A Cautionary Tale and a Wistful Remembrance About Settlement Security

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Faegre Drinker Biddle & Reath LLP

Our language around settlements connotes war and peace – in settling we are “buying our peace” or “ceasing hostilities.”  The old saw is that a good settlement leaves no one satisfied, but in truth, a good settlement leaves nothing significant left to do in the dispute.  In abandoning claims or defenses, we seek a measure of closure.  And in obtaining a durable settlement our client can live with, we necessarily rely, to some extent, on the regularity of the underlying proceedings, candor to the court, and some minimal level of good faith in the negotiations.

What happens when that reliance is upended and those expectations are dashed?  A recent unpublished California decision provides a cautionary tale.  It also stirred memories of a flawed settlement from three decades ago, inspiring this reverie.

Truck Insurance Exchange v. Federal Insurance Co. (2nd Appellate District, Div. 8 4/7/21) started as a coverage dispute stemming from a large number of product liability claims against a mask and respirator manufacturer.  The long-running mass tort (born in 1986) resulted in apparent exhaustion of the primary layer of the manufacturer’s coverage in 2003, triggering the excess/umbrella coverage layer.  Excess carriers were notified and assumed coverage.

Complications ensued when the manufacturer later found a “lost” primary policy issued by another carrier.  For simplicity, we’ll call the resulting combatants Excess and Primary.  Excess sued Primary for reimbursement of its premature expenditures, alleging the lack of exhaustion at the primary layer eliminated its coverage “duty” unless and until Primary’s policy was exhausted.  And the long-running mass tort thereupon spawned a long-running coverage battle.

Excess prevailed and Primary appealed.  The parties then settled the reimbursement case while the appeal was pending.  The settlement agreement resolved all claims, except it reserved Primary’s right to seek reimbursement for any overpayments it might ultimately make in covering the manufacturer under its policy.  Primary undertook coverage and the parties went their separate ways.

For a moment, anyway.  Peace soon proved elusive and closure a mirage.  When Primary asserted exhaustion, Excess disputed, and Primary sued this time, initiating a second coverage suit for reimbursement of its alleged post-exhaustion payments.  Excess prevailed on the exhaustion issue, but the court of appeal reversed.

On remand, Excess argued, for the first time, that the coverage it had provided manufacturer had been voluntary – a business decision to exercise its contractual right to associate in manufacturer’s defense.  This was a critical litigation fact – absent a duty to defend under the policy, in retrospect there had been no basis for Excess to seek reimbursement from Primary for its voluntary payments, and Primary had settled the coverage appeal under dispositively false pretenses.

Excess prevailed again, the trial court finding it had no duty to defend under the policy, and therefore no obligation to reimburse Primary.  An appeal from that decision is pending.

At that point yet another suit was spawned.  Primary sued Excess for fraud in inducing the settlement agreement, resulting in the adverse coverage judgment and dismissal of its appeal.

At the outset of the fraud case Excess filed an anti-SLAPP (strategic lawsuit against public participation) motion, contending (1) Primary’s case targeted protected First Amendment activity because the fraudulent statements and omissions were made in the course of litigation, and (2) the case was meritless because it was barred by the litigation privilege.  The trial court denied the motion.  Though the litigation was protected activity, the litigation privilege arguably did not apply.  Accordingly, Primary had sufficiently established a likelihood of prevailing on the merits.

The court of appeal has now affirmed on interlocutory appeal.  Among other things, the court held that there was a question of fact as to whether the litigation privilege applies, because the fraudulent omission might qualify as “extrinsic fraud.”  The court distinguished between “extrinsic” and “intrinsic” fraud, a distinction previously described as “nebulous.”  It basically boils down to whether the fraudulent conduct impeded a party’s full participation in the suit (extrinsic) or whether it involved the merits of the litigation and went undetected due to the innocent party’s unreasonable neglect (intrinsic).  The court reasoned that a trier of fact could find reasonable both Primary’s failure to discover the voluntary nature of Excess’s payments and Primary’s reliance on Excess’s representations and omissions indicating Excess had made the payments under a policy obligation.  Because the litigation privilege would not necessarily bar the suit, there was sufficient merit to survive the anti-SLAPP motion.

Which brings us to memory lane.  It was an automotive product liability case in the early 1990s involving performance of a car’s airbag.  Airbags were new technology back then, and fodder for suits.  If the airbag deployed, the claim was that it shouldn’t have, or should have done so less aggressively; if it failed to deploy, it allegedly should have.

The suit in question was a failure-to-deploy accident on the Bay Bridge.  The plaintiff driver testified it was a high-speed accident suggesting deceleration forces above the deployment threshold.  The passenger/employee’s testimony echoed her account.  With summary judgment unlikely, we reached a settlement at a judicial settlement conference.

A few days later, the passenger called me to confess she had lied at deposition about the accident circumstances, induced by plaintiff’s false promise of a share of the proceeds.

I moved to rescind the settlement as the product of fraud, perhaps naively expecting the court, also a victim, to be outraged.  It was – at me.  “How dare you try to back out of a settlement I negotiated!” thundered the judge.  Motion denied.  Innocence lost.  Settlement confirmed.

Two tales of fraudulently induced settlements gone awry, thirty years apart, with different results.  In both, the settlement yielded anything but the intended peace.  In one, a party’s subornation of perjury went entirely unpunished, and an effort to preserve the integrity of the settlement process was roundly rebuffed.  In the other, the jury is still out, so to speak, on whether the ill-gotten settlement will endure and whether justice will be served.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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