The Law of Unintended Consequences: or, “What do you mean you can’t tell me what the credits from prior settlements will be?” (Part 1)

In 1986, the People of the state of California were fed up, as is often the case.  At that time, they were fed up with trial attorneys who sued big companies in personal injury actions just because they had “deep pockets”, regardless of whether those companies had much to do with causing the injury that was the subject of the law suit. The response to that outrage was Proposition 51, which passed in June of 1986, and is now codified as Civil Code Section 1431.2.   One of the problems with Proposition 51 is that it ultimately did little to solve the issue it was created to solve.  Another problem with the Proposition is that it gave no guidance on how to derive credits from the settlements reached with other defendants when entering a judgment after trial.  

 

In this three-part series, I am going to describe in general terms what Proposition 51 is, how it has affected litigation in California, why is has made calculations of credits from prior settlements so difficult, how credits are calculated, and what defense counsel can do to improve the credits in any given case.

 

Before the passage of Proposition 51, liability was “joint”, with each defendant found liable responsible for paying all damages.  If there was more than one defendant remaining and held liable at trial, it was between them to decide (or litigate) the allocation – the plaintiff could collect the whole amount of the judgment from either defendant.  Because liability was joint,  after trial defendants could receive credit against the total liability from the settlements of other defendants.

 

The way that credits from any prior settlements were calculated was straightforward:  the relevant portions of the settlement were subtracted from the total verdict, and judgment was entered on the remainder.  I say “relevant portion” because by 1986 plaintiffs’ counsel, especially those in asbestos litigation, had figured out that settlements that resulted in a full release of present as well as potential future claims should not be fully deductible from the judgment entered after the trial of only some of the causes of actions that had been released.   Part of any settlement resolved the loss of consortium claim (if that potentially existed), and part of any settlement resolved the potential future wrongful death claim.  Similarly, in a wrongful death action, some portion of the settlement served to resolve the surviving portion of the personal injury case.  Judges were sometimes asked post-trial to intervene and adjust the allocation that the plaintiff had made, but, again, once that was done, the relevant part of the settlement was deducted from the verdict total, and a judgment was entered. 

 

While they wanted to eliminate the motivation to sue defendants who were only marginally liable, the backers of Proposition 51 knew that voters would want to be sure that people who were injured received  full compensation for their “actual damages,”  such as wage loss and medical bills.  The solution was to write a Proposition that continued to hold economic damages “joint”, so that any defendant who was found liable at trial would be responsible for the total of the economic damages, regardless of the extent to which that defendant was a cause of the injury.  Non-economic damages, such as those awarded for pain and suffering, was where the real abuse of the system was perceived.  Liability for that type of damage was henceforth to be several,  with any defendant found liable at trial to have judgment entered only for its share of “fault” as determined by the jury.  And thus the can of worms was opened wide…

 

Once the Proposition was passed, and the statute was in place, it was up to the trial court, at first, to figure out how to apply the new rules.  Judges got together to discuss how to apply Civil Code Section 1431.2 to the question of the allocation of prior settlements, and concluded that whatever was done, no plaintiff would ever recover more than the sum total of the jury’s verdict.  Those Judges were wrong.

 

In 1992, in the Espinoza v. Machonga case, the California Court of Appeals held that since liability for non-economic damages was several, and not joint, no defendant found liable at trial could get a credit from the settlements of other defendants that would apply to the non-economic damage portion of the verdict.  Thereafter, prior settlements could be applied as credits only to the economic damages awarded by the jury.

 

As you might imagine, plaintiffs’ counsel were delighted.  They were already allocating portions of settlements to potential future causes of action, reducing the amount available to apply as a credit after trial.  Now they could allocate between economic and non-economic damages, and further reduce the available credits!  After all, it’s only right to apply more money to non-economic damages, because those are always larger than the economic damages, right? 

 

    Wrong.  In 1995, Greathouse v. Amcord, Inc. was decided by the California Court of Appeals.  At the trial of that case, the jury awarded the Greathouse heirs $100,000 in non-economic damages, and $289,000 in economic damages.  Plaintiffs had allocated 80% of settlements received to non-economic damages, and just 20% to economic damages, and put that allocation in letters to each settled defendant when confirming the settlements.  The defendant objected, but the trial Judge refused to change plaintiffs’ allocation, and allowed an credit of only $56,800 from the $289,000 in prior settlements to be deducted from the economic damage portion of the judgment.

 

The Court of Appeals did not find it persuasive that settling defendants had been aware of and had implicitly agreed to any particular allocation of the settlements, since the settling defendants really didn’t care one way or the other how their settlement were allocated – they were out of the case.  The Court agreed with counsel for Amcord that since the jury had made an  allocation between economic and non-economic damages, the jury’s allocation should be the one used for the purpose of determining how much of each settlement was for economic damages, and how much was for non-economic damages when calculating the credit from the prior settlements.  In this particular case, the jury’s monetary award was 74.3% economic, and 25.7% non-economic (nearly the reverse of the plaintiffs’ counsel’s allocation.)  That made the credit from prior settlements $211,026, and reduced the judgment from $228,500 to $74,364 (including 2% of the non-economic damages, which was Amcord’s share of fault.)

 

Was that a great result for the defense?  Absolutely.  Has it created a real difficulty in a) predicting ultimate judgments, and b) calculating judgments after verdict?  You bet.  More on that next time.

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