Partial Settlements – Beware Of The Pitfalls!

From the Blog of Phyllis G. Pollack.

Many cases filed in court involve an attorneys’ fee provision (pursuant to either contract or state statute) by which the prevailing party is entitled to be awarded her reasonable attorneys’ fees and costs to be paid by the losing party.

This concept seems to be pretty straightforward. But, a recent California Supreme Court case, Goodman v. Lozano (2010) 47 Cal 4th 1327, 223 P2d 77, ( Goodman v Lozano )revealed that a plaintiff can still win at trial but yet pay attorneys’ fees to the defendant. How, you ask? Here are the facts.

In 2000, the plaintiffs, Randall L. Goodman and Linda Guinther contracted with Jesus and Natalia Lozano to purchase a new home. The home had just been built by AMPM Construction Company (formed by Alberto and Patricia Mobrici in 1996). The Mobricis were equal partners with the Lozanos on numerous construction projects, including the home purchased by plaintiffs.

In 2001, plaintiffs sued the Lozanos, Albert Mobrici, AMPM Construction, the architect and the real estate broker alleging numerous construction defects in their new home. Only the Lozanos were sued on a contract theory since they were the ones who signed the residential purchase agreement with plaintiffs. That agreement also contained a provision authorizing an award of attorneys’ fees to the prevailing party.

In 2004, plaintiffs settled with Albert Mobrici and AMPM Construction for $200,000. They also settled with the other defendants, except for the Lozanos, for an additional $30,000. The settling defendants filed a motion with the court to have these settlement deemed to have been made in “good faith.” The court granted the motion, thereby preventing the remaining defendants – the Lozanos – from seeking any contribution against these settling defendants later on and also causing the amount of this settlement to act as a set-off against any judgment that plaintiffs might win at trial.

Thereafter, the Lozanos served an offer to compromise (i.e. California Code of Civil Procedure §998) the matter for $35,000 which plaintiffs rejected.

The case was eventually tried by a judge only – no jury. The trial judge was not made aware of the prior settlement of $230,000. After hearing all of the evidence, the judge found in favor of plaintiffs for a total damage amount of slightly less than $146,000. Of this amount, $64,000 went to plaintiff’s breach of the residential purchase agreement claim.

The judge then learned of the prior settlement and determined that it should be offset against the present judgment: $146,000 less $230,000 = [$84,000], or in effect, $0.00. So, the trial judge entered a judgment determining that plaintiffs would receive nothing as a result of the trial.

Then, applying the appropriate California statutes and the contract provision providing that the “prevailing party” shall be awarded attorneys’ fees, the court awarded the defendants Lozano – $132,000 in attorneys’ fees and $12,000 in costs.

Plaintiffs appealed. Both the appellate court and the California Supreme Court affirmed. The Supreme Court did so after reading the plain language of the California statutes in question and reviewing their respective legislative histories. As such, it was clear that settlement offsets do affect the ultimate recovery and thus whether a party shall be deemed a “prevailing party” for purposes of an attorney fee award:

“The defendants’ clear and undisputed trial goal was to get a decision awarding less damages than the sum of the prior settlements. They fully achieved this objective. It is also noteworthy that the settlements were consummated well before the trial, in ample time for the plaintiffs to reassess their strategy. . . . “(47 Cal 4th at 1339).

I have mediated many cases in which plaintiff contemplates settling with one defendant and proceeding to trial against the remaining defendants, on the assumption that she will still be awarded her attorneys’ fees as the “prevailing party.” This case makes it clear that such an assumption is no longer accurate.

When settling with less than all of the defendants, the long term consequences must be thoroughly analyzed. The “easy” money today (which plaintiff no doubt wants to use to finance the ongoing litigation) may well not be worth the ultimate net loss of having to pay attorneys’ fees to the remaining defendant.

Or, to paraphrase a common saying – a bird in the hand may well not be worth the two in the bush!

. . .Just something to think about.

                       

Phyllis Pollack

Phyllis Pollack with PGP Mediation uses a facilitative, interest-based approach. Her preferred mediation style is facilitative in the belief that the best and most durable resolutions are those achieved by the parties themselves. The parties generally know the business issues and priorities, personalities and obstacles to a successful resolution as… MORE >