Settling a lawsuit is generally viewed as a positive step for plaintiffs. Not only is the case effectively over, but the defendant typically agrees to provide the plaintiff with money or some other consideration in exchange for a release of claims and other promises made by the plaintiff under the agreement. However, an unwitting plaintiff can suffer unexpected consequences if the plaintiff's attorney doesn't take special care when drafting and negotiating the terms of the settlement agreement.
For example, let's say a plaintiff asserts claims against a defendant for $300,000 and agrees to settle the case for $150,000. As part of the settlement, the plaintiff agrees to discontinue the lawsuit with prejudice. The phrase "with prejudice" means that the plaintiff agrees that s/he cannot bring the same claims against the same defendants ever again, and discontinuing a case with prejudice is a common provision in settlement agreements that are intended to fully and finally settle lawsuits.
Most defendants will not agree to hand any money over to the plaintiff before the lawsuit is discontinued. So what happens to a plaintiff if the lawsuit is discontinued, and then the defendant fails to pay? If the plaintiff failed to include certain protections in the settlement agreement, s/he may have essentially given up $300,000 worth of claims under the lawsuit in exchange for a $150,000 claim for breach of the settlement agreement.
Here are just a few examples of language that plaintiffs can insert into a settlement agreement to protect themselves in the event that a defendant fails to make the payments required under the agreement:
Option #1 - The 30 or 60-Day Order
In certain cases, a judge may agree to discontinue a case 30 or 60 days from the date on which the parties reach a settlement. This allows the parties time to agree on language, draft and sign the agreement, and exchange any funds, documents, or other items required under the agreement, while keeping the case within the Court's jurisdiction should any issues arise. Upon the expiration of the 30 or 60-day period, the case is automatically discontinued, unless the parties advise the Court otherwise. This option can be useful when all consideration under the settlement agreement can be exchanged quickly (e.g. the defendant is making a lump sum payment rather than paying the plaintiff over an extended period of time).
Option #2 - Liquidated Damages and Attorneys' Fees
To protect against a default, plaintiffs may also include a liquidated damages provision, which requires the defendant to pay a penalty in addition to the amount agreed upon to settle the case should the defendant default. The penalty should be high enough to act as a deterrent against a default by the defendant, but also proportional to the amount of the settlement and the alleged damages in the lawsuit so that the penalty can be justified to the defendant. Depending on the amount at stake, plaintiffs may consider setting liquidated damages at double the settlement amount or the full value of the claims that are being settled under the settlement agreement.
Instead of or in addition to liquidated damages, plaintiffs may seek to include a provision awarding the plaintiff all attorneys' fees incurred in any lawsuit brought to enforce the terms of the settlement agreement, should the defendant default, in addition to any amounts that are still owed under the settlement agreement.
Option #3 - Affidavit of Judgment by Confession
Finally, a plaintiff may demand that the defendant sign an affidavit of judgment by confession as part of the settlement agreement. Under the affidavit, the defendant acknowledges that it owes a debt to the plaintiff, usually in an amount equal to or greater than the amount due under the settlement agreement, and the parties agree that the plaintiff may file the affidavit only in the event that the defendant defaults on the settlement payment. If drafted and filed properly, the plaintiff can quickly obtain a judgment against the defendant without the need to file and litigate a new lawsuit. This allows the plaintiff not only to save time and money should the defendant default, but also to obtain and begin enforcing a judgment against the defendant within days or weeks, rather than months or years, of the defendant's breach.
Ultimately, the terms that a plaintiff is able to negotiate into a settlement agreement will vary depending on the strength of the claims, the circumstances of the particular case, and the parties' desire to resolve the litigation. However, a plaintiff who fails to include protections in the event of a default may face serious issues should the defendant fail to honor the terms of the agreement, particularly in situations where the plaintiff is waiving claims or rights that exceed the amount of the settlement in order to resolve the lawsuit.
To learn more about how Katz Melinger can help you, contact us.
Adam J. Sackowitz
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