The Use of a "Memorandum of Understanding"
in a Multi-Party Claim
Published in Spring 2004 MTLA
By Susan Bowden
Cases involving multiple defendants often give rise to difficult decisions that must be made as to which of the defendants, if any, the plaintiff should settle with if forced to try the case to a jury. The underlying concern driving any decision where multiple defendants are involved is preserving joint and several liability. Settling with one of the defendants prior to trial may result in a plaintiff's inability to collect the entirety of an award.
Prior to August of 2003, the joint and several liability statute established that, in multiple defendant situations, a plaintiff can recover the entire amount of a defendant's fault as long as that defendant is found at least 16% at fault.1 In August of 2003, the law changed and the amended statute now provides that defendants are not severally liable unless one of the defendants is found at least 51% at fault.2 The trigger phrase, jointly liable, is no longer part of the statute, and therefore, the common law principles of joint liability have arguably been resurrected. Under the common law principles of joint liability, a victim was allowed to collect 100% of her compensation from any solvent defendant who was found to be at least 1% at fault.3
The changes in the statute on joint and several liability were recently dissected by MTLA member Wil Fluegel in the Fall 2003 issue.4 As Mr. Fluegel's article surmises, the legislative intent of the amendments to the statute and the statute's actual effect are seemingly contradictory.5 Additionally, because the so called need for tort reform was essentially void of any factual findings or underpinnings, it is likely the new law will encounter constitutional objections.6 How the changes in the law, whether intended or not, will affect the plaintiff's ability to recover the entirety of an award, remain to be seen. Regardless, in a case involving multiple defendants, preserving joint and several liability remains one of the biggest hurdles when settling with one defendant, especially when there are multiple underlying theories of liability.
This article addresses a specific agreement reached with multiple defendants, which allowed the plaintiffs to receive immediate monies without severing joint and several liability, and without signing a release or petitioning the court for withdrawal of the funds pursuant to Minn. R. Civ. P. 67.02. Although the agreement was entered into before the August 2003 changes to the several liability statute, the principles remain valid and could be used to resolve similar issues in dram shop cases or where multiple defendants are involved.
Circumstances surrounding dram shop claims are among the forefront of situations where settling with one defendant, usually the alleged intoxicated person (AIP), could negatively impact a plaintiff's ability to fully recover all damages. Specifically, settling with the AIP on a Perringer basis may have the effect of severing joint and several liability. According to the joint and several liability law in effect until August of 2003, a plaintiff could collect up to four times the fault of one defendant if that defendant was determined to be 15% at fault or less. If a defendant was found to be at least 16% at fault, then that defendant could be responsible for the entire amount.
The problem has been that few of the typical releases/agreements used today allow the plaintiff immediate guaranteed money and the chance to try the case against the liquor establishment or the remaining defendants without hindering their ability to be made whole. Instead, a plaintiff must make a choice, immediate guaranteed money and risk full recovery or decline the offer and place any recovery in the hands of a jury.
There are several options for a plaintiff if one of the defendants wishes to settle prior to trial. In determining whether or not to settle, the plaintiff must take into consideration an apportionment of fault, amount of policy limits available, and the need for a guaranteed sum of money. A loan receipt typically allows a defendant to loan an amount of money to the plaintiff pursuant to an agreement that the plaintiff pay back the loan according to the agreement. A release is not entered into until after the conclusion of the case, which may have the effect of severing liability. This method allows the insured protection from excess claims, but does not relieve the settling defendant from its obligations at trial or from the potential risk of a contribution claim.
Another option for the insurer of the defendant wishing to settle is to deposit the funds into the court pursuant to Minn. R. Civ. P 67.02. The plaintiff must then petition the court to release the funds. Whether or not a release is required will depend on the parties. However, the settling defendant is not relieved of its duty to appear at trial and put forth a defense. Further, the insured is not protected against an excess verdict or the risk of a contribution claim. It only protects the insurer against a "bad faith" claim or a breach of fiduciary duty.7
There are various other releases used in similar situations involving multiple defendants. A Drake v. Ryan release is not appropriate if there is no issue of excess coverage above the primary policy.8 A Perringer release, while maybe appropriate if one of the defendants has very minimal exposure, will likely destroy joint and several liability between the releasing defendant and the rest of the defendants.9 Miller-Shugart releases are typically only used when an insurer denies coverage, leaving an insured open to personal liability.10 Because the insurer for the AIP typically does not raise coverage issues, Miller-Shugart agreements are not appropriate.
There is another option. In a recent case my clients entered into an agreement before trial with the AIP and its insurer. This agreement allowed the plaintiffs' guaranteed recovery of the AIPÕs policy limits and the underinsured limits in exchange for the plaintiff's execution of an agreement to execute a release at a later date. The agreement was simply referred to as a "Memorandum of Understanding."11
The case involved a one car rollover that killed a 29-year-old mother of two young children. The AIP was operating his vehicle over a bridge and became entrenched in railroad tracks. The 29-year-old was a passenger in the AIPÕs vehicle. As the AIP attempted to maneuver over the tracks, his wheels became entrenched, the vehicle rolled, and the 29-year-old was killed.
As a result, claims were brought against the AIP, the liquor establishment and the owner of the railroad tracks. Cross claims were then brought by the defendants. After several depositions were taken, the insurer for the AIP offered policy limits. In an attempt to provide the plaintiffs with a partial immediate settlement, with the opportunity to pursue the remaining claims without severing joint and several liability, an agreement, i.e. "Memorandum of Understanding," was reached among all parties.
The Memorandum of Understanding was essentially an agreement that the AIP would pay the plaintiffs its policy limits upon execution of the agreement. The policy limits would be paid regardless of what the outcome was at trial. In return, after trial or conclusion with the remaining defendants, the plaintiffs would execute a full and final release to the AIP for the policy limits. The remaining defendants would also agree to drop their cross claims against the defendant AIP.
Consideration for the plaintiffs included an agreement to refrain from pursuing the insurance company for any monies beyond the policy limits, as well as forgoing recovery of any additional monies beyond the limits from the insured. The intent of the memorandum was essentially to allow the plaintiff guaranteed immediate recovery.
The incentive for the AIP was that he would not be subject to judgment over the policy limits. Additionally, because the AIPÕs only potential participation at trial would be as a witness. His insurer was not required to put forth a defense. The AIPÕs insurer paid its policy limits (which they almost certainly would have had to pay eventually) with the security that they would not have to make any additional payments.
The major hurdle in cases such as this one is getting all of the defendants to agree to the release. What's in it for them? In the case described above, the incentive for the remaining defendants in signing the agreement and waiving their cross claims for indemnity or contribution against the AIP was that they could point their finger at the empty chair defendant. As agreed, in the event of trial, the AIP would not appear unless called as a witness and would not argue any apportionment of fault to the jury. Additionally, the special verdict form to be given to the jury would include an apportionment of fault among all defendants. The jury instructions would include a short explanation, agreed upon by all parties, which would simply explain to the jury that the defendant AIP would not be present throughout the entire trial.
The language of the memorandum was very specific in regard to joint and several liability. It was expressly noted that the defendant AIPÕs fault would be determined by the jury as if he was an active defendant and would be allocated pursuant to Minn. Stat. ¤ 604.02. The agreement further stated that if the court did not follow the agreement, with the exception that the agreement would not be disclosed to the jury, then the entire agreement would be deemed null and void. Further, the Memorandum of Understanding would not be effective unless signed by all parties and approved by the Judge.
The Memorandum of Understanding was reviewed and modified by all parties. Eventually, all agreed and signed the document. The Judge assigned to the case approved the agreement shortly after the document was signed.
Typically, the fear of an empty chair prevents settlements such as this. Agreeing to the empty chair is a significant concession that must made on a case by case basis where the facts of the case are such that the empty chair would not hinder the plaintiff's claim, but support it. In this case, the personalities of the parties, coupled with the parties known reputations, led to the decision that the empty chair was advantageous to the clients. Because there is no formula for determining when it would be advantageous, each case must be scrutinized and well researched to draw such a conclusion.
One of the factors in getting this case resolved with the AIP was the fact that the representative for the AIP realized the risk and unlike many other insurance representatives, recognized that he could protect his clients interests while showing the plaintiffs that integrity still exists in our legal system. That followed with the other two defense representatives as well.
Applying the principles used in the memorandum of understanding as discussed above, will allow plaintiffs to focus their case at trial on the remaining defendants or in a manner most advantageous to them, without risking partial recovery. The applicability of this release versus a loan receipt or depositing the money pursuant to 67.02, will depend on the facts of the case, potential apportionment of fault, and the ability of the parties to reach an agreement that does not jeopardize their positions. If agreements like the one discussed above can be reached in similar situations, then risks of recovery to the plaintiffs are minimized, which is part of the zealous advocacy of representing our clients. Although no release or agreement is foolproof, creativity in fashioning agreements to meet the specific needs of your client can only lead to more just results, even when the jury verdict is not.
1 Minn. Stat. ¤ 604.02 (1988).
2 Minn. Stat. ¤ 604.02 (2003).
3 Will Fluegel article on Joint and Several Liability: Responding to the changes in the Statute, MTLA Fall 2003 issue, Page 8, citing Maday v. Yellow Taxi Co. 311 N.W.2d 849, 850 (Minn. 1981); Nees v. Minneapolis St. Ry., 218 Minn. 532, 541, 16 N.W.2d 758, 764 (1944).
4 MTLA Fall 2003 issue, page 8.
5 Id.
6 Id..
