Volume 20, Number 3
April/May 2003

Settlement: Safe or Sorry?

By Andrew C. Simpson

Andrew C. Simpson is the principal of Andrew C. Simpson, P.C., a three-attorney law firm in St. Croix, U.S. Virgin Islands, practicing civil litigation and appeals. The author would like to acknowledge the contributions of Sasha Golden, Esq., Ryan S. Shaughnessy, Esq., and Richard Howland, Esq., all members of the ABA’s Solosez listserve, to this article. The old saw about a bird in the hand being worth two in the bush is echoed in the conventional wisdom that the certainty of a settlement is better than the unknown risks of going to trial. It is certainly common for a lawyer advising a client about a proposed settlement to call the client’s attention to the advantages of the settlement versus the risks of a trial. But how often do we think about the risks of settlement rather than the risks of trial? A settlement can pose risks for both the client and the lawyer, and it is important that the lawyer be aware of those risks and ensure that the client is properly informed as well. This article will explore those risks and suggest ways to minimize them. Settler’s Remorse

The most obvious risk associated with settlement is the possibility that the trial result could have ended up better than the settlement. Assuming that your opponent has not capitulated and offered everything that you wanted to get at trial, this risk will always exist, and there is little you can do about it. But if your client begins to dwell on the “what if” scenarios and develops settler’s remorse, it can create a risk for you—the risk of a malpractice action.

The settler’s remorse scenario is likely to arise in situations where a low settlement amount is accepted because one aspect of the client’s case is strong (e.g., damages), while another aspect is weak (e.g., liability). For example, suppose your client suffered facial disfigurement and brain damage when struck by a flying broken bat handle while watching a professional baseball game. While the damages are severe and could easily reach seven figures, the assumption-of-risk defense could bar any recovery. When the baseball team makes a large five-figure take-it-or-leave-it offer, you advise your client to accept the offer so that she will at least have some compensation that will help her with her ongoing medical expenses; because the need is so great and you did not have to put much time into the case, you even agree to cut your fee to help make the deal more palatable. She agrees with your advice and you strike the deal. Despite the disappointment at not realizing a huge contingency fee, you return to your office feeling good because you helped a client get some much-needed money that will help her on the road to recovery.

Six months later, that warm, fuzzy feeling you had is replaced by nausea when you are served with a malpractice complaint brought by your former client. It seems that two months after reaching the settlement, the state supreme court overturned one hundred years of precedent and ruled that the assumption-of-risk defense was not available in a similar situation. The client claims that you did not adequately inform her of the likelihood of success if the matter was pursued and the assumption-of-risk defense was aggressively challenged.

The settler’s remorse conundrum can be avoided by giving your client a document that summarizes all of the risks and has the client acknowledge an understanding of those risks. Such a document should advise the client that the settlement is final and will be the client’s only opportunity to recover for the injury, even if the law changes, new facts develop that make the case stronger, or there are unforeseen complications to the injury that make the injury worse in the future. If you are concerned that such a document will unduly influence your client to reject the settlement, you can have a separate document that describes the risks of going to trial: Witnesses might not be available, the jury might not believe the client, the judge might rule against the client on key issues, the defendant might go bankrupt, etc.

Settler’s remorse can arise in many different contexts. Your client might be at a cocktail party and hear that someone else got a bigger settlement for the same injury; or the client might begin to stew about the size of your contingency fee, which was forgotten until receiving the check from your office for the settlement—minus your fees and costs. One potential source of settler’s remorse requires special attention. If your client is still recovering from an injury and has not reached maximum medical improvement, then there is a higher risk that something will happen during the recovery process that could increase the damages: the expected recovery might not occur; the client could sustain an exacerbation of the injury during rehabilitation; or hidden injury might not show up until later. In situations where the client has not reached maximum medical improvement, it may be best to avoid a final settlement. If the client is in financial need that is causing pressure to settle before the full extent of the injury is established, you might explore alternatives that alleviate that pressure. If the client insists upon settling, make sure that the risks are adequately disclosed, in writing.

The danger of settler’s remorse also makes it advisable to avoid making settlement recommendations to clients. I think it is better to disclose the relative risks of trial and settlement and then let the client decide what is best, and I follow this practice even with the corporate defendants and insurers that comprise the majority of my clientele. Ultimately, it is the client’s decision; try as hard as I can, I can never fit myself fully into my client’s shoes. My financial and personal needs, time requirements, and ability to withstand the emotional roller coaster of litigation are different from those of my clients, so except in extreme situations, how can I possibly advise them as to whether settlement is best?

A secondary reason for letting the client decide is to lessen my risk. If my client has made the decision to settle, then it is harder—both emotionally and legally—for the client to shift the blame to me when settler’s remorse sets in. Additionally, I avoid creating a conflict of interest between my client’s interests in settlement and my own interests. If the case is a plaintiff’s contingency case, I might want cash quickly, while my client is better served rolling the dice and going for a bigger amount at trial, even though payment may not occur for several years. If I get involved in making a recommendation about whether to settle and the client develops settler’s remorse, then the client will have no difficulty establishing a bad motive for my allegedly poor advice. A recommendation for or against settlement can create additional issues for a client: The client might think the lawyer is afraid or unprepared to try a case or, conversely, only interested in running up a defense bill without consideration for the ultimate outcome.

The suggestion that you not make settlement recommendations does not mean that you should abdicate your responsibility to your client. You should use your knowledge and experience to describe the risks to your client—the possible consequences of settlement or trial—but let the client choose the path with the risks that are most acceptable to the him or her. Structured Settlements

Another area of risk involved in settling cases arises with structured settlements. If not handled properly, structured settlements can create a “damned if you do, damned if you don’t” scenario for the lawyer:

l You could be sued for not suggesting a structured settlement.

l You could be sued for assisting in a settlement that involves a structure.

l You could be sued for using the structured settlement company that the defense chooses.

l You could be sued for using a structured settlement service that you choose.

Fortunately, there is an easy solution to all of these Hobson’s choices, the same solution as in the case of settler’s remorse: the client’s written acknowledgment and acceptance of the risks involved.

Probably the most dangerous situation arises if you do not raise the possibility of a structured settlement with a client who is likely to need one. Take the hypothetical sports fan with the disfigurement and brain injury: Through brilliant lawyering, you come up with a theory that Major League Baseball “juiced” the baseball to increase home run production and this change in the baseball caused the bat to break. The judge agrees that your client did not assume the risk of this unknown phenomenon and denies the defendant’s motion for summary judgment. Settlement talks immediately ensue, and you garner your client a seven-figure settlement. The settlement check clears the trust account, and you write your client the largest check you have ever written in your life and wish her the best for the future.

Unfortunately, the facial disfigurement left your client a social outcast, and the brain injury impaired her cognitive and social skills. To compensate, she takes to buying lavish gifts for anyone who shows an interest in her, and 18 months later she has burned through the money. She then pours out her sad story to another lawyer she happens to meet, who tells her that she should sue you for not recommending a structured settlement; if the settlement had been structured, the client would have been protected from her own foreseeable actions.

In the above situation there are two potential pitfalls. First, there is the issue of giving full disclosure to the client so that the client can make an appropriate decision. Second, because you have knowledge of the client’s brain injury, it may be necessary to petition the court to appoint a guardian ad litem to help make the best decision for the client. You clearly cannot make the decision for the client as to whether to accept the structured settlement or the lump-sum payout, and you might be found to have owed a duty to the client to seek the appointment of the guardian ad litem because you knew or should have known that the client’s decision making capacity was impaired.

The choice of structured settlement companies can also present perils. It is common for insurance companies to propose a structured settlement and use a structured settlement company of their choosing in the process. But how do you know that this structured settlement is the most advantageous to your client? What is the financial relationship between the insurer and the structured settlement company? If it turns out that the insurance company got a sweetheart deal at your client’s expense, you could end up being sued for the difference in what the structured settlement company pays and what a different structured settlement company would have paid.

In another scenario, to avoid getting caught in this trap, you retain a structured settlement company you found in a lawyer’s periodical. That company creates a structured settlement for your client, but subsequently, the president of the structured settlement company embezzles the money or chooses assets for investment that turn out to be unsafe, and now you find yourself being sued for making the recommendation.

All of the problems associated with structured settlements can be avoided by carefully ensuring that your client (1) is aware of the risks and (2) makes the decisions. Tell the client that there are numerous structured settlement companies, and let the client make the decision as to which one to choose. If owing to age or infirmity your client is not capable of either fully understanding the risks or making decisions, then bring the appropriate personal representative into the picture or seek the appointment of one by the court—but do not make the mistake of making the decision for the client. Tax Consequences

One of the most common questions clients ask when considering settlement is, “What are the tax consequences?” Unless you are well versed in the tax code, do not assume a new risk by seeking to answer the question. In recent years in the context of employment law, the question of what was taxable seemed to change on a monthly basis as various courts weighed in on the issue. With the last round of tax reform being phased in over a ten-year period, do you really know what the tax consequences are? The safest thing to do is to suggest the client raise the issue with a lawyer or accountant specializing in that area.

The tax code also creates another risk in a settlement. The IRS requires companies making settlement payments in litigation to report the full settlement payment as income to the plaintiff’s attorney on a 1099 form if the settlement check is made payable to both the attorney and the client. Defense counsel needs to warn the clients of the obligation to submit the 1099 so that the clients do not get penalized. Plaintiffs’ counsel needs to be aware that the full settlement payment will be reported as the counsel’s income. The portion that is then paid to the plaintiff by the attorney is a deductible expense, but you must make sure that appropriate records are kept and reporting done. You do not want to try to prove to the IRS that your income is one-third of what the IRS says it is and not have the records to back that up.

Do you have an obligation to warn your client of the impact of a settlement upon other benefits the client currently receives? If your client is permanently disabled and receiving benefits such as Supplemental Security Income (SSI) or Medicaid, a cash settlement could wipe out those benefits, effectively reducing the overall value of the settlement. By contrast, if the settlement is established as a “Settlement Preservation Trust” or “Special Needs Trust,” then the SSI and Medicaid benefits may not be lost. Lawyers have been sued for not suggesting that a settlement be placed into such a trust to maximize the funds available for the client over the course of a lifetime. Logic suggests that the damage award could be the value of the lost benefits, projected over the client’s anticipated life expectancy.

Settlements may also include the risk of collection and enforcement. If the settlement payment is to be made over time, is the attorney responsible for collection when the account is in arrears, and if so, who bears the cost of that collection? If this was not addressed in your agreement with your client, you could end up working for that client for much longer than anticipated, and with no additional compensation. A similar problem may arise if you have to bring an action to enforce the terms of the settlement agreement. Confidentiality Clauses

Confidentiality clauses in settlement agreements provide fertile grounds to create risk. Defendants frequently require such clauses, but unless the settlement agreement contains a liquidated damages clause, proving damages in the event of a breach of confidentiality may prove impossible. The client could criticize defense counsel for failing to anticipate this difficulty. Even with a liquidated damages clause, however, proving who breached the confidentiality clause can be difficult to prove except in the most obvious cases. From the plaintiff’s perspective, agreeing to a confidentiality clause, particularly with a liquidated damages clause, can be problematic. How do you protect yourself and your client from satellite litigation if the defendant believes, even incorrectly, that you breached the clause? Other Risks

Settling cases has other risks. Settling too frequently may create the perception that you are afraid to try a case, thereby emboldening your opposition. From a defendant’s standpoint, settling cases for nuisance value creates a risk of copycat claims. If a defendant is in a position to face numerous copycat claims, the risks of settling for nuisance value may outweigh the risk of drawing a hard line and the accompanying risk of an occasional large verdict. For a products liability defendant, settlement may carry with it the risk that consumers think you have admitted a problem with your product (hence the demand for a confidentiality clause).

Lawyers always hear about the risks associated with going to trial and rarely about the risks of settlement. Each option carries risks. Only the client can, or should, make the decision as to which risk is better for the client. For an attorney, most of the personal risks associated with settlement can be avoided through careful communication with the client. 

 

 

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