Opinion ID: 578613
Heading Depth: 3
Heading Rank: 4

Heading: The Effect of a Settlement on ERISA Created Rights

Text: 47 In Chemung, we stated that Congress intended courts to fashion a federal common law of ERISA and held that rights to indemnity and contribution are integral aspects of that law. Chemung, 939 F.2d at 16. Our decision incorporated traditional equitable principles of trust law that favor apportioning liability in accordance with fault. Chemung reflects our belief that ERISA's purpose of deterring pension plan abuse is frustrated when solvent breaching fiduciaries are allowed to escape the consequences of their actions. Because the case did not require us to do so, however, we did not set forth the scope of indemnity and contribution under ERISA or define a defendant's ability to obtain them in light of a settlement. We now turn to those questions. 48
49 Under the settlement before us, certain claims against Riley would be dismissed, he would receive settlement credit for Aetna's payment and, if he could prove entitlement to contribution, he would secure a judgment reduction for the lesser of the amount that a settling defendant paid in satisfaction of claims or the amount representing that settling defendant's proportionate fault. 50 Riley asserts that these terms do not conform to the law of this Circuit. He argues that the district court should have considered relative fault before extinguishing his rights and that he is entitled to receive a judgment reduction at least in the amount paid by the settling parties. 51 The private plaintiffs and the Secretary insist that this Circuit has already adopted a judgment reduction rule and that this settlement was tailored to it. The private plaintiffs argue that the law in our Circuit disallows a nonsettling party from receiving a judgment reduction unless he proves that he would be entitled to contribution for that amount against the settling defendant. Thus, to the extent that an amount tendered by a settling defendant exceeds the proportionate fault of that settling defendant, the nonsettling defendant would not receive credit for it. 52 In our case, the auditors settled for $1,575,000. Under a hypothetical supplied by the settling plaintiffs, if the factfinder determines that the auditors' proportionate share of a judgment is $575,000, then Riley would not receive credit for the other $1 million paid by the auditors. This excess amount would not represent an amount paid to compensate the plaintiffs for the auditors' relative share of fault and thus, they argue, Riley should not receive credit for it. 53 As support, the private plaintiffs direct us to our decisions in Singer and In re Ivan F. Boesky Sec. Litigation, 948 F.2d 1358 (2d Cir.1991). Before addressing what we said in Singer and Boesky, we note that those cases involved securities law and not ERISA. Nevertheless, we may look to them for guidance. 54 In Singer, the plaintiff, Singer, sued Olympia Brewing Company (Olympia) and Loeb Rhoades & Co. (Loeb Rhoades) in separate actions for violations of the securities laws. Singer, 878 F.2d at 597-98. Prior to trial, Singer settled with Loeb Rhoades for $1,250,000. After a trial yielded Singer a $2,958,350.50 judgment against Olympia, the district court reduced the judgment against Olympia in the amount of $1,250,000. Id. at 597. 55 Singer argued that the setoff was improper. He stressed that Loeb Rhoades had settled not only securities claims but also a RICO claim that could have resulted in treble damages. Accordingly, he posited that the settlement [should] be deducted, not from the amount to be recovered under the judgment but from the highest amount of 'provable damages' that could have been recovered against the settling defendant. Id. at 600. We rejected this argument because the settlement must be deducted from the claim or judgment in the litigated case instead of from a speculative amount that a plaintiff had sought. Id. at 600-01. Underscoring our decision was that Singer had not claimed to have suffered more than one injury even though Loeb Rhoades and Olympia separately had violated the securities laws. Id. 56 We upheld the setoff, adopting the one satisfaction rule. This rule provides that when a plaintiff receives a settlement from one defendant, a nonsettling defendant is entitled to a credit of the settlement amount against any judgment obtained by the plaintiff against the nonsettling defendant as long as both the settlement and judgment represent common damages. Id. at 600. 57 Singer makes two main points. First, judgment reduction in accordance with the one satisfaction rule is based on the judgment in the litigated case, and a court will not help a plaintiff achieve a total recovery that exceeds that amount. Id. at 600-01. Second, where a settlement and a judgment compensate a plaintiff for the same injury, a nonsettling defendant is entitled to a judgment reduction at least in the amount of a prior settlement. Id. at 600. 58 Conspicuous by its absence is what Singer did not say. It did not address whether Olympia could sue Loeb Rhoades for contribution in excess of the judgment reduction. That issue was not before us. Cf. USF & G v. Patriot's Point Dev. Authority, 772 F.Supp. 1565, 1571 (D.S.C.1991) (No bar order was discussed in Singer, and the decision did not address the policy question of what credit method would be required to compensate the nonsettling defendant for the barring of his equitable right to contribution.). 59 Moreover, we did not say that a judgment against a nonsettling defendant should not be reduced by a settling defendant's individual payment where that payment exceeds an ultimate percentage finding on that settling defendant's liability. If this were true, then a plaintiff could maximize his total recovery by proving that a party who made the largest contribution to a settlement was the party least at fault. 60 The settlement before us would grant Riley (1) the dismissal of some claims against him, and (2) credit for Aetna's payment and the lesser of (a) an amount representing a settling defendant's relative fault, or (b) a settling defendant's actual contribution to the settlement. If a settling defendant is found blameworthy in an amount less than his settlement payment, then under the terms of this agreement Riley would not receive credit for an amount paid by that defendant in excess of relative fault. Inclusion of this settlement provision ignores the one satisfaction rule adopted in Singer. 61 A determination that a settling defendant paid an amount in excess of his fault should not affect a nonsettling defendant's right to judgment reduction. Absent a showing that damages are not common, a nonsettling defendant whose rights against settling defendants are to be barred is entitled to judgment reduction at least in the amount paid by all settling parties. 62 Moreover, the settlement we are reviewing provides that the private plaintiffs and the Secretary will not pursue any claims against Riley that are uniquely attributable to 1985. They assert that this provides Riley with credit for the $5.25 million that Republic paid to satisfy its liability. 63 As Riley points out, however, this leaves open the possibility that the private plaintiffs and the Secretary will argue that no claims are uniquely attributable to 1985. Thus, they could pursue all of their claims against Riley, who in fact might then receive no credit for Republic's payment. This also might result in a violation of Singer 's one satisfaction rule. 64 The private plaintiffs and the Secretary also argue that Boesky supports their argument. We disagree. 65 In Boesky, we did not adopt a method of judgment reduction. Although we recognized that settlement bars are often desirable because they facilitate settlement, no specific judgment reduction provision was before us. Boesky, 948 F.2d at 1362, 1364. In fact, we allowed the parties to defer adoption of a specific judgment reduction method, in part because neither the settling nor the nonsettling defendants object[ed] to these matters being deferred. Id. at 1369. In no way did we intimate that we later would approve a method of judgment reduction that did not conform to Singer. With that said, we now turn to a determination of the matter at hand. 66 We hold that contribution does not exist after a court approves a fair settlement bar. Otherwise, settlements among fewer than all the parties would be difficult to reach. However, third party participation in an evidentiary fairness hearing and court approval of the settlement bar are necessary to protect the due process rights of third parties. See United States v. International Brotherhood of Teamsters, 948 F.2d 98, 103 n. 2 (2d Cir.1991) ([A] consent decree may not impose ... obligations [on a nonparty] without affording the affected nonparty a meaningful opportunity to challenge the application of the decree to it.). 67 A settlement bar should not be approved unless it is narrowly tailored and preceded by a judicial determination that the settlement has been entered into in good faith and that no one has been set apart for unfair treatment. Moreover, a court should not approve a settlement bar that grants a nonsettling defendant a judgment reduction less than the amount paid by settling defendants toward damages for which the nonsettling defendant would be jointly and severally liable. 68 Relative fault is not the only factor that district courts should take into account when appraising the fairness of a settlement. The likelihood of the plaintiff's prevailing at trial and the adequacy of the resources of the most culpable party, for example, may also be taken into account. See Manual for Complex Litigation (Second) § 30.46, at 244-45 ([A] partial settlement providing little relief may be entirely satisfactory if the settling defendant has strong defenses or is impecunious.); In re Nucorp Energy Sec. Litigation, 661 F.Supp. at 1408 (The settlement should be considered in light of any uncertainties surrounding the settling defendant's liability.) (citation omitted). Consideration of all these factors, including relative fault, in determining what is a fair settlement guarantee[s] that a settling defendant escapes neither the responsibility for his wrongdoing nor, therefore, the deterrent effect which underlies the right to contribution. Id. at 1408-09. 69 A district court should conduct an evidentiary hearing when one is sought. However, we decline to delineate either the requirements or all of the appropriate considerations for that hearing. The test must be one of fairness. 4 70 The settlement at issue here does not adequately satisfy the requirements of our holding today, and thus the settlement bar cannot stand. The settlement provides for a judgment reduction that may be less than the amount paid by the settling defendants. The district court did not consider relative fault, nor did the district court make a proper determination that the settlement would compensate Riley fairly for his lost right to contribution. Therefore, the district court erred in approving the settlement insofar as that settlement barred Riley's right to contribution. 71
72 Riley insists that if a judgment were entered against him in this case, he would be entitled to indemnity. The district court, he argues, cannot extinguish this right. We disagree. 73 In Chemung, we stated that indemnity is available for ERISA defendants but did not set forth the circumstances in which it would be available. Traditional trust law has allowed joint tortfeasors to seek indemnity instead of contribution where others are substantially more at fault. See Restatement (Second) of Trusts § 258; 3 A. Scott, Scott on Trusts § 258.1, at 2210 (3d ed. 1967); Whitfield v. Lindemann, 853 F.2d 1298, 1303 (5th Cir.1988), cert. denied, 490 U.S. 1089, 109 S.Ct. 2428, 104 L.Ed.2d 986 (1989); Free v. Briody, 732 F.2d 1331, 1338 (7th Cir.1984). In Free, the Seventh Circuit expressly incorporated into the federal common law of ERISA a right to indemnity based on differences in relative fault. Free, 732 F.2d at 1336-38. But see Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146, 105 S.Ct. 3085, 3092, 87 L.Ed.2d 96 (1985) (rejecting the statutory basis through which Free incorporated the right of indemnity into ERISA). It is this form of indemnity--which relates to the distribution of liability among culpable tortfeasors--that Chemung dealt with and on which Riley's potential indemnity claims appear to be based. 74 Where a defendant seeks indemnity based on differences in fault, we see no reason why a court-approved settlement bar should have a different effect on that right than it would have on contribution. As we have made clear, a court-approved settlement bar may eliminate the right to contribution. Accordingly, if a district court determines after an evidentiary hearing that a settlement is fair and approves a settlement bar, then a defendant whose claim is based on differences in relative fault does not retain a right to seek indemnity. Thus, if the parties again come to terms and the district court determines after an evidentiary hearing that an agreement containing a settlement bar that precludes indemnity claims based on differences in relative fault is fair, reasonable and adequate, then it may approve that settlement.