Opinion ID: 2600722
Heading Depth: 3
Heading Rank: 1

Heading: Arizona's law on disclosure of settlement agreements, partial settlement agreements, and quasi-settlement agreements

Text: ¶ 18 The Arizona Reports are replete with discussion of various types of agreements made between trial counsel. We have examined Gallagher agreements, Damron agreements, Morris agreements, Bradshaw agreements, and agreements that have yet to be dignified with case names, such as high-low agreements and guaranty agreements. Having read the past cases, Respondents concluded there was no duty to disclose their unique agreement. They argue that their reading of the cases was correct or at least arguably so. ¶ 19 We first alluded to such agreements in Damron v. Sledge, 105 Ariz. 151, 460 P.2d 997 (1969). Damron was a damages action against two defendants, only one of whom was defended by insurance counsel. The insurers for the second defendant refused to provide a defense, claiming there was no coverage, thus leaving the second defendant to his own devices. Eventually the uninsured defendant and the plaintiff's lawyer agreed that the former would receive a covenant not to execute in exchange for assigning to the plaintiff the bad faith claim against his putative insurer. The plaintiff would then dismiss with prejudice against the insured defendant while the agreeing defendant would withdraw his answer and allow the plaintiff to take a default judgment. The agreement was disclosed to the trial judge and to the lawyer for the insured defendant, who for some reasonperhaps shock at the use of this new techniqueobjected vehemently to the whole process, saying that he thought the agreement was tainted with conspiracy, chicanery, and fraud.... Id. at 153, 460 P.2d at 999. The trial judge, perhaps also surprised, concluded that the agreement was collusive and fraudulent and therefore dismissed the entire case. We reversed on appeal, holding that the deal was not ipso facto collusive. Id. We also held that while the trial judge had inherent power to dismiss a collusive case, the judge could not do so without taking evidence to establish such collusion: It cannot be held that as a matter of law collusion exists simply because a defendant chooses not to defend when he can escape all liability by such an agreement, and must take large financial risks by defending. If, at a hearing, where the testimony comes from sworn witnesses rather than from arguments of the attorneys, it appears the defendant instead of defaulting agrees to perjure himself ..., or if some other definite evidence of collusion is adduced by proper testimony, a dismissal of the entire action may be justified. Id. at 155, 460 P.2d at 1001 (emphasis added). ¶ 20 There are significant differences between Damron and the present case. The Damron agreement was disclosed and the parties did not undertake a sham [8] trial in front of a judge and jury. Finally, unlike the present case, the court only held a default hearing, not a supposedly adversarial trial. Nothing we said in Damron legitimizes what was done here. ¶ 21 In City of Tucson v. Gallagher, 108 Ariz. 140, 493 P.2d 1197 (1972), the plaintiff gave a covenant not to execute to one of two defendants, but it was to be effective only above a certain amount, thus guaranteeing the plaintiff a minimal recovery from one or both of two defendants. We found no deprivation of a fair trial because, under the circumstances, this type of agreement could change neither the agreeing defendant's motive nor trial tactics in defending the case, and nothing that occurred during the trial demonstrated any impropriety. Id. at 142-43, 493 P.2d at 1199-1200. As in Damron, there are important differences between Gallagher and the present case. First, the Gallagher agreement was disclosed to the trial judge. [9] Second, the trial that followed the making of the covenant was real. There was no agreement that the plaintiff would dismiss at the end of the plaintiff's case; the second defendant was present and could and did defend as its trial strategy dictated. See id. Gallagher is no help to Respondents. ¶ 22 Respondents next rely on Mustang Equipment v. Welch, 115 Ariz. 206, 564 P.2d 895 (1977). The Mustang agreement did contain a confidentiality clause. Mountain States, one of two defendants, and the plaintiff agreed that if a verdict was returned against both Mountain States and Mustang, the plaintiff would execute only against Mustang. This, of course, gave Mountain States a motive to blame Mustang for the accident that caused the plaintiff's damages. Id. at 208, 564 P.2d at 897. We concluded that the particular agreement entered here did not encourage fraud or collusion because Mountain States had already cross-claimed against Mustang, and even without the agreement it would have attempted to show that Mustang's negligence had been the only cause of the accident. Id. at 210, 564 P.2d at 899. ¶ 23 Thus, we were satisfied that non-disclosure of the agreement had not affected the integrity of the trial. Id. at 211, 564 P.2d at 900. But we were disturbed by the non-disclosure and believed that failure to disclose such agreements could improperly affect many aspects of a case, including settlement, trial strategy, and arguments. Consequently, we concluded it was better policy to require candid disclosure of all Gallagher -type agreements to the court and to all parties concerned.... Id. In closing the opinion we used the following words, which we believe should have controlled Respondents' duty to disclose in the malpractice action against Dr. Bair: Finally, we think this is a matter of public policy. While we recognize that under the particular fact situation of this case there was neither fraud, collusion nor unethical conduct involved, we cannot condone secret agreements between a plaintiff and defendant which, by their very secretiveness, may tend to encourage wrongdoing and which, at the least, may tend to lessen the public's confidence in our adversary system. Pursuant to the foregoing, we hold the agreement entered into between Welch [plaintiff] and Mountain States [defendant 1] to be unenforceable due to the failure of the parties to disclose the agreement to counsel for Mustang [defendant 2] and to the court. Id. ¶ 24 The Mustang language is particularly applicable to the present case because the agreement before us is considerably less benign than that in Mustang. The trial in Mustang was to be a real trial with real results, not a pretense. The Mustang plaintiff did not agree to dismiss with prejudice before the case was submitted to the jury, nor did either Mustang defendant agree to allow the plaintiff's counsel free rein to do anything they wanted in presenting the case. ¶ 25 But, say Respondents, our court of appeals made it clear that the holding in Mustang had no application to cases like theirs, in which there was only a single party defendant. See State Farm Mut. Auto. Ins. v. Paynter, 122 Ariz. 198, 593 P.2d 948 (App. 1979). We disagree with this contention for two reasons. First, there were two defendants in this case, and both were parties at the time the agreement was made. The Hospital was still a party because Plaintiffs had moved for a new trial with regard to the order granting it summary judgment; therefore, any judgment entered in favor of the Hospital was not yet final and appeal was possible. Moreover, while the motion was pending, the Hospital was very much directly interested in the subject matter of the suit.... See State v. Lamberton, 183 Ariz. 47, 49, 899 P.2d 939, 941 (1995). Second, the Hospital was still active in the case, assisting Respondents by providing and paying for an obstetrical expert to testify for Dr. Bair. ¶ 26 Thus, we do not believe Paynter validates the procedure Respondents followed in Dr. Bair's case. [10] In Paynter, the court of appeals held that the failure to disclose the agreement did not require reversal because the language in Mustang and Gallagher applied to agreements between the plaintiff and only one of two defendants. Paynter, 122 Ariz. at 202, 593 P.2d at 952. Thus, the hearing officer found that Respondents took considerable comfort in Paynter and had a genuine belief that it freed them from any duty to disclose their agreement. ¶ 27 Accepting this for whatever it is worth, we now put an end to any comfort that others might feel in the future. We must reject Respondents' single-party argument and, insofar as it may be supported by Paynter, we must reject such an interpretation of that case. Respondents' argument and their reliance on Paynter overlook the presence of a very important participant in the casethe trial judge. The judge is not just a casual observer of the passing scene but has important responsibilities in an adversarial system. While the judge is not a party as are litigants who produce evidence or argue the case, he or she is more than a referee presiding in a merely formal or ritualistic role. In an adversarial system, the judge is responsible for ensuring that justice is accomplished according to the substantive rules and procedural mechanisms established by law. Those procedural rules do not contemplate hoodwinking judges any more than jurors. While some things must be excluded from jurors' consideration to focus their attention on matters legally relevant, the rules do not contemplate hiding the true nature of the proceeding from the judge. Nor do they permit lawyers to remain silent when it is evident that the judge has been misled about what is occurring in his own courtroom. ¶ 28 Thus, the words we used in Mustang should have been considered the law of this state. Any agreement that, by its nature, may tend to encourage wrongdoing or may tend to lessen the public's confidence in our adversary system cannot be condoned if kept secret. Mustang, 115 Ariz. at 211, 564 P.2d at 900. We hold today, as strongly as possible, that any agreement that has the potential of affecting the manner in which a case is tried is one that may encourage wrongdoing and must therefore be disclosed to the trial judge and all litigants in the case. Thus, Respondents did have a duty to disclose. The hearing officer found, however, that after adequate research Respondents had a good faith belief that they had no duty to disclose. So far as Respondents' failure to disclose the covenant not to execute is concerned, we accept the finding and on that basis conclude that Respondents made only an error of law rather than a violation of the ethical rules. We do not sanction lawyers for good faith errors of law. See In re Myers, 164 Ariz. 558, 560, 795 P.2d 201, 203 (1990).