A Hard Lesson About Settlement Agreements

Posted on April 25, 2011 by Ron White

Settlement agreements should not be the product of a cookie cutter operation. They must be carefully crafted to fit the laws and facts of the case. Considerable thought should be given to the scope of the release language in the agreement. We are again reminded of these fundamental principles by the unfortunate result in a California Court of Appeals case called Leung v. Verdugo Hills Hospital, a case in which the appellate court apologetically reached its conclusion while asking the California Supreme Court to reconsider a common law rule regarding releases that led to a very harsh result. 

The facts of the case are very sad: an infant suffered irreversible brain damage when his "bilirubin" reached toxic levels. In the medical malpractice action against the pediatrician and hospital, the parents of the child settled with the doctor for $1 million, the limits of his malpractice insurance, in exchange for a release of liabiity.  The trial court ruled that the settlement did not meet the standard of good faith under California Code of Civil Procedure sections 877 and 877.6, because it was grossly disproportianate to the doctor's potential exposure in the case. Nevertheless, the parents and doctor decided to go through with the settlement.

The case was tried to a jury, which found both the hospital and the doctor negligent, and awarded damages of $78,000 for past medicals, $250,000 for noneconomic damages, $82 million for future medicals, and $13 million for loss of future earnings. Apportioning fault, the jury found the hospital was 40% negligent, the doctor 55% negligent, and the parents 5% negligent. The trial court entered judgment which declared the hospital was jointly and serverally liable for 95% of all economic damages and severally liable for its 40% share of noneconomic damages.

The hospital appealed, claiming that the release and settlement agreement with the doctor acted as a release of the hospital's joint and several liabilty for economic damages. The hospital argued that in cases where there is a single injury:

Under the common law release rule, a release for consideration of one tortfeasor operates as a release of the joint and several liability of the other joint tortfeasors.

The Court of Appeals agreed and reversed the judgment of the trial court as to the hospital's joint and several liabilty for the economic damages. The judgment was affirmed insofar as it imposed several liability on the hospital for $250,000. Unless the California Supreme Court grants review of the case and decides to change the common law rule that led to this unintended outcome, the settlement and release agreement with the doctor wiped out $95 million, money that the jury felt was necessary to care for the future medical and finanicial needs of the child.

Lessons Learned

1. The Court noted that plaintiff could have avoided the result had the settlement agreement contained a covenant not to sue agreement rather than a release of liabilty. That way there would not have been a release of all who were potentially jointly and severally liable, only a promise that the party paying the money would not be subject to future collection efforts.

2. Plaintiffs must be very cautious about the scope of the release. Be sure you are releasing only those rights you intend to let go.

 

 

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Winner Ordered to Pay Opponent's Fees and Costs in CA Construction Defect Case

Posted on February 24, 2010 by Ron White

Bidding a construction project: is a little like going to trial: you put your best team of estimators together, they pour over the plans and specs, every contingency is thoroughly considered, and bingo, just like you planned, you're awarded the contract. Sometimes, however, the unexpected or unanticipated happens, and their goes your profit. An award at trial can be like that-you can lose even when you win, despite the excellent preparation and work by your trial team. The Supreme Court of California demonstrated this in a decision published February 4, 2010 (PDF), arising from a construction defect case that was filed in 2001.

Here's a summary of what happened: The homeowners bought a new home in beautiful Laguna Beach, California. Various construction defects surfaced shortly after the sale of the property. The homeowners sued everyone and their uncle, eventually settling with all but one of them. The trial court found the $230,000 in settlement money paid by five of the defendants was appropriate given the damages suffered and found that the settlement was done in "good faith," which meant that the settling defendants would be completely out of the lawsuit and no longer faced the threat of indemnity claims. The homeowners proceeded to trial against the non-settling defendant where the jury awarded them $146,000.

That was the good news; the bad news was the trial court ruled that even though the homeowners were awarded damages, the amount of the damages had to be off-set by the pre-trial settlement, resulting in a finding that the homeowners would get nothing as a result of the trial and, in fact, since they were not the prevailing party, they were ordered to pay the attorney fees of $132,000 and  $12,000 in costs to the non-settling defendant.

The decision was based on the Supreme Court's interpretation of California statutes, and the statutes reflect the intent of California lawmakers and that of most state legislators to create a legal system that encourages settlement and punishes those who reject reasonable settlements and then do worse at trial than they would have done had they accepted the pre-trial settlement offer. This can be a shock to litigants. They learn the hard way the painful lesson that even if you win, you can lose at trial.

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