Weekly Law Resume - September 6, 2012: Third Party Settlement – the Common Law Release Rule

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[author: David Blinn]

Aidan Ming-Ho Leung v. Verdugo Hills Hospital
California Supreme Court (August 23, 2012)

Where one tortfeasor settles with the plaintiff, but fails to obtain a good faith settlement, the common law rule relating to releases applies, and the settlement will be found to release all other parties from liability to the plaintiff. In this case, the California Supreme Court did away with the common law release rule.

Aidan Ming-Ho Leung was born at Verdugo Hills Hospital on March 24, 2003. He was born slightly premature, and his mother noted on three occasions on the day of his birth that she thought he was having trouble breastfeeding. The next day she raised various concerns about his health to her pediatrician, Dr. Nishibiyashi, but he told her there was nothing to worry about. She was discharged later that day. Three days later, she noticed Aidan was jaundiced, and called the hospital. She was again told that there was nothing to worry about, and to wait for her follow up appointment with the doctor in several days. The next day and the day after, she contacted the doctor’s offices about her concerns, and was told to give him some sun. By the sixth day after Aidan’s discharge, he seemed lethargic. After reaching an on-call physician at the doctor’s office and describing Aidan’s symptoms, Ms. Leung was told to get him to the hospital immediately. At the emergency room, Aidan was given a transfusion to attempt to lower his bilirubin levels, but it was too late; he developed kernicterus, resulting in permanent brain damage.

Aidan, through his mother, sued the hospital where he was born as well as Dr. Nishibiyashi. Before trial, the doctor settled for his policy limits of $1,000,000. The doctor attempted to obtain a good faith settlement, but the court denied the motion, finding the settlement “grossly disproportional” to the doctor’s potential share of liability. Nevertheless, the plaintiff and the doctor went forward with the settlement. At trial, the jury awarded total damages of almost $15.5 million, which included $250,000 in general damages, with the remainder being economic (past and future medical and future wage loss) damages. The jury also found that the pediatrician was 55% at fault, the hospital was 40% at fault, and Aidan’s parents were liable 2.5% each. The judgment held that the hospital was jointly and severally liable for 95% of the economic damages, less the settlement amount of the pediatrician. The hospital appealed.

The Court of Appeal agreed with defendant hospital that under the common law release rule, plaintiff’s settlement with and release of liability claims against the pediatrician also released the hospital from liability for plaintiff’s economic damages. The court did so reluctantly, observing that although the Supreme Court had criticized the common law release rule, it has not abandoned it. Plaintiff appealed.

The Supreme Court reversed, and in so doing, it repudiated the common law release rule. The Court first pointed out that the common law release rule could and did often lead to harsh results, including, for example, where a plaintiff might settle with a joint tortfeasor for a sum far less than plaintiff’s damages because of the inadequate financial resources of the tortfeasor. In this situation, the plaintiff would be denied the right to recover damages from the remaining tortfeasors, thus denying full compensation for plaintiff’s injuries. It was against this backdrop that the Legislature had enacted Code of Civil Procedure Section 877, providing that a settling tortfeasor who settled in good faith only released the other tortfeasors to the amount of his own payment. However, that only came into play where the settling party obtained a good faith settlement.

The Supreme Court rejected the hospital’s argument that the Legislature’s action in enacting Section 877 rule prevented the Court from abrogating the common law release rule. The Court felt that doing away with the common law release rule furthered the statutory purposes to encourage settlements, and would more fairly compensate a plaintiff. It thus held that the common law release rule was no longer valid.

The Court next turned to the question of how to deal with the settlement obtained by the physician, and how to apply it as a set off against the hospital’s liability to plaintiff. The Court considered but rejected a set-off without contribution approach, which would have given the hospital a credit for the settlement, and allowed recovery against it only of that amount related to its proportional responsibility. Plaintiff could not collect the balance of its judgment, and there would be no right of contribution against the settling tortfeasor. The Court rejected this approach because by statute, set-off without contribution was limited to good faith settlements only.

The Court then rejected the “proportionate share” method of apportionment proposed by the hospital, by which plaintiff would receive the moneys obtained from the settling tortfeasor, but then only the “proportionate share” of the economic damages from the non-settling tortfeasor, who would have no right of contribution from the settling tortfeasor. The Court felt that this would tend to encourage non-good faith settlements, and would also lead to the plaintiff not recovering all of its damages.

The Court held that the appropriate method of dealing with the setoff would be the “set-off-with-contribution” method. Under this method, the plaintiff recovers the settlement from the settling party; the non-settling parties remain jointly and severally liable for the remainder of the judgment, but they have a right of contribution back against the settling party if they end up paying more than their proportionate share. The Court held that this method does not change the respective positions of the parties and is fully consistent with both the comparative fault principle and the rule of joint and several liability.

The judgment was reversed and remanded to the trial court for further proceedings consistent with the Supreme Court’s decision as to the application of comparative fault theories to the settling and non-settling parties.

COMMENT

In light of the invalidation of the common law release rule, there is little incentive for a joint tortfeasor defendant to settle unless a good faith settlement can be obtained. Otherwise, the settling defendant will remain exposed to potential cross-complaints of non-settling tortfeasors.

For a copy of the complete decision see:

http://www.courts.ca.gov/opinions/documents/S192768.PDF