally, the district court dismissed the civil conspiracy and RICO claims because of the failure of the underlying substantive civil claims as requisite predicate acts.

In granting Chase summary judgment on its counterclaim for the deficiency of the sale of the aircraft to satisfy the loan, the district court rejected the Investors' argument that their liability for the debt was excused by the "Sumitomo doctrine."²  That ruling was based on findings closely tracking the court's earlier rulings on the Investors' fraud claims--that the restructuring of the loan was not concealed from the investors, who were sophisticated business people, and that the knowledge of any one partner (including Madalo) was imputed to all partners. The court awarded a deficiency judgment of $168,382.

Chase sought attorneys' fees and costs in excess of $332,723. The district court found that amount to be excessive and awarded $56,382.

Discussion

1. The applicability of federal and California Securities laws

a. Federal Law

Uncontraverted facts establish that this investment was carefully negotiated by the Investors with the aid of their own attorneys. The Investors were experienced in the process of investing, and they successfully sought to retain control over critical aspects of the business venture to protect their investment (as detailed by the district court at Order, ER 282, at 16). Thus, the Investors here are not the kind of passive investors excluded from access to information or managerial control that the federal securities laws were enacted to protect. Matek v. Murat, 862 F.2d 720, 725 (9th Cir. 1988). See also Koch v. Hankins, 928 F.2d 1471, 1479-80 (9th Cir. 1991) (investor expertise and actual ability to control investment is relevant to its characterization as a security).

We reject the Investors' contention that their formation as a limited partnership precludes such a finding. This court has expressly rejected any bright-line approach whereby the form of a transaction, such as a general or limited partnership, determines the applicability of the securities laws. Instead, the substantive "economic realities" of a particular situation are the determinative factors in assessing whether an investment is a "security." Id. at 727. Koch, 728 F.2d at 1480. Here, we agree with the district court that the investors negotiated for themselves an investment in which their own measure of managerial control served to obviate the need for, and applicability of, the federal securities statutes.

b. State Law

The district court found that the investment in this case did not constitute a "security," for purposes of the California Securities statutes, for the same reasons discussed above--"the high level of participation by these plaintiffs in management of the business venture." Order, ER 282 at 21. We agree.

In this context, the factor of "economic reality" is particularly compelling, because California law permits some degree of managerial involvement of limited partners without loss of limited liability, yet still restricts the protection of its securities statutes to passive investors. People v. Smith, 215 Cal. App. 3d 230, 263 Cal. Rptr. 684, 687-88 (1989). What we have said with regard to the federal claims applies here as well, because the California courts rely heavily on federal case law in determining the definition of "security" for purposes of California's security statutes. People v. Figueroa, 41 Cal. 3d 714, 735 n. 26, 224 Cal. Rptr. 719, 734 n. 26 (1986).

Accordingly, we agree with the district court that the Investors did not invest, here, in a "security" for purposes of California's statutes.

2. The claims of common law fraud and negligent misrepresentation

a. Fraud

i. By Chase

We agree with the district court that the claims of fraud and negligent misrepresentation by Chase are without merit. Two of the district court's several reasons are sufficient to dispose of the Investors' appeal in this regard. The statements made by Chase at the initial presentation, even if they were the kind of representations on which fraud could be based, could not have caused the damages of which the Investors complain: the subsequent negotiations leading to the purchase of the airplane indicate that the Investors did not rely on those statements. Similarly, Chase's alleged subsequent failure to notify all partners of changes in the required title ownership of the airplane, and in the structure of the loan, cannot constitute fraud, because at least one partner was notified of all changes, and knowledge of one partner is imputed to all partners. California Corporations Code Sec. 15052;³  Bedolla v. Logan & Frazer, 52 Cal. App. 3d 118, 127, 125 Cal. Rptr. 59, 66 (1975). Thus, Chase cannot be charged with failing to communicate all material facts to the investors.

ii. By Cessna

The statements made by Cessna at the original presentation did not constitute fraud for the same reason that Chase's statements could not constitute fraud: the Investors did not rely on those statements. Furthermore, the alleged statements made by Cessna could not be fraudulent because the uncontroverted evidence shows that Cessna could have honestly and reasonably believed the opinion advanced at the time. Cooper v. Jevne, 56 Cal. App. 3d 860, 866, 128 Cal. Rptr. 724, 727 (1976). In short, we agree with the district court that Cessna's statements were not so manifestly unreasonable as to constitute fraud.

b. Negligent Misrepresentation

The Investors' negligent misrepresentation action against both Chase or Cessna must also fail for the reason already discussed--the Investors did not rely on their statements. Their statements did not cause the Investors' injury.

3. The civil conspiracy or RICO violation claims

It follows from what we have already said that the conspiracy and RICO claims also fail. Common law civil conspiracy requires an underlying civil wrong. Unruh v. Truck Insurance Exchange, 7 Cal. 3d 616, 102 Cal. Rptr. 815, 826 (1972). Similarly, RICO requires the commission of a predicate wrongful act as well as a pattern of racketeering. Sedima S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 495-96 (1985). Because we have affirmed summary judgment as to all of the Investors' substantive claims, the conspiracy and RICO claims necessarily fail also.

4. The Investors "Sumitomo" defense to liability for the debt

The Investors assert that they should be exonerated from their responsibility under the surety notes because Chase unilaterally altered the risk of their guarantees. This defense, established by Sumitomo Bank v. Iwasaki, 70 Cal. 2d 81, 73 Cal. Rptr. 564 (1968), is not available here for reasons similar to those rendering the fraud claims meritless.

Chase's insistence on restructuring the debt as originally proposed does not meet the second requirement of the Sumitomo defense--that the creditor was aware of the debtor's ignorance of facts which materially increased the debtor's risk. Id., 73 Cal. Rptr. at 573. Here, the facts of the restructuring were not kept from the Investors, who were generally sophisticated in business matters. They all signed the subsequent documents which clearly reflected the changes in title and borrower. Furthermore, there is no doubt that Mr. Madalo--a partner in the Investors' partnership--was actively a party to the restructuring. There are no facts shown which would have led Chase to doubt that Madalo would share his knowledge with the Investors. The doctrine of imputation of partner knowledge assumes the opposite. Bedolla v. Logan & Frazer, 52 Cal. App. 3d 118, 127, 125 Cal. Rptr. 59, 66 (1975).

The Investors emphasize Madalo's varying misrepresentations to different partners, and then charge that Chase should have known Madalo was acting in bad faith toward his partners/investors. While the Investors provide ample evidence of Madalo's bad faith, they provide only the most conclusory allegations supporting their charge that Chase should have known Madalo was acting in bad faith toward the Investors. Indeed, their evidence of Madalo's varying explanations to the Investors for the changes in the financing demonstrates that the Investors were informed of and interested in the import of the changes, which they apparently agreed to on Madalo's assurances.

The Investors may well have been taken in and injured by Madalo, but the district court correctly refused to transfer the liability for that injury to Chase via the Sumitomo doctrine.

Chase requested attorneys' fees and costs of $332,723. Chase also requested $29,142 in sanctions against the Investors for failing to admit certain undisputed matters. The district court awarded fees and costs of $56,382, and ignored the sanctions request. The district court did not state what portion of its award was for fees and what was for costs, nor did it state what was a reasonable hourly rate or a reasonable amount of time that should have been expended in this litigation. The district court, in its Order of August 1, 1989 (SER 9), simply found Chase's fee request to be excessive and ordered the Investors to pay Chase $56,382.

The district court based its finding that Chase's request was excessive on two factors: first, it apparently apportioned the fee request between Chase's defense of the Investors' affirmative claims and its collection counterclaim, awarding fees only for the latter. The district court stated: "The bulk of Chase's efforts in this litigation were directed at defending against the investors' fraud claims rather than at litigating issues specific to its collection action." SER 9 at 2.

Second, the district court found that

Chase's counsel persisted in fully pursuing factual issues that were either irrelevant or unnecessary. Additionally, the sheer number of hours spent on this litigation as a whole appears excessive. As a result, the attorneys' fees billed in this action far exceeded the principal amount in issue. This manner of proceeding falls well below a reasonable standard of practice and will not be rewarded here.

SER 9 at 2.

We hold that the district court may have segregated Chase's prosecution of its collection counterclaim too rigidly from its defense of the Investors' affirmative claims.

a. Segregation of defense of affirmative action from collection counterclaim

In allocating costs under California Civil Code Section 1717,⁴  it is improper to distinguish simply between "offensive" and "defensive" costs. IMO Development Corp. v. Dow Corning, 135 Cal. App. 3d 451, 185 Cal. Rptr. 341, 347 (1982). That does not mean, however, that all actions remotely related to an action "on the contract" ought to be properly compensated under Section 1717.

Where a cause of action based on the contract providing for attorneys' fees is joined with other causes of action beyond the contract, the prevailing party may recover fees under section 1717 only as they relate to the contract action.

Diamond v. John Martin Co., 753 F.2d 1465, 1467 (9th Cir. 1985). The key to whether different elements of a complex litigation ought to segregated for purposes of awarding fees under section 1717 is whether there are common issues, and whether those issues are "inextricably intertwined." Id.

The district court's explanation of its fee award does not provide us with enough information to determine whether it erroneously denied fees for defending those aspects of the fraud claims which were inextricably intertwined with its contract collection action. We do not decide here how much of Chase's pursuit of its collection action is intertwined with its defense of the Investor's affirmative claims, but remand for specific findings in that regard by the district court. It may be that defense of the fraud claims is intertwined, but that defense of the RICO and conspiracy claims present separate issues.⁵  The district court is much more familiar with this case than we, and is in a better position to sort out these issues on remand.

Having so ruled, we do not address the more general issue raised by Chase, whether the district court insufficiently articulated its basis for the fee award. We note, however, that Federal courts sitting in diversity apply state law with regard to the determination of attorneys' fees. Alyeska Pipeline v. Wilderness Society, 421 U.S. 240, 259 n. 31 (1975); Diamond v. John Martin Co., 753 F.2d at 1467.⁶ 

California courts awarding attorneys' fees pursuant to section 1717 do not apply the lodestar approach toward determining attorneys' fees. Montgomery v. Bio-Med Specialties, Inc., 183 Cal. App. 3d 1292, 228 Cal. Rptr. 709, 712 (1986). Rather, California affords its trial courts broad discretion, in section 1717 cases, to consider a wide number of factors.⁷  Id., 228 Cal. Rptr. at 712. Further, California appellate courts reviewing section 1717 attorney's fee awards apply a "manifest abuse of discretion" standard, rather than the closer scrutiny exercised in attorney's fee awards pursuant to "private attorney general" statutes. Id. at 712-13. The degree of specificity with which the district court must explain its attorney's fee determination is no greater than that which is sufficient to enable us to exercise that level of appellate review.

Conclusion

Both of the district court's grants of summary judgment are AFFIRMED. The fee award is VACATED and REMANDED for further proceedings consistent with this opinion.