A Woodside couple will be stripped of $125,000 in attorney fees stemming from a 7-year feud with a Palo Alto contractor, the California Court of Appeals has decided.
Three First Appellate District justices handed down the decision on May 24. It caps what the court called a "spirited" breach-of-contract battle between Vance Brown, Inc., and venture capitalist Jeffrey Drazan and his wife, Stacy, which included three trips to the appeals court.
The Drazans previously paid Vance Brown $5.09 million in damages and other attorney fees after an arbitration panel ruled against them in the contract case in 2010.
The court's May 24 decision on attorney's fees relates to costs incurred before the arbitration hearing -- fees accrued just to determine if arbitration would take place. That one point took two years to resolve, the court noted.
The appeals justices sided unanimously with Vance Brown and have ordered the case back to the San Mateo County Superior Court for a final award, which could total $350,000, the contractor said.
The dispute began shortly after Vance Brown began work on the Drazans' Woodside estate.
The couple hired Vance Brown in 2002 to build their $18-million estate on Bridle Lane in Woodside. (The land valuation in 2003 was $7 million, according to the County of San Mateo Treasurer-Tax Collector.)
The Drazans created a holding company, Frog Creek Partners, to manage the project, but the couple always controlled the company, the arbitrators noted in their 66-page finding. Vance Brown was to build a main house, guesthouse, multi-car garage, pool, tennis courts, "ancillary" structures, plus irrigation and landscaping on 12 acres.
Work began in September 2002 before a contract was signed. Woodside doesn't allow construction during the rainy season, and Frog Creek was concerned about the narrow seasonal window, according to court documents.
Frog Creek's attorney suggested various changes to the proposed contract, which included elimination of a $50,000 cap on disputes subject to arbitration. Both sides agreed to most of the changes.
Frog Creek then made additional handwritten notations on a typed version of the contract. The changes included upping a $1.05-million landscaping and irrigation estimated budget to $1.3 million. Jeff Drazan signed this version in December.
But Vance Brown signed a separate "clean" version of the contract without the notations. The contractor's version did not include the $1.3 million landscaping change. The terms for dispute resolution, arbitration and attorney-fee provisions in both versions were identical, the court noted.
The Drazans insisted on a "not to exceed" $11,316,901 price. Vance Brown was to be paid monthly based on the estimated percentage of completion of each item on the contract.
The contractor submitted several bills, and the Drazans made the payments -- seemingly to everyone's satisfaction, arbitrators noted.
But instead of adding the approximately $250,000 landscaping increase to the overall budget, Drazan asserted in 2003 that the budgets for the other contract items were to be proportionately reduced. The project essentially added $250,000 worth of work for which Vance Brown would be responsible but for which it would not be paid. Under this arrangement, the Drazans would get the work for free, according to the arbitrators.
Drazan also altered the way the percentage of the monthly payments was calculated, the arbitrators found. At one point Frog Creek underpaid the contractor by approximately $1 million.
Vance Brown ended the contract for nonpayment and stopped working on the project in 2005; Frog Creek hired others to complete the work.
Frog Creek sued Vance Brown for breach of contract. The Drazans wanted a jury trial. But the contractor filed a motion to compel arbitration. Vance Brown cited its version of the contract. The case went to Superior Court, then to the Court of Appeals, which rejected the contractor's motion. The court found that Frog Creek had never signed Vance Brown's version of the agreement.
Vance Brown returned to Superior Court with a new motion based on the Frog Creek version of the contract. Frog Creek fought back by claiming there was "no valid agreement to arbitrate." The trial court first sided with the Drazans, but on appeal in 2007, the court sided with Vance Brown to compel arbitration.
The 2010 arbitration hearing on the breach of contract took 51 days.
Frog Creek Partners "materially breached" the contract, the arbitrators said. The Drazans had failed to tell Vance Brown that the project's plans and specifications were incomplete prior to signing the agreement -- called "fast tracking."
The contractor had based its estimate on the belief that plans were finalized, but the plans were still evolving even as Vance Brown was doing the work, the arbitrators noted.
"The evidence showed that Mr. Drazan, the architects, and the engineers knew they were not final and were still in the process of being developed, but nobody told Vance Brown," the arbitrators wrote.
The justices also rejected the validity of Drazan's unilateral payment reductions.
Vance Brown was awarded $1.9 million in damages, $2.5 million in attorney fees, and costs of $666,422.78 -- in total $5.09 million.
But the battle wasn't finished. Both sides wanted to recover attorney's fees incurred prior to the arbitration hearing.
Frog Creek went to court again in 2010 claiming it was the "prevailing party" on Vance Brown's initial unsuccessful effort to compel arbitration. They said they should recover costs for that court battle.
Vance Brown filed a cross-complaint. The contractor asserted it was the prevailing party in the overall lawsuit, and Frog Creek should not receive any money. The contractor should instead receive $128,000 for costs incurred to compel arbitration, it maintained.
Superior Court Judge Rosemary Pfeiffer granted Vance Brown $663,293 in net pre- and post-arbitration fees for prevailing in the arbitration case. But she denied the $128,000 claim and instead granted Frog Creek its claim for $125,000.
The appeals court, however, in reversing Pfeiffer's ruling stated: "The critical issue of statutory interpretation is whether Frog Creek's success in defeating Brown's March 2005 petition to compel arbitration ... made Frog Creek 'the party who recovered a greater relief in the action on the contract.' ... Frog Creek argues the petition was a distinct action on a contract ... but Brown contends the petition and subsequent appeal were 'really just a forum fight' that could not provide a basis for a separate attorney-fee award."
The appeals court determined that Vance Brown's first petition to compel arbitration did not resolve the contract dispute; the dispute remained in both side's claims of a breach of contract.
Since Vance Brown won the contract case overall, the lower court erred in awarding any monies to Frog Creek, the justices said. The court also agreed with the contractor's contention that it was entitled to the attorney fees.
"The party who ultimately prevails on a contract action is entitled to all of its fees including fees incurred during the lawsuit in proceedings where it did not prevail," the court said.
The case now returns to Superior Court to determine a reasonable attorney-fee award to Vance Brown. Those fees would include costs in the latest appeal.
The pre-arbitration and appeals fees are estimated at $350,000, Vance Brown said in a statement, and the company chided the Drazans for the long years in court.
"It made little sense that the Drazans refused to pay for their changes in 2004, and it made even less sense for the Drazans to make us chase them in court for the past seven years. What could have been settled in 2004 for $459,000 has cost Jeff and Stacy Drazan over $11 million in after-tax dollars," said Loren Brown, president of Vance Brown.
Jeff Drazan is currently managing partner at Bertram Capital. He was previously managing director of Sierra Ventures. The Drazans could not be reached for comment, and their attorney in the appeals case did not return requests for comment.