December 28, 2011 Articles

Releasing Joint Tortfeasors

By Douglas J. Pepe

The issue comes up frequently. Multiple parties contributed to the plaintiffs’ claimed losses. One of the alleged tortfeasors reaches an agreement-in-principle to settle with the plaintiffs. It’s time to draft the mutual releases. Does the release of defendant A have the potential to impact the plaintiffs’ claims against defendants B, C, and D? Do the mutual releases have the potential to impact the settling defendant’s rights and obligations vis-à-vis the other tortfeasors? The answer to both questions is yes. There are two issues both sides will want to consider and address in drafting your settlement agreement.

First, find the right rule. Each state has its own set of substantive rules in dealing with this situation. Determining which state’s law will apply can get tricky in the typical multi-party mass tort or class-action case. Choice-of-law analysis becomes important. When the case is in federal court on a state-law claim, the first place to look is the conflicts rule of the state in which the federal court sits. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941). Each state’s choice-of-law analysis will differ, and the analysis will be different when considering the effect of the release as between the parties to that release and the effect of the release as to third parties. For example, states following the Restatement (Second) of Conflict of Laws will apply the law chosen by the parties, or otherwise governing the contract, in determining the effect of a release as between the signatories (id. § 170, cmt. a), but will apply the law of the state with the “most significant relationship to the occurrence and the parties” when determining the effect of the release on the liability of other joint tortfeasors (id. §§ 170(1), 145). So, the law of two different states may apply to determine the substantive effect of the same release. Permutations of “choice of law” fact patterns abound. The key issue is to focus on the choice-of-law issue and know which rules will apply to all issues before you draft your release.

Second, take the applicable rules into account when drafting. Once you know which state rules potentially apply, account for those rules in the drafting process.

For example, at common law, the release of one joint tortfeasor without reservation acted as a release of all other joint tortfeasors. Some states still follow the common-law rule, making it critical in these jurisdictions for plaintiffs to insist on the inclusion of express language reserving all claims against the other tortfeasors.

Most states have abrogated the common-law rule by statute, but these statutes create a different set of drafting implications. A number of states have adopted the Uniform Contribution among Tortfeasors Act, with or without substantive modification. Under Section 4(a) of the act, a release of one tortfeasor does not discharge other tortfeasors “unless its terms so provide,” but the release reduces the injured party’s claims against other tortfeasors “to the extent of any amount stipulated by the release or covenant, or in the amount of the consideration paid for it, whichever is greater.” Under Section 4(b) of the act, the released defendant is also discharged from liability for contribution to any other tortfeasor. This contribution bar, however, has been modified in a number of states. Delaware’s rule, for example, provides for a discharge of contribution claims only to the extent the release itself contains a judgment reduction provision that reduces the non-settling tortfeasor’s liability “to the extent of the pro rata share of the released [tortfeasor].” See 10 Del. St. § 6304(b). This modification—which many other states also employ—is significant in substance, because it incentivizes settling defendants to insist on a pro rata judgment reduction provision in any release. There can be a significant difference to a plaintiff between agreeing to reduce a future judgment against non-settling defendants B, C, and D by the amount of the consideration paid by defendant A, and agreeing to reduce that future judgment by the full amount of defendant A’s proportionate fault. A settling defendant, on the other hand, wants to buy peace from future contribution claims and will consider a judgment reduction to be a significant—perhaps even deal-breaking—issue in states with a rule similar to Delaware’s. Settling parties need to know the ins-and-outs of the applicable rule to determine what, if anything, they are giving away, or failing to get, in the drafting process.

Other states, like New York, incorporate a mandatory equitable judgment reduction into the statute itself. Under New York’s GOL § 15-108(a), a release of one tortfeasor reduces the plaintiff’s claim against all other tortfeasors by the greater of (1) any amount stipulated in the release; (2) the amount of consideration for the release; and (3) the released tortfeasor’s equitable share of the plaintiff’s damages. The released defendant is relieved from any contribution obligations and has no right to contribution from anyone else. Id. § 15-108(b)-(c). Releases must meet three criteria to trigger the mandatory reduction of GOL § 15-108(a). First, the plaintiff must receive monetary consideration of greater than one dollar. This is a key consideration in structuring and drafting coupon settlements or injunctive relief cases. Id. § 15-108(a)(1). Second, the release must “substantially terminate[]” the dispute between the plaintiff and the released defendant. Id. § 15-108(a)(2). Some lower New York courts have found that a dismissal with prejudice, alone, constitutes a sufficient termination of the dispute to constitute a “release” within this subsection. Third, the release must be provided “prior to entry of judgment.” Post-judgment settlements are uncovered. Consider ways to structure around or take advantage of GOL § 15-108 in the drafting process.

The key take away is that knowing the rules and taking them into account can be important. No release is boilerplate. The application of unknown or unintended law can have troubling implications that could have been considered and addressed in the drafting process. Failure to do so can have serious substantive consequences when it comes to future claims against non-settling tortfeasors.

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