Once Is Enough: The Washington Court of Appeals Holds Trial Court Was Not Required To Reevaluate the Reasonableness of a Covenant Judgment

In Hidalgo et al. v. Barker et al. ___Wn. App. __, __P.3d__ ;  No. 30544-9-III (Sept. 10, 2013), the Washington Court of Appeals addressed the following issues of first impression in Washington State with regard to the determination of the reasonableness of a covenant judgment: 

1. Is a trial court required to conduct a hearing to determine the reasonableness of a stipulated settlement any time the settling parties modify the terms of their agreement? 
2. Does a trial court have the discretion to provide for prejudgment interest as a component of a reasonableness determination? 

The answer to the first question is “no.”  Absent a material change in one or more reasonableness factors, a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties is not required to entertain evidence and argument in support of revising that amount.

The answer to the second question is “yes.”  It is within the trial court’s discretion to either include or exclude prejudgment interest for the period between the date of settlement and the date judgment is entered.  

The Hidalgo Court also held that the trial court did not abuse its discretion when it found the parties’ first settlement agreement unreasonable and then multiplied what the court found to be the mid-point of the expected verdict range if the case went to trial by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

I. Background

Manuel Hidalgo was convicted of a crime and served over four years in prison before his judgment and sentence were reversed on the basis of the newly discovered evidence.  Mr. Hidalgo then brought a malpractice action against his public defenders and their law firm.  Westport Insurance Corporation insured the law firm and its attorneys under a professional liability policy with “wasting” limits (coverage limits included defense costs), meaning that every dollar spent defending the malpractice case reduced available coverage.

Westport appointed counsel to defend the law firm and its attorneys against Mr. Hidalgo’s claim and other related claims.  Efforts at a global settlement proved unsuccessful.   Mr. Hidalgo made several decreasing offers to settle with one of the attorneys, Mr. Stevensen, with a final offer of $75,000.  However, the claims against Mr. Stevensen were not settled.  In May 2005, after the limits of the insurance policy were exhausted, counsel appointed by Westport withdrew from the case.

In May 2007, Mr. Stevensen reached an agreement with Mr. Hidalgo to settle for a $3.8 million covenant judgment. The Hidalgo/Stevensen settlement agreement included a covenant not to execute against Mr. Stevensen  in exchange for  an assignment of Mr. Stevensen’s claims against Westport.  The agreement also provided for prejudgment interest from the date of the agreement until the entry of judgment and for post-judgment interest from date of entry.  In addition, the settlement was contingent on the court approving it as reasonable.

In February 2009, after reviewing “voluminous” briefing from both sides, the trial court conducted a reasonableness hearing lasting about three hours.  At the conclusion of the hearing, the court rejected the $3.8 million settlement figure as unreasonable and ruled that the reasonable settlement amount was $688,875.  The trial court stated that it had considered the nine reasonableness factors set forth in Glover v. Tacoma Gen. Hosp., 98 Wn.2d 708, 717, 658 P.2d 1230 (1983), overruled on other grounds by Crown Controls, Inc. v. Smiley, 110 Wn.2d 695,  756 P.2d 717 (1988), but explained that its conclusion focused on just two Glover factors:  the merits of the plaintiff’s liability theory and the merits of the defense theory.  The trial court found a probable range of damages for a legal malpractice case involving incarceration and the probability of Mr. Hidalgo’s success at trial.  Using these numbers, the trial court multiplied the mid-point of the expected verdict range  by its evaluation of the chance of a favorable verdict to arrive at $688,875 as the reasonable settlement amount.  Because the settlement was contingent on the trial court’s approval of the $3.8 million settlement figure, the settlement was void by its terms.  The litigation continued. 

In May 2010, Mr. Stevensen and Mr. Hidalgo entered into a new settlement agreement. This time, the agreed settlement amount was $2.9 million “or such amount as is found reasonable by the proper court.”  Mr. Hidalgo asked the trial court to rule on the reasonableness of the $2.9 million settlement. The trial court refused.  Instead, the court signed an order on its February 2009 reasonableness determination that included no findings of fact but did append and incorporate a transcript of its oral ruling from the 2009 hearing.   

Before judgment was entered, Mr. Hidalgo argued that he was entitled to prejudgment interest from the date of the agreement.  The trial court agreed and ruled that prejudgment interest of $134,755 was appropriate. The court also awarded post judgment interest at the statutory rate of 12 percent.  Mr. Hidalgo appealed and Westport cross-appealed.  

II. One Reasonableness Determination Is Enough

The Hidalgo Court ruled that that the trial court did not abuse its discretion by refusing to revisit its original reasonableness determination after the parties settled the second time.  The Court of Appeals explained that if a court determines the settlement is unreasonable, RCW 4.22.060(2) has been construed to require the court to then determine a reasonable settlement value.  “That stand-alone reasonable settlement amount will necessarily be independent of other terms of the parties’ agreement.”  Therefore,  if the “parties renegotiate the terms of a settlement agreement after the trial court determines a reasonable settlement amount, then, no further hearing should be required unless a different issue ‘of the reasonableness of the amount to be paid’ is presented.”

A second reasonableness hearing may be necessary if “[d]evelopments in the lawsuit that affect the merits of the claims, the defenses, or other Glover factors might result in a different issue of reasonableness.”  However:

short of a material change in one or more Glover factors, a new settlement agreement entered into by two parties does not require a court that has already conducted a reasonableness hearing and determined a reasonable settlement amount for those parties to entertain evidence and argument in support of revising that amount.

Accordingly, the Court of Appeals found that it was not an abuse of discretion for the trial court to refused to revisit its prior determination when “it saw nothing in the parties’ submissions that would cause it to revisit its prior determination.”

III. The Reasonableness Determination

Next, the Hidalgo Court rejected Mr. Hidalgo’s argument that the trial court abused its discretion when it found the first settlement unreasonable and determined that $688,875 was a reasonable settlement amount.  Mr. Hidalgo argued that the trial court (1) failed to explain how it applied the individual Glover factors; (2) ignored the eighth factor, consideration of the releasing party’s investigation and preparation; and (3) abused its discretion by using a “rigid calculation” and selecting a figure that was the mean of the probable range of recovery rather than a higher figure.

The Hidalgo Court rejected each of these arguments in turn and held that:

1. Washington decisions do not require trial courts to explain their application of the Glover Factors.
2. Absent some showing that an incorrect standard may have been applied, Washington appellate courts do not review a trial court’s reasonableness determination for a sufficient explanation, but for substantial evidence.
3. The trial court did not abuse its discretion by failing to consider or misapplying the eighth Glover Factor—the releasing party’s readiness for trial.  
4. The trial court did not abuse its discretion when it multiplied the mid-point of the expected verdict range by the perceived chance of a favorable verdict to determine the reasonableness of the settlement.

IV.  Prejudgment and Post Judgment Interest

Next, the Court of Appeals addressed Westport’s cross appeal challenging the trial court’s inclusion of prejudgment interest and its ruling that the 12 percent contract rate applied to post judgment interest, rather than the lower market-based rate for judgments founded on tortious conduct.  As to post judgment interest, Westport argued that the tort interest rate should apply because the underlying claim against Stevensen was a malpractice claim. The Court of Appeals disagreed.  Quoting Jackson v. Fenix Underground, Inc., 142 Wn. App. 141, 146, 173 P.3d 977 (2007), the Hidalgo Court held that the 12 percent contract rate applied because:

Once parties have agreed to settle a tort claim, the foundation for the judgment is their written contract, not the underlying allegations of tortious conduct.

The Hidalgo Court then addressed whether Mr. Hidalgo was entitled to prejudgment interest.  The court acknowledged that in Washington, a party’s entitlement to prejudgment interest as a question of substantive law turns on whether a claim is “liquidated” and found that Mr. Hidalgo’s claim was not liquidated.  Nevertheless, the Court of Appeals held that it was within the trial court’s discretion to either include or exclude prejudgment interest in its reasonableness determination.

Soha & Lang, P.S. attorneys are available to assist insurer clients in understanding and addressing the impact of this decision.

The opinions expressed in in this blog are those of the author and do not necessarily reflect those of Soha & Lang, P.S. or its clients.