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Prop. 51 and the House that Tech-Bilt

The issue of good faith still applies to the economic damages portion of a settlement

By Gerald A. Klein and Douglas L. Day

You have just settled a complicated tort action, but your client’s co-defendants refuse to stipulate to the good faith of the settlement. They fear that the state Supreme Court’s ruling in Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488, 213 Cal.Rptr. 256, together with Proposition 51 (Fair Responsibility Act of 1986) will place an unfair burden on them. Two questions run through your mind:

  • What is a good faith settlement under Tech-Bilt? and
  • How does Prop. 51 ( Civil Code §§1431-1431.5 effective June 4, 1986) change the Tech-Bilt rules?

For damages to which the doctrine of joint and several liability applies, each defendant liable for a plaintiff’s injuries is responsible for all of the plaintiff’s damages. Under the rules enunciated in American Motorcycle Ass’n v. Superior Court (1978) 20 Cal.3d 578, 146 Cal.Rptr. 182, multiple defendants may cross-complain against each other to allocate this joint and several liability according to their comparative fault. If any defendant cannot pay its share of liability, the remaining defendants must make up the difference.

Under §877(b) of the Code of Civil Procedure, a tortfeasor who settles with the plaintiff in good faith is discharged from liability to any other tortfeasor. Thus, a defendant who settles in good faith with a plaintiff avoids liability not only on the complaint but on any American Motorcycle ( AMA) cross-complaint as well.

Section 877(b) serves a dual purpose: It encourages settlement by permitting defendants to buy their peace, and it requires settling defendants to pay a fair share of the potential verdict. In their struggle to reconcile these competing goals, the courts have been unable to define good faith.

In River Garden Farms, Inc. v. Superior Court (1972) 26 CA3d 986, 103 CR 498, the court of appeal first attempted to set guidelines for determining whether a settlement was in good faith. The court admitted that a precise definition of good faith was “neither possible nor practicable.” Yet the court stated that the purpose of applying a good faith standard was to guarantee that the settling party paid a reasonable share of the potential judgment, concluding that “[t]he price of a settlement is the prime badge of its good or bad faith.”

Although the River Garden court held that the price of a settlement is a crucial factor in the good faith equation, other courts ruled otherwise and focused instead on whether the settling parties engaged in tortious collusion against non-settling parties. See, for example, Dompeling v. Superior Court (1981) 117 Cal.App.3d 798, 173 Cal.Rptr. 38. While the River Garden court also noted the dangers of collusion, it held that “[p]revention of collusion is but a means to the end of preventing unreasonably low settlements which prejudice a nonparticipating tortfeasor.”

The Dompeling court stated that “[b]ad faith is not established by a showing that a settling defendant paid less than his theoretical proportionate or fair share of the value of plaintiff’s case . . . . A settling defendant does not owe a legal duty to adverse parties, the non-settling defendants, to pay the plaintiff more so that the adverse parties may pay the plaintiff less.”

Under this liberal view of good faith, a defendant could settle cheaply and leave co-defendants bearing most, if not all, of the plaintiff’s damages. Some courts criticized this liberal view as fundamentally unfair but nonetheless found that even grossly low settlements did not constitute bad faith. See, for example, Cardio Systems, Inc. v. Superior Court (1981) 122 Cal.App.3d 880, 176 Cal.Rptr. 254.

The Tech-Bilt standard

In Tech-Bilt, the Supreme Court criticized the harsh results produced by the every-person-for-himself approach. The Tech-Bilt decision either expressly or impliedly overruled most of the cases involving good faith settlements and restored the fairness standard enunciated in River Garden. But like the court in River Garden, the Supreme Court refused to define good faith. Instead, the court enunciated several factors a trial court should consider in evaluating the good faith of a settlement:

  • Rough estimates of the plaintiff’s total recovery and the settlor’s proportionate liability;
  • The amount of the settlement;
  • The allocation of the settlement proceeds among plaintiffs; and
  • The informal principle that the settlor should pay less than he would if he were found liable at trial.

The Supreme Court said that since it is impossible to predict how a jury will evaluate liability or damages, a court must make its evaluation of the settlor’s good faith on the basis of information available to it at the time of the settlement. So long as the settlement is in the “ballpark” with the settling party’s potential share of liability, a court should find the settlement to be in good faith, said the court.

Prop. 51 changes

Prop. 51 was written to eliminate the “deep pocket” rule of joint and several liability in certain tort actions and holds defendants liable “in closer proportion to their degree of fault.” Code of Civil Procedure §1431.1(c). It requires juries to divide the plaintiff’s damages into two categories: economic and non-economic damages. Economic damages are “objectively verifiable monetary losses.” Although the courts have not yet defined this term, it is likely to include past and future medical expenses, lost earnings and lost use, plus burial costs, property damage, repair costs and loss of business or employment opportunities. Non-economic damages are defined as “subjective, non-monetary losses” such as pain and suffering, emotional distress, inconvenience, loss of society, loss of consortium, injury to reputation and humiliation.

Under Prop. 51 the allocation of damages among defendants for economic and non-economic losses is drastically different. However, until the courts have considered the distinctions between economic and non-economic damages, it will be difficult to know exactly what each includes.

Prop. 51 affirms defendants’ joint and several liability for all economic damages. In the event one or more defendants is judgment-proof, the solvent defendants still must pay the entire award, just as they did before Prop. 51 passed. For example, if a jury finds that the plaintiff suffered $10,000 in economic damages and that A, B and C are jointly liable, A, B and C are each responsible for the whole $10,000 regardless of their percentage of fault. If A and B are judgment-proof, C must pay the $10,000 of economic damages, even if C is only 1 percent liable.

Before Prop. 51, non-economic damages were treated the same as economic damages, and the plaintiff could recover all non-economic damages from any liable defendant. Now each defendant is liable for non-economic damages only in direct proportion to the defendant’s percentage of fault. Code of Civil Procedure §1431.2(a). Thus, if A, B and C are liable to the plaintiff and A is found 10 percent liable, A is liable for only 10 percent of the non-economic damages. Whether B and C are solvent is irrelevant. The plaintiff cannot require A to pay any more than 10 percent of the non-economic damages.

Since defendants are no longer jointly and severally liable for non-economic damages, whether a settling defendant pays a good faith share of non-economic damages is irrelevant to any other defendant. If the plaintiff underestimates a settling defendant’s potential liability, it is the plaintiff who bears the loss, not the settling party’s co-defendants. Accordingly, findings of good faith under Tech-Bilt are unnecessary as to the non-economic damage portion of any settlement

However, defendants continue to remain jointly and severally liable for economic damages, and defendants wishing to discharge cross-complaints for comparative indemnity for economic damages must still file a motion for a judicial determination that the settlement is in good faith. Unless the settlement reflects the “reasonable range” of the settling party’s potential share of economic damages, the court should not discharge cross-complaints for comparative indemnity.

Even before Prop. 51, there was a serious question whether good faith settlements could bar cross-complaints for total indemnity. See, for example, Standard Pacific of San Diego v. A.A. Baxter Corp. (1986) 176 CA3d 577, 222 CR 106. The right to total indemnity arises if one party’s liability is derivative of another’s, as in a product liability action, where a retailer’s liability derives from his association with a manufacturer. In such cases, the party to be indemnified is innocent of any wrongdoing and has incurred liability exclusively because of a legal relationship to the wrongdoer. Despite some rulings that cross-complaints for total indemnity can be dismissed ( see, IRM Corporation v. Carlson (1986) 179 Cal.App.3d 94, 224 Cal.Rptr. 438), there is no language in AMA, Tech-Bilt or Code of Civil Procedure §877 to justify such dismissals. Even after the adoption of Prop. 51 the propriety of dismissing cross-complaints for total indemnity pursuant to a good faith settlement remains clouded.

Sliding scale agreements

Section 77.5 of the Code of Civil Procedure impliedly authorizes the use of sliding scale agreements (sometimes referred to as Mary Carter agreements). Under such an agreement, a settling defendant guarantees the plaintiff a certain recovery at trial but requires the plaintiff to prosecute the action against the remaining defendants. If the plaintiff recovers a verdict against the remaining defendants equal to or exceeding the amount promised under the sliding scale agreement, the settling defendant pays nothing. If the plaintiff’s verdict is less than the amount the defendant guaranteed, the settling defendant pays the difference.

While sliding scale agreements guarantee an injured party a minimum recovery, they are potentially unfair to the non-settling parties. They permit a party with almost certain liability to expose a peripherally liable defendant to the entire judgment without any setoff or right to comparative indemnity. Even before Tech-Bilt and Prop. 51, some courts criticized this potential unfairness. For example, see, Burlington Northern Railroad Co. v. Superior Court (1982) 137 Cal.App.3d 942, 187 Cal.Rptr. 376.

Several courts have held that sliding scale agreements may constitute good faith settlements, but it is not clear whether sliding scale agreements survive Tech-Bilt and Prop. 51. If the common goal of Tech-Bilt and Prop. 51 is to encourage equitable apportionment of liability, settlements permitting a primarily liable defendant to shift damages to less liable non-settling defendants would seem to be out of step.

When ruling on the good faith of a sliding scale agreement, the courts are likely to consider:

  • The plaintiff’s potential recovery;
  • The comparative liabilities of the settling and non-settling parties;
  • The amount of the guarantee;
  • Whether the settlement requires the settling party to pay a guaranteed minimum.

If properly structured, a sliding scale agreement may be considered to be in good faith after Prop. 51. The courts are likely to approve a settlement that guarantees the plaintiff a substantial recovery while providing a guaranteed equitable setoff for the remaining defendants.

Insurance limits

Before Tech-Bilt and Prop. 51, tendering an amount equal to an insurance policy’s limit was generally considered to be a good faith settlement. See, for example, Stambaugh v. Superior Court (1976) 62 Cal.App.3d 231, 132 Cal.Rptr. 843. Prop. 51 does not address the ability of a party to pay; the amount of an insurance policy is therefore irrelevant to the question of a party’s proportional liability. Accordingly, tendering an insurance policy’s limit may not necessarily constitute a good faith settlement, although the Supreme Court in Tech-Bilt did acknowledge that the amount of the policy’s limit is a relevant consideration. After Tech-Bilt and Prop. 51, non-settling defendants will argue that the key to a good faith settlement is whether the settlement reasonably reflects the potential liability of the settling party.

Because plaintiffs who want to settle (and insurance carriers who may be obligated to pay continued litigation costs) will be prejudiced by such a rule, courts may find that tendering the amount of the policy’s limit constitutes a good faith settlement. Even after Tech-Bilt and Prop. 51, it seems likely that if the insurance policy represents the substantial assets of the defendant, the court will consider a settlement for the policy’s limit to be in good faith. If the defendant has substantial assets besides the policy, tendering the policy’s limit may not be enough to create a good faith settlement.

Suggested Reading: Peyrat, Proposition 51: A First Analysis (Cal CEB August 1986).

This article first appeared in California Lawyer, Vol. 6, No. 11, November 1986.