Court’s Rejection of “Collusive” Stipulated Judgment Is Affirmed

Water’s Edge Homeowners Association v. Water’s Edge Associates (Wash. Ct. App. Div. II, September 29, 2009).

Division Two of the Washington Court of Appeals affirmed a trial court's ruling that a stipulated judgment amount was unreasonable, based in part on evidence of collusion.

Water’s Edge Associates owned an apartment complex, and Key Property Services (KPS) was its property manager. Before converting the units to condominiums, Associates and KPS repaired some of the siding, roofs, and other external features. After conversion, an investigation revealed pervasive rot and deterioration. The homeowners association sued Associates and KPS alleging breach of implied and express warranties, breach of contract, violation of the Consumer Protection Act, and other claims.

Associates and KPS’ insurers, which the court of appeals referred to collectively as “Farmers,” appointed Bruce White as defense counsel. White obtained summary judgment dismissal of the plaintiff’s warranty claims.

In August 2006, the plaintiff’s attorney, Daniel Zimberoff, contacted Associates’ in-house attorney and suggested he send Farmers a letter drafted by Zimberoff criticizing White’s preparation of the case. Zimberoff also suggested that Associates and KPS hire Rick Beal or Greg Harper as coverage counsel because of their purported skill in “squeezing every possible nickel out of insurance companies.” After receiving a reservation of rights letter from Farmers in November 2006, Associates hired Harper, and KPS hired Beal, unbeknownst to White. Associates and KPS then filed a bad faith action against Farmers, including allegations that Farmers failed to retain separate counsel for Associates and KPS and failed to prepare for trial.

In a November 2006 memo his clients, White stated his plan to file another summary judgment motion and indicated he was confident most of the remaining claims would be dismissed. He estimated that, if the case went to trial, the potential verdict range was between $200,000 and $500,000. He thought $250,000 to $350,000 would be an appropriate settlement value. White’s second summary judgment motion was pending when Beal and Harper forced his withdrawal in January 2007 amid accusations of malpractice and ethical violations. Farmers then appointed separate defense counsel—Steve Todd for Associates and Mark Scheer for KPS.

Beal instructed Scheer not to formally appear. Beal and Zimberoff exchanged e-mails regarding Todd’s representation, with Beal stating his concern that Todd’s apparent agreement with White’s analysis “completely undermines any legal malpractice claim” against White’s firm. Beal demanded that the pending summary judgment motion filed by White be withdrawn.

After a failed mediation where the plaintiff demanded over $17 million, the parties began negotiating a covenant judgment settlement. Beal, Harper, and Zimberoff agreed on a stipulated judgment of $8.75 million. Associates and KPS agreed to assign any claims against Farmers and White to the plaintiff. Associates and KPS would each contribute $215,000 cash toward the settlement; however, they could recover those contributions if the plaintiff prevailed in the malpractice and bad faith action. The parties jointly moved for a reasonableness hearing to determine whether the $8.75 million judgment amount would be binding against Farmers. Farmers was allowed to intervene and conduct limited discovery.

The trial court ruled that $8.75 million was not a reasonable stipulated judgment amount. Although a trial court lacks authority, on its own initiative, to adjust a settlement amount as between the parties (RCW 4.22.060(3)), the court found that a $400,000 stipulated settlement would have been reasonable.

The court of appeals affirmed. Reviewing for an abuse of discretion, the court held that the trial court properly exercised its discretion in analyzing the reasonableness factors adopted in Chaussee v. Maryland Casualty Co., 60 Wn. App. 504 (1991). For instance, the court of appeals ruled that the trial court properly exercised its discretion in accepting White’s valuation of the case and his analysis that the dismissal of the plaintiff’s warranty claims had effectively “gutted” the case and that the withdrawn summary judgment motion might have been granted. The court of appeals also upheld that trial court’s rejection of Beal’s testimony that $8.75 million was reasonable, noting that Beal had never tried a construction defect case, whereas White was experienced.

The court of appeals noted that collusion was a primary basis of the trial court’s decision. The court recognized that the trial court had justifiably been troubled by circumstances including (1) the plaintiff’s attorney contacting Associates and KPS, writing a “ghost letter” for them to send Farmers criticizing White, and recommending that they hire Beal and Harper; (2) Beal and Harper’s undermining of White’s efforts to reduce Associates’ and KPS’s exposure; (3) the realignment of the parties interests in stipulating that Associates and KPS could recover their $215,000 contributions through a kickback provision; and (4) the fact that neither Associates or KPS had any interest in the amount of the stipulated judgment.

Finally, the court held that the trial court properly dismissed the case, as opposed to entering a final judgment in the amount of $8.75 million or, in the alternative, $400,000. The court reasoned that the higher amount was determined to be unreasonable, and the trial court lacked authority, on its own initiative, to adjust the settlement amount and enter a $400,000 judgment. The court observed that if the plaintiff wanted a presumptive measure of damages for its bad faith suit against Farmers, it should have agreed to the $400,000 found reasonable by the trial court.