The Fourth Appellate District Breaks With Wagner Regarding the Statute of Limitations in Express Indemnity Claims

Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc.

Court of Appeal, Fourth Appellate District

(July 2, 2015)

The Appellate Court reviewed three issues on appeal in this case. First, when does the statute of limitations on an express indemnity claim start? Second, what is the proper balancing of the equities in an equitable subrogation claim? Third, did the trial court err in denying the cross-defendant a jury trial on an express indemnity claim?

In 2007, plaintiff Jeffrey Epp (“Epp”) sustained serious injuries and was rendered a quadriplegic after diving into the shallow end of a hotel swimming pool while intoxicated. Epp brought claims for design and construction defects, negligence and loss of consortium against the St. Regis Resort, located in Dana Point, its parent company CPH Monarch Hotel, LLC (“CPH”), the general contractor, Valley Crest Landscape Development, Inc. (“Valley Crest”) and the subcontractor Mission Pools of Escondido, Inc. (“Mission Pools”), who built the pool.

Epp claimed the pool area contained insufficient and misplaced depth markers and signage to warn of the shallow depth. Construction was completed and the pool opened in 2001. Pursuant to the relevant contractual indemnity provisions, CPH tendered its defense to Valley Crest, which accepted and agreed to defend CPH. Valley Crest tendered its defense to Mission Pools, which failed to respond to the tender. Valley Crest filed a cross-complaint for express indemnity against Mission Pools, based on the alleged breach of the indemnity provisions in the subcontract.

Before trial, Epp settled with CPH for $4.5 million. Epp subsequently settled his claims against Valley Crest and its insurance company, Intervener National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) for $50,000.00. Valley Crest also incurred attorneys’ fees and costs in the amount of $202,096.61 in defending CPH and $419,064.93, defending itself. National Union intervened in Valley Crest’s cross-complaint, seeking equitable subrogation for the amounts it had paid. At the subsequent bench trial, the court awarded Valley Crest its full deductible of $250,000 plus other out of pocket costs for a total of $282,496, and awarded National Union $494,002.37 on its subrogation claim.

Appellant Mission Pools argued that the trial court erred because: (1) Respondent’s claim for express indemnity was barred under California Code of Civil Procedure § 337.1(a); (2) National Union should have borne the loss under the balancing of the equities; and (3) Mission Pools was entitled to a jury trial on Valley Crest’s claim for express indemnity.

Mission Pool’s first argument relies on California Code of Civil Procedure § 337.1(a) and the holding in Wagner v. State of California (1978) 86 Cal.App.3d 922 which essentially “starts the clock” on the four-year statute of limitations upon the completion of construction for which there are patent or obvious design or construction deficiencies, resulting in injury or death. Wagner holds that claims for indemnity are also barred under California Code of Civil Procedure § 337.1(a).

The Court of Appeals refused to follow Wagner for several reasons. First, Wagner failed to consider California Code of Civil Procedure § 337.15, which, unlike section 337.1, defines the word “action” to include an action for indemnity. Since the same definition of “action” was not used in 337.1, the Court held that the statute was not intended to apply to indemnity claims. Second, Wagner dealt with a claim for equitable indemnity. Here, the claim is for express indemnity. The Court reasoned that because the claim for express indemnity was based in contract, the statute of limitations as set forth in California Code of Civil Procedure § 337 subd. 1 was applicable. Third, the holding in Wagner runs counter to the public policy principle that “[a] tort defendant retains the right to seek equitable indemnity from another tortfeasor even if the plaintiff’s action against the cross-defendant is barred by the statute of limitations.” (Valley Circle Estates v. VTN Consolidated, Inc. (1983) 33 Cal.3d 604, 611, 189 Cal.Rptr. 871, 659 P.2d 1160.). Finally, the court stated that Wagner has been highly criticized by other Courts Of Appeal because it ignores the Supreme Court’s holding that claims for implied indemnity do not accrue until the indemnitee has suffered an actual pecuniary loss.

The Court held that Valley Crest’s claim for express indemnity and National Union’s claim for equitable subrogation, which arose from it, accrued when the tort defendant paid a judgment or settlement to which he was entitled to indemnity. Applying the accrual rule to this case, the earliest Valley Crest’s claim for express indemnity could have accrued was in May 2008, when it tendered its defense to Mission Pools. Valley Crest filed its cross-complaint two months later. The Fourth Appellate District held that the cross-complaint was timely filed.

Regarding Mission Pool’s second argument, that National Union’s claim for equitable subrogation should be denied due to the balancing of the equities, the court reasoned that the equities tipped against Mission Pools. Despite the fact that Mission Pools’ liability in causing Epp’s injury was “slim,” it had been alleged in the complaint. Although the equities were otherwise fairly evenly balanced, the Court ultimately determined that the trial court did not abuse it discretion because Mission Pools did not meet its contractual obligations, while National Union had done everything it was supposed to do to fulfill its obligations to Valley Crest. By Contrast, Mission Pools failed to respond to Valley Crest’s tender of defense and allowed its own commercial general liability policy to lapse.

Finally, the Appellate Court found the trial court committed reversible error in disallowing Mission Pools a jury trial on Valley Crest’s express indemnity claim. It held that Valley Crest’s money damages were legal, not equitable and were thus an adequate remedy. The appellate court reversed and remanded Valley Crest’s express indemnity claim. It affirmed in all other respects.

COMMENT

The Fourth Appellate District refused to follow the holding in Wagner, and has created a split as to whether indemnity claims are subject to the four year statute for patent defects. This is generally an indicator of when an issue is ripe for review before the California Supreme Court.

For a copy of the complete decision, see:

Valley Crest Landscape v. Mission Pools v. National Union Fire