Alki Partners, LP v. DB Fund Services, LLC

Filed 10/24/16

CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

ALKI PARTNERS, LP, et al., D068063

Plaintiffs and Appellants,

v. (Super. Ct. No. 37-2011-00056561-
CU-BC-NC)
DB FUND SERVICES, LLC, et al.,

Defendants and Respondents.

APPEAL from a judgment of the Superior Court of San Diego County, Timothy

M. Casserly, Judge. Affirmed in part and reversed in part with directions.

James A. Shalvoy for Plaintiffs and Appellants.

Pillsbury Winthrop Shaw Pittman, Richard M. Segal, Nathaniel R. Smith, Kirke

M. Hasson and G. Allen Brandt for Defendants and Respondents.

After allegedly losing millions of dollars in a hedge fund, investors sued the fund's

administrator for breach of contract, alleging the administrator failed to (1) value the

hedge fund's assets, (2) advise investors of the hedge fund's net asset value, and (3)

respond to investor inquiries about the fund. The superior court granted summary

judgment in favor of the fund administrator, determining the undisputed material facts
established no breach of contract. Later, the court awarded the fund administrator

$3,027,237.96 in attorney fees based upon a contractual provision entitled "Standard of

Care," which provides the administrator is to be indemnified for losses, including

reasonable attorney fees "resulting in any way from the performance or non-performance

of Administrator's duties hereunder . . . ."

The investors appeal, asserting triable issues of material fact preclude summary

judgment. They also contend the court erroneously awarded attorney fees. We affirm

summary judgment, determining the undisputed material facts establish the administrator

did not breach the applicable contract. However, we reverse the award of attorney fees

because the contractual language relied upon is a third party indemnity provision that

does not create a right to prevailing party attorney fees in litigation between the parties to

the contract. (See Carr Business Enterprises, Inc. v. City of Chowchilla (2008) 166

Cal.App.4th 14, 22-23 (Carr).)

FACTUAL AND PROCEDURAL BACKGROUND

A. Introduction—The Parties

This appeal involves several distinct entities having similar names. The

investment fund entities are Alki Partners, LP; Alki Capital Partners, L.P.; Alki Fund,

Ltd.; and Alki Capital Management, LLC. The fund administrators are DB Hedgeworks,

LLC, and Hedgeworks Fund Services Limited.

Adding to the potential for confusion, these entities are parties to distinct

contracts, one called a "Fund Administration Agreement" and the other an

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"Administrative Services Agreement." The record contains three such contracts, but they

differ from each other in material respects. One of them is not even signed.

Thus, to say "Hedgeworks" or "Respondents" breached "contracts" with "Alki"—

as plaintiffs often assert in their briefs, is confusing at best, and potentially misleading.

To clarify, the following persons or entities are involved in this appeal:

1. Alki Partners, LP

Alki Partners, LP (also known as Alki Capital Partners, L.P.) is a limited

partnership in the business of operating a hedge fund.1 Hereafter, we refer to Alki

Partners, LP, and Alki Capital Partners, L.P., as Alki Partners.

2. Alki Capital Management, LLC

Alki Capital Management, LLC (Alki Capital) was the general partner of Alki

Partners until approximately September 2008.

3. Scott Wilfong

Scott Wilfong is the president of Alki Capital. Wilfong was also the portfolio

manager for Alki Partners. Wilfong had sole authority to make investment decisions for

Alki Capital and Alki Partners.

1 The term "hedge fund" is commonly used "as a catch-all for 'any pooled
investment vehicle that is privately organized, administered by professional investment
managers, and not widely available to the public.'" (Goldstein v. SEC (D.C. Cir. 2006)
451 F.3d 873, 875.) Hedge funds are "'usually structured as limited partnerships to
achieve maximum separation between ownership and management . . . .'" (United States
v. Lay (6th Cir. 2010) 612 F.3d 440, 447.)
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 4. DB Fund Services, LLC, formerly known as DB Hedgeworks, LLC

DB Fund Services, LLC, formerly known as DB Hedgeworks, LLC

(Hedgeworks), is a company that provided administrative services to Alki Partners under

a contract entitled "Fund Administration Agreement" dated January 1, 2002.

5. Bullfrog Research, LLC

Bullfrog Research, LLC (Bullfrog) became the general partner of Alki Partners in

September 2008. Bullfrog is also the assignee of certain claims and causes of action of

individuals who are limited partners of Alki Partners.

6. Alki Fund, Ltd.

Alki Fund, Ltd. (Alki Fund) is a Cayman Islands company, an "offshore hedge

fund."

7. Hedgeworks Fund Services Limited

Hedgeworks Fund Services Limited (HFSL) is a Cayman Islands limited liability

company. HFSL provided administrative services to Alki Fund under a contract entitled

"Administrative Services Agreement" dated August 1, 2005.

B. Summary Judgment and Summary Adjudication Rulings

In May 2014 the court issued the summary judgment ruling that is the basis for the

instant appeal. However, in March 2014 the court made several rulings on a separate

motion for summary judgment and summary adjudication. As a result of those March

2014 rulings, which are not challenged here, some of the entities and contracts noted ante

are no longer involved in this case.

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 For example, in the March 2014 ruling, the court granted summary judgment in

favor of HFSL on the grounds it was dissolved before plaintiffs' action was commenced.

Thus, HFSL is out of the case.

The court also granted summary adjudication in favor of Hedgeworks against Alki

Fund on the grounds no contract existed between them. As a result, the court dismissed

claims alleged by Alki Fund. Alki Fund is out of the case.

There are other important results of these March 2014 rulings. The administrative

services agreement dated August 1, 2005, between Alki Fund and HFSL is not relevant in

this appeal. That August 1, 2005 contract does not determine Hedgeworks's contractual

obligations to Alki Partners because the court has already adjudicated that Hedgeworks is

not a party to that contract, and that ruling is not challenged on appeal.

The only contract that is relevant here is the fund administration agreement dated

January 1, 2002, between Alki Partners and Hedgeworks. In their response to

Hedgeworks's separate statement of undisputed material facts, plaintiffs concede this

point, agreeing it is "undisputed" that the agreement is the contract for administrative

services between Hedgeworks and Alki Partners.2

With these preliminary matters clarified, the relevant facts are summarized below.

2 Plaintiffs' briefs create considerable confusion by frequently quoting and relying
on terms of the inapplicable Alki Fund-HFSL contract. As noted ante, the court's March
2014 summary judgment and summary adjudication rulings established that HFSL
(which was a party to that contract) is out of the case because it was dissolved before
plaintiffs filed suit, and Hedgeworks (which is in the case) was not a party to that
contract.
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 D. The Alki Partners Hedge Fund

Alki Partners was created to acquire, invest in, and sell or otherwise trade in

securities, defined broadly to include "investment instruments and vehicles of every kind

and nature, foreign or domestic, whether publicly or nonpublicly traded . . . ."

Alki Capital, the general partner of Alki Partners, was given vast authority in

running Alki Partners. For example, the limited partnership agreement gives Alki Capital

exclusive authority to determine the value of the partnership's assets:

"10.6 Valuation. The value of the assets and liabilities of the
Partnership shall be determined by the [g]eneral [p]artner in good
faith and such determination shall be conclusive and binding on all
of the [p]artners . . . ."

The limited partnership agreement also gives Alki Capital "full, exclusive and

complete authority in the management and control of the business of the

[p]artnership . . . and [it] shall make all decisions affecting the [p]artnership."

From 2002 to September 2008, Wilfong, as owner of Alki Capital, had the sole

authority to make investment decisions for Alki Partners.

Only wealthy and sophisticated investors were eligible to become limited partners

in Alki Partners. The minimum investment was $250,000. The offering was available

only to investors having a net worth in excess of $1.5 million. Before being accepted into

the limited partnership, an investor had to demonstrate that he or she was an "accredited

investor," sophisticated in financial and business matters generally and in investing in

securities.

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 The Alki Partners' offering circular warned potential investors in all upper case

letters, "THESE SECURITIES ARE SUBJECT TO A HIGH DEGREE OF RISK."

Elsewhere, the circular explained that the general partner "has broad discretion to employ

any [s]ecurities trading or investment techniques" many of which "are high-risk activities

that could result in substantial losses under certain circumstances." After providing

biographical information about Wilfong, the offering circular states, "The [p]artnership's

performance depends, to a great extent, on the ability and experience of Mr. Wilfong in

making investment decisions."

G. The Hedgeworks Fund Administration Agreement

Alki Partners entered into a contract with Hedgeworks entitled "Fund

Administration Agreement," dated January 1, 2002 (the Agreement). The Agreement

refers to Alki Partners as "Client" and to Hedgeworks as "Administrator." The

Agreement provides that "No provision of this Agreement may be amended, modified,

waived or discharged except as agreed to in writing by the parties."

Under the Agreement, Hedgeworks agreed to perform certain accounting and

administrative functions for Alki Partners. In the ordinary course of business, each

month Alki Partners (or its prime broker) would provide Hedgeworks with values for the

fund's assets.3 If the value of a particular asset was not available on the securities

exchange or market, or if Alki Partners believed the reported value was not indicative of

3 A prime broker executes trades for a hedge fund.
7
fair value, Alki Partners had the right under the Agreement to provide Hedgeworks its

own valuation. Schedule A, paragraph 2(d) of the Agreement provides in part:

"The value of assets will be recorded at their fair value as
determined in good faith by the Client in the absence of current
quotations or if Client[] concludes that such quotations are not
indicative of fair value by reason of illiquidity of a particular
security or other factors."

Consistent with this provision, Wilfong testified in deposition, "I'm the one that

valued it. Hedgeworks had nothing to do with the valuation."

In turn, Hedgeworks would take the asset values provided by Alki Partners, factor

in monthly expenses and any other adjustments, and calculate the net asset value (NAV)

of the fund. Under schedule A.2. of the Agreement, Hedgeworks was required to prepare

limited partner statements on a monthly basis. Based on the fund's NAV, Hedgeworks

would calculate individual investor balances and prepare monthly statements of account

that it would send to each limited partner investor.

Hedgeworks issued the last such statements in mid-February 2008 for the month

ending January 31, 2008. It is undisputed that these statements were accurate. The

witness plaintiffs designated as the person most knowledgeable about their claims could

not identify any situation where Hedgeworks failed to provide information Alki Partners

requested or did something prohibited by the Agreement. Wilfong testified the

statements Hedgeworks sent to investors were "100 percent" accurate.

H. The Vatas Trades, Collapse, and Settlement

RemoteMDX, Inc. (RMDX) sells tracking devices to monitor individuals in the

criminal justice system. (See Alki Partners, L.P. v. Vatas Holding GmbH (S.D.N.Y.

8
2011) 769 F.Supp.2d 478, 485.) In 2007 Wilfong became acquainted with Lars

Windhorst, who was managing a German company called Vatas Holding GmbH (Vatas).

Wilfong learned that Vatas was interested in purchasing large quantities of RMDX stock,

but was having difficulty doing so "because of the time difference and the structure of his

firm." Wilfong agreed to purchase RMDX stock through Alki Partners and then transfer

the stock to Vatas for a fee.

From April 2007 to February 2008, Wilfong caused Alki Partners to purchase

large quantities of RMDX stock with the expectation that Alki Partners would then resell

that RMDX stock to Vatas at a profit. The market price of RMDX stock, which was less

than $2.00 per share in April 2007, rose to a high of $4.24 on December 7, 2007, and

remained at prices between $3.50 and $4.00 per share in January and early February

2008.

Initially, Wilfong's investment strategy was very profitable. In 2007 Alki Partners

was up approximately 35 percent. Wilfong testified that during this period, "People were

starting to beat down my door to get in."

However, in February 2008, when about 80 percent of Alki Partners' holdings

were in RMDX stock—expected trades with Vatas did not close. Wilfong testified Vatas

"reneged their trades . . . ."

Within just a few days, RMDX stock price plummeted—from $3.09 per share on

February 11 to $1.52 per share on February 15. Wilfong testified in deposition, "[T]he

trades broke. Stock had collapsed."

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 With Alki Partners owning a large amount of high-priced RMDX stock with no

one to whom to sell it, Wilfong went to Germany to negotiate a resolution with Vatas.

Wilfong believed Vatas was supported "by a family . . . worth $8 billion. Vatas had over

a billion dollars worth of public assets that were shown." Wilfong thought the "trades

were going to settle out."

In late February 2008, Wilfong (through Alki Capital, among other entities) and

Vatas entered into a "confidential" settlement agreement entitled "Heads of Terms for

Settlement" (Settlement). In the Settlement, Vatas agreed to pay approximately $5

million no later than March 6, 2008, as "collateral." Additionally, Vatas granted Alki

Partners a "put option" for 3,441,000 shares of RMDX stock at $3.84 per share, due April

30, 2008.4

The Settlement contains a "Confidentiality" provision, stating the terms of

settlement "and all communications between the parties related directly or indirectly

thereto . . . are of a confidential nature and shall not be disclosed except to directors or

employees of either [p]arty with a need to know or to advisors under duty of

confidentiality to such [p]arty." In deposition testimony, Wilfong explained that Vatas

insisted on such confidentiality:

"I thought I was the only one that he [(Lars Windhorst, of Vatas)]
owed money to. Turns out later on we found out he owed money to
lots of people. And he wanted us—the only way he was going to
send us money is if I didn't tell my investors what was going on. [¶]

4 A put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an asset at an agreed price on or before a
particular date. The value of the 3,441,000 shares at $3.84 per share was $13,213,440.
10
 It was an absolute—that was his No. 1 thing. . . . I was highly
regulated. Last thing he wanted was to have U.S. regulatory
authorities coming in because he had his entity and he was trying to
juggle all these balls and keep them up. [¶] . . . [¶] . . . So he was
afraid if I went to my investors in February and told them exactly
what was going on . . . Vatas would be shut down. [¶] . . . So it
was—it was Vatas's deal that if we told anybody anything, we
wouldn't have gotten any money."

I. Wilfong Instructs Hedgeworks Not to Communicate with Investors

To maintain the confidentiality of the Settlement, Wilfong instructed Hedgeworks

"not to say anything." Wilfong and his lawyers "bound the administrators not to disclose

information to investors." In deposition testimony, Wilfong further explained:

"Q: What did you instruct the administrators to do if they got
questions from the investors about this stuff?

"A: I told them not to say anything.

"Q: Who did you tell that to?

"A: All of them. It was not my administrator's responsibility to ever
interface with my investors. That—that wasn't their job. That
was—they'd be breaking confidentiality agreements with me and
stuff; so I told them if any of my investors reached out to them,
direct them back to me.

"Q: And you had authority to give that instruction?

"A: Absolutely.

"Q: You expected them to obey that instruction?

"A: I did, and if they had—if they had broken that, it would have
gone back to Lars [Windhorst], we wouldn't have gotten any money
out of Vatas."

Wilfong instructed Hedgeworks to refer any investor inquiries to himself. An e-

mail Wilfong sent to Hedgeworks in June 2008 states:

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 "The counter party [(Vatas)] in the unsettled trades is making
progress and I am feeling more confident everyday. . . . If
[investors] call you please remember that the settlement agreement is
confidential and refer them to either me or the fund's attorneys . . . ."

J. Wilfong Instructs Hedgeworks to Not Issue NAV's

Pending full performance of the Vatas Settlement, Wilfong directed Hedgeworks

to not prepare NAV's to send to investors. In deposition testimony, a Hedgeworks

representative testified:

"The reason why we didn't issue an NAV is because we were
directed by Mr. Wilfong to not issue investor statements to the
investors."

In Wilfong's own words, he "froze the NAV." He further explained in his

deposition testimony:

"'If the counterparty [(Vatas)] didn't follow through [on the
Settlement], the loss was material enough that I didn't feel
comfortable issuing official NAV's. I spoke to our administrators
and told them I was going to suspend issuing official NAV's unless
this situation was resolved.' [¶] . . . [¶] . . . [As] . . . the GP [general
partner], . . . I froze the NAVs until this problem was fixed."

In April 2008 Alki Capital sent a letter to investors, explaining, "Our fund recently

experienced settlement issues with a number of trades we executed with a single

counterparty," and "[w]e entered into a written agreement with the counterparty to protect

us against losses." The letter also stated that Alki Capital "will not be releasing

performance data pending the resolution of these settlement issues."

Wilfong also spoke to the investors by telephone. He testified, "If they had

questions, I answered what I could, let them know where we were, what was going

on . . . we'd received some money, that I think we're going to be made whole, that . . . I

12
had a confidentiality agreement with these people and that I didn't want to break it

because I want to get all our money back." Wilfong decided it was not appropriate to

report a value for Alki Partners' assets (and therefore it did not provide Hedgeworks with

asset values) unless Vatas fully performed under the Settlement. In deposition testimony,

Wilfong explained that even though Alki Partners' auditor, PriceWaterhouse, valued the

options Vatas had given in the Settlement, he determined it was inappropriate to use

those values to calculate NAV for the investors:

"He [(Vatas)] wasn't fulfilling his obligations. . . . I didn't feel
comfortable until—we got our money 100 percent that the NAV
should go out. I thought it would be . . . fraudulent for me to go out
and represent an NAV when we had half the assets of our fund in
these . . . instruments. [¶] I wanted to get the money in . . . before I
put out a real NAV."

In a letter to an investor, Wilfong explained, "After the original [Vatas] agreement

was in place my initial intention was to put out Alki's official NAV as normal; however,

with the underlying security [RMDX stock] continuing to go down I didn't feel

comfortable and thought it would be unethical to issue official NAV's."

In the ordinary course of business, Hedgeworks would have received asset values

at the end of February 2008 and used them to calculate NAV's and investor balances to

distribute by mid-March. However, without Alki Partners providing or approving the

asset value of the RMDX stock and put options in the Settlement, Hedgeworks could not

calculate the NAV or the investors' respective interests in the fund.

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 L. Hedgeworks Resigns

Vatas paid Alki Partners another $2 million in June 2008. However, Vatas did not

pay the remaining $1 million collateral, nor did Vatas honor the put options it granted in

the Settlement.

In July 2008 Hedgeworks notified Alki Partners it was immediately terminating its

administration services "in light of recent events" with the Alki Partners' funds "and due

to the lack of transparency available to us." Although the Agreement provided for 60-

days' notice of termination, Alki Partners agreed to the immediate termination.

M. Procedural History

1. Plaintiffs' first amended complaint

Alki Partners, Alki Fund, and Bullfrog (plaintiffs) sued Hedgeworks and HFSL in

a first amended complaint as follows:

1. Alki Fund alleged breach of contract;

2. Alki Partners alleged breach of contract;

3. As assignee of investors' claims, and as an alleged third party
beneficiary of the contract, Bullfrog alleged breach of contract;

4. All plaintiffs alleged breach of fiduciary duties.

More specifically, the first amended complaint alleged Hedgeworks breached its

contractual duties in the following respects:

1. "[F]ailing and refusing to calculate NAVs for the investors'
accounts;"

2. "[F]ailing and refusing to alert investors and/or agents of the
funds of their inability to calculate NAVs and the reasons therefor;"

14
 3. "[F]ailing and refusing to communicate with investors in
response to their direct inquiries;"

4. "[M]aintaining as confidential the facts behind its inability to
calculate NAVs for the investors' accounts."

2. Hedgeworks's cross-complaint

Hedgeworks filed a first amended cross-complaint containing allegations against

Alki Partners, Alki Capital, and Wilfong for express contractual indemnity and equitable

indemnity.

3. Demurrer to first amended complaint

The court sustained a demurrer to the breach of fiduciary duty cause of action,

with leave to amend.5 Plaintiffs did not amend and have not challenged that ruling here.

4. March 2014 rulings

Subsequently, as discussed ante, the court dismissed HFSL from the action

because HFSL was dissolved before plaintiffs commenced the lawsuit. Plaintiffs do not

challenge this ruling.

Based on evidence that Hedgeworks was not a party to the fund administration

agreement for the Cayman Islands-based Alki Fund, Ltd, the court dismissed the claims

of Alki Fund, Ltd. (and its investors, through Bullfrog). In issuing this ruling, the court

determined that the administrative services agreement dated August 1, 2005, "is the

hedge fund administration contract relating to Alki Fund, Lt[d]." This ruling is also not

challenged on appeal.

5 The record does not include the order sustaining the demurrer; however, the
parties' briefs agree on this point.
15
 As a result of these rulings, only the second cause of action (breach of contract by

Alki Partners against Hedgeworks) and the third cause of action (breach of contract by

Bullfrog against Hedgeworks) remained in the case.

5. Motion for summary judgment

In April 2014 Hedgeworks filed a motion for summary judgment, asserting

(among other grounds) the undisputed evidence established it did not breach the

Agreement because: (1) By not providing Hedgeworks with a value of the fund's assets,

Alki Partners did not fulfill a condition precedent to Hedgework's obligation to calculate

NAV's; and (2) Alki Partners instructed Hedgeworks to not communicate with investors,

and therefore cannot assert Hedgework's compliance with such directions breached the

Agreement.

Plaintiffs filed opposition. Relying heavily on provisions in the (inapplicable)

2005 administrative services agreement between Alki Fund, Ltd., and HFSL, they

asserted Alki Partners "had nothing to do with valuing the assets" and Hedgeworks was

contractually obligated to value the assets and calculate NAV's. Plaintiffs also argued the

"anti-fraud safeguards provided by a fund administrator" obligated Hedgeworks to

communicate with the investors, despite Alki Partners' contrary instructions to

Hedgeworks. Plaintiffs also asserted the RMDX stock trades were the product of a

fraudulent scheme between Hedgeworks and Wilfong to "cook the books" by increasing

Hedgeworks's own profitability, making it "a more attractive candidate to be acquired by

a larger organization."

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 In reply, Hedgeworks asserted its contractual duties were determined by the

Agreement alone, which created no duty to police the discretionary decisions of Alki

Partners. Hedgeworks's reply noted plaintiffs had misquoted provisions in the

Agreement and relied on terms in the Cayman Islands contracts that were inapplicable.

The court conducted a hearing. As the following colloquy shows, plaintiffs'

counsel agreed the material facts were undisputed:

"The Court: [T]his appears to be a purely legal issue. You're not
disagreeing on what occurred here. You're not disagreeing that
Wilfong told them not to—didn't give them the information they
needed to write the reports. And he told them not to send reports.
He told them not to have direct communication with the investors. I
mean, you're both agreeing that that's what occurred. The question
is, is that a breach of contract? That's legal. That's not a triable
issue. You agree on what the facts are.

"Mr. Shalvoy: Well, and we submit the evidence submitted, the
PriceWaterhouse fraud risk assessment memo, clearly establishes
that the only reason for this contract is to protect investors.

"The Court: All right. Thank you."

After taking the matter under submission, the court granted summary judgment to

Hedgeworks on several alternative grounds. Among other rulings, the court determined

"Hedgeworks['s] performance obligations under the contract were excused by failure of a

condition precedent. Specifically, the evidence shows that Hedgeworks had no

obligation to prepare investor statements because Alki [Partners] did not provide the

necessary value upon which those calculations would be based . . . ."

The court also determined the "undisputed material facts and evidence establish

that Alki [Partners] instructed Hedgeworks not to issue statements to Alki [Partners']

17
investors, thus waiving Hedgeworks['s] performance and Alki [Partners] is estopped from

now contending that Hedgeworks breached its contract with Alki [Partners] by following

Alki [Partners'] own instructions."

The court also granted summary judgment to Hedgeworks on the third cause of

action by Bullfrog because those claims "are derivative claims belonging to Alki

[Partners]."

The Agreement provides Hedgeworks shall not be liable to Alki Capital "except to

the extent such losses result from willful misconduct, gross negligence, fraud or

dishonesty by Administrator in the performance of its obligations and duties . . . ." The

court also granted summary judgment on the grounds that "even if Hedgeworks'

following of Alki [Partners'] instructions could be interpreted to constitute a technical

breach . . . Alki [Partners'] claims still fail because of the . . . provision limiting

Hedgeworks['] liability."

Additionally, the court ruled, "Plaintiffs' claims also fail for admitted lack of loss

causation."

Later, the court awarded Hedgeworks $3,027,237.96 in attorney fees based on an

indemnity provision in the Agreement.

After Hedgeworks dismissed its first amended cross-complaint without prejudice,

this appeal followed.6

6 The parties do not address whether the dismissal without prejudice renders the
judgment nonappealable. Because the record does not indicate the dismissal was
18
 DISCUSSION

I. THE STANDARD OF REVIEW

"'We review a grant of summary judgment de novo and decide independently

whether the facts not subject to triable dispute warrant judgment for the moving party as

a matter of law.'" (Griffin v. The Haunted Hotel, Inc. (2015) 242 Cal.App.4th 490, 498.)

II. THE COURT CORRECTLY GRANTED SUMMARY JUDGMENT

A. Appellants Have Forfeited Their Argument by Citing Their Own Points and
Authorities Rather Than Evidence

We begin by noting a few cardinal principles of appellate review. We start with

the presumption the judgment is correct. (In re Marriage of Arceneaux (1990) 51 Cal.3d

1130, 1133.) An appellant has the burden to demonstrate error. (Denham v. Superior

Court (1970) 2 Cal.3d 557, 564.) An appellant who fails to cite accurately to the record

forfeits the issue or argument on appeal that is presented without the record reference.

(City of Lincoln v. Barringer (2002) 102 Cal.App.4th 1211, 1239 (City of Lincoln).)

California Rules of Court,7 rule 8.204(a)(1)(C) provides that each brief must

"[s]upport any reference to a matter in the record by a citation to the volume and page

number of the record where the matter appears." The purpose of this rule is to enable

appellate justices and staff attorneys to locate relevant portions of the record

expeditiously. (City of Lincoln, supra, 102 Cal.App.4th at p. 1239, fn. 16.)

accompanied by any agreement for future litigation, the judgment is sufficiently final to
be appealable. (See Kurwa v. Kislinger (2013) 57 Cal.4th 1097, 1105.)

7 All references to rules are to the California Rules of Court.
19
 Plaintiffs did not comply with rule 8.204(a)(1)(C). In the "Argument" section of

the opening brief, they assert, "Alki [Partners] had no obligation to value fund assets."

To support that assertion, plaintiffs cite only to their trial court points and authorities.

The opening brief also asserts, "a triable issue of fact exists whether Alki [Partners]

waived [Hedgeworks's] performance by instructing it not to issue monthly statements."

As support for this assertion, plaintiffs again cite only to their own points and authorities

filed in opposition to the motion for summary judgment.

Citing points and authorities filed in the trial court is not appropriate support for

factual assertions in a brief. Points and authorities are not presented under penalty of

perjury. Matters set forth in points and authorities are not evidence. (Brehm

Communities v. Superior Court (2001) 88 Cal.App.4th 730, 735.) Evidence appears

elsewhere—in deposition testimony, discovery responses, and declarations. The

"Argument" section in the appellants' opening brief should have cited to those pages of

the record.8

By failing to support the factual assertions in their legal arguments with citations

to the evidence, plaintiffs have forfeited their argument the court erred in granting

8 The factual portion of appellants' opening brief does contain citations to evidence.
However, such citations do not cure the failure to cite evidence in the argument section of
the brief, and we will not pick and choose the portions of the brief in the statement of
facts that we may think are applicable to each assertion in the argument. Rule
8.204(a)(1)(C) is intended to enable the reviewing court to locate relevant portions of the
record "without thumbing through and rereading earlier portions of a brief." (City of
Lincoln, supra, 102 Cal.App.4th at p. 1239, fn. 16.) To provide record citations for
alleged facts at some points in a brief, but not at others, frustrates the purpose of that rule,
and courts will decline to consider any factual assertion unsupported by record citation at
the point where it is asserted. (Ibid.)
20
summary judgment. (City of Lincoln, supra, 102 Cal.App.4th at p. 1239 [arguments not

supported by adequate citations to record need not be considered on appeal].) In

reviewing a ruling on a motion for summary judgment, "de novo review does not obligate

us to cull the record for the benefit of the appellant in order to attempt to uncover the

requisite triable issues. As with an appeal from any judgment, it is the appellant's

responsibility to affirmatively demonstrate error and, therefore, to point out the triable

issues the appellant claims are present by citation to the record and any supporting

authority." (Lewis v. County of Sacramento (2001) 93 Cal.App.4th 107, 116,

disapproved on other grounds in Kaufman & Broad Communities, Inc. v. Performance

Plastering, Inc. (2005) 133 Cal.App.4th 26, 41-42.)

B. The Court Correctly Entered Summary Judgment

Notwithstanding plaintiffs' forfeiture, we have examined the record and conclude

the court properly entered summary judgment.

1. Failure to calculate NAV

Plaintiffs' first amended complaint alleges Hedgeworks breached the Agreement

by "failing and refusing to calculate NAVs for the investors' accounts." However, the

undisputed evidence is that Hedgeworks's ability to calculate NAV was dependent upon

Alki Partners providing values for the fund's assets. In deposition, Wilfong testified,

"Hedgeworks had nothing to do with the valuation." He explained that Alki Partners was

responsible for providing asset values to Hedgeworks:

"Q: So I wanted to ask you about that part of Schedule A that says:
[¶] 'The value of assets will be recorded at their fair value as

21
 determined in good faith by the client.' [¶] You understood that that
was part of the function of Alki Partners?

"A: That was my function, yeah, as the—the GP, as the managing—
I'm the one that came up with the valuations.

"Q: And before you—in order to do a calculation of net asset value,
you have to have a valuation from someone, correct?

"A: Correct. Yes."

Wilfong decided to not value the put options in the Vatas settlement until the

situation with Vatas was resolved, and therefore he did not provide Hedgeworks with a

value for those assets. As Wilfong explained in a letter addressed to an investor:

"After the original [Vatas] agreement was in place my initial
intention was to put out Alki Partners' official NAV as normal;
however, with the underlying security continuing to go down, I
didn't feel comfortable and thought it would be unethical to issue
official NAV's. I spoke to our administrators and told them I was
going to suspend issuing official NAV's until this situation was
resolved . . . ." (Italics added.)

In deposition, Wilfong testified he directed Hedgeworks to not calculate NAV,

stating, "I froze the . . . NAVs until this problem was fixed." Wilfong further explained:

"Q: So I don't understand why the NAVs weren't prepared and sent
out. [¶] . . .

"A: . . . I didn't feel comfortable until—until we got our money 100
percent that the NAV should go out. I thought it would be
fraudulent for me to go out and represent an NAV when we had half
the assets of our fund in these—these . . . instruments. [¶] I wanted
to get the money in and—in it before I put out a real NAV."

Based on this evidence, the court properly determined the undisputed material

facts establish Hedgeworks did not breach the Agreement by not calculating NAV's for

the investors' accounts. A party's failure to perform a condition precedent will preclude

22
an action for breach of contract. (Richman v. Hartley (2014) 224 Cal.App.4th 1182,

1192.) Where one party's obligation is dependent on the prior proper performance of the

other party, and that other party does not perform, the obligation is excused. (Mainieri v.

Magnuson (1954) 126 Cal.App.2d 426, 429 (Mainieri).)

Here, the undisputed evidence established Hedgeworks could not calculate NAV

unless and until Alki Partners provided Hedgeworks with the value of the fund's assets

(consisting mostly of RMDX stock and the value of the put options in the Settlement).

The undisputed evidence also established that Alki Partners refused to supply such data.

The court therefore correctly determined that Hedgeworks's contractual obligation to

calculate and disseminate NAV's was excused for failure of the condition precedent.

(Mainieri, supra, 126 Cal.App.2d at p. 429 ["The failure of appellant to perform this

condition precedent excused respondent's performance which was dependent on it."].)

Plaintiffs' arguments to the contrary are not persuasive. First, they assert Alki

Partners "had no obligation to value fund assets." Plaintiffs further contend, "the fund

administration agreements were clear in this regard." However, all the relevant

evidence is to the contrary. Without contradiction, Wilfong testified that pending Vatas's

performance under the Settlement, the fund's assets could not be appropriately valued:

"'If the counterparty [(Vatas)] didn't follow through, the loss was
material enough that I didn't feel comfortable issuing official NAVs.
I spoke to our administrators and told them I was going to suspend
issuing official NAVs until this situation was resolved.' [¶] . . .
[¶] . . . [T]he stock—it went from a small loss to a massive loss, and
I think . . . at that time I made the decision . . . it would
be . . . inappropriate to be putting out the NAVs like there was—
there were no problems . . . ."

23
 Section 2(d) of the Agreement provides that under such circumstances—i.e.,

where Alki Partners determined market quotations were not indicative of an asset's fair

value—Alki Partners was solely responsible for valuing fund assets:

"The value of assets will be recorded at their fair value as
determined in good faith by the Client in the absence of current
quotations or if Client[] concludes that such quotations are not
indicative of fair value by reason of illiquidity of a particular
security or other factors. Independent appraisals generally will not
be obtained in these situations. Securities or other assets that are not
readily marketable generally will be valued as determined in good
faith by the Client based upon the most appropriate information
available at that time."9

Ignoring section 2(d) of the Agreement, plaintiffs instead quote provisions in the

August 1, 2005 administrative services agreement between Alki Fund and HFSL. That

contract states the administrator will "calculate the value of the assets and liabilities of

the Fund."

However, plaintiffs cannot rely on the August 1, 2005 administrative services

agreement to create a triable issue of fact here because (1) Hedgeworks was not a party to

that 2005 agreement; (2) plaintiffs concede as an "undisputed" fact the Agreement (dated

January 1, 2002) "is the contract for the provision of hedge fund administration services"

to Alki Partners; and (3) the trial court dismissed all of Alki Fund's claims in this case, a

ruling plaintiffs do not challenge on appeal.

9 Plaintiffs' briefs contains only an incomplete quotation of the relevant provision in
the Agreement about valuation. They omit and ignore the contractual language: "The
value of assets will be recorded at their fair value as determined in good faith by the
Client in the absence of current quotations or if Client[] concludes that such quotations
are not indicative of fair value by reason of illiquidity of a particular security or other
factors."
24
 Plaintiffs also assert a triable issue exists that Hedgeworks was obligated to value

fund assets because "[t]here is an inherent conflict in allowing Alki [Partners] to value

assets because the fund manager's compensation is tied to the value of the assets he is

managing." However, any such conflict, even assuming it exists, does not negate

unambiguous contract language in the Agreement that "[t]he value of assets will be

recorded at their fair value as determined in good faith by the Client in the absence of

current quotations or if Client[] concludes that such quotations are not indicative of fair

value . . . ." (See Estate of Bodger (1955) 130 Cal.App.2d 416, 425 ["'It is not the

province of the court to alter a contract by construction or to make a new contract for the

parties; its duty is confined to the interpretation of the one which they have made for

themselves, and, in the absence of any ground for denying enforcement, to enforcing or

giving effect to the contract as made . . . without regard to its wisdom or folly . . . .'"].)

Plaintiffs further contend it is undisputed Hedgeworks could value the RMDX

stock itself. However, the put options in the Vatas Settlement were also fund assets. The

Alki Partners' limited partnership agreement defines "securities" in which the fund could

invest to include "options" and "puts." Moreover, the witness plaintiffs designated as the

person most knowledgeable about their claims, Hilaire Atlee, testified the Vatas put

options were fund assets:

"Q: Is a put option an asset?

"Mr. Shalvoy: Same objection.

"A: It is.

"Q: And the owner of this asset would be the grantee of the option?

25
 "A: Yes.

"Q: So the owner would be [Alki Partners]?

"Mr. Shalvoy: Same objection.

"A: Correct."

Without contradiction, Wilfong testified he was unable to value the Vatas put

options, stating, "I thought it would be . . . fraudulent for me to go out and represent an

NAV when we had half the assets of our fund in these—these . . . instruments. [¶] I

wanted to get the money in and—in it before I put out a real NAV."10

2. Failure to communicate with investors

Under the Agreement, Hedgeworks was required to engage in "[i]nvestor

[r]elations" and communicate with investors on an "[a]s [n]eeded" basis and "only when

specifically instructed by Client."

Plaintiffs' first amended complaint alleges Hedgeworks breached the Agreement

by failing to communicate with investors. More specifically, the first amended complaint

alleges Hedgeworks breached the Agreement by failing to (1) "communicate with

investors in response to their direct inquiries," and (2) "alert investors and/or agents of

the funds of their inability to calculate NAVs and the reasons therefor." The first

10 In their reply brief, plaintiffs cite a July 2008 e-mail from Hedgeworks to Wilfong
as evidence Hedgeworks "admitted tht it never considered the Vatas 'agreement' to be a
fund asset." However, that e-mail contains no such admission. In the e-mail,
Hedgeworks explains it has been unable to calculate a NAV since January 31, 2008,
because the outcome of the Vatas Settlement remained uncertain and "we cannot report
unsubstantiated numbers to your investors."
26
amended complaint also alleges Hedgeworks breached the Agreement by "maintaining as

confidential the facts behind its inability to calculate NAVs for the investors' accounts."

The court properly determined these claims fail as a matter of law because the

undisputed evidence establishes Alki Partners instructed Hedgeworks to not send

monthly statements to investors and to not communicate with investors. Wilfong

testified the Vatas Settlement was confidential, and "if we told anybody anything, we

wouldn't have gotten any money." Wilfong testified that Hedgeworks "had no legal

authority to tell my investors anything." Wilfong and his lawyers "bound the

administrators not to disclose information to investors." Alki Partners instructed

Hedgeworks to not communicate with investors:

"Q: What did you instruct the administrators to do if they got
questions from the investors about this stuff?

"A: I told them not to say anything.

"Q: Who did you tell that to?

"A: All of them. It was not my administrator's responsibility to ever
interface with my investors. That—that wasn't their job. That
was—they'd be breaking confidentiality agreements with me and
stuff, so I told them if any of my investors reached out to them,
direct them back to me.

"Q: And you had authority to give that instruction?

"A: Absolutely.

"Q: You expected them to obey that instruction?

"A: I—I did, and if they had . . . broken that, it would have gone
back to Lars [Windhorst], we wouldn't have gotten any money out of
Vatas."

27
 The trial court correctly determined that Hedgeworks did not breach the

Agreement by following Alki Partners' instructions to not communicate with investors.

To begin with, other than sending monthly NAV statements to investors (discussed ante),

the Agreement provides Hedgeworks will communicate with investors "only when

specifically instructed by Client." Alki Partners specifically instructed Hedgeworks to

not communicate. As quoted above, Wilfong told his administrators to refer all investor

inquiries to himself. In an e-mail dated June 23, 2008, Wilfong reminded Hedgeworks,

"If they [(investors)] call you please remember that the settlement agreement [(with

Vatas)] is confidential and refer them to either me or the fund's attorneys . . . ."

The court correctly determined Hedgeworks cannot breach its Agreement with

Alki Partners by complying with Alki Partners' own directions. In analogous

circumstances, the court in Sutherland v. Barclays American/Mortgage Corp. (1997) 53

Cal.App.4th 299 (Sutherland) stated:

"'We know of no principle of law . . . which will permit a party to a
contract, who is entitled to demand the performance by the other
party of some act within a specified time, and who has consented to
the postponement of the performance to a time subsequent to that
fixed by the contract, and where the other party has acted upon such
consent, and in reliance thereon has permitted the contract time to
pass without performance, to subsequently recall such consent and
treat the non-performance within the original time as a breach of the
contract.'" (Sutherland, supra, 53 Cal.App.4th at pp. 311-312.)11

11 Plaintiffs attempt to distinguish Sutherland on the grounds the Agreement here
contains a no-oral modification clause, whereas there is no mention of such a provision in
the contract involved in Sutherland. This argument fails because the court in Sutherland
rejected a similar argument. (Sutherland, supra, 53 Cal.App.4th at p. 311 [declaring
"without merit" the position that a valid modification had to be in writing].) Moreover,
28
 Plaintiffs do not deny or dispute that Alki Partners directed Hedgeworks to not

communicate with the investors. Instead, they contend Hedgeworks agreed to not

communicate with investors to "prevent the collapse of the Alki [Partners'] funds" and

thus increase Hedgeworks's own value and performance bonus. In their reply brief,

plaintiffs assert, "It is also reasonable to infer that [Hedgeworks] did not disclose the

RMDX trading problems in order not to alarm investors and derail Wilfong's efforts to

raise $100 million."

Plaintiffs also contend a triable issue exists whether Hedgeworks failed to

communicate with investors "to further its own financial self interest" and not because of

any instruction from Alki Partners. They claim that in 2005, Hedgeworks was losing

money and decided to "cook Alki [Partners'] books" to increase Hedgeworks's fees and

make it a more attractive acquisition for Deutsche Bank. Plaintiffs assert the evidence

reasonably shows Hedgeworks was in "collusion" with Wilfong to further its own

financial interests at the investors' expense and loss. They essentially assert Wilfong and

Hedgeworks conspired to create false "'pricing memos'" that "grossly inflated the asset

prices in the Alki [Partners'] accounts." Plaintiffs contend the evidence shows

Hedgeworks agreed to help Wilfong hide huge investment losses from the investors.

Plaintiffs also contend the evidence is reasonably susceptible to an inference that

Hedgeworks did not inform investors of the RMDX problems in order to secure its own

$22 million performance bonus as it anticipated being acquired by Deutsche Bank.

contrary to plaintiffs' assertion, Wilfong's instructions to not communicate were given
both orally and in a writing, an e-mail.
29
 In this action for alleged breach of contract, all of these assertions are unavailing.

The trial court dismissed plaintiffs' breach of fiduciary duty claims against Hedgeworks,

and plaintiffs do not challenge that ruling on appeal. Because plaintiffs' claims are

limited to those alleging breach of the Agreement, Hedgeworks's motives are irrelevant.

(See Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516

["the law generally does not distinguish between good and bad motives for breaching a

contract"].) A party's purported motive to breach a contract is not relevant to the issue of

whether there has been a breach. If failing to communicate with investors was not

otherwise a breach of contract, there was no breach even if Hedgeworks's failure to

communicate with investors stemmed from a bad motive, greed, or other self-interest.

(JRS Products, Inc. v. Matsushita Electric Corp. of America (2004) 115 Cal.App.4th 168,

182 ["motive, regardless of how malevolent, remains irrelevant to a breach of contract

claim"].)

3. Immediate resignation

The Agreement provides it may be "terminated by either party hereto upon at least

60 days' written notice . . . ." On July 16, 2008, Hedgeworks wrote to Alki Capital,

stating it was terminating its services under the Agreement "effective immediately." The

same day, after receiving the letter, Wilfong signed underneath a line stating,

"Acknowledged and Agreed." In deposition testimony, Wilfong stated he agreed to the

resignation.

Plaintiffs contend the court erroneously granted summary judgment because there

is a triable issue Hedgeworks breached the Agreement by not giving 60-days' notice of

30
termination. However, plaintiffs' first amended complaint does not plead the immediate

resignation as constituting a breach of contract. Because the pleadings set the boundaries

of the issues to be resolved in a motion for summary judgment, Hedgeworks was not

required to refute liability on a theory not included in the operative complaint. (Hutton v.

Fidelity National Title Co. (2013) 213 Cal.App.4th 486, 499.) Moreover, the undisputed

evidence is Alki Partners consented in writing to the immediate resignation.

Accordingly, the court properly entered summary judgment against Bullfrog because all

of Alki Partners' claims alleged in the first amended complaint fail as a matter of law.

III. THE COURT ERRED IN AWARDING ATTORNEY FEES

A. Factual Background

There is no prevailing party attorney fees clause in the Agreement. After the court

granted summary judgment, Hedgeworks sought $3,027,237.96 in attorney fees under an

indemnity provision in the Agreement, which provides in part:

"5. Standard of Care. Neither [Hedgeworks] nor any of its
affiliates, members, officers, directors, employees or agents, shall be
liable to [Alki Partners] or the Account for any acts or omissions or
any error of judgment or for any loss suffered by the Account in
connection with the subject matter of this Agreement, except to the
extent such losses result from willful misconduct, gross negligence,
fraud or dishonesty by [Hedgeworks] in the performance of its
obligations and duties, or by reason of [Hedgework's] reckless
disregard of its obligations and duties hereunder. [Alki Partners]
shall indemnify [Hedgeworks] . . . against any and all costs, losses,
claims, damages or liabilities, joint or several, including without
limitation, reasonable attorneys' fees and disbursements, resulting in
any way from the performance or non-performance of
[Hedgeworks's] duties hereunder, except those resulting from the
willful misconduct, gross negligence, fraud or dishonesty of
[Hedgeworks] or [Hedgeworks's] reckless disregard of its obligations
and duties hereunder, and in the case of criminal proceedings, unless

31
 [Hedgeworks] had reasonable cause to believe its actions
unlawful . . . .

"Notwithstanding any of the foregoing to the contrary, the provisions
of this paragraph 5 shall not be construed so as to relieve
[Hedgeworks] of, or provide indemnification with respect to, any
liability to the extent (but only to the extent) that such liability may
not be waived, limited or modified under applicable law or that such
indemnification would be in violation of applicable law, but shall be
construed so as to effectuate the provisions of this paragraph 5 to
the fullest extent permitted by law."

In its attorney fee motion, Hedgeworks stated it was not seeking attorney fees

incurred in defending any third party claim. Rather, Hedgeworks explained it was

seeking "only to recover the attorneys' fees it spent defending against the claims

unsuccessfully brought against it by its contractual counterparty, Alki [Partners]."

Hedgeworks asserted this indemnity provision afforded a right to prevailing party

attorney fees in an action between the parties to the contract for its alleged breach.

Plaintiffs did not challenge the reasonableness of the amount sought (over $3

million), but argued: (1) the Agreement lacked an attorney fee provision for the

prevailing party in litigation on the contract itself, and (2) recovery of attorney fees under

the indemnity provision required Hedgeworks to first prevail on its cross-complaint for

indemnity. The court rejected plaintiffs' arguments and awarded Hedgeworks the entire

$3,027,237.96 it requested.

B. The Standard of Review

Interpretation of a written contract is a question of law for the court unless that

interpretation depends upon resolving a conflict in properly admitted extrinsic evidence.

(City of Hope National Medical Center v. Genetech, Inc. (2008) 43 Cal.4th 375, 395

32
(Genetech).) Here, the trial court interpreted the Agreement without considering any

extrinsic evidence. Therefore, we exercise our independent judgment in interpreting the

indemnity provision, giving no deference to the trial court's ruling. (Rideau v. Stewart

Title of California., Inc. (2015) 235 Cal.App.4th 1286, 1295 (Rideau).)

C. Forfeiture

There is one other preliminary issue. As explained post, we conclude the court

erroneously interpreted the third party indemnity provision in the Agreement to provide a

right to prevailing party attorney fees in an action between the parties to the Agreement

for breach. In the opening brief, plaintiffs do not make this argument, instead asserting

the court erred in awarding fees without first adjudicating the merits of Hedgeworks's

cross-complaint for indemnity.

Generally, issues not raised in the opening brief are forfeited. (See Reyes v. Kosha

(1998) 65 Cal.App.4th 451, 466, fn. 6.) However, "[i]t is important to remember . . . that

the purpose of this general rule is to give the trial court and parties an opportunity to

correct an error that could be corrected by some means short of an opposite outcome in

the trial court." (Woodward Park Homeowners Assn., Inc. v. City of Fresno (2007) 150

Cal.App.4th 683, 712 (Woodward Park).) Thus, as an exception to this general rule, the

appellate court has discretion to consider an issue raised for the first time on appeal

where the relevant facts are undisputed and could not have been altered by the

presentation of additional evidence in the trial court. (Tsemetzin v. Coast Federal

Savings & Loan Assn. (1997) 57 Cal.App.4th 1334, 1341, fn. 6.) "It makes no difference

33
that the issue was first raised on appeal by the court rather than the parties, as long as the

parties have been given a reasonable opportunity to address it." (Ibid.)

The attorney fee issue we are now considering falls within this exception. The

question is whether the Agreement provides for an award of attorney fees to the

prevailing party in an action for breach between the parties to the Agreement. As noted,

here this is an issue of law. (Genetech, supra, 43 Cal.4th at p. 395.) Plaintiffs' failure to

raise this issue in their opening brief "does not bar our consideration of it if the parties

have had a fair opportunity to present their positions." (Woodward Park, supra, 150

Cal.App.4th at p. 714.) Before oral argument, we asked the parties to submit

supplemental briefs on this issue, which we have considered.

D. The Indemnity Provision Is Not an Attorney Fee Clause

"Generally, indemnity is defined as an obligation of one party to pay or satisfy the

loss or damage incurred by another party." (Rideau, supra, 235 Cal.App.4th at p. 1294.)

"A contractual indemnity provision may be drafted either to cover claims between the

contracting parties themselves, or to cover claims asserted by third parties." (Ibid.)

Indemnity agreements are construed under the same rules that govern the

interpretation of other contracts. (Myers Building Industries, Ltd. v. Interface

Technology, Inc. (1993) 13 Cal.App.4th 949, 969 (Myers).) Accordingly, the contract

must be interpreted to "give effect to the mutual intention of the parties . . . ." (Civ.

34
Code,12 § 1636.) The intention of the parties is to be ascertained from the "clear and

explicit" contract language. (§ 1638.)

Generally, an indemnification provision allows one party to recover costs incurred

defending actions by third parties, not attorney fees incurred in an action between the

parties to the contract. (Rideau, supra, 235 Cal.App.4th at p. 1298.) Courts look to

several indicators to distinguish third party indemnification provisions from provisions

for the award of attorney fees incurred in litigation between the parties to the contract.

The key indicator is an express reference to indemnification. A clause that contains the

words "indemnify" and "hold harmless" generally obligates the indemnitor to reimburse

the indemnitee for any damages the indemnitee becomes obligated to pay third persons—

that is, it relates to third party claims, not attorney fees incurred in a breach of contract

action between the parties to the indemnity agreement itself. (Carr, supra, 166

Cal.App.4th at p. 20.)

Courts also examine the context in which the language appears. Generally, if the

surrounding provisions describe third party liability, the clause will be construed as a

standard third party indemnification provision. (Myers, supra, 13 Cal.App.4th at p. 970.)

The court will not infer that the parties intended an indemnification provision to cover

attorney fees between the parties if the provision "'does not specifically provide for

attorney's fees in an action on the contract . . . .'" (Ibid.; see also Rideau, supra, 235

Cal.App.4th at p. 1298 ["The general rule is that the specification of attorney fees as an

12 All statutory references are to the Civil Code unless otherwise specified.
35
item of loss in a third party claim indemnity provision . . . 'does not constitute a

provision for the award of attorney fees in an action on the contract . . . .'"].)

For example, language stating, "Seller . . . agrees to indemnify and save buyer . . .

harmless from any and all losses . . . including . . . reasonable attorney's fees . . . arising

from any cause or for any reason whatsoever" (Building Maintenance Service Co. v. AIL

Systems, Inc. (1997) 55 Cal.App.4th 1014, 1022) does not provide for attorney fees in an

action between the parties for breach of contract. (Id. at p. 1030.) In such circumstances,

"there is no language . . . which reasonably can be interpreted as addressing the issue of

an action between the parties on the contract." (Ibid.)

Similarly, an indemnification clause in which one party promised to "indemnify"

the other from "'any, all, and every claim' which arises out of 'the performance of the

contract'" (Myers, supra, 13 Cal.App.4th at p. 974) deals only with third party claims, and

cannot support an award of attorney fees in an action for breach of contract between the

parties to the agreement. (Ibid.) The Myers court held that considering the ordinary

meaning of the words "indemnify" and the context of the provisions, the contract could

not be construed as separately providing for attorney fees in an action between the

parties. (Ibid.) The Myers court determined the indemnity provision there did not afford

a right to attorney fees incurred in breach of contract litigation between the parties to the

agreement, even though, as here, the contract provided the indemnity agreement was to

be enforced "[t]o the fullest extent permitted by law." (Id. at pp. 963-964.)

Carr, supra, 166 Cal.App.4th 14 is also instructive. There, the parties disputed

whether the following provisions provided a right to attorney fees incurred in enforcing

36
the agreement: "'[Carr] shall indemnify and hold harmless [Chowchilla] . . . from and

against all claims , damages, losses and expenses including attorney fees arising out of

the performance of the work described herein . . . .'" (Id. at p. 19.) The Carr court

reviewed three cases (Myers, supra, 13 Cal.App.4th 949; Meininger v. Larwin-Northern

California, Inc. (1976) 63 Cal.App.3d 82 (Meininger) & Campbell v. Scripps Bank

(2000) 78 Cal.App.4th 1328 (Campbell)) that considered whether an indemnification

agreement requiring reimbursement of legal fees "arising out of" or "related to" the

performance of certain duties extended to legal fees incurred in enforcing the agreement

itself. In all three decisions, the courts concluded the agreements did not allow recovery

of attorney fees incurred in enforcing the contract. (Carr, supra, 166 Cal.App.4th at pp.

20-22.)

The Carr court contrasted those decisions with Baldwin Builders v. Coast

Plastering Corp. (2005) 125 Cal.App.4th 1339 and Continental Heller Corp. v. Amtech

Mechanical Services, Inc. (1997) 53 Cal.App.4th 500 (Continental), which held such fees

were recoverable where the contract included express language for "'"attorney's fees

incurred in enforcing [the] indemnity agreement."'" (Carr, supra, 166 Cal.App.4th at pp.

22-23, italics omitted.)

The Carr court concluded the language of the indemnity provision under

consideration "more closely parallel[ed] the language found in Myers, Meininger, and

Campbell than the language at issue in Baldwin and Continental. Unlike Baldwin, there

is no express language authorizing recovery of fees in an action to enforce the contract."

(Carr, supra, 166 Cal.App.4th at p. 23.)

37
 Here, the critical provisions in the Agreement's indemnity clause are virtually

identical to the terms in Carr and in Myers. The Agreement states Alki Partners will

"indemnify" Hedgeworks for all losses, including attorney fees "resulting in any way

from the performance or non-performance of [Hedgeworks's] duties hereunder." This

language is indistinguishable from the provision considered in Carr, where the

indemnitor promised to indemnify "'against all claims, damages, losses and expenses

including attorney fees arising out of the performance of the work described herein.'"

(Carr, supra, 166 Cal.App.4th at p. 19, italics omitted.) It is also indistinguishable from

the indemnity provision in Myers, which indemnified "every claim" arising "out of the

performance of the contract." (Myers, supra, 13 Cal.App.4th at p. 974.) Furthermore, as

in Carr, there is nothing in the indemnity provision between Alki Partners and

Hedgeworks that extends the right to recover attorney fees to actions seeking to enforce

the Agreement itself. Accordingly, the same conclusion reached by the courts in Carr

and Myers also applies here: The indemnity provision does not provide a right to recover

attorney fees incurred in breach of contract litigation between the parties to the

Agreement.

Other portions of the indemnity provision in the Hedgeworks Agreement further

supports the conclusion the parties intended the indemnity agreement to only apply to

third party claims, and not in an action on the contract between themselves. The last

clause of the indemnity provision states Alki Partners will indemnify Hedgeworks for all

costs, including attorney fees "and in the case of criminal proceedings, unless

[Hedgeworks] had reasonable cause to believe its actions unlawful . . . ." Thus, the

38
Agreement itself characterizes such criminal proceedings as a subset of third party claims

in general. This further supports the conclusion the parties intended this to be a standard

third party indemnity provision, and not a prevailing party attorney fee clause in an action

between the parties to the Agreement for its breach.

In its respondent's brief, Hedgeworks relies on three cases where attorney fees

were awarded in direct actions between the parties to the contract under an indemnity

clause—Zalkind v. Ceradyne, Inc. (2011) 194 Cal.App.4th 1010 (Zalkind); Dream

Theater, Inc. v. Dream Theater (2004) 124 Cal.App.4th 547 (Dream Theater); and

Wilshire-Doheny Associates, Ltd. v. Shapiro (2000) 83 Cal.App.4th 1380 (Wilshire-

Doheny). However, each of these cases is materially distinguishable.

In Zalkind, one party agreed to indemnify the other for losses "'whether or not they

have arisen from or were incurred in or as a result of any demand, claim, action, suit,

assessment or other proceeding or any settlement or judgment. . . .'" (Zalkind, supra, 194

Cal.App.4th at p. 1028.) The Zalkind court found this language was "not limited to third

party claims." (Ibid.) No similar language appears in the Agreement.

Dream Theater, supra, 124 Cal.App.4th 547, is also distinguishable. There, the

contract provided indemnity against all losses "'whether or not arising out of third party

Claims.'" (Id. at p. 556.) This language clearly states the indemnification provision

applied to claims other than third party claims, namely claims asserted by one party

against the other. The Agreement here contains no such language.

In Wilshire-Doheny, supra, 83 Cal.App.4th 1380, the court considered whether

particular indemnity provisions were limited to third party claims. In that case, a

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corporation agreed to indemnify two of its corporate officers with respect to any claims

or action brought against them in their capacity as corporate officers. (Id. at pp. 1387,

1394-1395.) The corporation sued the two officers arising out of their conduct as

corporate officers. (Id. at pp. 1385-1386.) The indemnity provision specifically applied

to an "'action or suit by or in the right of the corporation to secure a judgment in its

favor.'" (Id. at p. 1395.) Noting this language in particular, the Wilshire-Doheny court

held the provision afforded a right to attorney fees in an action on the contract. (Id. at pp.

1396-1397.) Significantly, the language in the Agreement here contains no similar

language providing for a right to recover attorney fees.

In its supplemental brief, Hedgeworks contends "Section 5 is no mere third party

indemnity clause." Hedgeworks notes the paragraph is entitled "Standard of Care,"

which governs the relationship between Hedgeworks and Alki Partners, and not third

parties. Hedgeworks asserts the first sentence in section 5 concerns duties owed by

Hedgeworks to Alki Partners, and the second sentence "symmetrically covers everything

else," stating that in the absence of willful misconduct, gross negligence, fraud or

dishonesty, Hedgeworks would be made whole by Alki Partners for any and all costs.

Hedgeworks argues, "Read as a coherent whole, Section 5 functions to hold

Hedgeworks responsible if (and only if) it breaches the agreed-upon standard of care, and

to protect it from any and all costs if it complies with the same standard. There is no

reason to imagine that, although the title of the section and the first sentence both clearly

cover the issue of liability between the parties, the second sentence should be read as

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shifting gears, breaking the symmetry of the section's structure, and relating only to third

parties."

We disagree with Hedgeworks' interpretation of section 5 as it relates to a right to

attorney fees between the parties to the contract in an action for breach of the agreement.

To begin with, if the parties intended to provide a right to prevailing party attorney fees

in an action for breach of the Agreement, there could hardly be a more obtuse way of

doing so than the language in section 5. It would have been simple for the parties to

provide: If any action is commenced to enforce or interpret the terms of this agreement,

the prevailing party shall be entitled to recover reasonable attorney fees. But section 5

does not even contain the phrase "prevailing party" or refer to an action between the

parties for breach of the agreement. Courts will not infer the parties intended an

indemnification provision to cover attorney fees between the parties if the provision

"'does not specifically provide for attorney's fees in an action on the contract . . . .'"

(Myers, supra, 13 Cal.App.4th at p. 970.)

Moreover, Hedgeworks is incorrect in asserting, "there is no reason to imagine"

that the second sentence, dealing with indemnification, relates only to third party claims.

Section 1641 requires the contract to be construed as a whole, "each clause helping to

interpret the other."13 Ordinarily, "where specific words follow general words in a

contract, 'the general words are construed to embrace only things similar in nature to

13 Section 1641 provides: "The whole of a contract is to be taken together, so as to
give effect to every part, if reasonably practicable, each clause helping to interpret the
other."

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those enumerated by the specific words.'" (Nygard, Inc. v. Uusi-Kerttula (2008) 159

Cal.App.4th 1027, 1045.)

The last clause of the second sentence in section 5 deals exclusively with a

particular type of third party claims, those arising out of criminal prosecution. This

provision states: "[Alki Partners] shall indemnify [Hedgeworks] . . . against any and all

costs . . . and in the case of criminal proceedings, unless [Hedgeworks] had reasonable

cause to believe its actions unlawful . . . ." (Italics added.) The general words in section

5 that Alki Partners "shall indemnify" Hedgeworks are properly construed to embrace

"only things similar in nature" to the specific words—that is, third party claims. (See

Nybard, supra, 159 Cal.App.4th at p. 1045.)

In its supplemental brief, and again at oral argument, Hedgeworks contends Hot

Rods, LLC v. Northrup Grumman Systems Corp. (2015) 242 Cal.App.4th 1166 (Hot

Rods, LLC) supports interpreting the indemnity provision in the Agreement as affording

prevailing party attorney fees in an action between the parties for breach. However the

indemnity provision in Hot Rods, LLC is significantly different from the one in the

Agreement. In Hot Rods, LLC, the provision purported to indemnify from any "claim"

and defined "claim" as "any claim or demand by any Person for any alleged liabilities,

whether based in contract, tort, implied or express warranty . . . ." (Id. at p. 1181.) The

indemnity provision there also defined "person" broadly, so that combining the definition

of "claim" and "person" encompassed "both first and third party claims." (Id. at p. 1181.)

No such language appears in the Alki Partners-Hedgeworks indemnity provision.

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 Moreover, the court in Hot Rods, LLC noted that under the indemnity provision

there, Hot Rods was required to give Northrup notice of any environment actions, but

was not required to give similar notice for personal injury or property damage claims.

The court concluded that "[t]he reasonable inference is that the second type of claim was

not intended to be limited to third party claims, but contemplated claims from Hot Rods

as well." (Hot Rods, LLC, supra, 242 Cal.App.4th at p. 1182.) The Agreement here

contains no similar distinction.

In sum, section 5, entitled "Standard of Care," applies the same standard of care in

two different applications. First, the standard governs potential liability between

Hedgeworks and Alki Partners. Second, it applies the same standard as to Alki Partners'

obligation to indemnify Hedgeworks for third party claims.

To find a right to attorney fees in a direct action under an ordinary indemnity

provision, as here, would invest every agreement containing a standard third party

indemnity clause with a prevailing party attorney fee clause. This is particularly

inappropriate because section 1717, subdivision (a), which governs the award of

contractual attorney fees, applies only when the contract "specifically provides that

attorney's fees and costs, which are incurred to enforce that contract, shall be awarded

either to one of the parties or to the prevailing party . . . ." The indemnity clause here

does not "specifically" refer either to actions to enforce the contract or to the prevailing

party. Rather, it is a third party indemnity clause. The court erred in construing it

otherwise.

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 As a fall-back position, Hedgeworks contends that even if an attorney fee award

under section 5 is limited to defense of third party claims, the award should be affirmed

because Hedgeworks incurred the fees in defending against not only Alki Partners'

claims, but also against identical claims by a third party, Bullfrog.

This argument is unavailing because in the trial court, Hedgeworks took the exact

opposite position. In its motion for attorney fees, Hedgeworks told the trial court, "It is

important that the Court understand at the outset what Hedgeworks is not seeking by this

motion. Hedgeworks is not herein seeking fees incurred solely to defend claims brought

against it by . . . Bullfrog, which are third parties to the [Agreement]. . . . Put simply, by

this motion, Hedgeworks seeks only to recover the attorneys' fees it spent defending

against the claims unsuccessfully brought against it by its contractual counterparty, Alki

LP. Hedgeworks reserves the right to seek some or all of those fees by appropriate

procedures at a later time." Hedgeworks may not repudiate these representations now.

(Planned Protective Services, Inc. v. Gorton (1988) 200 Cal.App.3d 1, 12-13 [theory of

trial rule applied to attorney fee motion], disapproved on other grounds in Martin v. Szeto

(2004) 32 Cal.4th 445, 451, fn. 7.)

DISPOSITION

The "Amended and Final Judgment" entered May 1, 2015, is reversed insofar as it

awards DB Fund Services, LLC, attorney fees, and the trial court is directed to enter a

new order denying Hedgeworks motion for attorney fees. In all other respects, the

amended and final judgment entered May 1, 2015, is affirmed.

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 In the interest of justice, each party is to bear its own costs.

NARES, J.

WE CONCUR:

HUFFMAN, Acting P. J.

HALLER, J.

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