The U.S. Supreme Court held in 1986 that a trial court adjudicating a motion to approve a settlement agreement may not modify the settlement terms without the consent of the parties. Evans v. Jeff D., 475 U.S. 717 (1986). Thus, it has long been black letter law that a trial court may only determine whether a settlement is fair and reasonable, and either approve or disapprove the settlement. See, e.g., Stahl v. Rhee, 220 A.D.2d 39, 44-45 (2d Dept. 1996).1 Recently, however, both state and federal courts have expressed dissatisfaction with various aspects of settlement agreements presented for their approval. However, trial courts’ efforts to reform settlement agreements have been swiftly reversed by New York appellate courts.
We provide an overview of some recent opinions where New York trial courts questioned the terms of the settlement agreements that they ultimately approved, and proceed to discuss the cases where the trial courts did something different—and were reversed.
Trial Courts’ Discontent
In recent years, the first hint of a New York trial court’s discontent with its limited role in approving settlement agreements came in 2009 in In re Currency Conversion Fee Antitrust Litig., 263 F.R.D. 110, 124 n.3 (S.D.N.Y. 2009). In that case, a federal district court expressed dissatisfaction with the injunctive provisions of a settlement agreement in a class action lawsuit alleging a price-fixing conspiracy between debit card issuers.
The provisions at issue obligated the debit card issuers to disclose information to the card holders that would enable them to compare foreign currency conversion fees, thus promoting competition.2 However, the parties agreed to a five-year injunctive undertaking running from the date of the settlement, and Judge William Pauley commented that he would have preferred that the injunctive relief “continue for at least five years after a judgment is entered.”3 Since “this Court’s power to modify the Settlement is extremely limited,” the judge reluctantly approved the settlement terms.4 But, opining that “[t]his Court discerns no good reason for discontinuing the transparency provisions in July 2011,” the judge exhorted “consumers and government regulators” to “raise the issue” if “the Defendants fail to continue these reasonable disclosures.”5 Evidently, Pauley felt compelled to take this step to address the deficiency he saw in the settlement agreement, and did his best to issue dicta inspiring others to remedy the problem.
Just within the last two months, another New York federal district court judge issued dicta expressing her regrets in approving a settlement of a class action lawsuit. The class action lawsuit involved RICO claims that a landlord, after acquiring several hundred apartment buildings in New York City during the real estate boom, defrauded and harassed tenants in thousands of the rent-regulated apartments to move out. Charron v. Pinnacle Grp. N.Y., No. 07-cv-6316 (CM) (RJE), 2012 WL 2053530, at *2 (S.D.N.Y. June 6, 2012). The settlement provided for the class members to obtain designated levels of damages for “minimal” to “serious” harassment conduct, or their actual damages if higher, by filing individual claims before a claims administrator.6
Although the class representatives objected to the settlement, fewer than 1 percent of the remaining class members opted out or objected in any way.7 Since the class representatives opposed the settlement, the defendants would not agree to an “incentive award” as a term of the settlement.8 In adjudicating the motion for approval of the settlement, Judge Colleen McMahon stated that “[t]his is the rare case where I believe the Class Representatives have actually done something that might entitle them to compensation as part of the settlement,” as “no class representative in my experience has pursued their case as assiduously.”9 However, since “[t]his Court cannot modify the terms of the settlement sua sponte,”10 and the settlement agreement as a whole was otherwise fair and reasonable for the class, the judge approved the settlement.11
Attempts to Modify
Two New York state court decisions in 2010 took the plunge and approved settlement terms that had either been advanced only by one party, or that reflected the court’s own preferred modifications. As described below, both of these decisions were summarily reversed by the Appellate Division.
In February 2010, a New York trial court issued a series of orders concerning the approval of a compromise on a medical lien owed by an infant to a pediatric orthopedist, that had to be satisfied out of the infant’s proceeds from the settlement of a personal injury lawsuit. Legrow v. Emanuele, 70 A.D.3d 783, 784 (2d Dept. 2010). The infant’s mother had signed two “acknowledgements” that she would pay the infant’s bills from the pediatric orthopedist in question, after learning that the orthopedist did not belong to the infant’s father’s health insurance network.12 When the mother and the orthopedist negotiated a compromise on these medical fees, the orthopedist agreed to reduce the fees from $41,663.80 to $33,310.13 Nevertheless, the mother moved the court to approve a proposed compromise order reducing this medical lien to $15,000. In opposing the motion, the orthopedist and her medical group informed the court that they were only willing to reduce their fees to $33,310, although part of the charges could be paid by the mother rather than be deducted from the infant’s settlement proceeds.14
Despite the lack of agreement between the parties, the trial court granted the mother’s motion for a reduction of the medical lien to $15,000; then, a month later, amended its order to modify the lien to the amount agreed to by the orthopedist, $33,310; but, finally, more than a week following the second order, vacated the amended order and restored the lien to $15,000.15
The orthopedist and her medical group appealed the first as well as the final of these three orders. The Second Department did not see fit to comment extensively on the lower court’s orders, summarily deciding that the court “improvidently exercised its discretion by reducing the outstanding medical fees to be paid in satisfaction of the lien.”16 Further, the Second Department held that the fees approved in the second order by the lower court, $33,310, were “reasonable and fair to the infant plaintiff.”17 Thus, the court reversed the first and third orders, and reinstated the second order.18
In October 2010, another New York trial court was dissatisfied with a settlement that allocated only $30,000 of a total $8 million in settlement proceeds to the corporation on behalf of which shareholder derivative claims were asserted. Benedict v. Whitman Breed Abbott & Morgan, 77 A.D.3d 870 (2d Dept. 2010). The claims encompassed by the $8 million settlement included not only the shareholder derivative claim, but also “claims asserted by the plaintiffs in their individual capacities and as trustees and beneficiaries of certain trusts.”19
When the motion for approval of the settlement was submitted, settlement funds were allocated mostly to the individual shareholder plaintiffs and the beneficiaries of the trusts, plus in addition $30,000 to the corporation and legal fees.20 The trial court found that “the proposed allocation to [the corporation] was unfair and unreasonable,” and reallocated the settlement funds so that comparable amounts were allotted to each of the corporation ($2.4 million), the trust beneficiaries ($2 million), the beneficiaries of other related trusts ($2 million), and the individual plaintiffs ($1.6 million)—with no provision for legal fees.21 Notably, under the court’s modified plan, the corporation was allotted the largest portion of the settlement funds.
On appeal, the Second Department reiterated the black letter law that “[t]he court must determine whether a proposed settlement of a shareholder derivative claim is fair and reasonable to the corporation and its shareholders, then either approve or disapprove the settlement.”22 Since “the court may not modify the terms of the settlement,” the court swiftly reversed.23
New York trial court judges are not always entirely happy with the settlement agreements that they approve—and sometimes they feel compelled to express their dissatisfaction. Although usually these comments are issued as dicta, on a few occasions recently judges decided to approve a court-modified version of the settlement. The New York appellate courts, however, have not been willing to entertain any departures from well-settled principles. Thus, the trial courts’ attempts to modify settlements have been summarily reversed.
Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky. Chi-Ru Jou, an associate at the firm, contributed to the content of the article.
1. The Second Department held that “the power of the court to approve a settlement does not confer a concomitant power to dictate the terms of the settlement” and reversed the trial court’s removal of the mother as guardian ad litem in its approval of the settlement in an infant plaintiff’s lawsuit. Id.
2. Id. at 124.
3. Id. at 124 n.3 (emphasis added).
5. Id. at n.3.
6. 2012 WL 2053530, at *3.
7. Id. at *7.
8. Id. at *27.
9. Id. at *23, 27.
10. Id. at *27.
11. Id. at *32.
12. 70 A.D.3d at 785.
13. Id. at 784.
16. Id. at 785.
18. Id. at 784.
19. 77 A.D.3d at 871.
22. Id. at 872 (internal quotation omitted).