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Case Briefs
'Affirm and Sue' Trial Strategy Barred in CA
The 1994 Northridge, CA, earthquake caused damage to property owned by the Village Northridge Homeowners Association (“Village Northridge”). Village Northridge turned to its insurer, State Farm Fire and Casualty Company (“State Farm”), for coverage. In November 1999, although both parties disputed the policy limits and the amount of money owed, they negotiated a compromise settlement of the claim. Under the settlement, State Farm agreed to pay certain monies to Village Northridge, and Village Northridge released State Farm from all known or unknown claims related in any way to Village Northridge's earthquake claim.
In 2001, after the California Legislature revived certain insurance claims arising from the Northridge earthquake that the statute of limitations otherwise barred, Village Northridge sued State Farm. Village Northridge claimed that State Farm fraudulently induced Village Northridge to settle the claim for less than it was worth under the policy. Village Northridge sought to take advantage of the general contract rule that a party to a contract may elect to affirm a contract and sue for fraud. Specifically, Village Northridge sought to keep the settlement proceeds paid by State Farm and to pursue State Farm for additional monies. State Farm, on the other hand, argued that Village Northridge was required to rescind the prior settlement agreement and return the settlement proceeds it obtained as a condition precedent to bringing a fraud action.
The Los Angeles Superior Court sustained State Farm's demurrer. The Court of Appeal reversed, holding that Village Northridge could affirm the prior settlement, keep the settlement proceeds and sue for fraud. The California Supreme Court disagreed with the Court of Appeal, and remanded the matter for reconsideration in light of the court's reasoning. Village Northridge Homeowners Ass'n v. State Farm Fire & Cas. Co., __ Cal. Rptr. 3d __, 2010 WL 3385385 (Cal. 2010)
The California Supreme Court held that, unlike the law in certain other states, it has long been the law in California that if a party believes it has been fraudulently induced to release a disputed claim, the aggrieved party must rescind that contract and offer to restore the consideration received, if any. According to the California Supreme Court, it would inhibit insurance companies' practice of using a release as a settlement device if Village Northridge were permitted to settle with State Farm and sign a release, keep the money, and then sue State Farm without rescinding the settlement.
The California Supreme Court further noted that California law permits a party who has received benefits by reason of a contract that is subject to rescission to delay the restoration of such benefits until final judgment unless such delay is substantially prejudicial to the other party. The California Supreme Court stated that had Village Northridge sued for rescission of its release under the statutory scheme governing rescission, it may have had the opportunity to delay restoration of the consideration it received in settling the property damage matter. Instead, Village Northridge proceeded under an “affirm and sue” trial strategy that is barred in California by statute and existing precedent.
Chet A. Kronenberg, a partner at Simpson Thacher & Bartlett LLP, contributed this month's case brief.
'Affirm and Sue' Trial Strategy Barred in CA
The 1994 Northridge, CA, earthquake caused damage to property owned by the Village Northridge Homeowners Association (“Village Northridge”). Village Northridge turned to its insurer,
In 2001, after the California Legislature revived certain insurance claims arising from the Northridge earthquake that the statute of limitations otherwise barred, Village Northridge sued
The Los Angeles Superior Court sustained
The California Supreme Court held that, unlike the law in certain other states, it has long been the law in California that if a party believes it has been fraudulently induced to release a disputed claim, the aggrieved party must rescind that contract and offer to restore the consideration received, if any. According to the California Supreme Court, it would inhibit insurance companies' practice of using a release as a settlement device if Village Northridge were permitted to settle with
The California Supreme Court further noted that California law permits a party who has received benefits by reason of a contract that is subject to rescission to delay the restoration of such benefits until final judgment unless such delay is substantially prejudicial to the other party. The California Supreme Court stated that had Village Northridge sued for rescission of its release under the statutory scheme governing rescission, it may have had the opportunity to delay restoration of the consideration it received in settling the property damage matter. Instead, Village Northridge proceeded under an “affirm and sue” trial strategy that is barred in California by statute and existing precedent.
Chet A. Kronenberg, a partner at
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