Code of Civil Procedure section 998 Offer to Compromise: recap of recent decisions and analysis

The last few weeks have, by happenstance, seen a substantial run of decisions construing the correct application of Code of Civil Procedure section 998 Offers to Compromise.  These recent decisions provide cautionary tales about how to correctly draft a clear 998 Offer and how timing is everything when 998 Offers are on the table.

In Guerrero v. Rodan Termite Control, Inc. (June 16, 2008) ___ Cal.Rptr.3d ___, the Court of Appeal (First Appellate District, Division Three) tackled a difficult issue involving the effect of offsetting settlements, one before a rejected 998 offer, and one after.  The Court describes the core issue:

“The present appeal questions whether a pretrial settlement and corresponding offset to zero necessarily requires the shifting of postoffer costs under Code of Civil Procedure  section 998 if the plaintiff previously rejected a section 998 cash offer from the defendant against whom the claim was tried. There is currently a division of authority with respect to a similar issue under section 1032. However, regardless of the proper interpretation of section 1032, the determination of whether the plaintiff recovered more or less than the amount offered by the defendant for the purpose of applying section 998 is to be made taking into account any other settlements entered as of the time the section 998 offer was outstanding, but not considering settlements that had not yet been reached.

(Slip op., at p. 1.)    A brief statement of facts will add some clarity to the holding.  Plaintiff sued Gonsalves,  Help-U-Sell, and Rodan. In December 2003, Rodan served on plaintiff a section 998 offer to compromise for $5,000, each side to bear its own costs.  Plaintiff rejected the offer.  In November 2006, shortly before the start of trial, plaintiff entered a judicially approved good faith settlement with Help-U-Sell for $34,000. The case proceeded to trial against Rodan and the jury returned a special verdict for plaintiff in the amount of $15,600.  The court then granted Rodan’s motion pursuant to section 877 to offset the settlement proceeds against the verdict and reduce the judgment to zero. Judgment was entered in favor of plaintiff for zero dollars, and the Court of Appeal affirmed.  Rodan moved to tax the costs plaintiff incurred subsequent to the filing of the section 998 offer to compromise, arguing that plaintiff’s zero judgment was not more favorable than the $5,000 settlement offer.  At the same time, plaintiff filed a motion to strike Rodan’s memorandum of costs, contending he was nonetheless the prevailing party.  The trial court agreed with Plaintiff.(Slip op., at p. 2.)

The Court of Appeal affirmed, concluding that the correct application of section 998 requires taking into account only the verdict and any offsets to which the verdict was subject at the time the section 998 offer was outstanding.  (Slip op., at p. 5.)  In this instance, there was no offsetting settlement in 2003, the time at which the 998 offer was outstanding.  At trial, Plaintiff recovered more than the 998 offer of $5,000.  The Court reasoned that the purpose and policy of section 998 was furthered by this interpretation.

California Attorney's Fees has a thorough analysis of the decision, and Cal Biz Lit offers some further, cautionary commentary, inspired by the post at California Attorney's Fees.

In Ford Motor Credit Co. v. Hunsberger (June 18, 2008) ___ Cal.Rptr.3d ___, the Court of Appeal (Fourth Appellate District, Division One) examined the interplay between Civil Code section 1717 and Code of Civil Procedure section 998.  The defendant moved for an award of attorney fees as costs under Code of Civil Procedure section 998 after the plaintiff dismissed its breach of guarantee action.  The defendant argued that he was entitled to attorney fees because the plaintiff failed to obtain a more favorable judgment than his earlier section 998 offer, but the trial court denied the request.  The Court of Appeal concluded that the trial court was correct and fees were unavailable because section 998 did not create an independent right to fees:

“[S]ection 998 does not create an independent right to attorney fees and defendant's only avenue for the recovery of attorney fees was subdivision (a) of Civil Code section 1717, which creates a bilateral right to attorney fees where, as here, a contract contains a unilateral attorney fee provision.  However, this path to fees is blocked by subdivision (b)(2) of Civil Code section 1717, which bars any award of contractual attorney fees where an action has been voluntarily dismissed.

(Slip op., at p. 2.)  Under the analysis and holding of Ford Motor Credit Co. v. Hunsberger, a plaintiff pursuing claims arising under contract can avoid the exposure created by a section 998 offer via a dismissal.

Once again, California Attorney's Fees has a detailed discussion of the decision.

Finally, in Chen v. Interinsurance Exchange of The Automobile Club (June 19, 2008) the Court of Appeal (Second Appellate District, Division Eight) examined when ambiguity in a section 998 offers renders the offer void.

Plaintiffs suffered property damage.  Plaintiffs filed claims with their insurance carrier and later sued for insurance policy breach and bad faith.   While the suit was pending, plaintiffs’ home suffered new water damage in the kitchen unrelated to the earlier bathroom flooding.  Defendant issued a 998 offer to pay $251,000, conditioned upon plaintiffs executing a dismissal with prejudice of the pending lawsuit "as well as a general release of all claims in lieu of an entry of judgment against defendants."   Plaintiffs rejected the offer.

At trial, the jury awarded plaintiffs $8,500 in economic damages and $141,500 in non-economic damages.  Defendant sought to recover post-offer costs.  The trial court awarded $310,000 in post-offer costs to defendant and $9,800 in pre-offer costs to plaintiffs.

After noting that a 998 offer cannot dispose of any claims beyond the claims at issue in the pending litigation (Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal.App.3d 69), the Court of Appeal held that  the phrase "all claims" was ambiguous because of plaintiffs’ pending claim for kitchen flooding.  As a known claim, the Court concluded that a reasonable construction of the 998 offer would purport to release the kitchen claim that was not part of the litigation.   (Slip op., at pp. 5-6.)

And once more, California Attorney's Fees provides further discussion and summary of the Chen decision.

Finally, The Complex Litigator offers this additional, cautionary note about accepting 998 offers by cross-defendants that require a dismissal with prejudice and release of claims.  One might rationally (but incorrectly) believe that a cross-complainant can accept a 998 offer to compromise a cross-complaint with no affect on the defense of the original complaint.  That would be a dangerous mistake.  Under Torrey Pines Bank v. Superior Court (1989) 216 Cal.App.3d 813 and its limited progeny, some Courts of Appeal have determined that the acceptance of a 998 offer on a cross-complaint, and resulting dismissal with prejudice, may act as a retraxit, providing a basis for a summary judgment motion against the affirmative defenses asserted by the defendant/cross-complainant.  The upshot is that the defendant would be limited to "traversing the complaint" in its defense of the complaint, having withdrawn all of its affirmative defenses.