The California Supreme Court has created a potential hazard for defense attorneys who settle a case without addressing costs and fees in their settlement agreements. On March 10, 2016, in the case of Desaulles v. Community Hospital of the Monterey Peninsula, the Court found that when a defendant pays money to settle a case, a plaintiff receives a net monetary recovery and is therefore entitled to costs as the prevailing party under California Code of Civil Procedure section 1032. This holding overturned Chinn v. KRP Property Management (2008), 166 Cal App 4th 175, which held the defendant is the prevailing party when a monetary settlement results in a dismissal.

Under Code of Civil Procedure section 1032 the prevailing party in a lawsuit is entitled to recover her costs. The term “prevailing party” includes both “the party with a net monetary recovery” and “a defendant in whose favor a dismissal is entered.” (C.C.P. 1032(a)(4)) The question before the Supreme Court was when a defendant pays a monetary settlement in exchange for a dismissal, which party, if any, should be considered the prevailing party. The language of Section 1032 would appear to make both parties the prevailing party since a settlement typically results in both a monetary payment to the plaintiff and a dismissal in the defendant’s favor.

In its opinion, the Court first concluded that a plaintiff who receives a monetary settlement receives a net monetary recovery and is therefore a prevailing party entitled to her costs. The Court then considered the circumstances where “a defendant in whose favor a dismissal is entered” would be considered the prevailing party. The Court found that this portion of the statute only applied to defendants who are voluntarily dismissed by a plaintiff without paying any money.

The Court was careful to note that its holding creates a default rule that applies only where the settling parties do not otherwise agree to an allocation of their costs. Thus the takeaway from Desaulles is that a defendant negotiating a monetary settlement will pay plaintiff's litigation costs unless the final settlement agreement between the parties states otherwise.

Nathaniel Lucey is an attorney in the San Jose office. He can be reached at 408.286.0880 ornlucey@ericksenarbuthnot.com.