Gem Developers v. Hallcraft Homes of San Diego, Inc.

• Decision Date: 22 August 1989
• Docket Number: No. D008119,D008119
• Citation: 261 Cal.Rptr. 626,213 Cal.App.3d 419
• Court: California Court of Appeals Court of Appeals
• Parties: GEM DEVELOPERS, et al., Cross-Complainants and Appellants, v. HALLCRAFT HOMES OF SAN DIEGO, INC., Cross-Defendant and Respondent; Bonita Grande Condominium Owners Association, Intervenor and Appellant.

Page 626

261 Cal.Rptr. 626

213 Cal.App.3d 419

GEM DEVELOPERS, et al., Cross-Complainants and Appellants, v. HALLCRAFT HOMES OF SAN DIEGO, INC., Cross-Defendant and Respondent Bonita Grande Condominium Owners Association, Intervenor and Appellant.

No. D008119.

Court of Appeal, Fourth District, Division 1, California.

Aug. 22, 1989.

Review Denied Nov. 15, 1989.

Thomas A. Davies, San Diego, for cross-complainants and appellants.

John A. Bergen, for cross-defendant and respondent.

Aguirre & Eckmann, Gary J. Aguirre, James K. Eckmann and Arthur H. Skola, San Diego, for intervenor and appellant.

KREMER, Presiding Justice.

GEM Developers (GEM) and Bonita Grande Condominium Owners Association (Association) appeal a judgment on the pleadings in favor of Hallcraft Homes of San Diego, Inc. (Hallcraft) on a claim for comparative equitable indemnity on a strict liability theory. We conclude equitable indemnity may be sought on a strict liability theory in this case and therefore reverse.

FACTS

Since the trial court rendered judgments for Hallcraft on the pleadings, we must accept the allegations of the parties opposing judgment as true and determine whether their allegations state, or can be amended to state, a cause of action. (See Sullivan v. County of Los Angeles (1974) 12 Cal.3d 710, 714-715, fn. 3, 117 Cal.Rptr. 241, 527 P.2d 865.)

In 1971, Hallcraft owned a tract of land in San Diego County. Hallcraft, intending to develop the property, had the land mass-graded and filled in the early 1970s. Hallcraft also hired architects and engineers to draw up plans to construct condominiums on the land. Hallcraft completed the work sometime between 1971 and 1973.

In 1976, Hallcraft sold the graded land and architectural drawings first to Clearwater Construction Corporation which quickly transferred the land and drawings to Bicentennial Builders which, in turn, transferred to GEM. Bonita alleged Clearwater, Bicentennial and GEM were alter egos and/or agents of each other. GEM continued the development of the condominiums begun by Hallcraft. GEM's soil engineers tested the upper one foot of soil, GEM's landscaping subcontractors fine graded the upper one-tenth of a foot of soil and GEM's construction contractors built condominiums on the lots. GEM sold the completed condominium units to members of the public.

In 1982, the Association noticed cracking and tilting of the swimming pool. In September 1982, the Association sued GEM and others (collectively referred to as GEM) on theories of negligence, strict liability and breach of warranty for damages to common areas and structures due to soil subsidence. The Association did not name Hallcraft in their complaint. GEM cross-complained against Hallcraft and others for equitable indemnity.

In September 8, 1986, trial proceeded before a judge on the Association's action on a stipulated set of facts. The judge found in favor of the Association on all theories and awarded damages of $3,216,514.26 plus $1,185.78 in costs. The judge did not resolve the issues in GEM's cross-complaint and specifically ordered the stipulation of facts and judgment would not be binding on Hallcraft at trial.

GEM's insurer paid to the Association about a million dollars in partial satisfaction of the judgment and assigned all subrogation, indemnity and contribution rights against Hallcraft to the Association. Thereafter, the Association, with leave of the court, intervened in the action between GEM and Hallcraft.

Hallcraft moved for judgment on the pleadings as to both GEM and the Association on their claim for equitable indemnity based on strict liability theory. The trial court agreed and granted judgment on the pleadings as to the cause of action based on strict liability. The Association moved to amend but the court denied leave. The Association and GEM thereafter dismissed, without prejudice, their causes of action which were not based on strict liability. The judgments on the pleadings were entered against the Association and GEM respectively on February 23, 1988 and April 1, 1988.

DISCUSSION

I Equitable Indemnity on a Strict Liability Theory

Hallcraft contends GEM may not seek comparative equitable indemnity on a strict liability theory. Hallcraft relies on a series of cases addressing strict liability claims in commercial settings. (See Sumitomo Bank v. Taurus Developers, Inc. (1986) 185 Cal.App.3d 211, 229 Cal.Rptr. 719; Muro v. Superior Court (1986) 184 Cal.App.3d 1089, 229 Cal.Rptr. 383; Sacramento Regional Transit Dist. v. Grumman Flxible (1984) 158 Cal.App.3d 289, 204 Cal.Rptr. 736; Kaiser Steel Corp. v. Westinghouse Elec. Corp. (1976) 55 Cal.App.3d 737, 127 Cal.Rptr. 838; U.S. Financial v. Sullivan (1974) 37 Cal.App.3d 5, 112 Cal.Rptr. 18.) In these cases, the courts held strict liability was not available in suits between two commercial entities for a business loss.

These cases focus on the rationale behind the adoption of strict products liability theory. Under strict liability theory "[a] manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury...." (Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, 62, 27 Cal.Rptr. 697, 377 P.2d 897.) The theory was adopted because sales warranty theory, developed to meet the needs of commercial transactions and requiring a showing of privity, was inadequate to protect consumers. (Kaiser Steel Corp. v. Westinghouse Elec. Corp., supra, 55 Cal.App.3d 737, 746-747, 127 Cal.Rptr. 838.) "The doctrine of manufacturers' and suppliers' strict liability in tort was developed primarily to protect individual consumers, users, and, to some extent, bystanders who are in no position to protect themselves from defective products" rather than to protect commercial entities. (U.S. Financial v. Sullivan, supra, 37 Cal.App.3d 5, 18, 112 Cal.Rptr. 18.) By imposing strict liability in tort the loss is distributed by the product manufacturer; the manufacturer, unlike the consumer, can insure against the loss and distribute it as a cost of doing business. (Sumitomo Bank v. Taurus Developers, Inc., supra, 185 Cal.App.3d 211, 227, 229 Cal.Rptr. 719.)

The cases conclude strict liability theory was not intended to be used in a situation involving a suit between two businesses and a commercial loss since a business is not " 'in such a vulnerable position' " as is a consumer and has the capacity to spread the risks of harm resulting from a defective product (see ibid.; U.S. Financial v. Sullivan, supra, 37 Cal.App.3d 5, 18-19, 112 Cal.Rptr. 18 [holding a lender may not sue a developer on a strict liability theory for defects in lots or impairment of the lender's security]; see also Muro v. Superior Court, supra, 184 Cal.App.3d 1089, 1098, 229 Cal.Rptr. 383 [holding a commercial tenant could not pursue a strict liability claim against a commercial lessor] ); businesses which are "merchants" within the meaning of the Uniform Commercial Code have relatively equal bargaining power and can negotiate for "a product designed to negotiable specifications and not furnished off the shelf" (see Kaiser Steel Corp. v. Westinghouse Elec. Corp., supra, 55 Cal.App.3d 737, 748, 127 Cal.Rptr. 838 [holding a steel mill operator could not rely on a strict liability theory in its suit against the manufacturer of a defective motor which destroyed the motor and caused a temporary shut down of the mill] ); statutory principles of sales warranties work well in a commercial setting, with the doctrine of privity creating no artificial barriers to recovery (ibid.); and application of a strict liability theory "would improperly invade rules of law adopted by the Legislature in the California Uniform Commercial Code" when the Uniform Commercial Code regulates "the various aspects of plaintiff's purchase of [the product] from defendant, including liability for defects based on express and implied warranties" (Sacramento Regional Transit Dist. v. Grumman Flxible, supra, 158 Cal.App.3d at pp. 294-295, 204 Cal.Rptr. 736 [holding an operator of a mass transit fleet of busses could not sue a manufacturer for defects in the busses on a strict liability theory] ).

In sum, these cases hold that when a lawsuit arises in a commercial setting between two businesses and involves only a business loss, the parties should use normal commercial remedies (e.g., the Uniform Commercial Code) rather than a theory developed for the benefit of consumers (i.e., strict products liability). These cases, however, do not address the application of strict liability in the context of a claim for comparative equitable indemnity.

In contrast to the doctrine of strict liability which is designed to benefit the consumer-plaintiff, the doctrine of comparative equitable indemnity is designed to do equity among defendants. Under the equitable indemnity doctrine, defendants are entitled to seek apportionment of loss between the wrongdoers in proportion to their relative culpability so there will be "equitable sharing of loss between multiple tortfeasors." (American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 595, 597-598, 146 Cal.Rptr. 182, 578 P.2d 899, emphasis in original.) The purpose of equitable indemnification is to avoid the unfairness, under joint and several liability theory, of holding one defendant liable for the plaintiff's entire loss while allowing another responsible defendant to escape " 'scot free.' " (Id. at pp. 607-608, 146 Cal.Rptr. 182, 578 P.2d 899.) It is an extension of the comparative fault doctrine which allowed loss to be apportioned between plaintiff and defendants according to their respective responsibility for the loss. (Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1197, 246 Cal.Rptr. 629, 753 P.2d 585.)

Originally applied to defendants whose negligence caused the plaintiff's loss (see, e.g., American Motorcycle Assn. v. Superior Court...