Court Opinion

ID: 9896626
Source: CourtListenerOpinion
Date Created: 2023-11-13 21:05:20.993282+00
Date Added: 2024-06-11T09:15:10.786330
License: Public Domain

Filed 11/13/23 Hussein v. Razin CA4/3

                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

                IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                DIVISION THREE

 AHMED D. HUSSEIN,
                                                                       G061491, G061681
      Plaintiff, Cross-defendant,
      and Appellant,                                                   (Super. Ct. No. 30-2013-00679600)

           v.                                                          OPINION

 SHELDON RAZIN et al.,

      Defendants, Cross-complainants,
      and Appellants.

                   Appeal from two postjudgment orders of the Superior Court of Orange
County, Glenn R. Salter, Judge. Affirmed in part, reversed in part, and remanded.
                   Latham & Watkins, Michele D. Johnson, Peter A. Wald, Andrew R. Gray,
and Whitney B. Weber for Defendants, Cross-complainants and Appellants.
              Susman Godfrey, Stephen E. Morrissey, Bryan J.E. Caforio, and Kemper
Diehl for Plaintiff, Cross-defendant and Appellant; Ahmed D. Hussein in pro. per.
                               *             *              *
              The parties challenge the trial court’s denial of their respective motions for
                         1
costs. (Code Civ. Proc., § 1032.) The parties’ costs motions, and each party’s
competing motion to tax the other’s costs, followed prolonged litigation spanning nearly
a decade in which plaintiff and cross-defendant (and on appeal, respondent and
appellant), Ahmed D. Hussein, ultimately failed to prove his misrepresentation and
constructive fraud claims against Quality Systems, Inc. (QSI), but defeated the
cross-complaint against him for breach of fiduciary duty as a QSI director.
              As we explain, under the prevailing cost provision in section 1032,
subdivision (a)(4), and longstanding authority, “when neither the plaintiff nor the
defendant who has filed a cross-complaint prevails, the defendant is the prevailing party
entitled to costs.” (McLarand, Vasquez & Partners, Inc. v. Downey Savings & Loan
Assn. (1991) 231 Cal.App.3d 1450, 1454 (McLarand).) Under that code section QSI was
entitled to its costs as a matter of law. QSI is the prevailing party even though Hussein
was awarded $11 million in costs and attorney fees in an arbitral proceeding to recoup
costs in defending against QSI’s cross-complaint, since those separate arbitral cost
proceedings were never “in” the trial court for purposes of adjudicating or confirming the
award within the meaning of section 1032, subdivision (a)(4), which involves designation
of the party gaining a “net monetary recovery” as the prevailing party “in any” action or
proceeding before the trial court.
              Instead, Hussein pursued recovery through arbitration on his own, separate
and apart from the jury’s adjudication of his misrepresentation and constructive fraud

       1
              All further statutory references are to the Code of Civil Procedure.

                                             2
claims, and also from the bench trial adjudication of QSI’s cross-complaint against him
for breach of his fiduciary duty as a QSI director.
                 The trial court, however, properly denied QSI’s motion for enhanced costs
(expert witness fees) under section 998 following a pretrial offer of compromise that
Hussein rejected. We therefore affirm the trial court’s cost orders in part, reverse them in
part, and remand the case for the trial court to award QSI its costs as the prevailing
         2
party.

                    FACTUAL AND PROCEDURAL BACKGROUND
                 Twenty years ago, the Supreme Court in Small v. Fritz Companies, Inc.
(2003) 30 Cal.4th 167 (Small) authorized “holder’s actions”; in such an action, a
shareholder who alleges he or she refrained from selling shares in reliance on false

             2
               Appellants Sheldon Razin and Steven Plochocki challenge the trial court’s
blanket order denying QSI recovery of its costs (which they sought in a single motion
with QSI) on grounds that Hussein was the prevailing party with a net monetary
recovery. Razin and Plochocki contended in a separate section of their joint appellate
brief with QSI that the trial court could not conclude Hussein was the prevailing party
with a net monetary recovery as to them because they were not parties to the New York
arbitration in which Hussein received his indemnification award. This appellate
challenge is mooted by our reversal on grounds that, as a matter of law, QSI, Razin, and
Plochocki were the prevailing parties in the action below by virtue of successfully
defending against Hussein’s complaint, notwithstanding that all three parties lost on their
joint cross-complaint against Hussein for breach of fiduciary duty. Razin’s death during
the pendency of this appeal does not change or otherwise affect the fact that his and
Plochocki’s appellate challenge is moot.

              We are aware that in a related appeal between the parties that is currently
pending before us on Hussein’s challenge to the jury’s verdict against him on his
underlying lawsuit (Hussein v. Razin (Nov. 13, 2023, G061617) [nonpub. opn.]), the
parties have agreed that “all costs at issue were incurred or would be paid by QSI.” We
see no need, however, to formally take judicial notice in this appeal of such details on our
own motion because it will be for the trial court on remand to sort out QSI’s entitlement
to costs—and similarly Plochocki’s and Razin’s estate’s right to costs if they insist they
were separately entitled to them based on their costs motion with QSI.

                                              3
representations about the company’s financial performance can bring a claim for fraud or
misrepresentation under California law. (Id. at p. 171.)
               Ten years ago, in October 2013, Hussein filed his holder’s action alleging
claims of misrepresentation and constructive fraud against (1) QSI; (2) its founder and
largest shareholder, Sheldon Razin; and (3) its chief executive officer at the time in
question, Steven Plochocki. (Husssein v. Quality Systems, Inc. (Oct. 8, 2019, G055891)
[nonpub. opn.] (Hussein I).) The complaint alleged that “[h]ad Hussein never heard or
relied upon Defendants’ representations about QSI in late 2011 . . . [¶] . . . [and]
throughout 2012[,] he would have continued working with Jones Trading to sell his
9,333,700 QSI shares.” (Hussein I, supra, G055891.)
               QSI, Razin, and Plochocki filed a cross-complaint against Hussein
approximately a year later. The gravamen of the cross-complaint was that Hussein, a QSI
director, breached his fiduciary duty to the company by margining his QSI shares, i.e.,
pledging them as security for loans he obtained through several of his brokerage
accounts. (Hussein I, supra, G055891.) Hussein used the loan proceeds in part to pay off
other loans that, as the trial court later described, ‘“he had in Egypt at a higher rate . . . .”‘
(Ibid.) Among other damages, the cross-complaint sought disgorgement of the
‘“spread”‘ between the interest rates on Hussein’s Egyptian and U.S. loans,
approximately 6.5 percent and 1 percent respectively, which QSI estimated netted
Hussein $2 million in unwarranted savings through his alleged breach of fiduciary duty
by margining his shares. (Ibid.)
               In 2015, QSI obtained a favorable summary adjudication ruling disposing
of Hussein’s holder’s cause of action. The trial court concluded that ‘“in light of the
undisputed evidence of Plaintiff’s long standing battle with, and extreme distrust of,
QSI’s leaders, along with Plaintiff’s sophistication [as an investor] and desire to seek
control of the [QSI] board,”‘ Hussein ‘“could not have justifiably relied on Defendants’

                                                4
alleged misrepresentations”‘ and, therefore his holder’s claim failed. (Hussein I, supra,
G055891.)
              The matter proceeded to a bench trial on QSI’s cross-complaint. QSI
sought equitable disgorgement of money Hussein saved on the loan spread, plus
disgorgement of Hussein’s directorship salary. Having heard the evidence, the court
found that ‘“[e]quity does not demand that for some reason [Hussein should] give QSI
the benefit that he got from getting a lower interest rate in the United States compared to
the Egyptian rate”‘ and that there was ‘“no benefit that QSI should have gotten that
instead Mr. Hussein got.”‘ (Hussein I, supra, G055891.)
              The court also found that Hussein’s directorship income was essentially a
salary because ‘“that was [his] job,”‘ but that, while from the perspective of QSI’s
management and others including other board members, Hussein ‘“was a pain in
everybody’s backside,”‘ he was nevertheless ‘“a working, practicing member of the
board,”‘ and there was no basis to forfeit his salary since QSI failed to show a breach of
fiduciary duty. (Hussein I, supra, G055891.)
              At the close of the bench trial, Hussein sought attorney fees, arguing he was
entitled to them under the terms of his directorship indemnification agreement because he
prevailed on the cross-complaint. “The trial court denied Hussein’s request ‘without
prejudice’ to Hussein subsequently ‘fil[ing] an action for breach of the Indemnification
Agreement.’ The court ruled that this was the ‘proper course’ for Hussein to seek
                                                                                   3
indemnity fees under the agreement, rather than by his post-trial costs motion.”
(Hussein I, supra, G055891.)
       3
              As we discuss below, Hussein never attempted to file a complaint, a
cross-claim against QSI’s breach of fiduciary duty complaint against him, or other
pleading to seek to have the trial court enforce the indemnity agreement, whether by a
cause of action for declaratory judgment, breach of contract, or otherwise. Instead, he
elected to enforce the agreement through its arbitration provision, which we also discuss
more fully below.

                                             5
              After the conclusion of the bench trial, the trial court entered judgment on
its earlier summary adjudication of Hussein’s holder’s claim and on the bench trial result.
Both Hussein and QSI appealed, with Hussein challenging the summary disposition and
QSI the bench trial finding against it.
              We resolved the appeals in Hussein I. As to the holder’s action, we
explained that “[o]n our de novo review, we believe the issue is close, but conclude QSI
did not meet its burden as the moving party to establish as a matter of law that Hussein
could not prove reasonable reliance on QSI’s alleged misrepresentations.” (Hussein I,
supra, G055891.) While “QSI presented what appeared to be a strong case for summary
judgment by excerpting,” for example, “letters Hussein sent the SEC and NASDAQ,” we
found that close review of the letters and other evidence submitted by QSI showed fatal
“ambiguity, precluding judgment as a matter of law for QSI.” (Ibid.) As to a letter which
involved “squabbles and jealousies involv[ing] private jets and corporate boards,” we
found “a reasonable jury could view the letter as being limited in scope to travel policy
complaints and allegations of favoritism and board extravagance.” (Ibid.) “[B]ecause the
letter gave no hint of concern about QSI’s sales data and sales pipeline—the core subjects
of alleged QSI misstatements Hussein later claimed he relied on—a reasonable jury could
discount the importance of the letter to the litigation.” (Ibid.) With these ambiguities in
its evidence, QSI did not establish it was entitled to judgment as a matter of law on the
question of reliance for his holder’s claim. (Ibid.)
              Our opinion in Hussein I further explained that “[a]lternate grounds
advanced by QSI based on lack of the necessary specificity in pleading a holder’s claim
or inability to prove damages also fail to support summary judgment.” (Hussein I, supra,
G055891.) We also found no merit in QSI’s appellate challenge to the trial court’s ruling
after a bench trial on QSI’s cross-complaint. (Ibid.) Additionally, we upheld the court’s
ruling denying Hussein attorney fees at that time because, pending “any appeal
therefrom,” the bench trial result on QSI’s cross-complaint was not yet “the final

                                              6
disposition of the Proceeding” when Hussein made his motion, as required by the terms
of his indemnity agreement with QSI to trigger his right to indemnification. (Ibid.)
              Our disposition in Hussein I reversed the trial court’s summary adjudication
of Hussein’s holder’s action and affirmed the trial court’s judgment after the bench trial
on QSI’s breach of fiduciary duty claim against Hussein.
              On remittitur, Hussein renewed his motion in the trial court for
indemnification. The court deferred ruling on the motion. The court noted that it was not
the bench officer that heard QSI’s cross-complaint against Hussein and concluded that
resolving Hussein’s motion would require “really look[ing] at that indemnification
agreement” and that “the appropriate time to do it is after the entire case is complete.”
              Counsel for Hussein objected that QSI was applying the indemnity
agreement unequally, with Razin and Plochocki “continuing to receive the benefits of the
same indemnification [provision] through trial while Mr. Hussein is denied those
benefits.” Counsel added that “if Mr. Hussein needs to bring a separate lawsuit or
arbitration to obtain his indemnification rights, he will do so.”
              The matter proceeded to a jury trial on Hussein’s holder’s claim. After a
three-week trial in which the jury heard from 17 witnesses, the jury returned a defense
verdict. Responding to questions on the special verdict form, the jury did not reach the
issue of whether Hussein relied on any statements by Plochocki, Razin, or other QSI
personnel in deciding against selling his QSI shares; instead, it determined that, even if he
did, none of the statements were false or misleading. Hussein’s appeal of the judgment
entered on the jury’s verdict is now pending before this court.
              Meanwhile, almost exactly one year before the jury rendered its verdict in
July 2021, Hussein had already initiated arbitration proceedings under his indemnity
agreement with QSI seeking indemnification for his attorney fees and costs in
successfully defending against QSI’s cross-complaint. The terms of the indemnity
agreement provided that, ‘“at his option,”‘ Hussein had the right to seek adjudication of

                                              7
his indemnification claim ‘“by a court”‘ or through arbitration. (Hussein I, supra,
G055891.) Hussein chose the latter and commenced American Arbitration Association
arbitration proceedings in New York in July 2020.
              Hussein alerted the arbitrator that, with our opinion in Hussein I affirming
the bench trial result, his victory in defending against the cross-complaint was final. The
arbitrator found as to attorney fees that “[t]his is not a ‘fee-shifting’ case in which a
tribunal is asked to fix a reasonable fee for a prevailing party in a disputed matter . . . .
Instead, it involves [QSI’s] contractual obligation to provide full indemnification of all
Expenses actually and reasonably incurred” by Hussein, including a “multiplier of three”
that Hussein’s attorneys negotiated in their “contingent fee agreement” to represent him
in defending against the cross-complaint.
              The arbitrator awarded Hussein more than $11 million in indemnification
for defending against QSI’s cross-complaint. This consisted of more than $10 million for
“legal fees,” which was comprised of “a base fee of $2,498,813.13, trebled to
$7,496,439.38, and interest of $2,862,976.37.” A further $1,010,507.68 in
“indemnification (including interest) for other expenses” brought the award to its grand
total of $11,369,923.42. The arbitrator entered the award on September 2, 2021, and QSI
paid the award in full by the end of the month.
              Over the course of approximately another year of proceedings, the parties
filed their respective motions for costs and to tax each other’s costs that are the subject of
this appeal. The trial court issued two detailed minute orders denying each side’s request
for costs and granting each side’s motion to tax the other’s costs, with the result being
that the court awarded no costs.
              First, the court denied QSI’s costs motion, including expert witness
testimony fees and other costs that QSI sought after Hussein rejected its section 998
pretrial settlement offer. The trial court explained the background of its ruling as
follows: “Much of the costs sought to be charged [by QSI] are pursuant to an unaccepted

                                               8
offer under . . . section 998. The defendants served the plaintiff with a 998 offer to settle
the litigation for $4.5 million. It was rejected. The plaintiff[] lost at trial on the
complaint.” “An offer made under . . . section 998 must be made in good faith; and it
must be reasonable and carry with it the reasonable prospect of acceptance.” The trial
court then concluded: “The offer made here was neither reasonable nor made in good
faith, and there could be no reasonable belief that it would be accepted.”
              The court explained its thinking: “This litigation has stretched over eight
years. It was filed under a novel theory—as a holder’s action—a type of action
authorized by the California Supreme Court some years ago but which had never been
litigated in the state. The plaintiff sought roughly $450 million. And given the
statements made by the Court of Appeal in its opinion ordering this matter to proceed to
trial, the claim was well within reason to have been brought and maintained. There was
also a history involving these parties before other courts strongly suggesting that if the
facts could be proved the plaintiff would be in for a large payday. Further, and as the
defendants could easily guess, the amount offered would not have covered even the costs
the plaintiff had incurred just to get his day in court.” As a result, the court found QSI
was not entitled to its post-offer costs under section 998.
              The court also denied QSI its costs under section 1032, finding that QSI
was not the prevailing party in the action though it defeated Hussein’s holder’s claim.
              The court found it dispositive that “the plaintiff was successful on a claim
that went to arbitration. In that matter, the plaintiff was awarded over $11 million. [¶]
Under Code of Civil Procedure section 1032, subdivision (a)(4), the court has no
discretion to deny prevailing party status to one who qualifies. It is well settled that when
there are competing claims for monetary claims, courts look to the net monetary
recovery. [Citation.] Here, when the two results are compared, the plaintiff received the
net monetary recovery and thus qualifies as a matter of law as the prevailing party.”

                                               9
              The court acknowledged that “the two claims were not in direct
opposition,” recognizing obliquely that Hussein had not filed any affirmative pleading for
indemnification in the trial court. Nevertheless, the court held that Hussein’s victory in
the arbitral forum qualified to constitute a “net monetary recovery” for purposes of
determining a prevailing party in actions or proceedings before the trial court under
section 1032, subdivision (a)(4). The court reasoned that the jury and bench trials,
together with the arbitration in New York, “both were part of an on-going, epic saga
between two men—Hussein and Razin. Under the circumstances of this case, it would
make no sense to separate them, or to treat them as different matters.”
              The court then turned to and resolved in a separate order Hussein’s costs
motion, which Hussein filed after the court entered its ruling on QSI’s motion. The court
set out the background of its order by noting that “[t]he cost bill filed by Hussein is based
on this court’s prior finding that he was the prevailing party,” at least insofar as he gained
a monetary recovery in the arbitration, whereas QSI recovered nothing in any of the three
proceedings: the jury trial, the bench trial, or the arbitration. Hussein did not seek
double-recovery in the trial court of the same costs he recovered in the arbitration, but
rather sought his costs in prosecuting the holder’s action. The trial court observed,
“Essentially, he is claiming an entitlement to costs in that part of the action that he lost.”
              The court denied Hussein’s motion. “It is the court’s understanding that
Hussein received costs and an award of attorney fees in the two parts of this case that he
won [recovering in the arbitration both his costs for the bench trial and for the arbitration
itself]. It is inconceivable that he would also be statutorily entitled to those costs he
incurred in that part of the action he lost simply because he had obtained a ‘net recovery’
when the action was viewed as a whole. Moreover, it is not just that he lost the holder’s
action. He lost on the most basic of issues: The jury determined there had been no false
representation.”

                                              10
              The court explained it “went back and re-read the seminal case for holder’s
actions in California—Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167. Small was a
badly splintered opinion, and other than allowing a holder’s action in California, it
provided no real guidance. There was not, for example, any consensus as to what
damages were available in such an action or how such damages would be calculated. But
what was clear from the various opinions was that the Supreme Court was very
concerned that a plaintiff would use a holder’s action to seek damages in a case where
there had not been, as here, any misrepresentation. [¶] The court has considered the
purpose of the holder’s action and the factual finding of the jury. The court finds that
although Hussein may qualify as a prevailing party under the net monetary recovery
theory for purposes of defeating the defendants’ cost bill, in light of the rationale of Small
and the fact Hussein was compensat[ed] for his costs and attorney fees in that part of the
case he won, viewed in context he is not a prevailing party entitled to costs solely on the
holder’s action, which he lost.” Consequently, the trial court granted QSI’s motion to tax
Hussein’s costs.
              Both sides now appeal.

                                       DISCUSSION
       1.     Costs under Section 1032
              QSI contends it was the prevailing party in the action below, and therefore
it is entitled to its costs as a matter of law. We agree.
              Generally, the trial court’s prevailing party determination, “‘along with its
award of fees and costs, is reviewed for abuse of discretion.’” (Sharif v. Mehusa, Inc.
(2015) 241 Cal.App.4th 185, 191 (Sharif).) “When, however, the determination that a
litigant is a prevailing party involves the interpretation of a statute, the issue concerns a
matter of law that is reviewed de novo.” (Ibid.) “Assuming the ‘prevailing party’
requirements are met, the trial court has no discretion to order each party to bear his or

                                              11
her own costs of suit.” (Fairbank, Wegner & Wegner, Cal. Practice Guide: Civil Trials
and Evidence (The Rutter Group 2023) ¶ 17:205, p. 17-36; see, e.g., Michell v. Olick
(1996) 49 Cal.App.4th, 1194, 1198.)
              Section 1032, subdivision (b), provides in part that “a prevailing party is
entitled as a matter of right to recover costs in any action or proceeding.” As relevant
here, the statute defines the “prevailing party” as the one with “a net monetary recovery,”
if any, or in the alternative, the “defendant where neither plaintiff nor defendant obtains
any relief.” (§ 1032, subd. (a)(4).) Relief may be in the form of a monetary recovery, but
also ‘“includes, among other remedies, . . . specific performance, [an] injunction, or the
reformation or rescission of a contract.’” (Childers v. Edwards (1996) 48 Cal.App.4th
1544, 1549 (Childers).)
              As this court has explained, the statute’s reference to neither a plaintiff “nor
[a] defendant obtain[ing] any relief” (§ 1032, subd. (a)(4), italics added) implicitly
contemplates scenarios in which the defendant “files a cross-complaint against the
plaintiff because affirmative relief cannot be claimed in the answer” (McLarand, supra,
231 Cal.App.3d at p. 1454 [citing code section governing answers, § 431.30, subd. (c)]).
              For purposes of a cost award, “there is a single prevailing party.” (Sharif,
supra, 241 Cal.App.4th at p. 194.) Thus, in McLarand we rejected the notion that “when
a defendant files a cross-complaint against a plaintiff, and neither party prevails on its
action, both parties are ‘prevailing parties’ under section 1032 and both are entitled to an
award of costs.” (McLarand, supra, 231 Cal.App.3d at p. 1453.) Instead, section 1032,
subdivision (a)(4), grants prevailing party status to the defendant in such cases, i.e., the
prevailing party is the ‘“defendant where neither the plaintiff nor the defendant obtains
any relief.”‘ (McLarand, at p. 1454.) As we held in McLarand, “when neither the
plaintiff nor the defendant who has filed a cross-complaint prevails, the defendant is the
prevailing party entitled to costs.” (Ibid.)

                                               12
              Based on the foregoing authority, QSI was the prevailing party as a matter
of law when it defeated Hussein’s holder’s action—unless Hussein gained a “net
monetary recovery” in the proceedings before the trial court. For prevailing party
purposes under section 1032, subdivision (a)(4), a “net monetary recovery” trumps a
stalemate in which “neither the plaintiff nor the defendant obtains any relief” because the
latter category does not apply when there has been relief in the form of a monetary
recovery.
              Here, however, Hussein did not gain a net monetary recovery over QSI
within the meaning of section 1032. “A fundamental tenet of statutory construction is
that, if possible, significance should be attributed to every word, phrase and sentence of
an act.” (McLarand, supra, 231 Cal.App.3d at p. 1454.) Section 1032 governs cost
awards involving a ‘“Complaint,”‘ which term the statute expressly defines to include “a
cross-complaint,” and section 1032 also specifies that it applies to “a complaint in
intervention” and that “‘Defendant’ includes a cross-defendant,” but it does not mention
arbitration petitions or answers, nor arbitral petitioners or respondents. (See § 1032,
subd. (a)(1)-(3).) Nor does it suggest it is applicable to determine costs based on
proceedings before other tribunals, whether by complaint, cross-complaint, a complaint
                                            4
in intervention, or in some other manner.

       4
               Conceivably section 1032’s prevailing party calculus may include the
results of arbitration or mediation of complaints, cross-complaints, or other matters that
begin in the trial court and over which the trial court retains jurisdiction to confirm or
deny the award, but we do not consider this question as it is not before us. Hussein
suggests that, before resorting to arbitration, his attorney “informed the Court that
Hussein might choose to pursue arbitration on the indemnification issue, subject to the
Court’s retention of jurisdiction to enforce an arbitration award.” (Italics added.)
Hussein’s citation to the record does not support his claim that his turn to arbitration was
conditional on anything the court did. In any event, as we discuss below, Hussein points
to no authority that the trial court could retain jurisdiction to confirm or deny arbitration
of a cross-claim or cross-complaint that he never filed in response to QSI’s
cross-complaint.

                                                13
              The fact that subdivision (b) of section 1032 provides that a prevailing
party “is entitled as a matter of right to recover costs in any action or proceeding” does
not change our analysis. We interpret actions and proceedings referred to in the phrase,
“in any action or proceeding,” to mean those “in” the trial court for adjudication or
resolution “in” that forum (ibid.), and we interpret the right to costs as a prevailing party
to be a right to costs incurred “in” proceedings before the trial court, not to relief that may
or may not have been sought or obtained outside the trial court’s domain. The rules of
civil procedure—including section 1032—govern matters before California courts, not
those before other adjudicatory bodies. (See, e.g., §§ 22-23 [defining “action” and
“special proceeding” for purposes of California law, not other purposes].) We therefore
similarly interpret the “net monetary recovery” for purposes of determining a prevailing
party under section 1032, subdivision (a)(4), to be “net” of the proceedings in the trial
court, not elsewhere.
              This conclusion is consistent with the meaning of “relief” in the phrase
“obtains any relief” in subdivision (a)(4) of section 1032, which has been construed to
refer to ‘“the assistance, redress, or benefit which a complainant seeks at the hands of a
court . . . .”‘ (Childers, supra, 48 Cal.App.4th at p. 1549, italics added.) As we observed
in Hussein I, Hussein was entitled under the terms of his indemnity agreement to
adjudication of his indemnification claim ‘“by a court’ or, ‘at his option, [he] may seek’
arbitration . . . .” (Hussein I, supra, G055891.) Hussein chose the latter, taking his
indemnity claim to the American Arbitration Association (AAA).
              The relief he gained through AAA arbitration was not “at the hands of” the
trial court. The arbitrator awarded Hussein indemnification not only for his attorney fees
waived in defending against QSI’s cross-complaint, but also all of his “Expenses
Reasonably Incurred in Defense of th[at] Cross Claim.” This latter sum totaled more
than $1 million “as indemnification (including interest) for other expenses”; these
expenses apparently included Hussein’s court costs in the bench trial.

                                              14
              The arbitrator scrupulously allowed Hussein “indemnification only for
Expenses reasonably incurred in defense of [QSI’s] cross claim, which must be separated
from the costs of Mr. Hussein’s affirmative [holder’s] claim against [QSI in the jury
trial].” We see nothing in section 1032’s costs provisions to suggest that this arbitration
result should factor into a calculation of the “net monetary recovery,” if any, achieved by
affirmative “relief” for either party “in” proceedings before the trial court. In other
words, we see no basis in the terms of section 1032 to deprive QSI of its costs as the
prevailing party in the trial court where, on the claims adjudicated by the trial court, QSI
was entitled to its costs under subdivision (a)(4) as the “defendant where neither plaintiff
nor defendant obtains any relief” on claims before the court.
              Our conclusion is consistent with the well-established rule in California
which allows defendants who defeat a plaintiff’s claims to recover their costs even when
they fail to prevail on their counterclaim or cross-complaint against the plaintiff.
(Schrader v. Neville (1949) 34 Cal.2d 112, 114 (Schrader); McLarand, supra,
231 Cal.App.3d at pp. 1454-1455.)
              In Schrader, the Supreme Court declined to find any significance in
whether the defendant’s cross-claim was asserted as a “counterclaim” or as a
“cross-complaint.” (See Schrader, supra, 34 Cal.2d at pp. 114-115.) At the time, a
counterclaim was understood to be a “‘cause arising out of the transaction set forth in the
complaint as the foundation of the plaintiff’s claim.’” (Id. at p. 114.) There, confronted
with a competing claim arising from the same car accident, the Supreme Court observed
that if not for the plaintiffs’ complaint, the defendants “might not have sued to recover
damages.” (Id. at p. 115.)
              However, once the Nevilles were “made defendants in the action [by virtue
of the Schrader plaintiffs’ complaint], they were compelled to then assert any claim
which they might have against the Schraders arising out of the collision,” or risk losing
the claim because “all causes of action arising out of an automobile accident are part of

                                             15
one ‘transaction’ within the meaning of the code sections relating to cross-complaint and
counterclaim.” (Schrader, supra, 34 Cal.2d at p. 115.) The court held that, whether
labeled a counterclaim or, as the defendants there had done, as a cross-complaint, the
distinction was immaterial. “‘[T]he “net result” of a judgment which awards nothing to
plaintiff is favorable to the former. Although the defendant[s] did not recover on [their]
cross-complaint, [they were] the prevailing party in the court below because plaintiff[s]
w[ere] denied recovery against [them].’” (Ibid.)
              As we observed in McLarand, this rule has persisted through the different
iterations of section 1032. (McLarand, supra, 231 Cal.App.3d at p. 1455.) “The
Legislature is deemed to be aware of existing judicial decisions interpreting a statute at
the time legislation is enacted and to have enacted and amended statutes in light of such
decisions” and “legislative enactments will not be construed so as ‘to overthrow
long-established principles of law unless such [an] intention is made clearly to appear
either by express declaration or by necessary implication.’” (Ibid.) In the absence of any
legislative amendment to section 1032 subsequent to McLarand (or Schrader earlier), the
legislative intent regarding that section remains clear: when there is no net monetary
recovery by either party, the defendant is entitled to recover its costs as the prevailing
party in the action. QSI was therefore entitled to its costs as the prevailing party.
              Hussein argues the arbitration award was “part of the Superior Court
litigation” because he “pled his entitlement to indemnification for his costs and fees
defending against the Cross-Complaint as an affirmative defense.” But it remains as true
today as it was when this court issued its opinion in McLarand that “Affirmative relief
may not be claimed in the answer.” (§ 431.30, subd. (c); see McLarand, supra,
231 Cal.App.3d at p. 1454.)
              Hussein never pled a cause of action here for breach of the indemnity
agreement, either in an independent complaint or as a cross-claim in response to QSI’s
cross-complaint against him for breach of fiduciary duty. He does not suggest QSI’s

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cross-complaint mentioned the indemnity agreement in any way. Nor was the
cross-complaint “on” the indemnity agreement, alleging its breach. To the contrary,
QSI’s cross-complaint alleged a tort, i.e., breach of his fiduciary duty, not a breach of the
indemnity agreement or any other contractual obligation.
              The trial court that conducted the bench trial of QSI’s cross-complaint
advised Hussein to file a complaint or cross-claim for breach of the indemnity agreement
when it denied his motion for costs under the indemnity agreement as premature.
(Hussein I, supra, G055891.) More specifically, the court denied Hussein’s request for
his attorney fees ‘“without prejudice’ to Hussein subsequently ‘fil[ing] an action for
breach of the Indemnification Agreement.’ The court ruled that this was the ‘proper
course’ for Hussein to seek indemnity fees under the agreement, rather than by his
post-trial motion.” (Ibid.) Instead, Hussein elected to go to arbitration. Under these
circumstances, we cannot say that any dispute about the terms of the indemnity
agreement or a claim for indemnification under it was ever before the trial court. The
indemnity agreement was never a part of the superior court action involving Hussein’s
holder’s claim and QSI’s tort claim for breach of fiduciary duty.
              It is true that a new bench officer included this statement in the trial court’s
final judgment preceding the appeal in Hussein I: “Hussein is presently pursuing
attorneys’ fees and costs incurred in connection with the Cross-Complaint under his
Indemnification Agreement with QSI in a separate arbitration proceeding, and the Court
retains jurisdiction to confirm the ultimate arbitration award.” (Italics added.) But
Hussein never brought adjudication of any claim under the indemnity agreement within
the court’s “jurisdiction.” There is, therefore, no merit in Hussein’s claim that
adjudication of his indemnity claim was “part of the Superior Court action.” As a result,
there is no merit in his claim that he should be deemed the prevailing party in that action
as a whole based on his net monetary recovery in the arbitral forum.

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        2.      Costs under Section 998
                Hussein contends the trial court properly rejected QSI’s motion for costs
under section 998, while QSI argues the court erred in denying its bid for costs under that
statute. The issue is not mooted by our determination that QSI is entitled to recover its
costs as the prevailing party under section 1032 because section 998 authorizes enhanced
costs not available under section 1032, namely, expert witness fees.
                Section 998 applies most commonly to authorize a defendant’s recovery of
certain costs even when the plaintiff prevails at trial. Specifically, the defendant may
recover costs it incurs after the plaintiff rejects a pretrial settlement offer, where the
plaintiff’s monetary recovery does not surpass the defendant’s offer. (§ 998,
subd. (c)(1).) That portion of section 998 is not implicated here, but the same subdivision
also provides for enhanced costs when the defendant is the prevailing party. Specifically,
when the plaintiff fails to recover more than the defendant offered, the court “may require
the plaintiff to pay a reasonable sum to cover postoffer costs of the services of expert
witnesses . . . actually incurred and reasonably necessary in either, or both, preparation
for trial . . . or during trial . . . .” (Ibid.)
                “‘As recognized in numerous Court of Appeal decisions, the clear purpose
of section 998 . . . is to encourage the settlement of lawsuits prior to trial.’ [Citation.]
‘Section 998 achieves its aim by punishing a party who fails to accept a reasonable offer
from the other party.’” (Westamerica Bank v. MBG Industries, Inc. (2007)
158 Cal.App.4th 109, 129.)
                The offering party has the burden of demonstrating that the offer is
legitimate under section 998, and so “a section 998 offer must be strictly construed in
favor of the party sought to be subjected to its operation.” (Barella v. Exchange Bank
(2000) 84 Cal.App.4th 793, 799.) Additionally, ““‘a good faith requirement’” is read into
section 998, requiring that “‘the settlement offer be ‘realistically reasonable under the
circumstances of the particular case”“ and that there be ““some reasonable prospect of

                                                   18
acceptance.’”‘“ (Najah v. Scottsdale Ins. Co. (2014) 230 Cal.App.4th 125, 143.) “‘“[A]
party having no expectation that his offer will be accepted ‘will not be allowed to benefit
from a no-risk offer made for the sole purpose of later recovering large expert witness
fees.’”‘“ (Ibid.) Whether an offer is reasonable and made in good faith is a matter left to
the trial court’s sound discretion. (Elrod v. Oregon Cummins Diesel, Inc. (1987)
195 Cal.App.3d 692, 700 (Elrod).)
              As QSI acknowledges under Elrod, the discretionary standard means that to
some degree “the reasonableness of an offer may lie in the eye of the beholder.” (Elrod,
supra, 195 Cal.App.3d at p. 699.) Nevertheless, QSI contends the trial court erred in
finding a lack of good faith or reasonable expectation its offer would be accepted based
on its nominal amount in comparison to the damages Hussein sought and his significant
expenses incurred, as the court observed, “just to get his day in court.”
              QSI emphasizes authority that a section 998 offer should “not be evaluated
simply in comparison to the judgment [plaintiff] sought,” but instead its legitimacy
should be judged based on “the likelihood that [plaintiff] would prevail at trial” (Adams
v. Ford Motor Co. (2011) 199 Cal.App.4th 1475, 1485-1486) rather than on other
considerations (Culbertson v. R.D. Werner Co., Inc. (1987) 190 Cal.App.3d 704, 710
(Culbertson)). Thus, “[w]hen a defendant perceives himself to be fault free and has
concluded that he has a very significant likelihood of prevailing at trial, it is consistent
with the legislative purpose of section 998 for the defendant to make a modest settlement
offer.” (Ibid.)
              What QSI overlooks, however, is that in addition to Hussein’s incurred
costs and the magnitude of his claim, the trial court also based its finding on the “history
involving these parties before other courts strongly suggesting that if the facts could be
proved the plaintiff would be in for a large payday.” Indeed, in federal securities
litigation premised on the damages the same allegedly fraudulent misstatements made by
Plochocki and other QSI personnel caused to the QSI stock portfolio held by two public

                                              19
entity investment funds, QSI settled that case for $19 million after the Ninth Circuit
reversed a summary judgment ruling in QSI’s favor. (See In re Quality Systems, Inc.
Securities Litigation (9th Cir. 2017) 865 F.3d 1130 (Quality Systems).)
                There, the Ninth Circuit stated unequivocally that a jury could find the
“statements of Plochocki and other QSI officers were inconsistent with real-time
financial information and were materially false or misleading.” (Quality Systems, supra,
865 F.3d at p. 1144.) This finding likely led to QSI’s decision to settle that matter and,
with this “blood in the water,” QSI could not reasonably expect a nominal overture to
Hussein (one percent of the damages he claimed, supported by a battery of expert witness
testimony) would be accepted or regarded by a trial court as being made in good faith.
This is particularly true where Hussein was QSI’s longtime second-largest shareholder,
behind only Razin, its founder, and yet QSI settled with the smaller pension fund
shareholders in Quality Systems for an amount that nearly quadrupled the $4.5 million
QSI offered Hussein.
                QSI attempts on appeal to rehabilitate its offer to Hussein by emphasizing
that it included not just “$4.5 million in cash,” but also “the right to maintain and pursue
his indemnification claim in separate arbitration proceedings before AAA New York, and
a release of all claims against him relating to the litigation, including any right QSI
Parties would have to costs if they prevailed at trial.” QSI suggests that “[a]ltogether, the
Offer [it made under section 998] presented considerable value, potentially up to
$20 million.”
                We are not persuaded. The $11 million that Hussein recovered in the New
York arbitration, and which QSI silently incorporates in its $20 million calculation, had
nothing to do with the value of his holder’s claim. To the contrary, it was
indemnification for his expenses in defending against QSI’s unsuccessful breach of
fiduciary duty claim, which was not related to the alleged misstatements by Plochocki or
others that undergirded Hussein’s and the Quality Systems plaintiffs’ fraud claims. Thus,

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subtracting that amount from QSI’s $20 million figure reduces the claimed value of its
offer to $9 million—less than half of what QSI paid the Quality Systems plaintiffs with
smaller holdings. The trial court could conclude even this sum was not reasonably
calculated to gain Hussein’s acceptance.
              Finally, just as a plaintiff’s incurred costs are not dispositive in valuing a
case, by parity of reasoning neither are a defendant’s costs. (See Culbertson, supra,
190 Cal.App.3d at p. 710.) Therefore, QSI’s attempt to bolster the value of its offer by
including “any right QSI Parties would have to costs” must be discounted. Thus, the
$9 million figure (after Hussein’s $11 million arbitration recovery is subtracted from
QSI’s $20 million estimate) is reduced to a ballpark figure approaching the $4.5 million
offer by QSI. However tenuous Hussein’s claims, “[even if] tenuous indeed, having in
mind the enormous exposure[,] the trial court could find that [QSI] had no expectation
that its offer would be accepted.” (Pineda v. Los Angeles Turf Club, Inc. (1980)
112 Cal.App.3d 53, 63; see also Wear v. Calderon (1981) 121 Cal.App.3d 818, 821 [“A
plaintiff may not reasonably be expected to accept a token or nominal offer from any
defendant exposed to this magnitude of liability unless it is absolutely clear that no
reasonable possibility exists that the defendant will be held liable”].) The Quality
Systems settlement having amply demonstrated a reasonable possibility of liability, the
trial court could reasonably conclude QSI’s comparatively lowball offer to Hussein was
not made in good faith. For all the foregoing reasons, we find no error in the trial court’s
denial of its motion for costs under section 998.

                                      DISPOSITION
              The trial court’s cost orders are affirmed to the extent they denied QSI its
motion for enhanced costs for witness fees under section 998. The court’s order denying
QSI’s costs as the prevailing party under section 1032 is reversed. The matter is

                                              21
remanded for the court to determine and enter costs in favor of QSI. QSI is entitled to its
appellate costs.

                                                 GOETHALS, J.

WE CONCUR:

MOORE, ACTING P. J.

SANCHEZ, J.

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