By: Michael Nicoud

You would think that settling against one jointly and severally liable defendant would not prevent you from seeking recovery from any other jointly and severally liable defendants. But you might be wrong. In Ming-Ho Leung v. Verdugo Hills Hospital (2011), currently available on Westlaw at 11 Cal. Daily Op. Serv. 3519, a California Court of Appeals considered whether the common law release rule, which provides that a release of one joint tortfeasors for consideration automatically releases any and all other joint tortfeasors, is still good law in California. 

Factual Background of the Lawsuit

Just days after being born, Aidan Ming-Ho, the minor-plaintiff, suffered from permanent brain damage, leaving him unable to move or talk. In the days following Aidan’s birth, he developed an advanced form of jaundice leading to a rare and serious medical condition. He was admitted to the hospital and given a blood transfusion after his parents noticed he had become lethargic and had difficulty feeding. Sadly, the transfusion came too late and Aidan had already suffered irreversible brain damage. He would need substantial ongoing medical care for the rest of his life, as well as physical and speech therapy.

Through his mother as guardian ad litem, Aidan sued his pediatrician along with the doctor’s professional corporation and the hospital.

 Settlement with the Pediatrician and Procedural Background

Aidan settled with his pediatrician and his professional corporation for the $1,000,000 policy limit of his insurance. The trial court ruled that the settlement did not meet the good faith standards of California Code of Civil Procedure Sections 877 and 877.6 because the amount of the settlement was grossly disproportionate to the pedatrician’s potential exposure at trial. However, Aidan and his pediatrician decided to continue with the settlement and the case went to trial for apportionment of damages between the hospital and the pediatrician.

The jury found both the hospital and the pediatrician negligent. The jury awarded over $96,000,000 in total damages, with the hospital being found 40% negligent. The trial court approved Aidan’s minor’s compromise which left the hospital on the hook for 95% of the economic damages, and severally liable for 40% of the noneconomic damages (Only $250,000 of the damages were noneconomic).

On appeal, the hospital contended that it was not liable for any of the economic damages because the release rule applied. It argued that because the hospital and the pediatrician were jointly and severally liable for the economic damages, and because the pediatrician had been released from liability in exchange for consideration, the release rule provided that the hospital was also released from liability for the economic damages. Ultimately, the court reluctantly agreed with the hospital, after considering the current state of the release rule in California. In practical terms, Aidan was left unable to recover the hospital’s 95% share of over $96,000,000.

The History of the Release Rule in California

The California Supreme Court has historically followed the release rule, which provides that a release of one joint tortfeasor for consideration automatically releases all other joint tortfeasors from liability. The scope of the rule was drastically limited by an exception providing that if the plaintiff enters into a covenant not to sue rather than a release, the other joint tortfeasors can still be held liable. Of course there is no practical difference between a covenant not to sue and a release from liability, but this legal fiction allows settling plaintiffs to sidestep the release rule.

The reach of the release rule was narrowed even further in 1957, with the enactment of Civil Code Section 877.  Section 877 provides that as long as a release of one joint tortfeasor is given in good faith and before verdict or judgment, it will not operate as a release of the other joint tortfeasors. The settlement will decrease the amount of the claims against the other joint tortfeasors by the amount of the settlement, but this is a much less drastic remedy than the release rule.

Here, the Verdugo court considered the California Supreme Court’s treatment of the release rule and concluded that while the Supreme Court had repeatedly narrowed the scope of the release rule it had never completely abandoned it. The Verdugo court acknowledged one case that held the enactment of Section 877 effectively ended the applicability of the release rule in California. (River Garden Farms, Inc. v. Superior Court (1972) 26 Cal.App.3d 986, 999-1000.) However, the Verdugo court expressed its disagreement with that case given that the California Supreme Court has never specifically said the release rule is no longer the law in California. The Verdugo court also pointed out that the California Supreme Court had at least implicitly acknowledged the existence and applicability of the release rule as recently as 1985. (Citing to Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 294-95, 301.)

The Current State of the Release Rule in California

Between the California Supreme Court’s narrowing of the applicability of the release rule, the “covenant not to sue” exception, and the enactment of Section 877, the release rule is all but dead in California. However, under Verdugo the release rule is still applicable when Section 877 does not apply.

It may not stay this way for long however. With the constant narrowing of the rule, the California Supreme Court may be ready to completely abandon the doctrine. It is questionable that the doctrine provides any real value now, given that simply providing for a covenant not to sue, in lieu of a release, makes the release doctrine inapplicable. The Verdugo court seemed to strain to avoid agreeing with the hospital that the release rule still applied. The court even went so far as to “urge the California Supreme Court to repudiate the release rule once and for all.” (Verdugo, p. 15) But until that happens, you may just want to hold off on that release of liability, and instead, you might want to offer a covenant not to sue. The one thing this case illustrates perfectly is the importance of obtaining a good faith settlement determination in cases involving jointly and severally liable defendants.

— Cal.Rptr.3d —-, 2010 WL 106499

Cal.App. 4th Dist., 2010.

January 13, 2010

In this recent decision pertaining to a plaintiff shareholder’s attempt to recover attorneys’ fees, the California Court of Appeal held plaintiff was not entitled to attorneys’ fees under the substantial benefit theory because plaintiff (1) failed to give presuit notification of the alleged wrong-doing, and (2) failed to establish that plaintiff conferred an actual and concrete gain to the company’s shareholders.  This is the first case applying the presuit notification requirement in the context of an action by a shareholder.

Eric Waxman and Peter Morrison at Skadden, Arps, Slate, Meagher & Flom LLP represented the defendants and respondents. 

Factual and Procedural Background

In 2007, defendant Oakley, Inc., (“Oakley”) announced a proposed sale of Oakley to Luxottica Group at a sizeable premium above Oakley’s average trading price. 

Less than a week after the announcement, plaintiff filed a shareholder class action lawsuit to enjoin the acquisition as unlawful and unenforceable.  Plaintiff alleged that the directors breached their fiduciary duty by failing to take all reasonable steps to maximize shareholder value and by failing to disclose all material facts concerning the proposed acquisition.  Oakley demurred and the trial court sustained with leave to amend. 

Thereafter, Oakley filed a preliminary proxy statement with the SEC.  One week later, plaintiff filed an amended complaint alleging that the proxy misstated and omitted material facts.  Once again, Oakley demurred.  Plaintiff then sent Oakley a letter discussing plaintiff’s proposed changes.  In an effort to moot plaintiff’s unmeritorious claims, Oakley made some of plaintiff’s proposed changes.  Subsequently, plaintiff dropped the lawsuit while Oakley’s demurrer was still pending. 

After Oakley filed its final proxy statement and the acquisition was approved, plaintiff filed a motion for attorneys’ fees in the range of $325,000 to $375,000.  Plaintiff claimed it produced a substantial benefit to Oakley shareholders in the form of the disclosure of additional material information related to the Acquisition.  The trial court did not agree with plaintiff and denied its motion. 

The California Court of Appeal affirmed, holding plaintiff (1) failed to give presuit notification of the alleged wrong-doing, and (2) failed to establish that plaintiff conferred an actual and concrete gain to the company’s shareholders.

Plaintiff’s Failure to Give Pre-Suit Notification Precluded Recovery of Attorneys’ Fees under The Substantial Benefit Doctrine

Here, the Oakley court explained that a “plaintiff’s fee claim arises under a catalyst theory, which allows for attorneys’ fees ‘even when litigation does not result in a judicial resolution if the defendant changes its behavior substantially because of, and in the manner sought by, the litigation.’” (citing Graham v. DaimlerChrysler Corp. (2004) 34 Cal.4th 553, 560).  However, in order to recover under this theory, “not only must the lawsuit have some merit but also ‘the plaintiff must have engaged in a reasonable attempt to settle its dispute with the defendant prior to litigation.’” (Id.).

The Oakley court extended the reasoning in Abouab v. City and County of San Francisco (2006) 141 Cal.App.4^th 643, in which the Court of Appeal specifically applied Graham to fee claims under the substantial benefit doctrine.   In doing so, the Oakley court rejected plaintiff’s argument that Abouab be limited to lawsuits against public entities.

Here, plaintiff waited four weeks after filing its amended complaint to send Oakley a letter outlining its proposed changes.  Plaintiff never suggested revisions to Oakley before filing its complaint.  Thus, the Oakley court held that plaintiff did not satisfy the presuit notification requirement of the substantial benefit doctrine.

Plaintiff Did Not Confer Sufficient Benefits for Equitable Fee Shifting under The Substantial Benefit Doctrine 

Separate and apart from the lack of presuit notification, the Oakley court also affirmed the trial court’s order based on plaintiff’s failure to establish that the new material included in the proxy report warranted equitable fee shifting under the substantial benefit doctrine.  Plaintiff claimed to have secured a substantial benefit to Oakley shareholders by providing information to be used in the proxy statement.  The trial court disagreed, as did the court of appeal.  Upon review, the Oakely court did not find an abuse of discretion by the trial court.  Rather, the Oakley court noted that the changes to the final proxy statement came “by dint of nuisance and threat of expense.” (citing Graham, supra, 34 Cal.4th at 575).  Further, even if the changes to the proxy were material, that would not necessarily equate to a substantial benefit for purposes of equitable fee shifting.  Here, the court found the changes immaterial, but suggested that even material changes may not result in a fee award unless the changes constitute concrete benefits.

Pestotnik + Gold LLP  is located in San Diego, California.  Please visit our website at www.tprglaw.com