The Art Of Assigned Claims

In the context of large construction defect litigation, we are seeing more partial settlement strategies involving assignments of claims.  The most common is when the Developer/General Contractor agrees as part of a partial global settlement to assign its indemnity claims against one or more of the Non-Settling Subcontractor Cross-Defendants to the Plaintiff.  In theory, this type of settlement arrangement is beneficial to both the Developer/General Contractor and the Homeowner/Association Plaintiff because it allows the General Contractor to settle out around a stubborn or non-contributing subcontractor without having exposure to the fees and costs associated with a voluntary dismissal of its Cross-Complaint, and it provides the Plaintiff with additional damage claims and an avenue for recovery of attorney’s fees under the assigned subcontract(s).  This type of settlement is also designed to put additional pressure on the non-settling Subcontractor(s) by leaving them exposed to the balance of Plaintiff’s and General Contractor’s claims and essentially placing them in the position of the “last defendant standing” in Plaintiff’s game of musical chairs.  While this strategy may have its advantages in pressuring global resolution, the procedural implications of such a deal (if not properly executed) can be problematic if the case ultimately proceeds to trial.  Therefore, it is important that counsel on both sides carefully consider the terms of any proposed settlement with an assignment before making such a commitment.

First, it is likely the settlement will need to be subject to the Court declaring it in good faith pursuant to Code of Civil Procedure section 877 et seq., which means that a valuation will have to be placed on the assignment. In the context of proving whether the settlement is in “good faith” pursuant to CCP §887.6, the value of the assigned rights is not necessarily going to be the total amount of recoverable damages assigned. In California, the Courts have approved valuations of assigned rights at 20% of the total recoverable value for those rights.  See Erreca’s v. Superior Court, (1993) 19 Cal.App.4th 1475.  In Errecas’s, the discounted value was deemed reasonable to account for unknown factors such as the cost of prosecuting the claims, the probability of prevailing on the claims, the likelihood of collecting on any potential judgment, and the increased difficulty in proving a negligence claim as opposed to a strict liability claim. Id. at 1496-1499. In addition to placing a value on the assignment, the monetary portion of the settlement will need to be allocated amongst Plaintiff’s claims in support of any good faith motion.  The allocations and value of the assignment will inevitably play a critical role down the road with respect to Plaintiff’s ultimate recovery against the Non-Settling Subcontractors on its direct claims, so Plaintiff and the Non-Settling Subcontractor(s) should be mindful of the arguments they make during the good faith process because those same arguments will apply to the potential off sets available in relation to future jury verdicts or judgments.

Second, if the General Contractor’s Cross-Complaint is being assigned to Plaintiff, all parties need to be cognizant of the application of the assignment, and change in party positions, with relation to the pleadings on file.  Pursuant to Cal. Code Civ. Proc. §368.5, when claims are assigned during a pending action, the action “may be continued in the name of the original party, or the court may allow the person to whom the transfer is made to be substituted in the action or proceeding.”  Therefore, Plaintiff has the option of continuing the prosecution of the General Contractor’s Cross-Complaint against the Non-Settling Subcontractors in the name of the General Contractor, or the Plaintiff can seek to be substituted in as Cross-Complainant in place of the General Contractor.  No action by the Court is required to continue a case in the name of the original party after an assignment of interest in the action. Cleverdon v. Gray, (1944) 62 Cal.App.2d 612, 616.  However, if the Plaintiff wants to be substituted in place of the General Contractor, the Plaintiff must bring a motion to the Court to obtain an order for the substitution and seek leave to file a supplemental Cross-Complaint to allege the assignment and substitution.  It is within the trial court’s discretion whether or not to allow the substitution. Alameda County Home Inv. Co v. Whitaker, (1933) 217 Cal. 231, 234.

Third, a change in counsel may be necessary and further actions by the General Contractor may be required. In the event of a transfer of interest in a pending action, the attorney for the nominal party/assignor does not automatically cease to be the attorney of record. Casey v. Overhead Door Corp., (1999) 74 Cal.App.4th 112.  If the Plaintiff is going to continue to prosecute the Cross-Complaint in the name of the General Contractor, the Plaintiff’s attorney should substitute in as the attorney of record for the General Contractor (after Plaintiff dismisses its Complaint as to the General Contractor, of course). This is something that counsel for the General Contractor should discuss with his or her client when contemplating an assignment.  The General Contractor should be aware that Plaintiff’s Counsel, who was actively prosecuting claims against the General Contractor, could potentially become the General Contractor’s counsel of record. While control of the continued litigation of the Cross-Complaint will rest solely with the Plaintiff, the General Contractor remains a nominal party to the action with exposure to the potential entry of an adverse judgment against it. Union Bank v. County of Los Angeles, (1963) 223 Cal.App.2d 687.

Although the assignment will likely include an assumption by Plaintiff of all liability in connection with the continued prosecution of the Cross-Complaint, including responsibility for all orders and/or judgments entered for or against General Contractor, further legal action by the General Contractor may be required to enforce the provisions of the assignment in the event of an adverse ruling.  Conversely, further legal action by Plaintiff may be required to enforce the provisions of the assignment in the event General Contractor refuses to cooperate with Plaintiff’s requests for assistance in the form of witness testimony or documentation in support of the Cross-Complaint.

In short, an assignment of claims during the pendency of litigation can be a powerful tool in negotiating a settlement, but any counsel recommending an assignment must make sure they fully understand the terms of the assignment and advise their clients of the risks and benefits associated with such an agreement.  For more information regarding assignment of claims, contact Partner Katie Brach in LGC’s San Diego office.