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<xTITLE>Understanding Your Downside Risk</xTITLE>

Understanding Your Downside Risk

by Michael P. Carbone
February 2010

From Michael P. Carbone’s Mediation Strategies Blog

Michael P. Carbone
As a plaintiff in litigation, it is hard to imagine anything more frustrating than to get to the end of the road and to learn that you are may be the party writing the check instead of the one taking it to the bank. That is what happened to the plaintiffs in Goodman v. Lozano, S162655, decided this week by the California Supreme Court.

As explained by the Court:

"Under certain circumstances, a trial court must award costs and even attorney fees in favor of a “prevailing party” in an action. (Code Civ. Proc., § 1032, subd. (b).) “Prevailing party,” as relevant here, includes “the party with a net monetary recovery.” (§ 1032, subd. (a)(4); hereafter, section 1032(a)(4).) In this case, the plaintiffs settled with several defendants and later obtained a damage award against nonsettling defendants in an amount less than the settlement proceeds. By statute, an award in favor of a nonsettling defendant is offset by the amount the plaintiff has received from the settling defendants. (§ 877, subd. (a).) If the settlement amount is greater than the damage award, the award is entirely offset, resulting in a zero judgment…

"Based on the plain language of these statutes, we conclude that the plaintiffs here, ordered to take nothing against the nonsettling defendants due to the settlement offset, did not obtain a “net monetary recovery.”

"In March 2000, [the plaintiffs] contracted with [defendants] Lozano to purchase a newly constructed house….

"In 2001, plaintiffs sued the Lozanos [and other parties involved in the project] based on construction defects in their new house. Plaintiffs sued several of the defendants for various causes of action (including negligence, fraud, breach of warranties and negligent misrepresentation), but sued only the Lozanos for breach of contract. In 2004, [certain other defendants] settled with plaintiffs for $200,000, and other defendants — except for the Lozanos — settled with plaintiffs for a total of over $30,000. The trial court found these settlements were made in good faith. Plaintiffs subsequently rejected the Lozanos’ section 998 settlement offer of $35,000.  [Blogger's Note: The effect of a rejection of a defendant’s section 998 settlement offer in California is to shift to the plaintiff responsibility for the defendant’s post-offer costs, including attorneys fees.]

"In 2005, a bench trial was held on plaintiffs’ action against the Lozanos. The trial judge, who was not informed of plaintiffs’ settlement with the other defendants, found in favor of plaintiffs and calculated a “total damage award” of just under $146,000, of which $64,000 went to plaintiffs’ contract claim. After learning that the prior settlements totaled over $230,000, the judge determined that the Lozanos should receive credit for the settlements. Because the settlement amount easily surpassed the $146,000 awarded to plaintiffs, the trial judge found that plaintiffs should receive nothing by the action. Exercising his discretion under section 1032(a)(4), the trial judge determined that the Lozanos were the prevailing parties because they paid nothing under the judgment. He awarded the Lozanos $132,000 in attorney fees and $12,000 in costs."

Deducting the obligation for attorneys fees and costs from the prior settlements, the net result that plaintiffs have achieved to date amounts to $86,000. Of course, the matter does not end here because the Lozanos will also be entitled to claim their attorneys fees and costs on appeal and the final net result for plaintiffs will be a negative number, and probably a sizable one.

Prior to this decision by California Supreme Court, the case law on the point at issue was unclear. Lower appellate courts had reached conflicting conclusions. Presumably, plaintiffs were aware of the state of the law and nevertheless chose to litigate their case.

Every lawsuit must be analyzed as a financial transaction, and the risks to be taken have to be evaluated just as thoroughly as the potential rewards.

As the sergeant said on Hill Street Blues, “Be careful out there.”


MICHAEL P. CARBONE is a senior mediator who has also served as an arbitrator and court-appointed referee. His dispute resolution practice has been built over a period of more than 25 years and covers a wide range of fields.   His exceptional combination of transactional and litigation experience enables him to handle complex litigation and other challenging cases.  

Michael resolves business and commercial cases, real estate disputes, employment claims, construction claims and defect cases, estate and trust matters, insurance issues, legal malpractice, corporate and partnership disputes, and personal injury cases.  In his capacity as a court-appointed referee he has undertaken a wide variety of responsibilities, including sales and appraisals of real property, and the adjudication of trust accounting and administration matters.  

He is a member of numerous dispute resolution panels, including the National Panel of Arbitrators of the American Arbitration Association.  He is also listed on the mediation and discovery facilitation panels of several Superior Courts. 

He is a founder and past president of The Mediation Society, and a member of many other professional organizations, including the Academy of Court-Appointed Masters, the Dispute Resolution Section of the American Bar Association, and the Association of Business Trial Lawyers.

Michael is a frequent author and speaker on alternative dispute resolution issues.  He publishes a monthly newsletter entitled "Resolving It" which provides timely advice on strategies for successful mediation and discusses current issues, such as reforming the commercial arbitration process and mediating e-discovery.

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