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Tentative Ruling
Judge Thomas Anderle
Department 3 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION

Gregory Sain vs Tom Mitterer Construction et al

Case No: 1383216
Hearing Date: Tue Jul 30, 2013 9:30

Nature of Proceedings: Motion Good Faith Settlement

Motion for Determination of Good Faith Settlement Ruling The Court denies the motion of plaintiffs Gregory Sain, individually and as trustee of the Mountain Estate Property Trust, and Kathleen Sain, joined in by defendant Herbert J. Kendall, individually and as trustee of the Herbert J. Kendall Trust, for determination of good faith settlement. Background This action arises out of the sale of real property to plaintiffs Gregory Sain, individually and as trustee of the Mountain Estate Property Trust, and Kathleen Sain, by defendant Herbert J. Kendall, individually and as trustee of the Herbert J. Kendall Trust. The sale was “as is,” the property is located at 1475 East Mountain Drive in Santa Barbara and the purchase price was $7,000,000. After purchasing the property, plaintiffs sued the contractor – defendant Tom Mitterer Construction, Inc. – and subcontractors for construction defects; real estate agents and brokers for breaches of fiduciary duties and failures to disclose; and Kendall for negligence, intentional and negligent misrepresentation, concealment, violation of Civil Code § 1102, et seq., breach of contract and rescission. There are four cross- complaints. None of them name Kendall. A Case Management Conference is set for September 24, 2013. Settlement After a full day of mediation with an independent mediator, plaintiffs and Kendall reached a settlement under which Kendall will pay plaintiffs $2,500,000, plaintiffs will retain the property, Kendall will assign any claims he may have against brokers and agents for alleged failure to obtain informed consent of plaintiffs to the dual agency representation in the sale of the property, and plaintiffs will dismiss, with prejudice, all causes of action against Kendall. There is a mutual release in the settlement and it is contingent on the Court’s determination that the settlement is in good faith. Motion Kendall moves for determination of good faith settlement, in which plaintiffs join. They contend: The settlement meets the test for a good faith settlement. The evidence produced in discovery indicates that Kendall had no knowledge of construction defects on the property, so his liability was solely for rescission damages based on the Coldwell Banker and Sotheby defendants’ undisclosed dual agency. Total damages could have been $15,000,000. The $2,500,000 Kendall agrees to pay constitutes the insurance policy limits for this claim. The basis for the claim is the right to rescind for the undisclosed dual agency, for which Kendall was not at fault. The broker defendants put Kendall in a position where, even without his fault, he would be liable for rescission and attendant damages. The realtor defendants did not make clear to plaintiffs that Kendall was selling the property “as is” so that he would have no liability for further repairs or replacements since he had already reduced the price. The realtors advised plaintiffs on what inspections were required and took it upon themselves to provide plaintiffs will materials pertaining to Kendall’s improvements and repairs, including the repair of an external terrace/balcony, but failed to do so. They also failed to schedule inspections after assuming the obligation to do so. Instead, they represented to plaintiffs that the terrace/balcony did not leak. Any liability Kendall would have based on the broker defendants’ actions would be derivative – they are not joint tortfeasors. Any liability Kendall would have based on contractors’ work would be based on a principal/agent theory – they are not joint tortfeasors. The $2,500,000 is based on rescission damages alone and the other defendants would not be entitled to contribution or offset. It would not be out of the “ballpark” to allocate 100% of the liability regarding investigation and advice to the broker defendants. The contractors are 100% liable for any construction defects. Plaintiffs argue that the assignment of Kendall’s claims should be given no value or a nominal value of $5,000 for purposes of allocation and setoff. The assignment includes a claim for the commission of $350,000 plus interest and a demand for reimbursement of the amount Kendall paid to resolve plaintiffs’ $15,000,000 claim. As to contractor defendants, their exposure to other damages has no relation to the dual agency issue. As to the broker defendants, assignment of the contractual claims for commissions and the amounts paid for the rescission claim are not subject to the rules of valuation of an assigned equitable indemnity claim. Menelli Opposition Defendant Menelli Tile & Design, Inc. opposes the motion, in part. Menelli does not dispute that the parties reached the settlement in good faith but opposes the motion to the extent it would deny Menelli an offset for the amount paid by Kendall. Menelli contends: Plaintiffs sued Kendall, Tom Mitterer Construction, Menelli and others for negligence. Plaintiffs’ expert, Bart Mendel, opined that Kendall was knowledgeable in construction and performed work as an owner-builder. According to the expert, Kendall made numerous decisions that impacted the quality of the construction, including the deck waterproofing. Kendall’s decisions to hire less experienced and less expensive subcontractors affected the waterproofing and flashing work on which Menelli laid tile and Menelli would be entitled to indemnity but for the good faith determination. It would be inequitable to bar Menelli from seeking indemnity while at the same time denying Menelli an offset for the amount Kendall paid. Plaintiffs have elected to forego rescission, affirm the contract and seek damages. This is inconsistent with the proposed allocation of all amounts Kendall paid to the rescission claim. Tom Mitterer Construction (TMC) Opposition Defendant TMC, too, opposes the motion to the extent it would deny it an offset for amounts Kendall is paying pursuant to the settlement. TMC contends that Kendall is a joint tortfeasor with respect to the construction claims. TMC, too, relies, in part, on the report of plaintiffs’ expert and the fact that plaintiffs chose to reaffirm the contract and seek damages. Sotheby’s International Realty Opposition Defendants Sotheby’s International Realty, Inc. (“SRI”), Michael Calcagno, Nancy Hamilton and Bob Lamborn (collectively “Sotheby”) oppose the motion and contend: The settlement is not in good faith because of the allocation of 100% of the settlement amount to the rescission claim. The assignment of claims should be valued at $2,850,000 (commissions plus the amount paid). Plaintiffs had very little chance of success on their dual agency claims. SRI disclosed its dual agency to plaintiffs. Two of its agents represented plaintiffs and one of its agents, along with Coldwell Banker, represented Kendall. The dual agency of the broker does not extend to its agents. Therefore, the individual salespersons were not undisclosed dual agents. SRI submits a declaration of its real estate expert on the issue of liability. Kendall was exposed to tort liability with respect to the construction defects. Another of plaintiffs’ experts – Barbara Nichols – submitted a report in which she states: Tom Mitterer told Kendall that water damage extended into windows, doors and up the walls and framings at points where the deck met the house. Kendall did not disclose this information to plaintiffs. Kendall made representations to plaintiffs and their agents that he was a builder. In disclosure forms Kendall said that he had no problems with drainage and leaks, which is inconsistent with his deposition testimony. He stated the southern deck was repaired when he had not yet repaired it. Plaintiffs cannot recover both rescission and tort damages. The settlement as proposed, with no credit to non-settling defendants will violate the doctrine of no double recovery by plaintiffs. Coldwell Banker Opposition Defendants Coldwell Banker Residential Realty and Susan Burns oppose the motion. They make the same arguments as the other defendants opposing the motion. Coldwell adds that the rescission cause of action is based on the same claims made in the negligence, misrepresentation, concealment, Civil Code § 1102 and breach of contract causes of action. Plaintiffs’ Reply Plaintiffs argue that the $2,500,000 is within the ballpark of Kendall’s liability without valuation of the assignment. The assignment, by Sotheby’s own assessment, has no value because Sotheby’s expert contends that the dual agency claim has no value. The Court may reallocate the settlement amount at trial. There is no evidence of collusion. Kendall’s Replies Kendall filed a separate reply to each opposition, resulting in significant duplication. Kendall does not argue that any defendant is not entitled to an offset, only that the non-settling defendants have no grounds for a contribution or indemnity claim against him and thus will not be harmed by the settlement and determination of good faith. Kendall contends that the Court does not need to allocate the settlement amounts and determine offsets now – that can be reserved for trial. Kendall agrees that, on its face, the assignment is worth $2,850,000 and, for purposes of settlement, that is the value. The Court may determine at a later time that it is worth less. Kendall says the total settlement value is $5,350,000 (he appears to be at odds with plaintiffs on this figure). Plaintiffs have calculated Kendall is solely liable for $2,714,117.86, so there is $2,635,588.14 left to be allocated among the non- settling defendants. Kendall contends that the amount allocated to attorney fees should not be credited to offsets because only he was liable for attorney fees. The allocation to attorney fees in plaintiffs’ joinder in the motion is $600,000. Analysis “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.” CCP § 877.6(c). In considering a motion for determination of good faith settlement pursuant to CCP § 877.6, the court considers “a number of factors be taken into account including a rough approximation of plaintiffs' total recovery and the settlor's proportionate liability, the amount paid in settlement, the allocation of settlement proceeds among plaintiffs, and a recognition that a settlor should pay less in settlement than he would if he were found liable after a trial.” Tech-Bilt, Inc. v. Woodward-Clyde & Assoc., 38 Cal.3d 488, 499 (1985). A party asserting the lack of good faith has the burden of proof on that issue and must demonstrate that the settlement “is so far ‘out of the ballpark’ in relation to these factors as to be inconsistent with the equitable objectives of the statute. Other relevant considerations include the financial conditions and insurance policy limits of settling defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to injure the interests of nonsettling defendants.” Id. at 499-500. “[A] defendant's settlement figure must not be grossly disproportionate to what a reasonable person, at the time of the settlement, would estimate the settling defendant's liability to be.” Torres v. Union Pac. R.R. Co., 157 Cal.App.3d 499, 509 (1984) [italics added]. “In determining a settling defendant's equitable proportionate share of liability, the judge does not look to the plaintiff's claim for damages; rather the judge tries to determine a ‘rough approximation’ of what the plaintiff would actually recover if the case should go to trial.” Horton v. Superior Court, 194 Cal.App.3d 727, 735 (1987). When there has been no evidence the court made a rough approximation of plaintiffs’ total recovery, appellate courts have vacated good faith settlement determinations. West v. Superior Court, 27 Cal.App.4th 1625, 1636 (1994). “[W]hile [objecting party] bears the burden of demonstrating bad faith, [settling party] still has the burden of giving the court admissible evidence of its proportionate share of liability. “All affidavits relied upon as probative must state evidentiary facts; they must show facts and circumstances from which the ultimate fact sought to be proved may be deduced by the court.” Greshko v. County of Los Angeles, 194 Cal.App.3d 822, 834 (1987). Defendants do not argue that the amount of the settlement -- $2,500,000 plus whatever value is given the assignment of claims -- is inadequate. The only issues are the allocation of the entire settlement to the rescission claim and the amount of the value ascribed to the assignment of Kendall’s claims to plaintiffs. Even plaintiffs and Kendall do not agree on the value of his claims, though Kendall says he does not warrant a value. An actual allocation of the settlement proceeds among causes of action is not necessary at the time of the good faith settlement. On this, all parties appear to agree. Gouvis Engineering v. Superior Court, 37 Cal.App.4th 642 (1995), is instructive here. In that case, a non-settling subcontractor – Gouvis – challenged a settlement among a homeowners’ association, the developer and 21 subcontractors. The non-settling subcontractor challenged the good faith settlement determination based on the allocations of damage to specific categories of alleged damage. Id. at 646. The court found this was not a ground for objection to the settlement because the allocation is not binding. We conclude, however, that the allocation and indeed the valuation put on the settlement by the settling parties and approved by the trial judge as “good faith” have no binding or res judicata effect as to Gouvis in terms of the subsequent indemnity action. In order for a prior judgment to be conclusive as to subsequent proceedings, the issue first decided must be identical to the one subsequently presented. [Citation] In order that a party be bound by a prior adjudication, it must be shown that the prior procedure afforded a full and fair opportunity to litigate the issue. [Citation] Res judicata principles should not apply where the “scope of substantive inquiry and the potential for development of evidence are much more restricted than the corresponding opportunity afforded in a court of general jurisdiction . . . .” Id. at 650. The court explained that “the inquiry at the good faith settlement stage is not the same as the inquiry at trial, where complete precision of allocation could presumably be achieved.” Also, the burdens of proof are different, since the objecting party has the burden at the good faith hearing while, at trial, the burden would be the developers to prove the amount that has been paid by virtue of injury caused by Gouvis's fault. Id. at 650-651. Indeed, this Court has done exactly what is contemplated in the Gouvis case. In El Escorial Owners' Assn. v. DLC Plastering, Inc. (Case No. 1003147), the Court found the plaintiff failed to prove its claims that the defendants were responsible for toxic mold contamination. The Court had approved a good faith settlement, which had designated $1,559,943 as damages allocated for toxic mold. But because of Escorial's failure of proof, I found good cause to amend the good faith settlement allocation to remove that category and “reallocate” that amount to four other settlement categories. El Escorial Owners' Assn. v. DLC Plastering, Inc., 154 Cal.App.4th 1337, 1347 (2007). However, “[r]egardless of whether, and to what extent, the trial court is ultimately bound in determining credits after trial, the allocations made by the parties are relevant to the good faith of the settlement.” L.C. Rudd & Son v. Superior Court, 52 Cal.App.4th 742, 746-747 (1997). Where the settling parties have agreed to allocate less than all of the settlement amount to a portion of the causes of action, an evidentiary showing is required to justify such allocation. [Citation] The effectiveness of such an allocation depends upon its good faith. “The statutory requirement of good faith extends not only to the amount of the overall settlement but as well to any allocation which operates to exclude any portion of the settlement from the setoff. [Citations.]” [Citation] Erreca's v. Superior Court, 19 Cal.App.4th 1475, 1491 (1993). A party seeking confirmation of a settlement must explain to the court and to all other parties, by declaration or other written form, the evidentiary basis for any allocations and valuations made, and must demonstrate that the allocation was reached in a sufficiently adversarial manner to justify the presumption that a reasonable valuation was reached. Id. at 1495-1496. “[W]here an allocation is made of settlement proceeds which will affect the ultimate setoff or credit that a nonsettling defendant will receive against any future judgment, the allocation may not be given presumptive effect unless it was the product of adverse negotiation.” Regan Roofing Co. v. Superior Court, 21 Cal.App.4th 1685, 1702-1703 (1994). “A presumption that the parties have reasonably allocated a settlement amount between issues in the action should be reserved for a settlement by parties with truly adverse interests in the allocation.” Peter Culley & Associates v. Superior Court, 10 Cal.App.4th 1484, 1498 (1992). “Collusion exists where only one of the parties cares how proceeds are allocated….” Dillingham Construction, N.A., Inc. v. Nadel Partnership, Inc., 64 Cal.App.4th 264, 286 (1998). Here, only plaintiffs care about the allocation. Kendall’s only interest is in settling with plaintiffs and getting the CCP § 877.6 bar against claims of co-defendants. “[I]f the allocation appears to be the result of collusion between parties, the trial court must find that the settlement, or at least the allocation, was not in good faith as a matter of law, and reject the settlement.” Id. Also, there is ample evidence that the negligence, misrepresentation, concealment and breach of contract causes of action have some merit. The allocation of the settlement solely to the rescission claim appears designed to limit offsets rather than to reflect the relative merits of plaintiffs’ claims against Kendall. For this reason, the Court does not find the settlement, as presented, is in good faith. The Court is uncertain whether plaintiffs wish to have the Court approve the settlement sans allocation. It does appear that Kendall would be happy with that result. The settlement agreement itself says that the settlement “is paid to resolve the claim for rescission based upon alleged non-disclosure of dual agency by real estate defendants.” Clearly the intention was to allocate the settlement in such a way as to limit offsets. In their replies, plaintiffs and Kendall purport to back off the offset issue, leaving it for another day. If that were the case in the settlement itself, the Court would approve the settlement with no finding of allocation and reserving allocation and offsets for trial. But, as the settlement stands, under the Dillingham, Regan Roofing, Erreca’s and L.C. Rudd & Son cases, the Court must find the settlement is not a good faith settlement under Civil Code § 877.6.