United States Court of Appeals,

Ninth Circuit.

MASON AND DIXON INTERMODAL, INC., Plaintiff-counter-defendant-Appellant,

v.

LAPMASTER INTERNATIONAL LLC; Hartford Insurance Co., Defendants-counter-claimants-Appellees,

ITG Transportation, Third-party-defendant-cross-claimant-Appellee,

v.

W.E.S.T. Forwarding Service, Third-party-defendant-counter-claimant-Appellee.

 

No. 09-17833.

Argued and Submitted Dec. 9, 2010.

Filed Jan. 18, 2011.

 

Before ROBERT E. COWENFN*, A. WALLACE TASHIMA, and BARRY G. SILVERMAN, Circuit Judges.

 

FN* The Honorable Robert E. Cowen, Senior United States Circuit Judge for the Third Circuit, sitting by designation.

 

OPINION

SILVERMAN, Circuit Judge:

Mason and Dixon Intermodal, Inc. (MDII), a motor carrier, appeals the district court’s judgment in its diversity action regarding damage to goods in interstate carriage against Lapmaster, a shipper; Lapmaster’s insurer, Hartford; and a freight broker, ITG Transportation, Inc. Lapmaster and Hartford brought claims for the value of the damage to the freight against MDII under the Carmack Amendment, and California law negligence claims against ITG; and MDII maintained state law negligence and contribution claims against ITG. ITG entered into a settlement agreement with Lapmaster and Hartford, and moved for dismissal pursuant to a good faith settlement under Cal.Civ.Proc.Code §§ 877 and 877.6. The district court found the settlement to be in good faith and granted ITG’s motion, therefore barring MDII’s claims against ITG. MDII appealed.

 

We affirm.

 

FACTUAL BACKGROUND

Lapmaster purchased two large precision flat lapping and polishing machines manufactured in Japan for shipment and sale to a customer located in Fremont, California. The machines were “oversized,” that is, too large to fit into standard intermodal shipping containers. The machines were delivered without incident from Japan to the Port of Oakland, California. Lapmaster hired World Express Shipping Transportation and Forwarding Services, Inc. (WEST) to handle customs entry and arrange for transportation of the machines to Fremont. WEST contracted with ITG, a broker, which arranged for MDII to deliver the machines from the Port of Oakland to Fremont. During communications between WEST and ITG, ITG was made aware that the freight would be dimensionally oversized; however, WEST sent ITG a dispatch order that did not note the size of the freight. ITG called WEST to confirm whether the freight was “in gauge,” that is standard-sized, or oversized. WEST told ITG that the freight was “in gauge.” ITG then faxed a delivery order and bill of lading to MDII that requested “standard flat racks,” that is, equipment designed to accommodate standard-size freight. Accordingly, MDII dispatched two drivers, each equipped with standard flat racks, to pick up the freight at the Port of Oakland.

 

While being transported by MDII, the machines were damaged in two separate, but essentially identical, accidents. The first driver set out from the Port of Oakland on December 26, 2007; however, the second driver had brake problems and did not set out until the next day. En route from the Port of Oakland to Fremont, the oversized machine transported by the first driver struck the 23rd Avenue overpass on Interstate 880, and suffered irreparable damage. Although the second driver did not set out until the next day, the second driver nonetheless managed to irreparably damage the second machine in the exact same manner as the first-by striking it against the 23rd Avenue overpass on Interstate 880. Lapmaster’s insurer, Hartford, paid Lapmaster $820,554.92, exclusive of $10,000 in deductibles, on account of the accidents.

 

PROCEDURAL BACKGROUND

MDII initiated the proceedings before the district court by filing a complaint against Lapmaster and Hartford, seeking to limit its liability and for indemnification arising out of the accidents. The district court exercised diversity jurisdiction over MDII’s initial complaint. Lapmaster and Hartford filed counterclaims against MDII and third-party complaints against WEST and ITG. The district court exercised supplemental jurisdiction over the third-party complaints.

 

After the parties filed motions for summary judgment and partial summary judgment, the court issued an order disposing of nineteen causes of action in their entirety and a portion of thirteen others. Of the remaining claims, Lapmaster and Hartford maintained against ITG only state law claims for negligence, implied indemnity, and negligent interference with prospective economic advantage. Lapmaster and Hartford maintained only Carmack Amendment claims against MDII. The district court also made several findings regarding limitations on liability, including that (1) Lapmaster and Hartford’s maximum recovery could not exceed their actual losses of $804,693.18, (2) MDII had not limited its liability to an amount less than the maximum recovery, and (3) ITG’s liability was limited to $200,000 under a price quote provided to Lapmaster. Although it found that ITG had effectively limited its liability to $200,000 as to Lapmaster and Hartford, the district court also held that this finding “does not affect any indemnification claims MDII may have against ITG.” The district court then allowed MDII to add counterclaims against ITG for indemnity and negligence.

 

ITG, Lapmaster, and Hartford entered into a conditional settlement agreement by which ITG agreed to pay a total of $150,000 to be divided between Lapmaster and Hartford in exchange for a release of liability from all claims arising out of this incident. ITG then moved for dismissal pursuant to a good faith settlement under Cal.Civ.Proc.Code §§ 877 and 877.6. The district court granted ITG’s motion over MDII’s opposition. Applying the factors stated in Tech-Bilt, Inc. v. Woodward-Clyde Associates, 38 Cal.3d 488, 499 (1985), the district court found that the settlement between ITG, Lapmaster, and Hartford was reached in good faith. The district court found that a $150,000 settlement was “well within an appropriate range,” considering that ITG’s liability to Hartford and Lapmaster was limited to $200,000, per the district court’s earlier finding. The district court concluded that “it is clear that the facts of the case and the position of the parties mandated roughly this type of result.”

 

The cause of action was dismissed on November 24, 2009. MDII timely filed a notice of appeal on December 21, 2009.

 

JURISDICTION

The district court properly exercised diversity jurisdiction over MDII’s initial complaint against Lapmaster and Hartford pursuant to 28 U.S.C. § 1332. And, although not affirmatively alleged in MDII’s complaint, it also had federal question jurisdiction pursuant to 28 U.S.C. § 1331 because Count I of the complaint alleged a claim for declaratory relief under the Carriage of Goods by Sea Act, 46 U.S.C. § 30701 note. The district court thus properly exercised supplemental jurisdiction over the third-party complaints pursuant to 28 U.S.C. § 1367(a). We have jurisdiction pursuant to 28 U.S.C. § 1291.

 

STANDARD OF REVIEW

We review the district court’s application of California Code of Civil Procedure sections 877 and 877.6 to ITG’s motion to dismiss pursuant to a good faith settlement as a question of law to be reviewed de novo.   Willdan v. Sialic Contractors Corp., 158 Cal.App. 4th 47, 54, 69 Cal.Rptr.3d 633 (2007). We review the trial court’s determination that a settlement was made in good faith for an abuse of discretion. Id.

 

DISCUSSION

 

I. The District Court Correctly Applied State Substantive Law to ITG’s Motion to Dismiss Pursuant to Good Faith Settlement

 

When a district court sits in diversity, or hears state law claims based on supplemental jurisdiction, the court applies state substantive law to the state law claims. See Galam v. Carmel (In re Larry’s Apartment), 249 F.3d 832, 837(9th Cir.2001); Bass v. First Pac. Networks, Inc., 219 F.3d 1052, 1055 n. 2 (9th Cir.2000). This court has held that California Code of Civil Procedure section 877 constitutes substantive law. See Fed. Savings & Loan Ins. Corp. v. Butler, 904 F.2d 505, 511 (9th Cir.1990). The district court correctly applied California law to resolve ITG’s motion to dismiss pursuant to good faith settlement. See id.

 

II. The District Court Did Not Err in Applying California Code of Civil Procedure Sections 877 and 877.6 Because the Carmack Amendment Does Not Preempt State Settlement Law.

MDII argues that federal common law regarding partial settlement of cases with multiple defendants should preempt state settlement laws in cases involving liability under the Carmack Amendment because the diversity of state settlement laws conflicts with the federal interest in a uniform liability scheme for interstate carriers.

 

In determining whether federal law should preempt state law, the Supreme Court has instructed that “matters left unaddressed in [a comprehensive and detailed statutory scheme] are presumably left to the disposition provided by state law.” O’Melveny & Myers v. F.D .I.C., 512 U.S. 79, 85 (1994); see also Wyeth v. Levine, 129 S.Ct. 1187, 1194-95 (2009). Beginning with that presumption, courts should consider the purpose of Congress in enacting the federal statute at issue, id. (“the purpose of Congress is the ultimate touchstone in every preemption case”), and determine whether “there is a significant conflict between some federal policy or interest and the use of state law.” O’Melveny & Myers, 512 U.S. at 87.

 

A. The Federal Interest in a Uniform National Liability Policy for Interstate Carriers Is Designed to Ensure That Carriers May Predictably Assess Risk and Set Rates Accordingly.

The Carmack Amendment to the Interstate Commerce Act was enacted in 1906 to relieve the inconsistent outcomes caused by a patchwork of state laws governing a carrier’s liability for damage to goods in interstate carriage. See Adams Express Co. v. Croninger, 226 U.S. 491, 505 (1913). Before Carmack, the diversity of state law causes of action and limitations on liability related to these damages was such “that it was practically impossible for a shipper engaged in a business that extended beyond the confines of his own state, or a carrier whose lines were extensive, to know … what would be the carrier’s actual responsibility as to goods delivered to it for transportation from one state to another.” Id.

 

In Southwest Express Co. v. Pastime Amusement, the Court articulated the purpose of Congress in creating a uniform national liability scheme for interstate carriers, stating “[t]he underlying principle is that the carrier is entitled to base rates upon value and that its compensation should bear a reasonable relation to the risk and responsibility assumed. The broad purpose of the federal act is to compel the establishment of reasonable rates and provide for their uniform application.” 299 U.S. 28, 29 (1936) (citations omitted). To this end, in Adams, the Supreme Court held that the Carmack Amendment preempts all state and common law claims for relief against a carrier for damage to goods in interstate carriage, regardless of whether those claims contradict or supplement Carmack relief. See Charleston & W.C. Ry. Co. v. Varnville Furniture Co., 237 U.S. 597, 604 (1915) (finding that a $50 fine imposed by South Carolina law upon carriers who fail to timely report damage was preempted by Carmack); Hughes Aircraft Co. v. N. Am. Van Lines, Inc., 970 F.2d 609, 613 (9th Cir.1992) (holding that the Carmack Amendment preempts all state law tort and contract actions against a common carrier for damage to goods in interstate commerce).

 

The limitations of Carmack preemption illustrate that the federal interest in establishing a uniform liability policy does not extend beyond ensuring a carrier’s predictable maximum liability. In upholding a generally applicable Texas statute under which a Carmack plaintiff was awarded attorneys’ fees, the Court held that states may maintain laws that do not “in anywise either enlarge or limit the responsibility of the carrier for the loss of property intrusted to it in transportation, and only incidentally affect[ ] the remedy for enforcing that responsibility.” Mo., K & T, Ry. Co. of Tex. v.. Harris, 234 U.S. 412, 420, 34 S.Ct. 790, 58 L.Ed. 1377 (1914). The Court went on to note that the Texas statute was not inconsistent with the Carmack Amendment in that it did not affect a shipper’s “ground of recovery, or the measure of recovery” against a carrier for goods damaged in interstate carriage. Id. at 421-422. “[T]he Court concluded that whatever burden was thereby placed upon commerce was overbalanced by the importance of the statute to the state’s policy of offering an incentive to the prompt settlement of small but well-founded claims and as a deterrent of groundless defenses.” A.T. Clayton & Co., Inc. v. Missouri-Kansas-Texas, R. Co., 901 F.2d 833, 834-35 (10th Cir.1990) (citing Harris, 234 U.S. at 421); cf. Accura Sys., Inc. v. Watkins Motor Lines, Inc., 98 F.3d 874, 877 (5th Cir.1996) (holding that Carmack Amendment preempts Texas attorneys fees’ statute with no limit on fees, distinguishing Clayton and Harris because those cases involved limited fee recovery, and did not present a “potentially unlimited recovery of attorneys’ fees”).

 

Excluding from the scope of Carmack preemption a generally applicable statute designed to encourage settlement that “only incidentally affects” a shipper’s recovery from a carrier is in keeping with the purpose stated in Southwest Express that carriers be able to “base rates upon value” and that a carrier’s “compensation should bear a reasonable relation to the risk and responsibility assumed.” 299 U.S. at 29. When a carrier receives goods for interstate transportation, the carrier can assess the value of those goods, predict its liability with certainty based on “actual loss,” and set a rate based on the risk and responsibility assumed. The only information required to set that rate are the value of the goods and the carrier’s maximum liability for carrying them. To the extent that the additional burden of a generally applicable state law does not appreciably affect a shipper’s grounds for or measure of recovery against a carrier, it cannot affect a carrier’s calculus in setting rates, and therefore cannot conflict with Carmack’s purpose.

 

B. California Good Faith Settlement Law Does Not Conflict With the Federal Interest in a Uniform Policy of Liability for Damages to Goods in Interstate Carriage.

State settlement laws conflict with the Carmack Amendment only to the extent that those laws “enlarge or limit the responsibility of the carrier” for damages to the shipper. Harris, 234 U.S. at 420; see also Varnville Furniture Co., 237 U.S. at 604. There is no evidence nor any contention by any party that California Code of Civil Procedure sections 877 and 877.6 could increase MDII’s liability in excess of the maximum damages prescribed by Carmack, or limit the shipper’s recovery to less than the actual value of the damage to the machines. Much like the attorneys’ fees statute at issue in Harris, sections 877 and 877.6 are generally applicable, do not affect a shipper’s “ground of recovery, or the measure of recovery” against a carrier, and are important to California’s “strong public policy … to encourage the voluntary settlement of litigation.” Harris, 234 U.S. at 421-422; Osumi v. Sutton, 151 Cal.App. 4th 1355, 1359-60 (2007); see also A.T. Clayton & Co., Inc., 901 F.2d at 834-35(citing Harris, 234 U.S. at 421). Regardless of the settlement law applied, Lapmaster and Hartford have only a single, strict liability cause of action under the Carmack Amendment against MDII for damages to the machines under which they can collect no more than $804,693.18; and MDII cannot be held liable for those damages in excess of $804,693.18.

 

The Carmack Amendment does not show a preference for any particular approach to partial settlement because no regime conflicts with the statute’s goal of ensuring that carriers can “assess their risks and predict their potential liability for damages.” Suarez v. United Van Lines, 791 F.Supp. 815, 817 (D .Colo.1992) (citing Hughes v. United Van Lines, 829 F.2d, 1407, 1415 (7th Cir.1987)). A carrier’s net liability for damages after recovery from third parties based on their relative culpability does not depend on the legal mechanism by which a carrier may recover, but rather the extent of the third party’s culpability and that party’s preference for settlement. Under any settlement regime, these variables are unpredictable, and therefore cannot affect a carrier’s ability to set rates. Consequently, the application of diverse state settlement laws in Carmack Amendment cases does not threaten the federal interest in a uniform national scheme that allows carriers to set their rates based on predictable liability for damages to goods in interstate carriage. Federal law does not therefore preempt state law, and California Code of Civil Procedure sections 877 and 877.6 applies.

 

III. The District Court Did Not Err in Applying Cal.Civ.Proc.Code §§ 877 and 877.6 Because MDII and ITG Are Joint Tortfeasors.

MDII argues that sections 877 and 877.6 should not apply to bar MDII’s indemnity claims against ITG because MDII and ITG are not “joint tortfeasors” within the meaning of those statutes. MDII’s argument is unpersuasive, and mostly rests on the misconception that a claim under the Carmack Amendment is somehow not a claim for damages in tort.

 

MDII and ITG are joint tortfeasors, at least for purposes of the bar to claims for equitable indemnity under section 877, because they are each liable to Lapmaster and Hartford for a detriment caused by the breach of a duty. See BFGC Architects Planners, Inc. v. Forcum/Mackey Constr., Inc., 119 Cal.App. 4th 848, 852, 14 Cal.Rptr. 721 (2004). Both parties owed a duty to Lapmaster and Hartford related to the transportation of the machines. It is undisputed that ITG owed a duty of reasonable care under state law. MDII owed a duty governed by strict liability under the Carmack Amendment. See Georgia, Florida, & Atlantic Ry. v. Blish Milling Co, 241 U.S. 190, 196, 36 S.Ct. 541, 60 L.Ed. 948 (1916) (explaining that the Carmack Amendment covers “all losses resulting from any failure to discharge a carrier’s duty as to any part of the agreed transportation”).

 

MDII argues that “any party liable solely under a statute is not a tortfeasor subject to the provisions of [sections 877 and 877.6].” However, California courts have held that strictly liable defendants may be held responsible as joint tortfeasors alongside negligent defendants. See Safeway Stores, Inc. v. Nest-Kart, 21 Cal.3d 322, 330, 146 Cal.Rptr. 550 (1978) ( “Nothing in the rationale of strict [ ] liability conflicts with a rule which apportions liability between a strictly liable defendant and other responsible tortfeasors.”); BFGC Architects, 119 Cal.App. 4th at 852 (“strict liability … may sustain application of equitable indemnity”) (citing Daly v. Gen. Motors Corp., 20 Cal.3d 725, 737, 144 Cal.Rptr. 380 (1978)).

 

Because MDII and ITG are joint tortfeasors under California law, the district court did not err in applying Cal.Civ.Proc.Code §§ 877 and 877.6 to bar MDII from asserting claims for indemnity and contribution against ITG after the District Court granted the motion to dismiss the claims pursuant to a good faith settlement.

 

IV. The District Court Did Not Err In Concluding That the Settlement Between ITG, Lapmaster, and Hartford Satisfied the Good Faith Settlement Requirement of § 877.6.

To determine whether a settlement has been made in good faith, California courts consider (1) “a rough approximation of plaintiffs’ total recovery and the settlor’s proportionate liability”; (2) “the amount paid in settlement”; (3) “the allocation of settlement proceeds among plaintiffs”; and (4) “a recognition that a settlor should pay less in settlement than he would if he were found liable after a trial.” Tech-Bilt, 38 Cal.3d at 499. The California Supreme Court also held that “[o]ther relevant considerations include the financial conditions and insurance policy limits of settling defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to injure the interests of non-settling defendants.” Id.

 

The key facts in this case are that (1) ITG provided MDII with erroneous information on the “import dispatch” regarding the size of the machines and the proper equipment required to safely transport them; (2) an MDII driver, even after seeing the size of the machines, continued to load one machine onto his improperly equipped truck and proceeded to damage it by hitting a freeway overpass; and (3) a second MDII driver who did not depart the port until the next day was not alerted to the problems faced by the first driver, and proceeded to damage the second machine in exactly the same manner as the first. Under these facts, it is not unreasonable to conclude that MDII was responsible for the overwhelming majority of damage to the machines.

 

Furthermore, the district court had earlier ruled that ITG’s liability to Lapmaster and Hartford was limited to $200,000, and ITG settled with Lapmaster and Hartford for a total of $150,000 with $80,000 to be allocated to Lapmaster and $70,000 to Hartford. The district court’s order demonstrates that it considered all of the above facts in addition to MDII’s argument that ITG was still exposed to same degree of liability as MDII. The district court did not abuse its discretion in determining that the settlement between ITG, Lapmaster, and Hartford was made in good faith.

 

AFFIRMED.

Court of Appeal, Fourth District, Division 2, California.

SEARLES VALLEY MINERALS OPERATIONS INC., Plaintiff and Appellant,

v.

RALPH M. PARSON SERVICE COMPANY et al., Defendants and Respondents.

 

No. E049927.

Jan. 21, 2011.

 

OPINION

HOLLENHORST, J.

In this contract indemnity action, plaintiff and appellant Searles Valley Minerals Operations Inc. (Searles) appeals the judgment of dismissal entered in favor of defendants and respondents Ralph M. Parsons Service Company and Parsons Infrastructure & Technology Group, Inc. (Parsons), following an order sustaining Parsons’s demurrer, without leave to amend, to Searles’s cause of action for express indemnity.

 

Searles contends it adequately alleged a cause of action for express indemnity by alleging that Parsons was required, under an indemnity contract between Parsons and Kerr-McGee Chemical Corporation (KM), to provide KM with a defense and indemnify KM for losses arising from a wrongful death action against KM, Parsons, and Parsons’s subcontractor. Searles argues that, as an assignee of KM’s indemnity rights, it was entitled to reimbursement for paying KM’s defense costs.

 

While there appears to be no case law directly on point, we conclude that an assignee of contract indemnification rights stands in the shoes of the indemnitee. Therefore, if the indemnitor refuses to pay an indemnitee’s defense costs, the indemnitee, and in turn the assignee, can pay the costs and seek reimbursement from the indemnitor. Searles, as KM’s assignee, was entitled under the indemnity agreement to recover defense costs it paid on KM’s behalf. The trial court thus erred in sustaining, without leave to amend, Parsons’s demurrer to Searles’s cause of action for express indemnity, and we reverse the judgment of dismissal.

 

Parsons requests this court to grant judicial notice of Searles’s petition for writ of mandate, Parsons’s opposition to the petition, and this court’s order denying the petition. Searles opposes Parsons’s judicial notice request on the ground the documents are irrelevant. We grant Parsons’s request for judicial notice of the three documents, although the documents have little, if any, relevance since the writ petition was summarily denied and pertains to the ruling on the motion for reconsideration, not the demurrer. (Evid.Code, §§ 452, subd. (d), 459, subd. (a).)

 

1. Factual and Procedural Background

Decedent, Michael Todd Moore, was killed while working at Searles’s soda ash processing plant in Trona (the Argus plant). In a wrongful death action, Moore’s heirs sued KM, Parsons, and Parsons’s subcontractor, which manufactured parts for the plant’s pneumatic conveyor system. Parsons rejected KM’s tender of defense. Searles provided KM with a defense.

 

Searles’s Complaint Against Parsons for Indemnity

After judgment was entered in the underlying wrongful death action (the Moore lawsuit), Searles filed a complaint seeking reimbursement from Parsons for KM’s defense costs. Searles’s complaint included causes of action for (1) express indemnity, (2) equitable indemnity, (3) subrogation, and (4) declaratory relief.

 

Searles’s complaint contains the following allegations. In 1974, KM entered into a contract with Parsons for the design and construction of the Argus plant, located on property owned by KM. The design and construction included providing a pneumatic conveyor system. The construction contract contained an indemnity provision (paragraph 17) in which Parsons agreed to defend and indemnify KM for personal injury or death arising out of Parsons’s or its subcontractors’ negligence in connection with work Parsons or its subcontractors performed pursuant to the construction contract. Paragraph 61 of the construction contract permitted KM to assign the agreement.

 

Searles, formerly known as North American Chemical Company, purchased the Argus plant from KM. In connection with the purchase, Searles agreed to indemnify KM for any accidents or injuries resulting in KM being sued. Under the purchase agreement, KM, in turn, assigned to Searles its rights, including KM’s indemnity rights against Parsons under the construction contract.

 

In 2001, one of Searles’s employees, Michael Moore, was killed while working at the Argus plant. At the time, Moore was attempting to remove the door of the pneumatic conveyor system. Moore’s heirs filed a wrongful death complaint against KM, Parsons, and Parsons’s subcontractor. KM tendered its defense to Searles and to Parsons. Searles accepted KM’s defense, whereas Parsons declined it.

 

In 2004, the Moore plaintiffs, Searles, and Parsons entered into a release and assignment agreement and addendum, wherein it was agreed that all potential claims for indemnity, apportionment, and contribution, other than a pending workers’ compensation complaint-in-intervention, would not be extinguished by the judgment entered in the Moore lawsuit.

 

The jury in the trial on the Moore lawsuit awarded the Moore plaintiffs approximately $6.75 million in damages. The jury assigned no fault to KM or Parsons. The jury found Parsons’s subcontractor 25 percent at fault and Searles 75 percent at fault.

 

Searles incurred over $800,000 in attorney fees, costs, and expenses from providing KM with a defense in the underlying Moore lawsuit.

 

Searles alleges in the first cause of action for express indemnity that, under paragraph 17 of the construction contract between KM and Parsons, Parsons agreed to indemnify KM from all claims and liability for death arising out of Parsons’s negligence. The damages claimed by the Moore plaintiffs were caused in part by Parsons and arose out of the performance of its obligations under the construction contract. Under the agreement, Parsons agreed it would be liable for KM’s defense in the event of a dispute with a third party regarding work performed by Parsons. Searles, on behalf of KM, retained legal counsel to defend KM in the underlying action brought by the Moore plaintiffs. Searles is therefore entitled to recover KM’s defense costs.

 

In the declaratory relief cause of action, Searles alleges that, as assignee of KM’s rights against Parsons under paragraph 17, Searles is entitled to recover defense costs Searles incurred on KM’s behalf in defending KM in the underlying action under Civil Code section 2778, subdivisions (4) and (5).

 

All further statutory references are to the Civil Code unless otherwise indicated.

 

Parsons’s Demurrer

In March 2009, Parsons filed a demurrer to Searles’s complaint. As to the cause of action for express indemnity, Parsons argued that Searles failed to allege sufficient facts since there were no allegations that KM suffered any damage. Searles, rather than KM, paid for KM’s defense. Searles filed an opposition, arguing that, as KM’s assignee under the construction contract, Searles was entitled to recover KM’s defense expenses.

 

The trial court heard and sustained, without leave to amend, the demurrer to the first cause of action for express indemnity and the fourth cause of action for declaratory relief. The court overruled the demurrer to the second cause of action for equitable indemnity and third cause of action for subrogation.

 

After the trial court denied Searles’s motion for reconsideration of the ruling, Searles filed a petition for writ of mandate, requesting this court to direct the trial court to vacate its order denying Searles’s motion for reconsideration and grant the motion. This court summarily denied Searles’s writ petition, noting that: “ ‘A trial court’s order is affirmed if correct on any theory, even if the trial court’s reasoning was not correct.’ “

 

Searles filed a request for dismissal of the remaining second and third causes of action, and thereafter the trial court entered a judgment of dismissal of the action with prejudice.

 

2. Discussion

Searles contends the trial court erred in sustaining, without leave to amend, Parsons’s demurrer to the first cause of action for express indemnity. The trial court stated the demurrer was sustained on the ground that, although Searles, as KM’s assignee, “steps into [KM]’s shoes,” “[a]ttorney’s fees and costs are not expressly set forth in the [KM]/Parsons’ indemnification agreement and do not constitute legal damages.”

 

On appeal, the parties acknowledge this rationale is incorrect because paragraph 17 provides for a defense. Also, in an indemnification action, if the indemnity agreement provides for a defense which is not provided, attorney fees and costs are considered recoverable legal damages. Parsons argues the ruling is nevertheless correct because Searles is not entitled to reimbursement of KM’s attorney fees under paragraph 17, since KM did not incur any loss.

 

“In reviewing a judgment of dismissal after a demurrer is sustained without leave to amend, we must assume the truth of all facts properly pleaded by the plaintiffs, as well as those that are judicially noticeable.” ( Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25 Cal.4th 809, 814.) Here, the issue as to whether the complaint sufficiently alleges an action for express indemnity is purely legal. “Matters presenting pure questions of law, not involving the resolution of disputed facts, are subject to the reviewing court’s independent or de novo review. [Citation.]” ( Diamond Benefits Life Ins. Co. v. Troll (1998) 66 Cal.App.4th 1, 5 [Fourth Dist., Div. Two].)

 

The issue here is whether the fact that Searles paid KM’s defense expenses, after Parsons rejected KM’s tender of defense, precludes Searles from recovering KM’s defense costs, as assignee of KM’s indemnity rights, since KM did not incur any out-of-pocket losses.

 

In paragraph 17, Parsons agreed to indemnify KM as follows: “Contractor [Parsons], agrees that it will, at its sole cost and expense, defend, indemnify and save Owner [KM], its subsidiaries, and their officers and employees, harmless from and against any and all claims, demands, causes of action and liabilities for loss of use or damage to property … or for bodily injury, personal injury or death arising out of Contractor’s (or its subcontractor’s) negligence (including, as respect bodily injury, personal injury or death, the contributory negligence of Owner [KM] ) in connection with any work which Contractor (or its subcontractors) shall perform pursuant to this Agreement or any operations or activities of Contractor (or its subcontractors), in connection therewith.”

 

This provision entitled KM, as indemnitee, to a defense and indemnification by Parsons, the indemnitor, for any liability arising out of Parsons’s or its subcontractors’ negligence in connection with work Parsons or its subcontractors performed in constructing the chemical plant owned by KM, and later owned by Searle. ( Crawford v. Weather Shield Mfg. Inc. (2008) 44 Cal.4th 541, 553 (Crawford ).)

 

As explained in Crawford, section 2778 “first provides that a promise of indemnity against claims, demands, or liability ‘embraces the costs of defense against such claims, demands, or liability’ insofar as such costs are incurred reasonably and in good faith. (§ 2778, subd. 3, italics added.) Second, the section specifies that the indemnitor ‘is bound, on request of the [indemnitee], to defend actions or proceedings brought against the [indemnitee] in respect to the matters embraced by the indemnity,’ though the indemnitee may choose to conduct the defense. (Id., subd. 4, italics added.) Third, the statute declares that if the indemnitor declines the indemnitee’s tender of defense, ‘a recovery against the [indemnitee] suffered by him in good faith, is conclusive in his favor against the [indemnitor].’ (Id., subd. 5.)” ( Crawford, supra, 44 Cal.4th at p. 553.)

 

Here, KM tendered its defense to Parsons, Parsons rejected KM’s tender of defense, Searles paid for KM’s defense, and the lawsuit against KM and other defendants resulted in Parsons’s subcontractor being found 25 percent at fault. Under section 2778, subdivisions (3) and (4), KM was entitled under the indemnity agreement to a defense from Parsons and, since Parsons did not provide a defense, KM was entitled to recover its defense costs, assuming they were incurred in good faith. ( Crawford, supra, 44 Cal.4th at pp. 553, 555.)

 

Subdivisions (3) and (4) of section 2778 provide:

 

“3. An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion;

 

“4. The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so[.]”

 

Parsons argues that under subdivision (2) of section 2778, although Parsons owed KM a duty to defend under the indemnitee agreement, Parsons was not required to reimburse Searles for any of KM’s defense costs because KM did not pay them. Subdivision (2) of section 2778 states: “2. Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof[.]” Parsons claims this provision prohibited KM from recovering the cost of its defense because KM did not pay for its defense. But subdivision (2) does not bar Searles from recovering KM’s defense costs, because, just as KM had a right to reimbursement for its own defense after Parsons declined KM’s tender of defense, Searles, as assignee of KM’s indemnity rights, had the right to pay for KM’s defense after Parsons rejected KM’s tender, and recover the cost of paying for it.

 

As the court in Crawford notes: “One can only indemnify against ‘claims for damages’ that have been resolved against the indemnitee, i.e., those as to which the indemnitee has actually sustained liability or paid damages. Indemnification, after all, is the act of saving another from the legal consequence of an act. (§ 2772.) Hence, a clause requiring [the indemnitor] to indemnify [the indemnitee] ‘against’ defined claims clearly indicated that the indemnity obligation would apply only if [the indemnitee] ultimately incurred such a legal consequence as a result of covered claims.” ( Crawford, supra, 44 Cal.4th at p. 559.) Here, Searles, as KM’s assignee, incurred KM’s defense costs covered under the indemnity agreement.

 

United States Elevator Corp. v. Pacific Investment Co. (1994) 30 Cal.App.4th 122 and County of San Joaquin v. Stockton Swim Club (1974) 42 Cal.App.3d 968, cited by Searles for the proposition that Searles is entitled to recover KM’s defense costs, provide little, if any guidance here since the courts do not address the issue of whether an assignee of indemnity rights is entitled to recover attorney fees it paid on behalf of the assignor. The court in United States Elevator Corp. merely held that under section 2778, subdivision (4), an indemnitor generally must defend an indemnitee upon tender of the defense relating to claims embraced within the indemnity agreement, and failure to do so imposed on the indemnitor the duty to pay the indemnitee’s defense costs. (United States Elevator Corp. v. Pacific Investment Co., supra, at pp. 127-128.) Likewise, County of San Joaquin v. Stockton Swim Club, supra, at page 973 only addresses in a cursory fashion the right to recover defense costs incurred after an indemnitor rejects a proper tender of defense.

 

The question here is whether, for purposes of indemnity, did the “indemnitee” ultimately incur “a legal consequence as a result of covered claims [?]” ( Crawford, supra, 44 Cal.4th at p. 559.) It is undisputed that KM did not incur any attorney fees or other losses. Therefore KM is not entitled to recover the fees, since it did not pay them. But Searles, which was assigned KM’s indemnification rights, did incur KM’s attorney fees and therefore is entitled to recover them.

 

As the court in Johnson v. County of Fresno (2003) 111 Cal.App.4th 1087, 1096 (Johnson ) explains, an assignee stands in the assignor’s shoes: “An assignment carries with it all the rights of the assignor. [Citations] ‘The assignment merely transfers the interest of the assignor. The assignee “stands in the shoes” of the assignor, taking his rights and remedies, subject to any defenses which the obligor has against the assignor prior to notice of the assignment.’ [Citation.] Once a claim has been assigned, the assignee is the owner and has the right to sue on it. [Citation; Code Civ. Proc., § 368.5 (action or proceeding does not abate by the transfer of an interest).] In fact, once the transfer has been made, the assignor lacks standing to sue on the claim. [Citation.]”

 

Here, KM’s rights to a defense and indemnification were allegedly transferred to Searles by virtue of the assignment of KM’s indemnification rights under the construction contract to Searles. Thus, KM’s rights to Parsons providing KM with a defense or, alternatively, to Parsons paying KM’s defense costs, transferred to Searles. Parsons argues KM did not incur any defense costs since Searles paid for KM’s defense, and therefore Parsons did not have to pay anything under the indemnification agreement. We disagree. The fact that Searles paid KM’s defense costs, after Parsons refused to do so, did not absolve Parsons of its obligation to pay KM’s defense costs simply because KM did not literally pay the fees.

 

In Johnson, the court held the assignee of indemnification rights was entitled to indemnification recovery, even though the assignor never paid the underlying judgment entered against the assignor and thus did not incur any out-of-pocket loss. The Johnson court noted that “[l]iteral payment of the judgment by [the indemnitee] is not required.” ( Johnson, supra, 111 Cal.App.4th at p. 1094.)

 

We recognize that Johnson, as well as Fleck v. Bollinger Home Corp. (1997) 54 Cal.App.4th 926, also relied on by Searles, are distinguishable because in those cases there was a judgment entered against the indemnitee, which could be construed as a loss, unlike in the instant case in which a judgment was not entered against KM. Nevertheless, Johnson and Fleck support the proposition that an assignee of indemnity rights is entitled to assert the indemnitee’s rights to indemnity recovery even though the indemnitee has not suffered any actual monetary loss.

 

Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252 (Essex ) also supports this proposition. In Essex, the court held that the assignee of an insured’s right to a defense was entitled to recover attorney fees the assignee incurred in seeking recovery of the insured’s insurance policy benefits.

 

We recognize Essex is distinguishable in that it involves an insurance bad faith action, rather than a contract indemnity claim, and the insured sustained losses, including defense costs and a judgment entered against him. In addition, we recognize insurance indemnity law differs from contract indemnity law. ( Crawford, supra, 44 Cal.4th at p. 552.) Nevertheless, Essex is instructive in its discussion of assigned rights to attorney fees.

 

In Essex, a commercial dryer was damaged when it fell and was damaged while being transported to Five Star Dye House, Inc. (Five Star) by Luis Sanchez’s trucking company. Five Star sued Sanchez for negligence. Sanchez tendered his defense to his liability insurance carrier, Essex Insurance Company (Essex). Essex denied coverage and refused to defend Sanchez. Sanchez paid for his own defense, and judgment was entered against him.

 

Sanchez then assigned to Five Star his insurance bad faith claims against Essex, including Sanchez’s claim that Essex failed to provide a defense or indemnify Sanchez. Essex filed a lawsuit seeking a declaration that it did not have a duty to defend Sanchez in the underlying action. ( Essex, supra, 38 Cal.4th at p. 1256.) The trial court found that Essex committed bad faith by not defending Sanchez but denied Five Star’s request to recover its attorney fees incurred in attempting to recover Sanchez’s policy benefits wrongly withheld by the insurer (Brandt fees).

 

Brandt v. Superior Court (1985) 37 Cal.3d 813 (Brandt ).

 

The issue in Essex was whether: “When an insured assigns a claim for bad faith against the insurer, and the assignee brings a tort action against the insurer that includes a claim for wrongfully withheld policy benefits, may the assignee recover Brandt fees?” ( Essex, supra, 38 Cal.4th at p. 1255.) The court in Essex held the assignee was entitled to such fees even though they were not paid by the insured/assignor. (Ibid.)

 

The Essex court explained that in Brandt, supra, 37 Cal.3d at page 817, the Brandt court held that “when an insurer denies coverage in bad faith, the insured can recover attorney fees in an action to recover the policy benefits.” ( Essex, supra, 38 Cal.4th at p. 1257.) In Essex, the insured, Sanchez, assigned to Five Star his insurance bad faith claims, which included his right to recover attorney fees incurred in pursuing the claims.

 

The Essex court rejected Essex’s argument that only fees incurred by the insured (Sanchez) were recoverable, and therefore Five Star could not recover attorney fees it incurred as assignee in asserting Sanchez’s insurance bad faith claim, assigned to Five Star. (Essex, supra, 38 Cal.4th at p. 1263.) The Essex court reasoned that in an insurance bad faith action, a claim for breach of the duty to defend is assignable. (Ibid.) The claim Sanchez assigned to Five Star arose from Essex’s breach of its duty to defend Sanchez. (Ibid.)

 

As assignee, Five Star sought to recover the policy benefits wrongfully withheld, including the right to a defense. The Essex court noted that “ ‘[w]hen an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy,’ the fees incurred for those attorney services ‘are an economic loss-damages-proximately caused by the tort.’ “ ( Essex, supra, 38 Cal.4th at pp. 1263-1264, quoting Brandt, supra, 37 Cal.3d at p. 817.)

 

The Essex court further noted that: “ ‘As a general rule, the assignee of a chose in action stands in the shoes of his assignor, taking his rights and remedies….’ [Citation.] Had Sanchez brought the bad faith action against Essex, his right to recover Brandt fees would be unquestioned. As the assignee of Sanchez’s claim against Essex, Five Star stands in his shoes, and so may assert his right to recover any Brandt fees incurred in prosecuting the assigned claim.” ( Essex, supra, 38 Cal.4th at p. 1264.)

 

Likewise, in the instant case, where Parsons refused to provide KM with a defense, resulting in Searles paying for KM’s defense, Searles is entitled to recover from Parsons the cost of KM’s defense in the underlying wrongful death action. The fact that Searles paid the fees and costs, rather than KM, does not foreclose Searles, as KM’s assignee, from recovering the defense expenses Searles paid on KM’s behalf. Literal payment of KM’s attorney’s fees and costs by KM was not required since Searles was assigned the right to indemnification for economic damages which included the cost KM’s defense.

 

During oral argument, counsel for Parsons argued Searles had no valid express indemnity claim arising from Searles providing KM with a defense since KM’s rights to a defense and indemnity had previously been extinguished upon KM assigning its rights to Searles. This contention is only briefly alluded to at the end of Parson’s respondent’s brief, without citation to any legal authority: “If Searles actually became the ‘holder of the indemnity’ upon the assignment, then Kerr-McGee would not have had any right to [a] defense or indemnity when the Moore Action was filed. In that event, Searles would have no basis to assert that Parsons was required to defend or indemnify Kerr-McGee, and could not state a cause of action to recover Kerr-McGee’s defense costs.”

 

Not only does Parsons fail to cite any supporting authority for this proposition but, in addition, we reject this argument because Searles was entitled to recover KM’s defense costs as economic damages under the indemnity agreement, as KM’s assignee. Under the indemnity agreement, KM was entitled to a defense or, alternatively, to the cost of its defense. These rights were assigned to Searles and the fact that Searles paid KM’s defense, rather than KM, does not preclude Searles, as assignee, from recovering KM’s defense expenses under the indemnification agreement.

 

We thus conclude Searles adequately alleged a cause of action for express indemnity as assignee of KM’s indemnity rights.

 

3. Disposition

The judgment of dismissal is reversed. The trial court is directed to vacate its order sustaining the demurrer to the first cause of action for express indemnity, and to enter a new order overruling the demurrer to the first cause of action.

 

Searles is awarded its costs on appeal.