California’s “Good Faith Settlement” Law: An Example From a Recent Case

Lawsuits are expensive, as we all know, and as experienced business law litigators, we frequently find ourselves advising our business clients to settle their claims, usually at some reduced value, rather than pursue expensive, distracting litigation.  But sometimes, even where your adversary is willing to agree to pay a reasonable settlement amount, filing a lawsuit may be advantageous.  One reason for doing so, as we have discussed in a prior article on this blog, (“Suing for an Enforceable Settlement”), is that once you have lawsuit on file, you can secure any settlement involving payment over time with a stipulated Judgment which, if payment is not made as promised, you can immediately move to enforce.

Another reason for preferring a lawsuit, whether you are a plaintiff or defendant, is to take full advantage of California’s “Good Faith Settlement” statute, Code of Civil Procedure Section 877.6, (CCP § 877.6).  This statute provides a procedure to assure a settling party that they will not be dragged back into litigation on indemnity or contribution claims by another party sued for the same claim.  From the plaintiffs’ prospective, this can help encourage defendants to settle, knowing that they can be relieved of possible cross-claims for indemnity by Court order affirming their “good faith” settlement.  From the defendant’s point of view, likewise, it allows for certainty that they will not be dragged back into the matter by a non-settling party.

CCP § 877.6 applies both to contract and tort claims, as is clear from the initial paragraph of the statute:

a)(1) Any party to an action in which it is alleged that two or more parties are joint tortfeasors or co-obligors on a contract debt shall be entitled to a hearing on the issue of the good faith of a settlement entered into by the plaintiff or other claimant and one or more alleged tortfeasors or co-obligors, upon giving notice in the manner provided in subdivision (b) of Section 1005. Upon a showing of good cause, the court may shorten the time for giving the required notice to permit the determination of the issue to be made before the commencement of the trial of the action, or before the verdict or judgment if settlement is made after the trial has commenced.

The effect of a finding of “Good faith settlement” is set forth in paragraph 2(c) of the statute:

1. c) A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor or co-obligor from any further claims against the settling tortfeasor or co-obligor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault.

A REAL LIFE EXAMPLE:

THE PEST CONTROL COMPANY SETTLEMENT

Our firm was recently approached by a husband and wife who were traumatized when an employee working for a pest control fumigation company was found to have engaged in lewd acts in their bedroom, captured in ugly detail on their home security camera.  They felt violated and fearful, and wanted compensation and retribution, but also desperately hoped to avoid the embarrassment and public spectacle of a lawsuit on such sensitive matters.  We agreed to take the case.

Aside from the deviant employee, there were two separate pest control companies potentially liable to our clients, i.e. the prime contractor and a subcontractor.  The prime contractor (Company “A”) was eager to settle promptly, while the subcontractor (Company “B”) was stubbornly refusing to make any significant settlement offer.  Both Company “A” and Company “B” had potential liability for negligence, and if they were both found liable for negligence after trial they would be considered “joint tortfeasors”, and would be entitled to have their liability apportioned based on their proportionate degree of fault.  Thus, if our clients’ damages were found to be $150,000, and both company “A” and “B” were found equally liable, and they both were solvent, they would each have to pay $75,000; and if one paid more than $75,000, they would be entitled to pursue the other to contribute their fair share.

Company “A”, as noted, wanted to settle promptly. We finally agreed to accept their offer, in a significant compromise of our initial demand, based on some strong technical defenses they had as the prime contractor not responsible for the subcontractor’s employee.  But Company “A” also wanted,as part of the settlement agreement, a guarantee that, after paying that settlement, they would not be dragged back into litigation on a cross-complaint for indemnity, if and when we actually filed suit against Company “B”.  This was a problem because, without a “good faith settlement” ruling by a Court, we could not guarantee that Company “B” would not later come after Company “A” to indemnify Company “B” for any liability they might incur.  Since we had not yet filed a lawsuit, we could not get a “Good Faith Settlement” ruling from any Court.  And our clients strongly preferred, if at all possible, to settle with both Company “A” and Company “B” without filing a lawsuit, which is a matter of public record.  This complication delayed our settlement negotiations with Company “A” for several weeks, but we finally convinced them to settle without the finding of “Good Faith Settlement”.

It should be noted, however, that even though we refused to make our settlement with Company “A” contingent on a finding of “Good Faith Settlement” under CCP § 877.6, Company “A” could still ask a Court for such a finding, if and when a lawsuit was filed and Company “B” brought them in on a cross-complaint.  As a practical matter, moreover, the Courts tend to be very lenient in finding that settlements have been made in good faith under CCP § 877.6.  If we had ultimately pursued a lawsuit against Company “B”, and they cross-complained against Company “A”, the very strong likelihood is that Company “A” would prevail on having that cross-complaint dismissed on a finding of “Good Faith Settlement” under CCP § 877.6.

CONCLUSION

The protections afforded settling parties under CCP § 877.6 are very significant and must be considered when determining settlement strategy in any matter which may involve multiple wrongdoers/possible defendants.  The statute applies both to tort and contract claims, including many tort and contract claims which arise in the business context.  A knowledgeable business litigation attorney can help your business evaluate the best strategy for settling such claims, whether you are the claimant or the target of the claim.

At the Gehres Law Group, our litigation attorneys are knowledgeable and experienced in such matters, and we look forward to helping you and your business.Contact us today for a complementary evaluation.

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