2014-00157903-CU-IC

Elaine McDonold vs. Lexington Insurance Company

Nature of Proceeding: Determination of Good Faith Settlement

Filed By: Agle, Daniel S.

Defendants Cholakian & Associates, Kevin Cholakian and Jennifer Kung’s (“Cholakian”) Motion for Determination of Good Faith Settlement is granted.

After participating in mediation conducted by Peter Thompson, Esq. of Judicate West, Cholakian has reached a confidential settlement with Plaintiffs Elaine McDonald and Silva Trucking, Inc. Cholakian seeks the Court’s determination pursuant to Civil Procedure Code sections 877 and 877.6(a) that the settlement was in good faith, The complete settlement agreement is lodged separately under seal. (see ruling on Motion to Seal)

Elaine McDonold, a driver for Silva Trucking (“Silva”), was involved in a head-on collision with Debra Hackett, who was driving a bus. The injuries to Hackett were significant. Silva was insured [primary policy] by Carolina Casualty Insurance Company (CCIC) in an amount of up to $1 million per claim. After the accident, CCIC retained Cholakian & Associates to represent Silva with respect to the claims. Silva also had an excess policy through Lexington Insurance Company with a limit of $4 million above the initial $1 million of primary coverage. Lexington retained Lewis Brisbois Bisgaard & Smith, LLP (“LBBS”). On December 16, 2011, the Hacketts’ counsel (Eliot Reiner) wrote a letter to Cholakian that Plaintiffs and CCIC allege constituted a demand for both insurance policies. At the time, Cholakian had advised

both CCIC and Lexington that it saw exposure in this case far in excess of the available limits. With an extension, Silva and McDonold were given to January 17, 2012 to respond. On January 5, 2012, CCIC tendered its $1 million limits through Cholakian. Cholakian expected that Lexington’s attomeys would likewise communicate acceptance. Lexington, through its representatives at LBBS, sent a letter on the deadline date which, arguably, attached conditions to the tendering of Lexington’s excess coverage limits. The Hacketts’ counsel Elliot Reiner treated the letter as a rejection and continued forward with the litigation.

On July 27, 2012, the Hacketts filed suit in Sacramento County Superior Court, case number 34-2012-00128931, against Silva and McDonold for damages for personal injuries arising from the vehicle accident (“the Hackett Action”). On April 16, 2014, at the conclusion of a jury trial, the Court issued a “Revised Judgment on Special Verdict” in favor of the Hacketts and against Silva and McDonold for $35,263,683.25, plus prejudgment interest of $4,324,862.56. The total award of$39,588,545.81 was far in excess of the combined policy limits of the CCIC and Lexington policies.

On January 28, 2014, Plaintiffs filed the instant action, asserting causes of action for bad faith, breach of contract, and legal malpractice, based on alleged breaches of legal duties that Plaintiffs contend resulted in the excess judgment in the Hackett Action. Plaintiffs have made insurer-bad-faith claims against Lexington and Carolina, and malpractice claims against the Cholakian Defendants and LBBS/Zappala.

In support of this motion, Cholakian contends that since it communicated acceptance on behalf of CCIC and proffered the policy limits to the Hacketts in a timely manner that it has no liability to plaintiffs. Cholakian asserts that it did not have authority to tender the Lexington policy [Cholakian did not represent Lexington, no attorney-client relationship existed with Lexington and thus arguably no duty was owed by Cholakian to Lexington to tender Lexington’s limits] and had no role in responding on Lexington’s behalf to the Hacketts’ settlement offer. Cholakian and Kung have both testified that they expected Lexington’s counsel to accept the settlement offer based on representations made to them, and in fact did not see a copy of Lexington’s response letter until months after it was issued. (See excerpts of transcripts of the depositions of Cholakian and Kung, respectively. Exhibits A and B to the Declaration of Gregor A. Hensrude) .

Cholakian did not write Lexington’s response to the Hacketts’ demand letter. Cholakian had advised CCIC (and Lexington) that the case presented exposure far in excess of the policy, and believed that Lexington was going to accept the demand. Cholakian contends it is not responsible for the content or manner in which Lexington’s counsel wrote the letter in response to the policy limits demand, nor is it responsible for Hacketts’ rejection of the Lexington’s response.

California Code of Civil Procedure 877.6 provides in pertinent part:

(a) Any party to an action where it is alleged that two or more parties are joint tortfeasors or co-obligors shall be entitled to a hearing on the issue of good faith of the settlement entered into by the plaintiff or other claimant and one or more of the alleged tortfeasors or co-obligors….

(b) The issue of good faith of the settlement may be determined by the court on the basis of an affidavit served with the notice of hearing and any other counter-affidavits filed in response thereto, or the court may, in its discretion, receive other evidence at the hearing.

(c) 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 indemnity, based on comparative negligence or comparative fault.

A good faith settlement under Code of Civil Procedure section 877.6 bars any cross-complaints for total equitable indemnity or comparative partial indemnity. ( Standard Pacific v. A.A. Baxter Corp (1986) 176 Cal.App.3d 577; Zarbuck v. Superior Court(1997) 193 Cal.App.3d 120.) A principal goal of section 877 is the promotion of settlements. (See Staumbaugh v. Superior Court (1976) 62 Cal.App.3d 231,238 [“Except in rare cases of coercion or bad faith . . . a joint

tortfeasor shall be permitted to negotiate settlement of an adverse claim according to his own best interest, whether for his financial advantage, or for the purpose of peace and quiet, or otherwise.”].)

In Tech-Bilt, Inc. vs. Woodward-Clyde & Associates (1985) 38 Cal. 3d. 488, the California Supreme Court recognized the strong policy favoring settlement of lawsuits and established a standard for determining when a settlement is made in good faith. Id., at 494. The California Supreme Court laid out the analysis that should be employed by courts when evaluating a settlement under CCP § 877.6. The following factors are to be considered by the court when determining if settlement was made in good-faith:
A rough approximation of the plaintiffs total recovery and the settlor’s proportionate liability. 2.The amount paid in the settlement. 3. The allocation of settlement proceeds among plaintiffs. 4. The financial conditions and insurance policy limits of the settling defendants. 5. The existence of collusion, fraud or tortious conduct aimed to injure the interests of non-settling defendants. Id. At 499. In this case, the third factor is not applicable.

The California Supreme Court adopted the “reasonable range” test to determine whether a settlement was made in good faith within the terms of section 877.6. The Supreme Court stated that the trial court, in making its determination, should inquire into “whether the amount of the settlement is within the reasonable range of the settling tortfeasor’s proportionate share of comparative liability for the plaintiffs injuries.” (Id. at 499.) “[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.” (Tech-Bilt, supra, 38 Cal.3d at 499.) In deciding this issue, “the court must consider not only the settlor’s potential liability to the plaintiff [petitioner], but also its proportionate share of culpability as among all parties to alleged to be liable for the same injury. (TSI Seismic Tenant Space, Inc. v. Sup. Ct. (Geocon) (2007) 149 Cal.App.4th 159,166 (“TST”).) Because a good faith determination bars indemnity claims by non-settling parties, the true value of the settlement to the settlor is not the amount paid plaintiff but rather the value of the shield against indemnity claims. (Id.)

However, this does not mean that a settling defendant cannot pay less than their fair share. Rather, the California Supreme Court recognized that a defendant should pay less in settlement than he would if he were found liable at trial. (Ibid.) All that is necessary is that there be a “rough approximation” between a settling tortfeasor’s offer of settlement and its proportionate liability. (North County Contractor’s Assn. v. Touchstone Ins. Services (1994) 27 Cal.App.4th 1085, 1090.) Even after carefully weighing these elements, the judge is not expected to calculate the “reasonable range”

with precision. “An educated guess is the best a judge can do when deciding whether a settlement is made in good faith.” Id. at 1095.

Where good faith is contested, the settling party is required to make a sufficient evidentiary showing of all the Tech Bilt factors. City of Grand Terrace v Superior Court (1987) 192 Cal.App.3d 1251, 1262. Once the settling party has presented a prima facie showing of good faith by addressing the Tech-Bilt factors, the nonsettling defendant has the burden of proving that the settlement is out of the ballpark. Tech-Bilt v. Woodward-Clyde & Assoc. (1985) 38 Cal.App.3d 488, 499-500.

In this case, the total approximate recovery is purported to be in the “tens of millions of dollars,” representing the remaining amount due on the judgment after subtracting the policy limits tendered in addition to the amount Lexington paid in settlement. As to proportionate liability, Cholakian contends it cannot be liable for attorney malpractice because it did not cause the alleged rejection of the policy limits demand on Lexington, which it and plaintiffs contends is the act which caused the lid to be blown off the policies according to the Hacketts. Indeed, lawyers cannot be responsible for an insurer’s bad faith in not settling. The law has been clear in California that the duty to settle within policy limits is on the insurance carrier, a duty that cannot be delegated to counsel or experts. (See, e.g. Garner v. American Mut. Liability Ins. Co. (1973) 31 Cal.App.3d 843, 848-50; see also Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 576 (affirming dismissal of law firm hired by insurer from bad faith claim).) An insurer has a duty to the insured if bad faith occurred, and may in turn make a claim against the attorney only if the attorney provided bad advice with respect to the exposure. ( Garamendi v. Golden Eagle Ins. Co. (2004) 116 Cal.App.4th 694, 712 fn. 9.)

In opposition to the motion, LBBS contends that the Cholakian settlement is grossly disproportionate to their share of liability. LBBS contends that Cholokian breached their duty of undivided loyalty to the insureds (plaintiffs) by not reviewing LBBS/Zappala’s letter in a timely manner (i.e. when it was sent) and by not having intervened on behalf of their clients regarding the wording of Lexington’s response. LBBS contends that it is not enough or “out of the ballpark” to settle for the remaining amount on Cholakian’s “burn-down” limits policy when there are still tens of millions of dollars sought by plaintiffs representing the remainder of the judgment obtained in the underlying suit. LBBS disagrees with Cholakian’s arguments that the liability to plaintiffs arises only from the alleged rejection, via Zappala’s January 17, 2012 letter, of the purported policy limits demand, and disputes that Cholakian had nothing to do with this letter and therefore no potential liability. LBBS contends that Kung and Cholakian were in possession of Zappala’s the letter in January, but did not bother to look at it until April, (Adams Decl., Ex. Q at 203:25- 206:8.) After purportedly seeing the letter for the first time in April 2012, Kung testified to having numerous “concerns,” including being “very concerned” about a potential excess judgment. (Adams Decl., Ex. Q at 88:1-91:7.) Thus, LBBS contends Cholokian shares liability as it was partially responsible for Reiner’s having determined that the lid was blown off both the policies because of the failure to timely accept the global $5 million policy limits demand. LBBS contends that if there is liability in this case, it could easily be in the eight figures, and the Cholakian Defendants could reasonably be found wholly at fault at trial. LBBS also notes that it did not represent the insureds – only Cholakian did, as they were hired by primary insurer CCIC to represent the insureds (plaintiffs).

LBBS further contends Cholokian committed malpractice in the following ways as alleged in the Complaint in this case:

• Cholakian “failed to advise the [Insurers] to accept the demand and failed to make it clear to the insurance carriers that consequences from the failure to do so would be their responsibility” (Adams Decl., Ex. S, ¶ 6);

• Cholakian, “[w]hen the offer was not accepted, [] failed to immediately advise Plaintiffs of their rights in this regard and of their need for personal counsel” (Adams Decl., Ex. S, ¶6 (emphasis added));
• Cholakian “also failed to advise Plaintiffs that a demand was pending and that it was rejected” (Adams Decl., Ex. S, ¶6 (emphasis added));

• Cholakian “failed to fully advise Plaintiffs of actual and potential conflicts, failed to obtain their consent to continued representation following the discovery of actual and potential conflicts, failed to properly keep them informed of the case, and failed to properly defend them” (Adams Decl., Ex. S, ¶9 (emphasis added));
• Ms. Kung “wrote … and [] failed to accept the offer to settle while specifically rejecting reasonable conditions of acceptance” (Adams Decl., Ex. S, ¶29);
• Cholakian, “while the [underlying plaintiffs] were continuing to contemplate making further attempts to settle the case for an amount within the limits … failed to act expeditiously and reasonably] to explore settlement options at the amount of the policy limits” (Adams Decl.,Ex. S, ¶30)

• Cholakian “failed to communicate the offer … to Plaintiffs or to advise them of the right to hire independent counsel” (Adams Decl., Ex. S, “¶32);
• Cholakian “failed to timely advise the Plaintiffs of the conflict of interest… and further failed to timely advise Plaintiffs of their right to obtain personal counsel” (id.); and
• Cholakian “failed to act competently … by failing to timely investigate and assess the overall circumstances and act to settle the matters before, during and after the …

policy limits demand” (Adams Decl., Ex. S, ¶49(a)).

These allegations are contradicted by the evidence that Cholokian timely offered the $1,000,000 policy limits and had no authority to dictate to LBBS how to word their letter to Reiner that was considered to be a rejection. As noted in the Replies, as to any allegedly negligent act that occurred when Zappala’s letter was sent, there is no evidence, only speculation, that any additional efforts would have changed the fact that the Hacketts’ counsel considered the lid to have been blown off the policy limits. The mere possibility that the case could have been settled after Reiner considered the letter to be a rejection falls short of the “but for” showing required to demonstrate legal malpractice. In a legal malpractice action, the required elements are: (1) duty of the attorney to use the skill, prudence, and diligence comparable to that exercised by other members of the profession; (2) a breach of that duty; (3) causation; and (4) damages. ( Moua v. Pittullo, Howington, Barkei, Abernathy, LLP (2014) 228 Cal.App.4th 107, 112.) It is axiomatic that Plaintiffs must prove that but for Cholakian’s negligence, a default judgment would not have been entered against it. (Viner v. Sweet (2003) 30 Cal.4th 1232,1241 (purpose of the “but for” requirement is to ensure that damages awarded are actually caused by the malpractice); Laird v. Blacker (1992) 2 Cal.4th 606, 614.) Legal malpractice plaintiffs have always been required to demonstrate “to a legal certainty, not a mere probability,” that a defendant’s malpractice caused actual damage. (Slovensky v. Friedman (2006) 142 Cal.App.4th 1518, 1528.

LBBS contends that they did not reject the policy limits offer, noting that on January 18, 2012, Reiner wrote to Cholakian, acknowledging his understanding that the policy limits had been offered, stating “there are a number of things that I require regarding Silva and must have as soon as possible before this matter can globally resolve for the $5 million.” (Adams Decl., Ex. D.) Cholakian did not respond to Reiner until February

15, 2012, nearly a month later. (Adams Decl., Ex. F.) Reiner never responded to Zappala or his letter. The subsequent correspondence was almost exclusively between Reiner and Cholakian. (Adams Decl., Exs. G-N.) Zappala’s sole follow-up letter (Adams Decl., Ex. L) was ignored. Shortly thereafter, Reiner abruptly terminated settlement discussions and refused to engage in further discussions. LBBS thereafter filed an interpleader action on behalf of Lexington in which the full policy limits was deposited. Lexington eventually settled for “a significant portion of the total amount sought by plaintiffs.” This evidence, while it may be relevant to whether at trial a jury may give a defense verdict to LBBS and find that the Hacketts unreasonably failed to accept the correspondence as an acceptance of the offer, does not meet LBBS’ burden of proof to show that Cholakian is liable for a greater proportionate share than that which is represented by the settlement.

A further factor to consider is the financial condition and insurance policy limits of the settling defendants. (Tech-Bilt, supra, 28 Cal.3d at 499.) “And even where the claimant’s damages are obviously great, and the liability therefor certain, a disproportionately low settlement figure is often reasonable in the case of a relatively insolvent, and uninsured, or underinsured, joint tortfeasor.” (Ibid.) In this case, Cholakian settled for an amount just short of the balance of its available insurance policy limits. (See Hensrude Decl, at ¶ 8.)

In opposition, LBBS contends Cholakian has not provided sufficient evidence of its financial condition. They contend that cases approving “disproportionately low” settlements for insurance limits do so where there is evidence of the defendant’s financial condition. (See City of Grand Terrace, 192 Cal. App. 3d at 1262-65. LBBS contends Cholakian was arguably under-insured given the magnitude of cases they were handling. LBBS contends Cholakian should have offered evidence of their financial condition such as income, profits, losses, and assets. LBBS suggests that the motion should be continued to allow discovery of Cholakian’s financial condition. However, in this case, the evidence before the court does not show that “liability is certain.” When the evidentiary showing is that Cholakian did not commit malpractice, the Court accepts the remaining policy limits as representative of Cholakian’s proportionate liability in this case. Therefore, no further discovery on Cholakian’s financial condition is necessary.

The settlement was the product of months of arms-length negotiations after a failed mediation. (See Hensrude Dec. at ¶ 7.). LBBS has offered no evidence of collusion.

Therefore, the motion for determination of good faith settlement is granted.

The Court will sign the proposed order

Item 4 2014-00157903-CU-IC

Elaine McDonold vs. Lexington Insurance Company

Nature of Proceeding: Application for Order Sealing Record

Filed By: Agle, Daniel S.

Defendants Cholakian & Associates, Kevin Cholakian and Jennifer Kung’s Application for Order Sealing Record is unopposed and is granted.

Moving parties wish to seal the confidential settlement agreement entered into with the plaintiffs.

Before sealing a court record, a trial court must hold a hearing and expressly find that:

(1) There exists and overriding interest that overcomes the right of public access to the record; (2) The overriding interest supports sealing the record; (3) A substantial probability exists that the overriding interest will be prejudiced if the record is not sealed; (4) The proposed sealing is narrowly tailored; and (5) No less restrictive means exist to achieve the overriding interest.(Cal. R. Ct. 2.550(d).)

The sealing order must state the facts that support its issuance. (Cal. R. Ct. 2.550(e)

(1)(A).) Rule 2.550(d) is based on the factors set forth by the California Supreme Court in NBC Subsidiary (KNBC-TV), Inc. v. Super. Ct. (1999) 20 Cal. 4th 1178. The focal point of the sealing inquiry is the overriding interest requirement, which has two separate elements: (1) identification of an overriding interest, and (2) showing a substantial probability that the interest will be prejudiced absent sealing. (Id. at 1217-18.) While NBC Subsidiary provides examples of what may constitute “overriding interests,” including statutory privileges and privacy interests, “the rules do not attempt to define what may constitute an overriding interest, but leave this to case

law.” (Advisory Comm. Cmt., rule 2.550.) To that end, case law recognizes that “the overriding interest can involve the content of the information at issue, the relationship of the parties, or the nature of the controversy.” (Universal City Studios, Inc. v. Sup. Ct. (2003) 110 Cal. App. 4th 1273, 1281.) The Court has “considerable” discretion to order confidential information sealed. (See In re Providian Credit Card Cases (2002) 96 Cal. App. 4th 292, 295.)

Pursuant to CCP 2017.310, moving parties have demonstrated that there is a substantial probability that prejudice will result from the disclosure of the settlement agreement and that the party’s interest in the information cannot be adequately protected through redaction.“The privacy of a settlement is generally understood and accepted in our legal system, which favors settlement and therefore supports the attendant need for confidentiality.” (Hinshaw v. Superior Court (1998) 51 Cal.App.4th 233, 241.) The Court therefore finds that the private parties’ interest in maintaining the confidentiality of the settlement agreement overrides any public interest in accessing the records.

The court will sign the proposed order.