Regan Roofing Co. v. Superior Court

*1716 FROEHLICH, J.

I concur in the majority opinion in all respects. I write separately both to highlight difficult aspects of the majority and to voice reservations as to certain inferences which might be made from it. The central theme I derive from the majority opinion is that settlements are to be encouraged; partial settlements of multiparty construction defect cases will not occur unless the settling defendants can achieve the good faith settlement insulation against later claims which is provided by Code of Civil Procedure 1 section 877.6; determining whether a settlement is “within the ballpark” is highly subjective and cannot be a matter subject to significant precision; and that if the trial court evidences its own good faith and industry in terms of an independent evaluation of allocations made by the settling parties, its exercise of discretion will not be disturbed. The trial court did that in this case (except for its treatment of the value of the assignment of indemnity rights) and hence we affirm that decision.

Our affirmance confirmed a substantial allocation of settlement proceeds to “emotional distress damage.” We also affirmed the position we took in Erreca’s v. Superior Court (1993) 19 Cal.App.4th 1475 [ 24 Cal.Rptr.2d 156 ] (hereafter Erreca’s) requiring a reasonable valuation of the chose in action constituting an assignment of indemnity rights. I wish to comment on these two facets of the majority opinion.

I. Valuing the Assignment of Indemnity Rights

There seems now no dispute about the proposition that to be in “good faith” an approved settlement must value and allocate all elements of the settlement (see Southern Cal. Gas Co. v. Superior Court (1986) 187 Cal.App.3d 1030, 1036 [ 232 Cal.Rptr. 320 ]; Erreca’s, supra, 19 Cal.App.4th at p. 1500 .) Our recent Erreca’s opinion, among others (Alcal Roofing & Insulation v. Superior Court (1992) 8 Cal.App.4th 1121 [ 10 Cal.Rptr.2d 844 ] being foremost) makes it clear that the assignment of indemnity rights constitutes the transfer of an asset which must be valued and an accounting therefor rendered in the credit allocation to nonsettling defendants. In light of the specific requirements for credit contained in section 877, subdivision (a), this conclusion is difficult to challenge. The unusual nature of the chose in action for indemnity gives rise, however, to most peculiar practical problems associated with valuation. I will first review some of the practical problems of valuation, and then will conclude with the recommendation that we would be better off (notwithstanding our recent stance to the contrary) allocating no value to the assignment.

The first difficulty arises from the nonadversarial setting in which the value is achieved. This case appears to be typical of the problem. A *1717 monetary consideration is established for the principal settlement payment which, as in this case, constitutes close to the maximum the general contractor or developer has the capacity (whether by reason of lack of insurance coverage or otherwise) to pay. One of the seriously motivating factors impelling settlement is the contractor’s ability thereby to terminate litigation costs. While the contractor may have a good cause of action for indemnity against subcontractors, its frame of mind is not conducive to continued litigation. The chose in action represented by its indemnity claim is therefore not uppermost in its mind as a bargaining chip. Adverse negotiating positions do not exist, and the valuation put on the chose in action does not, therefore, achieve the status of presumptive correctness. (Peter Culley & Associates v. Superior Court (1992) 10 Cal.App.4th 1484, 1498 [ 13 Cal.Rptr.2d 624 ].)

From the plaintiff-assignee’s point of view there is everything to gain and nothing to lose by determining a low value for the assignment. If a value is to be allocated to the assignment, it must be set at the time of the settlement, and should not be delayed until a later date. The suggestion that valuation can be delayed until recovery is realized on the indemnity claim (made in Southern Cal. Gas Co. v. Superior Court, supra, 187 Cal.App.3d 1030, 1036 ) is unworkable. Not only would such a course of action deprive the remaining nonsettling parties of credit knowledge necessary for intelligent settlement negotiations, but it would effectively nullify any benefit the plaintiff might derive by the assignment. If nonsettling defendants are to receive full credit for whatever they ultimately pay as the result of the indemnity claim, the plaintiff is precluded from profit by way of his acceptance of the assignment. 2

There are other problems with the accepted treatment of indemnity assignments. The policy underlying the good faith settlement release provisions of section 877 et seq. is that settlements should be encouraged, and can be sufficiently encouraged only by immunizing the settling defendant from further litigation among his codefendants. The deprivation of the cross-complaint rights of the codefendants is justified by the requirement that they obtain credit, as an offset to any final judgment against them, for the amounts paid by the early-settling defendant. (Abbott Ford, Inc. v. Superior Court (1987) 43 Cal.3d 858, 873 [ 239 Cal.Rptr. 626 , 741 P.2d 124 ]; Roberts, The Good Faith Settlement: An Accommodation of Competing Goals (1984) 17 Loy.L.Rev. 841, 891.) Hence it is necessary to credit the nonsettling *1718 defendant with the amount paid by the settlor, to the extent payment relates to the claim for which the two are jointly liable.

The problem with applying this principle to the assignment of indemnity rights is that any alleged or actual defect in the rights theoretically should work to the advantage of the subcontractor (such defects as denial of coverage, refusal to provide a defense, lack of insurance coverage, insolvency of the subcontractor, etc.). However, the more defects asserted by the subcontractor, the less valuable the right would appear at the time of its assignment, resulting in reduction of the ultimate credit to the nonsettling subcontractor. His final liability, therefore, is increased by factors which otherwise would work to lessen it. The reverse of this picture would be that of the solvent subcontractor with good insurance who can likely pay the ultimate indemnity claim. This will increase the valuation of the claim at the time of the good faith settlement, resulting in a greater credit against the plaintiff’s judgment and hence a lower net payment by the subcontractor. 3

A reasonable argument can be made that the illogic of these theories would be rectified by the adoption of a rule denying any credit for assignment of indemnity rights. The subcontractor will get credit for all cash payments (or any consideration other than the indemnity assignment) made to the plaintiff. That same sum will measure the maximum obligation he may have to pay in indemnification of the contractor. In the example we have been using the judgment of $500,000 would be reduced by the $300,000 cash paid by the contractor, for a net obligation to the plaintiff of $200,000. If the subcontractor is then required to pay $300,000 in indemnity, he has simply paid the amount he justifiably owes: $500,000. By giving credit for the assumed value of the indemnification rights we greatly skew and confuse the transaction.

The reason for this somewhat unexpected and seemingly unintended credit computation is that the item providing the credit is not a typical asset, and not even a typical chose in action. It is a chose in action which has a mirror image—a double effect. To the extent it is valued it results (as per our Erreca’s opinion) in a credit to the subcontractor against any claim of the plaintiff; but to the extent it is realized in the plaintiff’s action the credit vanishes. If the chose in action is valued at its full potential, or as suggested in Southern Cal. Gas Co. v. Superior Court, supra, 187 Cal.App.3d 1030 , at *1719 its ultimate figure of recovery, the subcontractor receives an unmerited benefit because he gets a “double” credit (a credit for the cash settlement by the contractor and an identical credit for the chose in action). In such situation the subcontractor winds up paying only the indemnity claim. 4

If, on the other hand, the assigned claim should be valued at zero, the subcontractor receives no credit for the claim as against the plaintiff’s direct recovery, and also of course no credit in terms of the plaintiff’s recovery based on the assigned claim. Thus, in the example previously used, if the recovery is $500,000 and no credit value is given to the assigned claim, the subcontractor pays $200,000 as the balance of the direct judgment (the $500,000 judgment less the $300,000 credit for the contractor’s cash payment) and also is liable for $300,000 to satisfy the assigned indemnity claim. The subcontractor has been found liable for $500,000 in damages and he has paid $500,000 in damages—no injustice has resulted. 5

In summary: To the extent the assigned indemnity claim is given a value in the section 877.6 hearing it is productive of unjustified reduction of the plaintiff’s recovery and unwarranted limitation on the subcontractor’s liability. If the assigned indemnity claim is given no value, the plaintiff then has the potential of full recovery and the subcontractor must face the prospect of full liability. That latter result seems to be what we should be seeking. We have not said this in any of the authorities cited herein, and most particularly we did not say it in our recent opinion in Erreca’s . We are bound to follow clear precedent and hence do not now depart therefrom, at least so early in this game. If these views are found by others to have any merit, however, perhaps future wisdom will work a change in direction in this abstruse and challenging area of settlement law.

II. Valuation of Emotional Distress Damage

The trial court approved, and we have accepted, an allocation of $360,000 for noneconomic damages identified as emotional distress. I am concerned about this allocation because it appears to be one which deprives the *1720 subcontractors of a potential for credit, since Civil Code section 1431.2 provides that “liability for non-economic damages shall be several only and shall not be joint.” 6 Assuming the essentially nonadversarial nature of the allocation of settlement proceeds, as I have discussed above, there would be every reason to overload consideration into this “emotional distress” category. Since all that is required is a “ballpark” result, there will be a tendency to deprive subcontractors of credits.

There is, however, a more fundamental defect in this allocation of settlement proceeds to emotional distress damage. I realize that in this case the defendants had made and lost motions for summary judgment designed to remove emotional distress claims from the case. These claims therefore were ripe for presentation at trial and constituted bona fide bargaining chips to which value was properly allocated. My concern with this is that these claims should not have survived summary judgment and hence should not have been available for allocation of value. My distress with the majority opinion is that it gives credence to very recent case authority approving an award of emotional distress damage in a construction defect case (see maj. opn., ante, p. 1707, where the majority references a “dispute” as to the availability of such damage).

The cited case is Salka v. Dean Homes of Beverly Hills, Inc. * (Cal.App.). Perhaps my concern is unwarranted, since the Supreme Court has now granted review of this decision (Dec. 30, 1993 (S035772)). However, in my opinion the Court of Appeal’s decision in the case is wrong and by citing it (even noting the Supreme Court’s pending review) in a published opinion without adverse comment we give it dignity.

Salka was a claim, pure and simple, for construction defect damages. Improper grading and soils compaction caused flooding, standing water, dampness in the house and resulting damage to floors and walls. The trial was conducted before a referee, who found damage in terms of cost of repair and diminution in value, and in addition made an award of $50,000 for emotional distress. On appeal the emotional distress award was affirmed on the ground that since people’s homes are their most important investment and pertain to their personal living arrangement, it is clearly foreseeable that *1721 a negligently caused defect in the home will result in emotional distress. The Salka court thus focused solely upon foreseeability as the key to liability, ignoring considerable persuasive authority which excludes emotional distress as a component of damage in property damage cases.

The clear authority in the field is Cooper v. Superior Court (1984) 153 Cal.App.3d 1008 [ 200 Cal.Rptr. 746 ], which states flatly that there is “[n]o . . . recovery for emotional distress arising solely out of property damage, absent a threshold showing of some preexisting relationship or intentional tort.” (Id. at p. 1012.) While the Cooper court recognized that “emotional distress arising out of loss of property evokes a sentimental loss” (in that case damage to a home caused by a runaway tractor), it refused to countenance a recovery of damages on policy grounds, advising that “reasonable limitations on the extent and remoteness of a defendant’s liability must be maintained.” (Id. at p. 1013.) Cooper is cited with approval in 6 Witkin, Summary of California Law (9th ed. 1988) Torts, section 856, pages 218, 219, the text adding that “No California case has allowed recovery for emotional distress arising solely out of property damage, unless there was a threshold showing of some preexisting relationship or intentional tort.”

My research confirms Mr. Witkin’s conclusion. In Smith v. Superior Court (1992) 10 Cal.App.4th 1033 [ 13 Cal.Rptr.2d 133 ] (a legal malpractice case in which emotional distress damages were sought) the court affirmed that “mere negligence will not support a recovery for mental suffering where the defendant’s tortious conduct has resulted in only economic injury to the plaintiff.” (Id. at p. 1040.) 7 Our own court in Branch v. Homefed Bank (1992) 6 Cal.App.4th 793 [ 8 Cal.Rptr.2d 182 ] restated the rule originally set forth in Quezada v. Hart (1977) 67 Cal.App.3d 754 [ 136 Cal.Rptr. 815 ], that damages for emotional suffering are limited to cases involving either physical impact and injury to the plaintiff or intentional wrongdoing by the defendant. (Branch v. Homefed Bank, supra, at p. 800 ) We reiterated this position in Devin v. United Services Auto Assn. (1992) 6 Cal.App.4th 1149, 1162 [ 8 Cal.Rptr.2d 263 ], stating that “. . . it is the general rule that negligence which causes only monetary harm does not support an award of emotional distress damages.” (Italics in original.)

The defect in the Salka approach, in my opinion, is that it makes recovery dependent upon a factual determination of just how great the worry, consternation and distress over the event may be, or may be foreseen to be, as it *1722 affects a particular plaintiff. It is interesting to note that the referee in Salka awarded damages to plaintiff wife but none to plaintiff husband. Thus, apparently, a potential defendant must not only consider the objectively foreseeable consequences of his negligence, but also must conform that consideration to variable subjective consequences which will depend upon the sensitivity of a particular future plaintiff.

This philosophy is not, I contend, in harmony with the current policy trend in this field set forth by the Supreme Court. The clearest enunciation of this is found in Thing v. La Chusa (1989) 48 Cal.3d 644 [ 257 Cal.Rptr. 865 , 771 P.2d 814 ]. In discussing policy limitations on negligence recoveries the court said “. . . it is clear that foreseeability of the injury alone is not a useful ‘guideline’ or a meaningful restriction on the scope of the [negligent infliction of emotional distress] action. ... It is apparent that reliance on foreseeability of injury alone in finding a duty, and thus a right to recover, is not adequate when the damages sought are for an intangible injury. In order to avoid limitless liability out of all proportion to the degree of a defendant’s negligence, and against which it is impossible to insure without imposing unacceptable costs on those among whom the risk is spread, the right to recover for negligently caused emotional distress must be limited.” (Id. at pp. 663-664.)

The Salka court’s emphasis upon the peculiarly sensitive nature of reaction to damage to one’s home will not, I suggest, provide any reasonable limitation to claims for emotional distress damages. Particularly if the entitlement to damage is to be measured by the subjective reaction of the plaintiff, there is no limitation to the situations in which emotional distress of a severe nature can be foreseen from a defendant’s conduct. Those of us presently or formerly in the practice of law know only too well how distressed a client can become over his attorney’s mistake. The loss of a family business certainly can be as distressing as damage to one’s home. Similar examples are limitless. As we said in Branch v. Homefed Bank, supra, 6 Cal.App.4th at page 801, “The consequential injury resulting from economic loss in terms of emotional distress is not compensable. Recovery for worry, distress and unhappiness as the result of damage to property, loss of a job or loss of money is not permitted when the defendant’s conduct is merely negligent. As has been stated elsewhere, ‘emotional distress is but “part of the human condition.” ’ [Fuentes v. Perez (1977) 66 Cal.App.3d 163, 169 [ 136 Cal.Rptr. 275 ].] Loss by anyone of property or money, and certainly loss of expected wages, will normally produce mental anguish. ‘ “Complete emotional tranquillity is seldom attainable in this world” ’ [ibid., quoted in Quezada v. Hart (1977) 67 Cal.App.3d 754, 762 ( 136 Cal.Rptr. 815 )] . . . . Recovery for the inevitable distress resulting from finding *1723 oneself the victim of a negligent tortfeasor is, however, limited to economic loss unless malice, breach of a fiduciary duty, physical injury or impact, or some other unusually extreme or outrageous circumstance, can be shown.” (Branch v. Homefed Bank, supra, at p. 801 .)

It is hoped that our majority opinion will not be taken as inferential acceptance of a doctrine of potential recovery of emotional distress damages in cases based on economic losses, and I write this portion of my concurring opinion principally to make sure that it will not.

*1724 Appendix A

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*1726 Appendix B

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*1728 Appendix C

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All statutory references are to the Code of Civil Procedure unless otherwise specified.

Referring to the example contained in footnote 13 of the majority opinion, if the value of the indemnity claim were postponed until it was realized, the subcontractor would receive a $300,000 credit for it, which coupled with the $300,000 already received by plaintiff based upon the contractor’s cash payment would exceed the $500,000 liability.

Using the figures from our hypothetical settlement in footnote 13 of the majority opinion: If the value of the indemnity claim be raised from $100,000 to $200,000, the subcontractor receives a credit of $500,000 against plaintiff’s judgment (the $300,000 paid by the contractor and the $200,000 valuation of the assignment) and pays only the $300,000 related to the separate indemnity claim.

In our previous example, assuming total damage of $500,000 and a cash payment by the contractor of $300,000, with an assignment of the indemnity claim which is valued at $300,000, the subcontractor receives a $600,000 credit against any plaintiff direct recovery and pays only the claim based upon the indemnity chose in action, or $300,000, thus inequitably benefiting from the full valuation of the assigned claim.

It is to be noted, respecting this example, that the subcontractor presumably has also not been cheated of any benefit he otherwise might seek from the early-settling contractor. In assertion of the indemnity claim the plaintiff is subject to any defense the subcontractor might have against the contractor, and hence when we hypothetically assume a full recovery on the indemnity claim we have posited a situation in which the subcontractor has no defense to the claim.

Exactly how this concept would work in practice is difficult to predict. Each plaintiff in this case received an allocation for emotional distress of some $15,000. In a subsequent direct action against subcontractors how could this previously received compensation not be considered? Could not the defendant demand an instruction requiring the jury to determine the total amount of emotional distress experienced by the plaintiff homeowner and the portion thereof caused by the particular defendant’s actions? If a jury then evaluated the total as identical to the subcontractor’s misconduct, would not the court be obliged to reduce the award by the amount previously paid?

Reporter’s Note: Review dismissed July 28, 1994, and cause transferred to Court of Appeal, Second Appellate District, Division Four.

In footnote 1 on the same page 1040 the Smith court indicates that its rule would be even more restrictive than that stated in Cooper , saying that “To the extent Cooper stands for the proposition the mere existence of a preexisting relationship suffices to support recovery for mental suffering where another’s negligent conduct results in only economic injury, we disagree and decline to follow it.”