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Univ. of South Carolina School of Law

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Wednesday, December 19, 2007

Driving Down The 101: California Appellate Court Makes Incorrect Ruling On Settlement Letters

In Zhou v. Unisource Worldwide, Inc., 2007 WL 4374597 (Cal. App. 2 Dist. 2007), a California Appellate Court made an incorrect ruling on the admissibility of evidence of statements made during settlement negotiations.  In Zhou, the plaintiff, David Zhou, was injured in a multi-vehicle accident in June 2003 in which Frank David Barreto, operating a truck owned by Unisource, struck an automobile from behind, which in turn hit Zhou's van and injured him.  One year later, Zhou filed a lawsuit against Barreto and Unisource, seeking damages for the injuries he suffered in the accident, which included a hematoma to his forehead, fractured teeth, and injuries to his neck and back.  On March 1, 2004, however, before bringing the lawsuit, Zhou was involved in a second car accident when an automobile driven by Donna Thorntill backed up into his van. 

On April 8, 2004, Zhou wrote a letter to State Farm Insurance Company, Thorntill's insurance carrier, which stated in part that "this accident has increased my neck and back pain which was caused by a truck accident on June 1[7], 2003...."  Later, on July 7, 2004, Zhou wrote another letter to State Farm, which stated in part that "the major reason of my neck and low back [pain] was caused by the car accident on June 17, 2003."  The letter, however, also acknowledged that "this new car accident did complicate my medical treatments, and increase my back and neck pain substantially."  Furthermore, the letter noted that while Zhou had hoped to avoid surgery, as a result of the second accident, "the doctors think there is no way to avoid the surgery to get fully recovered."

Prior to trial against Barreto and Unisource, the court granted Zhou's motion in limine to exclude all evidence relating to any settlement negotiations concerning the March 1, 2004 accident, and the court granted it pursuant to, inter alia, California Evidence Code Section 1154, which states that "[e]vidence that a person has accepted or offered or promised to accept a sum of money or any other thing, act, or service in
satisfaction of a claim, as well as any conduct or statements made in negotiation thereof, is inadmissible to prove the invalidity of the claim or any part of it."  This Section is thus similar to Federal Rule of Evidence 408, which generally precludes the admission of evidence of compromises, offers to compromise, and related statements in federal cases to prove the validity, invalidity, or amount of a claim.

After trial, the jury returned a verdict in Zhou's favor for $1,423,295:  $173,295.24 in economic damages and $1,250,000 in general damages.  Barreto and Unisource thereafter appealed, contending, inter alia, that Zhou's letters to State Farm should have been admissible to show that Zhou's injuries were at least partially caused by the second accident.  The appellate court agreed.

The court held that California Evidence Code Section 1154 only prohibits evidence of settlement negotiations and related statements only if those negotiations relate to the claim being settled.  Thus, under California Evidence Code Section 1154, Zhou's letters to State Farm would have been inadmissible in a lawsuit against Thorntill in connection with the March 1, 2004 accident, but they were admissible in the lawsuit over the earlier accident, which involved a different claim.

As its support for this argument, the court cited to Fieldson Associates, Inc. v. Whitecliff Laboratories, Inc., 276 Cal.App.2d 770 (Cal.App.1.Dist. 1969).  Fieldson Associates involved a breach of contract action, and the court allowed settlement letters relating to the alleged breach of a different contract between the parties to be admitted because they were received to show the invalidity of a different claim: appellant's claim for lost profits under the purchase order, which was never mentioned in the negotiations concerning cartons. Id. at 772.

The court in Zhou seemed to miss the point of this case.  The reason that the court in Fieldson Associates allowed for the admission of the letters was not only because they related to a separate contract, but mainly because those letters never mentioned the contract at issue and thus the claim being settled.  Conversely, in the Zhou case, Zhou's letters to State Farm explicitly mentioned not only the March 1, 2004 accident, but also the June 2003 accident with Barreto.  Thus, the letters not only related to an accident other than the accident at issue, but they also clearly related to the accident at issue and should have been held inadmissible.  In other words, they proved the partial invalidity of Zhou's claim against Barreto and Unisource by proving the validity of her claim against Thorntill.

In the Zhou case, the court's incorrect ruling ended up being inconsequential because the court found that the letters' exclusion constituted harmless error to the extent that, inter alia, Zhou himself testified about the second accident during both direct and cross-examination.  But it stands as a potentially dangerous precedent in future cases.

-CM

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