United States Court of Appeals,

Fifth Circuit.

Nos. 90–3123, 90–3130.

FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the FSLIC Resolution

Fund substituted for Federal Savings & Loan Insurance Corporation, Plaintiff–Appellant,

v.

JOHN A. MMAHAT, ET AL., Defendants–Appellees.

FEDERAL DEPOSIT INSURANCE CORPORATION, as Manager of the Federal Savings &

Loan Insurance Corporation Resolution Fund, Plaintiff–Appellant,

v.

PETER E. DUFFY and NEW ENGLAND INSURANCE COMPANY, Defendants–Appellees.

May 20, 1992.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before KING, DAVIS and JOHNSON, Circuit Judges.

KING, Circuit Judge:

The Federal Deposit Insurance Corporation (FDIC) appeals the dismissal with prejudice of

its suit against Peter E. Duffy, a former partner in the law firm of Mmahat & Duffy, and New England

Insurance Company, Duffy's malpractice insurance carrier ( Duffy ). It also appeals from part of the

district court's denial of the Federal Savings & Loan Insurance Corporation's (FSLIC's) motion to

enforce the oral settlement agreement entered into in its su it against Duffy's former partner, John

Mmahat, and Mmahat & Duffy ( Mmahat ). The district court concl uded that the term s of the

Mmahat settlement agreement, and the pretrial order in that suit, barred the subsequent action against

Duffy. Finding that t

he dist rict court erred both in its interpretation of the M mahat settlement

agreement and the legal effect of the Mmahat pretrial order on the Duffy suit, we reverse the Mmahat

judgment in part, vacate the dismissal of Duffy, and remand Duffy for trial.

I. BACKGROUND

The Mmahat and Duffy suits both arise from Mmahat's activities as ge neral counsel of the1 Suit against New England was brought pursuant to the Louisiana direct action statute,

La.Rev.Stat.Ann. § 22:655. This provision gives the plaintiff the right to pursue a cause of action

against the wrongdoer directly against the wrongdoer's insurer. See Trahan v. Liberty Mutual

Ins. Co., 314 So.2d 350, 354 & n. 6 (La.1975).

2 For a more detailed discussion of this cause of action, see FDIC v. Mmahat, 907 F.2d 546,

549 (5th Cir.1990), cert. denied, ––– U.S. ––––, 111 S.Ct. 1387, 113 L.Ed.2d 444 (1986). now-defunct Gulf Federal Savings Bank (Gulf Federal) performed during the tenure of his partnership

at the law firm of Mmahat & Duffy (M & D). After Gulf Federal was placed in receivership in 1986,

the FSLIC, as receiver, brought various claims against Gulf Federal's former management and others,

including an action against Mmahat and M & D. The FSLIC did not name Duffy as a defendant in

any of these claims.

In an effort to simplify the trial, the Mmahat case was divided into two parts. Phase I

included the suit against M & D and Mmahat individually, and New England Ins urance Company

(New England), their professional liabilit y insurer, 1 for legal malpractice and breach of fiduciary duty.

The professional malpractice action rested on the claim that Mmahat had repeatedly advised Gulf

Federal to make loans in violation of the "loans-to-one-borrower" restrictions of the Federal Home

Loan Bank Board. 2 Phase II consisted of malpractice claims relating to t hree lo an transactions in

which Mmahat made defective title examinations and other errors. The Phase I case culminated in

a jury verdict for $35 million against Mmahat and M & D.

After the verdict was returned, but befo re the district court determined whether the

partnership's insurance policy covered the verdict, counsel announced a settlement on the Mmahat

Phase II claims. Counsel for the FSLIC dictated the terms of the settlement into t he record. The

settlement covered the Phase II claims for malpractice. The parties also reserved their rights and

defenses in connection with the jury verdict and any judgments rendered in the Phase I claim. New

England specifically reserved its right to contest both coverage and policy limitations on both phases

of the lawsuit and how payments of the Phase II settlement would be credited against the policy

limitations. The FSLIC reserved the right to oppose. When these terms were recorded, the district3 Mmahat and M & D also appealed the jury's liability verdict. On appeal, we sustained the jury

verdict and affirmed the district court's ruling on the coverage issue. FDIC v. Mmahat, 907 F.2d

546 (5th Cir.1990), cert. denied, ––– U.S. ––––, 111 S.Ct. 1387, 113 L.Ed.2d 444 (1991).

4 Because Duffy was in bankruptcy, the suit also alleged that New England, as Duffy's insurer,

was responsible for his liability up to the $2 million policy limit. court asked all attorney s present whether they had their client's authority to enter into the settlement.

They responded that they did. The district court then asked if the settlement affected anyone else.

Michael Ellis, co-counsel for Mmahat and M & D, announced that Duffy concurred.

In response to the district court's request, the parties listed the following issues as requiring

resolution to conclude the case: (1) whether Mmahat and New England had any claim against

American Casualty Insurance Company; (2) whether the policy exclusions of New England precluded

it from liabilit

y for payment of the Phase I judgment; (3) whether Mmahat was entitled to discharge

in bankrupt cy; and (4) the apportionment of damages between the officers and directors of Gulf

Federal and Mmahat and M & D.

After the parties reached this settlement on the Phase II claims, the district court ruled that

the New England policy did not cover any of the judgment against Mmahat and M & D because it

excluded coverage for "dishonesty." The FSLIC appealed this ruling. 3 While the appeal was pending,

the parties tried unsuccessfully to reduce their settlement to writing. On November 3, 1988, the

FSLIC filed a motion to enforce the Mmahat oral settlement agreement. On November 14, 1988,

the FSLIC filed suit against Duffy and New England, contending that Duffy, as a 40% partner in M

& D at a ll relevant times, was liable under Louisiana law for his virile share of the $35 million

judgment against the partnership rendered in Phase I. 4 In opposition, New England argued that

because the FSLIC failed to reserve its claims against Duffy or Ne w England as his insurer, the

FSLIC had settled and released those claims under the agreement. The district court agreed. It

denied the FSLIC's motion and sua sponte dismissed the Duffy complaint with prejudice. Specifically,

the district court based its decision on the followi ng grounds: (1) the FSLIC failed to include5 As noted above, the FSLIC instituted proceedings in Mmahat. Congress abolished the FSLIC

effective August 9, 1989. Financial Institutions Reform, Recovery, and Enforcement Act of 1989

(FIRREA) § 401, Pub.L. No. 101–73, 103 Stat. 183, 354 (1989); see 12 U.S.C. § 1437 note.

Under FIRREA, FSLIC's assets, including the instant claims, were transferred to the FSLIC

Resolution Fund. The FDIC, as manager of this fund, is now the real party in interest pursuing

this appeal. See FIRREA § 215, 103 Stat. 252; 12 U.S.C. § 1821a. In the remainder of our

discussion, we will refer solely to the FDIC as the appellant in these consolidated actions. potential claims against Duffy in the Mmahat pretrial order; (2) the settlement of Phase II in M mahat

implicit ly included relinquishment of all m alpract ice claims remaining after litigation of Phase I,

including any against Duffy; (3) the reservation of rights announced during the settlement served only

to preserve both parties' appeal rights from the jury verdict in Phase I; (4) neither party mentioned

any claim against Duffy when the district court requested a list ing of unresolved claims; and (5) since

the FSLIC was the party who dictated the ter ms of t he set t lement offer into the record, any

ambiguity, if it exists, should be construed against the FSLIC. The FDIC 5 appealed both rulings. We

granted the FDIC's motion to consolidate these appeals. The FDIC contends that the district court

erred in (1) concluding that the FDIC waived its claim against Duffy and New England by failing to

include the issue in the Mmahat pleadings or pretrial agreement; and (2) interpreting the scope of

the December 14, 1988 Mmahat settlement agreement. We address these issues in turn.

II. ANALYSIS

The parties disagree as to the appropriate standard to review oral settlement agreements.

New England maintains that Stipelc ovich v. Sand Dollar Marine, Inc., 805 F.2d 599, 603 (5th

Cir.1986), instructs us to review a court's interpretation of an oral settlement agreement under the

clearly erroneous standard. We do not believe Stipelcovich applies directly to the case at bar. See

id. (applying clearly erroneous standard to discern whether oral agreement entered into record and

written settlement agreement constituted one agreement or two separate settlements). Unlike

Stipelcovich, the issue here involves the interpretation of settlement terms. When the terms of the

settlement are clearly specified in the record, as they are in this case, we find it appropriate to use the

de novo standard we apply to review written contracts. S ee LTV Educ. Systems, Inc. v. Bell, 862

F.2d 1168, 1172 (5th Cir.1989) ("where the par t ies' intentions can be ascertained from the6 Federal Rule of Civil Procedure 19 specifies the criteria for determining who is a necessary or

indispensable party to a suit. Although the district court did not expressly conclude that Duffy

was an indispensable party to the Mmahat suit, its decision to dismiss the Duffy suit with

prejudice suggests that joinder of Duffy was required for just adjudication, i.e., so that his

interests would not be adversely affected by the judgment. See Fed.R.Civ.P. 19. unambiguous language of the instrument, construction of the release is a question of law for the

court.") (citing Weingart v. Allen & O'Hara, 654 F.2d 1096, 1103 (5th Cir.1981)). C ompare In re

Raymark Indus., Inc., 831 F.2d 550, 553 (5th Cir.1987) (applying clearly erroneous s tandard to

determine terms of ambiguous oral settlement agreement because "[t]he court did n o t specify the

terms of the settlement it was approving, nor did the parties seek such clarification at that time").

The FDIC contests the soundness of the district court's rationale in dismissing its claim

against Duffy. The district court first reasoned that the FDIC was precluded from proceeding against

Duffy individually because it did not name Duffy as a defendant or include a claim against Duffy in

the Mmahat pretrial order. We agree with the FDIC that the district court erred in determining that

the FDIC's failure to include Duffy as a party to Mmahat or mention him in the Mmahat pretrial order

barred the suit against him.

Federal Rule of Civil Procedure 16 governs the scope and course of a trial. A court m ay

properly rej ect an at t empt to pursue an issue not contained in the pretrial order unless its

co nsideration is necessary to prevent manifest injustice. T rinity Carton Co. v. Falstaff Brewing

Corp., 767 F.2d 184, 192 n. 13 (5th Cir.1985), cert. denied, 475 U.S. 1017 , 106 S.Ct. 1202, 89

L.Ed.2d 315 (1986). However, this rule does not establish whether an individual must be joined as

a party to an action. 6 We therefore consider whether the FDIC's failure to join Duffy as a defendant

in the Mmahat

suit prevented it from bringing the subsequent Duffy suit.

Neither federal nor Louisiana law requires the joinder of all partners in an action against a

partnership. S ee 7 Charles A. Wright, Arthur Miller & Mary Kay Kane, F ederal Practice and

Procedure § 1623 (2d e d. 1986) (joinder unnecessary for partners who are jointly and severally7 In Koppers, the plaintiff initially sued the partnership on a contract debt and obtained a

judgment against the partnership. A Louisiana court of appeals reversed the trial court's dismissal

of a subsequent action seeking judgment against the individual partners for their virile shares. The

appellate court reasoned:

[p]rior to filing the instant suit, Koppers had already obtained a judgment against

the partnership. Their present suit seeks redress against the individual partners for

their virile share of the partnership debt. Although, as a practical matter, it may

have been more economical and expedient to have joined the partners in the first

suit, the intent of the law has been satisfied that recovery was first sought against

the primary debtor, the partnership.

Koppers, 544 So.2d at 26.

8 This provision states:

A partnership as principal obligor is primarily liable for its debts. A partner is

bound for his virile share of the debts of the partnership but may plead discussion

of the partnership.

La.Civ.Code Art. 2817. The number of members in a partnership, not the extent of each

member's interest, defines the virile share. See Duncan v. Gill, 227 So.2d 376, 382

(La.App.1969). liable); K oppers Co. v. Mackie Roofing & Sheet Metal Works, 544 So.2d 25, 26 (La.App.1989) (The

purpose of La.Code Civ.P. art. 737 is not to "make it mandatory that the partners be named as

defendants every time a partnership is sued"; rather, its purpose is to require a partnership creditor

first to "exhaust his rights against the partnership before he proceeds against the indivi dual

partners."); 7 c

f. Cone Mills Corp. v. Hurdle, 369 F.Supp. 426, 438 (N.D.Miss.1974) (because

general partners are jointly and severally liable for their partnership obligations under Mississippi law,

one or more partners may be sued on a partnership obligation without jo ining all partners in the suit).

See generally Restatement (Second) of Judgments § 60 (1982) (a successful lawsuit against one

partner does not bar subsequent lawsuits against other partners individually o n the same debt); 7

Federal Practice and Procedure § 1613, at 196 n. 32 (noting that Official Comment to the Uniform

Partnership Act § 15 recognizes that under some state partnership laws, "the partnership may be sued

in the partnership name, and thereafter the partners separately until satisfaction is had"). Under the

Louisiana law of partnerships, each partner is secondarily liable for his virile share of the partnership

debts. S ee La.Civ.Code Art. 2817. 8 The fact that Duffy might have been joined in M mahat does not

preclude the FDIC from enforcing the Mmahat judgment against Duffy in a separate action. Since9 For this reason, Sports Factory, Inc. v. Chanoff, 586 F.Supp. 342 (E.D.Pa.1984), does not

support New England's argument. Sports Factory did not involve an action to collect on a

judgment. Rather, in Sports Factory, the district court held that Pa.R.Civ.P. 2134(a) did not

permit the plaintiff to bring new claims against a partner who was not individually named as a

defendant in a prior action against the partnership. The court noted that the purpose of the rule

was "to allow a plaintiff who has obtained a judgment against a partnership sued in firm name

only, to recover against individual partners who were not individually named as defendants to a

suit against the firm, to the extent that the judgment against the firm is unsatisfied." Id. at 348.

Consequently, Sports Factory harmonizes with the result we arrive at here. the Mmahat Phase I litigation resulted in a $35 millio n judgment against Mmahat and M & D, the

FDIC is entitled to seek Duffy's share of the liability for that judgment.

New England also contends that the Duffy claim is barre d because it arose from the same

transaction as Mmahat and was brought against an individual in privity with the parties in Mmahat.

Basically, New England contends that res judicata required that Duffy be jo ined as a defendant in

Mmahat or that he not be sued at all. This contention is based on the application of the doctrine of

claim preclusion, which "treats a judgment, once rendered, as the full measure of relief to be accorded

between the same parties on the same "claim' or "cause of action.' " K aspar Wire Works, Inc. v. Leco

Eng'g & Mach., Inc., 575 F.2d 53 0, 535 (5th Cir.1978) (citations omitted). In K aspar, we also

observed that "[t]he aim of claim preclusion is

... to avoid mult iple suits on identical entitlements or

obligations between the same parties, accompanied, as they would be, by the redetermination of

identical issues of duty and breach." Id.

Duffy does not rest on an identical obligation, nor doe s it require readjudication of the

malpractice claim. M

mahat was based on the malpractice of Mmahat, committed as a partner of the

firm. In contrast, D uffy is based on the pre-existing $35 millio n judgment against Mmahat and M &

D and Duffy's virile share of liabil it y for that debt pursuant to Louisiana Civil Code Article 2817.

Thus, the FDIC did not pursue a new theory of recovery in Duf f y; it sought merely to collect a

pre-existing judgment in its favor. 9 Obviously, res judicata would bar D uffy if the FSLIC had lost in

Mmahat because the FDIC would be seeking to relitigate the issue of liabilit y. However, res judicata10 The fact that New England is the active party to the suit does not affect our analysis here.

As Duffy's insurer, New England stands in Duffy's shoes. Ex parte Tokio Marine & Fire Ins. Co.,

322 F.2d 113, 116 (5th Cir.1963). An insurer may not rely on res judicata principles to avoid

liability if the suit against the insured in whose shoes the insurer stands would not be barred by res

judicata. Since res judicata does not bar the suit against Duffy, it does not bar the collection

effort against New England as his insurer. New England is not an identical party in Duffy because

the insurance policy provides separate coverage for Duffy as a partner of M & D. does not bar the FDIC's suit against Duffy to collect the judgment it obtained against the firm. 10 S ee

Restatement (Second) of Judgments § 60 (1982).

The FDIC also argues that the district court erroneously interpreted the oral settlement

agreement as discharging the FDIC's claims against Duffy for his virile share of liabilit y in the

judgment against M & D. It also challenges the district court's finding that the agreement reserved

the FDIC's rights for appeal purposes only. The FDIC maintains that the parties intended the M mahat

settlement to release Mmahat, M & D, and New England from liability only in connection with the

three specific claims enumerated during the Phase II settlement conference, and reserve the FDIC's

rights to enforce the Phase I jury verdict in its favor.

The district court found that the Phase II settlement agreement covered not only the specific

claims listed by the parties, but "all matters involved in the case other than those specifically set forth

in "Phase I.' " However, when he dictated the oral settlement agreement into the record, counsel for

the FSLIC described the terms of the settlement as follows:

The settlement of phase 2 of the litigation[, which] consists of FSLIC's claims against Mmahat

& Duffy and New England for malpractice in connection with 1) title opinions issued by

Mmahat & Duffy on the John Em's [sic] loan, 2) the special warranty deed prepared in

connection with the sale of the Chateau Legrand project and 3) the lack of title examination

on the Segura loan[,] consisting of th e fo llowing terms in connection with that settlement:

The FSLIC will settle and grant releases to John Mmahat, Mmahat & Duffy and New England

for the preceding claims in return for payment of, total amount of $250,000, which is made

up of $225,000 f

ro m New England and $25,000 from the third party defendant that [was]

brought into the action by New England, that third party defendant being Continental Land

Title Insurance Company.

(Emphasis added). This enumeration of the claims to be settled clearly co nfines the agreement to11 The district court also looked to the attorney's listing of unresolved issues to find that the

agreement included all remaining matters except those litigated in Phase I. Because Duffy was

not a party, a claim against him cannot properly be described as a remaining issue in the Mmahat

suit. The FSLIC would have had to explicitly waive any potential claim against Duffy during the

settlement conference to have this effect.

12 The New England insurance policy prevented both the insurer and the insured from settling

without the written consent of the other. The contract covering Mmahat & Duffy and its partners

specifies that

[t]he Insured may effect settlement of any claim ... with the written consent of the

Company, such consent not to be unreasonably withheld. The Insured shall not,

except at personal cost, ... settle any such claim in the absence of such consent....

The Company may, with the written consent of the Insured, make any settlement

or compromise of any claim which it deems expedient.... those claims. 11

The FDIC maintains that during the settlement conference, the FSLIC expressed no intention

to release Duffy from any liabilit y he might have for the Mmahat Phase I judgment. The district court

found that th e agreement failed to preserve the FDIC's right to proceed against Duffy and New

England as his insurer because,

had FSLIC attempted to reserve any rights against these parties, neither counsel for Duffy nor

counse l fo r New England, both of whom were present at this ... settlement, would have

concurred in such a settlement. Yet, both parties were specifically asked if they concurred

in the agreement and both responded affirmatively.

The record lacks the factual basis for this reasoning. No attorney appearing before the court during

the settlement conference identified himself as representing Duffy. The district court may have been

misled when it inqu ired whet her the settlement affected anyone else present. An attorney who

identified himself as representing Mmahat and M & D responded, "Mr. Duffy concurs." However,

the district court apparently misperceived the force of this statement. First, counsel never identified

himself as representing Duffy's individual interests, nor does the record show that Duffy himself was

present at the settlement conference. Second, the record contains no evidence that counsel for M &

D or New England had the authority to settle any claims brought against Duffy individually. 1213 The FDIC also requests reversal of the portion of the district court's judgment in Mmahat

that orders the FSLIC to "defend, indemnify, and hold harmless John A. Mmahat, Mmahat &

Duffy and New England as to all "Phase I' claims which FSLIC may have against these parties,

including any and all claims against Peter Duffy and/or against New England as his insurer...."

The transcript of the settlement agreement indicates that the FSLIC offered to indemnify only

Continental Casualty Insurance Company from any claims against remaining defendants to the

Mmahat litigation. Since the record lacks any indication that the FSLIC intended to indemnify

other parties, we conclude that this order rests on a factually erroneous finding. Furthermore, counsel for the FSLIC further stated that "the FSLIC will reserve and maintain

its rights under the jury verdict and any judgment to be rendered in it s favor on phase I which

consists, of course, of the claims for malpractice and breach of fiduciary duty in connection with the

loan-to-one borrower violations." This general reservation of rights necessarily includes the right to

enforce these judgments as well as the right to appeal from them.

In finding that the FSLIC released its right to pursue the claim against Duffy, the district court

relied on the fact that the FSLIC fa iled to list collection of the Phase I judgment from Duffy as an

unresolved issue during the settlement conference. As we observed above, because Duffy was not

a party to the Mmahat litigation, the FDIC need not have mentioned a potential claim against him as

an unresolved issue in Mmahat. In addition, the FDIC noted during the settlement conference that

insurance policy coverage issues remained unresolved. Accordingly, we conclude that the district

court erred in finding that the FDIC released all claims against Duffy in the M mahat settlement

agreement. 13 The FDIC's reservation preserved its right to file suit against Duffy and New England

in an effort to collect Duffy's virile share of the $35 million judgment in Mmahat.

III. CONCLUSION

For the foregoing reasons, we REVERSE that part of the district court's judgment in Mmahat

which orders the FDIC to release any claims against Duffy and New England as his insurer and

requires the FDIC to indemnify Duffy and New England as Duffy's insurer. Also, we VACATE the

district court's dismissal with prejudice of Duffy and REMAND that case for further proceedings

consistent with this opinion.