By: Donald L Swanson
The opinion is Belk, On behalf of herself and All others similarly situated v. Le Chaperon Rouge Co., et al., Case No. 1:18cv1954 in U.S. District Court, N.D. Ohio (decided July 6, 2020).
The opinion addresses Plaintiffs’ Motion to enforce a mediated settlement agreement. Defendants oppose the Motion on grounds of impossibility of performance.
Here’s what happened.
Defendant operates child care facilities throughout northern Ohio, and Plaintiffs worked for Defendant.
Plaintiffs file a class action lawsuit against Defendant and its owner, alleging violations of the overtime provisions of the Fair Labor Standards Act (29 U.S.C. §§ 201-291), Ohio Revised Code § 4111.03, and other laws. Plaintiffs allege that Defendant failed to pay for all hours worked, including work performed before and after paid shifts.
Plaintiffs’ proposed class consists of “all full-time teachers . . . who were subject to [Defendant’s] clocking-in and clocking-out practices.”
After Defendant and it’s owner file their answers and after various motions are filed, the Court refers the case to mediation.
Mediation occurs. The parties fail to reach a settlement, but they agreed to continue mediating.
Meanwhile, Ohio’s Governor, (i) orders all kindergarten through 12th grade schools in Ohio to close for several weeks, and (ii) authorizes emergency changes in child day care rules.
Mediation sessions continue happening. The parties reach a settlement, and various terms are recited on the record, including:
- A total settlement payment of $200,000 is to be made within 40 days after Court approval of the settlement;
- A release will be provided;
- The parties will jointly and promptly submit a motion for Court approval of the settlement, with a proposed notice to class members;
- Settlement checks and tax forms will be issued to each Class Member, after final Court approval; and
- The Court will retain jurisdiction to enforce the terms of the settlement agreement.
Things Fall Apart
Then, things start falling apart. Defense counsel says:
- deadlines cannot be met, since Defendant “is totally shut down” by the pandemic;
- the pandemic is “having major financial repercussions” on the Defendant; and
- Defendant cannot execute the Settlement Agreement, citing financial constraints imposed by the pandemic and the Governor’s directives.
Then, Plaintiffs file their Motion to approve and enforce the settlement agreement.
Defendants acknowledge that a “global settlement” was reached and that the terms of that settlement include provisions “intended to lead to approval of a class settlement.”
But Defendants argue that “unforeseen events have arisen—specifically, the state-mandated closure of its entire business enterprise and the concomitant economic catastrophe which has resulted—which renders the settlement unenforceable under Ohio law.”
Later, Defendants add the argument that the settlement payment provision was agreed to by only the Defendant and not by its owner.
On enforcing the Settlement Agreement, the Court says:
- Before enforcing a settlement, a district court must conclude that an agreement has been reached on all material terms; and
- In assessing whether an agreement has been reached, federal courts have recognized that settlement agreements are a type of contract subject to principles of state contract law.
Under Ohio law:
- A settlement agreement, like any other contract, requires a meeting of the minds as well as an offer and an acceptance;
- Settlement agreements are highly favored in the law; but
- Courts should be particularly reluctant to enforce ambiguous or incomplete contracts memorializing a settlement agreement between litigants.
Plaintiffs argue that the parties reached a global settlement agreement as to all material terms and that the agreement should be enforced.
Defendant and its owner do not dispute that Defendant entered into a settlement agreement. Instead, they argue that:
- the owner assumed no obligation to guarantee or assume joint and several liability for payment of the settlement amount; and
- the settlement agreement is not enforceable under Ohio law due to impossibility of performance.
Court’s Ruling on Joint Liability
On the question of whether Defendant’s owner agreed, under the settlement, to be personally liable for the settlement payment, the Court finds: the owner “assumed joint and several liability for payment of the total settlement amount” under the terms of the settlement agreement.
Defendant’s “Impossibility” Argument
Defendant and its owner argue that the settlement agreement is unenforceable under the contract law doctrine of impossibility.
They argue that, when the settlement was reached, “the impending COVID-19 pandemic was just emerging, and the consequent business crisis had not occurred.”
Defendant maintains that, prior to the pandemic, it was in a financial position to fund the settlement payment: Defendant operated 11 child day care centers and one private elementary school in Northeast Ohio, had 232 full-time employees, and had approximately 1,174 children enrolled.
However, thirteen days after settlement, the State of Ohio ordered all child day care centers to close, causing significant disruption to Defendant’s business. Defendant, for example, ended up laying off all its employees and had only 76 children in its care when it closed its doors under the Governor’s directives.
Although child day centers have since been permitted to re-open, Defendant argues that mandatory practices imposed by the State of Ohio regarding reduced staff to child ratios and maximum group size limitations have “wreaked havoc on” Defendant’s income and ability to pay the settlement.
Plaintiffs’ “Impossibility” Argument
In response, Plaintiffs argue that Defendant’s asserted inability to pay does not constitute an excuse because, under Ohio law, “a party generally assumes the risk of financial ability to perform when entering into any contract.”
Plaintiffs further argue that Defendant and its owner failed to submit any evidence regarding owner’s assets:
- The owner “is well able to pay, or at least finance, the $200,000 settlement” because she selectively recites the $153,000 annually that she and her husband earn in W-2 wages from Defendant, “but slips under the radar the roughly $1,065,076.20 she evidently pocketed in 2019,” paid by Defendant to her in rents as the owner of the properties occupied by her schools;
- The owner “had sufficient resources to purchase outright, and later finance, a home in Beverly Hills for her granddaughter, one of six homes she owns”; and
- The owner had sufficient assets to finance a multi-million dollar loan to cover her company’s tax debt.
Finally, Plaintiffs argue that Defendant and its owner could have sought inclusion of a force majeure provision in the settlement during mediation but failed to do so and cannot now retroactively insert such a provision into the settlement agreement.
Law of “Impossibility”
Under Ohio law:
- Impossibility of performance occurs where, after the contract is entered into, an unforeseen event arises rendering impossible the performance of one of the contracting parties;
- A contracting party will not be excused from performance merely because performance may prove difficult, dangerous, or burdensome;
- Instead, the performance must be rendered impossible without fault of the party asserting the defense and where the difficulties could not have been reasonably foreseen; and
- A party who raises the impossibility defense bears the burden of proving it.
Court’s “Impossibility” Findings
The Court finds that Defendant and its owner failed to demonstrate that performance of the parties’ settlement agreement should be excused because of impossibility.
For starters, the Court suggests that the pandemic-imposed difficulties might have been “reasonably foreseen” when the parties reached the settlement. For example:
- In days leading up to the settlement, the Governor declared a State of Emergency in Ohio, asked colleges and universities to shift to online learning and remote instruction, and recommended that spectators not attend any indoor sporting events;
- The Governor’s actions were well publicized at the time and news coverage regarding the pandemic was widespread; and
- On the day the parties reached their settlement agreement, the Governor (1) issued an Executive Order authorizing “emergency changes in child day care rules to respond to the public health crisis of the pandemic,” and (2) closed all kindergarten through 12th grade schools.
But in all events, Defendant and its owner failed to carry their burden of demonstrating that it is impossible for the Defendant and it’s owner to fund the settlement payment.
Accordingly, Plaintiffs’ Motion to enforce the parties’ mediated settlement agreement is sustained, as to both Defendant and its owner.
Impossibility of performance is a much-utilized contract defense in these pandemic days.
Yet, it’s unusual (though certainly not surprising) to see such a defense appear in a mediated settlement context.
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