Opinion
No. 56144-8-I Linked with No. 57679-8-I
Filed: April 2, 2007 PUBLISHED IN PART
A condominium homeowners association sued the developer for breach of contract and construction defect damages. The developer sued the general contractor and the general contractor, in turn, sued the subcontractors. At mediation, the homeowners association settled with all parties except the siding subcontractor for approximately $5.7 million. Without the consent of its insurer, the siding subcontractor later entered into a settlement agreement with the homeowners association. In exchange for a stipulated judgment of $3.3 million and assignment of its coverage and bad faith claims against the insurer, the homeowners association agreed to not execute on the judgment and dismiss the claims against the siding subcontractor.
At the request of the homeowners association, the court conducted a hearing to determine whether the settlement was reasonable. After ruling that the settlement was reasonable, the court entered the stipulated judgment against the siding subcontractor.
On appeal, the siding subcontractor's insurer contends the trial court did not have the authority to conduct a reasonableness hearing. In the alternative, the insurer challenges the court's reasonableness determination. Because the court had the authority to conduct a reasonableness hearing and did not abuse its discretion in determining that the settlement agreement was reasonable, we affirm.
FACTS
The Villas at Harbour Pointe is a 96 unit condominium development located in Mukilteo. Possession View, L.L.C. (PVLLC) was the developer of the project and Construction Associates, Inc. (CAI) was the general contractor. Construction on the condominium project began in March 1998. The first phase was completed by mid-1999, and the second phase by early 2000.
T G Construction, Inc. (T G) was the siding subcontractor for the project. T G's contract required it to indemnify CAI and obtain a general liability and commercial excess liability policy naming CAI as an additional insured. As agreed, T G obtained a policy from Mutual of Enumclaw (MOE).
The policy was in effect from October 26, 1997 to October 26, 2000.
Soon after construction was complete, homeowners began reporting water intrusion around the windows and the sliding glass doors. CAI concluded the water leaks were caused by defective siding installation, and notified T G. In early 2001, T G returned to perform repairs. But after T G's repairs, homeowners continued to report problems with water intrusion. The Association hired an independent construction expert to investigate the water intrusion. The expert's report identified a number of construction and design defects, including improper installation of water resistive barriers and window flashing.
On June 11, 2002, the Association sued the condominium developer, PVLLC, for $7.3 million in damages, alleging breach of contract and construction and design defects in violation of the Washington Condominium Act (WCA) and the Consumer Protection Act (CPA). PVLLC sued the general contractor, CAI. CAI sued the subcontractors for breach of contract, breach of warranty, and indemnification. MOE defended T G, subject to a reservation of its right to deny coverage.
64.34 RCW.
19.86 RCW.
T G filed a fifth-party claim against its subcontractors.
The parties retained a number of experts to investigate the alleged damage. The experts agreed T G's defective siding work resulted in water intrusion damage. The experts' estimated cost to repair the damage ranged from approximately $336,000 to $4.6 million.
During discovery, MOE learned that T G was administratively dissolved on October 23, 2000. T G then filed a motion for summary judgment, arguing that the statutory two-year time limitation to file a claim against a dissolved corporation barred CAI's claims against it. In October 2004, the trial court denied T G's motion for summary judgment. The trial court ruled that as a matter of law the two-year time limitation did not apply to CAI's post-dissolution claims and there were material issues of fact concerning the pre-dissolution claims.
In the alternative, T G argued CAI's contract claims were barred by the three-year statute of limitations.
The court also ruled that as a matter of law the six-year statute of limitations applied.
The Association filed a motion for summary judgment, claiming that the alleged construction and design work violated the Uniform Building Code (UBC) and the WCA. The court ruled that a number of the alleged defects violated the UBC and the WCA. As to T G's work, the court ruled that the improperly installed weather barriers and flashing violated the UBC and the WCA.
At mediation, the Association settled with all parties except T G for approximately $5.7 million. Without MOE's consent, T G then entered into a settlement agreement with the Association in November 2004. In exchange for a stipulated judgment of $3.3 million and assignment of its coverage and bad faith claims, the Association agreed to not execute on the judgment and dismiss the lawsuit against T G.
The Association also did not settle with the framing contractor, Burley Bear Homes, Inc.
On September 22, 2004, MOE filed a declaratory judgment action on coverage and its obligation to indemnify T G under the policy.
The Association and T G notified MOE that a reasonableness hearing on the settlement agreement was scheduled for December 2. MOE filed a motion to intervene for the "purpose of challenging the reasonableness of the settlement between Plaintiff and T G Construction, Inc." The court granted MOE's request to intervene and continued the hearing to allow MOE to conduct additional discovery.
The day before the hearing, MOE objected to the court's authority to conduct a reasonableness hearing in a breach of contract condominium construction defect case. Over MOE's objection, the court proceeded with the hearing. A number of witnesses testified on behalf of the Association and T G and MOE. The court also reviewed extensive documentary evidence including the experts' scope and estimated cost of repair, and a number of photographs depicting the damage.
In a memorandum decision issued on March 8, 2005, the court ruled that it had the authority to conduct a reasonableness hearing and the $3.3 million settlement between the Association and T G was reasonable. On March 17, the court entered the $3.3 million stipulated judgment against T G.
On April 12, MOE filed a motion asking the court to withdraw or correct its memorandum decision. Based on a recent decision of this court, MOE argued that the claims against T G were barred by the two-year time limitation to file a claim against a dissolved corporation. The court denied MOE's motion and entered findings and conclusions on its determination that the settlement agreement was reasonable.
Ballard Square Condo. Owners Ass'n v. Dynasty Constr. Co., 126 Wn. App. 285, 108 P.3d 818 (2005); rev. granted, 155 Wn.2d 1024, 126 P.3d 820, (2005), aff'd on other grounds, 158 Wn.2d 603; 146 P.3d 914 (2006).
Although the court denied MOE's motion to withdraw or correct the memorandum decision, the court concluded $3 million, instead of $3.3 million, was reasonable "based on risks Construction Associates/Association would have incurred at trial." The parties do not challenge the court's $3 million determination.
ANALYSIS
Authority to Conduct Reasonableness Hearing
MOE contends that under RCW 4.22.060, the trial court had no authority to conduct a reasonableness hearing in a breach of contract condominium construction defect case.
We review questions of law de novo. Dep't of Ecology v. Campbell Gwinn L.L.C., 146 Wn.2d 1, 9, 43 P.3d 4 (2002); Stuckey v. Dep't of Labor Indus., 129 Wn.2d 289, 295, 916 P.2d 399 (1996). The applicability of whether a statute applies is also a question of law.Lobdell v. Sugar `N Spice Inc., 33 Wn. App. 881, 887, 658 P.2d 1267 (1983).
As part of the 1981 Tort Reform Act, Laws of 1981, ch. 27 (codified in chapters 7.72 and 4.22 RCW), RCW 4.22.060 creates a right of contribution between joint tortfeasors and procedures to enforce that right. Glover v. Tacoma General Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695, 756 P.2d 717 (1988). Under RCW 4.22.060(1), the court's determination that a settlement amount is reasonable establishes the offset for a nonsettling joint tortfeasor. RCW 4.22.060(2) requires the court to determine whether the settlement amount is reasonable and, if not, set forth the amount that is reasonable.
RCW 4.22.060(2) provides:
A release, covenant not to sue, covenant not to enforce judgment, or similar agreement entered into by a claimant and a person liable discharges that person from all liability for contribution, but it does not discharge any other persons liable upon the same claim unless it so provides. However, the claim of the releasing person against other persons is reduced by the amount paid pursuant to the agreement unless the amount paid was unreasonable at the time of the agreement in which case the claim shall be reduced by an amount determined by the court to be reasonable.
In Glover, the Washington Supreme Court adopted a number of factors the court should consider in determining the reasonableness of a settlement under RCW 4.22.060. But according to the court, no one factor controls and the trial court retains the discretion to make an objective determination of the reasonableness of the settlement based on the facts and circumstances of each case. Glover, 98 Wn.2d at 718.
When an insurer refuses to settle a claim, the insured, without the consent of the insurer, can negotiate a settlement with the claimant.Red Oaks Condominium Owners Ass'n v. Sundquist Holdings, Inc., 128 Wn. App. 317, 322, 116 P.3d 404 (2005). The insurer is liable for the settlement amount to the extent it is reasonable. Red Oaks, 128 Wn. App. at 322. An insured's assignment of its bad faith claims also allows the claimant to seek more than the policy limits. In Besel v. Viking Ins. Co., 146 Wn.2d 730, 49 P.3d 887 (2002).
In Chaussee v. Maryland Casualty Co., 60 Wn. App. 504, 803 P.2d 1339 (1991), this court adopted the Glover factors to evaluate the reasonableness of a settlement between an insured and the claimant for a stipulated judgment and an assignment of coverage and bad faith rights in exchange for a covenant not to execute and dismissal. Because of similar concerns regarding the impact of a settlement on other parties and the risk of fraud or collusion, we concluded the Glover factors should apply to a covenant judgment settlement agreement between an insured and the claimant.Chaussee, 60 Wn. App. at 512.
In Besel, the Washington Supreme Court approved of the procedure adopted in Chaussee and of conducting a reasonableness determination in the underlying action prior to a coverage or a bad faith action. The court also held that the settlement amount the court determines is reasonable establishes the presumptive measure of harm in a later bad faith action against the insurer. Besel, 146 Wn.2d at 738. According to the Court, a reasonableness determination under the Chaussee criteria protects "insurers from excessive judgments especially where . . . the insurer has notice of the reasonableness hearing and has an opportunity to argue against the settlement's reasonableness." Besel, 146 Wn.2d at 739.
In Red Oaks, a recent breach of contract condominium defect case, this court reiterated the importance of the trial court's reasonableness determination when the insured enters into a stipulated judgment and assigns its coverage and bad faith claims in exchange for a covenant not to execute on the judgment. Red Oaks, 128 Wn. App. at 321-322. InRed Oaks, after the trial court denied the insurer's motion to continue the reasonableness hearing, the insurer decided not to participate in the hearing. On appeal, we held that the trial court's denial of the motion to continue did not violate due process and the insurer was not subject to greater bad faith liability by participating in the reasonableness hearing. Red Oaks, 128 Wn.2d at 324.
As in Chaussee, Besel and Red Oaks, the Association's settlement agreement with T G included a stipulated judgment in favor of the Association with a covenant not to execute and an assignment of T G's coverage and bad faith claims against MOE. Based on Chaussee, Besel andRed Oaks, we conclude the trial court has the authority in a contract condominium defect case to conduct a reasonableness hearing on a covenant judgment settlement agreement between an insured and the claimant.
MOE also argues the trial court did not have jurisdiction to conduct a reasonableness hearing because the Association and T G entered into the settlement agreement prior to the hearing. Specifically, MOE argues the court did not have jurisdiction because there was no case in controversy and T G did not comply with the requirements of RCW 4.22.060(1).
For a court to exercise judicial power, there must be a justiciable case or controversy. U.S. Const. art. III, § 2; To-Ro Trade Shows v. Collins, 144 Wn.2d 403, 411, 27 P.3d 1149 (2001) (before the jurisdiction of a court may be invoked, the virtually universal rule is that there must be a justiciable controversy). Because the stipulated judgment establishes the presumptive measure of harm in a later bad faith action against the insurer if the court determines the settlement is reasonable, there was a justiciable controversy.Besel, 146 Wn.2d at 738. And in Howard v. Spec. Underwriting, 121 Wn. App. 372, 89 P.3d 265 (2004), rev. denied, 153 Wn.2d 1009 (2005), this court rejected the argument that the reasonableness hearing must be held in the subsequent bad faith action. Howard, 121 Wn. App. at 379.
The Association contends MOE waived the right to argue jurisdiction based on its participation in the reasonableness hearing. But the right to challenge jurisdiction cannot be waived and may be raised at any time. Skagit Surveyors Eng'rs, L.L.C. v. Friends of Skagit Cy., 135 Wn.2d 542, 556, 958 P.2d 962 (1998).
The cases MOE relies on to argue that the court did not have jurisdiction are either inapposite or distinguishable. In Nat'l Sch. Studios, Inc. v. Superior Sch. Photo Serv., Inc., 40 Wn.2d 263, 242 P.2d 756 (1952), the court declined to accept review because the time limitation in a covenant not to compete had expired. In Rosling v. Seattle Bldg. Constr. Trades Council, 62 Wn.2d 905, 907, 385 P.2d 29 (1963), the court declined to review a case concerning picketing at a construction site because construction was complete, making the question "purely academic." In Tosco Corp. v. Hodel, 804 F.2d 590 (10th Cir. 1986), while the appeal was pending, the parties settled. When third parties moved to intervene, the court ruled that it lacked jurisdiction because there was no case or controversy.
Relying on the requirements of RCW 4.22.060(1), MOE also argues that the court did not have jurisdiction because MOE did not receive notice before T G and the Association entered into the settlement agreement. RCW 4.22.060(1) provides that:
A party prior to entering into a release, covenant not to sue, covenant not to enforce judgment, or similar agreement with a claimant shall give five days' written notice of such intent to all other parties and the court.
Under the plain terms of the statute, the claimant must provide five days notice of the intent to settle to all other parties. But here, there is no dispute that MOE was not a party and, therefore, was not entitled to notice under RCW 4.22.060(1). Nevertheless, even assuming MOE was entitled to notice as a party, MOE cannot establish a due process violation or prejudice. There is no dispute that MOE received notice of the settlement agreement before the reasonableness hearing or that MOE intervened and participated in the hearing. Red Oaks, 128 Wn. App. at 324. We conclude the trial court had jurisdiction to conduct a reasonableness hearing on the settlement agreement between the insured and the claimant in this condominium construction defect case.
The remainder of this opinion has no precedential value. Therefore, it will not be published but has been filed for public record. See, RCW 2.06.040; CAR 14.
Reasonableness Determination
In the alternative, MOE challenges the trial court's reasonableness findings on some of the Glover/Chaussee factors. Under Glover andChaussee, the court must consider the following factors in making a reasonableness determination: (1) the releasing party's damages; (2) the merits of the releasing party's liability; (3) the merits of the released party's defense theory; (4) the released party's relative faults; (5) the risks and expense of continued litigation; (6) the released party's ability to pay; (7) any evidence of bad faith, collusion, or fraud; (8) the extent of the releasing party's investigation and preparation; and (9) the interests of the parties not being released. Glover, 98 Wn.2d at 717. While the court must consider these factors, no one factor controls and the trial court has the discretion to decide each case individually. Chaussee, 60 Wn. App. at 512 (citing Glover, 98 Wn. App. at 717).
We review the trial court's determination of reasonableness for abuse of discretion. Werlinger v. Warner, 126 Wn. App. 342, 109 P.3d 22 (2005). A trial court abuses its discretion when its decision is manifestly unreasonable or is based on untenable grounds or untenable reasons. Mayer v. Sto Indus., Inc., 156 Wn.2d 677, 684, 132 P.3d 115 (2006). A reasonableness determination necessarily involves factual findings which will not be disturbed on appeal if supported by substantial evidence. Howard, 121 Wn. App. at 380.
MOE challenges the trial court's findings on the merits of T G's defense theory, the Association's damages, T G's ability to pay, and the risks and expenses of continued litigation.
First, MOE contends the trial court erred in finding that T G would not prevail on its corporate dissolution defense under former RCW 23B.14.340. Former RCW 23B.14.340 provided in part that "[t]he dissolution of a corporation . . . [b]y the issuance of a certificate of dissolution by the secretary of state . . . shall not take away . . . any remedy available against such corporation . . . for any right or claim existing, or any liability incurred, prior to such dissolution if action or other proceeding thereon is commenced within two years after the date of such dissolution."
T G in its motion for summary judgment argued that the two-year time limit under former RCW 23B.14.340 barred CAI's claims against it. The court ruled that as a matter of law CAI's post-dissolution claims were not barred. But as to CAI's pre-dissolution claims against T G, the trial court ruled there were material issues of fact about whether T G failed to give notice to CAI as a known claimant.
Former RCW 23B.14.060 provides that a dissolved corporation must notify "its known claimants in writing of the dissolution. . . ."
At the reasonableness hearing, the Association and T G presented additional evidence about whether CAI was a known creditor. In the court's findings of fact on the reasonableness of the settlement, the court stated that "[i]t is also likely Construction Associates' claim that it was a known creditor would have been found true by a jury in light of the sworn statements by C.A.[I]'s former employees, other evidence and complaints made."
After the court issued its memorandum decision finding the settlement reasonable and after the court entered the stipulated judgment for $3.3 million, MOE filed a motion to correct or withdraw the memorandum decision. In the motion to correct or withdraw, MOE cited and relied on this court's recent decision in Ballard Square. In Ballard Square, we held that former RCW 23B.14.340 did not apply to postdissolution claims based on pre-dissolution contract rights, but that the post-dissolution claims were barred by the common law. Ballard Square, 126 Wn. App. at 296. The trial court denied MOE's motion to correct or withdraw and entered findings of fact and conclusions of law consistent with its memorandum decision.
On review, the Washington Supreme Court affirmed but on different grounds. The court concluded post-dissolution claims against a dissolved corporation were authorized under former RCW 23B.14.340, but the 2006 amendment to the statute retroactively barred the claims. Ballard Square Condo. Owners Ass'n v. Dynasty Constr. Co., 158 Wn.2d at 619.
According to established caselaw, the court determines the reasonableness of a settlement "at the time the parties enter into it."Brewer v. Fibreboard Corp.,127 Wn.2d 512, 541, 901 P.2d 297 (1995);Mavroudis v. Pittsburgh-Corning Corp., 86 Wn. App. 22, 38, 935 P.2d 684 (1997). See also Schmidt v. Cornerstone Invest. Inc., 115 Wn.2d 148, 795 P.2d 1143 (1990). Even though the Ballard Square decision affected the analysis of T G's corporate dissolution defense, because the reasonableness determination is based on the facts and law at the time of settlement, we conclude the trial court's findings on the merits of T G corporate dissolution defense were not erroneous.
MOE also relies on CAI's brief in opposition to T G's motion for summary judgment to argue only post-dissolution claims was asserted against T G. MOE's argument is unpersuasive. In opposing T G's motion for summary judgment based on administrative dissolution, CAI argued not only that its claims against T G were post-dissolution but also that CAI was entitled to notice as a known claimant on the pre-dissolution claims.
Substantial evidence also supports the trial court's finding that a jury could conclude CAI was a known creditor. A former CAI employee, Deb Harrington, testified that in early 2000, she notified T G's president about the siding installation problems at the condominium. Records from CAI to T G in December 2000 and in October 2001, also show T G was on notice that there were water problems in several units, missing flashing, and leaks above the windows. In addition, CAI's project manager and superintendent, Rob Hensel, testified that in 2000 and 2001, he telephoned T G's president several times about the water intrusion problems and T G's defective work.
MOE also argues the trial court abused its discretion in failing to consider the Association's $1.9 million settlement offer after T G and the Association entered into the $3.3 million settlement agreement. But according to testimony, the $1.9 million offer was only based on the declaratory judgment and bad faith action against MOE.
The trial court's assessment of damages is also supported by substantial evidence. The experts all agreed T G's substandard work resulted in water damage to the condominium. The estimated cost of repair ranged from $300,000 to approximately $4.6 million. The court concluded that a jury would likely find that the cost of repair was between $2 and $4.6 million based on the record and that the $3.3 million settlement amount was reasonable.
Next, relying on Chaussee, MOE claims the trial court erred in failing to consider T G's ability to pay. In Chaussee, the court held that the judicial approval of a guardian's settlement on behalf of a minor was insufficient to establish reasonableness because the plaintiff failed to present any evidence to show the risk and expense of litigation or the defendant's ability to pay. Chaussee, 60 Wn. App. at 513.
But unlike in Chaussee, the trial court did not fail to consider T G's ability to pay. Substantial evidence supports the trial court's finding that as a dissolved entity, T G could only pay to the extent it was insured. T G stated in the settlement agreement that the company did not have the ability to pay. As part of the reasonableness hearing, the Association also presented a declaration from T G's owner confirming T G did not have the ability to pay.
Last, MOE argues substantial evidence does not support the trial court's finding that the expenses related to continuing the litigation were significant. Specifically, MOE asserts there was no evidence concerning reasonable attorney fees. Contrary to MOE's assertion, the Association submitted information concerning litigation costs and the amount of attorney fees. In addition, the trial court estimated the trial would last three to five weeks and described necessary pretrial preparation, including the fact that T G had to "hire its own experts to conduct additional discovery to duplicate much of this work at great expense." Substantial evidence supports the trial court's findings that the cost of continuing litigation was between $500,000 and $1 million.
CONCLUSION
The trial court had the authority and the jurisdiction to conduct a reasonableness hearing on the settlement agreement between the insured and the claimant for a stipulated judgment and covenant not to execute. We conclude the trial court did not abuse its discretion in determining the settlement between the Association and T G was reasonable and substantial evidence supports the trial court's findings. We affirm.
WE CONCUR: