Lessons From a Defective Settlement Agreement: Being Approved . . . and Then Falling Apart

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A defective document

By: Donald L. Swanson

There is “no mutual meeting of the minds concerning the terms” of the mediated and Court-approved settlement agreement. Therefore, the agreement “is not an enforceable contract.”

In re Singh, Case No. 15-02159, Doc. 33 (Bankry. N.J., Oct. 5, 2016).

Procedural Background

Two adversary proceedings are filed in the Chapter 7 case of In re Bhavesh Singh, Case No. 15-20348 in the New Jersey Bankruptcy Court. One adversary is a dischargeability action filed by a creditor against the Debtor (Case No. 15-02085), and the other is a fraudulent transfer action filed by the Chapter 7 Trustee against both the Debtor and his spouse (Case No. 15-02159).

A mediation occurs on June 15, 2016, and results in a global settlement of all issues in the two adversary proceedings. The settlement provides for, (i) periodic payments by Debtor and his spouse, (ii) a release upon completion of such payments, and (iii) entry of a $152,000 non-dischargeable judgment in favor of the creditor and against Debtor, if payments aren’t made as agreed.

On July 8, 2016, the Bankruptcy Court enters a “Consent Order” approving the settlement.

The Default and Further Litigation

Initial payments under the settlement aren’t made when due. So, the creditor files a Motion for entry of the $152,000 judgment. Debtor responds by making initial payments and filing a Motion to enforce the settlement agreement. Debtor argues that the causes for payment delays were out of his control and that any delinquencies are de minimus.

The Bankruptcy Court cites New Jersey contract law that, (i) mutual assent is a primary requisite to formation of a contract, and (ii) when a misunderstanding between contracting parties on a material term of agreement exists, there is no mutual assent and, therefore, no contract.

The Ruling

The Bankruptcy Court determines that language of the settlement document is simplistic, containing neither a cure provision nor a default provision. And the Court concludes that the settlement document is unworkable:

–“There was no mutual meeting of the minds concerning the terms” of the mediated and Court-approved settlement agreement. Therefore, it “is not an enforceable contract.”

–“Accordingly, this Court will enter an Order vacating” the prior Order that approves the settlement agreement.

Such conclusion is based upon the following findings:

–“All of the parties urge this Court to accept certain terms of the agreement and discard others. . . . To do so, would require this Court to re-write the parties’ agreement for them.  This Court cannot provide the material terms to the parties’ agreement.”

–“The parties made too many mistakes” in preparing their settlement agreement, “without fleshing out more of the material terms.”

–“The Court recognizes the difficult situation this decision puts the Trustee in . . . but unfortunately that benefit cannot override the deficiencies” in the settlement agreement.

The Lessons

Language used to memorialize the terms of a mediated settlement agreement is exceedingly important. And great care must go into the preparation of such language.

I’ve argued for many years that all parties to a mediation should begin, in advance of the mediation session, to prepare a settlement document. They should not wait for the conclusion of a long and arduous mediation session, when everyone is tired and grumpy, to begin drafting that document.

Surely, all parties to every mediation have an idea, in advance of the session, what the general outline and structure of a settlement might look like—or, at least, some of the provisions they will want to have. So, they should be considering and evaluating and preparing those critical provisions, in advance, to assure that all are included and the language is adequate.

In fact, each party should have a preliminary draft of a settlement agreement, with critical terms already prepared, in-hand when their side walks into the mediation session.

–And even better-yet, they should have initiated discussions with opposing parties about such a document.

Such advance actions and preparations might have prevented difficulties in the In re Bhavesh Singh case.

Postscript

More recently, the parties reached a new settlement agreement, which was approved last week by a Bankruptcy Court Order dated February 28, 2017 (Doc. 41, Case No. 15-02159).

1 thought on “Lessons From a Defective Settlement Agreement: Being Approved . . . and Then Falling Apart”

  1. Yet another example of how the court process does not serve its constituents in resolving disputes, and can even exacerbate them when the court’s idea of how things should be done is not met.

    Liked by 1 person

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