Opinion
Civil Action No. 3:99CV-727-C
July 3, 2003
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND RECOMMENDATION
This matter is before the court because the United States has filed a motion to redocket this case for trial (Docket No. 33), which the district court construed as a motion for relief from settlement (Docket No. 37). The district court referred the matter to the magistrate judge to determine whether the parties had reached settlement at a September 4, 2002, settlement conference and, if so, whether the United States is seeking "to avoid its responsibilities and obligations under that agreement"(Docket No. 41). For the reasons stated herein, the magistrate judge concludes that the parties did reach a settlement that should be enforced by the district court. The magistrate judge also concludes that sanctions should be imposed against the United States for disregarding the court's settlement conference orders.
I. FINDINGS OF FACT
1) This case began when Tommie Burns, Jr. filed an action against the United States of America to recover a penalty he believes was wrongfully assessed and collected by the Internal Revenue Service. (Docket No. 1.) The United States filed an answer and counterclaim, in which it asserted that Mr. Burns owed certain unpaid taxes, plus a substantial penalty that had been assessed in January of 1998. (Docket No. 8.)
2) The district court referred the case to the magistrate judge, pursuant to 28 U.S.C. § 636(b)(1)(A), for discovery dispute resolution and to conduct a settlement conference. (Docket No. 21.) Accordingly, the magistrate judge issued an order scheduling a settlement conference for July 16, 2002 (Docket No. 25). That order stated, in pertinent part,
COUNSEL ARE DIRECTED TO REVIEW THE ENTIRETY OF THIS SETTLEMENT CONFERENCE ORDER AND ADDENDUM IN DETAIL . . . At the conference, counsel who will actually try the case and each party, armed with full settlement discretion, shall be present . . . This means that each party must attend through a person who has the power to change the party's settlement posture during the course of the conference. Ir the party representative has a limit, or "cap" on his or her authority which would require telephonic consultation with corporate offices, this requirement is not satisfied. COMPLIANCE WITH THIS PROVISION IS CRITICAL.
The attached addendum is incorporated into and made a part of this order. DO NOT FAIL TO REVIEW THIS ADDENDUM. Failure to comply with any provision of this order, including the addendum, may lead to the award of sanctions, including but not limited to an award of costs, attorneys' fees and travel expenses.
( Id. (emphasis in original)). The attached addendum, in turn, stated:
Who must come? The most frequent problem in a settlement conference is the failure of a party to attend through a principal. The be perfectly plain: do not fail to bring a fully authorized client representative to the settlement conference. No lawyer, no matter how knowledgeable about the case and skillful in negotiation, is a substitute for a live client. Having the client available by telephone is not acceptable. The client must be personally present in the settlement conference.
The next most frequently asked question is when a representative is fully authorized. Please refer to the text of the settlement order, which is quite explicit. Principals with caps on their authority who must "call the home office" to authorize acceptance of an offer are not acceptable. The point of the settlement conference is to have the final decision-making representatives personally participate in the settlement conference and hear the presentations of the opposite side. Having an inadequately authorized principal defeats one of the essential purposes of the settlement conference.
( Id. (emphasis in original).)
3) At the United States' request, the magistrate judge later rescheduled the conference for September 4, 2002. (Docket No. 26.) That order explicitly stated, however, "[a]ll other provisions of the Court's Order entered June 7, 2002, Docket No. 25, shall remain in full force and effect." ( Id.)
4) On the date of the settlement conference, Mr. Burns and his counsel appeared. ( See Rep't on Settlement Conf. and Recommendation (Docket No. 29).) The United States was represented by Aneida P. Winston, the Department of Justice trial attorney assigned to this matter. (Id.)
5) During the settlement conference, the parties reached an agreement. Mr. Burns agreed to pay a fixed sum to the United States, less a small set-off for sums he had already paid. The United States agreed to waive and release all claims asserted in its counterclaim. The parties agreed upon a payment deadline. They acknowledged, however, that the settlement must be formally approved by the United States Attorney General, as is required by statute. See 28 U.S.C. § 2677.
6) Ms. Winston never informed the magistrate judge that she lacked full authority to settle the matter, nor did she request permission from the magistrate judge for a Department of Justice employee with full settlement authority to participate telephonically. She apparently informed Mr. Burns and his counsel that her authority was limited, however. Nevertheless, she spoke with one of her supervisors by telephone, as needed, and ultimately represented to Mr. Burns's counsel that the settlement terms were acceptable to the Department of Justice.
7) One of Mr. Burns's attorneys reduced the agreed-upon terms to writing and gave a copy entitled "Settlement Agreement" to the magistrate judge. ( See Exh. A attached hereto.) Neither side signed the document, but counsel for the United States acknowledged it and did not raise any objection to its contents.
8) Based on the parties' representations and the "Settlement Agreement" document presented to him, the magistrate judge issued that same day a report on the settlement conference and a recommendation, in which he informed the district court that the parties had "reached an agreement in principle on all material issues for the settlement of this matter." (Docket No. 29.) The magistrate judge noted that "there are certain formalities which must be observed to effect the final and definitive dismissal of this action, including the finalization of documents at the Department of Justice. (Id.) Because the parties informed him that the matter had settled, and that all that remained was the administrative finalization of the settlement documents, the magistrate judge recommended that the district court remand the case from the trial docket (id.), which the district court promptly did (see Docket No. 30). Neither party objected to the magistrate judge's characterization of the result of the settlement conference, or objected to the district court's decision to remand the case from the trial docket.
9) Almost two months later, however, the United States filed a motion to redocket the matter for trial, in which it characterized the outcome of the settlement conference as merely the presentation of an offer by Mr. Burns, and informed the court that the United States could not accept the offer. (Docket No. 33.) Mr. Burns opposed the motion, arguing that it was his understanding that settlement had been reached, subject only to certain administrative formalities required to finalize it. (Docket No. 36)
10) The district court construed the United States' motion as one for relief from settlement and referred the matter to the magistrate judge to determine whether settlement was actually reached and, if so, whether the United States is "attempting to avoid its responsibilities and obligations under that agreement." (Order dated April 22, 2003 (Docket No. 41).) The magistrate judge then scheduled a hearing on the matter, at which Ms. Winston and Mr. Fore, one of Mr. Burns's attorneys, appeared (Mr. Burns's trial attorney, and tax specialist, passed away in January 2003).
11) At the hearing, Ms. Winston acknowledged that she had read the magistrate judge's orders scheduling the settlement conference. She also acknowledged that she appeared at the settlement conference without full settlement authority, but stated she was in contact with one of her supervisors by telephone. She further acknowledged that she reached agreement with Mr. Burns regarding the significant settlement terms, confirmed most of those elements with her supervisor, and then represented to Mr. Burns and his counsel that the material elements they discussed were acceptable to the Department of Justice. She stated, however, that she forgot to mention the set-off component of the settlement terms to her supervisor. According to Ms. Winston, her supervisor at the Department of Justice found the set-off component to be absolutely untenable, and refused to approve the settlement solely on that basis.
II. CONCLUSIONS OF LAW
1) The district court must decide three issues presented by this case: (1) whether an enforceable settlement agreement exists; (2) whether the agreement should be enforced; and, (3) regardless, whether and to what extent sanctions should be imposed on the United States for its admitted failure to comply with the court's settlement conference orders. The magistrate judge will address each issue in turn.
A. Enforcement of the Alleged Settlement Agreement
2) As a preliminary matter, the magistrate judge notes that the district court has the authority to enforce settlement agreements in litigation pending before it. See, e.g., Brock v. Scheuner Corp., 841 F.2d 151, 154 (6th Cir. 1988). Indeed, the United States Court of Appeals for the Sixth Circuit deemed a district court's authority to enforce settlement agreements to be so broad and powerful, that it extends even to agreements that have not been reduced to writing. Id. The district court must conclude that the parties have agreed on all material terms, however, and may only enforce the settlement as agreed to by the parties; it may not add any additional terms. Id.
3) The question of what constitutes an enforceable agreement is one of state law. See Baumerilease Capital Corp. v. Nearburg, 958 F.2d 150, 152 (6th Cir. 1992). This is true because settlement agreements are type of contract properly governed by contract law. Id.; see also Frear v. PTA Industries, Inc., 103 S.W.3d 99, 105 (Ky. 2003). Accordingly, whether a settlement agreement between the parties exists and is enforceable is determined by reference to state substantive law regarding contracts. See Baumerilease, 958 F.2d at 152.
4) In Kentucky, a valid settlement agreement exists when there is an offer and acceptance, the terms are "certain, full and complete," and there are mutual concessions (i.e., consideration). See Hines v. Thomas Jefferson Fire Ins. Co., 267 S.W.2d 709, 711 (Ky. 1954). In this case, there is no disagreement regarding whether consideration would be paid. Ms. Winston agreed that the United States would waive and release its counterclaims; Mr. Burns agreed to pay money; and Ms Winston agreed that the United States would permit a set-off. ( See Exh. A.) Nor is there any question that all material terms were certain, full and complete. The parties agreed to the amount and nature of their respective consideration and the time at which payment would be due. (Id.) In sum, the parties are in agreement regarding the existence and scope of the offer. They disagree about whether there was any acceptance.
5) The United States argues that there was no acceptance of the offer because Ms. Winston did not have the authority to do anything other than accept the tendering of the offer — she could not formally accept the offer itself. It argues that only a few people at the Department of Justice are authorized to accept offers on behalf of the Attorney General and that no such person accepted the offer. The magistrate judge concludes that this argument is unpersuasive and unacceptable.
6) The court's settlement conference orders clearly required the presence of a representative of the United States who had full settlement authority with no need to "call the home office" for permission to accept settlement terms. "Were the purpose of a settlement conference merely to exchange offer and demand, there would be no need for any mediator, much less a federal Magistrate Judge." Schwartzman, Inc. v. ACF Industries, Inc., 167 F.R.D. 694, 699 (1996).
7) Indeed, Federal Rule of Civil Procedure 16(c) permits the magistrate judge and the district court to require that fully authorized representatives participate in settlement conferences. As the Fifth Circuit has noted, all parties are expected to conform their conduct to the rules applicable in federal court; "this is even more true for the federal government, a party that regularly appears before the federal courts, knows the rules by which they operate, and is even at times a special beneficiary of those rules." Bradley v. U.S., 866 F.2d 120, 126 (5th Cir. 1989); see also In re Stone, 986 F.2d 898, 903 (5th Cir. 1993) (declaring that the government is not excused from compliance with an order requiring that a representative with full settlement authority be present or readily available by phone).
8) At no time did Ms. Winston inform the court that she lacked full authority to settle this case at the settlement conference. Thus, at least from the magistrate judge's perspective, and Mr. Burns's initial perspective, she had apparent authority. Although Ms. Winston informed Mr. Burns's counsel of her limitations at some point during the conference, she also represented, or implied, that she had spoken with someone with the authority she lacked and that person had authorized her to accept the terms of the offer. Thus, to the extent there was ever any ambiguity, she re-established her apparent authority.
9) The Sixth Circuit has declared that third parties who reach settlement agreements with attorneys employed to represent their clients in regard to the settled claims are generally entitled to rely on the attorneys' apparent authority and, consequently, to enforcement of the settlement agreement, even if the attorneys act contrary to their clients' express instructions. See Capital Dredge and Dock Corp. v. City of Detroit, 800 F.2d 525, 530 (6th Cir. 1986). In reaching this conclusion, however, the Sixth Circuit deemed the applicable state law on the issue to be determinative, and predicted that Michigan courts would find an attorney's apparent authority binding with respect to a negotiated settlement agreement. Id.
10) In this matter, the applicable state's law is that of the Commonwealth of Kentucky. Unlike Michigan's courts at the time Capital Dredge was decided, the Kentucky Supreme Court has ruled on the issue of the effect of an attorney's apparent authority with respect to negotiated settlement agreements. Kentucky's Supreme Court held that, absent extraordinary circumstances, the apparent authority of an attorney cannot bind her client — express consent to settlement terms is required. See Clark v. Burden, 917 S.W.2d 574, 577 (Ky. 1996).
11) Extraordinary circumstances include (1) whether the third party would be substantially and adversely affected by his reliance on the unauthorized settlement, (2) whether the client's participation in the settlement particulars was sufficient to create implied authority, and (3) whether the client in essence ratified the settlement agreement by failing to express his disapproval within a reasonable time. Id. at 566-67.
12) The magistrate judge concludes that all three examples of extraordinary circumstances are applicable to this case. In this matter, Mr. Burns' tax specialist and trial attorney passed away recently. Because Mr. Burns believed the matter had been settled, pending only administrative finalization, his counsel agreed before he passed away that the case should be removed from the active trial docket. Had the matter remained on the active trial docket, however, Mr. Burns's tax attorney would have been able to represent his client at trial. Were this matter to be returned to the active trial docket now, Mr. Bums would have to retain new counsel and incur the expense associated with that person's need to familiarize him self with the facts and applicable law. Thus, the magistrate judge finds that Mr. Burns would be "substantially and adversely affected" if the settlement agreement were not enforced.
13) In addition, the magistrate judge concludes that Ms. Winston's phone calls to her superior created implied authority by virtue of his active participation in the settlement particulars. The effect of Ms. Winston's alleged failure to mention to him the set off amount ultimately is of less significance regarding the validity of the agreement than the impression she created of active discussions with an ultimate decision-maker and her later representation that all of the material terms discussed were acceptable. There may have been no meeting of the minds between Ms. Winston's supervisor and Mr. Burns, but Mr. Burns should be entitled to rely on Ms. Winston's implied authority derived from her supervisor's active, albeit indirect, participation in the negotiations.
14) Lastly, the magistrate judge concludes that the United States ratified the agreement by its silence. The magistrate judge entered his report on the settlement conference on the same day the conference was held. ( See Docket No. 29.) As noted above, that report recommended that case be removed from the active trial docket because the parties had "reached an agreement in principle on all the material issues for the settlement of this matter." (Id.) The magistrate judge clarified the "in principle" language by noting that "[b]ecause this litigation involves claims against the United States, there are certain formalities which must be observed to effect the final and definitive dismissal of the action, including the finalization of documents at the Department of Justice." (Id.) The magistrate judge then recommended that the district court allow the parties forty-five days to execute a formal agreement. (Id.)
15) The next day, the district court removed the matter from the trial docket, noting that it had "been advised that settlement has been reached on all matters in this case." ( See Docket No. 30.) The district court also dismissed the matter without prejudice and denied all pending motions as moot and gave the parties the recommended time to tender an agreed order of dismissal with prejudice. (Id.)
16) Forty-five days later, and on the last possible day for compliance with the district court's order, the United States requested additional time to finalize the settlement. ( See Docket No. 31.) In its request, the United States, for the first time, notified the court that it considered the settlement agreement to be a mere offer that needed to be approved not only by the Department of Justice, but also by the Internal Revenue Service. (Id.) A little over a week later, the United States notified the court that it rejected Mr. Burns's "offer" and asked that the case be returned to the court's trial docket.
17) At no point in the seven-to-eight weeks prior to its request for additional time did the United States notify the court that Ms. Winston did not have the authority to enter into the settlement agreement presented to the magistrate judge, or to agree to the terms of that agreement. If, as Ms. Winston stated during the magistrate judge's hearing on June 3, 2003, the sole problem was her failure to obtain approval for the set-off component of the agreement, which problem was quickly identified by her superior, the United States had ample time to inform either the magistrate judge, or the district court directly, or, for that matter, even Mr. Burns's counsel, that there was a problem. The United States failed to do so, however, until the case was removed from the trial docket and the original trial date had passed. The magistrate judge therefore concludes that the United States ratified the agreement by its silence. See Clark, 917 S.W.2d at 577 (citing with approval Combs' Adm'r v. Virginia Iron, Coal Coke Co., 33 S.W.2d 649, 651 (1930) (holding that an unauthorized settlement may be ratified by the client's silence, because "It is the client's duty, having knowledge of the settlement, to express his disapproval within a reasonable time.")).
18) In summary, the magistrate judge concludes that a valid agreement exists because both parties agree that there was agreement as to all material terms of the settlement, save one. With respect to the one disputed term, the magistrate judge concludes that several extraordinary circumstances justify incorporating the set-off component among the other enforceable terms of the presented agreement ( see Exh. A).
B. Sanctions
19) The next issue is whether and to what extent the court should impose sanctions on the United States for its failure to comply with the magistrate judge's orders establishing the settlement conference. To paraphrase the district court in G. Heileman Brewing Co. v. Joseph Oat Corp., 107 F.R.D. 275, 277 (W.D. Wis. 1985), aff'd en banc, 871 F.2d 648 (7th Cir. 1989), all federal proceedings are expensive public resources that should not be misused. A settlement conference attended by persons with no authority to settle is not productive. It is thus unquestionably a misuse of federal resources to disobey a court order designed specifically to maximize the potential for pre-trial resolution of disputes.
20) It is well within a district court's discretion to impose sanction's for a party's failure to comply with an order regarding a settlement conference. See, e.g., Empire, Inc. v. Wal-Mart Stores, Inc., 188 F.R.D. 478, 480 (E.D. Ky. 1999). Indeed, as the Eastern District of Kentucky has aptly has noted, a magistrate judge's order is not a frivolous piece of paper, idly entered, which can be cavalierly disregarded without peril. Id. The issuance of sanctions for a party's violation of a settlement conference order do not necessarily require a showing of bad faith, however. Id. "[I]f failure to comply is unexcused, sanctions may be appropriate. Id.
21) Rule 16(f) states that when a party does not comply with a pretrial order, the judge may "make such orders with regard thereto as are just, and among others any of the orders provided in Rule 37(b)(2)(B), (C), (D)." Although courts typically assess costs and fines as sanctions, they are increasingly availing themselves of the non-monetary sanctions suggested by Rule 16(f) of the Federal Rules of Civil Procedure. See, e.g., Lockhart v. Patel, 115 F.R.D. 44, 45 (E.D. Ky. 1987) (approving the striking of pleadings as a sanction against a party that failed to send a fully-authorized representative to a settlement conference).
22) In this case, the magistrate judge concludes that monetary sanctions are appropriate for the United States' failure to comply with the court's settlement conference orders. Had trial counsel conducted herself in any way other than the straightforward, professional manner that characterized her behavior at the hearing on the motion to redocket the case for trial, the magistrate judge would be inclined to recommend an additional, non-monetary sanction. Because she did not personally demonstrate any bad faith, monetary sanctions should be sufficient to encourage her and her superiors' future compliance with pretrial orders.
III. RECOMMENDATION
The magistrate judge concludes that the United States' is seeking to avoid its responsibilities and obligations with respect to an enforceable settlement agreement with Mr. Burns. Either the United States complied with the court's order and sent a fully authorized representative (in which case it is bound by the settlement agreement), or it ignored the very explicit provisions of the settlement conference order, and sent a representative who had apparent and implied authority and who fully convinced the court that the case was resolved and required only administrative formalities. The United States then delayed disclosing to the court that it disagreed with the fundamental economic terms of the settlement until after the trial date was remanded. Consequently, Mr. Burns, a small businessman, not only lost his trial date but his lawyer, who had become familiar with the case and who was a seasoned tax litigator, died. The United States does not have the option of repudiating its agreements or ignoring the orders of this court, any more than any other litigant. While the government may not dance with the nimbleness of a smaller litigant, it must dance by the same music as everyone else.
The magistrate judge recommends that the district court find that the parties' summary of their settlement (Exhibit A, attached hereto) is a valid settlement agreement, and recommends that the district court enforce that agreement. The magistrate judge also recommends that the district award Mr. Burns his costs and expenses associated with responding to the United States' motion to redocket, and all subsequent pleadings pursuant to Rule 16(f) of the Federal Rules of Civil Procedure.
NOTICE
Within ten (10) days after being served a copy of these proposed findings of fact, conclusions of law, and recommendation, any party who wishes to object must file and serve written objections, or further appeal is waived. Thomas v. Arn, 782 F.2d 813 (6th Cir. 1984); 28 U.S.C. § 636(b)(1)(C); Fed.R.Civ.P. 72(b).