With fewer and fewer cases going to trial, lawyers must be competent in settling claims and preparing settlement documents that accurately capture the terms of the settlement. While settlements often bring a sigh of relief from lawyers and their clients, getting from the point of settlement to execution and payment—this article is written from mostly the plaintiff’s perspective—can take months, and sometimes requires court-intervention. This usually happens, as stated in more detail below, when one side wants to renegotiate the material terms of a settlement agreement; and the main reason for seeking to renegotiate is often the other side was not adequately prepared going into and during settlement negotiations. This is particularly true in complicated cases involving multiple parties and claims.
Most litigators, if not all, have negotiated settlements and prepared many settlement documents. And there are many articles written about the “dos and don’ts” of negotiating a settlement or preparing a settlement document. This article focuses on a few additional points for practitioners to consider when negotiating a settlement or preparing a settlement document.
Know the Substantive Law
While this sounds simple and obvious, many settlements are broken because a party did not fully understand the substantive law regarding claims or defenses during settlement negotiations. The terms of a settlement agreement often depend upon substantive legal issues requiring lawyers to understand not only what should be in a settlement agreement, but also how those provisions are affected by the substantive law in the claims being settled, including whether they are legal and enforceable. If you practice in complex business litigation, as I do, virtually any area of the substantive law can be implicated in a business dispute.
I was reminded of the complexities surrounding settlement agreements recently where opposing counsel tried to break the parties’ settlement in a civil RICO case after the parties settled with no uncertain terms at a settlement conference with the assistance of a magistrate judge. The RICO action involved multiple defendants and multiple defense counsel. With the assistance from the judge, the plaintiff and a group of defendants settled their disputes. After the settlement, however, defense counsel argued that plaintiff should indemnify the settling defendants if any non-settling defendant brings a cross claim against the settling defendants—a material provision never negotiated nor permitted under RICO. In this case, defense counsel was on a fool’s errand as she was advocating for an unenforceable provision—a provision that would be of no value to her clients.
Regarding RICO lawsuits, a topic I discuss frequently, there are many important considerations when settling a RICO claim. For example, a defendant cannot obtain contribution for RICO liability, as in County of Hudson v. Janiszewski, 351 Fed.Appx. 662, 666 (3d Cir. 2009). This prohibition against contribution is based on the omissions in the RICO statute, as federal courts have held that in enacting RICO, Congress created a comprehensive list of civil remedies available to a plaintiff, see 18 U.S.C. Sections 1961.
Likewise, indemnification is prohibited under RICO (and many other federal statutes). This is because the predicate offenses of a RICO claim involve a finding of intent. Allowing indemnification claims would run counter to the paramount policy objectives of RICO to punish violators with personal liability and deter racketeering. Similarly, indemnification is unavailable for violations of Section 10(b) for securities fraud because violation of Section 10(b) must be predicated on a finding of scienter. It would be senseless to allow someone to “insure himself against his own reckless, willful or criminal misconduct,” as in In re Livent Securities Litigation, 193 F.Supp.2d 750, 754 (S.D.N.Y. 2002).
Ignorantia juris non excusat: a legal principal that a person who is unaware of a law may not escape liability for violating that law merely because the person did not know about the law. This same principle applies to practitioners when settling cases. You must know the substantive law relating to the claims and defenses in your case before a settlement conference or mediation so you can advise your clients appropriately and allow them to make informed decisions within the ambit of the law. The law is constantly changing and the duty to be informed of the latest case law and statutory interpretation in the appropriate jurisdiction applies before and through settlement. The restrictions provided by the law might very well play a large role in the settlement terms, including the actual settlement amount. And, you want to make sure you are following the law, including settlement provisions that are lawful. Once a party settles, she is bound by the settlement and the ignorance of the law is no excuse.
In the above RICO case, although counsel eventually conceded an indemnification provision for a RICO claim was improper, her attempt to put that provision caused several months of delay in executing the settlement agreement.
The Scope of the Release
The main reason to settle a case from the defendant’s perspective is get released from the lawsuit and potential liability resulting from the lawsuit. While there are many important things to consider when preparing releases, there is one thing I feel the need to emphasize about releases. The release language should expressly reserve those obligations not being released, including, in particular, the promise the released party made in exchange for obtaining the release. While this statement sounds simple (and it is), sometimes the law defies logic.
In a recent matter in which I represented the plaintiff-borrower, the court held that a release provision released all claims against the defendant-bank including the defendant’s obligations under the agreement that the defendant agreed in exchange for obtaining the release, see Front Street Development Association v. Conestoga Bank, No. 140803867 (Pa. Com. Pl. 2015). The case involved a loan transaction where a borrower brought claims against the bank alleging, among others, that the bank breached its promise to forbear under a forbearance agreement. Specifically, the borrower alleged that the bank agreed to forbear from taking certain adverse actions under the forbearance agreement and the bank breached that agreement by taking the actions the defendant agreed to forbear. The forbearance agreement contained broad release language commonly used by banks and other lenders (i.e., the release that says every claim is released, whether known or unknown, whether accrued or unaccrued … ). The trial court held, without any explanation, the release in the forbearance agreement “explicitly contemplated the precise claims asserted in the complaint” and therefore those claims are covered under the release. On appeal, the Superior Court affirmed the trial court’s decision, also echoing that the release provision released all obligations by the lender. The courts’ holding deems the forbearance agreement to be worth nothing more than the paper it’s printed on as the party who agreed to forbear was free to breach that promise.
This case is troublesome for the obvious reason, especially in a settlement context. The holding means a plaintiff who settles her case in exchange for a settlement payment could be without a remedy even if the defendant does not make the settlement payment and the settlement contains a broad release. Although I believe the holding was wrong, practitioners should heed advice from this cautionary tale and expressly make exceptions or reservations in the release language (e.g., “The plaintiff releases the defendant … provided, however, that nothing contained in this release paragraph shall be construed as releasing the defendant of his obligation under this settlement agreement”).
Dealing With Opponents Who Want to Renegotiate
As mentioned above, some opposing counsel (usually defense counsel) seek to renegotiate the terms of the settlement after the fact. Two common reasons trigger the desire to renegotiate. First, some counsel insist on using their “form” agreements that contain material terms that were not negotiated. Some of these material terms (that were not negotiated and agreed to at during the settlement negotiation), may include, a confidentiality provision, fee-shifting provision, liquidated damages provision, and indemnification provision. While defense counsel would argue these are “customary” provisions and therefore should be included even if they were not agreed to by the parties, let alone even discussed, that is simply not the case. Often, these provisions are not even appropriate under the circumstances or can lead to more of a headache than they are worth. A person who does not deviate from a “form practice” may not initially see the problems the form poses, so be careful.
The second common reason is “buyer’s remorse.” This commonly occurs when a party facing liability settles a matter, but comes to regret the settlement after days, weeks or even months have passed. The more time that elapses between the time of settlement and execution, the more likely it is this buyer’s remorse strengthens, leading to the “buyer” trying to renegotiate material terms. The solution I propose to deal with both issues is to write down a detailed term sheet during settlement. This term sheet should be agreed on at the settlement and distributed to opposing counsel so the parties are all on, and remain on, the same page.
Edward T. Kang is the managing member of Kang, Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities.