Multiple § 998 Offers: Which One Controls?

The California Code of Civil Procedure § 998 is a powerful tool for settlement purposes.  (For the full text of the statute, click here.)  If a plaintiff makes a § 998 offer and the defendant rejects the offer or allows it to expire, and the defendant does not achieve a better result at trial, then the plaintiff may be entitled to expanded costs—such as its expert witness fees—incurred after the offer was made.  The same applies in reverse: if a defendant makes a § 998 offer which is not accepted, and the plaintiff does not achieve a better result at trial, then the defendant may be entitled to expanded costs.  (Note that in both cases, the rejecting party must obtain a better result than the offer to avoid the cost-shifting effect.  A tie goes to the offeror.)

When there are multiple § 998 offers, things get a bit more confusing.  In Distefano v. Hall, 263 Cal. App. 2d 380 (1968) (link here), the Court of Appeal applied basic contract law principles to reach its determination that a subsequent § 998 offer extinguishes an earlier offer.

In DiStefano, the defendants made an offer for $20,000, and the plaintiff obtained an award of $28,500, which was reversed on appeal.  The defendants then made a 10,000 offer, and on retrial, the plaintiff recovered $12,559.96.  Defendants attempted to recover their post-offer costs dating back to the first $20,000 offer.  The court held that the latter offer extinguished the first one, and awarded the defendants none of their costs.

In T.M. Cobb Co. v. Superior Court, 36 Cal. 3d 273 (1984) (link here), the California Supreme Court approved of the DiStefano court’s reasoning, and said that general contract law principles may properly govern the statutory offer and acceptance process so long as they “neither conflict with the statute nor defeat its purpose.”  Id. at 280.

In Martinez v. Brownco Construction Co., Inc. (link here), the state Supreme Court was confronted with a slightly different situation, and rejected the “last offer” rule in that instance.  In Martinez, the plaintiff Mrs. Martinez made two settlement offers, one for $250,000 early in the case, and another for $100,000 shortly before trial.  At trial, she obtained a $250,000 award.  The issue is whether she could recover her costs from the date of the first offer, or only from the date of the second offer.

The Court reasoned that applying the DiStefano rule to these facts would actually frustrate the intent behind § 998.  The policy behind § 998 is to encourage the parties to settle, and applying the rule in this case limiting Mrs. Martinez to the costs incurred after only the second offer would discourage her (and others) from making more reasonable settlement offers as trial approached.

Instead, the Court held that allowing Mrs. Martinez to recover costs from the date of the first offer better fulfilled the purposes of § 998, stating “[w]here, as here, a plaintiff serves two statutory offers to compromise, and the defendant fails to obtain a judgment more favorable than either offer, recoverability of expert fees incurred from the date of the first offer is consistent with section 998’s language and best promotes the statutory purpose to encourage the settlement of lawsuits before trial.

Author: Amy Howse

Spendthrift Clauses and Choice of Law: How to Shield a Beneficiary’s Trust Assets in Bankruptcy

In an earlier blog post, we discussed choice of law provisions (commonly referred to as forum selection clauses) which control both the place where a contract dispute would be litigated and which jurisdiction’s laws would apply to the dispute.  A similar concept applies to trusts.

A trust is essentially a contract between the settlor (the person establishing the trust) and the trustee (the person holding title to the property).  It also governs the rights of third parties to the contract.  For example, if a beneficiary of a trust is sued, certain provisions in the trust could protect that beneficiary from having his or her trust property taken away in that lawsuit.

One of those protective provisions is a spendthrift clause, which can operate to prevent a creditor from seizing the beneficiary’s property.  Many trusts provide that the trust assets cannot be seized by a creditor, and courts routinely uphold those provisions.  However, in certain limited circumstances, the spendthrift clause will not protect all of the beneficiary’s trust interest.

Another way to protect the beneficiary’s interest is by including a choice of law provision.  In In re Zukerkorn, Sally Zukerkorn established a trust for the benefit of her children.  Her trust specifically selected Hawaii as the applicable law.

Thirty years later, Sally’s son, Herbert, filed for bankruptcy in his home state of California.  Herbert attempted to shield his trust income from the bankruptcy estate.  Under California’s bankruptcy laws, Herbert would have to turn over 25% of his trust income to pay his creditors in the bankruptcy.  Under Hawaii law, he wouldn’t have to turn over any of his trust income.

Ultimately, the court decided that Hawaii law applied.  Sally’s choice of law in her trust was upheld because Hawaii had a “substantial relation” to the trust.  At the time the trust was created, Sally lived in Hawaii, the trust property was located in Hawaii, and at least one of the beneficiaries lived in Hawaii.  Also, the court noted that the trust was currently being administered by a Hawaii corporate trustee.

The Court’s decision in Zukerkorn does not mean that every trust containing a choice of law provision will be governed by that state’s law.  A “substantial relation” must exist between the trust and the chosen state, and even still, a court might disregard the provision under certain circumstances, e.g., if the trust was a self-settled trust created for the sole purpose of shielding assets, or if certain public policy exceptions apply.

However, in cases like Zukerkorn, choosing the state law which will apply to your trust and ensuring that you establish a substantial relation between that state and the trust property could provide an additional protection for your beneficiaries.

If you’d like to create a trust for your own beneficiaries, or if you’d like us to take a second look at your estate plan to evaluate whether it achieves your goals, please feel free to give us a call.

In Re Zukerkorn, BAP No. NC-11-1506-JuKiJo (2012).

Author: Amy Howse

Mobilehome Park Owners Forbidden from Renting Their Own Mobiles?

Das Williams, a member of the California State Assembly, asked Attorney General Kamala D. Harris for an opinion on the following question: “If the management of a mobilehome park has enacted rules and regulations generally prohibiting mobilehome owners from renting their mobilehomes, is park management bound by these same rules and regulations?”  Opinion No. 11-703, available here.

The attorney general’s answer, somewhat surprisingly, is YES.

Why does this matter?  Because mobilehome park owners often have difficulty filling their parks with mobilehome owners.  On occasion, they have resorted to buying mobiles themselves and placing them in vacant park spaces, and then selling or renting them to potential residents.

In recent years, selling mobiles to residents has gotten much more complicated, as the state legislature is deliberating whether to adopt laws prohibiting park owners from financing the sale of park-owned mobiles to residents unless the mobile home park owner/manager is a licensed mortgage loan originator.   (See SB 376 from the 2011-12 legislative session.  It is still showing as “active,” although no hearings are scheduled as of the time of this writing.  The current status of the bill can be seen here.)  Federal laws may already require this, so the state of the law is a bit unclear.

Many mobilehome park owners have gone the easier route of purchasing mobiles to fill the vacant spaces and renting out those spaces to residents.  But now, based on the Attorney General’s opinion, park owners are prohibited from doing that if they have a park rule that prohibits tenants from renting their homes to third parties.

Many mobilehome parks have rules in place that prohibit mobilehome owners within the park from renting out or subletting their mobiles to others.  The policy behind the rule is that it is generally very difficult for mobilehome park management to enforce the park rules against those subtenants/sublessees, because there is no privity of contract between the park management and the resident.

However, Civil Code Section 798.23(a) states that the owners of the park and all employees of the park are subject to all of the same rules and regulations.  If the rules state that a mobile home owner cannot lease his or her mobilehome to a third party, then the rules also require that the mobilehome park owners are bound by the same restriction, even though the policy behind the no-subletting rule doesn’t apply when the mobilehome park owner is renting out a park-owned mobilehome.

So far, we have been unable to find any litigation that supports the attorney general’s new opinion, and that opinion is not binding law.  However, mobilehome park owners may want to play it safe by amending their park rules (giving the appropriate notice to the tenants, of course) to allow subleases only if the sublessee signs a contract with park management agreeing to abide by the community rules.

Author: Amy Howse