The trick of a settlement is to get paid on time and without a "lot of pushing and shoving." A settlement is a good settlement when money is in hand. A magic settlement is when the defendant pays on time. A settlement is a bad settlement when the plaintiff walks away totally and completely skunked.1
F.A.C.E., a pneumonic device that stands for FINALITY, ASSURANCE, CLARITY, and EFFICIENCY. Finality means that the settle encompasses all issues and forecloses, as best as possible, any continuing obligations that might initiate further litigation, or just as bad, the risk of litigation. Assurance means that the parties are going to receive, without risk, what they seek under the settlement, which is usually payment of money. Clarity means that the document is clearly and expertly drafted to insure that the parties received the benefit of the settlement and that the terms are spelled out in great detail. Efficiency means that the remedies in favor of the parties are accessible, without a barrier, and lack any burden (i.e., mediation or arbitration).
Face time with a settlement means that you stare at the settlement and settlement stares back at you. I hope that the settlement does not mumble, "You forgot something... time for a do-over."
On the other hand, in the vernacular: "Here's looking at you, kid."
Good lawyers win cases at trial. Great lawyers win at settlement. Let us turn a good lawyer into a great lawyer, and here is the paper map [GPS not required]:
I. MONEY MAKES THE SETTLEMENT GO AROUND
What happens when the claim exceeds the financial ability of the Defendant? Answer: Very careful drafting of a settlement agreement.
The "hair on fire" epiphany is that the claim is in the millions, but the Defendant lacks the liquidity to pay the claim upon entry of a judgment. Plaintiff wins at court, but stymied in collection. Typically, the Defendant has non-cash assets such as equity in a home, money in an IRA account, an annuity, or other assets difficult or sometimes even nearly impossible to reach. Everyone is unhappy because the plaintiff won, the attorneys spent good money, the defendant faces a big judgment, but the defendant's extensive assets make bankruptcy unattractive. Look for the settlement Deus Ex Machina falling from the sky.
The imbalance of liability over assets percolates from the date of filing the suit. The trial lawyer confronts this crisis at the mediation, settlement conference, on the eve of the trial - "hail Mary" - to settle the case, or the post-trial settlement when the defendants finally fess up that they do not have the financial ability to pay the judgment, nor the inclination.
What to do?2 3 A good settlement is always better than losing a case. A great settlement is the settlement that pays off, on time.4
II. The Watchword
The opening salvo of any settlement is that the settlement must enhance the position of the plaintiff in excess of the opportunities available under a judgment.5 The settlement must be a better deal than winning the case. If a party wins the case, a party has lots of remedies which include executing upon the defendant's assets, reaching assets that have been fraudulently conveyed, making the defendant's life miserable that might compel this person to settle for cash (a discount maybe), or ferreting out a bad faith claim against the defendant's insurance company, assuming a personal injury case. For that matter, the fact that the plaintiff has a judgment might itself compel the defendant to cough up the money. A large civil judgment destroys anyone's credit standing. Credit scores plummet.
Given the advantage of a judgment and the muscular enforcement, the settlement must offer a better deal. The reason is that most settlements include releases, long-term payment programs, dismissals of lawsuits, and agreements to merge all of the claims into the settlement, which obligates the parties to file a lawsuit on the settlement agreement. Should the defendant default under the settlement agreement, and given all of these moving parts, the settlement might be a total and complete disaster. These terms even might eviscerate the judgment. Giving up the judgment might be a mistake and a fatal mistake that poisons the relationship by and between the attorney and the client.
III. What Makes a Great Settlement Tick and Keep on Ticking?
This is a shopping list of what makes a settlement great. Many of these suggestions are more than just a suggestion they are a requirement in any settlement instrument. Let's keep in mind that many defendants and their lawyers smell "blood in the water," in settling the case. The defendants and their lawyers think they can "out maneuver" plaintiff's counsel, and through very clever negotiating, destroy the value of the plaintiff's claim. Details make the world go around, including settlements. Embrace this statement as the mantra of all settlements.
Let's take a trip down the yellow brick road.
A. Payment Programs Require Bona Fide Security
Professor Wimpy teaches us, "I'll gladly pay you Tuesday for a hamburger today." Professor Wimpy is a shrewd character because he knew that people who make promises to pay might default and disappoint everybody.
Let us frame the problem here. Plaintiff is on the sidewalk. Defendant is driving a car. Defendant is busy staring at their smart phone, and specifically trying to tune in to the latest version of "The Voice." Staring at the smart phone, rather than staring at the person on the sidewalk is a first rate formula to a big lawsuit, particularly if the defendant runs down the Plaintiff who suffers lifetime crippling injuries. This case is worth say $5M to $10M depending on the injuries. The defendant has insurance in which the limit is $1M and no umbrella. The defendant owns a $5M house is Palo Alto with about $4M worth of equity. Call this the "fat cow" asset. [Vegetarians may cringe at this, but no animal was harmed in the writing of this article.]
If the case is settled for $3M, rest assured the insurance company would gladly turn over the $1M. The defendant will sign a note or stipulation for entry of judgment for a five-year payment program for the balance. Expect the defendant to default. Any other expectation is fantasy.
To secure the payment of this long-term note, the plaintiff must demand and receive security. The security may consist of a Deed of Trust encumbering the home [or a mortgage, if you are in a mortgage state.] Alternatively, the security may consist of a judgment, which is entered, and the recording of an abstract of judgment. This sort of works, and sort of does not work because the debtor is going to assert a homestead in the event of a default and execution under the judgment.
To secure the security [not a typo here] the plaintiff needs to purchase title insurance to make sure that the security is good and attaches to the collateral. More than one plaintiff [and their lawyers] is kicked to the curb when they find that the real property has been transferred the day before the security attaches. Been there, done that, for many lawyers.
There are many little details, which we will spell out in the shopping list.
The property course professor teaches students that title is more than a grant deed. Title in the real world means "good and marketable title." Title also means that the grand deed (or quitclaim deed) was properly indexed and; therefore, appear in the grantor-grantee index. Apply these adages to a settlement. The security is more than a lien. Foreclosure under the lien delivers good and marketable title of the collateral, which would enable the plaintiff to monetize the collateral and pay the judgment.
B. Time is Your Enemy
California law specifies that plaintiff must bring the case to trial within five years. See, for example, C.C.P. section 583.310. [The five-year rule.] Should the parties enter into a payment program, they need to address the fact that the case must come to an end. An "end" means that the following must occur:
1. Judgment.
2. An order extending the five years.
3. An order entering the settlement agreement as the judgment.
4. Entering a dismissal without prejudice and the right to reinstate based upon a court order, which entitled the Plaintiff to do this.
Some case law suggests that a payment program might toll the five years. The problem is case law changes or offers variations. Better to have finality and specifically, a judgment, which stops the clock. At least the judgment brings the case to an end and avoids the risk of an involuntary dismissal for the failure to bring the case to trial.
C. Settlements in Federal Court or State Court: Ephemeral Post Settlement Jurisdiction
Settlements in Federal court range from the brilliant, bad or a total disaster. Here is the watchword. If a party settles a case in Federal court by way of a settlement agreement, with a reservation of rights to enter judgment at a later date, the court does not necessarily keep and retain jurisdiction to enter the judgment, or enforce the settlement agreement. The settlement agreement is a stand-alone document and itself must be the independent basis of federal jurisdiction.
Typically, plaintiff and defendant enter into a settlement agreement, that plaintiff dismisses the case with prejudice, and hopefully the defendant pays. This is a bad deal. First, absent a court order (maybe), plaintiff cannot unwind the dismissal with prejudice. If the dismissal is without prejudice, without a reservation of jurisdiction by the District court judge on its face, the court may not revive the action to enforce the settlement agreement. This is bad news all around. A defendant defaults because the defendant ran out of money, sold every asset to the wall, or squirreled away every nickel and dime.
The smart money here is to enter the settlement agreement as an independent judgment in the Federal court under California Code of Civil Procedure section 664.6, and that the terms of the settlement constitute a Federal judgment and enforced by the Federal judge. Anything less asks for trouble. See, Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375 (1994). Memorize it, if you are in Federal court.
State court offers the same complicated rules. If the parties settle the case where the plaintiff dismisses the action with prejudice and expects to receive payment under a settlement agreement in the event of a default, plaintiff cannot reopen the case unless the parties not only inserted that in the settlement agreement, but the judge signed off and approved the agreement. By approving, the agreement means that the judge retains jurisdiction to vacate the dismissal. See, Pietrobon v. Libarle (2006) 137 Cal.App.4th 992 (overview of the rules of road and potential outcomes including a suit on the settlement agreement).
Some judges might push back from vacating a dismissal with prejudice, even if the court specifically retains jurisdiction to do so. The court may be without the power to vacate a dismissal with prejudice. Therefore, the dismissal would be without prejudice which is still not even a good idea. Having a court approve the settlement agreement that provides for dismissal without prejudice may not even be enough to save the day. The court should enter an order providing for an order vacating the dismissal in the event of default, specifically on its face.
If the plaintiff is stuck by seeking to enforce the settlement agreement, plaintiff is obligated to file a brand new lawsuit, serve the lawsuit, proceed with a writ of attachment, and litigate an answer if filed. Plaintiff has certainly spent a lot of time and a lot of money, and the risk is that the defendant has already dissipated its assets. If the settlement agreement is in some way ambiguous or uncertain, plaintiff might be stuck litigating the settlement agreement and requiring the original trial counsel to be a witness. Plaintiff might have to hire a second set of lawyers. The second lawsuit burns up time, effort, and worse, money. Delay in reaching the assets of the default defendant is fatal if the defendant, in exploiting this delay, liquidates every asset.
D. Releases Gone Wild!
Releases are de rigueur. Why? Why is plaintiff releasing defendant of anything? The problem with the release is that plaintiff is not only releasing defendant of the claims, but most likely releasing third parties, such as officers, agents, directors, affiliates, shareholders, relatives, partners, and a whole long litany of everybody else.
The risk of this release is that plaintiff cannot sue the parties releasing these releases for the following: Fraudulent conveyances if they received assets from the debtor, liability as an alter ego, or other third party viable claims. This is for real. See, In re Mortgage Fund '08 LLC, 541 B.R. 467, 487-87 (Bankr. N.D. Cal. 2015), in which the trustee was skunked when the trustee filed a lawsuit against collateral parties who have received a release in settlement with the primary defendant. This was a complete windfall in favor of the collateral parties and in all likelihood, the defendant and the collateral parties knew what they were doing.
All releases do is give a "free pass" to third parties to participate in a fraudulent conveyance where the defendant dumps over the side valuable assets in the hands of third parties who are now "sue proof." A broad release opens the door to assets who sprout feet and beat a hasty retreat.
Next time, limit releases to the exact claim or banish the release. You can always demand that the defendant releases the plaintiff and not vice versa.
E. Alter Ego: To Be or Not To Be
Plaintiff settles. Plaintiff executes a broad based release. This release extinguishes all liabilities of an officer, director, shareholder, agent, employee, attorney, or third party. Defendant, a corporation or LLC defaults. Plaintiff proceeds with a debtor's examination. Plaintiff learns at the debtor's examination that the defendant, i.e., say, a corporation, is nothing more than a shell.
Plaintiff proceeds with an alter ego action or motion to amend the judgment for purposes of imposing liability upon the individual officers, directors, shareholders, etc. Their defense is, of course that they have been discharged. They are going to win. Plaintiff is now stuck with a shell corporation as the sole liable party and; therefore, an uncollectible judgment. The judgment goes down the drain, and never to be seen again.
The moral of this section is do not sign a release, and specifically do not sign any broad based release in favor of an insider. Again releases might insure that the "veil" never takes flight.
F. The Shopping List of Touch Stones:
1. Fixing the balance due, including a final total.
2. Setting the rate of interest and the date interest accrues.
3. Fixing the place of payment.
4. Fixing the amount of the payment.
5. Inserting a prepayment penalty.
6. An acceleration clause.
7. Notice of default and its limits.
8. Method of sending the notice of default, i.e., mail, email, overnight, or fax.
9. Right to foreclose on collateral or exercise remedies.
10. Attorney's fees clause.
11. Choice of law.
12. Form selection.
13. Waiver of the Statute of Limitations.
14. Representation that signatory is authorized to bind the parties.
15. Non-modification clause and integration clause.
16. Reservation of rights to reopen underlying case and court order directly authorizing the same, or;
17. Entry of settlement agreement as a final judgment.
18. Incorporation of security, i.e. deed of trust, UCC filing, abstract of judgment, or other remedies.
Details count and a settlement agreement should track this check list.
IV. The Acid Test
Here is the question, and the only question: Does the settlement offer the plaintiff a benefit greater than what a judgment would offer? The lawyer must conclude that the settlement is a better outcome, offers more rights, protects against later misfortunes, and is cheaper and easier to enforce than what is available under a judgment.
If not, walk. Retreat today, fight tomorrow.
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1 "Although this solution is less than perfect, it is a far cry from their being testimonially skunked." Gen. Instrument Corp. of Delaware v. Nu-Tek Elecs. & Mfg., Inc., No. CIV. A. 93-3854, 1994 WL 8146, at *2 (E.D. Pa. Jan. 12, 1994)
2 For those who are logicians: Liability > Liquid Assets + Insurance = A long term settlement. Liability > All assets + Insurance =Insolvency. Liability > Insurance + -Assets= Fraudulent Conveyance ∆↑ or Bankruptcy ∆↑. [Negative assets means that the Defendant refuses to apply assets in satisfaction of the judgment]. -Settlement Agreement > Value of Judgment = Recovery ∆ ↓. [Negative settlement means a settlement agreement which degrades the rights of the Plaintiff to enforce the judgment such as broad releases]
3 This means that "What to do?" is squared meaning that the answer to the question is exponential, i.e., What to do?2"
4 A banker is someone who lends money. A good banker is someone who lends money and gets paid. A great banker is someone who lends money, and gets paid on time.
5 Settlement ∆↑>Judgment = $$$
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