WORLDS IN COLLISION—CCP SECTION 998 AND OFFSETTING SETTLEMENTS: WHAT SETTLEMENTS GET TAKEN INTO ACCOUNT TO DETERMINE WHO IS A PREVAILING PARTY FOR 998 PURPOSES?

First District Decides Issue in 998 Context, Also Noting Split in Appellate Thinking in Interpreting CCP Section 1032.

            On June 16, 2008, we had our first post on Code of Civil Procedure section 998.  Lo and behold, the First District came out with a decision on the same day dealing with the procedural quagmire of how a section 998 offer is to be construed in light of offsetting settlements made both before and after the offer.  Very, very tough question, but tackled honestly and upfront by the First District, Division Three in Guerrero v. Rodan Termite Control, Inc., Case No. A118355 (1^st Dist., Div. 3, received for posting June 16, 2008) (certified for publication).

             Plaintiff residential home buyer sued the seller, dual broker, and termite company for dryrot and unpermitted, undisclosed repairs.  Termite company served a 998 offer for $5,000 (each side bearing its own costs) early on in the litigation, an offer not accepted by plaintiff.  Three years later, on the eve of trial, plaintiff entered into a judicially-approved good faith settlement with broker for $34,000.  Trial proceeded against the termite company, which suffered an adverse jury verdict of $15,600.  However, under Code of Civil Procedure section 877, the trial court offset the prior settlement proceeds against the verdict to reduce the judgment to zero, a result affirmed on appeal in a prior nonpublished appellate decision.  Plaintiff moved to recover costs, termite company moved to tax them, and the trial judge denied the motion to tax, with termite company appealing.

            The First District, Division Three, in a 3-0 decision penned by Acting Presiding Justice Pollak, affirmed.  The proper consideration in determining the effect of a 998 offer is to focus on the status of the litigation when the 998 offer was submitted.  When termite company served it “early on” 998 offer, plaintiff had recovered nothing by way of settlement and had a claim against termite company later liquidated by the jury in an amount over triple the $5,000 998 offer.  As succinctly put by Acting Presiding Justice Pollak, “[r]egardless of the offset based on subsequent developments in the litigation, plaintiff was justified in rejecting the offer when he rejected it.”  (Slip Opn., at p. 5.)

            The basic test announced in Guerrero is that a 998 offeree must take into account preoffer settlements that had been accepted, because “considering the amount of the verdict reduced only by the offsets to which it was subject at the time of the section 998 offer was outstanding is consistent not only with the purpose but is implicit in the language of section 998.”  (Ibid.)

            However, the First District went on to note a split in DCA opinions on the issue of whether a defendant whose judgment is reduced to zero by operation of a section 877 good faith settlement offset is still the “prevailing party” for purposes of awarding costs under Code of Civil Procedure section 1032.  “Pro” on the prevailing party issue are decisions such as Wakefield v. Bohlin, 145 Cal.App.4^th 963 (2006); Syverson v. Heitmann, 171 Cal.App.3d 106 (1985); Ferraro v. Southern Cal. Gas Co., 102 Cal.App.3d 33 (1985); while, conversely, the Fourth District, Division Three has said “no” in Goodman v. Lozano, 159 Cal.App.4^th 1313 (2008).  Although the First District in Guerrero stated “[w]e need not take a position” on this precise issue because it was dealing instead with section 998, the appellate court went on to show it likely would not side with Goodman—showing why Goodman did not necessarily produce equitable results.  (Slip Opn., at p. 8.)  (BLOG OBSERVATION—Given the multi-party contexts involving application of section 877, surely this issue will have to be resolved at some stage by the California Supreme Court. We do note that the California Supreme Court, on June 12, 2008, extended the time to grant or deny review of Goodman through July 14, 2008.)

            Finding that section 998 permits consideration of additional factors not involved in the section 1032 context, the Guerrero court summarized its 998 “at the time” test as follows:

            “If the defendant submits an offer that is equally or more favorable than the amount the plaintiff recovers after taking into account any settlements that had been reached as of the time the section 998 offer was outstanding, the plaintiff is entitled to recover its costs incurred prior to the submission of the section 998 offer but the defendant is entitled to recover costs incurred thereafter. However, if the plaintiff does obtain a determination that the nonsettling defendant is liable for an amount greater than the rejected section 998 offer, and that amount is not subject to any offsets that existed when the offer was rejected or permitted to lapse, there is no shifting of any portion of the costs.”  (Slip Opn., at p. 10.)

            Litigants will need to even more carefully consider the consequences of accepting or rejecting 998 offers if there are any offsetting settlements.

            (COMMENT BY MR. NYE—In response to our initial June 16, 2008 post on 998 offers, Mr. Nye—Cal Biz Lit’s CEO—had an astute observation:  “But you can’t understate the potential fee-shifting aspect of Code of Civil Procedure section 998 when there is otherwise a right to fees under contract, statute, etc.”  He is absolutely right and we thank him for this reminder.  As Guerrero corroborates, a defendant structuring a good 998 offer cuts off postoffer fees to plaintiff and, if the scheme also provides the defendant can recover fees, then the defendant gets postoffer fees.  Mr. Nye was also good enough to provide helpful authorities which underscore this lesson,  observing “[t]hat, of course, is Scott Co. of California v. Blount, Inc. (1999) 20 Cal.4^th 1103, and more recently, Duale v. Mercedes-Benz USA, LLC (2007) 148 Cal.App.4^th 718.”  Thanks, Bruce.)