THEYS v. Safeway Stores, Intervener and Respondent. (1987)

Civil Code section 3291, infra, and Code of Civil Procedure section 998, subdivision (d), infra, allow a personal injury plaintiff to recover prejudgment interest and expert witness' expenses if he or she makes a pretrial settlement offer, the defendant rejects it, and the plaintiff then obtains a judgment “more favorable” than the offer.   In this case we must determine if a plaintiff can add recoverable costs to a jury verdict in order to satisfy the “more favorable” judgment requirement.¹

John C. Theys, plaintiff and respondent, filed a complaint alleging personal injury arising from the negligence of Atchison, Topeka and Santa Fe Railway Company (Santa Fe), defendant and appellant, and others.   Respondent was working for Safeway Stores, Inc. (Safeway) when he was injured as he tried to move a sliding bulkhead to unload a freight car.   Safeway asserted a lien and filed a complaint-in-intervention seeking to recover workers' compensation benefits paid to respondent.   Santa Fe answered the complaint and the complaint-in-intervention.

Pursuant to Code of Civil Procedure section 998 ² respondent offered to settle with all defendants for $550,000 each party to bear its own costs.   None of the defendants accepted the offer.

The case was tried to a jury which returned its verdict finding Santa Fe negligent and exonerating the other defendants.   The jury determined respondent's total damages were $614,141.   The parties thereupon stipulated judgment should be entered for $75,551.43 in favor of Safeway and $538,589.57 in favor of respondent.   Judgment was entered accordingly.

Thereafter, respondent filed a memorandum of costs and disbursements.   Santa Fe moved to strike prejudgment interest of $122,800 and $6,737.75 in expert witness' expenses claimed by respondent.   The motion was denied, thereby awarding respondent costs of $144,486.65, which included prejudgment interest and expert witness' expenses and $14,948.90 of costs allowed under Code of Civil Procedure section 1032 (ordinary costs).   Santa Fe did not move to strike any of the ordinary costs.

Civil Code section 3291 (§ 3291) ³ provides that if a plaintiff makes an offer pursuant to section 998 which the defendant refuses, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at 10 percent per annum from the date of the plaintiff's offer.   In addition, the plaintiff may also receive the costs of the services of his expert witnesses in the discretion of the trial court.

The net or stipulated judgment in favor of respondent was $538,589.57, a sum less than the $550,000 offered in settlement.   If, however, the ordinary costs allowed to respondent of $14,948.90 are considered part of the judgment to satisfy the requirements of section 998, the judgment totals $553,538.47 thereby exceeding the settlement offer.   It was on this theory that respondent argued to the trial court that he had received a more favorable judgment and was entitled to prejudgment interest and expert witness fees.   Santa Fe, in response, argued (1) that costs cannot be added to a verdict to increase a judgment for purposes of section 998, and (2) that if costs can be added it can only be costs incurred prior to the settlement offer.   The parties stipulated at the hearing before the trial court that respondents' costs at the time of the offer would not be sufficient to increase the judgment to over $550,000.

The trial court ruled in favor of respondent and recognizing that this issue was one of first impression issued a Memorandum of Decision supporting its reasoning.   In pertinent part this memorandum reads as follows:

“Code of Civil Procedure § 998(c) in relevant part provides ‘If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment, the plaintiff shall not recover his costs and shall pay the defendant's costs from the time of the offer.’   The last clause of the above quoted section has been construed to allow plaintiff to recover his pre-offer costs—i.e., it has been held to mean only that the plaintiff shall not recover his costs from the time of the offer and shall pay the defendant's costs from the time of the offer.  Shain v. City of Albany (1980) 106 Cal.App.3d 294, 297–298 [165 Cal.Rptr. 69].  (emphasis added.)

“Defendant argues that, irrespective of who made the statutory offer, only plaintiff's pre-offer costs should be considered in determining whether the judgment was more favorable to plaintiff than plaintiff's statutory offer of $550,000.00.   While no case exactly in point has been found, there is language to support defendant's position in principal.   For example, in Bennett v. Brown (1963) 212 Cal.App.2d 685 [28 Cal.Rptr. 485] wherein the defendant made a statutory offer under then § 997 of the Code of Civil Procedure, the court held that plaintiff might add only pre-offer costs to the verdict in his favor in determining whether plaintiff had obtained a judgment more favorable than defendant's statutory offer.   In rejecting plaintiff's contention that his total costs should be included in the computation, the court in Bennett at p. 688 [28 Cal.Rptr. 485] stated ‘If the rule were as contended by the respondent (plaintiff below) and all costs incurred could be included in determining whether the recovery was more favorable than the offer of settlement, then a plaintiff could in many instances by costs alone insure a more favorable judgment.   Such result would defeat the purpose of the section and does not comport with the decisions of the decided cases.  (Citations omitted.)’

“The fact remains, however, that subsection (d) rather than subsection (c) of § 998 of the Code of Civil Procedure is controlling in the instant case, and subsection (d) makes no mention of any computation of costs from the time of the offer.   While in fairness it might be argued that a defendant and a plaintiff should be treated in like manner under Code of Civil Procedure § 998, had the legislature so intended it easily could have so provided.   This it did not choose to do, and plaintiff in the instant case is entitled to include allowable costs to judgment in determining whether plaintiff obtained a judgment more favorable than plaintiff's statutory offer.   Accordingly, defendant's motion for reconsideration in this matter is denied.

“While factually not in point, the case of Hilliger v. Golden (1980) 107 Cal.App.3d 394 [166 Cal.Rptr. 394] lends support to plaintiff's position herein.   In said case at page 400 the court stated ‘if we look to the judgment and to the costs, which the court did allow, we find that the total judgment to this point ․ makes a more favorable recovery to the plaintiff herein.’   In Hilliger, as in the principal case, it was the plaintiff who made the statutory offer, and only plaintiff's costs to judgment were mentioned by the court.”

ISSUES ON APPEAL

1. Can ordinary costs be added to a judgment in determining whether plaintiff received a judgment more favorable than his statutory offer?

2. If so, are they the costs incurred to the time of the offer, or to time of judgment?

3. Regardless of the cost issue argued by the party's to the trial court, did respondent receive a more favorable judgment under the facts of this case?

DISCUSSION

Santa Fe's principal argument is that no costs can be added to the judgment in order to determine whether respondent received a more favorable judgment than his pretrial settlement offer.   They contend decisional law for more than a century has held that costs are not a part of a judgment but are incidental thereto.   For example, in Gray et al. v. Dougherty, et al. (1864) 25 Cal. 266, 282, the opinion states, “Costs in equity are always in the discretion of the Court, and whether they are granted or withheld, they are but as incidents to and no part of the relief sought.”   In McCallion v. Hibernia, etc., Society (1893), 98 Cal. 442, 445, 33 P. 329, the court held “that plaintiffs are the owners of the money ․ [t]he costs taxed against defendant were incidental to the judgment ․” Other cases are cited that recognize various distinctions between a judgment and costs.⁴

Alternatively, Santa Fe contends that if costs are allowed as part of the judgment only those costs that have been incurred up to the time of the offer should be allowed.   The trial court in its memorandum of decision acknowledged that Bennett v. Brown, supra, 212 Cal.App.2d 685, 28 Cal.Rptr. 485, aided Santa Fe.  Bennett held that plaintiff might add only preoffer costs to the verdict otherwise plaintiff could subsequently run up the costs to insure a more favorable judgment thereby defeating the purposes of section 998.   Santa Fe also cites Harvard Investment Co. v. Gap Stores, Inc. (1984), 156 Cal.App.3d 704, 202 Cal.Rptr. 891, which relied on Bennett.

Respondent counters that the cases cited by Santa Fe were not considering costs related to a section 998 offer.   He states that cases facing this issue have included costs as part of the judgment.  Shain v. City of Albany, 106 Cal.App.3d 294, 165 Cal.Rptr. 69, directly decides that costs are a part of the judgment within the meaning of section 998.  Shain was a tort action tried before a jury.   Prior to trial defendant filed an offer of compromise in the amount of $100,000 with each party “to bear its own costs.”   Plaintiff rejected the offer.   The jury verdict after trial was in the amount of $100,000.   Plaintiff submitted a cost bill in the amount of $2,807.49, but defendant filed motions to strike the cost bill because plaintiff had failed to obtain a “more favorable” judgment.   Defendant had made the offer of compromise pursuant to subdivision (c) of section 998 which provides “If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment, the plaintiff shall not recover his costs and shall pay the defendant's costs from the time of the offer ․” The court held that plaintiff's recoverable costs to the time of the offer were $1,204.71.   The court added the recoverable costs to the verdict and thereby held that $101,204.71 was “a more favorable judgment” within the meaning of section 998 and concluded that the trial court had erred in striking plaintiff's cost bill.  Shain stated that Bennett v. Brown, supra, 212 Cal.App.2d 685, 28 Cal.Rptr. 485, had established that costs are correctly added to a jury verdict for purposes of determining a “more favorable judgment”.   Unfortunately for plaintiff in Bennett, the costs when added to the verdict did not equal a more favorable judgment.   Plaintiff had offered to settle for $600 which was rejected.   The verdict was for $500 and plaintiff's costs were $99.45.   Bennett held that the plaintiff had failed by $.46 of establishing a more favorable judgment.  Harvard Investment Co. v. Gap Stores Inc., supra, 156 Cal.App.3d 704, 202 Cal.Rptr. 891, also recognized preoffer costs as part of the judgment.

Contrary to Santa Fe's first argument the cases cited have established that ordinary preoffer costs can be added to a judgment when considering the judgment's total under section 998.   We believe these cases are sound.   The trial court, however, allowed all ordinary costs incurred up to judgment to be added thereby increasing the judgment to a sum greater than the offer.   It reasoned that the cases cited by appellant, namely Shain, supra, and Bennett, supra, dealt with a defendant's offer and section 998, subdivision (c) prevailed.  Section 998, subdivision (d) applies to a plaintiff's offer and the trial court interpreted this subdivision as allowing all costs as part of the judgment.   We do not find the language of subdivision (d) so clear a mandate.   It doesn't approve or reject the argument that costs are a part of the judgment.   The issue presented should be decided once and for all in order to place more stability and certainty on section 998 offers.

 Sections 998 and 3291 were enacted to encourage settlement of litigation without trial.⁵  Because the two sections penalize a defendant that refuses a statutory offer when a more favorable judgment is obtained offers must have a high degree of certainty and not be subject to fluctuating factors.   This was recognized in Bennett and Shain, supra, that denied addition of costs incurred after the offer because such allowance would encourage plaintiffs to increase their costs to help insure a more favorable judgment.   We agree with the reasoning of Bennett and Shain and decide there should be no distinction on allowance of costs between offers made by plaintiffs and defendants.   Only ordinary costs incurred to the time of the offer shall be added to the judgment for purposes of determining whether the judgment is or is not more favorable under section 998.   Respondent's preoffer costs when added to the net verdict are not sufficient to raise the judgment over $550,000.   If we were basing our ruling on this factor alone, respondent would lose this appeal.

 This case, however, has some unique facts that properly establish that respondent did in fact receive a more favorable judgment.   Respondent's offer to Santa Fe and the other defendants was $550,000, each side to bear its own costs.   Safeway's lien at the time of the offer was $28,253.59.   Safeway knew payment of this lien and acceptance of respondent's offer would settle the case.   Correspondence between the parties verify this.⁶  The verdict in favor of respondent for $614,141.00 was patently a judgment more favorable than the offer.   We have stated above that the sections at issue were enacted to encourage settlement and a high degree of certainty should apply to the damages and costs involved at the time of the offer.   There should be no doubt in the parties' minds on the amount necessary to settle the case.   If only costs at the time of the offer can be considered, the same rule should apply to the lien.   At the time of respondent's offer $578,253.59 was the total demand.   Santa Fe's total liability after the judgment exceeded this amount by $35,887.41.   The jury's verdict of $614,141.00 was a single total judgment comprising all of respondents' damages.  (See Lab.Code, §§ 3852 and 3855).   We conclude that the letter and the objectives of the two sections under the facts of this case have been satisfied and respondent received a more favorable verdict thereby permitting respondent to receive the benefits of sections 998 and 3291.

Santa Fe's argument that it did not pay the demand or the lien because it hoped to prove negligence on the part of Safeway is unavailing.   It apparently had decided to fight all liability and damages because no further offer was made after its offer of $35,000.

 The $122,800.00 representing the prejudgment interest allowed per section 3291 was included in the judgment by the trial court as a cost item.   This, of course, means that until the judgment is paid postjudgment interest is running on this sum as well as the damages and the other cost items.   Santa Fe correctly points out that this creates a situation where respondent receives interest on interest and violates the rule against compound interest.   Compound interest in such situations, however, is legal.   In Big Bear Properties, Inc. v. Gherman, 95 Cal.App.3d 908, 913, 157 Cal.Rptr. 443, the same objection was made.   This court clarified the issue as follows:  “They contend, however, that the allowance of such interest on that portion of the judgment representing prejudgment interest constituted an impermissible compounding of interest.   The contention is without merit.   ‘Although compound interest generally is not allowable on a judgment, it is established that a judgment bears interest on the whole amount from its date even though the amount is in part made up of interest ․ As a consequence, compound interest may in effect be recovered on a judgment whereby the aggregate amount of principal and interest is turned into a new principal․’  [Citations.]”

The judgment is affirmed.   Costs are awarded to respondent.

FOOTNOTES

1.   An appeal was also filed by John C. Theys.   Upon stipulation by all parties, this was dismissed.

2.   Section 998 provided in pertinent part as follows:  “(a) The costs allowed under Sections 1031 and 1032 shall be withheld or augmented as provided in this section.“(b) Not less than 10 days prior to commencement of the trial as defined in subdivision 1 of Section 581, any party may serve an offer in writing upon any other party to the action to allow judgment to be taken in accordance with the terms and conditions stated at that time.   If such offer is accepted, the offer with proof of acceptance shall be filed and the clerk or the judge shall enter judgment accordingly.   If such offer is not accepted prior to trial or within 30 days after it is made, whichever occurs first, it shall be deemed withdrawn, and cannot be given in evidence upon the trial.“(c) If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment, the plaintiff shall not recover his costs and shall pay the defendant's costs from the time of the offer.   In addition, in any action or proceeding other than an eminent domain action, the court, in its discretion, may require the plaintiff to pay the defendant's costs from the date of filing of the complaint and a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, the preparation or trial of the case by the defendant.“(d) If an offer made by a plaintiff is not accepted and the defendant fails to obtain a more favorable judgment, the court in its discretion may require the defendant to pay a reasonable sum to cover costs of the services of expert witnesses, who are not regular employees of any party, actually incurred and reasonably necessary in either, or both, the preparation or trial of the case by the plaintiff, in addition to plaintiff's costs․”

3.   Section 3291 provides in pertinent part:  “In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership, whether by negligence or by willful intent of the other person, corporation, association, or partnership, and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.  [¶] If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff's first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment․”

4.   These cases are Folsom v. Butte County Assn. of Governments (1982), 32 Cal.3d 668, 186 Cal.Rptr. 589, 652 P.2d 437 (settlement of a plaintiff's claim does not resolve the plaintiff's right to costs);  Rappenecker v. Sea-Land Service, Inc. (1979), 93 Cal.App.3d 256, 264, 155 Cal.Rptr. 516;  Slater v. Superior Court (1941), 45 Cal.App.2d 757, 761–763, 115 P.2d 32 (remittitur in lieu of new trial does not affect plaintiff's right to costs);  Whitaker v. Title Ins., etc., Co. (1918), 179 Cal. 111, 113, 175 P. 460;  Kamper v. Mark Hopkins Inc. (1947), 78 Cal.App.2d 885, 887, 178 P.2d 767.

5.   The legislative history of the section indicates section 998 was suggested by the judges of the Los Angeles Superior Court in the hope it would increase settlements and thereby ease the court's overcrowded case log.

6.   The attorney for Safeway wrote all parties a letter at the time which stated, “․ I am writing this letter in regards to a good faith demand for settlement.   My client's payments in the compensation case presently break down as follows:  Medical–$11,884.04, TD–5,918.00, PD–2,190.00, Rehab–8,261.55”Santa Fe responded to the offer by stating it intended to present respondent with a reasonable offer after further evaluation of the case.   In the spirit of compromise, however, it offered at the time $35,000.   No subsequent offer was made.

HASTINGS, Associate Justice.

ASHBY, Acting P.J., and EAGLESON, J., concur.