A Nonsettling Defendant's Perspective on Reasonableness Hearings Under Washington's 1981 Tort Reform Act

• Publication year: 1988

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 11, No. 3SPRING 1988

A Nonsettling Defendant's Perspective On Reasonableness Hearings Under Washington's 1981 Tort Reform Act

Luanne Coachman

Introduction

The 1981 Product Liability and Tort Reform Act requires that when parties enter into a settlement agreement, a hearing must be held on the issue of the reasonableness of the amount of the settlement.(fn1) Although the major purpose of the reasonableness hearing is to prevent the nonsettling defendant from having to pay more than her share of damages, current practices may be defeating this purpose. The following hypothetical illustrates problems that nonsettling defendants may encounter when faced with reasonableness hearings.

Attorney Smith represents one of two defendants in a personal injury/wrongful death action. She has been working with the codefendant's attorney to develop the expert evidence that she believes will exonerate their clients. The defense attorneys agree that even if their clients are not exonerated, liability should be spread evenly between them as their pockets are about equally deep and there is no evidence implicating one significantly more than the other. Plaintiff has demanded two million dollars and has rejected Smith's client's $500,000.00 settlement offer.

A day or two before trial, Smith learns that the other defendant has settled for $250,000.00, and that the hearing on the reasonableness of the settlement will be held that very afternoon. Not having been involved in a reasonableness hearing before, Smith drops her trial preparation to do some quick research. On the plane to the hearing, she reviews the three cases,(fn2) law review article,(fn3) and statutes(fn4) found, but finds few clues about what the reasonableness hearing will be like. One of the cases,(fn5) however, lists factors that the superior court judge should consider when ruling on the reasonableness of a settlement.

At the hearing, the plaintiff's attorney presents evidence of jury awards and settlements showing that $250,000.00 is a ball park figure in this type of case. Smith points out that while $250,000.00 is a ball park figure, it is 50 percent lower than her client's offer, and the plaintiff has offered no proof of why it was reasonable to accept the lower offer in the face of a higher one. Nevertheless, the judge, without articulating her reasons, issues a ruling stating, "I have examined all the factors set out by the court in Glover v. Tacoma General Hospital(fn6) and find that the settlement in this case is reasonable." At trial, the plaintiff, supported throughout by the settling defendant, obtains a jury verdict of ten million dollars.

Attorney Smith and other attorneys representing nonset-tling defendants at reasonableness hearings face several important questions that must be answered if they are to protect their client's interests. These questions include what kind of evidence is appropriate for the hearing, whether findings and conclusions are necesssary, what notice is adequate, what remedies are available if a settlement is collusive, and what effect the reasonableness hearing will have on the nonsettling defendant's subsequent trial. Unfortunately, these questions are not answered by the statute.

The legislature left significant gaps in the statute by not setting out a definition of reasonableness or delineating procedures for the hearings.(fn7) And because reasonableness hearings are a relatively recent addition to settlement procedures in Washington, the discussion in judicial opinions that will eventually fill the gaps is so far incomplete. As a result, many issues raised by reasonableness hearings have not been fully aired, or even identified. The attorney who has no experience with reasonableness hearings must grope her way along in very dim light-a distinct disadvantage when the attorney may be called upon to attack a settlement's reasonableness on just a few hours' notice.(fn8)

The legislative history of the reasonableness hearing statute shows that fairness concerns inspired the creation of reasonableness hearings: There is a legitimate concern that claimants will enter into "sweetheart" releases with certain favored parties. To address this problem, the section requires that the amount paid for the release must be reasonable at the time the release was entered into. Furthermore, it requires parties desiring to enter into such releases to give five days' notice to all other parties of the terms of the release.(fn9) Because the reasonableness hearing exists as a filter to block collusive settlements ("sweetheart releases"), the hearing must, by its form, provide meaningful exploration of collusion issues. However, as the hypothetical illustrates, "meaningful exploration" is not necessarily a practical reality.

The materials written about reasonableness hearings evoke the image of a conversation between settling parties and nonsettling defendants, with the legislature, courts, and commentators speaking for different sides. Much of this material amplifies the voice of the settling parties and, by contrast, reduces the nonsettling defendants' voice to a whisper. This Comment amplifies the nonsettling defendants' voice; for as we will see, the nonsettling defendant has much to lose at a reasonableness hearing. While the hearing was in large part created for her benefit to minimize her losses, existing practices may be subverting the hearing's purpose.

This Comment addresses the questions that the nonsettling defendant's attorney must answer. Section I sets out the function of reasonableness hearings in light of the policies the hearings are intended to further-avoiding collusion between settling defendants and plaintiffs and equitably apportioning the financial burden among tortfeasors. Section II examines the form of reasonableness hearings, including what evidence should be presented, what standards must be met, and the need for reviewable findings and conclusions. Section III analyzes, in terms of constitutional due process, the notice required by the statute. Section IV considers what remedy should follow a finding that a settlement is collusive. Section V examines the relationship between the reasonableness hearing and the nonsettling defendant's subsequent trial.

I. The Function of the Reasonableness Hearing

To understand the reasonableness hearing's function, we must look at the hearing in the context of the 1981 Product Liability and Tort Reform Act.(fn10) This Act established a right of contribution among joint tortfeasors(fn11) and so reversed Washington's common law rule.(fn12) The legislature established the right of contribution to promote judicial economy and fairness to defendants.(fn13) However, the Act cuts off the right of contribution between settling and nonsettling defendants when the settlement fails to release the nonsettling defendants.(fn14) When the nonsettling defendants are not released by the settlement, they receive a credit offsetting any future judgment against them in the case.(fn15) This pro tanto credit is set at an amount equal to the settlement amount, or if the settlement amount is found to be unreasonably low, the credit is set at an amount determined by the court to be reasonable.(fn16)

The legislature adopted the pro tanto credit rule to encourage settlements.(fn17) The rule encourages settlements in two ways. First, the rule encourages defendants to settle by creating immunity from further litigation for the settling defendant. Second, the rule encourages plaintiffs to settle by creating certainty for the releasor about the amount of credit against a future judgment.(fn18)

In addition to encouraging settlements, the pro tanto credit rule has the positive effect of apportioning the financial burden, to a limited extent, among codefendants. However, the credit may also have undesirable effects: it may cause the settling or nonsettling defendant to assume a disproportionately large share of the plaintiff's compensation, and it may encourage partial settlements at the expense of full.(fn19)

In the eyes of the nonsettling defendant, the biggest problem with a pro tanto credit approach to partial settlements is the possibility that a collusive agreement between the settling parties will result in a disproportionately low settlement and a correspondingly low credit against the judgment.(fn20) When a partial settlement releases the settling defendant from contribution, the plaintiff mayrelease one tortfeasor from his fair share of liability and mulct another instead, from motives of sympathy or spite, or because it might be easier to collect from one than from the other .... [T]he release from contribution affords too much opportunity for collusion between the plaintiff and the released tortfeasor against the one not released .... In most three-party cases, two parties join hands against the third. . . . (fn21)

These concerns about collusive settlements shaped the 1939 Uniform Contribution Among Tortfeasors Act's treatment of partial settlements.(fn22) This Uniform Act and its progeny were historical references for Washington's 1981 Product Liability and Tort Reform Act.(fn23) Under section 5 of the 1939 Uniform Act, the release of "any tortfeasor [did] not release him from liability for contribution unless it expressly provided for a reduction to the extent of the pro rata...