Seventh Circuit: Plaintiff Does Not Release Nonparties He Knows Nothing About When Settling With Defendants

by: Colin E. Flora

     Today’s discussion is easily the shortest appellate decision that I have seen in a rather long time. Classically, judges were often praised for authoring short opinions that ran little risk of introducing the dreaded obiter dicta into the caselaw. Under that view of legal opinions, Judge Posner’s opinion in Chancellor v. Select Portfolio Servicing would doubtlessly draw great praise. In a single paragraph, the court disposed of the appeal, reversing the district court in the process. Despite the brevity of the opinion, the import merits discussion.

     It also merits note that the decision was not designated as a “nonprecidential disposition” pursuant to Circuit Rule 32.1. We have previously discussed the importance of that designation, or lack thereof, and will not go into depth on the subject of unpublished opinions here.

     The basic question posed by Chancellor is whether a plaintiff who has orally agreed to settle with a defendant may also be required to release other entities that were not parties to the case. The answer to that question is clearly that it will depend on the facts. From Judge Posner’s decision, we get an example of when the answer will be no. In full, the opinion states:

The plaintiff reached an oral agreement to settle a litigation arising out of a home mortgage loan to him, but the defendants insisted that as part of the settlement he would have to release any claims he had against another bank, and also a trust company, neither of which had been a party to the litigation. Although the district judge agreed with the defendants’ position, it hasn’t been proved that anyone had told the plaintiff during the settlement conference that by agreeing to the settlement he would also be releasing any claim he might have against the two nonparties to the litigation. Because there was no evidentiary proceeding, there was no basis for the judge’s deciding that the plaintiff had agreed to release the claims against the nonparties. The judgment must therefore be vacated and the case remanded for a factual inquiry into the parties’ disagreement.

     As you can see, the conclusion in Chancellor is simply that there needed to be an evidentiary finding that the plaintiff knew he was agreeing to release the other defendants. Absent such a finding, the Seventh Circuit could not affirm the decision. Despite not providing a clear answer for Mr. Chancellor, the case does provide a clear answer in future cases. Clearly a plaintiff will not be deemed to have agreed to release non-parties if he no one had told him that was what he had agreed to do.

     Although that may seem a simple proposition, realize that the case reached the Seventh Circuit only after the district court reached a contrary decision. The district court found:

Chancellor and Defendants agree that at the conclusion of the February 23 settlement conference, there was agreement as to the following essential terms: (1) Chancellor would receive a global settlement amount of $30,000.00 of which Defendants would contribute $10,000.00; (2) Chancellor’s eligibility for available modification options would be assessed; and (3) in exchange for the monetary damages and the account review, Chancellor would release his claims. However, there are some factual disputes: Chancellor claims that the parties agreed to pay him the $30,000.00 within fourteen days of the conference, that the parties specifically agreed to review Chancellor’s eligibility for the Home Affordable Modification Program (“HAMP”), that there was no discussion about memorializing the settlement in writing, and that there was no discussion about U.S. Bank being the holder of the mortgage loan. SPS and Chase deny that there was any agreement to pay within 14 days of the conference and state that the conference concluded with the parties agreeing to draft a written settlement agreement. Defendants also claim that they made clear during the settlement discussions that U.S. Bank would be a party to the settlement agreement because any modification to Chancellor’s mortgage would require U.S. Bank's approval.

Despite these factual disputes, Chancellor does not argue that there was no meeting of the minds on February 23. Rather, Chancellor asserts that because Defendants failed to perform by failing to disburse $10,000.00 within fourteen days of the initial settlement conference, Chancellor is now entitled to rescind or terminate the agreement. Although Chancellor cites non-precedential California law to support his argument, the principle that a party “may terminate or rescind a contract because of substantial nonperformance or breach by the other party” also exists under Illinois law. However, the nonperformance or breach must be so substantial or material that it defeats the purpose of having made the agreement, renders performance of the rest of the contract different in substance, or otherwise justifies the injured party regarding “the whole transaction as at an end.” Even assuming that Defendants agreed to pay within fourteen days, failure to do so is not such a material or substantial breach as to justify undoing the entire agreement. Chancellor’s argument in opposition to enforcing the settlement therefore fails.

     It looks like the Seventh Circuit was able to put its finger on an issue different from what the district court considered. I was unable to obtain a copy of Mr. Chancellor’s response to the Motion to Enforce Settlement, but the Defendants’ reply in support of the Motion indicates that Mr. Chancellor did, in fact, argue that neither the bank nor the trust were mentioned at the settlement conference. Consequently, it is not entirely clear why that issue was not addressed by the district court.

     The lesson to be taken from this case is simple: make sure that all essential terms are agreed upon and backed up by evidence of the agreement before leaving a settlement conference. Although the parties needed to finalize the agreement, this problem could have been avoided by a memorandum of understanding that outlined the essential terms. If, as the Defendants argued, Mr. Chancellor had been told about the trust and bank needing to be released, then the matter would have been easily settled by a memorandum that said as much and bore Mr. Chancellor’s signature. For want of a nail, the kingdom was lost. A simple $10k settlement has ballooned into an appeal and will now require an additional hearing just because there was no memorandum of understanding.

     Of course, it is also possible that the trust and the bank were, in fact, never mentioned as part of the settlement. If that is so, then the missing nail was the error to mention them as part of the settlement. In either case, there was doubtlessly a poor horse and rider injured in the process due to the sloppy work of a farrier.

     For those unfamiliar with my reference to nails, riders, horses, and kingdoms, I direct you to the following proverb:

For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.

One final note, legal luminaries such as Judge Posner and Justice Antonin Scalia have each attributed the negligence in that proverb to the blacksmith. Lest history continue to smear the blacksmith who doubtlessly made a fine nail, the role of shoeing a horse is held by a farrier. The two certainly overlap both etymologically and in practicality. But, as the British Farriers Registration Council advises, “A ‘Farrier’ should not be confused with a ‘Blacksmith’. A farrier works with horses but needs training in blacksmithing in order to make the shoe properly. A blacksmith is a smith who works with iron and may never have any contact with horses.”

     Join us again next time for further discussion of developments in the law.

Sources

  • Chancellor v. Select Portfolio Servicing, ---F.3d---, No. 16-2475, 2017 U.S. App. LEXIS 13018 (7th Cir. July 19, 2017) (Posner, J.).
  • Chancellor v. Bank of Am. N.A., No. 14-cv-7712, 2016 U.S. Dist. LEXIS 68170 (N.D. Ill. May 24, 2016) (Coleman, J.), vacated, ---F.3d---, No. 16-2475 (7th Cir. 2017).
  • BCS Servs. v. Heartwood 88, LLC, 637 F.3d 750, 754 (7th Cir. 2011) (Posner, J.) (“Suppose the blacksmith had been negligent in failing to fasten the horseshoe to the horse's hoof with enough nails to hold it securely. His negligence was therefore a cause of the loss of the kingdom because it led to the loss of one of the riders, which led in turn to the defeat of the king’s army. (And not just any rider: Shakespeare in Richard III attributed Richard's loss of the Battle of Bosworth Field, and thus of his life and his crown, to his falling off his horse because the horse was not properly shod; in fact the horse had gotten mired in the mud of the field, for reasons unrelated to his shoe.) But had the blacksmith been told ahead of time that if he didn't fasten the shoe properly he could be responsible for the end of the York dynasty, the warning would not have induced him to use additional care in fastening the shoe to the hoof because the probability that his negligence would have such a consequence would have seemed slight. An injury will sometimes have a cascading effect that no potential injurer could calculate in deciding how carefully to act. The effect is clear in hindsight—but only in hindsight.”).
  • Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 287 (1992) (Scalia, J., concurring) (“Life is too short to pursue every human act to its most remote consequences; ‘for want of a nail, a kingdom was lost; is a commentary on fate, not the statement of a major cause of action against a blacksmith.”).
  • Seventh Circuit Rule 32.1.
  • Colin E. Flora, Citing Unpublished Cases in Indiana, Hoosier Litig. Blog (May 14, 2016).

*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.