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March 29, 2004

Olmstead v. Arthur J. Gallagher & Co. (2004) 32 Cal.4th 804

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The California Supreme Court holds that sanctions under C.C.P. § 128.5 and § 128.7 are mutually exclusive.  Broad sanctions under C.C.P. § 128.5 are not available in any case filed after December 31, 1994.

Carleen Olmstead and Cherie Rose “Olmstead” filed suit against an insurance broker, Arthur J. Gallagher & Co., and its employee, Vickie Sundgren, “Gallagher” for uninsured motorist benefits.  Gallagher sought sanctions against Olmsted under C.C.P.  §§ 128.5 and 128.7 for litigation related misconduct.  The trial court denied sanctions under § 128.5 because the case was initiated after January 1, 1995, the effective date of § 128.7.

The Court of Appeal agreed with Gallagher’s argument that § 128.5 continued to apply to reprehensible conduct outside of the filing of pleadings, even for cases initiated after the effective date of § 128.7.  As to sanctionable conduct in the context of pleadings, § 128.7 was the applicable statute.  [PL Update No.  148]

The Supreme Court reversed, deciding that the sections were mutually exclusive.

In 1994 the legislature amended C.C.P. § 128.5 to specifically apply to conduct occurring prior to December 31, 1994.  At the same time it enacted C.C.P. §§ 128.6 and 128.7.  Section 128.7 is modeled on F.R.C.P.  Rule 11 and applies to pleadings and other papers filed in court.  To obtain sanctions under 128.7 the objecting party must provide notice and an opportunity for the offending party to withdraw the pleading.  Section 128.7 applies in cases filed after January 1, 1995 and originally had a sunset date of January 1, 1999.  At that point § 128.6, which mimicked the provisions of § 128.5, became applicable.  Throughout the years the legislature has extended the time that § 127.7 would remain in effect.

The Supreme Court held that § 128.5 applies exclusively to actions filed prior to January 1, 1995 and § 128.7 applies exclusively to actions filed after December 31, 1994.  Only a strained reading of § 128.5 would allow its application to “actions or tactics” other than the filing of pleadings, in actions filed after December 31, 1994.  Section 128.5(b)(1) specifically limits the reach of the statute to “actions and tactics” that arise in a pre-1995 proceeding.

The court noted that the dates chosen for the operation of the § 128 series suggests that the Legislature intended to establish a tripartite scheme, with § 128.5 governing in claims filed on or before December 31, 1994, § 128.7 governing in claims filed after that date, and § 128.6 governing in the event that § 128.7 is repealed.  Section 128.6, which is contingent upon the repeal of § 128.7, would not have been necessary if § 128.5(a) was meant to apply concurrently with § 128.7.

The Court found that the legislative history of the 1994 amendments to § 128.5 makes it clear that the Legislature intended the sections to apply independently, during different time frames.  The court was also persuaded that each time § 128.7 had been extended, the Legislature was aware of case law that interpreted the statutes to operate independently.

The Court rejected the argument that the Legislature could not have intended to limit the authority of trial courts to sanction a wide variety of misconduct, other than the filing of motions and pleadings.  The language and legislative history of § 128.5 and related statutes make the scheme clear.  Although § 128.5 was a broad sanction scheme, the Legislature could rationally substitute a narrower one.  In addition, there are other ways to sanction litigation abuses.

Comment: Section 128.7 is a cumbersome tool to punish litigation abuse.  Courtesy and professionalism remain the most effective way to efficiently and fairly resolve disputes through litigation.


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