$8 million default judgment for car manufacturer's discovery violations

By A. Janay Ferguson

A car manufacturer’s discovery abuses justified an $8 million default judgment against it, the Washington Supreme Court recently held.

In Magana v. Hyundai Motor America, No. 80922-4 (Nov. 25, 2009), Jesse Magana was a passenger in a 1996 Hyundai Accent. An oncoming truck appeared to be in their lane. The Hyundai driver swerved to avoid it, veered off the road, hit several trees, and spun violently. Magana was thrown from the car and was rendered a paraplegic.

Magana sued Hyundai and both drivers. He alleged that a design defect in the Hyundai allowed the seat to collapse. During discovery, Magana requested many documents from Hyundai concerning other complaints or incidents involving the failure of seat backs. Hyundai objected, refused to answer directly, and reworded the requests so as to limit their scope. At trial, the jury awarded Magana $8 million.

Hyundai appealed. The Court of Appeals reversed and ordered a new trial based on inadequate jury instructions. Because the first jury had been properly instructed as to damages, the Court of Appeals left the amount of the jury’s $8 million intact and ordered that the new trial be limited to whether Hyundai was liable.

On remand, the trial court ordered Hyundai to produce a wide range of documents concerning consumer complaints and lawsuits over failure of seat backs like the one in Magana’s accident. Hyundai then produced a large number of documents that it had never produced before, more than five years after the lawsuit had begun.

Magana argued that Hyundai had produced many of these documents too late and that evidence of consumer complaints the documents identified had been lost. Despite its many objections to the discovery requests, Hyundai had never moved for a protective order that would permit it to avoid answering. The trial court conducted a lengthy evidentiary hearing on the discovery dispute. The trial trial court found that Hyundai’s discovery responses had been false and incomplete. The court concluded that Hyundai’s conduct had harmed Magana’s case because potentially crucial evidence had been permanently lost or destroyed.

The trial court imposed default judgment as a sanction against Hyundai. Because the jury in the first trial had found $8 million in damages, that was the amount of the default judgment.

Hyundai again appealed. The Court of Appeals reversed, holding that Magana had not suffered prejudice. The appellate court also held that the trial court had failed to establish adequately that a lesser sanction than default judgment would not suffice. Magana sought and won review by the Washington Supreme Court.

The Supreme Court reversed the Court of Appeals, because “Hyundai is a sophisticated multinational corporation, experienced in litigation.” The default judgment “appropriately compensates [Magana], punishes Hyundai, and … educates and deters others,” the Court held.

Two justices dissented, arguing that because Magana’s counsel had failed to move to compel the discovery responses for several years, Magana had not shown prejudice, and that a lesser sanction such as a trial continuance or monetary sanctions would have sufficed.

Insurer successfully challenges consent judgment

By Steven G. Wraith

The Washington Court of Appeals rejected a consent judgment that plaintiffs sought to enforce against a liability insurer, in a rare victory for an insurer in such cases.

In Water’s Edge Homeowners Assn. v. Water’s Edge Associates, 216 P.3d 1110 (Sept. 29, 2009), the plaintiff Homeowners Association (HOA) at Water’s Edge condominiums sued the seller, Water’s Edge Associates, and its property manager, alleging that they failed to disclose widespread rot in the condominium property when they converted it from apartments into condominiums.

Farmers Insurance Exchange and related companies insured the defendants. Farmers defended the case under a reservation of rights. Defendants hired separate coverage counsel who sued Farmers, seeking coverage for the HOA’s lawsuit and alleging bad faith in Farmers’ handling of the claims.

The HOA’s counsel suggested that defendants hire as coverage counsel two lawyers who “have had substantial success squeezing every possible nickel out of insurance companies on behalf of their clients.” Defendants did so but did not tell their insurance-defense counsel. Their relationship with insurance-defense counsel deteriorated, and their coverage counsel asserted that he had conflicts of interest. Insurance-defense counsel withdrew, and Farmers hired new defense counsel.

The HOA later settled with defendants without Farmers’ participation. The defendants agreed to pay $215,000 in cash, consented to judgment of $8.75 million, and assigned to the HOA all coverage and bad-faith claims that defendants had against Farmers. The HOA covenanted not to execute against the defendants’ personal assets and to pursue only coverage and bad-faith damages against Farmers.

The HOA asked the trial court to rule that the settlement was reasonable. The trial court permitted Farmers to intervene, conduct discovery regarding the settlement's reasonableness, and present evidence on that issue. The trial court criticized the defendants’ coverage counsel, who “had never actually tried a construction defect case and that his introduction to the case came late in the litigation.” In contrast, the trial court found more credible the opinion of the defense attorney who had been forced to withdraw, who opined that the case had a settlement value of $500,000 at most. The court also found that the economic-loss rule, which bars recovery of purely economic damages in tort, would bar much of the HOA’s case. The trial court held that the $8.75 amount of the settlement was unreasonable and that a judgment of only $400,000 would have been reasonable.

The Court of Appeals agreed that the economic-loss rule defeated the HOA’s claims of misrepresentation and breach of fiduciary duty. The court also noted that the HOA could recover only limited damages, the lesser of the diminution in value of the condominiums and the cost to repair. Since all unit owners who had sold their condos had made a profit, the Court of Appeals held that there was no proof of diminution in value. The settlement “systematically neglected, ignored, and grossly violated” the interests of Farmers, which the parties excluded from key settlement negotiations. The trial court properly found bad faith and collusion between the HOA and defendants in entering into the settlement. Far from acting as adverse litigants, the parties collaborated to prejudice Farmers. One indication of that collusion was the parties’ agreement that defendants would sue their insurance-defense counsel and apply the proceeds toward the settlement.

Insurers have lost most Washington appellate cases involving attempts to enforce consent judgments like this one and have been forced to pay such “paper judgments” even when they exceeded policy limits. Water’s Edge is the rare decision that recognizes the inherently collusive nature, and thus the unreasonableness, of many settlements of this type.

Around The Firm

Sam B. Franklin and Keith J. Kuhn won summary judgment of dismissal of all claims in Tahraoui v. Kogut, a legal-malpractice case. Plaintiff was the unsuccessful tenant-defendant in a protracted wrongful-detainer action. After losing that case, the tenant sued his attorney for negligently failing to assert the proper substantive law. The court rejected that allegation on its merits and ruled that the attorney had raised all significant arguments that he could have raised in the underlying unlawful-detainer case.

Jeffrey P. Downer and Keith Kuhn won summary judgment in Won Corp. v. Catalyst Commercial Partners. Claiming damages in both contract and tort, the plaintiff, a Korean-style restaurant franchise, sued its landlord for failure to transfer a premises lease in a timely manner. Plaintiff alleged business losses on the sale of one of its restaurants. Jeff and Keith’s client had acted as the landlord’s real estate broker for the purpose of negotiating the lease transfer. The court agreed that there was no basis to claim breach of contract or any tort claims against the broker.

Jeff Downer and Peter E. Sutherland won partial summary judgment in Maislen v. Bernier, which involved a severe auto accident in which plaintiff suffered numerous serious injuries and incurred $200,000 in medical bills. Plaintiff alleged cognitive impairment from brain damage that he claimed to have sustained in the accident. However, plaintiff lacked medical testimony that attributed his cognitive difficulties to any injuries he suffered in the accident. The court agreed with Jeff and Peter that such medical testimony was necessary to prove causation and dismissed that part of the case. Plaintiff moved for reconsideration, and the court denied that motion also.

Bradley D. Westphal recently tried Stewart v. Nordbo, a three-day jury trial in King County Superior Court. Brad’s client was a motorist who hit plaintiff in a marked crosswalk. Plaintiff suffered from cerebral palsy and was wheelchair-bound, Brad’s client admitted liability, The jury returned a verdict of $27,037.03, which included stipulated medical bills of $16,037.03. The jury’s verdict was considerably less than the settlement amount that defendants had offered prior to trial. ... Brad Westphal also won a defense award in mandatory arbitration in Harvey v. Leonard. This was a disputed-liability case in which Brad’s client was broadsided while making a turn into her driveway. Plaintiff alleged that the defendant abruptly turned in front of her and failed to use her directional signal. The arbitrator also awarded Brad’s client $50,000 on her counterclaim for her personal injuries suffered in the accident. ... Brad Westphal won a motion for summary judgment in Jones v. Pieratt. Plaintiff alleged that a dog owned by Brad’s client bit and injured him. All claims against defendants were dismissed because the dog, while residing at Brad’s client’s residence, was owned and under the care, custody, and control of another person who lived at defendants’ home.

Marc Rosenberg won Medialdea v. Loeffler, a professional-liability action against an attorney in federal district court. Plaintiff alleged violations of the federal Fair Debt Collection Practices Act (FDCPA) and Washington’s Consumer Protection Act (CPA), which were based on events occurring in an underlying unlawful-detainer action, in which the attorney had represented the plaintiff. The claims were based primarily on the allegation that, in a motion for attorney fees in the underlying unlawful-detainer action, the attorney sought reimbursement fees for an unregistered process server and for utility fees, which were allegedly not permitted under law or contract. The federal court dismissed the CPA claims on a motion because plaintiff did not show damages, since the superior court had denied reimbursement of these fees on the motion. The FDCPA claims were dismissed on summary judgment in regard to the process server fees, because the attorney made representations to the debtor’s attorney, rather than to the debtor, and therefore did not fall under the FDCPA. Plaintiff also failed to show that the representations by the attorney regarding the utility fees were either false or misleading.

Rebecca S. Izsak recently won a defense award in arbitration in Lagonoy v. Huang, et al. Plaintiffs contended that Rebecca’s clients, a construction company and its employee, were negligent in failing to properly stop traffic near a construction site, which led to plaintiffs’ vehicle being struck by a second car exiting a driveway 200 feet from the area. The court denied summary judgment, finding that there were issues of fact as to whether the drivers relied on the actions of the employee who was stopping traffic. But at the arbitration hearing, Rebecca successfully persuaded the arbitrator that any alleged actions of her clients did not cause or contribute to the accident.