assignment of a claim or cause of action california

Assignment of claims

An untraditional approach to combining the claims of plaintiffs; how it differs from class actions, joinder, consolidation, relation and coordination

A large class of plaintiffs engages you to bring a common action against a defendant or set of defendants. As counsel, you resolve to combine the plaintiffs’ various claims into a single lawsuit. In this article, we touch on some of the traditional approaches, such as a class action, joinder, consolidation, relation, and coordination. To that list, we add as an approach the assignment of claims, a procedural vehicle validated by the United States Supreme Court, but not typically employed to combine the claims of numerous plaintiffs.

Class actions

In Hansberry v. Lee (1940) 311 U.S. 32, the United States Supreme Court explained that “[t]he class suit was an invention of equity to enable it to proceed to a decree in suits where the number of those interested in the subject of the litigation is so great that their joinder as parties in conformity to the usual rules of procedure is impracticable. Courts are not infrequently called upon to proceed with causes in which the number of those interested in the litigation is so great as to make difficult or impossible the joinder of all because some are not within the jurisdiction or because their whereabouts is unknown or where if all were made parties to the suit its continued abatement by the death of some would prevent or unduly delay a decree. In such cases where the interests of those not joined are of the same class as the interests of those who are, and where it is considered that the latter fairly represent the former in the prosecution of the litigation of the issues in which all have a common interest, the court will proceed to a decree.” ( Id. at pp. 41-42.)

In California’s state courts, class actions are authorized by Code of Civil Procedure section 382, which applies when the issue is “‘one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court.’” ( Noel v. Thrifty Payless, Inc. (2019) 7 Cal.5th 955, 968; see also, e.g., Cal. Rules of Court, rules 3.760-3.771.) “The party advocating class treatment must demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives.” ( Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021.) “The community of interest requirement involves three factors: ‘(1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.’” ( Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 435; see Civ. Code, § 1750 et seq. [Consumers Legal Remedies Act]; cf. Fed. Rules Civ.Proc., rule 23(a) [prerequisites for federal class action].)

Parties, acting as co-plaintiffs, can also obtain economies of scale by joining their claims in a single lawsuit. Under California’s permissive joinder statute, Code of Civil Procedure section 378 (section 378), individuals may join in one action as plaintiffs if the following conditions are met:

(a)(1) They assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question of law or fact common to all these persons will arise in the action; or

(2) They have a claim, right, or interest adverse to the defendant in the property or controversy which is the subject of the action.

(b) It is not necessary that each plaintiff be interested as to every cause of action or as to all relief prayed for. Judgment may be given for one or more of the plaintiffs according to their respective right to relief.

This strategy of joining multiple persons in one action has been referred to as a “mass action” in some decisions involving numerous plaintiffs. (See Aghaji v. Bank of America, N.A. (2016) 247 Cal.App.4th 1110, 1113; Petersen v. Bank of America Corp . (2014) 232 Cal.App.4th 238, 240 ( Petersen ); cf. 28 U.S.C. § 1332(d)(11)(B) [federal definition of “mass action”].)

In Petersen , for example, 965 plaintiffs who borrowed money from Countrywide Financial Corporation in the mid-2000’s banded together and filed a single lawsuit against Countrywide and related entities. ( Petersen , supra , 232 Cal.App.4th at pp.  242-243.) The plaintiffs alleged Countrywide had developed a strategy to increase its profits by misrepresenting the loan terms and using captive real estate appraisers to provide dishonest appraisals that inflated home prices and induced borrowers to take loans Countrywide knew they could not afford. ( Id. at p. 241.) The plaintiffs alleged Countrywide had no intent to keep these loans, but to bundle and sell them on the secondary market to unsuspecting investors who would bear the risk the borrowers could not repay. ( Id. at pp. 241, 245.) Countrywide and the related defendants demurred on the ground of misjoinder of the plaintiffs in violation of section 378. The trial court sustained the demurrer without leave to amend and dismissed all plaintiffs except the one whose name appeared first in the caption. ( Id . at p. 247.) The Court of Appeal reversed and remanded for further proceedings. ( Id . at p. 256.)

Petersen resolved two questions. First, it concluded the operative pleading alleged wrongs arising out of “‘the same . . . series of transactions’” that would entail litigation of at least one common question of law or fact. ( Petersen, supra, 232 Cal.App.4th at p. 241.) The appellate court noted the individual damages among the 965 plaintiffs would vary widely, but the question of liability provided a basis for joining the claims in a single action. ( Id. at p. 253.) Second, the appellate court concluded “California’s procedures governing permissive joinder are up to the task of managing mass actions like this one.” ( Id. at p. 242.)

Consolidation

Code of Civil Procedure section 1048, subdivision (a) provides that, “[w]hen actions involving a common question of law or fact are pending before the court, it may order a joint hearing or trial of any or all the matters in issue in the actions; it may order all the actions consolidated and it may make such orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.” (See also Fed. Rules Civ.Proc., rule 42.)

There are two types of consolidation. The first is a consolidation for purposes of trial only, when the actions remain otherwise separate. The second is a complete consolidation or consolidation for all purposes, when the actions are merged into a single proceeding under one case number and result in only one verdict or set of findings and one judgment. ( Hamilton v. Asbestos Corp., Ltd. (2000) 22 Cal.4th 1127, 1147 ( Hamilton ).)

Consolidation is designed to promote trial convenience and economy by avoiding duplication of procedure, particularly in the proof of issues common to the various actions. (4 Witkin, Cal. Procedure (5th ed. 2008) Pleadings, § 341, p. 470.) Unless all parties in the involved cases stipulate, consolidation requires a written, noticed motion (Cal. Rules of Court, rule 3.350(a); Sutter Health Uninsured Pricing Cases (2009) 171 Cal.App.4th 495, 514), and is subject to the trial court’s discretion. ( Hamilton, supra, 22 Cal.4th at p. 1147.)

In a procedure somewhat similar to consolidation, under California Rules of Court, rule 3.300(a), a pending civil action may be related to other civil actions (whether still pending or already resolved by dismissal or judgment) if the matters “[a]rise from the same or substantially identical transactions, incidents, or events requiring the determination of the same or substantially identical questions of law or fact” or “[a]re likely for other reasons to require substantial duplication of judicial resources if heard by different judges.” ( Id. , rule 3.300(a)(2), (4).) An order to relate cases may be made only after service of a notice on all parties that identifies the potentially related cases. No written motion is required. ( Id ., rule 3.300(h)(1).) The Judicial Council provides a standard form for this purpose. When a trial court agrees the cases listed in the notice are related, all are typically assigned to the trial judge in whose department the first case was filed. ( Id ., rule 3.300(h)(1)(A).)

Related cases are not consolidated cases. Related cases maintain their separate identities but are heard by the same trial judge. Consolidated cases, in contrast, essentially merge and proceed under a single case number.

Coordination

Under Code of Civil Procedure section 404, the Chairperson of the Judicial Council is authorized to coordinate actions filed in different courts that share common questions of fact or law. (See Cal. Rules of Court, rule 3.500 et seq.) The principles underlying coordination are similar to those that govern consolidation of actions filed in a single court. (See Pesses v. Superior Court (1980) 107 Cal.App.3d 117, 123; see also 28 U.S.C. § 1407 [complex and multidistrict litigation].)

Thus, for example, in McGhan Med. Corp. v. Superior Court (1992) 11 Cal.App.4th 804 ( McGhan ), the plaintiffs petitioned for coordination of 300 to 600 breast implant cases pending in 20 different counties. Coordination was denied because the motion judge found that common questions did not predominate “in that the cases involve[d] different implants, different designs, different warnings, different defendants, different theories of defect, different modes of failure, and different injuries.” ( Id. at p. 808.) Among other factors, the trial court concluded that it was impractical to send hundreds of cases to a single county and that the benefits of coordination could be best achieved by voluntary cooperation among the judges in the counties where the cases were pending. ( Id. at p. 808, fn. 2.)

The Court of Appeal reversed in an interlocutory proceeding, ruling the trial court had misconceived the requirements of a coordinated proceeding. ( McGhan, supra, 11 Cal.App.4th at p. 811.) As the appellate court explained, Code of Civil Procedure section 404.7 gives the Judicial Council great flexibility and broad discretion over the procedure in coordinated actions. ( Id. at p. 812.) Thus, on balance, the coordinating judge would be better off confronting the coordination drawbacks (including difficulties arising from unique cases, discovery difficulties, multiple trials, the necessity of travel, and occasional delay) because the likely benefits (efficient discovery and motion practice) were so much greater. ( Id. at pp. 812-814.)

Civil Code section 954 states “[a] thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner.” The term “thing in action” means “a right to recover money or other personal property by a judicial proceeding.” (Civ. Code, § 953.) California’s Supreme Court has summarized these provisions by stating: “A cause of action is transferable, that is, assignable, by its owner if it arises out of a legal obligation or a violation of a property right. . . .” ( Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (2009) 46 Cal.4th 993, 1003.) The enactment of Civil Code sections 953 and 954 lifted many restrictions on assignability of causes of action. ( Wikstrom v. Yolo Fliers Club (1929) 206 Cal. 461, 464; AMCO Ins. Co. v. All Solutions Ins. Agency, LLC (2016) 244 Cal.App.4th 883, 891 ( AMCO ).)

Thus, California’s statutes establish the general rule that causes of action are assignable. ( AMCO, supra , 244 Cal.App.4th at pp. 891-892.) This general rule of assignability applies to causes of action arising out of a wrong involving injury to personal or real property. ( Time Out, LLC v. Youabian, Inc. (2014) 229 Cal.App.4th 1001, 1009; see also, e.g., Bush v. Superior Court (1992) 10 Cal.App.4th 1374, 1381 [“‘assignability of things [in action] is now the rule; nonassignability, the exception. . .’”].)

Although the assignment of claims on behalf of others to an assignee, or group of assignees, is not unique, it has not typically been used as a procedural vehicle for combining the claims of numerous plaintiffs. But, that’s not to say it can’t be done.

In fact, the United States Supreme Court has sanctioned such an approach. In Sprint Communications Co., L.P. v. APCC Services, Inc. (2008) 554 U.S. 269 ( Sprint ), approximately 1,400 payphone operators assigned legal title to their claims for amounts due from Sprint, AT&T, and other long-distance carriers to a group of collection firms described as “aggregators.” ( Id. at p. 272.) The legal issue presented to the United States Supreme Court was whether the assignees had standing to pursue the claims in federal court even though they had promised to remit the proceeds of the litigation to the assignor. ( Id . at p. 271.) The Court concluded the assignees had standing.

In support of its conclusion, the Court recognized the long-standing right to assign lawsuits:

. . . [C]ourts have long found ways to allow assignees to bring suit; that where assignment is at issue, courts — both before and after the founding — have always permitted the party with legal title alone to bring suit; and that there is a strong tradition specifically of suits by assignees for collection. We find this history and precedent ‘well nigh conclusive’ in respect to the issue before us: Lawsuits by assignees, including assignees for collection only, are ‘cases and controversies of the sort traditionally amenable to, and resolved by, the judicial process.’

( Sprint , supra , 554 U.S . at p. 285.)

On this basis, the Court concluded:

Petitioners have not offered any convincing reason why we should depart from the historical tradition of suits by assignees, including assignees for collection. In any event, we find that the assignees before us satisfy the Article III standing requirements articulated in more modern decisions of this Court.

( Sprint , supra , 554 U.S at pp. 285-286.)

The Court also considered the argument that the aggregators were attempting to circumvent the class-action requirements of Federal Rule of Civil Procedure 23. ( Sprint, supra, 554 U.S. at pp. 290-291.) The Court rejected this argument as a barrier to aggregation by assignment on the grounds that (1) class actions were permissive, not mandatory, and (2) “class actions constitute but one of several methods for bringing about aggregation of claims, i.e., they are but one of several methods by which multiple similarly situated parties get similar claims resolved at one time and in one federal forum. [Citations.]” ( Id. at p. 291.)

Granted, Sprint arose in the context of Article III, a “prudential standing” analysis. However, in reaching its decision that assignees had standing, the Court relied significantly on three California state decisions addressing assignment of rights under California law. (See Sprint, supra, 554 U.S. at pp. 294-296.)

Under California law, assignment of claims is not a panacea. Not all claims can be assigned. In California, assignment is not allowed for tort causes of action based on “wrongs done to the person, the reputation or the feelings of an injured party,” including “causes of action for slander, assault and battery, negligent personal injuries, seduction, breach of marriage promise, and malicious prosecution.” ( AMCO, supra , 244 Cal.App.4th at p. 892 [exceptions to assignment also include “legal malpractice claims and certain types of fraud claims”].) Other assignments are statutorily prohibited. (See, e.g., Civ. Code, § 2985.1 [regulating assignment of real property sales contracts]; Gov. Code, § 8880.325 [state lottery prizes not assignable].)

Likewise, because a right of action cannot be split, a partial assignment will require the joinder of the partial assignor as an indispensable party. (See, e.g., Bank of the Orient v. Superior Court (1977) 67 Cal.App.3d 588, 595 [“[W]here . . . there has been a partial assignment all parties claiming an interest in the assignment must be joined as plaintiffs . . . ”]; 4 Witkin, Cal. Procedure, supra, Pleadings, § 131(2), p. 198 [“If the assignor has made only a partial assignment, the assignor remains beneficially interested in the claim and the assignee cannot sue alone”].)

That said, California’s rules of law regarding standing and assignments do not prohibit an assignee’s aggregation of a large number of claims against a single defendant or multiple defendants into a single lawsuit. To the contrary, no limitations or conditions on this type of aggregation of assigned claims is imposed from other rules of law, such as California’s compulsory joinder statute. (See Sprint , supra , 554 U.S. at p. 292 [to address practical problems that might arise because aggregators, not payphone operators, were suing, district “court might grant a motion to join the payphone operators to the case as ‘required’ parties” under Fed. Rules Civ.Proc., rule 19].)

There are many procedural approaches to evaluate when seeking to combine the claims of multiple plaintiffs. Class actions and joinders are more traditional methods that trial counsel rely on to bring claims together. Although a largely unexplored procedural approach, assignment appears to be an expedient way of combining the claims of numerous plaintiffs. It avoids the legal requirements imposed for class actions and joinders, and it sidesteps a trial judge’s discretion regarding whether to consolidate, relate, or coordinate actions. Indeed, under the right circumstances, an assignment of claims might provide a means of bypassing class action waivers in arbitration agreements. Perhaps an assignment of claims should be added to the mix of considerations when deciding how to bring a case involving numerous plaintiffs with similar claims against a common defendant or set of defendants.

Judith Posner

Judith Posner is an attorney at Benedon & Serlin, LLP , a boutique appellate law firm.

Gerald Serlin

Gerald Serlin is an attorney at Benedon & Serlin, LLP , a boutique appellate law firm.

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Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages), get full access to this document with practical law.

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• Enhance productivity
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• Substantive Law
• 1 Scope of this note
• Effect of contractual prohibition on assignment
• 3 At what stage may a claim be assigned?
• 4 To whom can a cause of action be assigned?
• Legal assignment or equitable assignment?
• Requirements for a legal assignment
• Requirements for an equitable assignment
• Effect of consideration
• No loss occurring to assignee before assignment of claim
• General principles
• Exceptions to the rules on maintenance and champerty
• Security for costs
• Costs incurred by the assignor before the assignment
• Who is liable for costs awarded in favour of the defendant?
• Assignment of benefit and burden of solicitors' retainer
• When might an office-holder assign a claim?
• Who may assign a claim in insolvency?
• Claims capable of assignment by an office-holder
• Claims not capable of assignment by an office-holder
• Assignment of claims to an office-holder
• Potential liability of office-holder
• 10 Drafting an assignment of a cause of action
• Legal assignment
• Equitable assignment
• Assigning proceedings that have been commenced
• Counterclaims where a claim has been assigned

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CACI No. 326. Assignment Contested

Judicial council of california civil jury instructions (2023 edition).

© Judicial Council of California .

Page last reviewed May 2023

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California Supreme Court Overrules Existing Law on Assignment of Claims After Loss

On August 20, 2015, the California Supreme Court issued its unanimous opinion in Fluor Corp. v. Superior Court , Opinion No. S205889, an appeal from Fluor Corp. v. Superior Court (2012) 208 Cal.App.4th 1506, review granted and opinion superseded sub nom. Fluor Corp. v. S.C. (Cal. 2012) 149 Cal.Rptr.3d 675 (" Fluor ").  Petitioner Fluor Corporation asked the California Supreme Court to revisit its opinion in Henkel Corp. v. Hartford Accident and Indemnity Co. (2003) 29 Cal.4th 934 (" Henkel ").

Overruling Henkel , in an opinion written by Chief Justice Cantil-Sakauye, the Court unanimously sided with Fluor, holding that:

For the reasons set forth, Insurance Code section 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured's assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement.

The Court remanded the case to the Court of Appeal for proceedings consistent with the Court's opinion.

The State of the Law Prior to Fluor .

This dispute arises out of the enforceability of anti-assignment clauses that are commonly included in insurance policies.  A typical anti-assignment clause reads:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

Henkel addressed the issue of whether the insured conveyed its liability insurance policies by operation of law when it sold certain assets to a successor corporation, where those assets included liabilities (i.e., a chemical products business).  Claimants sued the successor corporation for personal injuries allegedly caused by the predecessor corporation's chemical products business.  The predecessor corporation's liability insurers refused to defend the claim against the corporate successor, contesting the assignment of the insurance policies.  The successor corporation sued the liability insurers for refusing to defend. 

Henkel held that anti-assignment clauses in liability insurance policies are enforceable except if:

(1) at the time of the assignment the benefit has been reduced to a claim for money due or to become due, or

(2) at the time of the assignment the insurer has breached a duty to the insured, and the assignment is of a cause of action to recover damages for that breach.

( Henkel at 945.)  In other words, with regard to a liability policy, a court will enforce an anti-assignment clause unless the claim has already been reduced to a judgment or settlement, or the insurer has committed an assignable breach.

Fluor's facts are nearly identical to Henkel's . A successor corporation seeks coverage for asbestos claims under a predecessor corporation's liability policies. ( Fluor at 528.)  The policyholder, seeking to avoid an anti-assignment clause, argues that Henkel was wrongly decided.  The policyholder argues that Henkel ignored California Insurance Code section 520, enacted in 1872, which states "[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss...."  In other words, Henkel appears to conflict with Insurance Code section 520. 

The Court of Appeal began its opinion by noting:

During the 130 years since its enactment, the 1872 statute has been cited only once. No one raised it in Henkel . This decision will be the second judicial opinion in the history of the state to even mention the statute, and the first to address it.  ( Id. )

After reviewing cases in both California and other states, the court of appeal concluded:

Here is the nub. The 1872 Legislature drew no bright lines and made no controlling pronouncements about liability insurance, or about how "loss" in the context of such policies is to be defined. We see nothing in Insurance Code section 520 or in Henkel to support Fluor–2's assumption that the Supreme Court would have reached a different result had the parties in that appeal briefed or argued the statute's applicability. In the absence of an express legislative directive, stare decisis controls.  ( Id . at 537.)

In sum, Henkel held that a policyholder can assign its rights, despite an anti-assignment clause, only after liability had been established (or a breach occurred).  Fluor Corporation argued, based on statute and on common law grounds, that a policyholder can assign its rights any time after a "loss" has occurred.  In the case of a liability policy, the "loss" is the event that triggers coverage under the policy (e.g., "bodily injury" or "property damage").

The California Court of Appeal in Flour sided with Hartford. The Court of Appeal concluded that section 520 does not apply to liability insurance. The appellate court further suggested that even assuming the statute applies to such policies, it should be construed to reflect the same rule articulated in Henkel .  On appeal to the California Supreme Court, Fluor argued against both propositions. 

The California Supreme Court's Opinion in Fluor .

In a unanimous decision written by the Chief Justice, the Supreme Court agreed with Fluor on both issues.  The Court, applying section 520, found that the statute applies to third party liability insurance, and that, properly construed in light of its relevant language and history, section 520 bars an insurer from refusing to honor an insured's assignment of policy coverage regarding injuries that predate the assignment.  The Court concluded that "It follows that the decision in Henkel, which assessed the proper application of a consent-to-assignment clause under common law principles, cannot stand in view of the contrary dictates of the controlling statutory provisions of section 520." (Slip Op. at 3.)

The Court concluded:

As further explained below, the rule embodied in section 520 is consistent with the overwhelming majority of cases decided before and since Henkel. The principle reflected in those cases — precluding an insurer, after a loss has occurred, from refusing to honor an insured's assignment of the right to invoke policy coverage for such a loss — has been described as a venerable one, borne of experience and practice, facilitating the productive transformation of corporate entities, and thereby fostering economic activity. ( Id .)

In short, after the Fluor decision the law in California is that courts will not enforce anti-assignment provisions in liability insurance policies after the loss has occurred.  With regard to standard occurrence-based liability policies, the "loss" is the coverage-triggering event, such as "property damage" or "bodily injury," and not the finding of liability.

Related Professionals

By Katie E. Brach

In the context of large construction defect litigation, we are seeing more partial settlement strategies involving assignments of claims.  The most common is when the Developer/General Contractor agrees as part of a partial global settlement to assign its indemnity claims against one or more of the Non-Settling Subcontractor Cross-Defendants to the Plaintiff.  In theory, this type of settlement arrangement is beneficial to both the Developer/General Contractor and the Homeowner/Association Plaintiff because it allows the General Contractor to settle out around a stubborn or non-contributing subcontractor without having exposure to the fees and costs associated with a voluntary dismissal of its Cross-Complaint, and it provides the Plaintiff with additional damage claims and an avenue for recovery of attorney’s fees under the assigned subcontract(s).  This type of settlement is also designed to put additional pressure on the non-settling Subcontractor(s) by leaving them exposed to the balance of Plaintiff’s and General Contractor’s claims and essentially placing them in the position of the “last defendant standing” in Plaintiff’s game of musical chairs.  While this strategy may have its advantages in pressuring global resolution, the procedural implications of such a deal (if not properly executed) can be problematic if the case ultimately proceeds to trial.  Therefore, it is important that counsel on both sides carefully consider the terms of any proposed settlement with an assignment before making such a commitment.

First, it is likely the settlement will need to be subject to the Court declaring it in good faith pursuant to Code of Civil Procedure section 877 et seq., which means that a valuation will have to be placed on the assignment. In the context of proving whether the settlement is in “good faith” pursuant to CCP §887.6, the value of the assigned rights is not necessarily going to be the total amount of recoverable damages assigned. In California, the Courts have approved valuations of assigned rights at 20% of the total recoverable value for those rights.   See   Erreca’s v. Superior Court , (1993) 19 Cal.App.4th 1475.  In  Errecas’s , the discounted value was deemed reasonable to account for unknown factors such as the cost of prosecuting the claims, the probability of prevailing on the claims, the likelihood of collecting on any potential judgment, and the increased difficulty in proving a negligence claim as opposed to a strict liability claim.  Id.  at 1496-1499. In addition to placing a value on the assignment, the monetary portion of the settlement will need to be allocated amongst Plaintiff’s claims in support of any good faith motion.  The allocations and value of the assignment will inevitably play a critical role down the road with respect to Plaintiff’s ultimate recovery against the Non-Settling Subcontractors on its direct claims, so Plaintiff and the Non-Settling Subcontractor(s) should be mindful of the arguments they make during the good faith process because those same arguments will apply to the potential off sets available in relation to future jury verdicts or judgments.

Second, if the General Contractor’s Cross-Complaint is being assigned to Plaintiff, all parties need to be cognizant of the application of the assignment, and change in party positions, with relation to the pleadings on file.  Pursuant to Cal. Code Civ. Proc. §368.5, when claims are assigned during a pending action, the action “may be continued in the name of the original party, or the court may allow the person to whom the transfer is made to be substituted in the action or proceeding.”  Therefore, Plaintiff has the option of continuing the prosecution of the General Contractor’s Cross-Complaint against the Non-Settling Subcontractors in the name of the General Contractor, or the Plaintiff can seek to be substituted in as Cross-Complainant in place of the General Contractor.  No action by the Court is required to continue a case in the name of the original party after an assignment of interest in the action.  Cleverdon v. Gray,  (1944) 62 Cal.App.2d 612, 616.  However, if the Plaintiff wants to be substituted in place of the General Contractor, the Plaintiff must bring a motion to the Court to obtain an order for the substitution and seek leave to file a supplemental Cross-Complaint to allege the assignment and substitution.  It is within the trial court’s discretion whether or not to allow the substitution.  Alameda County Home Inv. Co v. Whitaker,  (1933) 217 Cal. 231, 234.

Third, a change in counsel may be necessary and further actions by the General Contractor may be required. In the event of a transfer of interest in a pending action, the attorney for the nominal party/assignor does not automatically cease to be the attorney of record.  Casey v. Overhead Door Corp.,  (1999) 74 Cal.App.4th 112.  If the Plaintiff is going to continue to prosecute the Cross-Complaint in the name of the General Contractor, the Plaintiff’s attorney should substitute in as the attorney of record for the General Contractor (after Plaintiff dismisses its Complaint as to the General Contractor, of course). This is something that counsel for the General Contractor should discuss with his or her client when contemplating an assignment.  The General Contractor should be aware that Plaintiff’s Counsel, who was actively prosecuting claims against the General Contractor, could potentially become the General Contractor’s counsel of record. While control of the continued litigation of the Cross-Complaint will rest solely with the Plaintiff, the General Contractor remains a nominal party to the action with exposure to the potential entry of an adverse judgment against it.  Union Bank v. County of Los Angeles,  (1963) 223 Cal.App.2d 687.

Although the assignment will likely include an assumption by Plaintiff of all liability in connection with the continued prosecution of the Cross-Complaint, including responsibility for all orders and/or judgments entered for or against General Contractor, further legal action by the General Contractor may be required to enforce the provisions of the assignment in the event of an adverse ruling.  Conversely, further legal action by Plaintiff may be required to enforce the provisions of the assignment in the event General Contractor refuses to cooperate with Plaintiff’s requests for assistance in the form of witness testimony or documentation in support of the Cross-Complaint.

In short, an assignment of claims during the pendency of litigation can be a powerful tool in negotiating a settlement, but any counsel recommending an assignment must make sure they fully understand the terms of the assignment and advise their clients of the risks and benefits associated with such an agreement.  For more information regarding assignment of claims, contact Partner Katie Brach in LGC’s San Diego office.

Article III, Section 2, Clause 1:

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction; to Controversies to which the United States shall be a Party;—to Controversies between two or more States; between a State and Citizens of another State, between Citizens of different States,—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

An assignment of a legal claim occurs when one party (the “assignor” ) transfers its rights in a cause of action to another party (the “assignee” ). 1 Footnote Black’s Law Dictionary 136 (9th ed. 2009) (defining “assignment” as “the transfer of rights or property” ). The Supreme Court has held that a private litigant may have standing to sue to redress an injury to another party when the injured party has assigned at least a portion of its claim for damages from that injury to the litigant. The Supreme Court in the 2000 case Vermont Agency of Natural Resources v. United States ex rel. Stevens held that private individuals may have Article III standing to bring a qui tam civil action in federal court under the federal False Claims Act (FCA) on behalf of the federal government if authorized to do so. 2 Footnote 529 U.S. 765, 768, 778 (2000) . The FCA imposes civil liability upon “any person” who, among other things, knowingly presents to the federal government a false or fraudulent claim for payment. 3 Footnote 31 U.S.C. § 3729(a) . To encourage citizens to enforce the Act, in certain circumstances, a private individual, known as a “relator,” may bring a civil action for violations of the Act. Such plaintiffs sue under the name of the United States and may receive a share of any recovered proceeds from the action. 4 Footnote Id. § 3730(d)(1)–(2) . Under the FCA, the relator is not merely the agent of the United States but an individual with an interest in the lawsuit itself. 5 Footnote Vt. Agency of Nat. Res. , 529 U.S. at 772 ( “For the portion of the recovery retained by the relator . . . some explanation of standing other than agency for the Government must be identified.” ) (citing 31 U.S.C. § 3730 ).

Ordinarily, if the relator’s financial interest in the outcome of the case were merely a byproduct of the suit itself, there would be no injury sufficient for standing. 6 Footnote Id. at 772–73 ( “An interest unrelated to injury in fact is insufficient to give a plaintiff standing. . . . A qui tam relator has suffered no [invasion of a legally protected right]—indeed, the ‘right’ he seeks to vindicate does not even fully materialize until the litigation is completed and the relator prevails.” ) (citations omitted). The Supreme Court has held that a litigant’s interest in recovering attorneys’ fees or the costs of bringing suit by itself normally does not confer standing to sue. E.g. Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 107 (1998) ( “The litigation must give the plaintiff some other benefit besides reimbursement of costs that are a byproduct of the litigation itself.” ); Diamond v. Charles, 476 U.S. 54, 70–71 (1986) ( “[T]he mere fact that continued adjudication would provide a remedy for an injury that is only a byproduct of the suit itself does not mean that the injury is cognizable under Art. III.” ). In Stevens , however, the Supreme Court recognized a distinction that confers standing upon qui tam plaintiffs in FCA cases. Justice Antonin Scalia, writing for the Court, determined that assignments of claims are distinguishable from cases in which a litigant has a mere financial interest in the outcome of the suit because the assignee-plaintiff actually owns a stake in the dispute as a legal matter. 7 Footnote Vt. Agency of Nat. Res. , 529 U.S. at 773 . Justice Scalia drew support for this distinction from the long-standing historical practice of the government assigning a portion of its damages claim to a private party and allowing that party to assert the injury suffered by the federal government as a representative of the United States. 8 Footnote Id. at 774, 778 The Court noted the “long tradition of qui tam actions in England and the American colonies,” 9 Footnote Id. concluding that “Article III’s restriction of the judicial power to ‘Cases’ and ‘Controversies’ is properly understood to mean ‘cases and controversies of the sort traditionally amenable to, and resolved by, the judicial process.’” 10 Footnote Id. Although the Court held that the relator had standing to sue under the qui tam provision, it ultimately determined that the plaintiff could not maintain the action against a state agency for allegedly submitting false grant claims to the EPA because states were not “persons” subject to liability under the False Claims Act. Id. at 787 .

Eight years after deciding Stevens , the Supreme Court again found that an assignee of a claim had standing, even when the assignee had promised to remit all of the money it recovered in the proceedings to the assignor. 11 Footnote Sprint Commc’ns Co. v. APCC Servs., Inc. , 554 U.S. 269 , 271 (2008) . In Sprint Communications Co. v. APCC Services, Inc. , payphone operators had assigned their legal claims for money owed to them by long-distance communications carriers to third-party collection agencies. 12 Footnote Id. at 271–72 . The agencies were authorized to bring suit on behalf of the payphone operators and promised to pay all of the proceeds of the litigation to the payphone operators for a fee. 13 Footnote Id. at 272 . The Court held that these collection agencies had standing to pursue the operators’ claims because of the long history of courts’ acceptance of such claims. 14 Footnote Id. at 273–75 . The Court noted that “federal courts routinely entertain suits which will result in relief for parties that are not themselves directly bringing suit. Trustees bring suits to benefit their trusts; guardians ad litem bring suits to benefit their wards; receivers bring suit to benefit their receiverships; assignees in bankruptcy bring suit to benefit bankrupt estates; executors bring suit to benefit testator estates; and so forth.” Id. at 287–88 . Assignment was sufficient to transfer the injury to the collections agencies, and the injury to the operators that had been transferred to the collection agencies would be redressed by a favorable judicial decision, even if the agencies would subsequently pay all of the proceeds to the operators. 15 Footnote Id. at 286–87 ( “[I]f the [collection agencies] prevail in this litigation, the long-distance carriers would write a check to [them] for the amount of dial-around compensation owed. What does it matter what the [agencies] do with the money afterward?” ).

The Stevens and Sprint cases could have broader implications for Article III standing doctrine, as they suggest a way in which the constitutional limitations on standing may be bypassed through the assignment of rights to a third party. 16 Footnote See also ArtIII.S2.C1.6.4.3 Particularized Injury. For instance, if Congress enacts a federal statute recognizing an injury to the federal government that otherwise satisfies Article III’s requirements, it may assign a portion of its claim to a private party, thereby potentially giving that plaintiff standing to sue as a representative of the United States. 17 Footnote See Vt. Agency of Nat. Res. , 529 U.S. at 773 . This is essentially the operation of the False Claims Act. 18 Footnote 31 U.S.C. §§ 3729–3733 . However, it is unclear whether every such statute would necessarily resolve all Article III standing concerns. In Stevens and Sprint , the Court gave significant weight to the lengthy history of courts recognizing the types of assignments at issue when determining that the litigants in those cases had standing to sue. 19 Footnote See id. at 774, 778 ; Sprint Commc’ns Co. , 554 U.S. at 273–75 . Moreover, there may be a number of concerns about the constitutionality and practicality of using assignments to delegate core government functions (e.g., criminal prosecutions) to private parties when courts have not historically recognized claims based on such assignments, including concerns about interference with the Executive Branch’s Article II powers and prosecutorial discretion. 20 Footnote See Heather Elliott , Congress’s Inability to Solve Standing Problems , 91 B.U. L. Rev. 159 , 195–204 (2011) (questioning whether Congress’s assignment of claims to citizen suitors in order to confer standing would be constitutional or practical).

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Pruitt v. Fontana

C. D. PRUITT et al., Appellants, v. JOSEPH FONTANA, Respondent.

Wolver & Wolver for Appellants.

Voorhees, Stewart & Voorhees for Respondent.

Plaintiffs appeal from a judgment dismissing the action. The appeal has also been taken from orders striking their fourth amended complaint and denying their motion to permit the filing of such pleading.

On March 24, 1955, after demurrers to his original complaint and two amended pleadings had been sustained, plaintiff C. D. Pruitt filed his third amended complaint for damages for breach of contract comprising two causes of action. On April 14, 1955, a demurrer to this pleading was sustained and plaintiff was allowed 10 days to amend. On May 3, 1955, subsequent to the 10 days' leave period, a fourth amended complaint was filed, adding Citrus Homes as a party plaintiff. Three additional causes of action were included in this amended pleading. Defendant thereupon demurred to the fourth amended complaint and also filed a motion to strike the entire pleading. The motion to strike was made essentially on the ground that the fourth amended complaint "adds new and substantially different causes of action and new parties than were included in all prior complaints." No question of the late filing was raised. On May 20, 1955, the motion to strike was granted. [143 Cal. App. 2d 678]

On June 8, 1955, plaintiffs filed a notice of motion to reconsider the order striking the fourth amended complaint, and for leave to amend by filing the fourth amended complaint adding Citrus Homes as a new party plaintiff. The notice of motion was supported by an affidavit of plaintiff's attorney stating his recent research indicated (1) Citrus must be treated as a joint venturer with plaintiff; (2) that the agreement previously pleaded simply as a sales contract should be pleaded in the alternative as an option to purchase; and (3) the facts of the estoppel previously pleaded should be alleged in separate causes of action. The affidavit concluded that "failure to do so heretofore was the result of mistake, inadvertence or excusable neglect." On July 5, 1955, the motion to reconsider was granted. At the same time the court heard and denied plaintiff's motion for leave to file the fourth amended complaint. Defendant filed an application for dismissal under Code of Civil Procedure section 581, subdivision 3, for failure to amend the third amended complaint within the time allowed. This application was granted and the action dismissed.

It has been conceded on appeal that the question of the late filing of the fourth amended complaint is not before this court, since plaintiffs were granted additional time to file this pleading by oral stipulation of counsel. It is urged, however, (1) that plaintiffs' fourth amended complaint was properly stricken because it included a new party plaintiff and three additional causes of action without procuring leave of court; and (2) that in any event, the fourth amended complaint, like its predecessors, failed to allege a cause of action.

The Third Amended Complaint

The third amended complaint is in two counts. Count I alleges the following facts:

1. Defendant owned approximately 25 acres of property in Los Angeles County, subject to a $42,500 deed of trust, of which Mr. and Mrs. Gorman were beneficiaries. On April 10, 1952, plaintiff and J. A. Thompson fn. 1 entered into a written contract with defendant, as an unmarried man, for the purchase of this property for $78,986.25. The instrument was deposited in an escrow established that day to handle the transaction. Under the terms set forth in the instrument, which is pleaded only by its legal effect, the buyers were to [143 Cal. App. 2d 679] pay into escrow the sum of $1,200 per acre on or before May 1, 1953. The balance was to be paid in full on or before September 1, 1953. The land was to be taken subject to covenants, easements, etc., of record "to be approved by the buyers." It was also agreed that the buyers would pay the Gormans $17,500 and execute a second deed of trust to the Gormans, subordinate to after-acquired construction loans, for the amount of the balance due. The instrument was made contingent upon receiving approval of the Gormans to the transaction.

2. Prior to July 1, 1952, plaintiff deposited $6,000 into escrow, which was to remain his property until completion of the escrow.

3. Prior to the execution of the above writing, the buyers told defendant they were purchasing the land to subdivide it into lots under the California Subdivision Map Act, to construct homes thereon, and sell it as improved real property. It would therefore be necessary to have the property engineered and mapped and such maps approved for recordation as a subdivision by the proper governmental agencies. As a prerequisite to the approval of such maps, the property would have to be free of all easements not approved by the governmental agencies. In order for the buyers to cause the land to be improved, it would be necessary that the title be acceptable to lending institutions. The only covenants, easements, etc., which the buyer would approve would be those acceptable to the governmental agencies and lending institutions. Defendant thereupon stated that the land was not subject to any covenants, easements, rights of way, etc.

4. On April 14, 1952, a written amendment was executed by which the close of escrow was made to be the time the tract map was ready for filing, or not later than August 1, 1952.

5. On May 23, 1952, plaintiff learned that the land was subject to the following easements: (a) An easement over the east 40 feet thereof as a private road; (b) an easement to lay and maintain water pipes by Leffingwell Rancho, Inc., a corporation; (c) an easement to lay pipelines and incidental purposes to the Pacific Electric Railway, a corporation; (d) an easement over the north 7.5 feet of the southerly 19.30 feet for a pipeline not to exceed 16 inches in diameter to Industrial Fuel Supply Company, a corporation, and (e) the right to receive water by means of conduits and pipelines upon said land. [143 Cal. App. 2d 680]

6. Upon discovering these facts, plaintiff advised defendant of the existence of the above easements, and stated that with the exception of the one set forth under subparagraph (d) supra, he could not approve the easements.

7. On about July 1, 1952, plaintiff and defendant reached an oral agreement modifying their prior written understanding in the following particulars: (1) Plaintiff would accept the land subject to the Industrial Fuel Supply Company easement (5d, supra); (2) defendant would procure the removal of the other easements; (3) defendant would convey the land to plaintiff by a deed with policy of title insurance containing as exceptions only the approved easement, general and special taxes and two deeds of trust; (4) plaintiff would release $3,500 from escrow, this money to be paid the beneficiaries of the Gorman trust deed to prevent default under said deed and to obtain their consent to the transaction between the parties; and (5) the time for payment of the purchase price and close of escrow was continued until 10 months after the recordation of the subdivision maps.

8. On or about July 1, 1952, plaintiff released $3,500 from escrow, which was paid to the Gorman trust deed beneficiaries, in return for which defendant delivered to plaintiff a second deed of trust upon the property here involved to secure said sum. On October 11, 1952, the consent of the Gormans to the making of the sale on the terms described and to the execution of a new deed of trust to them in satisfaction of their existing deed of trust was obtained. At about the same time, defendant, as an unmarried man, executed and delivered into the escrow a deed to the property here in question.

9. Plaintiff, after accepting the easement of the Industrial Fuel Supply Company, "performed all of the conditions of said sale ... required of him" and made ready a subdivision map for presentation to the governmental agencies and recordation. However, defendant failed and refused to remove the remaining easements previously described as unacceptable. As a result of defendant's failure to remove the easements not accepted by plaintiff, the subdivision map could neither be presented to the governmental agencies nor recorded.

10. Subsequent to January 24, 1953, defendant sold and deeded the property here involved to a third party.

11. Between April 10, 1952, and January 24, 1953, plaintiff expended approximately $10,000 in doing the engineering and map work necessary for the preparation of the subdivision of the property. On or about January 24, 1953, the property had a reasonable market value of $200,000. [143 Cal. App. 2d 681]

The second count of the third amended complaint realleges all of the above facts. It then adds a single paragraph, alleging that at all times defendant was a married man; that the described realty was community property; that any conveyance thereof executed by defendant without his wife "would not be merchantable, nor would the same be acceptable as the title requisite to a subdivision by the [California] Department of Real Estate" and "would be voidable and subject to the provisions of section 172a of the Civil Code." The prayer is for damages for breach of contract.

As has been indicated, a demurrer to this pleading was sustained with leave to amend. Thereupon, a fourth amended complaint was filed.

The Fourth Amended Complaint

The fourth amended complaint is entitled "Breach of Contract, Breach of Option and Estoppel." Citrus Homes, Inc., is added as a party plaintiff, pursuant to an allegation that on May 1, 1952, it received an assignment of "a portion and part of [plaintiff's] right, title and interest" in the contract of sale and remains the holder thereof.

The fourth amended complaint, although containing five causes of action, is founded on the transaction previously described. Except for the introduction of the additional party plaintiff, it contains essentially a slight expansion of the facts, embraces an additional legal theory as a basis for relief, and alleges as separate causes of action the concept that defendant is estopped to deny the validity of the agreement for the sale of the property.

The first count of the fourth amended complaint is virtually in all respects a reiteration of the first count of the third amended complaint. Apart from the allegation of Citrus' interest as a partial assignee, the only new matter is an allegation (1) that plaintiffs approved and accepted two of the five easements, instead of merely one, these being the Industrial Fuel Supply easement (5d, supra) and an easement to lay and maintain water pipes held by Leffingwell Rancho, Inc. (5b, supra); (2) that the Leffingwell easement had been transferred to Harold and Reba Tracy, from whom on August 25, 1952, plaintiffs agreed to purchase for $7,500 three areas of land lying immediately adjacent to the property here in dispute for the purpose of obtaining such easement; and (3) that an additional $2,500 was expended for engineering and mapping the land purchased from Tracys for subdivision purposes. [143 Cal. App. 2d 682]

The second count of this pleading realleges virtually all of the facts of the first count, but describes the written agreement of the parties as an option to buy the property, and omits the allegations that said writing contained the provision that the land would be taken "subject to covenants, conditions, restrictions, reservations, rights, rights of way and easements, if any, appearing of record, and to be approved by the buyers." It is alleged that prior to August 1, 1952, plaintiffs exercised their option to purchase under the agreement as modified and "have performed all of the conditions of said option and purchase," except that the subdivision maps it had prepared could not be recorded because of defendant's failure to remove the easements from the property as agreed.

The third cause of action is simply a reiteration of the second cause of action of the third amended complaint, except for the addition of the new matter previously set out.

The fourth cause of action realleges the allegations of the first count and alleges that prior to plaintiffs' making of the expenditures of $3,500 to the Gormans, $12,500 for engineering and mapping, and $7,500 due under the contract of sale to the Tracys, defendant knew that these expenses would be incurred by plaintiffs and is therefore estopped to deny the validity of the agreement.

The fifth cause of action is also predicated on estoppel as above described but relates to the second count for breach of the option agreement.

Defendant's motion to strike the entire fourth amended complaint was based on the ground that it "adds new and substantially different causes of action and new parties than were included in all prior complaints ..." This motion was granted. Subsequently, the court, upon reconsideration of defendant's motion to strike the fourth amended complaint, denied the accompanying motion by plaintiffs for leave to file the fourth amended complaint. Plaintiffs assign these rulings as error upon their appeal from the judgment of dismissal. Their position is well taken.

No Distinct or Different Obligation is Alleged

[1] The governing rule is that where leave to amend is granted, plaintiff is not precluded from adding a new cause of action which supports recovery upon the original obligation sued upon under a different legal theory. (Barr v. Carroll, 128 Cal. App. 2d 23 [274 P.2d 717], collecting the authorities at pp. 26-33.) The inquiry is directed to "whether an [143 Cal. App. 2d 683] attempt is made to state facts which give rise to a wholly distinct and different legal obligation against the defendant." (Klopstock v. Superior Court, 17 Cal. 2d 13 , 20 [108 P.2d 906, 135 A.L.R. 318].) [2] A change of theory regarding the basis of recovery does not constitute a change of the cause of action or the introduction of a new and different action than the one originally alleged. (Wells v. Lloyd, 6 Cal. 2d 70 , 88 [56 P.2d 517].) The transaction complained of in the fourth amended complaint is substantially identical to the one set forth in the prior pleading. [3] The principal difference that appears is that the gravamen of count one is characterized as sounding for breach of contract of a sale in the third amended complaint, while the fourth amended complaint alleges virtually the same facts as also constituting breach of an option to purchase. This is merely pleading a different legal basis on which recovery may be predicated and not the injection of a distinct or different obligation as the foundation of liability. Similarly, the added facts upon which are based the allegations that defendant is estopped to assert any invalidity of the agreement do not introduce any new cause of action into the case. They are pleaded wholly in support of the fundamental obligation sued upon and primarily in anticipation of a defense that might otherwise be available to defendant on the face of the pleadings were they barren of such allegations. This type of elaboration of the facts is the legitimate office of the amendment of otherwise defective pleadings. As stated in Klopstock v. Superior Court, supra, at page 20, " 'The most common kinds of amendments are those in which complaints are amended that do not state facts sufficient to constitute a cause of action.' " While it would have been more exemplary practice to include the fourth and fifth causes of action as a part of the first and second counts, respectively, instead of separately realleging the latter counts and adding thereto the facts of estoppel, we are not here concerned with the question of surplusage which thus permeates the pleading, defendant's attack being directed to the issue of incorporation of new and distinct counts by amendment. As we have seen, this contention must fail.

Citrus Homes, Inc., Properly Joined

The fourth amended complaint discloses that Citrus Homes, Inc., was the transferee by written assignment of a portion of plaintiff Pruitt's interest in the transaction here involved. Having been given leave to amend, plaintiff was entitled to [143 Cal. App. 2d 684] join as a party plaintiff a partial assignee of the very obligation sued upon, for not only is there no prejudice sustained by defendant by such procedure but it is to his advantage to have his liability, on a single claim, adjudicated in one suit with all claimants parties to the litigation. (See 2 Witkin, Cal. Proc., §§ 55, 56, 83.) [4] Where there is no attempt to state a new and different cause of action in an amended complaint, but merely to add a partial assignee as a party plaintiff to secure a complete determination of the original cause of action, the amendment is proper. (See Curtis v. Nye & Nissen, 86 Cal. App. 507, 513 [261 P. 747].)

For the foregoing reasons, it was an abuse of discretion to strike plaintiff's fourth amended complaint and to deny him leave to file this pleading.

Sufficiency of Fourth Amended Complaint

It is contended that in any event the fourth amended complaint does not state a cause of action against the defendant, the alleged contract being illusory, and unenforceable under the statute of frauds. This position cannot prevail.

It will be observed at the outset that the written instrument executed by the parties relating to the sale of defendant's property provided that the land is to be taken subject to covenants, easements, etc., "to be approved by the buyers." There is nothing in the writing as pleaded which sets up any objective criterion which in any degree qualifies the buyer's right to withhold approval of any restrictions or easements appearing of record. The buyers are given unrestricted subjective discretion to determine for themselves whether they wish to approve the state of the title so far as existing covenants, conditions, easements, etc., are concerned. In Lawrence Block Co. v. Palston, 123 Cal. App. 2d 300 [266 P.2d 856], an analogous problem was considered with respect to the sale of an apartment building. The prospective purchaser, Neidorf, signed an offer in which he agreed to buy subject to "OPA rent statements to be approved by buyer" and "Subject to Buyer's inspection and approval of all apartments." The court held that the buyer's reservation of such untrammelled right of approval did not create a binding agreement but simply constituted an option to purchase. The court stated (p. 308): "These conditions had the effect of reserving to [Neidorf] the unrestricted discretion to decide whether to be bound or not, even in the event of an unqualified acceptance by the offeree. No standard or basis for these 'approvals' is established. No hint is given as to what criteria, [143 Cal. App. 2d 685] if any, are to determine whether the O.P.A. rent statements and all the apartments will be approved by the buyer ... By simply refusing to approve the O.P.A. statements or the apartments Neidorf could withdraw from the agreement. Actually, the Neidorf 'offer' was not an offer to enter into an agreement, but an offer to enter into an agreement if he later wished to do so. This illusory promise is the only offer that is submitted by plaintiff to defendant. When by the terms of an agreement the owner of property binds himself to sell on specified terms, and leaves it discretionary with the other party to the contract whether he will or will not buy, it constitutes simply an optional contract [citing cases]."

These statements apply with equal force to the instant case. Defendant offered to sell his property subject to easements, etc., of record. Plaintiffs did not bind themselves to accept such existing easements but reserved in themselves the right to approve any easements burdening the property. All that the contract amounted to here was an option to purchase defendant's property in the event plaintiffs were satisfied with and approved the existing burdens on the land and signified their acceptance. Until so accepted, the transaction between the parties was a mere nudum pactum. However, as the complaint alleges, plaintiffs were not so satisfied and informed defendant in May, 1952, that they could not approve all the easements of record. This, of course, constituted a rejection of the option. Plaintiffs, in turn, offered to proceed with the transaction if defendant would, among other things, agree to effect the removal of three of the easements which were unacceptable to them and extended time for payment of the purchase price until 10 months after the recordation of the subdivision maps. [5] Under the settled law, the exercise of an option must be unconditional and in accordance with its terms, and an attempt to exercise an option upon terms varying from those offered is tantamount to the rejection of the original offer and the making of a counteroffer. (Hayward Lbr. & Inv. Co. v. Construction Products Corp., 117 Cal. App. 2d 221 , 227 [255 P.2d 473]; Bourdieu v. Baker, 6 Cal. App. 2d 150 , 158 [44 P.2d 587].)

It is alleged in the pleading that in July, 1952, the parties orally agreed to a contract for the sale of defendant's property based on the terms previously incorporated in the writing, and further providing, in part, that plaintiff would accept two of the easements of record, that defendant would clear the three unacceptable easements and convey the land by [143 Cal. App. 2d 686] deed with policy of title insurance showing the land subject only to certain taxes and the accepted easements, that plaintiffs would release $3,500 from escrow to the Gormans to prevent a default under the trust deed, and that the time for close of escrow would be extended until 10 months after the recordation of the subdivision maps. The transaction being for a conveyance of property, the contract fell within the operation of the Statute of Frauds (Civ. Code, § 1624), which declares invalid an agreement for the sale of real property unless the contract, "or some note or memorandum thereof, is in writing, and subscribed by the party to be charged or by his agent." In Ellis v. Klaff, 96 Cal. App. 2d 471 , 476-477 [216 P.2d 15], the court states: "To be sufficient, the required writing must be one 'which states with reasonable certainty, (a) each party to the contract ... and (b) the land, goods or other subject-matter to which the contract relates, and (c) the terms and conditions of all the promises constituting the contract and by whom and to whom the promises are made' [citation]. Unless the writing, considered alone, expresses the essential terms with sufficient certainty to constitute an enforceable contract, it fails to meet the demands of the statute [citations]. Accordingly, where the statute of frauds, rather than the parol evidence rule is invoked, it follows that recovery may not be predicated upon parol proof of material terms omitted from the written memorandum, even though the oral understanding is entirely consistent with, and in no way tends to vary or contradict, the written instrument. [Citations.] In the words of the Supreme Court, 'The whole object of the statute would be frustrated if any substantive portion of the agreement could be established by parol evidence.' [Citation.]" Since, as we have seen, the original writing was merely an option which plaintiffs did not exercise according to its terms and since plaintiffs must rely on the oral terms subsequently agreed to in order to establish all the material provisions of the alleged contract, it is manifest that there exists no note or memorandum which contains all the essential terms of the agreement to render it enforceable under the statute of frauds. (Fritz v. Mills, 170 Cal. 449, 458 [150 P. 375]; Friedman v. Bergin, 22 Cal. 2d 535 , 539 [140 P.2d 1]; Ellis v. Klaff, supra.) [6] Where material or essential terms of a contract within the statute of frauds are not reasonably expressed in a note or memorandum, their absence may not be supplied by parol. (Friedman v. Bergin, supra; [143 Cal. App. 2d 687] Ellis v. Klaff, supra; Craig v. Zelian, 137 Cal. 105, 106 [69 P. 853].)

But conceding that the contract was within the statute of frauds and that the oral contract was invalid for want of a sufficient note or memorandum reflecting its material terms, defendant, under the circumstances of this case, is estopped to raise the bar of the statute. It is well settled that the facts of a particular case may bring into play an equitable estoppel against the party seeking to set up the statute of frauds and foreclose reliance thereon. (Seymour v. Oelrichs, 156 Cal. 782, 794-795 [106 P. 88, 134 Am.St.Rep. 154]; Le Blond v. Wolfe, 83 Cal. App. 2d 282 , 286 [188 P.2d 278]; Moore v. Day, 123 Cal. App. 2d 134 , 138 [266 P.2d 51].) [7] Succinctly stated, one facet of this principle provides that a defendant will be estopped to set up the bar of the statute whenever he has represented by his words or conduct, that he means to stand by the oral agreement of the parties, and the plaintiff has changed his position to his detriment in reliance thereon. (Seymour v. Oelrichs, supra; Le Blond v. Wolfe, supra; Kaye v. Melzer, 87 Cal. App. 2d 299 , 306 [197 P.2d 50].) It has found classic expression in the Seymour case, supra, where the court states: " 'The fraud most commonly treated as taking an agreement out of the statute of frauds is that which consists in setting up the statute against its enforcement, after the other party has been induced to make expenditures, or a change of situation in regard to the subject-matter of the agreement, or upon the supposition that it was to be carried into execution, and the assumption of rights thereby to be acquired; so that the refusal to complete the execution of the agreement is not merely a denial of rights which it was intended to confer, but the infliction of an unjust and unconscientious injury and loss. In such case, the party is held, by force of his acts or silent acquiescence, which have misled the other to his harm, to be estopped from setting up the statute of frauds ... The vital principle is that he who by his language or conduct leads another to do what he would not otherwise have done shall not subject such person to loss or injury by disappointing the expectations upon which he acted. Such a change of position is sternly forbidden. It involves fraud and falsehood, and the law abhors both.' " After an exhaustive examination of the authorities in which a defendant was estopped to assert the statute of frauds to defeat enforcement of an oral contract, the Supreme Court, in Monarco v. Lo Greco, 35 Cal. 2d 621 , 623-624 [220 P.2d [143 Cal. App. 2d 688] 737], couched the principles developed by the modern cases in the following language: "The doctrine of estoppel to assert the statute of frauds has been consistently applied by the courts of this state to prevent fraud that would result from refusal to enforce oral contracts in certain circumstances. Such fraud may inhere in the unconscionable injury that would result from denying enforcement of the contract after one party has been induced by the other seriously to change his position in reliance on the contract [citations], or in the unjust enrichment that would result if a party who has received the benefits of the other's performance were allowed to rely upon the statute. [Citations.] In many cases both elements are present. Thus not only may one party have so seriously changed his position in reliance upon, or in performance of, the contract that he would suffer an unconscionable injury if it were not enforced, but the other may have reaped the benefits of the contract so that he would be unjustly enriched if he could escape its obligations. [Citations.]"

The facts alleged in the pleading constitute a perfect case for the application of the doctrine of estoppel. [8] Accepting as we must the veracity of the allegations of the pleadings, including the statement that plaintiffs have performed all the conditions of the contract of sale, fn. 2 the following factual context emerges in both the first and second causes of action: The parties opened an escrow to consummate their transaction. When the oral agreement of July 1, 1952, was arrived at, plaintiffs released $3,500 from this escrow to the Gormans to avert default by defendant under the deed of trust. Defendant executed a second trust deed in favor of plaintiffs to secure this amount. In October, 1952, defendant deposited a deed in escrow, clearly susceptible of a representation by conduct that he proposed to stand upon the oral contract. Plaintiffs expended large sums of money in reliance on the contract for engineering work and the preparation of subdivision maps. Plaintiffs contracted to purchase land in order to remove an easement from the property. Plaintiffs complied with various obligations of the agreement, which included payment of $17,500 to the Gormans and the execution of a new [143 Cal. App. 2d 689] second deed of trust to them of approximately $25,000 in satisfaction of the outstanding deed of trust. In 1953, when the reasonable market value of the property was $200,000, a sum far in excess of the price agreed on by the parties, defendant sold the property to some third party. The aggregate effect of these facts is to establish an implied representation by defendant that he proposed to stand by the oral agreement, a substantially detrimental change of position by plaintiffs in pursuance of the contractual objectives induced by defendant's conduct; an unconscionable injury to plaintiffs if the oral agreement were not recognized as valid, and an unjust enrichment to defendant if he could escape its obligations. The elements of estoppel referred to in Monarco v. Lo Greco, supra, being present in copious measure, the oral contract is lifted out of the bar of the statute of frauds by the pleadings.

The fourth and fifth causes of action are essentially repetitious of the first and second counts, but add the allegation that defendant knew prior to plaintiffs' making the various expenditures alleged that such expenditures would be made and specifically invoked the doctrine of estoppel, only the facts of which are related in the previous counts. This added allegation aggravates a situation which, as has been shown, already cries loudly for the application of an estoppel, establishing as it does defendant's knowledge of and silent acquiescence in plaintiffs' severely disadvantageous change of position under the oral contract. Though a more adept pleading would incorporate these allegations into the first and second counts rather than encumbering the complaint with separate statements of estoppel, for present purposes we must hold that those counts sufficiently allege causes of action.

For the foregoing reasons, it is clear that the allegations of the first, second, fourth and fifth counts suffiicently allege a cause of action in plaintiffs. We do not decide, however, that these counts may not be subject to special demurrer, and the court may, in its discretion, require the clarification of uncertainties or ambiguities, if any, therein appearing. (See Stowe v. Fritzie Hotels, Inc., 44 Cal. 2d 416 , 425 [282 P.2d 890].)

Turning now to the third cause of action, we find, apart from a reallegation of the first count previously described, the addition of one paragraph which asserts that at all times mentioned defendant was married, that the land involved was community property, and that any conveyance thereof executed [143 Cal. App. 2d 690] by defendant without his wife would be unmerchantable, voidable under Civil Code, section 172a, and unacceptable as a title requisite to a subdivision by the California Division of Real Estate. This count adds no significant factor to the pleadings and is fundamentally a mere duplication of the first count. In its present posture, the third count essentially alleges that defendant in effect contracted to convey community property as if he had sole title to it. [9] It is well settled that a person may legitimately contract to sell real property which he does not own provided that when the time comes to furnish the title as agreed he is able to do so. (Wheat v. Thomas, 209 Cal. 306, 316 [287 P. 102]; Hanson v. Fox, 155 Cal. 106 [99 P. 489, 132 Am.St.Rep. 72, 20 L.R.A.N.S. 338]; Backman v. Park, 157 Cal. 607, 610 [108 P. 686, 137 Am.St.Rep. 153].) [10] Plaintiffs suggest that this count should be treated as the allegation of a perpetration of a fraud upon them. But this count cannot be viewed in such light, there being not the slightest intimation in the complaint that plaintiffs were purporting to state a count sounding in fraud. Not only is the complaint entitled "Breach of Contract, Breach of Option and Estoppel" (which, of course, standing alone, is not controlling), but it is conspicuous in not once using the words fraud, fraudulent, misrepresentation, or any other term implying deceit in describing defendant's conduct. As stated in Anderson v. Willson, 48 Cal. App. 289, 294 [191 P. 1016]: "[Defendant's] contract will not be held fraudulent ... by virtue of the mere fact that, when he made it, he did not have the title that he agreed to pass to his vendee." Furthermore, this count has other obvious and basic defects as a pleading of fraud. There are no allegations that plaintiffs did not know defendant was a married man, that they were ignorant that the property in question was community property or that they relied on any misrepresentation made by defendant regarding ownership of the land or the state of the title. (Senter v. Monroe, 77 Cal. 347, 350 [19 P. 580].) There is no indication or allegation that defendant would not or could not obtain his wife's agreement to the conveyance of the alleged community property or that he would not obtain a conveyance of her interest in the property to himself prior to the time fixed for performance. Furthermore, there is no showing in the pleading of any damage sustained as a direct result of any misrepresentation by defendant (Woodson v. Winchester, 16 Cal. App. 472, 476 [117 P. 565]; Swasey v. de L'Etanche, 17 Cal. App. 2d 713 , 719 [ 143 Cal. App. 2d 691 ] [62 P.2d 753]); the only damage alleged is that flowing from a breach of contract rather than from the practice of an actionable fraud. For the various reasons pointed out, the third count is fatally deficient as sounding in fraud, and mere surplusage in any other sense.

The judgment of dismissal and the order striking plaintiffs' complaint are reversed, with directions that the trial court entertain proceedings in accord with the views here expressed. The order denying plaintiffs' leave to file their fourth amended complaint being nonappealable, the attempted appeal therefrom is dismissed.

Moore, P. J., and Ashburn, J., concurred.

FN 1. Thompson subsequently assigned his interest to plaintiff.

FN 2. Except for full payment of the purchase price, which was not due until 10 months after recordation of the maps. Recordation was prevented by defendant's failure to remove the easements. "Defendant having excluded by its own remissness the materialization of the contractual objectives, it cannot take advantage of such act to defeat its liability to plaintiff." (Richardson v. Walter Land Co., 118 Cal. App. 2d 459 , 464 [282 P.2d 42].)

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When Assigning the Right to Pursue Relief, Always Remember to Assign Title to, Or Ownership in, The Claim

• Posted on: Oct 4 2016

Whether a party has standing to bring a lawsuit is often considered through the constitutional lens of justiciability – that is, whether there is a “case or controversy” between the plaintiff and the defendant “within the meaning of Art. III.” Warth v. Seldin, 422 U.S. 490, 498 (1975). To have Article III standing, “the plaintiff [must have] ‘alleged such a personal stake in the outcome of the controversy’ as to warrant [its] invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on [its] behalf.” Id. at 498–99 (quoting Baker v. Carr , 369 U.S. 186, 204 (1962)).

To show a personal stake in the litigation, the plaintiff must establish three things: First, he/she has sustained an “injury in fact” that is both “concrete and particularized” and “actual or imminent.” Lujan v. Defenders of Wildlife , 504 U.S. 555, 560 (1992) (internal quotation marks omitted). Second, the injury has to be caused in some way by the defendant’s action or omission. Id . Finally, a favorable resolution of the case is “likely” to redress the injury. Id . at 561.

When a person or entity receives an assignment of claims, the question becomes whether he/she can show a personal stake in the outcome of the litigation, i.e. , a case and controversy “of the sort traditionally amenable to, and resolved by, the judicial process.’” Sprint Commc’ns Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 285 (2008) (quoting Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 777–78 (2000)).

To assign a claim effectively, the claim’s owner “must manifest an intention to make the assignee the owner of the claim.” Advanced Magnetics, Inc. v. Bayfront Partners, Inc. , 106 F.3d 11, 17 (2d Cir. 1997) (internal quotation marks and brackets omitted). A would-be assignor need not use any particular language to validly assign its claim “so long as the language manifests [the assignor’s] intention to transfer at least title or ownership , i.e., to accomplish ‘a completed transfer of the entire interest of the assignor in the particular subject of assignment.’” Id. (emphasis added) (citations omitted). An assignor’s grant of, for example, “‘the power to commence and prosecute to final consummation or compromise any suits, actions or proceedings,’” id. at 18 (quoting agreements that were the subject of that appeal), may validly create a power of attorney, but that language would not validly assign a claim, because it does “not purport to transfer title or ownership” of one. Id.

On September 15, 2016, the New York Appellate Division, First Department, issued a decision addressing the foregoing principles holding that one of the plaintiffs lacked standing to assert claims because the assignment of the right to pursue remedies did not constitute the assignment of claims.  Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 2016 NY Slip Op. 06051.

BACKGROUND :

Cortlandt involved four related actions in which the plaintiffs – Cortlandt Street Recovery Corp. (“Cortlandt”), an assignee for collection, and Wilmington Trust Co. (“WTC”), an indenture trustee – sought payment of the principal and interest on notes issued in public offerings. Each action alleged that Hellas Telecommunications, S.a.r.l. and its affiliated entities, the issuer and guarantor of the notes, transferred the proceeds of the notes by means of fraudulent conveyances to two private equity firms, Apax Partners, LLP/TPG Capital, L.P. – the other defendants named in the actions.

The defendants moved to dismiss the actions on numerous grounds, including that Cortlandt, as the assignee for collection, lacked standing to pursue the actions. To cure the claimed standing defect, Cortlandt and WTC moved to amend the complaints to add SPQR Capital (Cayman) Ltd. (“SPQR”), the assignor of note interests to Cortlandt, as a plaintiff. The plaintiffs alleged that, inter alia , SPQR entered into an addendum to the assignment with Cortlandt pursuant to which Cortlandt received “all right, title, and interest” in the notes.

The Motion Court granted the motions to dismiss, holding that, among other things, Cortlandt lacked standing to maintain the actions and that, although the standing defect was not jurisdictional and could be cured, the plaintiffs failed to cure the defect in the proposed amended complaint. Cortlandt St. Recovery Corp. v. Hellas Telecom., S.à.r.l. , 47 Misc. 3d 544 (Sup. Ct., N.Y. Cnty. 2014).

The Motion Court’s Ruling

As an initial matter, the Motion Court cited to the reasoning of the court in Cortlandt Street Recovery Corp. v. Deutsche Bank AG, London Branch , No. 12 Civ. 9351 (JPO), 2013 WL 3762882, 2013 US Dist. LEXIS 100741 (S.D.N.Y. July 18, 2013) (the “SDNY Action”), a related action that was dismissed on standing grounds.  The complaint in the SDNY Action, like the complaints before the Motion Court, alleged that Cortlandt was the assignee of the notes with a “right to collect” the principal and interest due on the notes. As evidence of these rights, Cortlandt produced an assignment, similar to the ones in the New York Supreme Court actions, which provided that as the assignee with the right to collect, Cortlandt could collect the principal and interest due on the notes and pursue all remedies with respect thereto. In dismissing the SDNY Action, Judge Oetken found that the complaint did not allege, and the assignment did not provide, that “title to or ownership of the claims has been assigned to Cortlandt.” 2013 WL 3762882, at *2, 2013 US Dist. LEXIS 100741, at *7. The court also found that the grant of a power of attorney (that is, the power to sue on and collect on a claim) was “not the equivalent of an assignment of ownership” of a claim. 2013 WL 3762882 at *1, 2013 US Dist. LEXIS 100741 at *5. Consequently, because the assignment did not transfer title or ownership of the claim to Cortlandt, there was no case or controversy for the court to decide ( i.e. , Cortlandt could not prove that it had an interest in the outcome of the litigation).

The Motion Court “concur[red] with” Judge Oeken’s decision, holding that “the assignments to Cortlandt … were assignments of a right of collection, not of title to the claims, and are accordingly insufficient as a matter of law to confer standing upon Cortlandt.”  In so holding, the Motion Court observed that although New York does not have an analogue to Article III, it is nevertheless analogous in its requirement that a plaintiff have a stake in the outcome of the litigation:

New York does not have an analogue to article III. However, the New York standards for standing are analogous, as New York requires “[t]he existence of an injury in fact—an actual legal stake in the matter being adjudicated.”

Under long-standing New York law, an assignee is the “real party in interest” where the “title to the specific claim” is passed to the assignee, even if the assignee may ultimately be liable to another for the amounts collected.

Citations omitted.

Based upon the foregoing, the Motion Court found that Cortlandt lacked standing to pursue the actions.

Cortlandt appealed the dismissal. With regard to the Motion Court’s dismissal of Cortlandt on standing grounds, the First Department affirmed the Motion Court’s ruling, holding:

The [IAS] court correctly found that plaintiff Cortlandt Street Recovery Corp. lacks standing to bring the claims in Index Nos. 651693/10 and 653357/11 because, while the assignments to Cortlandt for the PIK notes granted it “full rights to collect amounts of principal and interest due on the Notes, and to pursue all remedies,” they did not transfer “title or ownership” of the claims.

The Takeaway

Cortlandt limits the ability of an assignee to pursue a lawsuit when the assignee has no direct interest in the outcome of the litigation. By requiring an assignee to have legal title to, or an ownership interest in, the claim, the Court made clear that only a valid assignment of a claim will suffice to fulfill the injury-in-fact requirement. Cortlandt also makes clear that a power of attorney permitting another to conduct litigation on behalf of others as their attorney-in-fact is not a valid assignment and does not confer a legal title to the claims it brings. Therefore, as the title of this article warns: when assigning the right to pursue relief, always remember to assign title to, or ownership in, the claim.

Tagged with: Business Law

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Post-loss Assignment of Claims in California

In a prior blog , I discussed the California Supreme Court’s decision in Fluor Corporation v. Superior Court , 1 regarding the post-loss assignment of insurance benefits. In Fluor , the California Supreme Court held that section 520 of California’s Insurance Code prohibits insurance companies from refusing to honor post-loss assignments of benefits, regardless of whether the assigned benefits (a) had accrued at the time of the assignment ( i.e ., constituted “Noncontingent Benefits”), or (b) had not yet accrued but could accrue if additional events occurred or additional conditions satisfied ( i.e. , constituted “Contingent Benefits”).

Within days of the California Supreme Court’s decision in Fluor , an affiliate of Hartford Accident & Indemnity Company, which was effectively the “losing” party in Fluor , relied on the decision in Fluor to obtain a victory in a (federal) District Court case that also concerned a post-loss assignment of rights pertaining to an insurance policy. In Hartford Casualty Insurance Company v. Fireman’s Fund Insurance Company , 2 Hartford Casualty sued Fireman’s Fund on its own behalf and as the assignee of three of Fireman’s policyholders. Hartford had issued a business liability policy to one of the Fireman’s policyholders, Herndon Partners. Herndon was owned by another of Fireman’s policyholders, Paul Owhadi. For its part, Fireman’s had issued (1) a homeowner’s policy to Mr. Owhadi, under which Herndon Partners was named as an additional insured, and (2) an excess liability policy to Mr. Owhadi and the third policyholder, Susan Owhadi.

Fireman’s excess policy contained exclusions for business activity, business property, and workers compensation. The Fireman’s Fund policies also contained a clause which stated, “Assignment of this policy or a claim will not be valid unless we give our written consent.” 3

All of the policies covered, or seemed to cover, the property on which a worker was electrocuted and died. At the time of the death, the property was owned solely by Herndon Partners. Hartford defended Herndon in the wrongful death lawsuit that followed but Fireman’s Fund denied coverage because Herndon was not a named insured under either of its policies. Fireman’s also raised the business exclusions in its excess policy as grounds for denying coverage under that policy.

After an $8.8 million judgment was entered against Herndon, all three of the policyholders assigned to Hartford, “claims against Fireman’s Fund related to the wrongful death lawsuit and the two Fireman’s Fund policies.” 4 Hartford then filed a complaint against Fireman’s Fund for indemnity, contribution, professional negligence, declaratory judgment, and reformation of the Fireman’s Fund policies. Specifically, Hartford alleged that Fireman’s Fund knew that the property was owned by Herndon and that it was a rental property. Therefore, according to Hartford, Fireman’s policies should be “reformed” to delete the business exclusions and name Herndon as an insured.

Fireman’s moved to dismiss the reformation claim alleging that Hartford lacked standing to bring that claim because (1) Fireman’s policies expressly prohibited the assignment of claims without its consent, and (2) the California Supreme Court’s decision in Fluor did not apply to the reformation claim because a reformation claim does not seek “defense or indemnification coverage.” 5

The District Court rejected Fireman’s arguments, holding that under section 520 of California’s Insurance Code and the California Supreme Court’s decision in Fluor , the clause in Fireman’s policies that prohibited assignments was void regarding post-loss assignments. 6 The District Court also held that section 520 “applies broadly” and protected Hartford’s cause of action for reformation. 7, 8

The decision in Hartford is significant to the degree it suggests that the courts in California may interpret and apply section 520 broadly to post-loss assignments that pertain to rights or benefits under an insurance policy, including legal rights and causes of action not set forth in the policy. While the decision in Hartford pertained specifically to liability policies, neither the language of section 520 nor any court decisions I have found appear to limit the statute’s application to liability policies.

Determining the validity of an assignment pertaining to an insurance claim or policy always begins with an analysis of the terms of both the policy and the assignment. Before making any major decisions concerning an assignment, policyholders should seek independent professional advice and, when applicable, obtain multiple bids or offers from prospective assignees or purchasers of the assigned rights. ____________ 1 Fluor Corp. v. Superior Court , 61 Cal.4th 1175, 354 P.3d 302 (Cal. 2015) . 2 Hartford Cas. Ins. Co. v. Fireman’s Fund Ins. Co. , 2015 WL 5168643 (N.D. Calif. Sept. 3, 2015) . 3 Id. , fn. 3 (emphasis added). 4 The decision in Hartford does not specify what claims were assigned or how they were described in the assignment. 5 According to the opinion in Hartford , the quoted language was drawn from the Fluor decision by Fireman’s Fund. Partly because that phrase is found in multiple locations in the Fluor decision, it is not clear which instance of the phrase Fireman’s Fund was referring to. However, I believe the quotation is from the Supreme Court’s closing paragraph in Fluor : “For the reasons set forth, Insurance Code 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement.” [Emphasis added.] 6 Id. , *4 (“Thus, under Insurance Code § 520, the clause prohibiting the assignment of claims against Fireman’s Fund is void”). 7 Id. (“Nothing in the text of Insurance Code § 520 limits its applicability to only claims involving ‘defense or indemnification.’”). 8 Section 520 states, in its entirety, “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.”

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What is “Assignment” of a Bad Faith Claim?

When an insurance company fails to settle a claim within its insured’s policy limits (despite a reasonable likelihood that a verdict will exceed those policy limits), the insurance company may be exposed to a claim for bad faith. 

Under the law, an insurance company has a duty to give fair consideration to the rights of its insured when considering a settlement offer. 

Let’s say an insurance company fails to consider its policyholder’s rights in deciding whether to accept a reasonable settlement offer. As a result, the policyholder’s assets are exposed to a judgment in excess of their insurance protection. In this situation, the policyholder may have a bad faith claim against the insurance company.  

For example, a driver of a vehicle who is insured with a policy limit of $100,000 causes an accident that results in over $300,000 in damages to the other driver.  The injured driver wants to settle the case for the $100,000 limit, but the at-fault driver’s insurance company refuses to accept the offer without a reasonable basis for doing so.

The case then proceeds to trial and results in a verdict far exceeding the amount of the coverage available, jeopardizing the policyholder’s personal assets.  In that situation, the policyholder is personally on the hook for $200,000 when their insurance company should have ensured they paid nothing out of pocket. 

If there is a reasonable likelihood of an excess verdict, like when the injured claimant’s medical bills exceed the policy limit, and the insurer still fails to settle the claim, the insurance company has breached its duty of good faith to its policyholder. 

In this situation, the policyholder has the right to bring a cause of action against the insurer, not the injured driver, for the amount of the excess verdict. The policyholder had a contractual relationship with the insurer, and the policyholder is obligated to compensate the injured victim.  Technically, it is the insured who was wronged through their relationship with the insurer.  Thus, the bad faith claim belongs to the insured. 

How does the injured victim get compensated?

Only a small minority of states allow the injured third-party to bring a bad faith action directly against the insurance company. However, in many jurisdictions, including Illinois, the policyholder can transfer, or “assign,” their right to pursue the bad faith claim against the insurer to the injured victim. 

Often, the policyholder will trade their rights to prosecute the bad faith claim, in exchange for an agreement not to execute the judgment against the policyholder’s assets.   Essentially, they trade their case against the insurance company for relief from the judgment.  The assignment of a bad faith claim can be accomplished by a voluntary agreement or may be compelled by an order of the court. 

What happens when an insurance company refuses to defend its policyholder?

Sometimes, an insurance company may refuse to defend its insured in a third-party claim by an injured party.  Insurers may claim that there is no coverage for an occurrence for whatever reason, and because there is no covered event, there is no duty to defend the insured. 

Some courts find that, where an insurer improperly refuses to represent its insured, the insured may settle the claim on their own, directly with the injured claimant, and then seek reimbursement from the insurance company. [i]  

This is often true, even if the policy precludes settlements made without the insurance company’s consent. [ii]   Often where this is the rule, an insured can agree to have a judgment entered against them for a certain amount, and then assign the bad faith claim connected to that judgment to the injured victim. 

In summary, even though a third-party claimant will most likely be unable to pursue a claim for bad faith directly against the offending insurance company, compensation for the injured victim can often be awarded via assignment of the insured’s bad faith claim. 

[i] See, e.g. Ansonia Assoc. Ltd. P’ship v. Pub. Serv. Mut. Ins. Co., 693 N.Y.S.2d 386, 389 (1998)

[ii] See Id.

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• Practical Law

Assignment of a claim or cause of action

Practical law uk practice note 1-522-7861  (approx. 32 pages).

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