Assigned Equitable Indemnity Claims

by Raphael Metzger, Esq.

A defendant’s equitable indemnity claim against its co-defendants can often be quite valuable to the plaintiff, who may obtain such a claim by assignment as part of a settlement.  Plaintiff’s counsel can substantially enhance (sometimes almost double) the plaintiff’s recovery in multi-defendant tort cases by obtaining assignments of such claims from settling defendants and proving them at trial.

Most plaintiffs’ attorneys do not seek assignments of equitable indemnity claims, although they can usually be had for the asking.  These claims are not typically assigned because the plaintiff’s attorney does not appreciate their value and therefore does not request defense counsel to have settling defendants assign their equitable indemnity claims to the plaintiff.

What is an equitable indemnity claim?  How can the plaintiff obtain such a claim?  And how can it be valuable to the plaintiff?

The Nature of an Equitable Indemnity Claim

"The right to equitable indemnity stems from the principle that one who has been compelled to pay damages which ought to have been paid by another wrongdoer may recover from that wrongdoer."  Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1380, 13 Cal.Rptr.2d 382.

In American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 146 Cal.Rptr. 182, the Supreme Court discarded the common law all-or-nothing cause of action for equitable indemnity between tortfeasors and replaced it with a rule of partial indemnity.  The Court held: "In order to attain [the system envisioned in Li v. Yellow Cab Co. (1975) 13 Cal.3d 804, 532 P.2d 1226, 119 Cal.Rptr. 858], in which liability for an indivisible injury caused by concurrent tortfeasors will be borne by each individual tortfeasor 'in direct proportion to its respective fault,' we conclude that the current equitable indemnity rule should be modified to permit a concurrent tortfeasor to obtain partial indemnity from other concurrent tortfeasors on a comparative fault basis."  Id., 20 Cal.3d at 598.

Applicability of Equitable Indemnity Claims

California courts have recognized equitable indemnity claims between multiple negligent tortfeasors, American Motorcycle, supra; between strictly liable and negligent defendants, Safeway Stores, Inc. v. Nest-Kart (1978) 21 Cal.3d 322, 328; when asserted by a negligent party against another who is  guilty of wilful misconduct, Allen v. Sundean (1982) 137 Cal.App.3d 216, 225; Sorensen v. Allred (1980) 112 Cal.App.3d 717, 726; to allow a negligent defendant to shift loss to an intentional tortfeasor, Weidenfeller v. Star & Garter (1991) 1 Cal.App.4th 1, see, also, Gardner v. Murphy (1974) 54 Cal.App.3d 164; and even between two intentional tortfeasors.  Baird v. Jones (1993) 21 Cal.App.4th 684.

However, an intentional tortfeasor may not obtain equitable indemnity against a negligent tortfeasor. Allen v. Sundean, supra, 137 Cal.App.3d at 227, see also Godfrey v. Steinpress (1982) 128 Cal.App.3d 154, 176 [plaintiff’s contributory negligence held no defense to intentional tort]

Limitations on Equitable Indemnity Claims

There are, however, some limitations on equitable indemnity claims.

First, equitable indemnity does not apply between persons who are not joint tortfeasors.  Munoz v. Davis (1983) 141 Cal.App.3d 420 [no claim by attorney sued for malpractice for failing to timely file personal injury suit against negligent driver who caused client's injuries because loss of a right of action is different injury than that caused by driver]

Second, “[i]ndemnification between joint tortfeasors is an equitable rule created to correct potential injustice, and ... is not available where it would operate against public policy.”  Leko v. Cornerstone Building Inspection Service (2001) 86 Cal.App.4th 1109, 1117.

Third, equitable indemnity does not apply to noneconomic damages, which are not recoverable under Civil Code § 1431.2, Poire v. C.L. Peck/Jones Brothers Construction Corp. (1995) 39 Cal.App.4th 1832, or against a medical provider for damages not recoverable under MICRA.  Western Steamship Lines, Inc. v. San Pedro Peninsula Hospital (1994) 8 Cal.4th 100.

Equitable Indemnity Claims are Assignable

Importantly, an equitable indemnity claim is an assignable chose in action.  Bush, supra, 10 Cal.App.4th at 1380-81.  Assignment of an equitable indemnity claim to a tort plaintiff offends no traditional principle of indemnity.  Id., 10 Cal.App.4th at 1382.

Thus, it has been held that a tort plaintiff may settle his/her claims against one concurrent tortfeasor by taking as part of the settlement an assignment of that tortfeasor's American Motorcycle claim.  Bush, supra, 10 Cal.App.4th at 1378.

By obtaining a court order determining that its settlement with the plaintiff is in good faith, a settling defendant is entitled to an order barring all cross-complaints for equitable indemnity from being asserted against it.  C.C.P. § 877.6(c).      

This is true even though the settling defendant assigns its own equitable indemnity claims to the plaintiff!  Bush, supra, 10 Cal.App.4th at 1382.

Equitable Indemnity Claims Can be Valuable

The value of an equitable indemnity claim is often in the eye of the beholder!

An equitable indemnity claim is usually considered to be of little or no value to a settling defendant.  Settling defendants rarely pursue their equitable indemnity claims against their co-defendants; most defendants abandon their equitable indemnity claims without a thought.  Defendants are happy to extricate themselves from litigation and have little desire to litigate their equitable indemnity claims against co-defendants.  It is precisely because defendants do not consider equitable indemnity claims to be valuable that plaintiffs can usually obtain assignments of them for the mere asking.

While an equitable indemnity claim may be of little or no value to a defendant, it can be quite valuable in the hands of the plaintiff, because plaintiff’s counsel can prove an assigned equitable indemnity claim at trial.  The actual value of the claim to the plaintiff depends on the evidence adduced at trial.

If the plaintiff asserts assigned equitable indemnity claims at trial and the remaining defendants do not introduce any evidence that the settling defendant was at fault, then the settling defendant will have paid the plaintiff more than its fair share, and the plaintiff -- standing in the shoes of the settling defendant -- will be entitled to total indemnity of all economic damages from the non-settling defendants.  In such a case, the plaintiff is entitled to recover from the remaining defendants the same sum received from the settling defendant, in addition to the verdict the plaintiff obtains on his/her own economic damage claims.

Recovery on Claim is Not a Double Recovery

While this smacks of an unlawful double recovery, it isn’t.  All cases addressing the issue hold that an assignment of equitable indemnity claims bestows no double recovery or windfall on the plaintiff.  See, Regan Roofing Co. v. Superior Court (1994) 21 Cal.App.4th at 1711-1713; Erreca's v. Superior Court (1993) 19 Cal.App.4th at 1503-1504; Bush v. Superior Court (1992) 10 Cal.App.4th at 1384-1388.

The Non-Settling Defendant’s Right to Offset

What about the non-settling defendant’s right to an offset or credit?  The defendant is, of course, entitled to offset all sums the plaintiff has received from settlements with other defendants.  Since the non-settling defendant is entitled to offset the equitable indemnity claim that the plaintiff receives as part of his/her settlement, what value is the assignment of such a claim to the plaintiff?

At first blush, it would seem that the plaintiff gains nothing by obtaining an assignment of a settling defendant’s equitable indemnity claim, because the non-settling defendant gets to offset the assignment.  However, this is not so, because the non-settling defendant is only entitled to offset the value of the assigned equitable indemnity claim at the time of the assignment -- not the value of the claim as later proven at trial.

There is a vast difference between the value of an equitable indemnity claim at the time of assignment and the time of trial.  The value of an equitable indemnity claim at the time it is assigned to the plaintiff is negligible, as is apparent from the customary abandonment of such claims by defendants.

Economists are often engaged to testify about a plaintiff’s economic damages in tort cases.  The economist engaged by plaintiff’s counsel can also opine as to the value of an assigned equitable indemnity claim as of the date it was assigned to the plaintiff.  Since an assigned equitable indemnity claim is an unliquidated contingent asset, an economist would value the claim by determining its fair market value as of the date of the assignment.

The "fair market value" of an equitable indemnity claim is negligible, because there is no market or exchange on which equitable indemnity claims are traded.  Indeed, equitable indemnity claims cannot lawfully be sold, because they are a type of investment contract and hence, are technically unregistered securities, under federal and state securities laws.

For these and other reasons, an economist would value an equitable indemnity claim as of the date it is assigned to the plaintiff in the range of worthless to negligible.

Accordingly, the offset that a non-settling defendant receives for the assigned equitable indemnity right is the negligible value of the claim fixed (by the economist) at the time of the assignment -- not the amount the claim is proven to have at trial.

Taking the defendant’s offset into account, the net value of the equitable indemnity claim to the plaintiff is the difference between the potentially substantial value of the claim as proven at trial and the negligible value of the claim at the time it is assigned to the plaintiff.

Procedure for Obtaining the Claim

To obtain a settling defendant’s equitable indemnity claims, a written assignment may simply be included in the settlement agreement.

To assure the settling defendant that it is buying peace, defense counsel may insist that the agreement state that the settling defendant will have no obligation to assist the plaintiff in proving the assigned claim.

Plaintiff’s counsel typically can agree to such a condition, because the assigned claim can usually be established without the assistance or cooperation of the settling defendant.  All that the plaintiff has to do is properly assert the assigned claim at the time of trial and the value of the claim will be established based upon the jury’s allocation of fault based on the evidence adduced at trial.

Procedure for Asserting the Claim

An assigned equitable indemnity claim may, but need not necessarily be, asserted in a pleading.  If the settling defendant has filed a cross-complaint for equitable indemnity, the plaintiff may file a motion to substitute as the proper party on that claim, and request leave to file an amended pleading as assignee.

If the settling defendant has not filed a cross-complaint, the plaintiff may file a motion for leave to file a cross-complaint for equitable indemnity, lodging the proposed pleading with the court.  Alternatively, the plaintiff may simply request the court to determine the amount of recovery on assigned equitable indemnity claims by post-trial motion.

Procedure for Valuing the Assigned Claim

The plaintiff may be able to obtain a court order determining the value of the assigned claim before trial. 
The settling parties should agree on the value of the settlement and its allocation between economic and non-economic damages at the time of the settlement.  Regan Roofing, supra, 21 Cal.App.4th at 1702.

"Although valuation of any settlement asset must necessarily include some estimation and extrapolation, the valuation of assigned indemnity rights should normally be made at the time of settlement as part of the overall good faith showing for the settlement."  Regan Roofing, supra, 21 Cal.App.4th at 1714.

Where the value of an intangible asset is agreed upon in a settlement among adversaries, the value is presumed to be reasonable.  Erreca's, supra, 19 Cal.App.4th at 1495-1496.

Among the factors to be considered in determining the value of the assigned claim are (1) the maximum entitlement to indemnity that the assignment represents; (2) the cost to prosecute the claims; (3) the probability of prevailing on them; (4) the extent of the assignor's potential comparative fault that would reduce the value of the assignment; (5) the likelihood of collecting on a judgment on them; and, (6) whether the assignees had any intention of actually pursuing such indemnity right, or whether they preferred to pursue only their own direct rights.  Regan Roofing, supra, 21 Cal.App.4th at 1714. 

The credit or offset to be accorded a non-settling defendant should normally be fixed at the time that the settlement is reached, since the issue of the credit is part of the overall good faith determination.  Erreca's, supra, 19 Cal.App.4th at 1498-1500.

Advantages of Asserting the Assigned Claim

The plaintiff gains several strategic advantages by obtaining and asserting assigned equitable indemnity claims: (1) The claim can result in a substantial additional recovery for the plaintiff; (2) The effect of such a recovery is to substantially reduce the non-settling defendants’ rights to offset the value of the settlement received; (3) As defendants settle and assign plaintiff their equitable indemnity claims, the non-settling defendants’ exposure is increased; (4) If the non-settling defendants’ liability is similar to that of the settling defendants, the non-settling defendants will be reluctant to introduce evidence that the settling defendants were at fault, thereby enabling the plaintiff to recover the maximum amount on the assigned claims; (5) Such a situation creates a strong incentive for remaining defendants to settle so as not to be left "holding the bag," and remain in the unenviable position of one of a few remaining defendants whose offsets have largely been nullified by assignments.

An Example of How it Works

Assignments of equitable indemnity rights are fairly common in construction defect cases, but have generally not been made in personal injury cases. Following is an example of how the concept was recently used by the author to advantage in a personal injury case.

An infant was injured while in the care of foster parents.  The infant brought a negligence case against the foster parents and against the county for failing to adequately select and monitor the foster parents.  The value of the claim was $200,000.  Plaintiff settled with the county for $75,000 and assignment of the county’s equitable indemnity claim against the foster parents.

The county made a motion for good faith settlement approval and plaintiff filed a motion to value the assigned indemnity claim at $750.  Both of these motions were granted.  The plaintiff then filed a motion to substitute herself as the real party in interest on the county’s cross-complaint for equitable indemnity and contribution.  This motion was also granted.

The foster parents’ insurer was willing to pay full value on the claim and offered the plaintiff $125,000 — $200,000 less $75,000 for the money the plaintiff had already received in her settlement with the county.

Plaintiff’s counsel pointed out that the foster parents’ insurer had not taken into account the assigned equitable indemnity claim.  Defense counsel conceded that since the plaintiff would only offer evidence of the foster parents’ negligence at trial, the jury would attribute no more than 20% fault to the county.  Accordingly, the value of the assigned equitable indemnity claim attributable to noneconomic damages at time of trial was agreed to be no less than $60,000.  Giving the foster parents credit for the $750 value of the assignment at the time it was made, the net value of the assigned indemnity claim was calculated at no less than $59,250.

The insurer therefore agreed to pay another $50,000, resulting in a recovery of $250,000 for the plaintiff on a case that was worth $200,000 but for its enhanced value due to the assigned equitable indemnity claim.

Conclusion

These concepts are complicated and confusing to judges as well as attorneys.  However, when counsel has acquired an understanding of assigned equitable indemnity claims, strategies to maximize their value can be devised.  When properly handled by a skillful practitioner, assigned equitable indemnity claims can often be utilized with considerable effect to maximize a client’s recovery in most multi-defendant tort cases.

This article was published in the Los Angeles Daily Journal on April 28, 1997 under the title “Give and Take: The Benefits of Assigned Equitable Indemnity Claims.”  It was thereafter republished in the book “Determining Economic Damages,” by G.D. Martin and T. Vavoulis (Grewall, S., Ed.) James Publishing Inc. (June 2002).