Bay Development, Ltd. v. Superior Court

Decision Date31 May 1990
Docket NumberNo. S000888,S000888
Citation50 Cal.3d 1012,269 Cal.Rptr. 720
CourtCalifornia Supreme Court
Parties, 791 P.2d 290 BAY DEVELOPMENT, LTD., et al., Petitioners, v. The SUPERIOR COURT of San Diego County, Respondent; HOME CAPITAL CORPORATION, Real Party in Interest.

Wright & L'Estrange, Robert C. Wright, William R. Nevitt, Jr., Robert S. Robertson and Timothy C. Stutler, San Diego, for petitioners.

No appearance for respondent.

Asaro & Keagy, Steven A. McKinley and Richard R. Freeland, San Diego, for real party in interest.

KENNARD, Justice.

In this case we must decide whether a tort defendant that has entered into a good faith settlement with the plaintiff remains liable to other defendants for an indemnity claim that rests on a theory of "implied contractual indemnity." A brief overview of the relevant legal background may help to place this complex issue in perspective.

When a tort action involves multiple defendants, there is often an inherent tension between the state's interest in encouraging the voluntary settlement of litigation and the state's interest in promoting a fair apportionment of liability among the defendants. In an attempt to harmonize these two important interests, California has established a number of interrelated legal principles.

Under California law, when one of a number of tort defendants enters into a settlement agreement with a plaintiff, the nonsettling defendants' liability to the plaintiff is reduced by the amount of the settlement. (Code Civ.Proc., § 877, subd. (a).) 1 If the nonsettling defendants believe that the settling defendant has not paid a fair share of the potential liability, and that therefore their liability has not been reduced by a sufficient amount, they may pursue a claim for equitable indemnity against the settling defendant, seeking to compel that defendant to bear an additional share of any liability that may be imposed on them. (See, e.g., American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 604-607, 146 Cal.Rptr. 182, 578 P.2d 899.)

The Legislature has recognized, however, that a defendant is unlikely to settle with a plaintiff if the settlement will not end the defendant's involvement in the litigation and will leave it vulnerable to further liability to other defendants. (See Stambaugh v. Superior Court (1976) 62 Cal.App.3d 231, 236, 132 Cal.Rptr. 843.) Accordingly, the Legislature has provided that if a trial court determines a settlement was made in "good faith," a settling defendant is relieved of any further liability to the nonsettling defendants for equitable indemnity. (§ 877.6, subd. (c); see, e.g., Abbott Ford, Inc. v. Superior Court (1987) 43 Cal.3d 858, 871-874, 239 Cal.Rptr. 626, 741 P.2d 124; Tech-Bilt, Inc. v. Woodward-Clyde & Associates (1985) 38 Cal.3d 488,

494-500, 213 Cal.Rptr. 256, 698 P.2d 159.) 2

Under this general framework, the trial court's good faith determination plays a key role in harmonizing the objective of encouraging settlement with the objective of promoting a fair apportionment of loss among multiple tortfeasors. (Abbott Ford, Inc. v. Superior Court, supra, 43 Cal.3d at p. 873, 239 Cal.Rptr. 626, 741 P.2d 124; Tech-Bilt, Inc. v. Woodward-Clyde & Associates, supra, 38 Cal.3d at p. 494, 213 Cal.Rptr. 256, 698 P.2d 159.)

A trial court's decision that a settlement was made in good faith, however, does not absolve a settling defendant from a subsequent indemnification claim in all circumstances. For example, when the settling defendant has previously entered into a contractual agreement to indemnify a nonsettling defendant, a settlement--even if in good faith--does not relieve the settling defendant from performing the contractual indemnification obligations. (See C.L. Peck Contractors v. Superior Court (1984) 159 Cal.App.3d 828, 834, 205 Cal.Rptr. 754.)

The issue here is whether a good faith settlement by a defendant who has not entered into an indemnification agreement bars a nonsettling defendant's claim for indemnity when the claim is based on a theory of "implied contractual indemnity," that is, on the theory that the settling defendant's obligation to indemnify should be inferred from some contractual relationship between the defendants. The Courts of Appeal have reached conflicting conclusions on this issue. 3

In this case, the Court of Appeal held that a good faith settlement bars a claim for implied contractual indemnity. The nonsettling defendants seek a determination that such a claim, like a claim based on an agreement to indemnify, is not barred by such a settlement.

We conclude that the judgment of the Court of Appeal should be affirmed. As we shall explain, our decision in E.L. White, Inc. v. City of Huntington Beach (1978) 21 Cal.3d 497, 506-507, 146 Cal.Rptr. 614, 579 P.2d 505 establishes that a claim based on an implied contractual indemnity theory is a form of equitable indemnity, and therefore such a claim is barred by a good faith settlement under section 877.6, subdivision (c).


This proceeding arises out of a dispute concerning the Mission Village Condominium Project, a 251-unit condominium development in San Diego. In May 1981, current and former owners of the condominium units filed the underlying lawsuit against Bay Development, Ltd. (Bay), a limited partnership that owns the project, and Bowen Company (Bowen). Bowen was both the general partner of Bay and the real estate broker that marketed the units in the project. The complaint alleged, among other things, that in marketing the condominiums Bay and Bowen had fraudulently misrepresented there were 365 parking spaces for the 251 units when in fact there were only 326 spaces. The complaint asserted that the lesser number of parking spaces diminished the value of the condominium units, and sought damages for the diminution.

Shortly after the action was filed, Bay and Bowen filed a cross-complaint for indemnity against, among others, Home Capital Corporation (Home), the company from which Bay had purchased the property in 1979. In their cross-complaint, Bay and Bowen asserted: (1) Home had incorrectly represented the number of parking spaces to the California Department of Real Estate in 1978; (2) the Department of Real Estate had relied on Home's representations in preparing its public report on the project; and (3) Bay, in turn, had relied on the report in buying the property and making its own representations to the prospective buyers of the condominiums in the project. The cross-complaint maintained that if Bay and Bowen were to be held liable for the misrepresentations, they would be entitled to be indemnified by Home on the basis of both equitable indemnity and implied contractual indemnity theories. 4

After the filing of the cross-complaint, plaintiffs filed an amended complaint, substituting Home for one of the Doe defendants included in the original complaint. Thereafter, shortly before the case was to go to trial, Home entered into a settlement agreement with plaintiffs. In return for Home's payment of $30,000, plaintiffs agreed to release, and to dismiss with prejudice, all claims against Home.

Home then filed a motion, seeking (1) a determination that its settlement with plaintiffs was a "good faith" settlement within the meaning of section 877.6, and (2) an order granting summary judgment in its favor on the indemnity cross-complaint of Bay and Bowen. Bay and Bowen opposed the motion, contending that Home's $30,000 settlement was not a good faith settlement and that, even if the settlement had been entered into in good faith, it did not bar their claims against Home, either for equitable indemnity or for implied contractual indemnity.

In support of its motion, Home filed declarations and a deposition transcript of one of Bay's officials to demonstrate that its $30,000 settlement was not disproportionate to its potential share of liability. The declarations stated that opposing real estate experts had variously estimated the diminution in value attributable to the discrepancy in parking spaces to be between $75,000 and $700,000, and that during settlement conferences the settlement judge had suggested $250,000 as a realistic total settlement figure.

More important, the declarations and deposition transcripts indicated that several Bay and Bowen officials admittedly knew before marketing of the units began that the parking space figure in the initial Department of Real Estate report did not reflect the number of striped parking spaces then existing in the project. According to the declarations, Bay nonetheless submitted the same 365-space figure to the Department of Real Estate when it obtained a second public report on the project, and that second report was actually used by Bay in its marketing campaign.

One of Bay's officials explained in his deposition that Bay did not change the number of parking spaces listed in its submission to the Department of Real Estate because it did not believe the 365-space figure was in fact inaccurate. The Bay official testified that architects had informed Bay there was sufficient room within the project's existing parking area to accommodate 365 parking spaces if the area were restriped and a greater proportion of the spaces sized for compact cars. He also testified Bay had notified the homeowner's association it was willing to restripe the parking lot to create additional spaces by reducing the number of spaces that would accommodate full-size cars.

Home argued that these facts totally undermined the claim of Bay and Bowen that in marketing the units they had reasonably relied on Home's earlier representation of the number of parking spaces. Home asserted that this evidence established that Bay and Bowen, rather than Home, bore the sole, or at least the major, responsibility for any damage plaintiffs might have incurred. In light of this evidence, Home asserted that its $30,000 settlement was generous and clearly within the reasonable...

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