August 06, 2012 Top Story

Attorney's Settlement "Mistake" Raises Ethical Questions

Plaintiff's lawyer disavows last-minute settlement after learning jury would have awarded $9 million

Renee Choy Ohlendorf

A lawyer’s last-minute attempt at settlement to avoid a potentially adverse verdict recently backfired. The case highlights important considerations for plaintiff and defense counsel in the context of courtroom settlement discussions.

In Hernandez v. Schaefer Ambulance Service, Inc., after a week-long trial, attorney C. Michael Alder requested a Los Angeles jury to award millions to his developmentally disabled client. The client allegedly sustained severe injuries when the defendant ambulance company failed to adequately restrain plaintiff during transport.

The jury deliberated for only four hours. Anticipating a defense verdict, the plaintiff’s counsel struck a hallway deal for $350,000 over a 40-minute period. (Prior to closing argument, defendants had offered $1.25 million to settle.) The parties’ respective counsel then informed the court of the settlement off the record.

The court announced that a settlement had been reached just before the lunch hour and discharged the jury. The settlement was not placed on the record before lunch, although it is not entirely clear why not.

Apparently, plaintiffs counsel followed the jury out of the room. “All hell broke loose” when they learned that the jurors were about to award $9 million to plaintiff, according to Judge Michael C. Johnson, who presided over the trial.

After a recess, Alder requested a new trial, announcing that he had made a “mistake” and never had his client’s consent to settle, though Hernandez and his mother were in the hallway where settlement was discussed. Denying a defense request for dismissal with prejudice, Judge Johnson took time to admonish plaintiff’s counsel for “"engage[ing] in misconduct by misleading the court,” but nonetheless declared a mistrial and later set a new trial date in January 2013.

Was There Actually a Settlement? 

California Code of Civil Procedure § 664.6 requires that settlements be put “in a writing signed by the parties outside the presence of the court or orally before the court” to be enforceable. Though the court announced that a settlement had been reached, it appears that the terms of settlement were not put on the record.

“It is not clear whether there was a settlement because the authority of the plaintiff’s attorney to settle was not clear,” observes Charles M. Denton, Grand Rapids, Michigan, cochair of the ABA Section of Litigation’s Alternative Dispute Resolution Committee“[Model Rule of Professional Conduct] 1.2 says there is no settlement without client authorization. The judge seems to have decided there was no settlement because it was not put on the record and he did not get a chance to ask the plaintiff whether he understood and consented to the agreement—especially because he was disabled,” Denton says.

Jurisdictions are divided on whether an attorney’s apparent authority to settle an action is sufficient to bind the client. For example, the U.S. Courts of Appeals for the First and Third Circuits have held that an attorney must possess actual authority to settle to bind the client.

By contrast, the Sixth Circuit Court of Appeals held that a client is bound by his attorney’s unauthorized settlement, under Michigan law, because an attorney is cloaked with apparent authority to settle by virtue of his retention. The Second Circuit and District of Columbia Court of Appeals also upheld settlements made by the attorney’s apparent authority, but decline the presumption that attorney retention alone is sufficient to confer an attorney with apparent authority for settlement. Instead, those circuits require apparent authority to be established through express manifestations of the attorney’s authority by the client to opposing counsel.

Ethical Issues Raised by the Settlement, or Lack Thereof

If the plaintiff did not consent to the settlement, then the issue becomes whether his attorney complied with Model Rule 3.3, which imposes a duty of candor toward the tribunal. “From the judge’s comments, it appears that he had some concerns along these lines,” says Jennifer Borum Bechet, New Orleans, cochair of the Section of Litigation’s Ethics and Professionalism Committee. “Plaintiff’s attorney’s declaration may amount to an admission that he misrepresented information to the court and opposing counsel, and may also give rise to the other attorneys’ duty under Model Rule 8.3 to report [Alder] to disciplinary authorities. In that regard, the seriousness of the possible offense is the relevant inquiry,” she adds.

What’s more, under Comment 10 to Model Rule 1.7, which governs conflicts between current clients, Alder’s continued representation of plaintiff may be a conflict of interest. “It might be expected that where the client is claiming that his attorney lacked authority to settle, the attorney who admits he advised the court that the case was settled would have a personal interest that might limit his ability to continue to represent that client,” Bechet explains.

There are, however, circumstances in which an attorney may take steps to protect a client with diminished capacity from harm under Model Rule 1.14. Subpart (b) provides,

    When the lawyer reasonably believes that the client has diminished capacity, is at risk of substantial physical, financial or other harm unless action is taken and cannot adequately act in the client’s own interest, the lawyer may take reasonably protective action, including consulting with individuals or entities that have the ability to take action to protect the client and, in appropriate cases, seeking the appointment of a guardian ad litem, conservator or guardian.

“Whether a defense verdict would be financial harm contemplated by the rule is an interesting question,” remarks Bechet.

Avoiding Pitfalls During Settlement Negotiations

According to Denton, a common mistake that practitioners make during settlement negotiations is failing to anticipate all the essential elements of an agreement. “The amount of the settlement is important, but what is the scope of the release? Are there any third-party claims? Subrogation rights? Is there indemnification? Is confidentiality an issue? Failure to understand all the terms can create more or less problems based on where you are in litigation,” he states.

Denton advises attorneys to have a standard settlement agreement on hand during arms-length negotiations with other parties to make sure that a key issue is not missed. He also recommends for younger attorneys especially “to take the time to talk with the client and take them through all the issues before telling opposing counsel you have a deal. You might say it is legalese and mumbo jumbo, but if you can’t explain it to the client, then you don’t have an agreement.”

Renee Choy Ohlendorf is an associate editor for Litigation News.

Keywords: Model Rules of Professional Conduct, settlement agreement, settlement negotiation, ethics

Related Resources

  • Hernandez v. Schaefer Ambulance Service, Inc., Los Angeles Superior Court Case No. BC451751.
  • California Code of Civil Procedure §664.6.
  • ABA Model Rule of Professional Conduct 1.2.
  • ABA Model Rule of Professional Conduct 1.7 and Comment 10 thereto.
  • ABA Model Rule of Professional Conduct 1.14.
  • ABA Model Rule of Professional Conduct 3.3.
  • ABA Model Rule of Professional Conduct 8.3.
  • Malave v. Carney Hospital, 170 F.3d 217 (1st Cir. 1999) (“settlement agreement entered into by attorney is ineffective if the attorney did not possess actual authority to bind the client”).
  • Fennell v. TLB Kent Co., 865 F.2d 498 (2d Cir. 1989) (attorney had no apparent authority to settle case without client consent where client made no manifestations to opposing counsel of such authority).
  • Makins v. District of Columbia, et al., 861 A.2d 590 (D.C. Cir. 2004) (to uphold settlement on the grounds of attorney’s apparent authority, the client must make manifestation of her attorney’s authority to settle to opposing counsel).
  • Garabedian v. Allstates Engineering Co. et al., 811 F.2d 802 (3d Cir. 1987) (“an attorney can only enter a binding compromise if the client has authorized him to do so. While there is a presumption that a settlement entered into by an attorney has been authorized by the clinet, rebuttal of the presumption renders any purported settlement ineffective.”).
  • Capital Dredge and Dock Corp. v. City of Detroit, 800 F.2d 525 (6th Cir. 1986) (upholding unauthorized settlement by attorney on grounds that attorney is cloaked with apparent authority to settle by virtue of his retention by client).

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