California Mediation and Arbitration

Settlement Agreements: An Agreement Is Enforced Under CCP 664.6 Despite $250K Liquidated Damages Clause

Liquidated Damages Of $250K Were Reasonable In Proportion To $2.2M Settlement.

        After an all-day tele-mediation the parties executed a term sheet providing that defendant/cross-complainant would pay $1.6M to plaintiff, and cross-defendant would pay $600K. Defendant/cross-complainant had second thoughts the next day and reneged on payment. Cross-defendant paid $600K. And plaintiff successfully enforced the settlement in the trial court under CCP § 664.6. Defendant appealed -- unsuccessfully. BTHHM Berkeley, LLC v. Stewart Johnson v. Holda Novelo, A166242 (1/4  3/28/24) (Goldman, Brown, Streeter).

        The panel rejected arguments that the settlement agreement lacked enough specificity. Although it contemplated future events, such as execution of a stipulation, releases, and assistance if necessary by the mediator, those aspects did not negate the sufficiency of the agreement, which by its terms was "admissible and enforceable in court" and "a good faith settlement."

        Sometimes it is argued that the liquidated damages clause in an agreement amounts to an unreasonable forfeiture and is not enforceable. The argument did not fly here. Civil Code § 1671(b) creates a presumption that liquidated damages are valid unless the party challenging shows the damages are unreasonable. With a non-consumer contract and a $2.2M settlement, Justice Goldman explained that the liquidated damages were not unreasonable.

        However, the panel did remove some prejudgment interest. Prejudgment interest is an element of damages, and the settlement agreement set the damages. The panel would not create a new damage term that the parties did not agree to.

        COMMENT: What probably weighed in favor of enforcing the settlement? The trial judge found that defendant's declaration seeking to avoid enforcement was "self-serving." The parties were sophisticated, this was a commercial transaction, and they received legal advice. The settlement term sheet included the following language: "Parties agree the Agreement is admissible and enforceable in court pursuant to CCP § 664.6. The parties agree that this is a good faith settlement between adverse parties. . . ." And while defendant did not pay $1.6M toward the settlement, another party did pay its share of $600K.

Settlement: Conditional Acceptance Of A Settlement Offer Does Not Result In A Settlement Using Section 998 Procedure

An Offeree's Acceptance Of A Section 998 Offer Must Be "Absolute And Unqualified" To Form A Binding Settlement.

        "Absolute and unqualified" did not describe the offeree Says Siri's acceptance of Sutter Home Winery's offer in Says Siri v. Sutter Home Winery [Trinchero Family Estates], A161923 (1/4  8/25/22) (Pollak, Streeter, Goldman). Instead, Siri accepted Trinchero's settlement offer on the condition that the trial court resolve issues relating to how much interest Siri could recover on the judgment. Invoking Section 998 procedure, the trial court ordered judgment be entered pursuant to Section 998, and ultimately denied the claim for prejudgment interest. Because Siri's acceptance was not absolute and unqualified, the Court of Appeal reversed the judgment of dismissal, remanding "for further proceedings consistent with this opinion."

        COMMENT: Justice Pollak explains, "Treating Siri’s conditional acceptance as a counteroffer that Trinchero accepted by agreeing to have the court rule on Siri’s motion for an award of interest, the court might find that an enforceable settlement agreement had been reached. . . . Such an issue is not now before us; we hold only that Siri’s conditional acceptance did not create an agreement enforceable under section 998."

        Justice Pollak is a very clever judge and this is a clever opinion. But we are a bit puzzled. Did Justice Pollak simply give the trial judge a roadmap to reach the same result as before? Or are there going to be further stumbling blocks that prevent reaching the same result?

Settlement: Marital Settlement Agreement Is Held To Be Waiver Of Surviving Spouse's Spousal Rights

Read Probate Code §§ 144 - 144.

        An enforceable marital settlement agreement can lead to a waiver of spousal rights. In Welch v. Welch, B311507 (2/5  5/31/22) (Moor, Rubin, Kim), a husband and wife, anticipating the dissolution of their marriage, entered into a marital settlement agreement (MSA) to distribute their property. The court entered judgment, the wife died, and the surviving husband sought to undo the settlement agreement. He succeeded in the trial court, but failed in the Court of Appeal. 

        The issue was whether the surviving spouse, the husband, waived spousal rights enumerated in the Probate Code, § 141(a) by entering into the MSA. The Court of Appeal held that the MSA was enforceable, because it was a complete property settlement, the parties were represented by counsel, and the husband had  received a "fair and reasonable disclosure of the property or financial obligations" of his wife.

 

Settlements: Lawyer's Alleged Duress Doesn't Void Settlement Agreement With Defendant Who Didn't Know About Duress

“'Duress by a third person' is the legal label for this contract case."

       Plaintiff Laura Fettig entered into a settlement agreement, on the record, of her personal injury case. Later, she tried to set aside the settlement agreement, arguing she had only settled under duress caused by her attorney who threatened to abandon her case if she refused the settlement. Defendants did not know about the duress, and entered into the settlement in good faith. "But duress by a third person [i.e., by her lawyer] cannot void a contract when the other contracting party did not know about the duress and relied in good faith." Affirmed. "The court rightly refused to rescind the contract." Fettig v. Hilton Garden Inns Management LLC, No. 307348 (2/8  5/4/22) (Wiley, Grimes, Harutunian).  

Settlement Of A Class Action: Ninth Circuit Affirms Denial Of Claimants' Motions To Enforce Class Action Settlement Agreement In VW "Clean Diesel" Litigation

Express Modification Provisions In Volkswagen Class Settlement Agreement Allowed For A Modifying Amendment.

Look Sharp Barber Shop sign (painted 1969 Volkswagen), Yuma, Arizona. John Margolies, photographer. Library of Congress. [No, that's not the model involved in the "Clean Diesel" Litigation, but we liked the photo].

        The settlement agreement between class action plaintiffs and Volkswagen Group of  America, Inc. provided for compensation to owners and lessees of diesel cars with so-called "defeat devices" that altered automobile emission profiles, concealing that diesel engines emitted excessive pollution. A nation-wide class action settlement of the civil claims was approved by the district court in October 2016, with the court retaining the jurisdiction to "enforce, administer, and ensure compliance" with it terms, and the settlement was affirmed by the 9th Circuit in 2018.

        The settlement, however, excluded certain "branded title" vehicles with titles such as "Junk," "Rebuilt, or "Salvaged." Then in February 2018, the Claims Supervisor, whose role was created to administer the settlement, announced that under a "Framework", "branded title" vehicles would also include vehicles purchased from "insurance auctions."

        Claimants who  had purchased at insurance auctions and were not excluded by the modification tried to enforce the settlement that did not exclude them. However, the district court accepted this modification, finding that the Claimants who had acquired vehicles at insurance auctions did so after Volkswagen's fraud became public, and thus did not "unknowingly suffer harm from the auto manufacturer's actions." Furthermore, most such vehicles were already taken off road, and thus were not polluting anymore, so the additional exclusion of vehicles from the settlement did not undermine the purpose of the  settlement. 

        The Claimants appealed the denial of their motion to enforce the settlement. In re Volkswagen "Clean Diesel" Litigation, No. 19-16361 (9th Cir. 9/10/20) (Bumatay, Schroeder, Morris). The Court of Appeals affirmed, reasoning that the district court did not abuse its discretion denying the Claimants' motion, because the district court had retained jurisdiction, and the  settlement agreement included express modification provisions allowing the modification to be made.

        Judge Bumatay, who authored the opinion, wrote: "It doesn't take a mechanic to understand this case."

Settlements: 9th Circuit Takes Negotiation Strategy Into Account In Case Where Trial Judge Slashed Fees Because Plaintiff Settled for 10% Of Claim

The Majority Opinion Acknowledges That Parties Can Start High When Staking A Claim.

          In today's Daily Journal, I have an article about Vargas v. Howell et al., 2020 DJDAR 905 (9th Cir. Feb. 5, 2020), entitled: 'Mechanical' analysis of attorney fees award in civil rights case results in partial reversal'.  In Vargas, the trial judge slashed a senior litigation attorney's fees 90% in a civil rights case. The Court of Appeals panel majority required further explanation for the severe discount, and District Judge Roger Benitez dissented, believing that the trial judge had provided enough explanation already. While my article focuses on the fee issue, one issue addressed in the case will be of interest for mediators, as well as for attorneys and clients negotiating a settlement.

          The majority opinion argues that punishing a fee applicant in a civil rights case because the settlement amount is a fraction of the claim can create "perverse incentives." Because it is unusual and interesting for a court to speculate or opine about the effect of a fee award on settlement negotiation strategy, I provide the court's comments. Here is the panel's discussion of the potential impact on negotiation strategy of a trial court's discounting fees 90% because the settlement was 10% of the claim:

     The effect of that approach is to punish Vargas’s attorneys for pursuing what might well have been a sensible negotiation strategy. A reasonable attorney representing Vargas could have made the strategic choice to present an initial damages estimate as high as possible. Of course, an unrealistically high estimate could make settlement talks unproductive, and an attorney must also ensure that any estimate presented to the court is “likely [to] have evidentiary support after a reasonable opportunity for further investigation.” Fed. R. Civ. P. 11(b)(3). But within those limits, Vargas’s attorneys could reasonably have decided that by offering a high damages estimate, they would retain “room to later grant concessions, while still reaching a favorable settlement.” Stephen J. Ware, Principles of Alternative Dispute Resolution § 3.15, at 313 (3d ed. 2016). Had they started from a lower number, the settlement might have been lower. Whether or not that is the strategy Vargas’s attorneys had in mind, they should not be faulted for negotiating a settlement.
     The district court’s approach threatens to create perverse incentives for lawyers representing civil rights plaintiffs. If fees are reduced whenever a case settles for less than the initial demand, lawyers will be encouraged to make only modest initial demands, limiting the potential recovery for their clients. And as the litigation proceeds, they will be encouraged to refuse to lower their demands, making settlement more difficult and prolonging the litigation. No one will be well served by that approach.

 

Settlement Agreements: How To Minimize Bankruptcy Risks In Settlement Agreements

Useful Advice In An Online Article.

    A problem sometimes arising in mediation is that while the parties may agree on a settlement amount, the defendant signals it may declare bankruptcy, putting the value of any settlement in doubt. How can bankruptcy risks be minimized in settlement agreements? I found an online article addressing this question on the Holland & Hart website to be useful. Rather than remake the wheel, here is a link to the article.

    I would, however, caution California practitioners to be careful with the discussion about preserving the full amount of the original claim in the event bankruptcy is declared, because there is a substantial amount of California law supporting the proposition that once a settlement amount is agreed upon, reverting to the full amount of the claim in the event that the settlement agreement is breached may constitute a penalty and forfeiture.

Settlement Agreements: Judgment Creditor's Release Of Judgment Debtor Does Not Preclude Her Attorney From Pursuing Contingency Fee and Costs From Judgment Debtor

The Trial Judge Thought Something Didn't Seem Right.

    An opinion from the Second District, Division 6, begins snappily: "Of course, on occasion, a client may not fully appreciate the excellent result achieved by her or his attorney." And of course, the author is Justice Gilbert. Mancini & Associates v. Jason Schwetz, B290498 (2/6  9/4/19). 

    The background is that Mancini & Associates obtained a substantial jury award for their contingency fee client Gina Rodriguez, who had sued her employer for wrongful termination, sexual harassment, sexual battery, and breach of contract, among other causes of action. The award proved to be uncollectable. Some years later, Rodriguez and her former employer, Jason Schwetz, buried the hatchet, and entered into a settlement agreement and release, without consideration. 

    Mancini & Associates sued Schwetz and the trial court decided Mancini "established that Schwetz intentionally interfered with the retainer agreement and . . . entered judgment for $409,351,351.81. "In ruling, the trial judge commented, 'Something about this [factual situation] doesn't seem right. It's inconsistent. Sometimes I see this happen, this sort of resolution when there is evidence of a kind of romantic relationship that's been rekindled . . . '"

    Justice Gilbert asks, "Does this release preclude the attorney from pursuing his costs and fees from the defendant?" And answers: "Of course not."

 

 

    

Settlement Agreements: 2/4 Cal Court of Appeal Holds That Stipulated Judgment Constituted An Unenforceable Penalty

And The Court Explains How The Stipulated Judgment Could Have Been Structured So As To Be Enforceable.

        "The principal issue in this appeal is whether the stipulated judgment constitutes an unenforceable penalty." Red & White Distribution, LLC, et al. v. Osteroid Enterprises, LLC and cross-complaint, B291188 (2/4  8/9/19) (Currey, Manella, Willhite).  Here, "the parties entered into a settlement agreement providing that if R&W defaulted, the Osteroid Parties could file a stipulation for entry of judgment, with the amount of the judgment being $700,000 more than the settlement amount plus interest and attorneys' fees." The Court of Appeal concluded that the additional $700K was an unenforceable remedy under Civ. Code section 1671(b), pertaining to whether a liquidated damage clause is valid or unenforceable.

         And all this is well-established law under Ridgley v. Topa Thrift & Loan Assn., 17 Cal.4th 970 (1998) and Greentree Financial Group, Inc. v. Execute Sports, Inc., 163 Cal.App.4th 495 (2008). So why did the Court bother to publish?

        We believe it is because the trial judge declined to follow Ridgley and Greentree, believing that it could instead follow Jade Fashion & Co., Inc. v. Harkham Industires, Inc., 229 Cal.App.4th 635 (2014). And so the Court of Appeal performed its educational role by explaining that the cases are not inconsistent, and that the stipulation, had it been structured à la Jade Fashion, could have been enforceable. 

        What would an enforceable stipulation require? An agreement to discount for timely payment of an admitted debt. Thus, the outcome of Red & White Distribution could have been an enforceable stipulation if the parties had agreed or the appellate record had demonstrated that R&W admitted it owed $2.8M, and the parties had stipulated to discount the debt to $2.1M upon timely payment, absent which the full amount would have been due.

But that is not how the parties structured the settlement. 

    COMMENT: My colleague Mike Hensley represented the successful party in the Greentree appeal. Mike and I are the co-creators of another blog, California Attorney's Fees.

 

 

 

 

 

 

 

 

Settlement Agreements: Civil Code Section 1668 Negates Contractual Clause Eliminating Liability For Fraud When Tortious Elements Are In The Past

But Civil Code Section 1668 Does Negate Contractual Clause Exempting Party From Responsibility When Elements Of Tort Are Concurrent Or Future Events When Contract Is Signed.

    Until Lingsch v. Savage, 213 Cal.App.2d 729 (1963) and Orlando v. Berkeley, 220 Cal.App.2d 224 (1963) came along, sellers attempted to remove liability for the condition of property by using "as-is" conditions in contracts, taking advantage of the ancient rule, "caveat emptor" or "buyer beware." As a consequence of those cases, interpreting as-is clauses so as to be consistent with Civil Code section 1668¹, which does not allow one to exempt oneself from one's own fraud, an as-is provision is ineffective to relieve the seller of fraud. And so argued the assignee of an apartment complex purchased earlier from a developer when suing the developer and related entities for defective construction. SI 59 LLC v. Variel Warner Ventures, LLC et al., B285086 (2/2  11/15/18) (Ashmann-Gerst, Chavez, Hoffstadt).

    In affirming dismissal of Plaintiff/Appellant's complaint, the Court explains the temporal limitation of section 1668: "section 1668 negates a contractual clause exempting a party from responsibility for fraud or a statutory violation only when all or some of the elements of the tort are concurrent or future events at the time the contract is signed. Contrariwise, we hold that section 1668 does not negate such a clause when all the elements are past events. Regarding the element of damages, which is necessary for tort liability, this means that at least some form of economic or physical damage has occurred." Thus, with a suitable disclaimer, one can be off-the-hook for past fraud, but not fraud occurring concurrently with or after the contract is signed.

    COMMENT: This is a slippery area, and the ruling, particularly with regard to damages, could invite future litigation. One can foresee future argument arising over whether a statutory violation that arguably led to a diminution in market value before a contract was signed, and which was known to the seller but not to the buyer, and subsequently led to physical injury after the contract was signed, nevertheless allows for a complete release of liability, despite Civil Code section 1668, because some damage by way of diminution of value occurred before the contract was signed.

¹ Section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."