LYSNE v. BIGHAM (1995)

Court of Appeal, First District, Division 2, California.

Johan LYSNE et al., Plaintiffs and Appellants, v. William BIGHAM, et al., Defendants and Respondents.

No. A062892.

Decided: April 17, 1995

Francis B. Mathews, S.B., Mathews & Kluck, Eureka, for plaintiffs and appellants. W. Timothy Needham, Janssen, Malloy, Marchi, Needham & Morrison, Geri Anne Johnson, The Harland Law Firm, Eureka, for defendants and respondents.

This is the third appeal ¹ in an action commenced by plaintiffs and appellants Johan and Roberta Lysne (the Lysnes or appellants) in November 1986, seeking to recover damages resulting from a soil subsidence problem with their home in Eureka, California.   Respondent William Bigham, doing business as Bigham Construction Company (jointly, hereinafter, Bigham), is the licensed contractor who built the Lysnes' home, and respondent Trueman Vroman (Vroman) is a soils engineer who issued a soils report on the Lysnes' home.

In a new trial following the previous appeals, the trial court found on the basis of stipulated facts that the Lysnes had been fully compensated for their losses by a $70,000 insurance payment in October 1986.   Accordingly, the trial court entered judgment in favor of respondents, apparently finding that they had purchased (at an unspecified discount) an assignment of the insurer's subrogation rights following the first trial and were, thus, entitled to an offset in the full amount the insurance company had paid for the benefit of the Lysnes.

The Lysnes contend that respondents do not have a valid assignment of subrogation rights, and that any offset to which respondents may be entitled should be limited to the amount respondents actually paid for the insurance company's subrogation rights.   Invoking the “common fund” doctrine, appellants further contend that they must be allowed to recover a portion of their attorney fees and costs from respondents or that, in the alternative, respondents' offset must be reduced by the amount of attorney fees and costs appellants incurred in litigating this case through two trials and the prior appeal.

We conclude that the assignment of the subrogation lien in this case for less than face value constitutes a partial waiver of the insurer's subrogation rights in favor of the alleged tortfeasors, a result that cannot be countenanced under well-established California law.

I. Factual and Procedural Background

On November 18, 1986, the Lysnes filed an action against respondents, among others, for alleged damages to a house they had purchased in September 1985.   The house was built in 1979 for the Reverend J. Hood Snavely and Elizabeth M. Snavely by respondent Bigham, a licensed contractor.   Prior to construction, Bigham retained an engineer, respondent Vroman, who issued a soils report regarding the property.   The Snavelys sold the property to Robert and Alice Toyota in March 1981.   The Toyotas, in turn sold the property to the Lysnes in September 1985, at a purchase price of $88,000.

The Lysnes financed their purchase of the Eureka house by transferring to it a California Department of Veterans Affairs (Cal–Vet) loan they had taken out on their former residence in Crescent City.   Under Cal–Vet procedures, the Lysnes were required to purchase the home in their own names but then deed the house back to Cal–Vet until the loan was paid off.   According to appellants' verified first amended complaint, the Cal–Vet loan is a once-in-a-lifetime, low-interest loan.   As a condition of the Cal–Vet loan, the Lysnes were required to obtain insurance on the house.   They obtained a Wausau policy for this purpose through the Department of Veterans Affairs.   Wausau's agent for submission of claims was Underwriters Adjusting Company (Underwriters).

On October 20, 1986, the Lysnes submitted to Underwriters a proof of loss regarding the subsidence problems.   After investigation, Wausau, through Underwriters, paid the policy limits, $70,000, to Cal–Vet to settle the Lysnes' insurance claim.   Cal–Vet retained $50,000 to pay off its loan, and paid the balance of $20,000 to the Lysnes.   Wausau retained its rights of subrogation under its policy, but assigned that right to Underwriters for collection.

Not satisfied with the insurance settlement, the Lysnes filed suit against Bigham, Vroman, and others for the subsidence damage to their home.   In the fourth cause of action in their verified first amended complaint, appellants alleged:  “ ‘That to the extent that the Cal–Vet Loan is entitled to reimbursement as a part hereof, plaintiffs do subrogate them with respect to their claim herein.’ ”   However, they refused to acknowledge any claim for subrogation as to their insurer, thereby forcing Underwriters to file a complaint in intervention to try to recover the subrogation proceeds.   The Lysnes filed an answer opposing the subrogation claim.

A jury trial on the Lysnes' claims commenced in April 1989.   Throughout the litigation, the Lysnes continued to oppose Underwriters' claim to subrogation.   At the end of this first trial, the court found that Underwriters had a right to subrogation of the $70,000 paid by Wausau and ordered a directed verdict in its favor.²  The jury subsequently found in favor of all defendants, but the trial court granted the Lysnes' motion for a new trial as to Bigham and Vroman.   Respondents separately, and unsuccessfully, appealed from this latter order, which was affirmed by this court by opinions filed August 10 and December 6, 1990.

While the matter was on appeal, Bigham and Vroman purchased and received an assignment of Underwriters' subrogation claim, the proceeds from which were to be paid to Wausau under an agreement between Underwriters and Wausau.   There is no evidence of the purchase price for this assignment.

The matter came on for retrial on May 3, 1993.   The parties submitted the case to the trial court on the following stipulated facts:  “[1] That at the time of sale of the property at 3329 I Street, the property was purchased for $88,000.00.  [2] At that time, the property was worth in excess of $20,000.  [3] On June 5, 1989 [the trial court] issued a directed verdict determining that Underwriters Adjusting Company has a subrogation lien on any judgment in favor of the [Lysnes] against any or all of the defendants in the sum of $70,000.  [4] That defendants Bigham and Vroman have purchased from Underwriters Adjusting Company any and all lien rights of Underwriters Adjusting Company as set forth in paragraph 3 hereof.”

Based on the foregoing stipulated facts, the trial court determined that because the Lysnes had received more by way of insurance proceeds than they had lost, they had suffered no damage.   Accordingly, the trial court entered judgment against the Lysnes.   The Lysnes timely appealed.

II. Discussion

A. The Assignment of Subrogation Rights at a Discount to the Tortfeasors Who Allegedly Caused the Damage for Which Indemnity Payments Have Been Made, is Invalid.

Although their arguments are inartfully framed, appellants' principal contention appears to be that respondents—as the alleged tortfeasors—do not have a valid assignment of Wausau's subrogation rights, or that public policy considerations invalidate the purported assignment of the subrogation lien.   Alternatively, appellants argue that the amount of respondents' offset should be reduced to the amount of consideration given for the purported assignment of the subrogation rights.

As for their argument that respondents did not actually obtain an assignment of the insurer's subrogation rights, the evidence is overwhelmingly to the contrary.   Clearly, Wausau assigned its subrogation claim to Underwriters for collection purposes.   Such a conclusion is supported by the uncontroverted testimony of Dennis Cirimele, Underwriters' recovery manager.   Moreover, appellants are collaterally estopped from relitigating that issue because it was actually litigated and necessarily decided in connection with the trial court's directed verdict in favor of Underwriters after the first trial.   As recited in the parties' stipulation, respondents then purchased the subrogation claim from Underwriters.

 “The California rule is that a chose in action is presumptively assignable.  (Civ.Code, §§ 953, 954.)”  (Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1378, 13 Cal.Rptr.2d 382.)   As a general matter, this presumption extends to subrogation rights.  (Id. at p. 1381, 13 Cal.Rptr.2d 382.)   However, such assignments will not be permitted in derogation of public policy.  (Id. at p. 1384, 13 Cal.Rptr.2d 382;  Platt v. Coldwell Banker Residential Real Estate Services (1990) 217 Cal.App.3d 1439, 1444–1445, 266 Cal.Rptr. 601.)   The question then becomes whether granting a credit to an alleged tortfeasor pursuant to such an assignment violates public policy.   We conclude that it does.

 In Quinn v. Warnes (1983) 144 Cal.App.3d 309, 192 Cal.Rptr. 660, Division One of this court addressed this issue in an analogous context involving worker's compensation insurance.   In Quinn, the plaintiff was injured in an automobile collision while acting in the course and scope of his employment.   He received $4,200 for temporary disability and medical benefits from El Dorado Insurance Company, his employer's worker's compensation carrier.   After the plaintiff filed a complaint alleging negligence of the driver of the other car, El Dorado filed a notice of lien claim in the action, requesting reimbursement of its payments.   Shortly thereafter, El Dorado became insolvent, and the insurance commissioner was appointed as liquidator of the company.   Before the jury trial began, the defendant and his liability insurance carrier purported to take an assignment of El Dorado's lien claim in exchange for $2,100, or precisely half the face amount of the lien.  (Id. at p. 311.)   After trial, the jury returned a verdict in favor of plaintiff in the amount of $13,808.20, as to which the trial court allowed defendants a set-off of $4,200, the full “face amount” of the lien.  (Ibid.)

On appeal, the plaintiff argued, inter alia, that the assignment of the subrogation claim to the alleged tortfeasor (or his insurer) was violative of public policy, including the policy underlying the collateral source rule, and that the assignment was an unfair claims settlement practice in violation of Insurance Code section 790.03, subdivision (h).  (Quinn v. Warnes, supra, 144 Cal.App.3d at pp. 312, 192 Cal.Rptr. 660.)   Division One rejected these arguments, holding that the collateral source rule did not apply in the worker's compensation context (id. at p. 317, 192 Cal.Rptr. 660), and that the unfair claims settlement practices cause of action could not be brought in the existing lawsuit (id. at p. 313, 192 Cal.Rptr. 660).   As to the argument that the assignment violated public policy, the court refused to so hold in the case before it primarily because there was no showing that the assignment had “adversely affected” the plaintiff in any way.  (Id. at pp. 317–320, 192 Cal.Rptr. 660;  see also id. at pp. 312, fn. 2, 313–314, 192 Cal.Rptr. 660.)

Quinn v. Warnes, supra, is distinguishable from the instant case on several bases and, thus, not controlling of our decision.³  First, appellants have made a showing—albeit a weak one—that they were adversely affected by the purported assignment of subrogation rights.   They alleged causes of action which, if proven at trial, could lead to an award of general and exemplary damages against respondents in excess of the loss in value (approximately $68,000) of their home.   Appellants have also had to expend funds for attorney fees and costs since the first trial to set the stage for a recovery to benefit both them and their insurer.⁴  Of course, if appellants are able to recover damages of at least $70,000 from respondents, Underwriters can come in and execute on its lien to that extent, less any amount awarded to appellants under a “common fund” theory.⁵  The point is, however, that appellants—not the defendants—should receive the benefit of any discount Underwriters may be willing give to settle its subrogation claim.⁶

Furthermore, unlike Quinn, the instant case arises in a first-party insurance context.   That is, unlike worker's compensation, the collateral source of benefits here was appellants' own insurance company, from which they were required to and did purchase an indemnity policy covering losses to their home.   As explained in a recent case from Division Three of this court, the collateral source rule, which is well-established as a part of California law (see Helfend v. Southern Cal. Rapid Transit Dist., supra, 2 Cal.3d at p. 10, 84 Cal.Rptr. 173, 465 P.2d 61), applies to the instant case.  (Pacific Gas & Electric Co. v. Superior Court (1994) 28 Cal.App.4th 174, 179–180, 33 Cal.Rptr.2d 522.)   In that case, PG & E brought a state court action against its former employee, Michael Salazar, and two nonemployees, Allen and Swafford, who had contracted with PG & E to provide washing services or canvas covers to boat owners whose vehicles were subject to “fallout” from neighboring power plants.   PG & E alleged that the three men had conspired and used various schemes to bilk it out of money.  (Id. at p. 177, 33 Cal.Rptr.2d 522.)

Having paid nearly $500,000 in premiums for fidelity bonds over a three-year period, PG & E sent a proof of loss to its insurance company, National Union, claiming a loss of $3 million because of Salazar's dishonest conduct.   (Pacific Gas & Electric Co. v. Superior Court, supra, 28 Cal.App.4th at p. 177, 33 Cal.Rptr.2d 522.)   PG & E subsequently filed a federal court action against National Union.   National Union, in turn, joined Allen, Swafford, Salazar, and others under a third party complaint for declaratory relief.   Prior to trial in the state court action, PG & E and National Union entered into a settlement of the federal court claims under which the insurer paid PG & E $1 million, dismissed its third party complaint, and waived its subrogation rights under the fidelity bonds.   Thereafter, Allen and Swafford successfully moved the state court for an order granting them a credit for the $1 million paid to PG & E by its insurance carrier.   PG & E filed a petition for writ of mandate seeking interlocutory review of the trial court's order.  (Id. at pp. 176–177, 33 Cal.Rptr.2d 522.)

The principal issue in the writ proceedings in this court was whether the payment from National Union under the fidelity bonds was “wholly independent” of the wrongdoer—in that case, the employee, Salazar—such that the collateral source rule would bar the credit in favor of Allen and Swafford, the alleged tortfeasors.  (Pacific Gas & Electric Co. v. Superior Court, supra, 28 Cal.App.4th at p. 177, 33 Cal.Rptr.2d 522.)   The defendants reasoned that they should receive credit for payments made by Salazar's employer's insurance just as they would if Salazar or Salazar's own insurance carrier had paid a judgment.   The Court of Appeal rejected this argument, holding that the collateral source rule most clearly applies to payments made to the plaintiff by the plaintiff's own insurance company, and that if anyone is to receive the benefits of such insurance payments, it should be the insured—not the alleged tortfeasors.  (Id. at pp. 182, 184, 33 Cal.Rptr.2d 522;  see also De Cruz v. Reid (1968) 69 Cal.2d 217, 223, 227, 70 Cal.Rptr. 550, 444 P.2d 342.)   A similar choice is presented in this case, and must be resolved in favor of the insured appellants over the alleged tortfeasors.

Of course, unlike Pacific Gas & Electric Co. v. Superior Court, supra, there was no express waiver of either contractual or equitable subrogation rights in the instant case.   However, Underwriters' assignment of its lien to respondents at a discount was, in effect, a partial waiver of its subrogation rights in favor of the alleged tortfeasors.   Such a result cannot be countenanced under California law.  (28 Cal.App.4th at p. 184, 33 Cal.Rptr.2d 522;  De Cruz v. Reid, supra, 69 Cal.2d at pp. 223, 227, 70 Cal.Rptr. 550, 444 P.2d 342;  see also Philip Chang & Sons Associates v. La Casa Novato (1986) 177 Cal.App.3d 159, 170, 222 Cal.Rptr. 800.)

We conclude that the assignment of subrogation rights from Underwriters to respondents must be set aside and that the judgment of the trial court, which rises and falls with the validity of that assignment, must be reversed.⁷

B. Appellants May Raise Their Common Fund Argument at an Appropriate Time on Remand.

Because we have decided that the judgment must be reversed, we need not delve deeply into the appellants' claim that they were entitled to recover a portion of their attorney fees pursuant to the “common fund doctrine.”   We will, however, provide a brief overview of that issue for the benefit of the parties and the trial court on remand.

“Under the common fund doctrine, when litigation produces a fund that benefits others as well as the litigant, the litigant may recover attorney fees from the fund or from the other parties enjoying the benefit of the fund.  [Citation.]   The rule is rooted in ‘the historic power of equity.’  [Citations.]   It requires ‘those for whose benefit the action or proceeding was taken to bear their share of the expenses of litigation․’  [Citation.]   When the recovery is from a third party (rather than from the fund), it is sometimes called ‘equitable apportionment.’  [Citations.]”  (City and County of San Francisco v. Sweet (1995) 32 Cal.App.4th 1483, 1486–1487, 38 Cal.Rptr.2d 620.)

 In the insurance context, an insurer may be required to reimburse its insured for attorney fees expended in securing a settlement or recovery against a third party where permitting the insurer to be reimbursed without participating pro rata in the insured's attorney fees and costs would result in the unjust enrichment of the insurer.  (Lee v. State Farm Mut. Auto. Ins. Co. (1976) 57 Cal.App.3d 458, 466–469, 129 Cal.Rptr. 271.)   Three elements must be established to justify an award of attorney fees and costs to an insured pursuant to the common fund doctrine:  “(1) without the litigation there would have been no recovery;  (2) the recovery was an available fund out of which the beneficiaries of the litigation would be paid;  and (3) the applicant seeking contribution in respect to costs and attorney fees was the sole ‘active litigant’ and as such obtained the recovery that provided the fund.”  (Lindsey v. County of Los Angeles (1980) 109 Cal.App.3d 933, 936, 167 Cal.Rptr. 527.)

Appellants argue that they were the ones who set the stage for the insurance company to realize the value of its subrogation lien by defending the appeals from the trial court's order granting them a new trial against respondents.   Up to that point, however, it does not appear that they were the “sole ‘active litigant’ ” in the proceedings below.   Until the end of the first trial, appellants disputed the existence of any right of subrogation in Underwriters.   It was not until the trial court directed a verdict in favor of Underwriters that that issue was laid to rest.   Arguably, though, appellants did confer a significant benefit on its insurer by successfully defending against the prior appeals, thus resuscitating the causes of action alleged against respondents.   Appellants may, thus, be entitled to recover a pro rata share of the fees and costs expended in the course of those appeals.   However, a final determination of appellants' “common fund” claim must await a final resolution—by verdict or settlement—of the parties' dispute over the remaining causes of action and the production of an identifiable fund out of which appellants and their insurer can be paid.

III. Conclusion

For all the foregoing reasons, the judgment of the trial court is reversed and the cause remanded for further proceedings consistent with this opinion.   Costs to appellants.

FOOTNOTES

1.   In the previous appeals, Nos. A047255 and A047737, Division Two affirmed the trial court's order granting the Lysnes a new trial against the respondents herein.

2.   Appellants did not appeal from this judgment which is, by now, final.

3.   The Quinn court's analysis is also questionable.   The court placed heavy reliance on that portion of Witt v. Jackson (1961) 57 Cal.2d 57, 73, 17 Cal.Rptr. 369, 366 P.2d 641, which held that “where the employer is negligent and therefore not entitled to a lien on the judgment obtained by the employee against a third-party tortfeasor, the judgment must be reduced by the amount of the benefits paid to the employee.”   (Quinn v. Warnes, supra, 144 Cal.App.3d at p. 317, 192 Cal.Rptr. 660.)   More specifically, the court focuses on the observation in Witt, supra, 57 Cal.2d at page 73, 17 Cal.Rptr. 369, 366 P.2d 641, that “the injured employee may not be allowed double recovery.”  (Quinn v. Warnes, supra, 144 Cal.App.3d at p. 312, fn. 2, and pp. 313, 317–318, 192 Cal.Rptr. 660.)   In reality, the portions of Witt on which the court relied had nothing to do with the case before the court in that there was in Quinn no claim that the plaintiff's employer was negligent in any manner.  (144 Cal.App.3d at p. 311, fn. 1, 192 Cal.Rptr. 660.)   Moreover, the continuing viability of these portions of Witt is in doubt.  (See Galvis v. Petito (1993) 13 Cal.App.4th 551, 562–563, 16 Cal.Rptr.2d 560.)

4.   Thus, appellants may be entitled to recover a portion of these fees and costs under a “common fund theory.”   This is another significant difference between Quinn and the instant case.   Unlike appellants, the plaintiff's in Quinn were clearly entitled to recover their attorney fees and costs pursuant to the worker's compensation statutes.  (144 Cal.App.3d at p. 313, 192 Cal.Rptr. 660.)   Even if the appellants in this case were able to recover more than one full measure of damages due them on the tort claims, this would be allowed, under the terms of the collateral source rule, as a means of compensating for the attorney fees they had to expend to obtain the recovery.  (See Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 13, 84 Cal.Rptr. 173, 465 P.2d 61.)

5.   We will discuss this issue in greater detail in section II.B, post.

6.   Another distinction, of course, is that the insurer in Quinn became insolvent during the pendency of the litigation there and was subject to liquidation proceedings.   No comparable cause for urgency appears in the record of this case to explain why Underwriters would want or need to unload its subrogation claim at a discount.   Underwriters has a final judgment declaring that they have an enforceable lien in the amount of $70,000.   Nothing further was required than for them to sit back and watch as appellants prosecuted—or settled—their claims with respondents.   As the Supreme Court observed in Helfend v. Southern Cal. Rapid Transit Dist., supra, “The double shift from the tortfeasor to the victim and then from the victim to his insurance carrier can normally occur with little cost in that the insurance carrier is often intimately involved in the initial litigation and quite automatically receives its part of the tort settlement or verdict.”  (2 Cal.3d at p. 11, 84 Cal.Rptr. 173, 465 P.2d 61, fn. omitted.)   If the consideration respondents gave for the assignment accurately reflected their liability for the damage to appellants' home or the settlement value of appellants' claim, Underwriters had little or nothing to lose by allowing the three principal parties to resolve their dispute before moving in to collect.   If by verdict or by settlement the case is determined to be worth more than respondents paid for the assignment, Underwriters will come out ahead, as will appellants to the extent the recovery exceeds the value of the lien.

7.   We express no opinion whether Wausau's or Underwriters' conduct in this case could constitute an unfair claims settlement practice (Ins.Code, § 790.03, subd. (h)), or a breach of the insurance contract, or a breach of the covenant of good faith and fair dealing which is implied by law in every insurance contract.   Although the court in Quinn v. Warnes, supra, 144 Cal.App.3d at page 313, 192 Cal.Rptr. 660, answered this question in the negative as to the statutory cause of action, we note that the bad faith claim asserted in that case was against a third party's insurer and, as such, has been expressly disapproved by our Supreme Court.  (Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329, overruled by Moradi–Shalal v. Fireman's Fund Ins. Cos. (1988) 46 Cal.3d 287, 250 Cal.Rptr. 116, 758 P.2d 58.)   Here, by contrast, appellants' claim(s) would run against their own insurance company, Wausau and its agent Underwriters.   Such first-party bad faith claims are still permitted after Moradi–Shalal v. Fireman's Fund Ins. Cos., supra, at page 305, 250 Cal.Rptr. 116, 758 P.2d 58.

PHELAN, Associate Justice.

KLINE, P.J., and SMITH, J., concur.