Washington Court Of Appeals Holds That An Owner's Settlement With A Contractor And Subcontractor Unreasonable And The Result Of Bad Faith

In this case, Yuan Zhang (“Zhang”) purchased an apartment building that he knew had a significant amount of exterior rot.[i]  Zhang’s inspector, however, told him that renovating the exterior balconies and resurfacing the roof would bring the building into good condition.  Zhang hired Hawk Construction, LLC, (“Hawk”) to perform the remedial work and Hawk hired Ready Construction, LLC, (“Ready”) as a subcontractor.  Ready removed a portion of exterior siding, but did not immediately install new siding.  Substantial water damage to the building occurred while it was exposed to the elements. Hawk and Ready agreed to begin the repairs anew, but abandoned the job several months later.

Zhang sued Hawk, and Hawk sued Ready. The trial court entered summary judgment, finding Hawk to be liable. Zhang then settled with Hawk for $1.8 million and with Ready for $522,000.  Each settlement contained a covenant not to execute (an agreement not to pursue the contractors) and an assignment of claims against Capital Specialty Insurance Corp. (“Capital”), Ready and Hawk’s insurance provider.  Under RCW 4.22.060, Zhang filed motions concerning both settlements and asked the court to find the settlements reasonable.  Capital was allowed to intervene, and then filed a motion objecting to the reasonableness of both settlement awards.  The trial court determined that the amounts were reasonable, but reduced Zhang’s settlement with Hawk by $180,000, without submitting any written findings.

In an unpublished opinion, the Division I of the Court of Appeals of Washington reversed the trial court’s ruling, finding the settlement amounts to be unreasonable.  Because Zhang’s settlements contained a covenant not to execute and an assignment of claims against Capital, the Court of Appeals held that Hawk and Ready had no incentive to negotiate a reasonable settlement.  In essence, the Court felt that the contractor and subcontractor were throwing their insurance company “under the bus.”  The Court also found that Zhang’s settlement with Hawk included amounts for pre-breach work, duplicative expenses, unpaid receipts, and highly suspect attorneys’ fees amounts.  Furthermore, Zhang’s settlement with Ready included unrelated costs, large expert fees, and inflated attorneys’ fees.  The Court considered the structure of the settlements suggested collusion, fraud, and bad faith.  It was particularly troubled by Zhang using Hawk’s indemnity claim against Ready as an opportunity to collect a duplicate portion of the loss (double recovery for the same damages).

Comment: This case demonstrates the importance of a trial court’s findings of facts.  The trial court found the settlement amounts reasonable, more or less, but neglected to write down the findings.  Had the trial court judge submitted findings, the Court of Appeals would have reviewed the decision based on the more strict “abuse of discretion” standard, rather than “de novo” (i.e. reevaluating the entire case anew).  There is a high likelihood that the Court of Appeals would not have reached this decision if it reviewed the case under the stricter “abuse of discretion” standard.


[i] Zhang v. Hawk Constructions, LLC, 2012 WL 6554778 (2012).

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