F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

PSM H O L D I

N G C O R P

. , a Corporation, Plaintiff-Appellant
,

v

.

N A T I O N A L F A R M F I N A N C I A L C O R P O R A T I O N , a Corporation; B U S I N E S S A L L I A

N C E I N S U R A N C E C O M P A

N Y , a Corporation; L A R

R Y P. C H A O , an I ndividual,

Defendants-Appellees. Nos. 15-55026 15-55941

D .C. No. CV 05-08891 MMMPSM H O L D I N G V

. N A T ’ L F A R

M F I N A N C I A L 2

PSM H O L D I

N G C O R P

. , a Corporation, Plaintiff-Appellee
,

v

.

N A T I O N A L F A R M F I N A N C I A L C O R P O R A T I O N , a Corporation; B U S I N E S S A L L I A

N C E I N S U R A N C E C O M P A

N Y , a Corporation; L A R

R Y P. C H A O , an I ndividual, Defendants-Appellants. Nos. 15-55087 15-55943 15-56184

D .C. No. CV 05-08891 MMM

OPI NI O N

Appeals from the United States District Court for the Central District of California Valerie B . F airbank and Marg aret M. Morrow, District J udg es, Presiding *

Arg u ed and Submitted December 6, 2016

Pasadena, California

F iled March 7, 2018

B efore: Stephen Reinhardt, A. W allace Tashima, and Richard A. Paez , Circuit J udg es.

Opinion by

J u dg e Tashima

* J u d g e F airb an k p resid ed o v er th i s case f ro m its in cep tio n t

h ro u g h J u ly 2 0 0 9

. On rem an d f

ro m th e Nin th Circu it, th e case w as tran sf erred to J u d g e Mo rro w , w

h o p resid ed o v er all su b seq u en t p ro ceed in g s

.PSM H O L D I N G V

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M F I N A N C I A L 3

SUMMARY * *

Restitution / Rescission

The panel affirmed in part, reversed in part, and dismissed in part the district court s ’ j u dg ment and orders concerning remedies in various appeals arising from claims for breach o f contract and fraud.

The district court held that a judg ment cr e ditor, w ho seiz ed a judg ment debtor’s company pursuant to a judg ment that was reversed on appeal, could recover in restitution for losses suffered while it w as in possession of the seiz ed
company

. T he district court denied the judg ment cr e d itor’s request to rescind its quota share re i n surance ag reement (“QSA”) with B usiness Alliance I nsurance Company

.

The panel held that to the ex tent the district court’s orders of J uly 26, 2010, and October 8, 2 0 13, affirmed defendants’ rig ht to recover restitution, they w ere sound. I n reviewing the district court’s December 17, 2014 o rder, the panel h eld that the district court erred in allow i n g t h e judg ment creditor to

recover in restitution. T h e p anel’s conclusion rested on the California Supreme Court ’s decision in W ard v. Sherman
, 100 P. 864 (Cal. 1909), wherein the court in a n analog ous situation, declined to awar d t h e judg ment creditor an affirmative recovery to offset its losses. The panel’s decision

was bolstered by the plain reading o f Restatement (F irst) o f Restitution § 74 a

nd Restatement ( T h ird) of Restitution § 18,

** T h is su m m ary co n stitu

t es n o p art o f th e o p in io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.PSM H O L D I N G V

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which sug g ested that in similar cases, the rig ht of restitution ran only to the judg ment debtor.

The panel rejected the judg ment c reditor’s challen ge s to the d i s trict c ourt’s October 8, 2013 order deny ing the judg ment c r e d i t or’s r equest for rescission of its QSA. Specifically
, the panel held that the district court d id not err by failing to consider California Civil Code § 101 9
, which

concerns the removal o f fix tures from leaseholds. S e cond, the district court thoroug hly analy z ed whether the QSA amounted to a nec es sary e x pense or, instead, an improvement. F inally
, policy considerations did not favor the judg ment creditor’s position.

The panel reversed the district court’s May 1 9, 2015 order
g ranting in part and deny ing in part defen d a n t s ’ motion to

recover p ost-appeal attorney s’ fees. T he panel held that the district court erred in awarding attorne y s ’ f ees under California Civil Code § 1717, while s i m ultaneously concluding that the judg ment c r editor had fully s at isfied the

o b l ig ations stemming from the operative judg ments. T h e panel dismissed, as moot, defend a nt’s appeal of the district court’s reduction of the lodestar fee amount.

B e cause the panel reversed t h e judg ment creditor’s

r estitution award, the panel v acated the district court’s J uly 14, 2015 order deny ing defendants’ motion to retax costs and re m a

nded for reconsideration in lig ht of chang ed circumstances.

The panel ordered t h a t i n e ach of the five appeals, e ach party should bear its own costs on appeal.PSM H O L D I N G V

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COUNSEL

Aluy ah I

. I moisili (arg

ued) a nd L inda Dakin-Grimm, Milb a n k Tweed Hadley & McCloy
, L os Ang el es, California, for Plaintiff-Appellant/Cross-Appellee.

Peder K. B atalden (arg

ued) and Mitchell C. Tilner, Horvitz & L evy , Encino, California; J oseph W

. Cotchett and Nancy L

. F ineman, Cotchett Pitr e & McCarthy
, B urling ame, California; for Defendants-Appellees/Cross-Appellants.

OP INION

TASHI MA, Circuit J udg e:

At t h e heart of this case lies a conceptually

s t r a ig htforward, but procedurally complex
, question of f irs t impression for our Circuit: Can a judg ment c r editor, w ho seiz es a judg ment debtor’s company pursuant to a judg ment that is subsequently reversed on appeal, r ecover in restitution for losses suffered while it w as in pos s e s s ion of the seiz ed
company ? The district court answered in the a ffirmative. I n doing so, it awarded Plaintiff PSM Holding Corp. more than $1.1 million in restitution. D e fendants now challeng e this award.

All told, the par t i e s have filed five appeals a nd crossappeals, w hich were c o nsolidated for oral a rg ument a

nd decision. W e have jurisdiction under 28 U.S.C. § 1291, a nd we affirm in part, reverse in part, and dismiss in part.PSM H O L D I N G V

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I.

A. The Law suit and Trial

Prior to the instant lawsui t , Defendant-Appellee/CrossA ppellant National F arm F inancial Corporation (“National F arm”) owned B usiness Alliance I nsu r a nce Company (“B AI C”). L arry Chao, the president of National Fa r m , cofounded B AI C in the 1990s w ith his wife, J ulie Chao. B AI C
p rovided insurance to small b usinesses. B AI C h ad $1 4

. 2 mi l l i on in net written premiums a nd $2.8 million in net income by

2005.

I n early 2005, National F arm entered into neg o tiations to sell B AI C to Plaintiff

- Appellant/Cross-Appellee PSM Holding Corporation (“PSM”). Ultimately
, h owever, National F arm walked away from the deal. Thereafter, PSM sued N ational F arm, L arry Chao, a nd BA I C (collectively
, “Defendants”) alleg ing claims for breach of contract a nd fraud.

F ollowing a t r i a l
, a jury found in favor of PSM a nd awarded it $40 million on its breach of contract c laim and $3 million o n its frau d c l a i m. I n p o st-trial proceeding s, J udg e F airbank g ranted in part and denied in part Defendants’ motion f or judg ment a s a matter of law (“J MOL ”). The motion was denied, with the e x ception that judg ment was entered in favor of Defendants on the fraud claim, thereby

r e d ucing PSM’s damag es award to $40 million. J udg e F airbank also g ranted D efend a nts’ motion to stay ex e cution of the judg ment pending appeal, conditioned on Def en d ants posting a $40 million bond. However, after Defendants failed
t o p o s t the required b ond and National F arm entered bankruptcy
, PSM e x ecuted on th e judg ment. I n OctoberPSM H O L D I N G V

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2008, B AI C was transferred to PSM. At the time of transfer, B AI C had more than $30 million in assets.

After taking p ossession of B A I C, PSM took various steps to integ rate B AI C into it s e x i s ting business. F or ex ample, PSM and B AI C entered into a n intercompany q u o ta share reinsurance ag r eement (the “QSA”). The QSA provided that, for e very insurance policy B AI C issued, PSM would receive 90 percent of the policy ’s i n s u r a n ce premiums in ex chang e for assumi n g 9 0 p e r cent of the policy ’s risk of loss. B AI C would retain the remaining ten percent of the premiums a nd would c o n tinue to b e r esponsible for ten percent of the policies’ risk of loss. PSM also assumed control of 90 percent of B AI C’s loss a nd loss ex p enses r es e rv es, thereby

r e n dering it responsible for 90 percent o f B A I C’s loss e s o n policies written prior to O ctober 2 1
, 2 008, as well as on future p olicies. Additionally
, PSM and B AI C entered into an I ntercompany Service A g reement (“I SA”), under which PSM would provide to B AI C certain ex ecutive, administrative, a nd other services.

B. The Judgm ent is Reversed

On J une 18, 2 0 0 9
, the N inth Circuit reversed J udg e F airbank’s p artial denial of Defendants’ J MOL motion. The Ninth Circuit held that “[ t] he plain terms of the ag reement dictate that no contract was formed because th e s i gnature lines f or N ational F arm; L arry Chao, as an individual; a nd J u l ie Chao, as an individual, were left blank. As a resu l t , none o f the parties could be l i a ble under its terms.” PSM Holding Corp. v. Nat’l Farm Fin. Corp.
, 339 F

. App ’ x 693, 694 ( 9 t h Cir. 2009). The c a se was remanded to the district
court.PSM H O L D I N G V

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C. P ost-Rem a nd P roceedings

1. July 26, 2010, Order on Restitution

On remand from the N inth Circuit, it was undisputed that PSM should pay restituti o n t o Defendants. A t issue, however, was the appropriate amount.

On J u ly 2 6
, 2010, the district court g ranted in p art a nd denied in p art Defendants’ motion for restitution a nd attorney ’s fees. Althoug h D efendants’ motion opposed a return of B AI C to National F a rm and, instead, soug ht a restitution award in the amount of $59.6 million, the district
court ordered “[ r] estitution in t h e form of the return o f B AI C’s shares to [ D] efendants.”

The d istrict court’s decision relied heavily on R e s t a t e m e n t (F irst) of Restitution § 74, which provides that:

A person who has conferred a benefit upo n anot h e r in c o mpliance with a judg ment, o r whose property has been taken thereunder, is entitled to res t i t u tion if the judg ment is reversed o r set aside, unless restitution would be inequitable or th e p arties c ontract that
pay ment is to be final; i f t h e judg ment is modified, there is a rig ht to restitution o f the

ex c ess.

Restatement (F irst) of Restitution § 74 (Am. L aw I nst. 1937). I n such situations, comment e to § 74 provides, “the judg ment debtor is entitled to sp e c i f ic restitution, tog ether with the value of [the property ’s] use in the meantime, diminished b y

ex p enses necessarily incurred in the protection of the propertyPSM H O L D I N G V

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and the pay

ment of t ax es and liens, but not including the

ex p ense of improvements.” Id. at § 74, cmt. e.

According to the district c ourt, this rule is consistent with

a similar principle set for t h in Restatement (Third) o f Restitution and Unjust E n richment § 18 (Am. L aw. I nst. 2011):

A transfer or taking of property , in compliance with or otherwise in consequence of a judg ment that is subsequently reversed o r avoided, g ives the dis advantag ed party a

c l aim in restitution as necessary to avoi d unjust enrichment.

F inally
, the court supported its decision by rely ing on several state court decisions – f rom California and elsewhere

– that confronted similar issues, including Stockton Theatres, Inc. v. Palermo
, 264 P.2d 7 4 (Cal. Dist

. C t

. A pp. 1953), Erickson v. Boothe
, 274 P.2d 460 ( Cal. Dist. Ct. App. 1954), and Fleer Corp. v. Topps Chewing Gum, Inc.
, 539 A.2d 1060 (Del. 1988).

B a sed on these authorities, the district court conclud e d that “Defendants a r e e n titled to specific restitution of the B AI C s h ares.” 1 Additionally
, the d istrict court determined that Defendants w ere “entitled to an accounting of the p rofits earned while PSM held B AI C, ‘diminished by ex penses necessarily incurred in the protection of the property and the
pay ment of tax es and liens.’” (Quoting Restatement (F irst) of Restitution, § 7 4 cmt. e (Am. L aw I nst. 1937).) According ly
, the district court ordered “an accounting of the

1 P SM retu rn ed th e B A IC sh ares to Def en d an ts in

early 2 0 1 1

.PSM H O L D I N G V

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profits PSM g enerate d t h r o ug h its ownership of [ the B AI C] shares.” 2

2. Oc t ober 8, 2013, Order o n Accounting a nd Rescission of

QSA

Post remand, Defendants filed a motion for an award o f PSM’s profits. Defendants s o u ght $14 million in profits. PSM opposed the motion, arg uing that it actually suffered a $1.5 million loss as a result of its temporary possessio n a nd control of B AI C. Additionally
, PSM soug ht to rescind the QSA. T he district court determined that ex pert testimony was

r e quired in order to resolve Defendants’ motion for p rofits and PSM’s request for rescission. According ly
, it appointed
two ex perts: (1) Debra J

. Roberts, who wou ld consider the QSA issue; a

nd ( 2) Timothy H

. Hart, a fore n s i c a ccountant, who w ould consider the question of profits. After each ex pert filed her/his report, the district court ruled.

On the question of rescission, the distric t c o u rt denied PSM’s request, rely

ing o n the following illustration:

A o btains judg me n t in ejectment ag ainst B and is put in possession of B lackacre. After knowledg e that an appeal has been t aken, A makes improvements thereon to the amount o f $1000, at a

n ex pense of $100 repair s a roof which otherwise would have leaked, a nd pay s tax es thereon to t h e amount of $300. He

2 In ad d itio n to ord erin g a retu rn of th e B A IC sh ares an d an

acco u n ti n g o f p r o f

i ts, th e district co u rt aw ard ed Def en dan ts $ 2 ,2 24 ,2 2 0 .7 6 in atto rn ey s’ f

ees an d $ 53 ,9 8 4 .9 9 in co s ts. T h ese aw ard s o f f ees an d co s ts

are n o t at issu e o n

th is ap p eal.PSM H O L D I N G V

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remains on the land for two y ear s , at the e nd of which time the judg ment is reversed. B is

e n t i t l ed to restitution of the land and to th e reasonable rental value of the land during the
two y ears, less the amount ex pended by A for the necessary repairs and for the pay ment o f
tax es; ordinarily [ diminishment in] restitution f or the value of the improvements would not be g ranted.

Restatement ( F irst) of Restitution § 7 4 cmt. f, illust. 14 (Am. L aw I nst. 1937). T h is ru l e , the district court reasoned, is consistent with the well-established proposit i o n that “the distinction b etwe e n ‘r ep a i r s a n d maintenance’ a nd ‘improvements’ can b e c haracteriz ed ‘as the difference between ‘keeping ’ a

nd ‘putting’ [ a n ]

. . . asset in g ood condition.” ( Quoting M

oss v. Comm i ssioner
, 831 F .2d 833, 835 (9th Cir. 1987).)

Under this leg al framework, the district c o u r t concluded that “[ t] he factual record supports t h e conclusion that the reinsurance agr e ement was an improvement r ather than a necessary c ost of p r otectin g BA I C.” I t reasoned that “[ t] he reinsurance ag reement increased the amount of reinsurance B AI C had prior to the time PSM acquired i t ” a nd, consequentl y , “ the a g reement added to B AI C’s value b y

r educing the a mount of risk it faced.” A nd, there is nothi n g in the rec o r d t o sug g est that “absent replacement of the

ex isting ex cess o f loss and c a t a s t r ophe insurance with the [ QSA]
, B AI C would h ave been u n a ble to function a s an insura n c e company .” Similarly
, the district court found no evidence sug g e sting that “there was an imminent dang er that the California Department o f I nsurance would take reg ulatoryPSM H O L D I N G V

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a c t i o n ag ainst B AI C that would have precluded it f r o m writing insurance business.”

B e cause, a ccording to the d i s trict c ourt, the QSA was “better characteriz ed as an ‘improvement’ [ rather] th a n an

ex p ense ne c e ssary to p rotect B AI C,” the district court

c o n c luded that “rescission of the ag reement [ was] no t warranted.”

W ith respect to p r o fits, the district court made the following finding s: (1) De f endants were entitled to r ecover $203,532 in “ sy

ner gy p ro f

its” from PSM; (2) there was no evidence to support Defendants recovery of “future profits”; (3) Defendants were e ntitled to recover a $30,973 tax benefit previously r eceived b y PSM d u e to its ownership of B AI C; (4) Defendants were not e n titled to any recovery as a result o f PSM’s liquidation of PSM’s stock p ortfolio; (5) PSM was not entitled to an additional manag e ment f e e bey ond what h ad already been paid directly by B A I C; (6) De f e n d ants were entitled to recover $254,524 in improperly charg ed transition costs; (7) PSM was e ntitled to “an adjustment of the restitution award” of $332,190 to cover “operating ex penses associated with B AI C while it ran the company ”; (8) PSM

was entitled to a credit of $557,402 in “ceded premiums,” i.e.,
p r e m i u ms paid on reinsurance contracts that B AI C entered into prior to PSM’s ownership; and (9) PSM co u l d “offset”
any restitution pay

ment to Defendants by $700,0 0 0 to

ac c o u n t f o r PSM’s assumption of a loan made by B AI C to National F arm.

The district court then o rdered the parties to jointly “prepare an accounting o f the amounts owed [ Defendants]

a n d the amounts PSM [ w as] e ntitled to deduct.” The co u r tPSM H O L D I N G V

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added that it would “ e nter judg ment in favor of whichever party is owed money

pursuant to the accounting .”

3. Decem ber 17, 2 014, Order on Restitution o f P rof its

The p artie s – unable to r each a g reement on the amounts owed – e ach f

iled a proposed judg ment. The parties ag reed that, based on the district court’s prior October 8
, 2013, order, PSM was to be allotted $1,100,563 in net principal. That is, per the October 8 order, PSM’s offsets and credits ex ceeded the Defendants’ recovery of profits and benefits by just over $1.1 million. Nonethe less, the parties disputed what should happen nex t. F or its part, PSM soug ht to recover $1,100,563 in net principal, net prejudg ment interest at a rate of $211 per day until the entry o f judg ment, and undetermined costs and
at torney s’ fees. I n c ontrast, D efendants requested that the district c ourt award nothing to PSM and award unstated costs to Defendants.

T h e c r ux of Defendants’ p osition was that the district

c o u r t should award n othing to PSM because “[ b ]ased u p o n the rules of restitution, which are g rounded on the principles of equi t y , it would b e inequitable to award PSM monies, especially since it operated BA I C at a loss during its operations.”

I n its December 17, 2014, order, the district court rejected Defendants’ arg uments and awarded $1,100,563 to PSM. I n support o f its decision, the court articulated the follow i ng “fundamental r

ul e ” o f restitution: “the g oal of restitution is ‘to p lace the par t i e s in as favorable a position as they could have b een in had the judg ments n o t be enforced pending appeal.’” (Citing Gunderson v. W all
, 126 Cal. Rptr. 3d 880, 883 (Ct. A pp. 2011).) Moreover, the district court continued,PSM H O L D I N G V

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“[ a] bsent evidence of bad f aith, e ven assuming PSM operated B AI C at a loss, equity does not require that P SM be h eld

r e sponsible for the loss.” (Citing Restatement (F irst) o f Restitution § 74, cmt. f. (Am. L aw I nst. 1937).)

I n the sam e order, the district court considered PSM’s request for prejudg ment interest, pursuant to California Civil Code § 3287(a). As a preliminary matter, the district court emphasiz e d that, under § 3287(a), “[ e] very person who is entitled to recover damag e s certain, or capable of being made certain by calculation

. . . is entitled also to recover interest thereon

. . . .” (Quoting Cal. Civil Code § 3287(a) (emphasis and alterations i n orig inal).) Moreover, the district court added, “an accounting action is prima facie evidence [ that] a claim is uncertain.” (Quoting Chesapeake Indus., Inc. v

. Togova Enters., Inc.
, 197 C a l

. R ptr. 348, 353 (Ct. App. 1983).) Then, after survey ing several Californi a appellate
court d ecisions which stand for the s a me proposition, the d i s t r i ct c ourt reasoned that “[ h ] ere, the issue of restitution

was complex
, and necessitated that the court appoint business valuation and reinsurance ex p erts,” a n d that “[ t] here were

numerous discrete questions that the court had to resolve in order to determine the a mount o f restitution.” B ased on these finding s, the district court declined to award prejudg ment interest.

Concurrently with it s December 17 order, the district
court entered a final judg ment, in which it ord e r ed t h at: (1) based on the Ninth Circui t ’ s r eversal, PSM would “take nothing by way o f i t s complaint”; (2) Defendants would

recover $2,224,220.76 in a t t o r ney s’ fees and $53,984.99 in
costs stemmi n g f

r om pre-reversal proceeding s; (3) PSMPSM H O L D I N G V

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would recover $1, 1 0 0
, 5 6 3 f r o m D efendants as restitution; a nd (4) the action would be dismissed. 3

The parties cross-appealed from the December 17 order.

4. May 19, 2015, Order on P ost-Reversal Attorneys’ F ees and Costs

On December 31, 2014, D ef en d a n ts moved for postr e versal a ttorney s’ fees. Defendants soug ht fees un d e r California Code o f Civil Procedure § 6 85.040 or, alterna t i v e l y , under California Civil Code § 1717. PSM opposed the motion. T h e district court first considered whether D efe n d ants could recover fees under § 685.040, which provides:

The judg ment cred itor is entitled to the reasonable and necessary costs of enforcing a judg ment. Atto r n ey ’s fees incurred in enforcing a judg ment are not included in costs collectible under this title unless o t h erwise provided by law. Attorney ’s fees incurred in enforcing a jud gm ent are included as costs collectible under this t i tle if the underlying judg ment includes an award of attorney ’s fees
to the judg ment creditor pursuant to subparag r aph ( A) of parag raph ( 1 0) o f subdivision (a) of Section 1033.5.

3 T h e d i strict co u rt also stated th at D ef en d an ts m ay f

ile su b seq u en t or ad d itio n al atto rn e y s ’ f

ees m o tio n s, i n acco rd an ce w i th Fed eral Ru le of Civ il P ro ced u re 5 4 (d ).PSM H O L D I N G V

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I n t u r n , C a l i f

o r n i a C o d e o f C i v i l P r o c e d u r e § 1 033.5(a)(10)(A) p rovides that collectible costs inclu d e “attorney s’ f

ees[ ] w hen authoriz ed b y

. . . [ c] o n t r a ct.” The district court further noted that “[ a] motion for post-judg ment costs, including attorney s’ fees, u nder § 685.040 mus t ‘ b e made b efore the judg ment is satisfied in full, but n o t l a ter than two y e ars after the costs h a v e been incurred.’” (Quoting Cal. Code. Civ. Proc. § 685.080(a).)

The district court interprete d D efendants’ position to be that the “judg ment” at issue was either (1) the Ninth Circuit’s mandate r ev ersing J u dg e F a irbank’s judg ment in favor o f PSM on the breach of c ontract claim, or (2) the district court’s Dece m b er 17, 2014, judg ment. Under either interpretation, the district court found, Defendants c annot prevail.

A c cording to the district court, the Ninth Circuit’s mandate c ould not serve as the operati v e judg ment because it did not itself include an award of attorney s’ fees, and, as a result, § 685.040 has no applicability

. Similarly
, the district
court reasoned, the D ecember 17, 2014, judg ment likewise fails to provide a basis for r ec o very of post-reversal fees because the fees requested by Defendants were incurred prior
to entry of that judg ment. Thus, “ it is unclear how defendants could h ave incurred fees ‘enforcing ’ t h a t judg ment.” Additionally
, the district court added that PSM satisfied e ach of these judg ments prior to the filing of Defendants’ motion,

a f act that independently p recluded recovery under § 685.040.

Nex t, t h e d i strict court considered D efendants’ a lternative motion for f

e e s pursuant to § 1717, which provides a s follows:PSM H O L D I N G V

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I n any action on a contract, where the contract specifically provides t h at attorney ’s fees a nd costs, which are incurred t o enforce that contract, shall be awarded either to one of the
p arties or to the p revailing p arty , then t h e party who is determined t o b e the party pr evailing on the contract, whether he or she is the party specified i n the contract or not, shall be entitled to r easonable attorney ’s fees in addition to other costs.

Cal. Civ. Code § 1717(a).

The d istrict cour t beg an its analy sis by o bserving that PSM’s breach of contract claim was “indisputably ” a n action “on the contract,” as r equired b y § 1717. Moreover, the district c ourt reasoned, “ the restitution motions .

. . are ‘part

o f [ t h e ] defense’ of the contractual claim.” (Alterations in orig inal.) (Quoting Anchor Pacifica Mgmt. Co. v. Green
, No. B2 53529, 2014 W L 3841227, at *1 (Cal. Ct. App. Aug

. 5, 2014) (unpublished).) That is, according to the district court, “D efendants here lost B AI C a f ter J udg e F airbank entered judg ment and PSM ex ec uted on the judg ment; their postappeal restitution motions soug ht to recover the company a nd profits/benefits they were d enied as a result of the erroneous judg ment.” B ecause the r estitution motions were not d istinct

or separate from the underly ing b reach of contract action, the motions were, the district c ourt concluded, “on the contract” for purposes of § 1717.

Having d etermined Defendan t s ’ post-reversal motions

were “ on the contract,” the district court considered whether Defendants were the prevailing party , as required for
recovery under § 1 7 17. Reje c t i ng PSM’s arg uments to thePSM H O L D I N G V

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contrar y , t h e district court emphasiz ed that Defendants “achieved total victory on the c laims it ass e rt e d in its complaint and their counterclaims when the Nint h Circuit reversed the $40 millio n j u d gment entered in favor o f PSM

a nd held that PSM had no binding purchase ag reement w i t h defendants.” I n lig ht of this “total victory ,” the district court concluded that “Defendants ’ relative success in the postappeal restituti o n p r o ceeding s for which they now seek fees is more p roperly considered in determining a re a sonable lodestar amount.”

The district court nex t calculated the lodestar fee o f $ 4 3 8
, 175. I t r educed this amount by 30 percent “ to reflect the defendants’ limited success o n the post-appeal restitution motions.” That is, while D efendants succee ded in securing the return o f B AI C from PSM, “the c ourt declined to award $59.6 million in restitution and denied their request for p rofits in its entirety .” According ly
, the dist r ict court awarded Defendants p o st-reversal a ttorney s’ fe e s i n the amount o f $306,722.50.

The parties fi l e d c r oss-appeals f rom the May 19, 2015, order on attorney s’ fees.

5. July 14, 2015, Order Denying Def endants’ Motion to Retax Costs

On December 31, 2014, Defenda n t s filed an a pplication
to the Clerk to tax c osts in the amount o f $155,085.13. T he Clerk awarded De f

e n dants $ 3,662.22 relating to c ertain depositions, but refused to tax $455 in filing f e e s a nd $150,967.22 in costs a t t ri b utable to the c ourt-appointed

ex p erts. Defendants then moved to retax costs.PSM H O L D I N G V

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I n considering Defendants’ motion to retax costs, the district court beg an by acknowledg ing that the Ninth Circuit has construed F ederal Rule of Civil Procedure 54(d)(1) a s creating a “ presumption in favor of awarding costs to the prevailing party , while at the same time g ranting a distr i ct court the discretion to d e c l i n e to do so.” ( Citing Berkla v

. Corel Corp.
, 302 F .3d 909, 9 21 (9th Cir. 2002).) H o w e v e r, the district court continued, a s p art o f its discretion, a court may deny costs f

or several reasons, i n c luding
, specifically
, “whether the prevailing party ’s recovery was nominal o r partial.” (Citing Q uan v. Com p u t e r Scis. Corp.
, 623 F .3d 870, 888–89 (9th Cir. 2010).)

I n lig ht of this discretion, a s well as its p rior finding s o f limited success, the d istrict cour t concluded that “it is appropriate to deny certain cost[ s] for which defendants seek reimbursement despite their ‘prevailing p arty ’ status.” Thus, the court held:

[ B ]ased on d e f

endants’ limited success a nd partial recovery
, the benefit to both parties of the court-appoint ed ex perts’ reports, and the necessity of r etaining such ex perts to assist in analy z ing the complex issues r aised by the post-appeal restitution proceeding s, the court

ex e rcises its discretion to deny def endants’ request to tax their share o f t h e courtappointed ex p erts’ fees.

Defendants appealed the district court’s J u l y 14, 2015, order deny

ing their motion to retax certain costs.PSM H O L D I N G V

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II.

W e take the questions raised in these five appe a l s seriatim

.

A. The aw ard of

“restitution” to P SM (No. 15-55087)

1. Standard of

Review

“W e review a district court’s interpretation of state law de novo.” Ariz. E lec. Power Co-Op., I nc. v. Berkeley
, 5 9 F .3d 988, 991 (9th Cir. 1995) (citation o m itted). “W h en interpreting state law, federal c ou rt s ar e bound b y decisions of the state’s hig hest c o u r t

. ” I d. (citation omitted). “I n the absence of such a decision, a federal c ourt must predict how the hig hest state court would d ecide the issue using intermediate appellate c o urt decisions, decisions from other jurisdictions, statutes, treatises, an d restatements a s g uidance.” Id. (quoting Sec. Pac. Nat’l Bank v. Kirkland ( I n re Kirkland) , 915 F .2d 1236, 1239 (9th Cir. 1990)).

2 Analysis

To the ex tent the district court’s orders of J uly 26, 2010, and October 8, 2013, affirmed Defendants’ rig ht to r ecover resti t u t i on, they a

re sound. See S

chubert v. B a tes , 185 P.2d 793, 791 (Cal. 1947) (“A person who has conferred a benefit
upon a nother in c ompliance with a judg ment, or whose property has been taken thereunder, is entitled to restitution if the judg ment is reversed o r set aside

. . . .” (quoting Restatement ( F irst) of Restitution § 74 (Am. L aw I n st. 1 937) (internal quotation marks omitted))). I t is the district court’s subsequent o rder of D ecember 1 7, 2014, that broke new g round. T here, the district court awarded PSM, the judgmentPSM H O L D I N G V

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creditor
, restitutio n

. This presents a question of first impression: can a judg ment creditor – who seiz es a judg ment debtor’s company pursuant to a judg ment tha t i s then reversed

– re cover in restitution for losses suffered w hile it possessed the seiz ed company ? The district court ans w ered this question in the affirmative, thereby awarding PSM more than $1.1 million in resti t u t ion. Perhaps because of its doctrinal novelty
, neither the p arties ’ briefing on a ppeal nor the district court’s o rder cites controlling authority to support this award. I n stead, the parties rely on two provisions in the Restatements o f Restitution, § 908 of the California Code o f Civil Procedure, and several California state court d ecisions.

a. Restatem ents of Restitution

The Restatement (F irst) of Restitut i o n was formally adopted in 1936. Section 74 thereof provides that:

A perso n who has c onferred a benefit upon another in c o m p liance with a judg ment, o r whose property has been taken thereunder, is entitled to restitution if t h e judg ment is reversed o r set aside, unless restitution would be inequitable or the parties cont r act that
pay ment is to be final.

Two comments to § 7 4 warrant mention. Comment e states:

I f the property of the judg ment debtor was awarded to the judg ment creditor

. . . [ t hen] the judg ment debtor is entitled to specific restitution, tog ether with the v alue of its use in the meantime, diminished by ex penses

ne cessarily incurred in the protection of thePSM H O L D I N G V

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property and the pay m ent of tax es and liens, b u t n o t i n c l u d i n g t h e e x p e n s e o f improvements . . . .

Separately , Comment f provides:

The judg ment c reditor i s not liable for losses
not c a u sed by his mismanag ement of the
p r o p e rty

. . . ex c e pt w here the action was broug ht in b ad f

aith o r where there was a sale

on ex ecution and the sale was improperly conducted . . . .

Fi nally
, I llustration 15 to Comment f describes a situati o n where, a fter a judg ment creditor takes possession o f c ertain real property , a fire d est roy s valuable timber located
t hereupon. See Restatement ( F irst) of Restitution § 74 c m t

. f illus. 15 (Am. L aw I nst. 1937). The I llustration makes clear that while the judg ment d ebtor is entitled to restitution of the real property , he is not entitled to co m p en s a t ion for the timber.

A p l a i n r e ading o f § 74 and the comments thereto undermines t h e a w a rd of restitution to PSM. Section 74 provides a rig ht of rest i t u t i on to a p articularly described party : namely
, the “ person who has conferred a benefit upon another in compliance with a judg ment.” Id. at § 74. I n this
case, that refers to the Defe n dants, not to PSM. The
comments to § 74 affirm this same pri n c iple. Comment e

ex p ressly states that “the judgment d e btor is ent itled to specific restitution.” Id. at § 74 cmt. e (emp h a s i s added). L ikewise, Comment f – in limiting w hat can be recovered in restitution – speaks in t e r m s o f the judgment creditor’s liability or lack of liability

.PSM H O L D I N G V

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The California Supreme Court has n o t spoken directly to the question presente d i n this appeal. On two occasions, however, it cited § 74 approvin gl y

. S e e, e .g. , Sullivan v

. W ellborn
, 195 P.2d 787, 7 8 9–91 (Cal. 1948) (comparing defendant to a judg ment c reditor and d eny ing his request to reduce money owed to p laintiff because the costs incurred b y defendant were not n ecessary to pre s e r v e wrong f ully possessed property

); Schube r t v. Bates
, 185 P.2d 793, 796 (C al

. 1947) ( quoting § 74 in an o rder affirming a restitution award to B a tes, who was force d to leave her home pursuant to an erroneous judg ment that was subsequently reversed). These cases sug g est that the California Supreme Court would likely look to § 74 to resolve the instant appeal.

A similar provision is included in Restatement (Third) o f Re s t i t u t ion a nd Unjust E nrichment, formally adopted in 2011. Section 18 thereof provides that:

A transfer or taking of property , in compliance with or otherwise in consequence of a judg ment that is subsequently reversed o r avoided, g iv es the disadvantag ed party a claim in restit u t ion as necessary to avoid unjust enrichment.

Comment e to § 18 con fi r m s t h a t “[ t] he rule o f this section
recog niz es a judg ment debtor’s entitlement to restitution only ‘as necess a ry to avoid u njust enrichment.’” Restatement (Third) of Re s t i t u tion § 1 8 cmt. e (Am. L aw I nst. 2011). B oth this rule and the comment accord with the plain r eading of § 74. Specifically
, § 18’s use o f the phrase “disadvantag ed party ,” when read in c onte x t , c a n be interpreted only as a reference to the party who is deprived o f property by court order – in other words, t h e j u d gm e n t debtor. Id. at § 18.PSM H O L D I N G V

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PSM’s arg ument to the contrary , that the phrase “disadvantag ed p arty ” s h o uld be read to invoke e ither the judg ment creditor or the judg ment debtor, is unpersuasive. B ut, even if we accept P S M ’ s position and assume, without deciding
, that § 18 is a mbig uous, Comment e clarifies a nd confirms that § 18 “recog niz es a judgment debtor’s
ent i tlement to restitution,” at least to the ex tent such restitution is r equired to a v o id unjust e nrichment. Id. at § 18 cmt. e (emphasis added).

I n sum, a plain reading of § 74 of the Restatement (F irst) of Restitution and § 18 o f the Restatement (Third) o f Restitution stands at odds w ith the d istrict court’s December 1 7 o r der. However, because these authorities are, at mos t , merely p ersuasive, our analy sis must also take into account other potential sources of law.

b. Calif ornia Code of

Civil P rocedure § 908

California C ode of Civil Procedure § 908 provides, in part, as follows:

W h en the judg men t or o rder is reversed o r modified, the reviewing c ourt may direct that the p arties b e r eturned so far as possible to the
p o s i t i o n s t h e y o c c u p i e d b e f o r e t h e enforcement of or ex ecution on the judg ment

or order. I n doing s o , t h e reviewing court may order r estitution on reasonable terms a nd conditions o f all property and r ig hts lost b y the erroneous judg ment . . . .

S ec tion 908 thus identifies the purpose of a warding restitu t i o n i n cases like the one at hand: to restore, in so farPSM H O L D I N G V

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M F I N A N C I A L 25

a s i s possible, the parties involved to the positions the y occupied prior to enforcement of t h e j udg ment. Here, then, § 908 i n s t r ucts that the purpose of restitution should be to return PSM and Defendants to their r espective positions ex ante PSM’s ex ecution of the judg ment and its taking possession of B AI C.

The district court’s December 17 order describ e s t h e “fundamental rule” of r estitu t i o n a s “plac[ ing ] the p arties in

as favorable a position as they could have been i n h a d the judg ments not been enforced pending appeal.” (Citing Gunderson
, 126 Cal. Rptr. 3d at 8 8 3

. ) And, apply ing this rule, t h e d istrict court c oncluded that if PSM was not permitted to recoup the ex p enses it incurred while it operated B AI C, then D efendants w ould b e p l aced in a position more favorable than the one they w o u ld have occupied had PSM

never ex ecuted on the judg ment.

At first g lance, the district court’s application of the rule embodied in § 908 may appear sound. B ut on careful reflection, it is not. To beg in w it h
, t he district court’s approach is arg uably inconsistent with § 908 ’s p lain lang uag e, which provides that a r estitution award s h o u ld include “all property and ri ghts lost by the erroneous j u d g me n t .” Cal. Code Civ. Proc. § 908 (emphasis added). Here, it is incorrect to say that PSM suffered losses as a direct
consequence of the erroneous judg ment. Rather, these losses resulted from PSM’s own, affirmative decision to ex ecute on the judg ment while D efendants’ appeal r e m ained p ending

. Relatedly
, the d istrict court’s order ig nores that PSM assumed

some amount of risk w hen i t o p t e d to ex ecute on the jud gm e n t w hile an appeal was pending

. See, e.g. , Strong v

. Laubach
, 443 F .3d 1297, 1300 (10th Cir. 2006) ( “ By

ex e c uting on their judg ment and receiving the g arnishedPSM H O L D I N G V

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M F I N A N C I A L 26

funds during the pendency of the appeal, the Strong s assumed the risk that they mig ht h ave to r e p ay the money if L aubach prevailed on appeal.”).

c. Calif ornia State Court Decisions

i. Calif ornia Suprem e Court

More than o ne hundred y ears ag o, the California Supreme C o urt in W

ard v. Sherman
, 100 P. 864 (Cal. 1909 ), considered a case w ith fact s a n a l og ous to the case at bench. I n W ard
, the p laintiff surrendered, pursuant to a judg ment o f the Maricopa C o u n t y Court, of the Territory of Ariz ona, possession o f the “Sun F lower cattle rang e,” tog ether with its animals and equipment, to defendants Sherma n a nd Hardenberg

. 4 Id. at 864

– 6 5

. On a ppeal, the A riz o na Territorial Supreme Court affirme d
, but the U .S. Supreme Court reversed. I

d. at 865. Thereafter, the plaintiff, who h ad already retaken possession of the property , broug ht an action “to r ecover the cattle and horses a nd their natural increase

. . . less the reasonable cost of manag ing the rang e and caring for the property , and for an accounting

. ” Id. I n considering plaintiff’s r equest for restit ution, the California Supreme Court stated the operative rule of law:

W h ere a judg ment or decree of an inferior
court is reversed by a fina l j u dg ment on appeal, a party is in g eneral e n t i t led to restitution of all the thing s lost by r e ason o f the j u d gment in the lower court; and, according ly
, the court s will, where justice

4 T h u s, u n l i k e in th e u su al case, th e p l ain tif f in W a rd w as th e j u d g m en t d eb t o r.PSM H O L D I N G V

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M F I N A N C I A L 27

requires it, place him as nearly a s may be in the condition in which he stood previously

.

Id. (citations omitted).

Moreover, the court continued, where a part y s ee k s to recover under these circumstances:

[ T] he defendant must account for the property received under the judg ment whic h h as been reversed, and the rule g overning the ex tent o f his liability is that a p p l icable to a trustee, which [ ma y b e] stated as follows: “The
g eneral doctrine being that trustees oug ht to conduct the b u siness o f t h e trust on the same

manner as an ordinarily prudent man o f business would conduct his own, they will not be c harg eable w i t h more than they have received nor held responsible for losses that
may arise, when they have a c ted in g ood faith

an d w ith common skill, prudence a nd dilig ence.”

Id. at 865–66 (quoting 2 8 Am. & Eng

. Ency

. of L aw 1059 (2d ed. 1908).

Apply ing these principles to the case before it
, the California Supreme Cou r t beg an by noting that “the defendant and those who held the ranc h and the personal property under him conducted the b usiness of the ranch with

care and dilig e nce.” Id. at 866. That is to say , there was no bad faith or mismanag ement. Nonetheles s , the court determined, “the ex pe n s e properly incurred by them in conducting said business was more than $1,000 in e x cess o fPSM H O L D I N G V

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M F I N A N C I A L 28

the a mount received b y them as the proceeds of the ranch a nd of the cattle.” Id. According ly
, the California Supreme Court affirmed the lower court order, w hich had concluded that “plaintiff was not e ntitled to recover from the defendant, a nd that the defendant should have judg ment ag ainst the p laintiff for his costs.” Id. at 865, 867.

Thus, th e California Supreme Court in W ard confronted

a circumstance a

nalog ous to the one w e face today : o ne wherein a judg ment creditor (who, in that case, was t h e de fe n d a nt) took possession o f a property pursuant to an

erroneous judg ment , manag ed the property responsibly a nd in g ood faith, but nevertheless incurred losses that ex ceeded
any resulting profits.

The relevance of W

ard lies as much in what the California Supreme Court did not do, as well as wi t h wh at it did do. That is, the court d id not award the j u d gm e nt creditordefendant an affirmative recovery to offset the losses suffered while it manag ed the ranch, d espite of the fact that the court made a finding that such ex penses ex c eeded any potential
pr o f i t s or proceeds that the defendant may have earned. Rather than allow defendant an affirmative recovery , the
court simply d enied plainti f f ’s request for restitution a nd awarded defendant the costs of litig a tion. Id . at 865, 867.

ii. Calif ornia Courts of

Appeal

Althoug h the dist r i c t court acknowledg ed W ard in its December 17, 2014, order, it relied more ex tensively on two California Courts of Appeal decisions: Gunderson , 126 Cal. Rptr. 3d 880
, a n d Stockton Theatres, Inc. v

. P a lermo
, 264 P.2d 74 (Cal. Dist. Ct. App. 1953).PSM H O L D I N G V

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M F I N A N C I A L 29

This is itself arg ua b l y p roblematic: in diversity cases, f e d e ral courts should consider decisions of the Californ i a Courts of Appeal only “where the Supreme Court o f California has not spoken on the question” and where there is

no “convincing evidence that the hig hest court of the state would decide [ the issue] d ifferently .” Cmty. Nat’l Bank v

. Fid. & Deposit Co. of

Md.
, 563 F .2d 1319, 1321 n.1 (9th Cir. 1977) ( internal quotation marks and citations omitted). Here, the California Supreme Court’s decision in W ard may , itself, well be such “convincing evidence.”

Even setting this issue aside, however, the district court’s December 17, order re m a i n s problematic. This is because neither G underson nor Stockton Theatres prov i d e s the leg al support necessary to sustain PSM’s recovery in restitution.

I n Gunderson
, a jury awarded the plaintiff c ompensatory and punitive damag es a nd the d efendants appea led. See 126 Cal. Rptr. 3d. at 881.W h ile the appeal was p e nding
, the plaintiff ex ecuted o n the judg ment. Id. at 881–82. The court of appeal affirmed the compensatory dama g es, but reversed the award o f punitive damag es. Id. at 882. The p laintiff voluntarily returned the punitive damag es, but declined to pay the interest that had a ccrued during the pendency of t he appeal. Id. The defendant moved for restitution of the interest
, w h ich the plaintiff opposed on the g round that he had incurred $ 100,000 in unnecessary costs a s a result of the defendant’s misconduct. Id.

The court of appeal beg an its analy sis by setting forth the relevant leg al principles. “A person whose property has been taken under a judg ment ‘is entitled to restitution if the judg ment is reversed or set aside, u nless restitution would be inequitable.’” Id. at 8 83 (quoting Stockton T h eatres ,PSM H O L D I N G V

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264 P.2d a t 77). The court relied on California Code of Civil Procedure § 908 for the proposition that

[ U ] p o n the reversal or modification of a judg ment, “ the reviewing c ourt may direct that the parties be r etu r ned so far as possible
to the position they o c c upied before the enforcement of or ex e c ution on the judg ment

or order. I n doing so, the r e v i e w i ng court may order restitution on reasonable terms a nd conditions o f all property and r ig hts lost b y the erroneous judg ment or order.”

I d. at 883. Thus, the c ourt summariz ed, “[ t] he fundament al rule g uiding the court in such proceeding [ s] is, so far a s possible, to place the parties in as f avorable a position as they could h ave been in had the judg ments not been enforced pending appeal.” Id. (alterations in orig inal) (quoting Stockton Theaters , 264 P.2d at 85).

Apply ing these principles, the court reasoned that because W a ll’s “prolong ed evasive misconduct” caused G underson to inc u r a d ditional costs when ex ecuting the judg ment, returning the parties to their orig inal p ositions did not require restitution of interest. Id. at 885 (“B y permitting Gunderson
to retain whatever interest had accrued on the reversed portion of his award, the trial court was, in effect, attempting
to r eturn him to the position he held prior to the ex ecution o f
t he judg ment.”). On this basis the court affirmed the tr i al court’s denial of W all’s motion for restitution. Id.

The d istrict court’s relia

n c e o n G u n d

e r son is unpersuasive for three reasons. F irst, Gunderson does not g o as far as the district c o u r t ’ s order: that is, the Gunderson court did notPSM H O L D I N G V

. N A T ’ L F A R

M F I N A N C I A L 31

r e q u i r e W a ll (the judg ment debtor) to affirmatively make a pay ment in restitution to G underson (the judg ment creditor). 5 Y e t this is precisely the leg ally dubious step at issue on th i s appeal. Second, Gunderson involved a situation wherein the judg ment debtor’s recovery was limited b ecause o f the debtor’s own misconduct. No such misconduct has been ascribed to Defendants here. F inally
, even if the district court relied on Gunderson only f o r t h e g eneral proposition that restitution in this ty

pe of case aims to “return[ ] the parties to their orig inal positions,” it fails to persuade. This is because,

on the r ecord here, there is insufficient evidence to conclude that D e f e n dants would have incurred the same losses h ad their possession of B AI C not been interrupted.

The district court’s reliance on Stockton Theatres is unconvincing for the same reasons. There, Emil Palermo, the

owner and lessor of a theater, soug ht a declaratory judg ment

a ga i n s t Stockton Theatres I nc., the lessee of the theater, to void the lease between them. Stockton Theatres
, 264 P.2d at 76–77. The trial court found in favor of Palermo and voided the lease. Id. at 77. Thereafter, Pale r m o initiated a nd prevailed in an unlawful detainer action a ga i nst Stockton Theatres. Palermo retook possession of the p roperty for several y ears. Id. On a

ppeal, b oth judg ments were reversed. Id. Consequently
, the lease was deemed vali d a n d Palermo returned possession of the theater b ack to Stockton Theatres. Id. Viewing this victory a s incomplete, Stockton Theatres

5 If it h ad
, th en th e co u rt w o u ld h av e n eed ed t o c a lcu late th e d if f eren ce b etw een th e in terest receiv ed b y Gu n d erso n w h ile h e p o ssessed th e $ 8 0 0 ,0 0 0 pen d in g ap peal, an d th e ad d itio n al co sts in cu rred b y h im as

a resu lt o f W all’ s m isco n d u ct. T h e co u r t d i d n o t d o so , o p tin g in stead sim p ly to d o ro u g h j u stice b y zero in g o u t Wall’ s restitu tio n aw ard

. T o b e

an alo g o u s to th e in stan t case, th e co u rt w o u ld h av e h ad to o rd er Wall (th e j u d g m en t d eb to r) to af

f irm ativ ely p ay Gu n d erso n (th e j u dg m en t cred ito r).PSM H O L D I N G V

. N A T ’ L F A R

M F I N A N C I A L 32

then soug ht to recover, in restitution, the income Palermo h ad earned from operating

the theater b usiness during the period the a pp e a l w a s pending

. I

d. After a

n accounting
, the trial
court awarded Stockton T heatres $13,658.75 in lost income. Id.

T h e c ourt of appeal beg an by reiterating the familia r principles of restitutio n in cases where a judg ment is subsequen t l y r eversed. Id. at 77–78 (citing Restatement (F irst) of R es t i tution § 74 (Am. L aw I nst. 1 937) a nd W ard ). I n deny ing Palermo’s appeal, the court reasoned that Palermo “knew those judg ments were n ot final and that the basic one had already been m a d e t h e subject o f an appeal.” Id. at 79. Thus, he knew that “if the appeal was successful he would be subject to a demand by the theatre company t hat he account f or all that he had r eceived throug h his enforcemen t o f t h e questioned judg ments.” Id. “To m ake out the rig h t o f restitution,” the court of appeal con c l u d e d, “it was only
necessary for the theatre company to show . . . that thing s o f value had been taken from it throug h the judg ments appealed from an d t h r oug h Palermo’s e n forcement thereof and h ad passed into Palermo’s hands and that thereafter the judg ments had been reversed.” I

d. Once established, “[ i] mmediately the rig ht of restituti o n arose and it was the duty of the court to place the parties back as n early as c ould be in the situation in which each h a d b een when the erroneous judg ments were rendered.” Id.

Here, too, the di s trict court’s r eliance on Stockton Theatres is unpe r s u a sive. Unlike the district court’s December 1 7 order, the court in Stockton Theatres d i d not require Stockton Theatres, the judg ment debtor in that c ase, t o m ake a

n affirmatively p ay in restitution to Palermo, the judg ment creditor. I

n fact, imag ining such a result confirmsPSM H O L D I N G V

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M F I N A N C I A L 33

the district court’s error in o ur case: if Palermo had operated the theater at a sig nificant loss, no one would ex pect Stockton Theatres to make h im whole under a theory of restitutio n

– doing so would be self-evidently unfair.

d. Conclusion

Reviewing the December 17 order d e novo, as we must here d o , we conclude that the district court erred in allowing PSM – the judg ment creditor – to recover in restitution. Our conclusion rests on the California Supreme Court’s decision in W ard
, wherein the court, confronted with an analog ous circumstance, declined to a ward the judg ment c reditor an affirmative r e covery to offset its losses. O u r h o lding is bolstered by the plain reading of Restatement ( F irst) o f Restitution § 74 a

nd Restatement ( T h ird) of Restitution § 18, both of which sug g est that, in cases such as the one b efore us, the rig ht of restitution runs only to th e judg ment debtor. According ly
, for the r easons set forth, we reverse the district court’s award of restitution to PSM. 6

B. Rescission of

P SM’s QSA w ith BAIC (No. 15-55026)

1. Standard of

Review

The applicable standard o f review for this part is the standard set forth in Part I I .A.1, supra.

6 Ou r co n clu sio n w ith resp ect to restitu tio n also ren ders m o o t P SM’ s ap p eal o f th e d istrict co u rt’ s o rd er den y in g P SM p rej u d g m en t i nt e r e st. No . 1 5

- 5 50 2 6 . B ecau se th ere is n o aw ard
, th e q u estio n o f w h eth er P S M

w as en titled to receiv e p rej u d g m en t in t erest o n th at aw ard is m o o t.PSM H O L D I N G V

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M F I N A N C I A L 34

2. Analysis

The d istrict court’s October 8, 2013, order denied PSM’s request to rescind its QSA w i t h BA I C

. That decision relied heavily on Comment e to § 7 4 of the Restatement (F irs t ) o f Restitution, which p rovides, in relevant part, that a judg ment creditor may “diminish[ ] ” a judg ment debtor’s recovery b y “ex p e nses necessarily incurred” but not by “the ex penses o f improvements.” The district court fo u nd that “[ t] he f actual record supports the conclusion that the reinsurance ag reement

was a n improvemen t r a t her than a necessary cost o f prot e cting B AI C,” and, as a result, that rescission thereof would be improper.

PSM raises three arg uments on appe a l

. F irst, PSM contends that t h e district court erred by not apply ing
, or at least considering
, California Civ i l C o de § 1019, which

concerns the removal o f fix tures from le a s eh o lds. Second, PSM arg ues that the district court compounded this error b y

m i s a p ply ing § 908, which compels a court to r eturn the parties to the p ositions they o ccupied p rior to enforcement o f the erroneous judg ment. F inally
, PSM arg ues tha t p olicy considerations favor its position, particularly because, absent reversal, “

judg ment creditors woul d face an insurmountable dilemma.”

PSM’s arg uments are unpersuasiv e

. F irst, § 1019 provides:

A tenant may rem ove from the demised premises, any time during the continuance o f his term, any

thing affix e d thereto for purposes of trade, manufacture, ornament, or domestic
use, if the r emoval can be effected withoutPSM H O L D I N G V

. N A T ’ L F A R

M F I N A N C I A L 35

injury to the premises, unless the thing has, b y the m an n e r in which it is a ffix ed, become an integ ral part of the premises.

Cal. Civ. Code § 1019. The lang u ag e of § 1 01 9

– i n particular, its refere n c e t o “ tenants” and “premises” – has little relevance to the instant case. PSM was never a “ tenant” and never possessed a “premises” on which any thing c ould be “affix ed.” T herefore, PSM’s a rg ument that the district court abused its discretion by f

a iling to consider § 1019 is without merit. 7

Second, PSM’s arg ument that the district c ourt e rred in its application of California Code of Civil Proc e d u re § 908 is similarly unconvincing

. Rely ing on Stockton Theatres
, PSM
arg ues that it should not be held liable for ex penses that were necessarily incurred to preserve B AI C’s value, and that the district court’s “mechanical r emoval ” o f these costs was

error. Contrary to PSM’s arg ument, ho w e v e r , the district
court thoroug hly analy

zed whether the Q SA amoun ted to a necessary ex pense or, instead, an improvement.

The d istrict court r easoned that the applicable tes t for disting uishing between “ repairs and maintenance” a nd “improvements” is whether “ the improvements were made to ‘put’ the particular capital asset in efficie nt operating condition

. . . [ or] if

. . . they were made merely to ‘keep’ the
asset in efficient operating c o ndition[

. ] ” (Quoting Moss
, 831 F .2d at 835.) Apply ing this standard, th e district court

7 Mo reo v er, P S M’ s relian ce o n Cen tra l P a cific S u p p ly Co rp

. v. Breto n , 9 3 7 F.2 d 6 1 1
, 1 9 9 1 W L 1 3 4 4 4 8 (9 th Cir. 1 9 9 1 ) (u n pu b lish ed ), is lik ew i se u n av ailin g

. Cen tra l Pa cific in v o lv ed a leaseh o ld o f real p ro p erty , see id

. at * 1 , w

h ich is f ar af ield f ro m o u r f acts.PSM H O L D I N G V

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M F I N A N C I A L 36

concluded from the record evidence that PSM’s decision to enter into the QSA “ a d

d ed to B A I C’s value by r educing the
amount of risk it face d

. ” (Emphasis added.) B ecause the QSA “put” B A I C into a better position than it had been at the time PSM took possession of it, the district court conclu d ed that “ the reinsurance a g reement is better characteriz ed as an ‘improvement’ than an ex pense necessary to protect B AI C.”

F inally
, PSM’s policy a

r g ument also fails. The cr u x o f PSM’s arg u m e n t is that, absent reversal, judg ment creditors who ex ecute on a judg ment a n d t ake possession o f property will face an “insu r m o u ntable dilemma,” wherein they must caref u l l y d e d u c e w h i c h p r o j e c t s are “repairs a

nd maintenance” o n the property a nd which a

re “ i m p rovements.” B ut this a

rg ument is based on a fa l s e premise that it was Defendants or the district cou r t , n ot PSM, that opted to

ex e c ute on the judg ment while an appeal remained pending

. I t w as this affirmative choice that put PSM i n t h e position that it has now, with hindsig ht, discovered to be unenviable.

C. The aw a r d o f post-reversal attorneys’ f ees t o Def endants under § 1717 (No. 15-55941)

1. Standard of

Review

W e “review[ ] de novo questions of law concerning entitlement to attor n ey ’s fees.” Lagstein v. Certain Underwriters a t Lloyd’s o

f London
, 725 F .3d 1050, 1056 (9th C i r

. 2013) (citation omitted). “State law g overns whethe r a party is entitle d t o attorney ’s f ees in diversity cases such a s this one.” Id. (citation omitted). However, “[ w] e review [ the
amount of] a ttorney fees awarded under state law for abuse o f discretion.” Muniz v. United Parcel Serv., Inc.
, 738 F .3d 214,PSM H O L D I N G V

. N A T ’ L F A R

M F I N A N C I A L 37

218–19 (citing 389 Orange St. Partners v. Arnold , 179 F .3d 656, 661 (9th Cir. 1999)).

F or this inquiry
, because w e r e v iew a diversity c ase, “[ d] ecisions of the Califor n i a Supreme Court, including reasoned dicta, are b inding on us a s to California law.” Id. at 219 (citation o mitted). “ D ecisions of the six district appellate
courts ar e p e r s u asive but d o not bind each other or u s.” Id. (citation o mi t ted). B ut “[ w ] e should nevertheless follow a published intermediate sta te court decision reg arding California law unless w e a re convinced that the C a l ifornia Supreme Court would reject it.” Id. (citation omitted).

PSM’s a ppeal challeng es whether the district court erred in a w arding f ees under California Civil Code § 1 7 17. This is

a leg a l challeng e and is thus reviewed de novo. Defendants’ appeal challeng es the district court’s decision to reduce their fee award by thirty percent on g r ound s t h at they achieved only limited success. B ecause this is a c h a l l eng e to the
amount of f

ees awarded by the district court, we review for abuse of discretion.

2. Analysis

The district cour t ’ s M a

y 19, 2015 order g ranted in part and denied in p art Defendants’ motion to recover post-appeal attorney s’ fees. Althoug h the district court denied a s untimely Defendants’ request f or fees pursuant to California Code of Civil P ro c edure § 685.040, it awarded fees under § 1717. Reviewing de novo, we reverse.PSM H O L D I N G V

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M F I N A N C I A L 38

California Civil Code § 1717 states that:

(a) I n any action o n a contract, where the
contract specifically provides that attorney ’s fees a nd costs, which are incurred to enfo r ce that contract, shall be awarded either to one o f the p arties or to the prevailing party , then the party who is determin ed to b e the party prevail ing on the contract, whether he or she is the party specified i n the contract or not, shall b e entitled to reasonable att o r n e y ' s fees in addition to other costs. . . .

(b)(1) The court

. . . shall determine who is the par t y p revailing on the contract for
purposes of this section, whet h e r or not the suit proceeds to final judg ment.

Cal. Civ. Code § 1717(a)–(b).

I n Carn e s v. Zamani
, 488 F

. 3d 1057 (9th Cir. 2007), we held that “[ i] n California, the c o n t r a c tual rig ht to attorney fees contemplated by section 1717 is ex ting uished upon satisfaction of the ju d gm e nt.” Id. at 1 061 (citing Berti v

. Santa Barbara Beach Props.
, 145 Cal. Rptr. 3d 364, 369 (Ct. App. 2006)).

Here, the district court determined that PSM h ad satisfied the judg ment i n f

u ll prior to Defendants’ request for postreversal f e es, and that this is true irrespective of which order Defendants’ take as the o p e rative “judg ment.” See PSM Holding Corp. v. Nat’l Farm F in. Corp.
, No. CV 05-08 8 9 1 MMM, 2015 W L 1 1 652518, at *8 (C.D. Cal. May 19, 2 015) (“Defendants did not file their motion for attorney s’ fees a ndPSM H O L D I N G V

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M F I N A N C I A L 39

costs under § 865.040 until December 31, 2014, several y ears after PSM’s oblig ations under the mandate, i.e., return o f B AI C shares a

nd pay men t o f a t torney s’ fees and costs, h ad been satisfied.”); id. at * 9 ( “More fundamentally
, even if the fees soug ht by defendants could be characteriz ed as f e e s incurred to enforce the December 17, 2014 judg ment, § 685.040 p rovides no basi s for a warding the f

ees because PSM’s ob l i g a tions under the December 17 judg ment were fully satisfied prior to the date defendants f iled their m o t i o n for a ttorn e y s’ fees.”). Notwithstanding these intermediate

co n c l usions, the district court then proceeded to award Defendants a ttorney s’ fees under § 1717, without addressing why , consistent with Carnes , Defendants’ rig ht to these fees

was n ot e x t i ng uished upon PSM’s satisfaction of the judg ment. Id. at *10–14.

B e cause the district court erred w h e n it awarded attorney s’ fees to Defendants under § 1717, while simultaneously c oncluding that PSM had fully satisfied the oblig ations stemming from the operative judg ments, we

reverse. 8 Under Carnes
, any rig ht to a t t o r n e y s’ f e es under § 1717 “ is e x ting uished upon sati s f ac t ion of the judg ment.” 488 F .3d at 1061 (citation omitted).

8 Ou r d ecisio n to rev erse th e d istrict co u rt’ s aw ard o f p o st- r e v ersal f ees to Def

en d an t s u n d e r § 1 7 1 7 ren d ers m o o t Def en d an t s’ ch allen g e to th e d istrict co u rt’ s th irty

p ercen t red u ctio n

o f th e lo d estar am o u

n t.PSM H O L D I N G V

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M F I N A N C I A L 40

D. The denial of costs t o Def endants f or court-appointed experts. (No. 15-56184)

1. Standard of

Review

W e review a district court’s application of F ederal Rule of Civil Procedu re 54(d)(1) and its denial o f costs f or abuse of discretion. See Berkla , 302 F .3d at 917.

2. Analysis

F ollowing the district court’s e nt r y of judg ment on December 17, 2014, Defendants filed an application with the Clerk to tax costs. After a h earing
, the Clerk tax ed deposition
costs in the amount o f $3,622.22 ag ainst PSM, but denied Defendants’ remaining requests to tax a $455 filing fe e a nd $150,967.91 in costs attributable t o the c ourt-appointed

ex p erts. D efendants then filed a motion to retax co s t s

. On J uly 14, 2015, the district court deni e d t h e motion. The district court’s decision r ested on Defend a n t s ’ “limited

success a nd partial recovery , the benefit to both parties of the court-appointed ex perts’ reports, and the necessity o f retaining such ex perts to assist in analy z i n g the c omplex issued raised by the post-appeal r estitution proceeding s.” B ecause we revers e t h e d istrict court’s restitution award to PSM, the district cou r t ’s r ationale for deny ing Defendants’ motion to retax is undermined, at least in part. A c cording ly
, we vacate the district c ourt’s denial a nd remand for f

urther consideration in lig ht of today ’ s opinion.PSM H O L D I N G V

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M F I N A N C I A L 41

III.

F or the reasons set forth above:

1. I n No. 15-55026 & 15-55087, we reverse the district court’s December 17, 2014, o rder with r espect to the order’s award of $1.1 million in restitution to PSM. 9 W e dismiss as
moot PSM’s appeal o f the district c o u r t’s denial o f prejudg ment interest. W e affirm the December 17 order in all other respects, including as to the issue of QSA rescission.

2. I n No. 15-55941, we reverse the district court’s May 1 9
, 2 0 15, order awarding attorney s’ f e e s to Defendants. I n No. 1 5 -55943, Defendants ’ appeal o f the district court’s reduction of the lodestar fee amount is dismissed as moot.

3. I n No. 15-56184, becaus e w e reverse PSM’s restitution award, we vacate the district court’s J uly 14, 2015, order deny ing Defendants’ motion to retax costs and remand for reconsideration in lig

ht of the chang ed circumstances.

4. I n each of these five appeals, each party shall bear its own costs on appeal.

AF F IRMED in part, REVERSED in part, V ACATED and REMANDED in part, and DISMISSED in part.

9 W e reco g n ize th at, in aw ard i n g P SM a $ 7 00 ,0 00 o f f set, th e d istrict

co u rt also req u i red P SM to retu rn th e acco u n t receiv ab le to B A IC. T h is $ 7 0 0 ,0 0 0 f

o rm ed a p art o f th e aw ard to P SM th at w e n o w rev erse, an d so

w e also rev erse th at asp ect of th e d istrict co u rt’ s o rd er th at req u ired P S M
to retu rn th e receiv ab l e to B A IC.