Opinion
H035794
12-21-2011
DE ANZA INTERIORS et al., Plaintiffs and Appellants, v. RICHARD HSU et al., Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
(Santa Clara County Super. Ct. No. CV082250)
I. INTRODUCTION
When an insurer has paid an insured loss, the insurer gains a right of subrogation which entitles it to seek to recoup from the party responsible for the loss the insurance benefits paid to the insured. In this case, the plaintiffs' property was damaged in a fire. Plaintiffs' insurer paid plaintiffs for covered losses, and plaintiffs' and the insurer separately sued defendants. Later, the insurer settled its action and assigned its right of subrogation to defendants' insurer on defendants' behalf. Plaintiffs' action proceeded, and a jury found defendants liable for the property damage. In a post-verdict motion, defendants asserted their assigned right of subrogation and sought a setoff against the damage award in the amount of the insurance benefits that plaintiffs had received from their insurer. The court granted the motion.
We conclude that the collateral source rule does not prohibit such a setoff and that defendants, as assignees, were entitled to subrogation in the form of a setoff to prevent plaintiffs from receiving a double recovery. However, because the defendants were able to realize the monetary value and benefit of their subrogation right only because of plaintiffs' success at trial—a success to which defendants did not contribute—we further conclude that defendants are liable for a share of the costs that plaintiffs incurred in succeeding at trial. Accordingly, we hold that the trial court abused its discretion in setting off the full amount of defendants' subrogation claim without charging them a share of the costs plaintiffs incurred. Thus, we reverse the judgment and remand for further proceedings concerning the amount of any setoff.
II. STATEMENT OF THE CASE
Plaintiffs Stephen and Teresa Ho and De Anza Interiors, Inc. (plaintiffs) sued Richard Hsu and Fung-Li Kan, the owners of the Fatima Restaurant, AAA Fire Protection Services (AAA), Michael Treverton, dba Treaverton Fires Control (Treverton), and Kidde-Fenwal, Inc., for damages caused by a fire that spread from the restaurant to De Anza Interiors. More than a year later, State Farm Insurance Company (State Farm), plaintiffs' insurer, filed a separate subrogation action against Hsu and Kan to recover $474,809 that it had paid to plaintiffs under their insurance policy. Plaintiffs' and State Farm's actions were consolidated. Just prior to trial, State Farm settled its case. Under the settlement, California Capital Insurance Company (CCIC), Hsu and Kan's insurer, paid State Farm $300,000 on Hsu and Kan's behalf. In exchange, State Farm released all of the defendants named in its and plaintiffs' action and assigned all of its subrogation rights to CCIC on behalf of Hsu and Kan. Plaintiffs' action proceeded to trial on January 19, 2010. During the course of trial, plaintiffs settled with AAA, Treverton, and Kidde-Fenwal, Inc. Thereafter the jury found Hsu and Kan (hereafter defendants) liable to plaintiffs and awarded damages of $731,387. In a post-verdict motion, defendants, asserting their assigned subrogation right, sought asetoff deduction of $474,000 from the damage award. The court granted the motion, denied plaintiffs' motion to vacate that ruling, and entered judgment reflecting the setoff.
The court also deducted the plaintiffs' settlements with AAA and Kidde-Fenwal from the damage award. Plaintiffs do not challenge these deductions. The total setoff, including the $474,000, from the award of $731,387 was $576,500, resulting in a net judgment of $154,887.
On appeal from the judgment, plaintiffs claim that (1) the collateral source rule prohibited the setoff; (2) defendants were not entitled to enforce State Farm's right of subrogation; (3) the setoff was precluded because defendants failed to plead it as an affirmative defense, and there was a lack of mutuality of debts between the parties. Plaintiffs further claim that if defendants were entitled to a setoff, then defendants should have been charged with a share of the attorney fees plaintiffs incurred in securing the damage award; and, if not, the setoff should have been limited to $300,000. Last, plaintiffs claim that the trial court erred in denying their request for an evidentiary hearing on the setoff and their motion to vacate the judgment.
We reverse the judgment and remand for further proceedings.
III. APPLICATION OF THE COLLATERAL SOURCE RULE
We proceed directly to plaintiffs' contentions and summarize additional facts where necessary to address the issues raised.
For convenience we shall refer to the collateral source rule as simply "the Rule."
Citing Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1 (Helfend),plaintiffs contend that under the Rule, they were entitled to the entire damage award regardless of the insurance benefits they received. Thus they claim that the setoff violated the Rule.
In Helfend, supra, 2 Cal.3d 1, the Supreme Court stated that it "has long adhered to the doctrine that if an injured party receives some compensation for his injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the tortfeasor." (Id. at p. 6; see Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 349.) "The rule embodies the venerable concept that a person who has invested years of insurance premiums to assure his medical care should receive the benefits of his thrift. The tortfeasor should not garner the benefits of his victim's providence." (Helfend, supra, 2 Cal.3d at pp. 9-10, fn. omitted.) Moreover, the Rule "expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and for other eventualities. Courts consider insurance a form of investment, the benefits of which become payable without respect to any other possible source of funds. If we were to permit a tortfeasor to mitigate damages with payments from plaintiff's insurance, plaintiff would be in a position inferior to that of having bought no insurance, because his payment of premiums would have earned no benefit. Defendant should not be able to avoid payment of full compensation for the injury inflicted merely because the victim has had the foresight to provide himself with insurance." (Id. at p. 10.)
The collateral source doctrine functions both as a substantive rule of damages, and as a rule of evidence. (See Lund v. San Joaquin Valley Railroad (2003) 31 Cal.4th 1, 8 (Lund); Arambula v. Wells (1999) 72 Cal.App.4th 1006, 1015.) As part of the law of damages, the Rule dictates that a plaintiff may obtain full damages from the tortfeasor regardless of monies received from a collateral source for the same injuries. (Lund, supra, 31 Cal.4th at p. 8.) The evidentiary function is analytically distinct from the Rule itself and precludes the introduction of evidence relating to any benefits the plaintiff may have received from a collateral source. (Ibid.)
Although the court in Helfend considered money received under an insurance policy to be from a collateral source, the Rule, as we shall explain, does not apply in this case.
In Helfend, the court focused on whether an insured may recover full damages from a tortfeasor despite having received insurance benefits for the same loss. The court concluded that the tortfeasor should not get a reduction in damages simply because the injured/insured had private insurance, even if this meant that the damage award duplicated insurance benefits. However, Helfend had nothing to do with whether an insurer can recover through subrogation the amount of benefits it paid to its insured. (See Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 23, 35.)
Had this case not involved an insurer's subrogation rights, plaintiffs' claim to the entire damage award, except for setoffs not at issue here, would have merit. (See, e.g., Peri v. L.A. Junction Ry. Co. (1943) 22 Cal.2d 111, 131 [plaintiff's damages not reduced by amount of insurance benefits]; Pacific Gas & Electric Co. v. Superior Court (1994) 28 Cal.App.4th 174, 179-184 (PG & E) [plaintiff entitled to pursue full damages from tortfeasor despite receipt of insurance benefits].) But such is not the case.
"Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim." (Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1291 (Fireman's Fund I).) It provides a " ' "method of compelling the ultimate payment by one who in justice and good conscience ought to make it—of putting the charge where it justly belongs." ' " (Meyers v. Bank of America Etc. Assn. (1938) 11 Cal.2d 92, 101 (Meyers).)
In the insurance context, when an insurer pays an insured for a loss caused by a third party, the insurer obtains a right of subrogation by operation of law, and often under a provision in the insurance contract, which entitles the insurer to pursue recovery from third parties legally responsible for the insured's loss. (Plut v. Fireman's Fund Ins. Co. (2000) 85 Cal.App.4th 98, 104 (Plut); Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1994) 21 Cal.App.4th 1586, 1595-1596.)
"Subrogation is of two sorts: 'legal' and 'conventional.' Legal subrogation has its source in equity and arises by operation of law. [Citation.] Conventional subrogation arises by act of the parties and rests on contract. [Citation.]" (Fifield Manor v. Finston (1960) 54 Cal.2d 632, 638.)
"The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured's claim, and succeeds only to the rights of the insured. The subrogated insurer is said to ' "stand in the shoes" ' of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have." (Fireman's Fund I, supra, 65 Cal.App.4th at p. 1292.)
" 'When, as often happens, the insured is only partially compensated by the insurer for a loss (because of deductibles, policy limits, and exclusions), operation of the subrogation doctrine "results in two or more parties having a right of action for recovery of damages based upon the same underlying cause of action." [Citation.] The insured retains the right to sue the responsible party for any loss not fully compensated by insurance, and the insurer has the right to sue the responsible party for the insurer's loss in paying on the insurance policy. [Citation.]' [Citations.]" (Low v. Golden Eagle Ins. Co. (2002) 101 Cal.App.4th 1354, 1364, quoting Allstate Ins. Co. v. Mel Rapton, Inc. (2000) 77 Cal.App.4th 901, 908 (Mel Rapton).)
Generally, an insurer has three ways to enforce a right of subrogation. It can seek to recoup directly from responsible third parties either by intervening in the insured's lawsuit against them or by filing a separate lawsuit; alternatively, it can seek to recoup directly from the insured's recovery from the responsible third parties. (Hodge, supra, 130 Cal.App.4th at p. 551; Plut, supra, 85 Cal.App.4th at p. 104; Mel Rapton, supra, 77 Cal.App.4th at p. 908; PG & E, supra, 28 Cal.App.4th at p. 183; Ferraro v. Southern Cal. Gas Co. (1980) 102 Cal.App.3d 33, 42-43 (Ferraro) (disapproved on other grounds in Goodman v. Lozano (2010) 47 Cal.4th 1327, 1330, 1336-1337; see Croskey, supra, ¶¶ 9.111.25-9.111.36, pp. 9-47 & 9-48.)
In Hodge v. Kirkpatrick Development, Inc. (2005) 130 Cal.App.4th 540 (Hodge), the court opined that this third alternative "might not be permissible[.]" (Id. at p. 552; see Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2010) ¶¶ 9:111.35-9:111.36, p. 9-48 [citing Hodge] (Croskey).) However, in Plut, supra, 85 Cal.App.4th 98, the court noted that the weight of foreign authority was that the insurer may pursue this alternative. (Id. at p. 104.)
Regardless of the path taken by the insurer, the insured, in effect, shares its right to damages against responsible third parties with the insurer to the extent of the insurance benefits received. In essence, the insurer's status changes from being a collateral source to that of a co-injured party entitled to damages for the injury; and the amount of benefits paid becomes the measure of the insurer's share of the damage award.
On point is Ferraro, supra, 102 Cal.App.3d 33. There, a ruptured gas line caused an explosion that destroyed the plaintiffs' buildings. The plaintiffs sued the electric company, its construction company, and the gas company. The plaintiffs received $70,000 from their insurance company, which became partially subrogated to the plaintiffs' claims up to that amount. The plaintiffs settled with the electric company and its contractor, proceeded to trial against the gas company, and obtained a jury award of $90,000. Thereafter, the trial court set off the award by the $70,000 insurance recovery, and on appeal, the plaintiffs claimed the Rule barred the setoff. (Ferraro, supra, 102 Cal.App.3d at pp. 37-40, 45.)
In rejecting that claim, the Ferraro court acknowledged the policy behind the Rule as explained in Helfend. It pointed out, however, that the Helfend court also recognized a competing policy of preventing double liability and double recovery. (Ferraro, supra, 102 Cal.App.3d at p. 46.) The Ferraro court further explained that " '[a]n adjunct of subrogation is the rule prohibiting double recovery of damages, a rule of special importance in the prosecution of subrogation claims because the proration of damages among those who have shared the costs of personal injuries increases the possibility of duplicate claims for the same loss. Only one totality of recovery of damages for personal injuries is allowed, and only one totality of liability may be imposed on the tortfeasor. [Citations.]' " (Id. at pp. 46-47, quoting Ventura County Employees' Retirement Association v. Pope (1978) 87 Cal.App.3d 938, 951, italics added.)
In Helfend, the court responded to criticism of the Rule on the grounds that it provided plaintiffs with a "double recovery"—i.e., insurance benefits plus full recovery from a tortfeasor—rewarded plaintiffs for injuries, and defeated the principle that damages should compensate the victim but not punish the tortfeasor. (Helfend, supra, 2 Cal.3d at p. 10 & fns. 4, 5, & 6 [citing critical commentators].) The court opined "that 'double recovery is justified only in the face of some exceptional, supervening reason, as in the case of accident or life insurance, where it is felt unjust that the tortfeasor should take advantage of the thrift and prescience of the victim in having paid the premium.' [Citation.]" (Id. at p. 10.) That said, the court further noted that insurance policies increasingly provide for either subrogation or refund of benefits upon a tort recovery, which eliminates double recovery. (Id. at pp. 10-11.) The court also rejected the notion "that the tortfeasor be required to pay doubly for his wrong—once to the injured party and again to reimburse the plaintiff's collateral source . . . ." (Id. at p. 11, fn. 15.)
The Ferraro court reasoned that because an insurer has the right to recover payments through subrogation, the prohibition against double recovery should predominate over the Rule. As the court analyzed it, "the payment of the $70,000 in insurance proceeds in this case, due to the subrogation agreement with [the insurer], cannot be considered 'collateral source' recovery. On the contrary, a collateral source is one 'wholly independent of the tortfeasor.' [Citation.] Therefore, since '[t]o subrogate is to put in the place of another; to substitute' [citation], when an insurance carrier becomes subrogated to the claim of an insured against a third party tortfeasor, the payment of insurance proceeds is no longer a 'collateral source.' To characterize [the plaintiffs'] receipt of the $70,000 as a collateral source payment would violate the rule against double recovery, since both the subrogee and the subrogor have a right of action against the tortfeasor. The tortfeasor would have potential double liability if payment of insurance benefits by the subrogee to the subrogor is allowed to be designated a 'collateral source.' " (Ferraro, supra, 102 Cal.App.3d at p. 47; accord, Garbell v. Conejo Hardwoods, Inc. (2011) 193 Cal.App.4th 1563, 1572 ["The subrogation doctrine . . . modifies the collateral source rule."]; see Harsany v. Cessna Aircraft Co. (1983) 148 Cal.App.3d 1139, 1145-1146 [where no double recovery, the Rule applied]; Shifrin v. McGuire & Hester Construction Co. (1966) 239 Cal.App.2d 420, 422-424 [where insurer settles with tortfeasor, insured's recovery from the tortfeasor is reduced by amount of insurance benefits]; cf. Quinn v. Warnes (1983) 144 Cal.App.3d 309, 317 (Quinn) [the Rule inapplicable to enforcement of workers' compensation insurer's right to reimbursement for benefits paid to injured employee].)
Plaintiffs claim that Ferraro was wrongly decided. Citing PG & E, supra, 28 Cal.App.4th 174, they argue that Ferraro erred in stating that insurance was not a collateral source. Citing Miller v. Ellis (2002) 103 Cal.App.4th 373 (Miller),they also argue that Ferraro erroneously concluded that the prohibition against double recovery should predominate over the Rule.
In PG & E, supra, 28 Cal.App.4th 174, PG & E filed a $3 million claim with its insurer under a fidelity bond against losses due to employee dishonesty. It then sued an employee and his accomplices (the defendants) for the losses due to fraud. The insurer also sued those defendants. PG & E settled with its insurer for $1 million, and in return, the insurer dismissed its suit against the defendants and waived its subrogation right to recover its payment to PG & E. PG & E then proceeded against the defendants. An issue arose concerning whether the Rule applied to the $1 million PG & E had received from its insurer. The trial court found the Rule inapplicable, reasoning that the payment was caused by a defendant/employee's dishonesty, and therefore, it was not from a source independent of the defendants. (Id. at pp. 177, 179.)
The appellate court rejected this analysis. The court explained that the trial court had "confused the triggering event for insurance coverage with the source of the collateral benefit provided by insurance. While [the employee's] actions may have been a necessary condition to payment under the fidelity policy, the source of the payment was wholly independent of [the employee], who did not pay premiums for the policy either directly or constructively." (PG & E, supra, 28 Cal.App.4th at p. 179.) Under the circumstances, the Rule applied.
Concerning PG & E's double recovery, the court noted that PG & E's insurer waived any subrogation rights. Given the waiver, PG & E was free to pursue a full recovery from the defendants and had no obligation to share it with its insurer. (PG & E, supra, 28 Cal.App.4th at pp. 183-184.) The court opined that as between PG & E and the tortfeasors, the benefit of the insurer's waiver should inure to PG & E. (Id. at p. 184.) Accordingly, the defendants were not entitled to a credit against a judgment. (Ibid.)
PG & E is inapposite because it did not involve subrogation rights. As in Helfend, the issue was whether the benefit of insurance payments should inure to the tortfeasor or the insured—i.e., PG & E. Although there is superficial tension between Ferraro's and PG & E.'s statements about whether insurance is a collateral source, PG & E, like Helfend, supports the notion that the assertion of subrogation rights renders the Rule inapplicable because the insured and insurer share recovery from a third party tortfeasor, which, in turn, prevents double recovery.
Plaintiffs' reliance on Miller, supra, 103 Cal.App.4th 373 is equally misplaced. Like PG & E., Miller did not involve subrogation rights. There the court held that in an action by a tortfeasor against a co-tortfeasor to recover the cost of defending against the plaintiff, the trial court erred in awarding the former the full cost of the defense, of which all but the deductible had been paid by malpractice insurance. In reaching this conclusion, the court opined that the Rule, which in certain situations may result in double recovery, was inapplicable because it was designed to protect injured parties, and the tortfeasor was not injured by having to pay to defend against its own liability. (Miller, supra, 103 Cal.App.4th at pp. 378-379.)
Miller does not suggest that when valid subrogation rights are asserted, the Rule should nevertheless predominate over the prohibition against double recovery. Nor does Miller suggest that the Rule bars a setoff against a damage award based on subrogation rights.
In sum, we conclude that the Rule was inapplicable here and did not impair the right of subrogation arising from State Farm's payment of insurance benefits or prohibit a setoff in the amount of that payment.
We acknowledge that State Farm did not assert its right of subrogation; rather defendants did as assignees. However, plaintiffs did not claim below, and do not now claim, that the Rule somehow prohibits the assignment of subrogation rights or that State Farm's assignment of rights to CCIC on defendants' behalf was invalid, improper, or against public policy. This is understandable because "[t]he California rule is that a chose in action is presumptively assignable [citations] . . . ." (Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1378; see Civ. Code, §§ 953, 954.) As a general matter, this presumption extends to subrogation rights. (Offer v. Superior Court (1924) 194 Cal. 114, 121; Bush v. Superior Court, supra, 10 Cal.App.4th at p. 1381; Dibble v. San Joaquin Light and Power Corp. (1920) 47 Cal.App. 112, 117; cf. Quinn, supra, 144 Cal.App.3d 309 [workers' compensation insurer assigned subrogation lien to tortfeasor]; Hone v. Climatrol Industries, Inc. (1976) 59 Cal.App.3d 513 [same].)
IV. EQUITABLE SUBROGATION
Plaintiffs contend it was error to give a setoff based on a right of subrogation because defendants failed to plead a setoff in their answer, they failed to establish the elements of equitable subrogation, and there is no mutuality of debts between the parties.
A. Failure to Plead
Plaintiffs claim the trial court erred in even entertaining defendants' post-trial motion for a setoff because defendants did not plead the setoff in their answer.
Code of Civil Procedure section 431.70 provides, in relevant part, "Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the person's claim would at the time of filing the answer be barred by the statute of limitations."
Generally, a setoff is new matter that must be affirmatively pleaded. (Title Ins. Co. v. State Board of Equalization (1992) 4 Cal.4th 715, 731; e.g., Fassberg Const. Co. v. Housing Authority of City of Los Angeles (2007) 152 Cal.App.4th 720, 762-763 (Fassberg).)
Plaintiffs assert that this pleading requirement is "designed to put the plaintiff on notice that a court may ultimately deduct that claimed credit from any jury verdict, so that the plaintiff can litigate the case with that claimed credit in mind." They claim that defendants' failure to plead the setoff was prejudicial because as a result, plaintiffs lacked notice that defendants would seek a setoff. They argue that if they had had proper notice, they would have litigated the case differently than they did. More specifically, "they would have conducted significant discovery into issues, approached settlement negotiations differently, and likely would have altered their trial strategy and how it presented damages the jury. Ultimately, it likely would have affected how the jury conducted its deliberations, and how it allocated damages."
In their opposition to the motion for a setoff, plaintiffs argued that they "would have conducted discovery on the issue," "inquired about the terms of the settlement between defendants and State Farm; how much each defendant contributed to the amount; whether the defendants pooled their money; what rights each defendant held as a result of the settlement, i.e., were the subrogation rights held by one defendant, or where they allocated among the defendants, and if so, what fraction did each defendant hold; and what was each defendant's understanding of the agreement, and specifically to what they believed they were contributing."
Plaintiffs filed their action against several defendants in March 2007, and State Farm filed its subrogation action in November 2008. Just prior to trial on January 19, 2010, State Farm entered a settlement, under which CCIC paid money to settle State Farm's claim, and in exchange State Farm released all defendants and assigned its subrogation right to CCIC on defendants' behalf. Later, the court granted a motion to approve the good faith settlement. Trial commenced on January 19. On January 29, plaintiffs reached a settlement with AAA which included an assignment of AAA's subrogation rights. On February 5, plaintiffs reached a settlement with Treverton which included an assignment of Treverton's subrogation rights. At that time, and after discussions with these defendants, plaintiffs' counsel thought that State Farm's settlement with defendants had been part of a larger settlement among all of the defendants under which they had pooled their money to settle State Farm's action and in return State Farm had assigned its subrogation rights to all of the defendants in equal shares. Counsel understood that there could later be a setoff.
In February, State Farm and CCIC signed the written settlement agreement and CCIC paid State Farm in accordance with the agreement.
The chronology of events shows that defendants could not have pleaded a setoff in their initial answer because they did not obtain State Farm's subrogation rights until a few days before trial. Under the circumstances, defendants would have had to obtain the court's permission to amend their answer. Had they done so, we believe that permission should and would have been granted. There is a general policy of liberality in permitting amendments at any stage of the proceedings. (Berman v. Bromberg (1997) 56 Cal.App.4th 936, 945; Sullivan v. City of Sacramento (1987) 190 Cal.App.3d 1070, 1081.) Indeed, State Farm's subrogation action had already put plaintiffs on notice that they might have to share a portion of any recovery from defendants with State Farm based on the amount of benefits State Farm had paid out to plaintiffs. And although State Farm's subrogation action may have disappeared, its right of subrogation did not and remained a potential source of recovery. In this regard, we note that plaintiffs had notice of State Farm's settlement and knew or should have known that it might have encompassed State Farm's subrogation right. Finally, an amendment to plead the setoff would have merely reflected a change in who was asserting the subrogation right.
" 'There is a policy of great liberality in permitting amendments to the pleadings at any stage of the proceeding. [Citations.] An application to amend a pleading is addressed to the trial judge's sound discretion. [Citation.] On appeal the trial court's ruling will be upheld unless a manifest or gross abuse of discretion is shown. [Citations.] The burden is on the plaintiff to demonstrate that the trial court abused its discretion.' [Citation.] ' "When a request to amend has been denied, an appellate court is confronted by two conflicting policies. On the one hand, the trial court's discretion should not be disturbed unless it has been clearly abused; on the other, there is a strong policy in favor of liberal allowance of amendments. This conflict 'is often resolved in favor of the privilege of amending, and reversals are common where the appellant makes a reasonable showing of prejudice from the ruling.' " [Citation.]' . . . [Citation.] '[I]t is an abuse of discretion to deny leave to amend where the opposing party was not misled or prejudiced by the amendment. [Citation.]" ' " (Berman v. Bromberg, supra, 56 Cal.App.4th at p. 945; e.g., Kittredge Sports Co. v. Superior Court (1989) 213 Cal.App.3d 1045, 1047-1048.)
Furthermore, plaintiffs would have been in no better position to address the subrogation claim had defendants amended their answer than they were later in the context of a post-verdict motion for a setoff. We point out that enforcing subrogation rights and permitting equitable setoffs are matters that invoke the trial court's equitable powers. Thus, even if defendants had amended their answer, their right to seek subrogation would have presented issues for the court to decide in a separate proceeding. That proceeding would naturally be held after the jury returned a verdict because if the jury found that defendants were not liable, defendants' subrogation right would, in essence, be worthless. Moreover, such a post-trial equitable proceeding would not be fundamentally different from the proceedings here on defendants' post-verdict motion. The issues would have been the same: do defendants possess a subrogation right; and if so, what amount does that right entitle defendant to recover in the form of a setoff against the judgment.
Plaintiffs' assertion that if defendants had pleaded their right to subrogation and a setoff, they would have approached settlement negotiations differently, sought different discovery, and litigated the case in some other way is unpersuasive. Plaintiffs knew that State Farm had settled its subrogation action with defendants before trial. They knew that they had not obtained State Farm's subrogation right, and yet when they settled with certain defendants, they obtained their subrogation rights. Moreover, plaintiffs' opposition to the motion for a setoff reveals that before trial, plaintiffs had an extensive awareness and understanding of the negotiations among various defendants that resulted in the settlements with State Farm, CCIC, AAA, Treverton, and Kidde-Fenwal, Inc. Finally, we note that the goal of plaintiffs' action was to establish defendants' liability for the fire losses and the amount of those losses, and the issues to be resolved had nothing to do with the benefits plaintiffs had received from State Farm or State Farms right of subrogation. Plaintiffs ultimately achieved their goals, and the jury awarded plaintiffs the damages necessary to make them whole. Under the circumstances, we fail to see how amendment of the answer days before trial would have affected plaintiffs' approach to the litigation or how some additional discovery would, or could, have made any difference in that litigation or plaintiffs' settlement negotiations with other defendants. Finally, plaintiffs fail to explain how or why the jurors would have viewed the case differently had defendants amended their answer. Again, the question of an equitable setoff based on a subrogation right and issues related to how much State Farm paid out in benefits to plaintiffs were matters for the court to determine sitting in equity.
In short, we do not find that defendants' failure to amend the answer was prejudicial or that it prohibited the court from entertaining defendants' post-verdict motion as a matter of law. In our view, the procedure was similar to a routine post-verdict proceeding to determine the credit against a judgment for damages to which a nonsettling defendant is entitled based on the amount of a good faith settlement between the plaintiff and codefendants. (See Code of Civ. Proc. § 877; e.g., Knox v. County of Los Angeles (1980) 109 Cal.App.3d 825.)
B. Failure to Establish Elements
Plaintiffs claim that defendants failed to establish the elements necessary for equitable subrogation and that the setoff violated equitable limitations on subrogation.
A right of subrogation can arise by operation of law and by contract, but in most instances, this distinction has no significance for the same facts which give rise to subrogation by operation of law are ordinarily the same facts which entitle a person to claim the benefit of a contract or convention for subrogation. Regardless of the source of the right, enforcement is governed by the equitable doctrine of subrogation. (See Century Indem. Co. v. London Underwriters (1993) 12 Cal.App.4th 1701, 1708 and fn. 6; Croskey, supra, 9:16, p. 9-3.)
Because subrogation is an equitable doctrine, the right is not absolute and its enforceability is not automatic or mandatory. (In re Whitney's Estate (1932) 124 Cal.App. 109, 118; accord, Meyers, supra, 11 Cal.2d at p. 101.) "While the insurer by subrogation steps into the shoes of the insured, that substitute position is qualified by a number of equitable principles. For example, an insurer cannot bring a subrogation action against its own insured. [Citation.] An insurer also cannot seek subrogation of personal injury claims in the absence of a statutory authority. [Citations.] Additionally, before asserting a subrogation right, an insurer usually must pay the insured, who must have recovered from the loss in full. [Citation.]" (State Farm General Ins. Co. v. Wells Fargo Bank (2006) 143 Cal.App.4th 1098, 1106-1107 (State Farm).)
Moreover, to enforce a right of subrogation, an insurer must establish a number of specific elements, one of which represents the most restrictive equitable limitation: the insurer must show that its equitable position is superior to that of the responsible third party such that justice requires that the loss be entirely shifted from the insurer to that party. (State Farm, supra, 143 Cal.App.4th at pp. 1111-1112; Fireman's Fund I, supra, 65 Cal.App.4th at p. 1292; Patent Scaffolding (1967) 256 Cal.App.2d 506, 509; see also Croskey, supra, [¶] 9:41, p. 9-12.)
In addition to this element, an insurer/subrogee must also establish the following: (1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer was not primarily responsible for the insured's loss; (3) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (4) the insurer paid the compensation to protect its own interest and not as a volunteer; (5) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (6) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; and (7) the insurer's damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable. (State Farm, supra, 143 Cal.App.4th at pp. 1111-1112; Fireman's Fund I, supra, 65 Cal.App.4th at p. 1292; Patent Scaffolding, supra, 256 Cal.App.2d at p. 509; see also Croskey, supra, [¶] 9:41, p. 9-12.)
1. Superior Equitable Position
Plaintiffs claim that as assignees of State Farm's right, defendants stepped into the shoes of State Farm, and therefore defendants bore the burden to establish an equitable position superior to their own. According to plaintiffs, defendants cannot possibly do so because they were directly and primarily responsible for plaintiffs' fire losses.
Plaintiffs are correct that by assignment, defendants stepped into State Farm's shoes. However, in analyzing the enforceability of the right of subrogation, plaintiffs treat defendants as if they were still in their "tortfeasor" shoes.
As noted, an insurer/subrogee's right is derived solely from the insured's right: the insurer takes all rights and claims against the party responsible for the underlying loss up to the amount of benefits paid and thus is entitled to recoup its payments subject to the same defenses that could have been asserted directly against the insured. (Fireman's Fund I, supra, 65 Cal.App.4th at p. 1292.) The rights of an assignee are the same: the assignee's rights are derived solely from the assignor. The assignee stands in the shoes of the assignor, taking all of the rights and remedies that the assignor possessed but subject to any defenses that could have been asserted against the assignor at the time of the assignment. (Johnson v. County of Fresno (2003) 111 Cal.App.4th 1087, 1096.)
Here, defendants, as assignees, succeeded to State Farm's position as subrogee and obtained all of State Farm's rights, equitable and legal, at the time of the assignment, subject of course to claims and defenses that could have been asserted against State Farm. Thus, in asserting the right of subrogation, defendants did so as assignees and not as tortfeasors. (Cf., e.g., Engle v. Endlich (1992) 9 Cal.App.4th 1152, 1164-1165 [upholding plaintiff/employee's purchase and enforcement of employer's workers' compensation lien because in asserting it, plaintiff did so as the employer's assignee and not as a plaintiff].) Accordingly, the focus of an equitable analysis here is on whether State Farm would have been entitled to enforce the right and whether State Farm's equitable position was superior to that of the party responsible for the underlying loss.
This focus on the assignor rather the assignee is illustrated in Lawyers Title Ins. Corp. v. Feldsher (1996) 42 Cal.App.4th 41. There, a third party foreclosed on its deed to certain property and in doing so closed out a lender's junior mortgage on the same property. A title insurer paid the lender/insured's loss and received in return an assignment of the lender's rights and claims against the third party. The insurer then sought equitable subrogation to recoup its payments from the third party. In analyzing the equities of the parties, the court focused on the equitable position of the lender/assignor, not that of the title insurer/assignee, vis a vis the third party, and because the lender did not occupy a superior position, the title company was not entitled to equitable subrogation. (Id. at pp. 50-55.)
To support their view that the focus of equitable analysis should be on defendants as tortfeasors and not on defendants as assignees, plaintiffs rely on statements extracted from Meyers, supra, 11 Cal.2d 92. Literally applied, those statements may appear to support defendants' view; but, as we shall explain, when read in context, they do not.
In Meyers, supra, 11 Cal.2d 92, a fidelity insurer paid its insured's claims for losses arising from checks forged by an employee and cashed by a bank. The insured/employer assigned its legal claims for negligence against the bank to the insurer, and in the legal action against the bank on the insurer's assigned claim, the trial court entered judgment against the bank. (Id. at pp. 93-94.)
The issue on appeal was whether the insurer properly could seek reimbursement from the bank through the legal claim it had been assigned. The Supreme Court said no. It explained that an insurer's remedy to recoup insurance benefits was equitable subrogation against the party responsible for the insured's loss. That right arises by operation of law, and a formal assignment of legal claims by the insured added nothing. Thus, if an insurer is not entitled to equitable subrogation against a particular third party, the insurer cannot alternatively seek reimbursement based on its assignment of a separate legal claim against that third party. Turning to the facts, the court found that the insurer could not seek equitable subrogation against the bank because the bank was not directly responsible for the losses underlying the claims. The employee's forgery had caused the losses. Moreover, because the bank had a duty to cash the forged checks, the insurer could not show that its equitable position was superior to that of the bank. Thus, the insurer was not entitled to equitable subrogation and could not alternatively seek to reimbursement from the bank based on its assigned legal claim. (Meyers, supra, 11 Cal.2d at pp. 94-95.)
It was in this context that the court stated, "[O]ne who asserts a right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity to be entitled to such subrogation, or substitution[.]" (Meyers, supra, 11 Cal.2d at p. 96.) Thus, "where by the application of equitable principles, a surety has been found not to be entitled to subrogation, an assignment will not confer upon him the right to be so substituted in an action at law upon the assignment. His rights must be measured by the application of equitable principles in the first instance, his recovery being dependable upon a right in equity, and not by virtue of an asserted legal right under an assignment." (Id. at p. 97, italics added.)
The circumstances here are entirely different. Whereas the insurer in Meyer never had an enforceable right of subrogation against the bank because it could not establish a superior equitable position, State Farm clearly had an enforceable right of subrogation against defendants because it occupied an equitable position superior to that of defendants, who were responsible for plaintiffs' losses. State Farm then assigned its right in exchange for valuable consideration. Meyers did not face these circumstances or even consider the assignability of an enforceable right of subrogation to a third party or the enforceability of the right by the assignee.
It is axiomatic that "[l]anguage used in any opinion is of course to be understood in the light of the facts and the issue then before the court, and an opinion is not authority for a proposition not therein considered." (Ginns v. Savage (1964) 61 Cal.2d 520, 524, fn. 2; accord, Kinsman v. Unocal Corp. (2005) 37 Cal.4th 659, 680.) Given the factual context and issues considered in Meyers, the statements quoted above do not reasonably stand for the proposition that an insurer may not assign its right of subrogation to the party responsible for the underlying loss; nor do the statements reasonably stand for the proposition that even though the insurer occupied an equitable position superior to that of the party directly responsible for the underlying loss, the insurer's assignee must separately establish that its own equitable position is superior.
Because defendants stepped into the shoes of State Farm and asserted the right of subrogation as assignees, plaintiffs' reliance on State Farm, supra, 143 Cal.App.4th 1098 is also misplaced. There, an insurer sought subrogation against third parties who were only indirectly responsible for the fire that cause the insured's loss. The trial court concluded that because the third parties did not start the fire, the insurer's position was inferior to theirs and denied subrogation. In reversing, the court opined that "[t]he direct wrongdoer, having caused the loss, cannot be considered an innocent party. [Citation.] In [that] situation, an innocent insurer will always have superior equities." (Id. at p. 1113.) However, the court found that the trial court's approach to balancing the equities of indirect wrongdoers was flawed, finding instead that it was unfair to bar enforcement of subrogation rights against third parties whose negligence indirectly rendered them liable to the insured. (Id. at pp. 1118-1119.)
Citing Caito v. United California Bank (1978) 20 Cal.3d 694, plaintiffs argue that the setoff was unjust because they "were awarded more in damages than what State Farm paid on its claim," and they also "expended significant attorney fees and costs over the last three years."
In Caito v. United California Bank, supra, 20 Cal.3d 694, the court articulated the "justice" element for equitable subrogation as follows: " 'Subrogation must not work any injustice to the rights of others.' " (Id. at p. 704.)
We fail to see how the fact that the jury awarded plaintiffs more than what State Farm paid in benefits represents an injustice. Indeed, it appears to be a non sequitur. Moreover, plaintiffs cite no authority for the dubious proposition that an insurer's partial payment for a loss weighs against enforceability of a subrogation right. Nor do plaintiffs cite any authority for the equally dubious proposition that litigation expenses are relevant in determining whether a right of subrogation is enforceable in the first instance.
2. Subrogation Against Insured
Citing St. Paul Fire & Marine Ins. Co. v. Murray Plumbing & Heating Corp. (1976) 65 Cal.App.3d 66 (St. Paul), plaintiffs argue that in receiving a setoff against plaintiffs' damage award, defendants, as State Farm's assignees, effectively circumvented the equitable prohibition against an insurer seeking subrogation against its insured.
"An insurer has no right of equitable subrogation against its own insured with respect to a loss or liability for which the insured is covered under the policy because, as between the insurer and the insured, the insurer assumes responsibility for the loss or liability." (Truck Ins. Exchange v. County of Los Angeles (2002) 95 Cal.App.4th 13, 21 (Truck); accord, McKinley v. XL Specialty Ins. Co. (2005) 131 Cal.App.4th 1572, 1575; see Croskey, supra, ¶ 9:118, p. 9-50.) We find the rule inapplicable here.
This rule is based on equitable principles of basic fairness. " 'To permit the insurer to sue its own insured for a liability covered by the insurance policy would violate these basic equity principles, as well as violate sound public policy. Such action, if permitted, would (1) allow the insurer to expend premiums collected from its insured to secure a judgment against the same insured on a risk insured against; (2) give judicial sanction to the breach of the insurance policy by the insurer; (3) permit the insurer to secure information from its insured under the guise of policy provisions available for later use in the insurer's subrogation action against its own insured; (4) allow the insurer to take advantage of its conduct and conflict of interest with its insured; and (5) constitute judicial approval of a breach of the insurer's relationship with its own insured.' " (St. Paul, supra, 65 Cal.App.3d at p. 75, quoting Home Insurance Company v. Pinski Brothers, Inc. (1972) 500 P.2d 945, 949; see Truck, supra, 95 Cal.App.4th at p. 21 [for insurer to recover against insured would be inequitable].)
None of these equitable considerations of fairness are implicated here. Defendants as assignees did not seek equitable subrogation against State Farm's insureds (plaintiffs); they sought an equitable setoff equivalent to the amount State Farm would have been entitled to recover. It is true that the setoff reduced plaintiffs' net award, but in that regard, the result was no different than it would have been had State Farm enforced its own right. As noted above, an insurer can seek to recover the amount it has paid to an insured directly from responsible party by intervening in the insured's suit or filing its own suit against that party; or it can seek to recoup directly from plaintiffs' recovery from the responsible party. Taking the latter approach is not the same as suing one's insured for equitable subrogation. (See, e.g., Plut, supra, 85 Cal.App.4th 98, 101-107 [upholding post-judgment setoff against insured's damage award in the amount of insurer's subrogation claim].) Moreover, the purpose of subrogation is to prevent the insured from obtaining a double recovery. (Helfend, supra, 2 Cal.3d at p. 11, fn. 17.) Adopting plaintiffs' theory that defendants are circumvented the rule barring subrogation against an insured, would, in effect, extinguish the right assigned by State Farm and result in plaintiffs getting a double recovery for their fire losses, one recovery through insurance, the other from the jury.
3. The Make-Whole Rule
Plaintiffs claim that before defendants could enforce their assigned right, plaintiffs must have received full compensation for their loss. They assert, "The fact that the jury awarded [plaintiffs] more than what State Farm had paid them indicates that [plaintiffs] had not recovered from their loss in full." This claim invokes the equitable "made-whole" rule.
"The made-whole rule is a common law principle that limits the insurer's reimbursement right in situations where the insured has not recovered his or her 'entire debt.' [Citations.] The rule precludes an insurer from recovering any third party funds paid to the insured until the insured has ' "been fully compensated for [his or] her injuries . . . ." ' [Citation.]" (21st Century Ins. Co. v. Superior Court (2009) 47 Cal.4th 511, 519 (21st Century.) Thus, " '[t]he general rule is that an insurer that pays a portion of the debt owed to the insured is not entitled to subrogation for that portion of the debt until the debt is fully discharged. In other words, the entire debt must be paid. Until the creditor has been made whole for its loss, the subrogee may not enforce its claim based on its rights of subrogation.' [Citations.]" (Sapiano v. Williamsburg Nat. Ins. Co. (1994) 28 Cal.App.4th 533, 536; Plut, supra, 85 Cal.App.4th at p. 104; but see Croskey, supra, ¶ 9:111.28, pp. 9-47 & 9-48 [insurer having paid policy limit need not wait until insured has been made whole].)
Plaintiffs focus on the insurance benefits they received and appear to overlook the fact that the jury awarded them damages for their total property loss—i.e., the amount necessary to make them whole. Before seeking a setoff, defendants did not pay the damage award minus the setoffs for other settling defendants. Nevertheless, we conclude that under the circumstances, full payment of the net damage award prior to enforcing the subrogation right was not mandatory, necessary, or appropriate.
In a declaration in opposition to defendants' motion for a setoff, Jennifer Ho, "principal for De Anza Interior," stated that plaintiffs incurred $554,101.78 in attorney fees and costs related to the litigation. However, fees and costs are not properly considered in determining whether an insured has been made whole. (See 21st Century, supra, 47 Cal.4th at p. 515; Croskey, supra, ¶ 9:98.1, p. 9-40.)
For example, in Plut, supra, 85 Cal.App.4th 98, an insurer paid some but not all of its insured's claims for fire damage to property. Later, the insured sued the insurer for breach of the insurance contract. The jury awarded damages against the insurer, and in post-judgment proceedings, the court granted the insurer's request for a setoff against the damage award in the amount of its subrogation claim. (Id. at pp. 101-103.) In upholding the setoff, the court initially found that the insurer had acquired valid subrogation rights. It then found that the damage award represented the amount necessary to make the insured whole for their property loss. Last, the court concluded that it was unnecessary for the insurer to pay the damages award before seeking to recoup under its subrogation claim. The court acknowledged that " '[t]he doctrine of subrogation requires that the person seeking its benefit must have paid a debt due to a third person before he can be substituted to that person's rights and it is not the liability to pay but an actual payment to the creditor which raises the equitable right. [Citations.]' [Citations.]" (Id. at p. 106.) On the other hand, the court pointed out that " 'a court of equity will compel a set-off when mutual demands are held under such circumstances that one of them should be applied against the other and only the balance recovered,' and the fact that one of the parties' demands 'has not been reduced to judgment is no obstacle to its allowance as a set-off against a judgment. [Citation.]' In proper circumstances, 'a setoff procedure simply eliminates a superfluous exchange of money between the parties.' [Citation.]" (Id. at pp. 106-107.) Under the circumstances, the court observed that allowing the setoff only after the insurer fully paid the damage award would have forced "a superfluous transfer" of money to the insureds and then back to the insurer. Accordingly, the court concluded that an immediate setoff reducing the insureds' damage award was proper. (Id. at p. 107.)
Here, requiring defendants to fully pay the damage award before allowing them to enforce their assigned subrogation right would involve the superfluous transfer of money first from defendants to plaintiffs and from plaintiffs back to defendants, all out of the same pot of money.
C. Lack of Mutuality
Plaintiffs claim that defendants were not entitled to a setoff because "there was no mutuality of debts between the parties."
"The right to a setoff is 'founded on the equitable principle that "either party to a transaction involving mutual debts and credits can strike a balance, holding himself owing or entitled only to the net difference, . . . ." [Citation.]' [Citation.] '[I]t is well settled that a court of equity will compel a set-off when mutual demands are held under such circumstances that one of them should be applied against the other and only the balance recovered.' [Citation.]" (Fassberg, supra, 152 Cal.App.4th at p. 762.) " 'To be mutual, [the debts] must be due to and from the same persons in the same capacity.' " (Prudential Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118, 1127; Kay v. Metz (1921) 186 Cal. 42, 49.)
"Whether a setoff is appropriate in equity is a question within the trial court's discretion. We review the court's decision under the abuse of discretion standard. [Citation.] An abuse of discretion occurs if, in light of the applicable law and considering all of the relevant circumstances, the court's decision exceeds the bounds of reason and results in a miscarriage of justice. [Citations.]" (Fassberg, supra, 152 Cal.App.4th at p. 763.)
Plaintiffs note that State Farm assigned its right of subrogation to CCIC. They argue that since CCIC owned the subrogation credit and plaintiffs owned the judgment debt, the setoff did not involve mutual debts and credits between plaintiffs and defendants. Plaintiffs further argue that because CCIC acquired the subrogation credit on defendants' behalf, "such an acquisition by representation could only vest ownership in [defendants] in a different capacity than that in which they appear herein."
Setoff is "preeminently an equitable doctrine" (Advance Industrial Finance Company v. Western Equities, Inc. (1959) 173 Cal.App.2d 420, 427), and "flexibility is particularly appropriate when applying equitable doctrines, such as setoff." (Granberry v. Islay Investments (1995) 9 Cal.4th 738, 748.)
CCIC paid for and took the right of subrogation "on behalf" of defendants. Thus, defendants owed the judgment debt in their capacity as tortfeasors but were entitled to a subrogation credit against the judgment in their capacity as beneficial owners of the assignment. Although there was not a perfect correspondence between defendants' debt to plaintiffs as tortfeasor and defendants' right of subrogation as assignees, the setoff here does not, in our view, exceed the bounds of reason or appear inequitable or against public policy. On the contrary, it made sense. Defendants owed plaintiffs damages for plaintiffs' fire losses; the subrogation right was based State Farm's payments to plaintiffs for the same losses; and as beneficial assignees of that right, defendants were entitled to enforce it one way or another. Since the damages and credit represented compensation for the very same losses, the setoff represented a reasonable and efficient way to avoid an unnecessary exchange of money and reduce the exchange between plaintiffs and defendants to a single transaction. (See Jess v. Herrmann (1979) 26 Cal.3d 131, 137 [in the absence of some public policy limitation, "setoff procedure simply eliminates a superfluous exchange of money between the parties" and "merely reduces the exchange to a single transaction"]; e.g., Plut, supra, 85 Cal.App.4th at p. 107.)
V. AMOUNT OF THE ACTUAL SETOFF
Plaintiffs contend that in determining the amount of any setoff, the court erred in failing to charge defendants with a share of plaintiffs' attorney fees. They further claim that the subrogation right implicitly encompassed a waiver of any amount over $300,000, the amount that State Farm accepted from CCIC in exchange for the assignment. Last they claim that the amount of the setoff is not supported by the evidence or the special verdict.
A. Failure to Charge Attorneys Fees
Plaintiffs assert that as a result of their efforts and expenses in prosecuting the action, defendants reaped a substantial benefit in the form of a setoff even as they fought plaintiffs every step of the way. Citing the "common fund" doctrine and the court's equitable authority, plaintiffs claim that under the circumstances, they were entitled to have defendants charged with a proportionate amount of the fees and costs that plaintiffs incurred.
Like the "made whole" rule, the "common fund" doctrine "is a second limitation on an insurance company's ability to recover funds from its insured where the insured obtains a judgment or settlement from the third party tortfeasor. Under the common-fund rule, ' "[W]hen a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or preservation of that fund, such plaintiff or plaintiffs may be awarded attorney's fees out of the fund." ' [Citation.] ' "The bases of the equitable rule which permits surcharging a common fund with the expenses of its protection or recovery, including counsel fees, appear to be these: fairness to the successful litigant, who might otherwise receive no benefit because his recovery might be consumed by the expenses; correlative prevention of an unfair advantage to the others who are entitled to share in the fund and who should bear their share of the burden of its recovery; encouragement of the attorney for the successful litigant, who will be more willing to undertake and diligently prosecute proper litigation for the protection or recovery of the fund if he is assured that he will be promptly and directly compensated should his efforts be successful." [Citation.]' [Citation.] Under this rule, an insurance company that does not participate in the underlying action must pay a pro rata share of the insured's attorney fees and costs when it seeks reimbursement from its insured out of funds obtained by the insured from the responsible third party. [Citation.] That is, the insurance company's reimbursement must be reduced proportionately to reflect the attorney fees paid by the insured. [Citation.]" (Progressive West Ins. Co. v. Superior Court (2005) 135 Cal.App.4th 263, 275-276; accord 21st Century, supra, 47 Cal.4th at pp. 520-522; Quinn v. State of California (1975) 15 Cal.3d 162, 167, 176; Lee v. State Farm Mut. Ins. Co. (1976) 57 Cal.App.3d 458, 467; e.g., Hartford Accident & Indemnity Co. v. Gropman (1984) 163 Cal.App.3d Supp. 33, 40 [insured required to reimburse insurer from damages obtained from tortfeasor, but court erred in not charging insurer with pro rata share of insured's litigation costs under "common fund" doctrine]; see Croskey, supra, ¶9:98.1, p. 9-40.)
Plaintiffs assert that "State Farm did not fully participate in [the] case below, having filed their complaint on November 7, 2008, almost 18 months into the litigation and avoided a three week trial by settling days before." They further note that they alone prosecuted the action against defendants and obtained the damage award. Defendants obviously did not contribute in any way to plaintiffs' success; rather, in their capacity as alleged tortfeasors, defendants opposed plaintiffs. After the verdict, however, defendants, now in State Farm's shoes, stepped forward as assignees and asserted their subrogation right. Only because of plaintiffs' success were defendants able to realize the full value of their subrogation claim by converting it into a setoff that substantially reduced their liability for damages. Accordingly, plaintiffs claim that the "common fund" doctrine applied, and the court erred in failing to charge defendants as passive beneficiaries of plaintiffs' efforts with a pro rata share of their fees and costs.
Plaintiffs raised this claim in its opposition to defendants' motion for a setoff. There is no reporters' transcript of the hearing, and thus the record does not reflect an oral ruling on that claim; nor is there a separate order granting the motion. Rather, the judgment simply states that defendants were entitled to a setoff as assignees of State Farm's subrogation claim.
Defendants do not refute, or even dispute, plaintiffs' factual assertions concerning State Farm's lack of participation in plaintiffs' action against defendants. Rather, in their exceedingly brief response to this "common fund" claim, defendants argue that it "would completely abrogate the 'English Rule,' long enshrined in American law, that litigants must bear their own attorney's fees and costs unless they contractually agree otherwise." Defendants further argue that even if the "common fund" doctrine applied, they did not receive any windfall but "the benefit of their bargain with State Farm . . . ." Thus, according to defendants, plaintiffs' prosecution of their claims against defendants did not confer any benefit on defendants, and therefore, plaintiffs must bear their own attorney fees and costs.
Defendants appear to be confused about the English and American rules concerning the recovery of fees and costs. The American rule is that "each party in a lawsuit ordinarily shall bear its own attorney's fees unless there is express statutory authorization to the contrary." (Hensley v. Eckerhart (1983) 461 U.S. 424, 429; Trope v. Katz (1995) 11 Cal.4th 274, 278 ["California follows what is commonly referred to as the American rule, which provides that each party to a lawsuit must ordinarily pay his own attorney fees."].) "The American rule is contrasted with the 'English' rule, under which a losing party may be required to pay the winner's fees in addition to his or her own expenses." (Sears v. Baccaglio (1998) 60 Cal.App.4th 1136, 1144, italics added; Java Oil Ltd. v. Sullivan (2008) 168 Cal.App.4th 1178, 1190 [" 'The English rule is that generally the loser must pay the winner's attorneys fees.' "].) Indeed, under the English rule, defendants, as losing party, would have been required to pay plaintiffs' attorney fees and costs.
At oral argument, counsel for defendants acknowledged that he had confused the two rules.
Next, we note that the "common fund" doctrine is a well-established exception to the American rule. (Serrano v. Priest (1977) 20 Cal.3d 25, 35 [" 'common fund' exception to the American rule . . . is grounded in 'the historic power of equity' "].) Moreover, the doctrine has been applied in the insurance context. (E.g., Hartford Accident & Indemnity Co. v. Gropman, supra, 163 Cal.App.3d Supp. at p. 40.) Thus, applying the doctrine here would not abrogate the American rule.
Defendants' claim that it would abrogate the rule rests on the view that plaintiffs as prevailing the party and defendants as the losing party should, under the American rule, bear their own fees and costs. Thus, making defendants pay a share of plaintiffs' fees goes against the grain of the American rule. However, the flaw in this reasoning is that defendants would be required to pay fees not as losing tortfeasors but as assignees of State Farm's subrogation right and beneficiaries of plaintiffs' successful efforts, which gave value to that right. In other words, just as defendants, as assignees, were entitled to stand in State Farm's shoes and reap a substantial benefit from its subrogation right, so too defendants, as assignees, ought to be subject to claims and defenses that could have been asserted against State Farm. Although an actual "common fund" claim against State Farm did not exist, and could not have existed, at the time of the assignment, such a claim is an inherent latent burden of a right of subrogation. In our view, allowing defendants to enjoy the benefit of its assigned right without having to share the burden of obtaining that benefit would be inconsistent with the equitable principles that govern enforcement of subrogation rights. (See also Civ. Code, § 3521 ["He who takes the benefit must bear the burden"].)
Last, defendants' view that the $474,000 reduction in their liability for damages did not constitute a substantial benefit defies logic and reason. Had State Farm stood on the sidelines while plaintiffs alone prosecuted their action against defendants and then, after plaintiffs prevailed, sought subrogation reimbursement from plaintiffs' damage award, the "common fund" doctrine would have applied and required the court to charge State Farm with a pro rata share of plaintiffs' fees and costs, thereby reducing the net amount of the reimbursement. As assignees, defendants essentially are in the same position, although instead of receiving actual reimbursement of monies as State Farm would have been entitled to, defendants received a substantial setoff against the money damages that they were otherwise liable to pay.
Thus, the question before us is whether the court erred in rejecting plaintiffs' request to charge defendants with a pro rata share of the fees and costs incurred in obtaining the damage award.
We review the trial court's exercise of its equitable powers under an abuse of discretion standard of review. (City of Barstow v. Mojave Water Agency (2000) 23 Cal.4th 1224, 1256; Hirshfield v. Schwartz (2001) 91 Cal.App.4th 749, 755.)
The enforcement of subrogation rights and application of the "common fund" doctrine are both matters that involve the exercise of a trial court's equitable powers and discretion. An abuse of equitable discretion occurs " 'when, in light of applicable law and considering all relevant circumstances, the court's ruling exceeds the bounds of reason. [Citations.]' [Citation.]" (Jeng-Cheng Ho v. Shih-Ming Hsieh (2010) 181 Cal.App.4th 337, 345.)
The pertinent facts are undisputed. Plaintiffs alone sued multiple parties including defendants and pursued that action by themselves for 18 months. At that point, State Farm filed a separate subrogation action. It later settled its case, gave up any claims it had against defendants, and assigned its subrogation rights. There is no evidence that State Farm participated in plaintiffs' action or provided them with any material assistance in prosecuting it. Nor is there any evidence refuting plaintiffs' assertion that State Farm did not participate in their action. Thereafter, plaintiffs continued to prosecute their action, and defendants defended against it, presumably seeking to avoid, or at least minimize, their liability. The jury found defendants liable to plaintiffs. After plaintiffs prevailed, defendants, now standing in State Farm's shoes, stepped forward and asserted the assigned subrogation right and obtained a substantial setoff against the damage award.
Given these circumstances, we find no reasonable basis, factual, legal, or equitable, for the court to deny the request for apportionment under the "common fund" doctrine. Indeed, that defendants first fought against plaintiffs' recovery and then, after losing, sought to benefit from that very recovery as assignees makes the equitable case for applying the doctrine compelling. Accordingly, we conclude that when viewed in light of applicable law and all relevant circumstances, the trial court's failure to charge defendants with a pro rata share of plaintiffs' fees and costs incurred in obtaining the damage award exceeded the bounds of reason and constituted an abuse of discretion.
For this reason, and because the setoff reflects what the trial court found to be the amount of benefits that plaintiffs received from State Farm, we further conclude that the judgment cannot stand and the matter must be remanded for the court to assess defendants' pro rata share of attorney fees and costs and redetermine the amount, if any, of a setoff.
B. Waiver of Subrogation Rights
Plaintiffs claim that when State Farm received $300,000 from CCIC in exchange for its subrogation right, State Farm waived the right to seek reimbursement for more than that amount. Thus, as subrogees standing in State Farm's shoes, defendants were at most entitled to a setoff of $300,000 and not $474,000.
Defendants assert, and plaintiffs concede, that this claim was not raised below. Although a reviewing court will ordinarily not review claims made for the first time on appeal which could have been but were not first presented to the trial court (Premier Medical Management Systems, Inc. v. California Ins. Guarantee Ass'n (2008) 163 Cal.App.4th 550, 564), plaintiffs would be entitled to raise it below on remand. For this reason and because the claim primarily poses a question of law, we exercise our discretion to address it at this time. (E.g., Fort Bragg Unified School Dist. v. Solano County Roofing, Inc. (2011) 194 Cal.App.4th 891, 907.)
"Case law is clear that ' "[w]aiver is the intentional relinquishment of a known right after knowledge of the facts." [Citations.] The burden . . . is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation, and "doubtful cases will be decided against a waiver" [Citation].' [Citations.] The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right. [Citation.]" (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.) " 'California courts will find waiver when a party intentionally relinquishes a right or when that party's acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.' [Citation.]" (Id. at pp. 33-34.)
The settlement agreement between State Farm and CCIC on defendants' behalf does not contain an express waiver of any subrogation right or expressly limit the enforcement of the assigned subrogation right to the amount of the settlement. Nor do the circumstances support a finding of implied waiver. The fact that State Farm settled its action for less than the face value of its subrogation claim was not inconsistent with an intent to assign the full value of that claim. Nor would settling for less than the amount of the subrogation claim have any tendency to induce anyone, least of all CCIC who obtained it on defendants' behalf, to believe that enforcement of the assigned right would be limited to the amount of the settlement. On the contrary, State Farm's agreement to settle more reasonably reflects its calculated determination that it was worth discounting its subrogation claim in order to avoid further litigation expenses and the risk of not recovering anything if the jury found that defendants were not liable for the fire losses. Conversely, the agreement reasonably represented a calculated hedge by CCIC against the possibility of a plaintiffs' verdict: if plaintiffs prevailed, then for a discount, CCIC obtained for the defendants a substantial subrogation setoff against the damage award.
To support their claim, plaintiffs quote Mid-States Ins. Co. v. American Fidelity & Casualty Co. (9th Cir.1956) 234 F.2d 721 for the proposition that "if the creditor acquiesces in or consents to the assertion of a subrogation pro tanto by one who has paid a portion of the debt, no one else is entitled to object." (Id. at p. 731.) Attempting to shoe-horn the facts here into that proposition, plaintiffs argue that "State Farm consented to and acquiesced in the pro tanto subrogration in favor of [defendants for $300,000]."
Mid-States Ins. Co. v. American Fidelity & Casualty Co., supra, 234 F.2d 721 is inapposite. It did not involve the assignment of a subrogation right or its enforcement by an assignee. Nor did it consider whether an insurer's acceptance of less than the amount of its subrogation claim automatically and necessarily limited the amount an assignee could recover through enforcement of the right of subrogation.
VI. PLAINTIFFS' REMAINING CLAIMS
Our conclusion that the matter must be remanded for a recalculation of the setoff renders moot plaintiffs' claims that (1) the court erred in denying plaintiffs' motion for an evidentiary hearing on the amount of any setoff; (2) there was insufficient evidence to support its finding of a $474,000 setoff; and (3) the jury's special verdict did not support that amount. On remand, the court will have to hold an evidentiary hearing to determine the amount of plaintiffs' attorney fees and costs directly incurred in obtaining the jury award, defendants' pro rata share of that amount and the amount of any subrogation setoff. Our conclusion also renders moot plaintiffs' claim that the court erred in denying its motion to vacate.
We note that in response to plaintiffs' motion to vacate on the ground of insufficient evidence, defendants submitted additional evidence that does support the trial court's determination concerning the amount it set off.
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VII. DISPOSITION
The judgment is reversed. The matter is remanded to the trial court for further proceedings.
Plaintiffs are entitled to their costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)
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RUSHING, P.J.
WE CONCUR:
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PREMO, J.
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ELIA, J.