A recent decision in a construction defect case from the 1st District Court of Appeal, filed May 2, 2016, Hearn Pacific Corporation v. Second Generation Roofing Inc., 201 Cal.Rptr.3d 806, reminds us of a few legal precepts that are sometimes forgotten in the turmoil of litigation. Do not take contradictory legal positions without explanation. Do not ignore evidence or authority contrary to your position. Do not play hide-the-ball with the Court. Do not sell out one client at the expense of another without explanation. Justice Therese M. Stewart succinctly summed up this case: “It involves a civil procedure game of cat-and-mouse like none we have before encountered.”
Plaintiff Hearn Pacific Corporation (Hearn) acted as the general contractor on a construction project. The project owner sued Hearn and others for design and construction defects. Hearn cross-complained against various sub-contractors including Defendant Second Generation Roofing Inc. (Second Generating.) That underlying case was settled by Hearn’s insurers after Hearn assigned its indemnity rights to its insurers. Second Generation and another subcontractor did not participate in the settlement.
Hearn amended it cross-complaint after settlement to allege the existence of the assignment of its indemnity rights by Hearn to its carriers, North American Specialty Insurance Company (North American) and RSUI Group, Inc. Thereafter Second Generation successfully defended the cross-complaint and was awarded costs of $30,256.79 and attorney fees of $179,119.00. Second Generation then sought leave of court to amend the order awarding attorney fees to name North American as a judgment debtor.
Despite the assignment, and their representation of Hearn, the attorneys for Hearn argued there was no basis to impose the liabilities of Hearn’s subcontract upon its insurer, North American. The trial court agreed and denied the request to amend the orders. The Court of Appeal reversed, directing the trial court to add North American as a judgment debtor on the orders awarding costs and fees.
HOISTED BY ONE’S OWN PETARD, NOT ONCE BUT TWICE
- Attorney Fee clause in a contract. California has a reciprocal attorney’s fees provision which has been found to be a “fundamental policy” of the state. If a party is claiming attorney’s fees pursuant to an attorney fee clause in a contract, the adverse party likely can recover attorney fees if it is found to be the prevailing party. The issue is not a simple one especially where contract and tort claims are mixed. See Windsor Pacific LLC v. Samwood Co., Inc. (2013) 213 Cal.App.4th 263, 273-275, 152 Cal.Rptr.3d 518. Suffice it to say, think long and hard before jumping in. There is no information here upon which to pass a Monday morning quarterback judgment on North American’s initial decision to pursue indemnity after settling the claims against its insured. However, after losing on the merits and after having been hoisted on the attorney fee petard, North American pressed on, incurring further attorney fees and increasing its exposure. That is a head scratcher.
- What you say can be used against you. Second Generation used Hearn’s pleadings and its evidence to prove the assignment to North American. Hearn objected to the use of its pleading and the declaration of its board member. The trial court sustained the objections but the Court of Appeal found the objections without merit.
Pleadings are not evidence but the allegations can be binding on the proponent of the pleading in the absence of a showing of mistake or inadvertence and as long as the opposing party is not contesting the pleading. See Hearn, supra. On the other hand, declarations under penalty of perjury are evidence. The fact that they were offered in an unrelated motion or for another purpose does not prevent the opponent from using them against you. See Hearn, supra.
Hearn’s attorneys also argued “Hearn remained the only party asserting claims against Second Generation.” After pointing out their own pleading contradicted that assertion, the Court of Appeal added: “It may be Hearn has some explanation for its change of tune, but the explanation is not to be found in the 32 pages of briefing Hearn has filed on appeal, nor did it surface in any way at oral argument. Responsible (not to mention, effective) appellate advocacy requires confronting serious potential obstacles, not burying one’s head in the sand to them, be they potentially controlling adverse authorities or problematic portions of the record.” Hearn, supra.
There is little doubt their arguments did not pass the straight face test. While laughter may be the best medicine, common sense dictates against taking a legal position contradicted by your pleadings and evidence you have proffered in support of those pleadings.
IN FOR A PENNY, IN FOR A POUND
Hearn’s attorneys also opposed the motion on the ground there was no coverage under North American’s policy as Hearn was being defended under a reservation of rights. That argument ignored North American having placed itself in the lawsuit when its attorneys amended the cross-complaint alleging the assignment of Hearn’s claims. Nonetheless, the attorneys argued the only avenue by which North American could be named as a judgement debtor was by way of Insurance Code Section 11580 which, “enables a judgment creditor to bring a direct action against the judgment debtor’s insurer to satisfy the judgment out of policy proceeds.” Hearn, supra. The Court of Appeal rejected that argument holding that North American could be added as a judgment debtor under Code of Civil Procedure Section 386.5 given the assignment.
Code of Civil Procedure Section 386.5 allows a lawsuit to either continue in the assignor’s name (Hearn) or for the assignee (North American) to be substituted in. When North American obtained the assignment it was as if it were operating under “subrogation principles,” i.e. stepping out of its shoes as the insurer and into the shoes of its insured as far as liability for contractual attorney fees was concerned. See Hearn, supra, at p. 16, citing Employers Mutual Liability Ins. Co v. Tutor–Saliba Corp. (1998) 17 Cal.4th 632, 639–642, 71 Cal.Rptr.2d 851, 951 P.2d 420; Allstate Ins. Co. v. Loo (1996) 46 Cal.App.4th 1794, 1799–1801, 54 Cal.Rptr.2d 541. Once the assignment was pled, North American was in the case for better or worse.
WHO DO THEY REPRESENT??
The attorneys ostensibly representing Hearn were solely concerned with protecting North American’s interests. One would think Hearn’s attorneys would have joined in Second Generation’s motion rather than oppose it. The Court of Appeal questioned their motives, noted the possibility of a conflict but chose not to address the issue further once the attorneys at oral argument advised Hearn was “dissolved and had no assets.” Hearn, supra, footnote 16 in the decision. This is a very thin line. Aside from the possible ethical violations, their position ostensibly conflicting with their client’s interests caused the Court of Appeal to question both their motives and arguments from the outset.
While we do not know whether there were grounds to pursue the cross-complaint initially, it seems obvious now the result was inevitable. Desperate situations often result in arguments that overreach, as apparently occurred here. How do we know when to settle the matter and close the file? Common sense reminds us to pause and appraise the situation. Here, there was a claim for attorney fees which ended as a zero-sum game. Reasonableness is the guide once the endeavor commences. If the argument is not reasonable, it should not be made. Responsibility dictates recognizing defeat and cutting losses.
 Official cite and page numbers were not available at time of publication.
 Hearn appealed from the award of attorney fees. That appeal was dismissed as untimely. Hearn, supra.
 For reasons of their own Second Generation Roofing Inc. did not include RSUI Group, Inc.
 Play Hamlet (III.iv.207) by Shakespeare. Essentially, “blown up by one’s own bomb”.
 Civil Code Section 1717; First Intercontinental Bank v. Ahn (2015) 798 F.3d 1149.
 See Myers v. Trendwest Resorts, Inc. (2009) 178 Cal.App.4th 735, 100 Cal.Rptr.3d 658, discussed at length in Hearn at pp. 5-6, for a discussion of the use of judicial admissions as opposed to evidence.
ABOUT THE AUTHOR: Leslie M. Price is an Associate at Tyson & Mendes. Mr. Price specializes in personal injury and general liability litigation. Contact Leslie at 858.263.4099 or firstname.lastname@example.org.