Law360: A Settling Party’s Cross-Claim Shield in Bankruptcy Cases | Articles

California Code of Civil Procedure (“CCP”) Sections 877.6 and 877 create a procedure whereby a settling defendant can be insulated from claims of contribution and indemnity from non-settling codefendants. This arises in cases of joint tortfeasors, environmental or asbestos situations where one defendant wants to extricate itself and eliminate the risk of future cross claims for contribution or indemnity from the other defendants. In bankruptcy cases, multiple defendants are frequently jointly sued in avoidance actions pursuant to 547 or 548 . Co-defendants may have contribution or other cross claims against one another. Under California law, a non-settling defendant who complies with the requirements of CCP 877.6 will be insulated from these indemnity/contributions claims leaving the non-settling defendants exposed for their respective liability without a source of contribution from the settling defendant.

There is no similar statutory insulating procedure under Federal practice including the Bankruptcy Code. The result is attempted with the use of specific language in an order confirming a settlement under Rule 9019 or perhaps a 524(g) injunction in connection with plan confirmation. Although a bankruptcy case has not been found that incorporates 877.6, there are many other federal cases utilizing 877.6 where diversity or a state law claim is properly before the court so that the “substantive” provisions of California law can be imported. Utilizing the CCP, the court applies the “substantive law of California” (Mason and Dixon Intermodal Inc. v. Lapmaster International LLC, 632 F.2d 1056 (9th Cir. 2010)).

Structure of CCP 877.6 and Federal Jurisdiction

CCP 877 and 877.6 delineate a procedure whereby the settling defendant files an application with the court seeking a determination that the settlement being proposed is in “good faith.” The order confirming the settlement bars all claims from being asserted by the non-settling defendants. “Good faith” requires a question of fact determination to be made by the court and will be discussed in more detail below.

A method of importing the 877.6 procedure into bankruptcy case is addressed herein. A bankruptcy case has not found that accomplishes this. However, in the federal courts, the 877.6 procedure has been incorporated in cases involving; environmental issues, Los Angeles Unified School District v. United Allows Inc. (12-CV-5033-LAS(RZX), 2013 U.S. Dist. Lexis 173243 (C.D.CA Dec. 9, 2013); Diversity Jurisdiction under the Carriage of Goods Act, Masson and Dixon International v. Lapmaster International LLC, 632 F2d. 1056 (9th Cir. 2010); Charles N. Lewis v. Russell, No: Civ. 2:03-2646 WBS CKD, 2012 U.S. Dist. Lexis 161343, (D.C.E.D.CA.2012); breach of contract /negligent representation (diversity removal case). Gross v. Metropolitan Life Insurance Company, No. 12-CV-2478 H (JMA), 2013 U.S. Dist. Lexis 68075 (S.D. CA May 13, 2013)

Incorporating state avoidance actions claim under Section 544(b)(1) into the suit under 547 – 548 is the nexus for the importation and application of 877.6 into the bankruptcy settlement. Thus, the state law jurisdictional connection of incorporating a claim under California law permits the “Piggyback” of 877 and 877.6 application into a bankruptcy process.

877.6 Procedure

The CCP requires the settling party to file an application with the court in the pending action to find that the proposed settlement is being entered into in “good faith.” The application shall set forth the terms of the settlement and why it is “fair and equitable.” These are obvious questions of fact that need to be resolved to avoid collusion so that the court can determine that the proposed settlement is not “out of the ball park.” (Tech-Bilt, Inc. v. Woodward-Clyde & Associates, 38 Cal.3d 488, 698 P.2d 159, 213 Cal.Rptr 256 (Cal.,1985) where one party is “selling out” the other).

The California Supreme Court in Tech-Bilt, Inc. v. Woodward-Clyde & Associates, Supra, delineated the factors a court is to consider when evaluating a settlement to reach the ultimate conclusionary finding of “good faith.” These factors are the: (1) rough approximation of the total recovery and the settling parties’ proportional liability; (2) settlement amount; (3) allocation of settlement proceeds; (4) recognition that the settlement parties should pay less than that would be found liable for at trial; (5) financial conditions and insurance policy of the settling defendant; (6) any evidence of collusion, fraud or tortious conduct aimed at the non-settling defendants based on the information available to all parties at the time of the settlement. (38 Cal. 3d at 497).

The challenging party has the burden of proof to establish that the settlement is “out of the ball park” and therefore inconsistent with equitable objectives of 877.6. As the settling amount will be substantially less than the claimed amount, the required factual findings may require expert testimony, etc. If the court determines that the settlement is in “good faith”, the other jointly liable parties are forever barred from pursuing any cross claims. Presumably, the appeal process, delineated in the CCP, would apply in the Federal courts. However, that assumption has not been tested. The Ninth Circuit has ruled that CCP 877.6 is a matter of California “substantive” and not procedural law. (Supra, 632 F. 2d. at 7061). “This court has held that California Code of Civil Procedure Section 877 constitutes substantive law.” (See Federal Sav. and Loan Ins. Corp. v. Butler, 904 F.2d 505, 1990 WL 70564 (C.A.9(Cal.),1990), stating: The district court correctly applied California law to resolve ITG’s Motion to Dismiss pursuant to good faith settlement.” (632 F.2d at 1061).

Conclusion

The settlement and notice procedure of Rule 9019 may constitute the “application” required by 877.6. Utilizing the California statutory approach and combining it with Rule 9019 arguably results in obtaining the desired result of a settlement that eliminates exposure from the non-settling parties’ claims. Rule 9019 authorizes the court to approve a settlement that provides flexibility, is in the best interest of the estate and permits the court to fashion “equitable” orders as it sees fit. (See: 10 Collier on Bankruptcy, 16th Edition at 9019) and cases cited therein.

Thus, barring indemnity and contribution claims by incorporating CCP 877.6 may facilitate settlements, enhancement of the estate and may be a viable option in multi-defendant cases.

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1 All citations are to the Bankruptcy Code 11USC 101 et seq. or the Federal Rules of Bankruptcy Procedure (“FRBC”)

2 See: In re Landvest Mortgage, Inc. v. De Arsmond. 123 BR.623 (Bankr. N.D. Cal. Feb. 4, 1991); In re Plant Dissolution Company 485 B.R.203; (Bankr. N.D. Cal. Oct. 9, 2012)