It is, of course, the last hour. The energy that filled the room during the opening session is fading faster than the setting sun. You are dog tired, having bailed out of bed at 4:00 a.m. to polish your opening statement. The trash receptacles overflow with crumpled paper, empty soft drink cans, and “gourmet” leftovers from the sandwich place downstairs. The mediator, bless her, flushed out the core issues before lunch, demonstrating a competence you’ve learned not to take for granted. A sort of compromise seems to be emerging, although no one but the mediator feels good about it. All that mutual unhappiness is supposed to signal the imminent arrival of a reasonable settlement, but your client rep is equal parts skeptical and fidgety. Now what? Has the a/c really shut down for the day?

In the ancient tradition of deus ex machina, the mediator taps on your conference room door and sweeps in with new notes, a relieved smile, and crow’s feet you’d swear weren’t there this morning. They’ve agreed, she announces – with one little condition. To your surprise, it is a little condition, which you explain to your client rep. You’re not convinced he gets it, but he agrees. The mediator offers to draft a settlement memo. She has a form. Give her ten minutes? Victory (the mediation version) is at hand. You and your cell mate start thinking about a cool and refreshing beverage (at separate establishments).

Thus begins mediation’s most dangerous hour. For lawyers, in the structure of a mediation lurks an irony: At the moment your physical, mental, and psychological fuel tanks all point to “E,” you are assigned a different and often deceptively difficult task: To ensure that the “informal” written memorial of the settlement is in fact the silver bullet your client thinks it is. After all, you are being paid to end this dispute – like, for real – so that your client collects the money (all of it) or that the injunction is effective (completely) or that the claims die (all of them) and stay dead. An inadequate settlement memorandum is an invitation for Jason to don his hockey mask once again and return to your client’s door. To say the least, next fall’s news that last spring’s mediation almost worked will not be well received by your client.

 

An Effective Memorandum of Settlement – Whose Job Is it, Anyway?

That would be yours. It is not – repeat, not – the mediator’s job. A form for a settlement memorandum1 and some initial drafting by an experienced, neutral non-party is a good place to start, but a fundamentally lousy place to end. Your client will not ask the mediator whether he should sign the memorandum; he will ask you. Furthermore, if the mediator’s draft misstates or omits a term, it’s pretty clear against whom the client will seek recourse, and it will not be the mediator.2 A few considerations to help avoid such a fate are set out below.

 

Documents to Follow?

Job One of an effective settlement memorandum is to be, well, effective. That is, the document ends the dispute and doesn’t create a new one. Unfortunately, more than one Texas lawyer has learned the hard way that the report of Jason’s demise at mediation was greatly exaggerated. The risk of an ultimately ineffective settlement memorandum may be highest when the document intentionally sidesteps some sticky point of contention in the interest of getting the deal done.3 In such instances, the pale substitute for actual agreement may be an unspoken hope that the lingering problem will resolve itself with the execution of the “formal” settlement agreement to be circulated a day or two later. After all, dinner is waiting.

Ah, the best-laid plans of mice and lawyers. Consider the facts of Liberto v. D. F. Stauffer Biscuit Co.,4 which began with Liberto’s 1996 suit against Stauffer for infringement of a registered package design for animal crackers. (Yes, that one – the box with red and yellow stripes.) In 1998, the parties executed a settlement agreement stating that Liberto would dismiss his suit and grant Stauffer an exclusive license for use of the striped design. The agreement, however, merely “contemplated that the parties would continue to negotiate ‘the specific terms of [the] license to be agreed upon.’”5 The parties negotiated, sure enough, but never agreed on the license terms. Several years and machinations later, the Fifth Circuit concluded that the 1998 settlement document was the dreaded (and unenforceable) “agreement to agree.”6 Liberto, who had hoped to collect damages for Stauffer’s failure to pay royalties, went home empty-handed. Whether Liberto then attempted to put his lawyer in stripes is not a matter of public record.

The same problem can arise in settings less exotic than trademarks and animal crackers. After a lengthy mediation, the parties in Martin v. Black outlined the terms of a settlement on “two handwritten documents referred to as ‘term sheets’ which were signed by the parties and their counsel and/or advisors.”7 So far, so good. One sheet, however, stated that the “parties’ understandings are subject to securing documentation satisfactory to the parties.”8 Satisfaction apparently eluded Martin, who amended her petition and returned to the battlefield. When her opponents filed a “Motion to Enforce Settlement Agreement,” Martin responded by swearing that she “did not intend for the handwritten ‘term sheets’ executed at approximately midnight at the conclusion of the second day of mediation ... to constitute final and binding settlement agreements.”9 The trial court was unimpressed and granted the motion. The court of appeals, however, reversed, explaining that “we cannot say as a matter of law whether the parties intended the formal documentation to be a condition precedent to a final settlement agreement or merely a memorial of any already enforceable settlement agreement.”10

The Dallas court seems to have reached the opposite result in Lerer v. Lerer,11 which affirmed a summary judgment enforcing a mediated settlement agreement, despite affidavit testimony that one party did not believe the agreement was binding. Although the settlements in both cases contemplated the post?]mediation execution of additional documents, the Lerer agreement is distinguishable from the Martin agreement (maybe) by the former’s lack of any indication that it was “subject to” the documents to come.12 Still, Saint Prudence strongly cautions against allowing anything that looks like a “subject to” to slip into a memorandum of settlement.13

 

Leave the Crystal Ball to the Fortune Teller

An equally dangerous cousin of RSTTF (“remaining settlement terms to follow”) is SDOFE (“settlement depends on future event”). For example, Paula Plaintiff may be insisting at the mediation that she won’t eat more than 50 percent of her loss, but Dave Defendant either can’t or won’t cough up enough cash to break 30 percent. It’s late in the day, and the mediator has used the “I” word twice. Then Dave remembers he has a third-party deal that will close in a few months that should generate enough nickels to pay Paula 65 percent of her loss. The compromise is obvious, but the risk should be, too. What if the deal doesn’t close? Worse, what if Paula concludes that the deal didn’t close because Dave had a little “discussion” with that third party?

Even in the absence of bad faith, a settlement that turns on a future event may be an ill-advised path out of the mediator’s conference room. The plaintiff in Malatt v. C & R Refrigeration,14 demanded the return of its deposit toward C & R’s manufacture of a super-fast freezer. When further payments by the purchaser went AWOL, C & R ceased production of the machine and kept the deposit. The parties signed a settlement agreement requiring C & R to “use its best efforts to market and sell [the freezer], in an expeditious and commercially reasonable manner.” When the freezer was sold, the parties agreed, C & R would refund the deposit “immediately.”15

The sale, however, was less than super-fast. In fact, the freezer remained unsold after three years of what the trial court found to be the “best efforts” required by the settlement agreement. Since the freezer’s sale was a condition precedent to C & R’s obligation to return the deposit, the trial court concluded, the deposit need not be returned. Furthermore, the court decided that the sale of the freezer had become a “commercial impracticability,” and it declared C & R discharged from the obligations of the settlement agreement, and the court of appeals affirmed.16 Look to Longfellow for this last-hour rule:  “Trust no future, howe’er pleasant!”17

 

What Exactly Is Getting Released?

You want all claims released, right? Of course you do, except when you don’t (or – more commonly – when your client doesn’t). How do you respond to your client’s sly, mid-afternoon confession that, as soon as the ink dries on this settlement and “things have settled down,” he plans to file a new suit against the present opponent? Ouch. This time your client wants to be Jason, and Jason will be most unhappy if a court concludes his new suit is barred by a settlement memorandum that you told him to sign. Despite what you think you know about compulsory counterclaims and res judicata, if the next lawsuit sounds viable (and even if it doesn’t), you are well advised to parse the settlement memorandum’s release language very carefully.

That parsing can be a challenge, in part because Texas courts sometimes construe releases in a manner that you might not expect. Apparently, every Texas court of appeals has a word processing macro for the following text:

To release effectively a claim in Texas, the instrument must “mention” the claim to be released. Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931, 938 (Tex. 1991). Even if the claims exist when the release is executed, any claims not clearly within the subject matter of the release are not discharged. Id.18

As a legal guide, that quote and three bucks will buy you a latte and not much else.

Nine years after Brady, perhaps sensing that “mention” comes up a little short in the Precision Department, the Supreme Court took another run at releases in Keck, Mahin & Cate v. National Union Fire Ins. Co.19 There the Court observed that “Brady simply holds that the release must ‘mention’ the claim to be effective. It does not require that the parties anticipate and identify each potential cause of action relating to the release’s subject matter.”20 Although Keck reiterated that a claim is not released unless it’s “mentioned”21 and explained what “mention” is not, the Court never really said what “mention” is in the context of a release.

It should be no surprise, then, that the lower courts continue to wrestle with settlement agreements that recite the release of “all claims.”22 At a minimum, those two short words should receive careful attention before anyone signs a settlement memorandum. Of course, if your client intends to continue the war with a new cause number, the better practice is to carve the next claim out of the release with an explicit description of the nature of the claim23 or with a time restriction on the scope of the release.24 (The latter may be an easier sell to your opponent.) Suggested query for your last-hour punch list: Do the circumstances call for a smart-bomb release or the more common F-5 version that scrapes the ground clean?

 

“Could Have Been Asserted”?

Another slab of boilerplate that may show up in a settlement memorandum is the parties’ agreement to release each other from “all causes of action that have been asserted or that could have been asserted in the litigation.” In most instances, such broad release provisions are enforceable,25 but later the parties may find that, when they signed the memorandum, they were not on the same page regarding what “could have been asserted” in the litigation but was not. Danger, Will Robinson: Some Texas courts seem inclined to include in the category of “could have been asserted” any claim relating in any way to the subject matter of the original litigation, even a claim that, as a practical matter, could not have been asserted in the first suit. For example, the El Paso court held in Kalyanaram v. Burck that a release of all claims “aris[ing] out of the subject matter of the original litigation” released a claim for malicious prosecution, even though the said prosecution did not begin until after the release had been signed.26 Yikes.

Apparently, no Texas appellate court has considered whether other real-life barriers to asserting a claim (such as discovery of the claim after a deadline to amend pleadings) may be invoked to avoid a ruling that the claim has been released because it “could have been asserted” in the earlier litigation.27 Like a “formal” settlement agreement to be signed next week, a sure-to-happen future event, and a boilerplate reference to “all claims,” a release of claims that “could have been litigated” should not find its way into a settlement memorandum without careful consideration of what the term actually means in the context of the particular case.

 

Stay Cool

And you thought it was time to go. You were absolutely brilliant today, engineering a settlement no one believed would ever happen. Good for you, but hold on a little longer. That settlement memorandum has the power to undo all your good work. But, if you pay attention, mediation’s most dangerous hour can be part of your accomplishment, instead of a trap door.

Tom P. Allen is a First Assistant City Attorney for the City of Houston. He is a 1983 graduate of the University of Texas School of Law.

 

Endnotes

1. A/k/a the “mediated settlement agreement” or “MSA.”  See, e.g., Lerer v. Lerer, No. 05?]0200124?]CV, 2002 WL 31656109, at *1 (Tex. App.–Dallas Nov. 26, 2002, rev. denied).   2.SeeTex. Civ. Prac. & Rem. Code § 154.055(a) (immunizing mediators from almost all civil liability for acts or omissions relating to mediation).  See also L. Wayne Scott, The Law of Mediation in Texas, 37 St. Mary’s L.J. 325, 414?]415 (2006).   3. A familiar phenomenon in a variety of contexts.  See, e.g., Dworkin v. Duncan, 456 N.Y.S.2d 939, 944 (N.Y. Civ. Ct. 1982) (“In drafting the Loft Law, the legislature was deliberately vague in its use of the term ‘residential occupant’ rather than ‘tenant’ for two reasons.  The first was the difficulty of reaching a consensus among the various interest groups involved in the legislation ....”).   4. 441 F.3d 318 (5th Cir. 2006).   5.Id. at 322.   6. Id. at 323 (construing Texas law).   7. 909 S.W.2d 192, 194 (Tex. App.–Houston [14th Dist.] 1995, writ denied).   8. Id. at 195.   9. Id. at 197.   10. Id. (citing Foreca, S.A. v. GRD Dev. Co., Inc., 758 S.W.2d 744, 746 (Tex. 1988)).   11. No. 05?]02?]00124?]CV, 2002 WL 31656109 (Tex. App.–Dallas Nov. 26, 2002, rev. denied).   12. Id. at *3.  Accord, Hardman v. Dault, 2 S.W.3d 378, 381 (Tex. App.–San Antonio 1999, no pet. rev.) (affirming summary judgment enforcing settlement agreement that contemplated “final documents” but contained no “’subject to’ language”).   13. The Golden Belt?]and?]Suspenders Award goes to the drafter of the mediated settlement agreement construed in Castano v. San Felipe Agric., Mfg., & Irrigation Co., 147 S.W.3d 444 (Tex. App.–San Antonio 2004).  Although the agreement stated that ‘’’final documentation’ and ‘further documents’ were necessary to reach a ‘closing,’” it also provided that “’notwithstanding such additional documents the parties confirm that this is a written settlement agreement as contemplated by Section 154.071 of the Texas Civil Practice and Remedies Code.’”  Id. at 448.  The San Antonio court affirmed the summary judgment enforcing the agreement.  Id. at 450.   14. 179 S.W.3d 152 (Tex. App.–Tyler 2005, no pet. rev.)   15. Id. at 155.   16. Id. at 159?]60.   17. From Henry Wadsworth Longfellow, “A Psalm of Life,” in The Complete Poetical Works of Longfellow (1893).   18. This particular macro is courtesy of Smith v. Ferguson, 160 S.W.3d 115, 120 (Tex. App.–Dallas 2005, rev. denied).   19. 20 S.W.3d 692 (Tex. 2000).   20. Id. at 698 (citation omitted).   21. Subsequent cases have hammered home the rule that, in the absence of an adequate “mention,” even the broadest possible release may not be effective.  See, e.g., Davis v. American Bank of Commerce, No. 03?]04?]00482?]CV, 2005 WL 1489751, at *3 (Tex. App.–Austin June 23, 2005, rev. denied) (mutual release explicitly “intended to be of the broadest nature and to be dispositive of all matters involving [the parties], known or unknown” found to be ambiguous).   22. Compare, e.g., Kalyanaram v. Burck, 225 S.W.3d 291, 299 (Tex. App.–EI Paso, Rule 53.7(f) motion granted) (holding that release of “all civil claims ... aris[ing] out of the subject matter of [the settled] litigation” included release of later claim for malicious prosecution), withBiggs v. ABCO Props, Inc., No. 13?]03?]00398?]CV, 2006 WL 414919 at *3 (Tex. App.–Corpus Christi Feb. 23, 2006, rev. denied) (holding that lender’s release from “all claims ... arising out of or in any manner relating to any of the commercial agreements and/or relationships existing among or between any of them” did not “mention” guaranty and, therefore, did not release guarantor).   23. See, e.g., Smith v. Ferguson, 160 S.W.3d 115, 122 (Tex. App.–Dallas 2005, rev. denied). Cf.Stafford v. Allstate Life Ins. Co., 175 S.W.3d 537, 541?]42 (Tex. App.–Texarkana 2005, no pet. rev.) (declining to construe release narrowly in absence of “any language of limitation”).   24. See, e.g., Davis, supra n.21, at *2?]*3 (“By mentioning [a] time period, the release effectively discharged all malpractice claims during the period described, but not those arising later.”).   25. Indeed, “a valid release may encompass unknown claims and damages that develop in the future.”  Keck, 20 S.W.3d at 698 (citations omitted).   26. Kalyanaram, supra n.22, 225 S.W.3d at 299.   27. The Ninth Circuit’s standard for bankruptcy cases may suggest a path for Texas courts asked to determine what “could have been asserted” in the settled litigation:  “An issue ‘could have’ been litigated at the confirmation hearing if a party in interest had the opportunity to investigate and litigate it and the debtor did not prevent it from being litigated by fraud, misrepresentation or concealment.”  In re Valenti, 310 B.R. 138, 150 (B.A.P. 9th Cir. 2004) (citing Wright, Miller & Cooper, Federal Practice & Procedure § 4415 at nn.17?]21 (2002)).