Simple construction dispute turns into ugly McMansion of a case

Litigation can get personal. Particularly when you are both the attorney as well as the litigant. In Karton v. Ari Design & Construction, Inc., 61 Cal.App.5th 734 (2021), the Second District Court of Appeals examined an attorneys' fee motion brought by an attorney-litigant in a construction case, statutory penalties available against an unlicensed contractor, and the liability of license bond sureties.

The Karton Case

It started out as many construction cases do - pretty straightforwardly. Attorney David Karton and his wife hired a contractor, Ari Design & Construction, Inc., to do some work on their house. After the Kartons had paid Ari $92,651, a dispute arose. Actually, two disputes arose. The Kartons believed that Ari, which had two to four people working on the project, had performed work without workers' compensation insurance. The Kartons also believed that Ari had overbilled for its work to the tune of $35,096. Interestingly, Ari didn't disagree that it had overbilled, but contended that it had only overbilled by $13,000. And it was over these disputes that the parties litigated the matter, ultimately resulting in attorneys' fees and sanction requests of $559,417.

The Kartons sued Ari, three of its principals, Shahar Toledano, Jonathan Guttman and Ilan Messika, and Ari's license bond surety Wesco Insurance Company - alleging five causes of action for breach of contract, money had and received, violation of Business and Professions Code section 7031, claim against license bond, and unfair competition.

After a three-and-a-half-day bench trial the Kartons prevailed, with the trial court finding that Ari overbilled the Kartons the amount they claimed of $35,096, but awarding the Kartons the entire $92,651 they had paid to Ari, because the court found that Ari was subject to Business and Professions Code section 7031 by failing to have workers' compensation insurance for its employees. The trial court also awarded the Kartons an additional $10,000 under Code of Civil Procedure section 1029.8, which provides for treble damages, capped at $10,000, and attorneys' fees against "[a]ny unlicensed person" whose work injures another person. And, finally, the trial court awarded the Kartons $2,850 for storage fees, for a total award of $109,501. The trial court also awarded the Kartons $12,500 against Ari's license bond surety Wesco.

Following the trial, the Kartons filed a post-trial motion for attorneys' fees. At the time the motion was heard the trial court judge had been reassigned and a new judge was assigned to the case. In their motion, the Kartons requested $271,530 in attorneys' fees, $52,021 in discovery sanctions, and $203,646 for proving matters at trial that had been denied in discovery for a total amount sought of $543,307. In its tentative ruling, the trial court determined that $450 per hour was a reasonable rate for the Kartons' attorney but noted that the Kartons' motion lacked a breakdown of hours spent by counsel beyond a "bare-bones declaration" asserting that a total of 603.4 hours was spent on the case and an estimate of percentages devoted to different tasks. The trial court proposed to continue the hearing to allow the Kartons the opportunity to supply the missing evidence to justify their request.

At the hearing, David Karton and his attorney appeared, though Karton did most of the talking. Karton asked for 30 days to submit supplemental papers, which the court granted, and set a 10-page limit on the filing excluding exhibits. Thereafter, the Kartons filed 11 pages of text and 400 pages of supplemental briefing and updated their demand to add $16,110 to their fee request.

At the hearing, in which only David Karton appeared, the trial court expressed surprise that Karton had increased his fee request "beyond what had previously been requested." The trial court also commented on Karton's lack of civility in his briefing, stating that it was "replete with attacks on defense counsel such as that defense counsel filed 'knowingly false claims of witness tampering,' 'her comments were frivolous' [and that] something was 'typical of the improper tactics employed by defendant and their counsel'" "It was really offensive to me," stated the trial court, "the attacks made in the case."

While acknowledging that among the documents filed by the Kartons were billing records, although block billing records, the trial court noted that 300 of the 400 pages of supplemental briefing was "extraneous documentation ... that I did not need and did not want in ruling on this motion." "If this is reflective of the litigation that went on in this relatively simple-sounding case," stated the court, "I understand how you may and your counsel may have spent the number of hours that you claim to have spent," noting that the Kartons had gone "so far beyond what was necessary on this matter."

Before taking the matter under submission, the trial court observed that Karton was "agitated about this case. This is your personal matter, and I understand that. I see that you have strong feelings about this case and strong feelings about the course of this litigation and how it has proceeded." At one point, the court also told Karton, "can you not interrupt me. I would appreciate your letting me finish my sentence," to which Karton apologized.

The following day, the trial court issued a minute order approving 200 hours at $450 per hour for a total fee award of $90,000. The minute order noted that the trial court had given Karton leave to file supplemental briefing of 10 pages but that Karton had filed hundreds of pages with 20 or more additional exhibits as well as Karton's "inflammatory language." The minute order also reviewed the law surrounding the lodestar method of determining reasonable attorneys' fees and noted its broad discretion to adjust an award downward or to deny it completely if it determined a fee request was excessive. The trial court also ruled that there was no statutory or contractual basis to award attorneys' fees against Wesco.

The Kartons appealed.

The Appeal

On appeal, the Second District Court of Appeal noted that "[c]ourts have developed two ways to define a reasonable fee":

"The first method is the lodestar approach. This method traces back at least to the famous Lindy case: Lindy Bros. Builders, Inc. of Philadelphia v. American Radiator & Standard Sanitary Corp. (3d Cir. 1973) 487 F.2d 161, 168. The lodestar is the multiplicand of a reasonable hourly rate and a reasonable number of hours. The court then may adjust the lodestar based on a variety of factors. Germane factors include the nature, difficulty, and extent of the litigation, the skill it required, the attention given, and the success or failure of the enterprise, as well as other factors. Whether the attorney worked on a contingency is relevant. A trial court is not required to state each charge it finds reasonable or unreasonable. A reduced award might be fully justified by a general observation that an attorney over-litigated a case.

The second method is the percentage-of-recovery approach. The percentage approach arose in the class action context and predated the lodestar method, but has always shared the lodestar method's fundamental goal of defining "reasonableness" in a given case.

Over the decades, there has been a nationwide tug-of-war about which method is superior: lodestar versus percentage. Each approach has advantages and disadvantages. The lodestar method better accounts for the amount of work done, while the percentage approach more accurately reflects the results achieved.

In 2010, the American Law Institute concluded 'most courts and commentators now believe that the percentage method is superior. Critics of the lodestar method note, for example, the difficulty in applying the method and cite the undesirable incentives created by that approach - i.e., a financial incentive to extend the litigation so that the attorneys can accrue additional hours (and thus, additional fees).'"

The Court of Appeal then went on to state, in a number of must-quote passages, why it was "reject[ing] the Karton's complaint that the $90,000 attorney fee award is too small":

On the Difficulty of the Case: "Difficult issues require more attorney hours. Simpler questions require fewer. Here the issues were pedestrian: whether a contractor had insurance and a license."

On the Equities: "[T]he Kartons over-litigated this matter. They had about a $23,000 dispute with their contractor . . . but it does not justify lounging a disproportionate litigation offensive. The Kartons' strategy netted them windfall gains: the harshness of contractor licensing laws allowed them to recoup all their construction monies, plus $10,000, and to retain the benefit of months of free construction work."

On Proportionality: "Weighing cost and benefit, this trial court concluded a fee three times the judgment was not reasonable. This was logical: rational investors or buyers would not spend $3 to get something worth $1."

On Civility: "Excellent lawyers deserve higher fees, and excellent lawyers are civil... [T]he Kartons [came] out swinging, apparently believing the best defense is a good offense. This approach demonstrates the trial court was within its discretion to conclude the Kartons conducted litigation that was less than civil."

Ouch.

The Kartons didn't lose on every count, however. The Court of Appeals held that, contrary to the ruling of the trial court, the license bond surety Wesco was liable for the Kartons' attorneys' fee award despite the bond being capped at $12,500:

"Wesco says it cannot be liable for more than the $12,500 sum of its bond. Yet it voluntarily wrote the Kartons a check for $38,768.49, which was the sum of the $12,500, plus post judgment interest, and plus costs. When a surety decides to fight a lawsuit, it can make itself liable for the costs of the litigation in excess of the face of its bond, as Weco's own actions demonstrate... Instead, Wesco decided to gamble that it and Ari could avoid liability altogether on the merits. 'Having lost that gamble, [Wesco] is not in a position to complain about liability for court costs.'"

Whew. Do. Not. Trifle. With. This. Court.

Conclusion

While Karton is primarily a case about the risks of over-litigating a case there's a couple of construction law gems in there as well. First, in a disgorgement action against an unlicensed contractor you may be able to recover your attorneys' fees, as well as treble damages up to $10,000, under Code of Civil Procedure section 1029.8. Second, license bond sureties are subject to post judgment interest and costs even if it causes the total liability of the surety to exceed the current license bond amount of $12,500.