Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_15-cv-01578/USCOURTS-casd-3_15-cv-01578-1/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1332fd Diversity-Breach of Fiduciary Duty

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UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA

JACK A. HASTINGS, an individual, 

Plaintiff,

v. 

THOMAS J. HASTINGS, individually 

and as trustee of the Doris E. Cosgrove 

Trust, et al., 

Defendant.

 Case No.: 3:15-cv-01578-H-KSC 

ORDER ADOPTING REPORT AND 

RECOMMENDATION AND 

DENYING PLAINTFF’S MOTION

[Doc. Nos. 41, 39] 

On January 26, 2016, the parties executed a settlement agreement (the “Settlement 

Agreement”) and, on February 23, 2016, filed a joint motion to dismiss this case. (Doc. 

No. 35.) The Court granted the motion to dismiss but retained jurisdiction to enforce the 

settlement. (Doc. No. 36.) On August 26, 2016, the parties filed a joint motion to 

enforce the Settlement Agreement. (Doc. No. 39.) The Court referred the motion to the 

magistrate judge, who filed a Report and Recommendation on October 7, 2016. (Doc. 

No. 41.) The Report and Recommendation found in favor of the Defendant and 

recommended denying Plaintiff’s motion. (Id.) Plaintiff filed an objection to the Report 

and Recommendation on October 20, 2016. (Doc. No. 42.) For the following reasons, 

the Court adopts the Report and Recommendation and denies Plaintiff’s motion. 

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BACKGROUND 

On July 16, 2015, Plaintiff sued to recover his interests in the proceeds of the 

Julian Property Sale. (Doc. No. 1.) On December 7, 2015, the magistrate judge held an 

Early Neutral Evaluation Conference (“ENE”) that resulted in the parties agreeing to 

settle the case. (Doc. No. 22.) The magistrate judge summarized the settlement 

agreement as follows: 

“The monetary settlement will be for the sum of $235,000, with the 

caveat that $30,000 of that figure will be set aside for the time being to allow 

for the filing of a tax return for the trust for the year 2015 and any associated 

costs for the preparation of that trust. It’s believed that the tax indebtedness 

for the sale of the subject property may be in the $50,000 range, plus the 

estimated preparation cost will be approximately $10,000 which is why we 

reached the $30,000 set-aside for Mr. Hastings in this matter. 

The understanding as well is that there may be offset – some offset in 

the tax indebtedness based on what was set aside by the California Franchise 

Tax Board. So there wouldn’t be any return separate and apart from what 

the tax indebtedness might ultimately be determined by the federal and state 

agencies.” 

(Doc. No. 22 at 2-3.) 

 Following the ENE, the parties executed the written Settlement Agreement 

with the following provisions: 

 d. Thirty Thousand and 00/100 Dollars ($30,000.00) shall be 

withheld (“Reserved Funds”) for the payment of Jack’s fifty percent (50%) 

share of any federal, county or state taxes associated with the sale of the 

Julian Property, including Jack’s 50% proportional share of all costs for the 

preparation of said tax returns (collectively, the “Taxes”); 

 e. In the event Jack’s fifty percent (50%) share of the Taxes is less 

than the amount of the Reserved Funds, Thomas shall pay to Jack the 

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difference between the Reserved Funds and the actual Taxes due as set forth 

on the tax returns (and 50% of preparation expenses), within forty-five (45) 

days of the filing of the tax returns. Within forty-five (45) days of the filing 

of the Trust’s tax returns, Thomas will provide Jack with copies of the 

Trust’s tax returns and all invoices reflecting accounting, legal and tax 

preparation expenses incurred in the preparation of said tax returns; 

 f. To the extent that the California Franchise Tax Board refunds 

any portion of the funds held at the close of escrow for the Julian Property 

($21,645.00), Thomas shall pay to Jack fifty percent (50%) of any refund 

within five (5) business days of receipt of said funds, with documentation of 

said refund to be sent to counsel for Jack contemporaneously with the 

payment ... 

(Doc. No. 39-2 at 8.) 

On June 2, 2016, Defendant sent Plaintiff an accounting calculating Plaintiff’s 

share of the taxes: 

Total Taxes:

Federal $46,504.00 

State of California $15,929.00 

Return Preparation $2,400.00 

 ------------ 

Taxes $64,833.00 

Jacks 1/2 share $32,416.50 

Reserved funds $30,000.00 

Jack Proportional Share $0 

(Doc. No. 39-1 at 7.) 

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 Upon receipt of this accounting, Plaintiff’s lawyer emailed Defendant’s lawyer 

saying “Your client’s math is off. The correct accounting should be as follows: 

 Federal: $46,504.00 

 State: ($5,716) 

 Return Preparation: $2,400 

 Taxes: $43,188.00 

 Jack’s 1⁄2 share: $21,594.00 

 Reserved funds: $30,000.00 

 Jack’s share: $8,406.00 

(Doc. No. 39-1 at 15.) 

 Subsequently Defendant’s lawyer provided a slightly different accounting: 

 $46,277 Federal Taxes (paid 4/15/16) 

 $277 5/18/16 IRS Supp Notice 

 $21,645 California FTB 

 $2,400 Tax preparation (Agent Wealth Mgmt.) 

 Total: $70,588 

 Less $5,716 

 Total taxes: $64,833 

 Jack’s share: $32,441.50 

(Doc. No. 39-1 at 17.) 

The parties were unable to settle their disagreements and, on August 26, 2016, 

filed a joint motion to enforce their settlement. (Doc. No. 39.) 

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DISCUSSION 

I. LEGAL STANDARD 

“It is well settled that a district court has the equitable power to enforce summarily 

an agreement to settle a case pending before it.” Callie v. Near, 829 F.2d 888, 890 (9th 

Cir. 1987). The only requirements are that (1) the agreement be complete, id., and (2) 

both parties must have either agreed to the terms of the settlement or authorized their 

respective counsel to settle the dispute, Harrop v. Western Airlines, Inc., 550 F.2d 1143, 

1144-45 (9th Cir. 1977). If these requirements are met, the Court will interpret the 

agreement pursuant to “familiar principles of contract law.” Jeff D. v. Andrus, 899 F.2d 

753, 759 (9th Cir. 1989). In California, “[a] contract must be interpreted as to give effect 

to the mutual intention of the parties as it existed at the time of contracting.” Cal. Civ. 

Code § 1636. This intent, however, is objective—“the intent manifested in the agreement 

and by surrounding conduct”—and not controlled by the “subjective beliefs of the 

parties.” United Commercial Ins. Serv. Inc. v. Paymaster Corp., 962 F.2d 853, 856 (9th 

Cir. 1992). If the contract language is “clear and explicit” then the “language of the 

contract is to govern.” Cal. Civ. Code § 1638. 

II. ANALYSIS 

The parties do not dispute they entered into a complete, legally enforceable 

Settlement Agreement on January 25, 2016. (Doc. No. 39-2 at 7-12.) Thus the only 

issue for the Court is to ascertain the “mutual intention of the parties as it existed at the 

time of contracting.” Cal. Civ. Code § 1636. 

The Settlement Agreement language is “clear and explicit” as to Plaintiff’s tax 

liability. Cal. Civ. Code § 1638. Defendant would withhold $30,000 of Plaintiff’s 

proceeds from the settlement. (Doc. No. 39-2 at 8, § 1(d).) These reserved funds would 

be used to cover “[Plaintiff’s] fifty percent (50%) share of any federal, county or state 

taxes associated with the sale of the Julian Property, including Jack’s 50% proportional 

share of all costs for the preparation of [taxes].” (Id.) If Plaintiff’s fifty-percent share 

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was less than $30,000, the amount withheld, then “[Defendant] shall pay to [Plaintiff] the 

difference between the Reserved Funds and the actual Taxes due.” (Id. at 8, § 1(e).) 

Plaintiff’s fifty-percent share includes “any federal, county or state taxes associated 

with the sale of the Julian Property.” (Id. at 8, § 1(d).) The total taxes associated with 

the sale of the Julian Property were $64,883,1 so Plaintiff’s corresponding amount is 

$32,441.50. As this amount is greater than $30,000, Plaintiff is not due anything under 

Section 1(e) of the Settlement Agreement. 

Plaintiff argues that this straightforward interpretation of the Settlement Agreement 

should be upended because it would render Section 1(f) meaningless. (Doc. No. 42 at 4.) 

This is not so. Section 1(f) states that “[t]o the extent that the California Franchise Tax 

Board refunds any portion of the funds held at the close of escrow for the Julian Property 

($21,645.00), [Defendant] shall pay to [Plaintiff] fifty percent (50%) of any refund within 

five (5) business days of receipt of said funds.” (Doc. No. 39-2 at 8, § 1(f).) Plaintiff 

argues this refund is independent of the potential refund in Section 1(e) and the phrase 

“shall pay” should be read strictly to mean that Plaintiff is owed fifty-percent of that 

refund, regardless of his total tax liability. (Doc. No. 42 at 4.) But Plaintiff’s reading 

fails to consider the Agreement as a whole. See Lemm v. Stillwater Land & Cattle Co., 

217 Cal. 474, 480 (1933) (“A Court must look at the contract as a whole and give to each 

particular clause thereof the modification or limitation or qualification which it is evident 

from the other parts of the contract the parties intended.”). Viewed in light of the entire 

agreement, Section 1(f) is better read as controlling the timing of Plaintiff’s possible 

refund. This reading does not render the provision meaningless and preserves the 

intended fifty-fifty sharing of the tax burden. 

Section 1(f) is not meaningless as it serves to control the timing of any additional 

refund Plaintiff would receive on account of having overpaid the California Franchise 

                                                                

1

 Federal taxes totaled $46,277 (paid on April 15, 2016) plus $277 (paid on May 18, 2016). California 

taxes totaled $15,929, resulting from the original $21,645 (paid on January 8, 2015), minus the expected 

refund of $5,716. 

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Tax Board taxes. Section 1(e) provides for timing of Plaintiff’s initial refund: 

“[Defendant] shall pay to [Plaintiff] . . . within forty-five (45) days of the filing of the tax 

returns.” (Doc. No. 39-2 at 8, § 1(e).) However, this clause fails to account for the 

possibility that Plaintiff’s liability could be adjusted after this initial refund. Plaintiff was 

aware of this possibility because his accountant told him the California Franchise Tax 

withholding had likely been too high. (Doc. No. 39-2 at 3.) If some of this tax money 

was later refunded, then Plaintiff’s fifty-percent portion should be adjusted, resulting in 

the possibility of an additional refund. And, given this possibility of an additional refund, 

it is understandable that the parties would include an additional clause specifying the 

timing of that later refund. That is what happened here; Section 1(f) ensures that Plaintiff 

would receive any additional refund within 5 days. 

Plaintiff acknowledges the Settlement Agreement was intended to distribute the tax 

burden evenly amount the parties. (Doc. No. 42 at 2.) Reading Section 1(f) as a timing 

clause is necessary to preserving that balance. As noted previously, the total taxes 

associated with the sale of the Julian Property were $64,883. If Plaintiff’s reading of 

Section 1(f) were to be adopted, he would pay substantially less than half that amount. 

Under his proposed construction, Plaintiff would contribute $30,000 towards taxes 

pursuant to Section 1(e) with no refund.2

 Then, under Section 1(f) Plaintiff would 

receive a refund of approximately $2,850. So at the end of the day, Plaintiff would 

contribute only $27,150 to the total tax liability of $64,883—which is substantially less 

than fifty-percent. Because this is at odds with a literal reading of Sections 1(d) and 1(e), 

as well as the parties’ manifest intent, the Court rejects Plaintiff’s interpretation. The 

better reading of Section 1(f) is that it regulates the timing of certain refunds, subject to 

                                                                

2

 The Court notes that this is already less than half of the total tax liability. However, the Settlement 

Agreement does not provide for a situation in which Plaintiff’s liability is greater than the $30,000 

withheld from Plaintiff’s share of the sale proceeds. As such, the Court finds the parties’ manifest intent 

at the time of contracting was to limit Plaintiff’s liability to $30,000. 

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the substantive calculations under Sections 1(d) and 1(e).3

 To the extent that plaintiff 

subjectively intended to avoid part of his tax liability by inserting Section 1(f), this does 

not override the objective intent manifested in the Agreement. United Commercial Ins. 

Serv., Inc., 962 F.2d at 856 (“The relevant intent is ‘objective’—that is, the intent 

manifested in the agreement and by surrounding conduct—rather than the subjective 

belief of the parties.”). 

Plaintiff argues that he would bear fifty-percent of the tax liability under his 

reading of the agreement because he effectively contributed fifty-percent of the 

California Franchise Tax at the time it was originally withheld from the sale of the 

property. (Doc. No. 42 at 2-3.) Although Plaintiff could have made this argument during 

settlement negotiations, nothing to that effect was ultimately memorialized. Plaintiff 

could not have actually contributed to the California Franchise Tax at the time of the sale 

because he did not have possession of the property or the proceeds from the sale—that is 

why he sued. And had the settlement negotiations granted him some credit for the tax 

withholding, it should have been memorialized in the Settlement Agreement. Instead, the 

Agreement gave Plaintiff a sum of money, minus his tax liability of a “fifty percent 

(50%) share of any federal, county or state taxes associated with the sale of the Julian 

Property.” This language is clear and explicit and the Court is unwilling to read in any 

exceptions. 

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3

 The Court acknowledges that there is nothing in the Settlement Agreement expressly making a Section 

1(f) refund conditional on Plaintiff’s fifty-percent share of the tax liability being less than $30,000. 

However, this implicit conditionality is supported by the fact that at the time of entering into the 

Settlement Agreement, both parties believed that $30,000 was more than enough to cover Plaintiff’s 

share—indeed, if they had not assumed as much they would have withheld more. And if the $30,000 

was enough to cover Plaintiff’s share, then Plaintiff would necessarily receive a refund under Section 

1(f). Thus the implicit conditionality flows directly from the Settlement Agreement’s underlying 

assumption. 

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CONCLUSION 

For the foregoing reasons, the Court adopts the magistrate judge’s Report and 

Recommendation in favor of the Defendant and denies Plaintiff’s motion to enforce the 

settlement. As recommended by the magistrate judge, to the extent Defendant has not yet 

paid to Plaintiff the $235,000 from the sale of the Julian Property pursuant to the terms of 

their settlement, Defendant is ordered to do so within 30 days. 

IT IS SO ORDERED.

DATED: November 1, 2016 

 

 MARILYN L. HUFF, District Judge 

 UNITED STATES DISTRICT COURT 

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