Astudillo v. Duggleby

Filed 9/26/07 Astudillo v. Duggleby CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

Appeal from a judgment of the Superior Court of Orange County, David A. Thompson, Judge. Affirmed.

OConnor & Schmeltzer, Lee P. OConnor and Timothy J. OConnor for Defendant and Appellant.

Pierce & Weiss, Anne E. McIntire and Brian S. Letofsky for Plaintiffs and Respondents.

When an injured employee prosecutes an action against a third party tortfeasor, Labor Code section 3856[1] authorizes the employee to recover his or her litigation expenses and attorney fees from the judgment before the employer may exert a lien on the judgment to recover the amount of workers compensation benefits expended on the employees behalf. In this case, the third party tortfeasor was sued by the injured employee and his employer. The employer settled its action and assigned its lien to the third party tortfeasor. The jurys verdict was less than the amount of the employers lien. On appeal, the third party tortfeasor contends the trial court erred by applying section 3856 to award the employee his costs and attorney fees from the judgment before offsetting the judgment with the lien because the employee did not benefit from the judgment and because the employer actively participated in the litigation. We find no error and affirm the judgment.

FACTS AND PROCEDURE

While working at his landscape job, Jose Astudillo was struck by a car driven by Kurt Duggleby. Dugglebys negligence is not at issue.

On July 8, 2005, Zurich American Insurance Company (Zurich) filed a complaint against Duggleby to recover the workers compensation benefits it paid on behalf of Astudillos employer. On July 14, 2005, Astudillo and his wife filed this personal injury action against Duggleby. The complaints were consolidated for trial.

In June 2006, Zurich settled its action against Duggleby for $70,000. As part of the settlement, Zurich assigned to Duggleby its $92,787.56 lien on any judgment Astudillo might obtain against Duggleby. Zurichs complaint against Duggleby was dismissed. Duggleby made a joint offer to Astudillo and his wife to settle for a total of $5,001.00. They did not accept the offer.

In September 2006, Astudillo and his wifes complaint proceeded to trial. The jury returned a special verdict awarding $32,519.96 in damages to Astudillo and awarding no damages to Astudillos wife. The trial court entered a judgment that recited the jurys verdict, but which stated because Duggleby held the Zurichs lien, Astudillo would have to recover a verdict in excess of $92,787.56 before Duggleby was obliged to pay anything on the judgment. Astudillo was awarded costs of suit.

Astudillo subsequently filed his cost bill, seeking $11,422.59 in costs, and a motion seeking attorney fees pursuant to section 3856 equal to one-third of the gross verdict amount. He asked the court to vacate its original judgment and enter a different judgment (i.e., one that first awarded attorney fees and costs under section 3856, and then applied the Zurich lien against the remaining judgment). Duggleby filed his memorandum of costs seeking to recover costs from Astudillos wife of $8,496.46.

In his opposition to Astudillos motions, Duggleby did not challenge the reasonableness of the attorney fees or costs, but argued because the jurys verdict did not exceed the amount of the Zurich lien, Astudillo was not the prevailing party and was not entitled to his costs or attorney fees. At oral argument, Duggleby argued attorney fees were inappropriate because Zurich had actively participated in the litigation by filing a complaint and settling its lien.

The trial court granted Astudillos motions. It vacated its original judgment and entered an amended judgment. The amended judgment recited the jury verdict in Astudillos favor for $32,519.96, awarded Astudillo attorney fees of $10,839 and costs of $11,422.59 out of that amount, and after offsetting an award to Duggleby of costs of $5,296.46 against Astudillos wife, entered a judgment for Astudillo of $16,965.13 to be paid to Astudillos attorneys. The judgment then permitted Duggleby to assert the Zurich lien to offset any remaining balance that would otherwise have been owed to Astudillo.

DISCUSSION

A. The trial court properly awarded attorney fees under section 3856.

Duggleby contends the attorney fees and costs award was improperly awarded under section 3856. We disagree.

We begin with background on the statutory remedial scheme for employees who are injured on the job. With some exceptions not applicable here, when a worker is entitled to workers compensation benefits for an injury, those benefits constitute the workers exclusive remedy against his or her employer for injuries sustained in the course of employment. ( . . .  3602, subd. (a).) The worker, however, may recover a judgment from a negligent third party who caused the injury. ( . . .  3852.) Likewise, in appropriate circumstances, the employer is entitled to recover from the negligent third party the amount of compensation the employer has paid to the injured worker. ( . . .  3852; . . . .) The employer may sue the third party directly, or may claim a portion of any judgment recovered by the injured employee. [I]f an injured worker files suit against the third party tortfeasor and recovers damages, the workers employer is entitled to receive out of such recovery the workers compensation benefits that the employer has already paid. [Citations.] [Citations.] (Phelps v. Stostad (1997) 16 Cal.4th 23, 30 (Phelps).)

Employer includes the employers workers compensation insurance carrier. ( 3850; Fidelity & Cas. Co. v. McMurry (1963) 217 Cal.App.2d 767, 769.) Accordingly, because Zurich paid workers compensation benefits on behalf of Astudillo, it had the right to recover those benefits from the third party tortfeasor, Duggleby. Here, Zurich initially pursued the direct approach by filing a complaint against Duggleby that was consolidated with Astudillos action. But, Zurich then settled its case by selling its $92,787.56 lien to Duggleby for $70,000. At that point, vis--vis the lien, Duggleby stepped into the shoes of employer for all purposes. [Citations.] (Crampton v. Takegoshi (1993) 17 Cal.App.4th 308, 318 (Crampton), disapproved on other grounds in Phelps, supra, 16 Cal.4th at p. 34.) And at that point, Dugglebys lienholder rights in any judgment Astudillo obtained against him were the same as Zurichs.

We turn then to the proper allocation of the $32,519.96 judgment Astudillo secured. The trial court allocated the judgment in accordance with the priorities set forth in section 3856, subdivision (b), which provides, If the action is prosecuted by the employee alone, the court shall first order paid from any judgment for damages recovered the reasonable litigation expenses incurred in preparation and prosecution of such action, together with a reasonable attorneys fee which shall be based solely upon the services rendered by the employees attorney in effecting recovery both for the benefit of the employee and the employer. . . . (Italics added.) Only after allowing for the employees costs and attorney fees, may the court allow as a first lien against the amount of such judgment for damages, the amount of the employers expenditure for compensation . . . ( 3856, subd. (b)), and then [a]ny remaining portion of the judgment goes to the injured employee. (Phelps, supra, 16 Cal.4th at p. 30, fn. omitted.)

The priority scheme set up by section 3856 is not dependent on whether the judgment obtained exceeds the amount of the employers lien. To the contrary, The rule giving priority to the claim for litigation expenses and attorney fees was created for cases like the present one in which the amount of the judgment is insufficient to pay reasonable litigation expenses and attorney fees and also fully reimburse the employer. [Citation.] (Phelps, supra, 16 Cal.4th at pp. 30-31.) [T]he Legislature in enacting section 3856, created a priority scheme which assures the worker the services of an attorney by guaranteeing priority to attorney fees in the event a judgment is insufficient to recompense the worker and satisfy the employers claim. [Citations.] (Manthey v. San Luis Rey Downs Enterprises, Inc. (1993) 16 Cal.App.4th 782, 789.)

Section 3856 is a statutory application of the so-called common fund doctrine. [Citation.] That is, a party who expends attorney fees in winning a lawsuit which creates a fund from which others derive benefits may require those passive beneficiaries to bear a fair share of the litigation costs. The amount of the judgment owing to the passive beneficiary may be reduced to compensate the active litigant for his attorney fees. [Citation.] [] The common fund doctrine does not apply, however, where members of the benefited group have retained their own, separate counsel to participate in the litigation. The common fund doctrine rewards an active litigant only where there are other, passive members of the group who benefit from the outcome. [Citations.] (Walsh v. Woods (1986) 187 Cal.App.3d 1273, 1277 (Walsh).)

In subdivision (c), section 3856 recognizes the common fund doctrine does not apply absent a passive beneficiary, by providing that when the action which creates the common fund is prosecuted both by the employee and the employer by separate counsel the court orders costs and attorney fees paid based solely upon the service rendered in each instance by the attorney in effecting recovery for the benefit of the party represented.

Duggleby contends section 3856, subdivision (b), is inapplicable because there was no passive beneficiary. He contends Zurich was an active participant in this litigation, and thus Astudillo is only entitled to costs and fees under section 3856, subdivision (c) (or  3860, as discussed anon), to the extent he actually benefited from the judgment. And because the judgment was less than the lien, and Astudillo himself had no net recovery, he cannot be said to have benefited at all from his litigation efforts.

Duggleby has confused the two funds involved. There was of course the $70,000 settlement fund secured by Zurich after filing its complaint when it sold its $92,787.56 lien to Duggleby. But at issue here is the fund represented by the $32,519.96 judgment which Astudillo alone secured and to which Duggleby (wearing his employer hat as assignee of the lien) is a passive beneficiary in that the judgment is now available to satisfy the lien.

Crampton, supra, 17 Cal.App.4th 308, is instructive. In that case, the employer alone settled and sold its $75,000 lien to the third party tortfeasor for $25,000. At trial, the injured employee obtained a verdict for less than the amount of the lien. But, the court concluded section 3856, subdivision (b)s priorities applied to the judgment explaining, The jury returned a verdict of nearly $59,000 against defendant. Had that fund not been generated by plaintiffs legal efforts alone, the employer (or its assignee) would not have had any fund from which to recoup (or offset) the amount of workers compensation benefits paid to plaintiff. The employer held a lien for $75,000 and plaintiffs efforts enabled it (or in this case, its assignee) to satisfy a good portion of that claim. [] The result is not changed simply because the employer assigned its rights to defendant. Defendant simply stands in the shoes of the employer and the lien rights he obtained by assignment from the employer must be treated the same way. To the extent that defendant is asserting his assigned lien rights to offset the judgment against him, he is asserting them as the employer and not in his capacity as a party defendant. And those lien rights of the employer are allowable against the judgment only [a]fter the payment of such [litigation] expenses and attorneys fee . . . . ( . . .  3856, subd. (b).) Consequently, plaintiff is entitled to an award of attorney fees under this statute for securing a verdict benefitting the lienholder. (Crampton, supra, 17 Cal.App.4th at pp. 318-319;[2] see also Raisola v. Flower Street Ltd. (1988) 205 Cal.App.3d 1004, 1008 (Raisola).)

Just as Astudillo had nothing to do with obtaining Zurichs settlement, there is nothing in the record suggesting Zurichs counsel had anything to do with trying Astudillos case or contributed to obtaining the verdict in his favor. (See generally Hartwig v. Zacky Farms (1992) 2 Cal.App.4th 1550, 1554.) Just because Zurich began as a party plaintiff does not mean it was an active participant in obtaining Astudillos judgment against Duggleby. Zurich settled its complaint and dismissed its action well before trial. (See Manthey v. San Luis Rey Downs Enterprises, Inc. (1993) 16 Cal.App.4th 782, 788 (Manthey) [[U]pon the dismissal of the complaint in intervention the entire posture of the case revert[s] to that prior to filing of the complaint in intervention with [the] carrier[s] lien on file pursuant to section 3856, subdivision (b). [Citation.]].)

Our Supreme Courts decision in Phelps, supra, 16 Cal.4th 23, is not only instructive, but we believe it is controlling in this case. (Auto Equity Sales, Inc.v.Superior Court (1962) 57 Cal.2d 450, 455.) In Phelps, an employee sued the third party tortfeasor (the defendant) for injuries and the employer filed a complaint in intervention seeking reimbursement of the $28,000 in workers compensation benefits paid to the plaintiff. The matter was submitted to nonbinding judicial arbitration, which resulted in an award of $45,000 to the plaintiff and full reimbursement of workers compensation benefits to the employer. The plaintiff rejected the arbitrators award and requested a trial de novo. The defendant then settled with the employer paying the employer $20,000 in exchange for an assignment of the employers right to reimbursement from any recovery obtained by the plaintiff. At the subsequent trial, the jury returned a verdict for the plaintiff of only $14,600. Because the plaintiffs award at trial was lower than the arbitrators award he had rejected, the plaintiff was barred from recovering his own costs as the prevailing party in the action. (Code Civ. Proc.,  1141.21, subd. (a).) But, the Supreme Court held the plaintiff was nevertheless entitled to reimbursement of attorney fees and costs from the judgment pursuant to section 3856, subdivision (b). (Phelps, supra, 16 Cal.4th at p. 34; see also Manthey, supra, 16 Cal.App.4th at pp. 788-791.)

The Supreme Court reasoned in Phelps that the arbitration costs statute (Code Civ. Proc.,  1141.21, subd.(a)), and section 3856 concerned different sets of relationships. The former simply relates to the allocation of costs between opposing parties. But [s]ection 3856 governs the distribution of a judgment between an injured employee and his or her employer. (Phelps, supra, 16 Cal.4th at p. 32.) Keeping the applicable relationships in mind, the court concluded that while the plaintiffs failure to obtain a more favorable recovery caused him to lose any entitlement to costs or fees as a prevailing party under the arbitration statute (id. at p. 33), it had no impact on his rights under the Workers Compensation Act [( 3200 et seq.)], even though the defendant was the assignee of the employers right of reimbursement (id. at pp. 30-31 & fn. 5).[3]

Duggleby contends Phelps is distinguishable because in Phelps there was no active participation by the employers counsel in securing the judgment, whereas here Zurich actively participated in the litigation. We see no significant distinction between Phelps and the current case. In Phelps, the lienholder intervened in the plaintiffs action which went to nonbinding arbitration, after the arbitration it settled with the defendant and assigned the lien to the defendant, and the plaintiff alone then took the case to trial and secured a judgment in his favor. Here, Zurich filed a complaint against Duggleby, settled its complaint three months before trial, and assigned its lien to Duggleby, and Astudillos complaint proceeded to trial, and he obtained a judgment in his favor.

As noted in Walsh,supra, 187 Cal.App.3d at page 1277, it is the participation in creating the common fund, i.e., the fund from which the lien may be satisfied, that is relevant. Nominal participation is not sufficient and the question of active participation [is] one of fact for the trial court. (Id. at p. 1278.) Although the trial court did not make a specific factual finding that Zurich did not actively participate in securing the judgment, the doctrine of implied findings requires that we infer the trial court made any findings which are necessary to support the . . . order, so long as any such implied findings are themselves supported by substantial evidence. [Citation.] (Massachusetts Mutual Life Ins. Co. v. Superior Court (2002) 97 Cal.App.4th 1282, 1287-1288; see also Fladeboe v. American Izuzu Motors (2007) 150 Cal.App.4th 42, 58.) We may safely infer a finding by the trial court that Zurich did not actively participate in securing the judgment. The issue of Zurichs participation was argued below. The trial court implicitly rejected that Zurich actively participated in securing the judgment, commenting, I didnt see [them] here in the trial.

Duggleby contends that because Zurich settled its complaint, the award of attorney fees is governed by section 3860, not section 3856. Accordingly, he argues, Draper v. Aceto (2001) 26 Cal.4th 1086 (Draper), is directly on point and compels reversal of the fees award. He is incorrect.

Section 3860 contains priorities for allocation of settlement funds that are similar to the priorities contained in section 3856 for allocation of a judgment. If a settlement is effected solely through the efforts of the employees attorney, the employee has first priority from the settlement fund to recover litigation costs and his attorney fees for services in securing and effecting settlement for the benefit of both the employer and the employee. ( 3860, subd. (c), italics added.) If a settlement is effected solely through the efforts of the employers attorney, then employer has first priority from the settlement fund to recover its costs and attorney fees for services in securing and effecting settlement for the benefit of both the employer and the employee. ( 3860, subd. (d).) And if the settlement is achieved through the efforts of both the employees and the employers attorneys, then there is priority for the costs and attorney fees of both based upon the [attorneys] respective services rendered in securing and effecting settlement for the benefit of the party represented. ( 3860, subd. (e).) In Draper, supra, 26 Cal.4th 1086, because the employee and the employer accepted a settlement of the third party action for an amount that was less than the employer had paid out in workers compensation benefits, there was no monetary recovery by the employee. Accordingly, the court concluded the settlement did not benefit the employee and no fees were awarded to her attorney out of the settlement fund. (See also Manriquez v. Adams (2003) 108 Cal.App.4th 340.)

Draper, supra, 26 Cal.4th 1086, and section 3860, are not applicable here. By their plain terms, section 3860, subdivisions (c), (d), and (e), apply only to the allocation of a settlement fund when that settlement has been entered into by both the employer and the employee. Here, although Zurich settled its complaint, there was no issue about allocation of its settlement money. This case concerns allocation of a subsequent judgment secured by the employee alone, what the employers rights are in that judgment (or in this case the third party tortfeasor who through an assignment has stepped into the shoes of the employer), and is thus governed by section 3856.

Finally, Duggleby complains the result here will discourage settlements between employers and third party tortfeasors, where the employee has refused to settle as well. He suggests the following hypothetical situation to demonstrate his point: A third party tortfeasor settles with the employer buying the employers $1 million lien for $900,000; the employee proceeds to trial alone and secures a jury verdict in his favor for $900,000. If the judgment is allocated first to the employees costs and attorney fees, before any lien offset, using the same one-third formula used by the trial court in this case, the third party tortfeasor would have to pay $300,000 in attorney fees. Thus, he ends up paying out a total of $1,200,000more than the lien. Had the tortfeasor not settled with the employer, he would only have to pay the $900,000 verdictleaving the employer and employee to worry about how it gets allocated. While that is certainly a conceivable situation, it is not an overly troubling result. It raises nothing more than a question of the risks and economics of any given settlement that litigants face all the time. The third party tortfeasor always faces the risk that he or she will end up paying more than the amount of the employers lien and one would assume will typically negotiate a deeper discount from the employers lien amount to compensate for that risk. Indeed, in this case the combined settlement amount and attorney fees award was less than the total amount of Zurichs lien.

DISPOSITION

The judgment is affirmed. The Respondents are awarded their costs on appeal.

OLEARY, J.

WE CONCUR:

BEDSWORTH, ACTING P. J.

FYBEL, J.

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[1] All further statutory references are to the Labor Code, unless otherwise indicated.

[2]Crampton went on to conclude that despite the employee being entitled to attorney fees under section 3856, subdivision (b), Code of Civil Procedure section 1141.21 precluded the award because the judgment was less than a prior arbitration award. (Crampton, supra, 17 Cal.App.4th at pp. 319-320.) It was on this point the Supreme Court disapproved Crampton in Phelps, supra, 16 Cal.4th at page 34 (see discussion post).

[3] In passing, Duggleby similarly asserts Astudillo was not entitled to costs or attorney fees under Code of Civil Procedure section 1032 because he was not the prevailing party. (Code Civ. Proc.,  1032, subd. (a)(4) [Prevailing party includes the party with a net monetary recovery . . . .].) As in Phelps, whether Astudillo had a net recovery or was a prevailing party for purposes of Code of Civil Procedure section 1032 has no bearing on his rights under the Workers Compensation Act. Accordingly, we need not address this point further.