If a Lawsuit is Settled with a Monetary Settlement to the Plaintiff, who Pays the Plaintiff’s Costs Incurred in the Lawsuit?

Most lawsuits end with a settlement before trial. This occurs through direct negotiation and mediation. When this happens, “costs” that have been incurred in the lawsuit process such as court filing fees, witness fees, fees for recording and transcribing depositions, and other costs, sometimes totaling tens of thousands of dollars, can be awarded to the prevailing party if the parties don’t agree how to handle costs in the settlement. If this happens, the losing party pays these costs of the prevailing party.  But when the parties have not designated how to handle costs in their settlement agreement, how does a court determine who the prevailing party is in a settlement and therefore, who pays the costs of the prevailing party?

In DeSaulles v Community Hospital of the Monterey Peninsula[i], the California Supreme Court addressed this issue of, who is the “prevailing party” when a plaintiff voluntarily dismisses a lawsuit after entering into a monetary settlement.

The Lawsuit

Maureen DeSaulles filed a lawsuit that contained seven causes of action (seven legal claims). Defendant, Community Hospital of the Monterey Peninsula (“CHOMP”), filed a motion for summary adjudication (to defeat parts of the lawsuit) and motions in limine (limiting evidence at trial) which resulted in two causes of action that would go to trial, breach of contract and breach of the covenant of good faith and fair dealing.

Before a jury was empaneled, the parties settled the last two causes of action and put the settlement on court record and permitted the court to retain jurisdiction for enforcement of the settlement via Code of Civil Procedure §664.6. The court record stated that the last two causes of action would be dismissed with prejudice (cannot be reasserted later) and that CHOMP would pay DeSaulles $23,500 in damages.

Since plaintiff, DeSaulles, could appeal the other causes of action, DeSaulles did appeal but the Court of Appeal affirmed the judgment of the trial court in an unpublished opinion [225 Cal.App.4^th 1427].

Both DeSaulles and CHOMP returned to the trial court to argue that they were the prevailing party entitled to have their costs paid by the other party. The trial court stated, “The Court believes it can exercise its discretion in determining which party did prevail, and because [the Hospital] prevailed on significant causes of action and thereafter entered into a settlement on the remaining costs, the Court finds that [the Hospital] is the prevailing party.”[i] The trial court awarded $12,731.92 in costs to be paid by DeSaulles to CHOMP and awarded no costs to DeSaulles.

The Court of Appeal reversed the trial court, concluding that DeSaulles had obtained a “net monetary recovery” and was therefore the prevailing party. The Court of Appeal said that CHOMP was not entitled to costs because even though it obtained a dismissal, it was only a partial dismissal of the case, a dismissal of the last two causes of action as part of the settlement.  The California Supreme Court granted review of the Court of Appeal decision.

Analysis

California Code of Civil Procedure §1032(a)(4) includes in its definition of the “prevailing party” “the party with a net monetary recovery” or “a defendant in whose favor a dismissal is entered.” Code of Civil Procedure §1032 states,

(a) As used in this section, unless the context clearly requires otherwise:

(1) “Complaint” includes a cross-complaint.

(2) “Defendant” includes a cross-defendant or a person against whom a complaint is filed.

(3) “Plaintiff” includes a cross-complainant or a party who files a complaint in intervention.

(4) “Prevailing party” includes the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against that defendant. When any party recovers other than monetary relief and in situations other than as specified, the “prevailing party” shall be as determined by the court, and under those circumstances, the court, in its discretion, may allow costs or not and, if allowed may apportion costs between the parties on the same or adverse sides pursuant to rules adopted under Section 1034.

(b) Except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.

(c) Nothing in this section shall prohibit parties from stipulating to alternative procedures for awarding costs in the litigation pursuant to rules adopted under Section 1034. [emphasis added]

In this case, no separate statute other than §1032 provides for a means of allocating costs and DeSaulles and CHOMP did not allocate costs in their settlement agreement.  Consequently, DeSaulles argued that she had a net monetary recovery and is entitled for her costs to be paid by CHOMP but CHOMP argued that it had a dismissal entered in its favor and thus it was the prevailing party entitled to have its costs paid by DeSaulles.

CHOMP argued that the rationale in a prior decision, Chinn v. KMR Property Management[ii], controlled in DeSaulles. The Chinn court concluded that the dismissal of an action (lawsuit) makes the defendant the prevailing party and that settlement proceeds do not qualify as a “net monetary recovery” that would make the settling plaintiff the prevailing party.

Here, the California Supreme Court first addressed whether a dismissal obtained in exchange  for a monetary settlement  may be considered a dismissal in a defendant’s favor within the meaning of §1032(a)(4), entitling defendant to have defendant’s costs paid by the plaintiff.

The Supreme Court asserted that the legislature did not intend to have a plaintiff bring an action (lawsuit), force a defendant to incur great costs defending the lawsuit, and have the plaintiff dismiss an unmeritorious lawsuit before judgment to avoid paying defendant’s costs.  This would be unjust to the defendant. However, the Supreme Court concluded after analyzing case law, that this rationale does not apply to cases involving dismissals when plaintiffs obtain a monetary settlement. Therefore, the court decided that where a monetary settlement is involved and a case is dismissed, the defendant is not considered the prevailing party and therefore the defendant must pay their own costs.

But can a plaintiff who obtains a monetary settlement be the “prevailing party” pursuant to §1032(a)(4)?  Would the plaintiff be the “party with a net monetary recovery” to allow the plaintiff to have their costs paid for by the defendant?

Although CHOMP argued that some cases define “recovery” as not including settlement proceeds, the California Supreme Court believes it does.

The Supreme Court analyzed the language of §1032 and noted that §1032(a)(4) also addresses the situation when there is no “monetary relief” and thus equates “monetary relief” with “net monetary recovery.” The Supreme Court concluded that “the term ‘recovery’ in section 1032(a)(4) encompasses situations in which a defendant settles with a plaintiff for some or all of the money that the plaintiff sought through litigation.”[i] This coincides with the rationale in International Industries, Inc. v. Olen[iii]where the California Supreme Court said that although a plaintiff may dismiss a lawsuit when he/she/it learns it is without merit, the plaintiff may also dismiss when the defendant is willing to pay the plaintiff all or substantially all of the relief sought. “Just as a plaintiff cannot avoid a cost award by dismissing an action on the eve of trial, so a defendant cannot avoid a cost award merely by settling on the eve of trial.”[iii] The Supreme Court cited cases predating the 1986 reenactment of §1032 and post 1986 that support its rationale.

The Supreme Court also concluded, “Where, as here, the parties stipulate before the court that the plaintiff has been paid a sum of money in exchange for a dismissal of an action, the plaintiff is as legally entitled to receive money from the defendant as a plaintiff who obtains a stipulated judgment without a dismissal. The former plaintiff is every bit as much a prevailing party as the latter.”[iii]

The Supreme Court also addressed whether the $23,500 was a “net monetary recovery” when CHOMP defeated five causes of action out of seven. Citing Olen andMichell v. Olick[iv], where the plaintiff obtained a $63,000 jury award for only one of twelve causes of action entitling that plaintiff to costs, it concluded that DeSaulles is entitled to have her costs paid by CHOMP.

The Supreme Court also noted that a defendant is in a better position to ascertain the allocation of costs if it settles and can include that allocation in a settlement agreement.  “Section 1032 merely establishes a default rule, and a settling defendant is in a far better position to calibrate the terms of a settlement, including allocation of costs, with appropriate provisions in the settlement agreement.”[i]

The Supreme Court suggested that trial courts could encourage the parties to address costs in settling and putting the settlement on record pursuant to Code of Civil Procedure §664.6.

The dissenting opinion in this case states that in cases like DeSaulles, the court should have the discretion to allocate costs in an equitable manner rather than awarding them solely to plaintiff.

Sometimes it may be appropriate to apportion costs between the parties.

However, the majority opinion in this case is as follows:

In sum, we hold that a dismissal pursuant to a monetary settlement is not a dismissal in the defendant’s “favor” as that term is used in section 1032(a)(4). We further hold that a plaintiff that enters into a stipulated judgment to be paid money in exchange for a dismissal has obtained a “net monetary recovery” within the meaning of section 1032(a)(4), whether or not the judgment mentions the settlement. Our holdings establish a default rule that applies only when the parties have not resolved the matter of costs in their settlement agreement or have not stipulated “to alternate procedures for awarding costs (§1032, subd.(c)). We disapprove the contrary holding of Chinn v. KMR Property Management, supra, 166 Cal.App.4^th 175, 185-190.[i]

Thus, DeSaulles was awarded her costs to be paid by CHOMP.

Conclusion

How does this case apply to plaintiffs and defendants who enter into a stipulated judgment such as one using Code of Civil Procedure §664.6 or §998?  It is highly recommended that the parties in litigation consider including language in any settlement agreement about the allocation of costs, especially those involving a monetary settlement. If the cost allocation is not included when there is a monetary settlement, the plaintiff will be considered to have a “net monetary recovery” and thus be the prevailing party entitled to have the defendant pay plaintiff’s costs.