Court Determines that a $3.7 Million Stipulated Settlement Is Unreasonable
Paul Rosner of Soha & Lang, P.S. successfully argued that a $3.7 million stipulated settlement of a lawsuit was unreasonable. The lawsuit stemmed from the alleged sexual abuse of a student by an elementary school teacher. The Court held that the reasonable settlement value was
$450,000.
The teacher worked for a school district that had coverage from a risk pool. The school district settled all claims against it and its current and former employees related to the alleged sexual abuse for $300,000. After that settlement, the plaintiffs filed suit against the teacher in Cortes v. Davis, Benton County Superior Court cause No. 16-2-00861-2. The complaint was later amended to add claims against the teacher’s husband in a blatant attempt to trigger coverage under their homeowners insurance policy and set up a bad faith claim against the homeowners insurer. (The homeowners insurer settled with the plaintiffs for an undisclosed amount prior to the reasonableness hearing.)
After several delays due to scheduling and Covid, the Court held a reasonableness hearing in person on March 10 and 11, 2021. The Court heard live testimony from the plaintiffs’ expert on reasonableness, the settlement guardian ad litem and the risk pool’s expert on reasonableness, the latter of whom was an experienced defense lawyer.
On April 16, 2021, the Court ruled that the $3.7 million stipulated amount was not reasonable. The Court issued a 31-page ruling discussing the reasonableness factors courts consider in evaluating the reasonableness of a stipulated settlement: The releasing person’s damages; the merits of the releasing person’s liability theory; the merits of the released person’s defense theory; the released person’s relative faults; the risks and expenses of continued litigation; the released person’s ability to pay; any evidence of bad faith, collusion, or fraud; the extent of the releasing person’s investigation and preparation of the case; and the interests of the parties not being released. Water’s Edge Homeowners Ass’n v. Water’s Edge Associates, 152 Wn. App. 572, 585 (2009). Of these, the Court did not address the released person’s relative fault, which both sides agreed did not apply in this context.
With regard to the releasing person’s damages, the Court noted that there was limited information because relatively little pre-settlement litigation investigation had occurred. The Court stated that the evidence regarding damages did not justify the damages in the amount of the $3.7 million stipulated amount.
The Court also considered the merits of the releasing person’s liability theory. The Court noted that the teacher had pleaded guilty to child molestation in the first degree so that the plaintiffs had a very strong liability claim. However, the Court also noted that the stipulated settlement did not consider the previous settlement release, which could have limited the defendants’ liability because the teacher was a district employee. The Court noted that the evidence regarding claims
against the teacher’s husband did not appear to be strong because of the absence of any pre- settlement litigation investigation. The Court found that this factor did not favor the reasonableness of the stipulated settlement.
Next, the Court considered the merits of the released person’s defense theory. The Court stated the defendants had a reasonable defense based on the prior settlement agreement, which potentially provided a basis for dismissing the case. The Court also stated that the teacher’s husband may have had a very strong defense regarding the statute of limitations on several claims. The Court found that this factor did not support the reasonableness of the stipulated settlement.
With regard to the risk and expenses of continued litigation, the Court noted that the defendants had been offered a cost-free defense from their homeowners insurer and that they had declined to accept the defense. The Court also noted that the defendants had incentive to continue litigation because they might have also received a defense from the risk pool. The Court noted that the defendants never really explored the risk pool’s provision of a defense because they entered into stipulated settlement prior to the risk pool completing its initial investigation. The Court found this factor did not support the reasonableness of the stipulated settlement.
Next, the Court turned to the released person’s ability to pay. The Court noted that the defendants had no ability to pay any judgment and had limited income and assets. The Court found that this factor did not support the reasonableness of the stipulated settlement.
With regard to the “bad faith, collusion or fraud” factor, the Court noted that neither side had done any investigation and also that the litigation and the parties’ communications were focused on settlement. While this was concerning, the Court could not find any direct evidence of bad faith, collusion or fraud. The Court concluded this factor favored a reasonable stipulated settlement, but not in the amount of $3.7 million.
Next, the Court considered the extent of the releasing party’s investigation and preparation of the case. The Court noted that there had been little pre-settlement litigation investigation and the parties were posturing for a stipulated settlement from very early on. The Court found that this factor did not support the reasonableness of the $3.7 million settlement.
Finally, the Court considered the interest of the party not being released, which was the risk pool. The Court found that this factor did not support the stipulated settlement of $3.7 million.
In terms of takeaways, this case demonstrates the need for trial courts to allow insurers and other coverage providers to participate meaningfully in a reasonableness hearing so that their due process rights are protected. Too often, courts allow insurers and other coverage providers very little discovery. However, cases in which courts have struck down highly inflated stipulated settlements, such as the Water’s Edge decision and this case, remind the courts that these collusive settlements should be viewed skeptically because the settling defendants have no incentive to keep the settlement amount reasonable. The case also illustrates the need for sufficient time to prepare for a reasonableness hearing and the need for discovery – at a minimum – related to the settlement process.
$450,000.
The teacher worked for a school district that had coverage from a risk pool. The school district settled all claims against it and its current and former employees related to the alleged sexual abuse for $300,000. After that settlement, the plaintiffs filed suit against the teacher in Cortes v. Davis, Benton County Superior Court cause No. 16-2-00861-2. The complaint was later amended to add claims against the teacher’s husband in a blatant attempt to trigger coverage under their homeowners insurance policy and set up a bad faith claim against the homeowners insurer. (The homeowners insurer settled with the plaintiffs for an undisclosed amount prior to the reasonableness hearing.)
After several delays due to scheduling and Covid, the Court held a reasonableness hearing in person on March 10 and 11, 2021. The Court heard live testimony from the plaintiffs’ expert on reasonableness, the settlement guardian ad litem and the risk pool’s expert on reasonableness, the latter of whom was an experienced defense lawyer.
On April 16, 2021, the Court ruled that the $3.7 million stipulated amount was not reasonable. The Court issued a 31-page ruling discussing the reasonableness factors courts consider in evaluating the reasonableness of a stipulated settlement: The releasing person’s damages; the merits of the releasing person’s liability theory; the merits of the released person’s defense theory; the released person’s relative faults; the risks and expenses of continued litigation; the released person’s ability to pay; any evidence of bad faith, collusion, or fraud; the extent of the releasing person’s investigation and preparation of the case; and the interests of the parties not being released. Water’s Edge Homeowners Ass’n v. Water’s Edge Associates, 152 Wn. App. 572, 585 (2009). Of these, the Court did not address the released person’s relative fault, which both sides agreed did not apply in this context.
With regard to the releasing person’s damages, the Court noted that there was limited information because relatively little pre-settlement litigation investigation had occurred. The Court stated that the evidence regarding damages did not justify the damages in the amount of the $3.7 million stipulated amount.
The Court also considered the merits of the releasing person’s liability theory. The Court noted that the teacher had pleaded guilty to child molestation in the first degree so that the plaintiffs had a very strong liability claim. However, the Court also noted that the stipulated settlement did not consider the previous settlement release, which could have limited the defendants’ liability because the teacher was a district employee. The Court noted that the evidence regarding claims
against the teacher’s husband did not appear to be strong because of the absence of any pre- settlement litigation investigation. The Court found that this factor did not favor the reasonableness of the stipulated settlement.
Next, the Court considered the merits of the released person’s defense theory. The Court stated the defendants had a reasonable defense based on the prior settlement agreement, which potentially provided a basis for dismissing the case. The Court also stated that the teacher’s husband may have had a very strong defense regarding the statute of limitations on several claims. The Court found that this factor did not support the reasonableness of the stipulated settlement.
With regard to the risk and expenses of continued litigation, the Court noted that the defendants had been offered a cost-free defense from their homeowners insurer and that they had declined to accept the defense. The Court also noted that the defendants had incentive to continue litigation because they might have also received a defense from the risk pool. The Court noted that the defendants never really explored the risk pool’s provision of a defense because they entered into stipulated settlement prior to the risk pool completing its initial investigation. The Court found this factor did not support the reasonableness of the stipulated settlement.
Next, the Court turned to the released person’s ability to pay. The Court noted that the defendants had no ability to pay any judgment and had limited income and assets. The Court found that this factor did not support the reasonableness of the stipulated settlement.
With regard to the “bad faith, collusion or fraud” factor, the Court noted that neither side had done any investigation and also that the litigation and the parties’ communications were focused on settlement. While this was concerning, the Court could not find any direct evidence of bad faith, collusion or fraud. The Court concluded this factor favored a reasonable stipulated settlement, but not in the amount of $3.7 million.
Next, the Court considered the extent of the releasing party’s investigation and preparation of the case. The Court noted that there had been little pre-settlement litigation investigation and the parties were posturing for a stipulated settlement from very early on. The Court found that this factor did not support the reasonableness of the $3.7 million settlement.
Finally, the Court considered the interest of the party not being released, which was the risk pool. The Court found that this factor did not support the stipulated settlement of $3.7 million.
In terms of takeaways, this case demonstrates the need for trial courts to allow insurers and other coverage providers to participate meaningfully in a reasonableness hearing so that their due process rights are protected. Too often, courts allow insurers and other coverage providers very little discovery. However, cases in which courts have struck down highly inflated stipulated settlements, such as the Water’s Edge decision and this case, remind the courts that these collusive settlements should be viewed skeptically because the settling defendants have no incentive to keep the settlement amount reasonable. The case also illustrates the need for sufficient time to prepare for a reasonableness hearing and the need for discovery – at a minimum – related to the settlement process.