United Commercial Insurance Service, Inc. v. PayMaster Corp.

962 F.2d 853

• Court: Court of Appeals for the Ninth Circuit
• Decided: April 14, 1992
• Docket: No. 90-56108
• Status: Published

Opinions

D.W. NELSON, Circuit Judge:

Appellant Paymaster Corp. was awarded a judgment in excess of $11 million in compensatory and punitive damages against several defendants, including appellee American Bankers Insurance Corp. (American). Paymaster settled with all defendants other than American for $1.7 million in compensatory damages. Concurrent with this settlement, Paymaster executed a partial satisfaction of judgment in favor of American. The agreement provided that American’s punitive damage liability would be reduced by $1.7 million, in exchange for American dropping its claim against the other defendants for indemnification.¹

American claims that this agreement was separate from the underlying settlement, and that it is therefore entitled to a $1.7 million reduction in compensatory damages (for which it was jointly and severally liable) pursuant to the settlement and a $1.7 million reduction in its punitive damages pursuant to the satisfaction. Paymaster claims that it agreed to reduce American’s punitive damage liability by $1.7 million instead of reducing compensatory damages. The district court found that American was entitled to a $3.4 million setoff on the basis of two separate satisfactions. We affirm.

FACTS

Paymaster sued American, United, and several individual defendants (the Raydens) for violations of the Lanham Act and California unfair competition law. In 1987, Paymaster was awarded a judgment against all defendants for roughly $6.0 million in compensatory damages and costs. All defendants were jointly and severally liable for these damages. In addition, United was held liable for $3.0 million in punitive damages and American for nearly $2.4 million in punitive damages. American and the other defendants maintained cross-claims against each other for indemnification.

All defendants appealed the district court’s judgment on the merits to the Ninth Circuit. While that appeal was pending, Paymaster agreed with United and the Raydens to settle their portion of the case. Pursuant to the Settlement Agreement, the Raydens would pay $500,000 and United’s insurers would pay $1.2 million to Paymaster. However, the Raydens and United conditioned their settlement with Paymaster on receiving a full release from American of its cross-claim for indemnity. Thus, Paymaster could not recover its $1.7 million from United unless it could somehow persuade American to give up its cross-claim against United for the full amount of the judgment.

American demanded consideration in exchange for relinquishing its cross-claim against United and the Raydens. Accordingly, Paymaster executed a Partial Satisfaction of Judgment in favor of American, which provided that American’s punitive damage liability would be reduced in an amount equal to the amount United and the Raydens ended up paying Paymaster. This partial satisfaction was expressly “in consideration of [American] entering into its contingent settlement agreement and mutual release with [United] ...” Paymaster letter to American, Nov. 11, 1988.

In return, American executed a Settlement Agreement and Mutual Release with United in which each agreed to drop its claims against the other. This mutual release was expressly contingent upon American receiving the partial satisfaction of judgment. Id. at 1.1.

Paymaster and American subsequently disputed the amount remaining due on the judgment. American filed a Motion for Partial Relief from Judgment under Rule 60(b)(5), claiming that the combined effect of the agreements was to reduce its liability by $3.4 million ($1.7 million each in compensatory and punitive damages). The trial judge received declarations from counsel involved in negotiating the agreements, and heard oral argument. Relying on the two agreements, the partial satisfaction, and Paymaster’s November 11 letter, as well as on two of the declarations of counsel, the trial court concluded that two separate satisfactions occurred — one between United and Paymaster, and another between American and Paymaster. It therefore concluded that American’s liability should be reduced by $3.4 million, and entered judgment accordingly. Paymaster appeals.

DISCUSSION

Standard of Review

District court decisions under Rule 60(b) are normally reviewed only for an abuse of discretion. Browder v. Director, Illinois Dep’t of Corrections, 434 U.S. 257, 263, 98 S.Ct. 556, 560, 54 L.Ed.2d 521 (1978). However, we review de novo the district court’s decision of questions of law. Pekarsky v. Ariyoshi, 695 F.2d 352, 354 (9th Cir.1982), cert. denied 464 U.S. 1052, 104 S.Ct. 735, 79 L.Ed.2d 194 (1984).

“The construction and enforcement of settlement agreements are governed by principles of local law which apply to interpretation of contracts generally.” Jeff D. v. Andrus, 899 F.2d 753, 759 (9th Cir.1989). This is true even though the underlying cause of action is federal. Id.; In re Beverly Hills Bancorp, 649 F.2d 1329, 1332-33 (9th Cir.1981). Under California law, the interpretation of a contract is a question of law subject to de novo review. If interpretation requires the resolution of disputed facts or a determination of the credibility of extrinsic evidence, the appellate court will defer to the district court’s resolution of those issues if it is supported by substantial evidence. But once the facts are resolved, the interpretation of the agreement in light of those facts is a question of law. Parsons v. Bristol Dev. Co., 62 Cal.2d 861, 44 Cal.Rptr. 767, 770, 402 P.2d 839, 842 (1965).

In this case, the district court relied primarily on the language of three contracts — the Settlement Agreement between United and Paymaster, the Settlement Agreement and Mutual Release between United and American, and the November 11 letter from Paymaster to American. The court also considered the declarations of the parties’ attorneys regarding the meaning of the letter, resolving the conflict in their testimony in favor of American. Finally, it considered issues of public policy in interpreting the contract. The resolution of the credibility dispute regarding the meaning of the letter must be upheld unless clearly erroneous, while the remainder of the district court’s conclusions are subject to de novo review.

Contract Interpretation

A settlement agreement is treated as any other contract for purposes of interpretation. Adams v. Johns-Manville Corp., 876 F.2d 702, 704 (9th Cir.1989). Under California law, the intent of the parties determines the meaning of the contract. Cal.Civil Code §§ 1636, 1638. The relevant intent is “objective” — that is, the intent manifested in the agreement and by surrounding conduct — rather than the subjective beliefs of the parties. Lawyer’s Title Ins. Co. v. U.S. Fidelity & Guar. Co., 122 F.R.D. 567, 569 (N.D.Cal.1988); Beck v. American Health Group Int’l, 211 Cal.App.3d 1555, 260 Cal.Rptr. 237, 242 (1989). For this reason, the true intent of a party is irrelevant if it is unexpressed. Union Bank v. Winnebago Indus., 528 F.2d 95, 99 (9th Cir.1975); Mill Valley v. Transamerica Ins. Co., 98 Cal.App.3d 595, 159 Cal.Rptr. 635, 639 (1979).

Applying these principles to this case is not simple. The relevant documents are silent on whether the $1.7 million reduction in American’s punitive damages was meant to replace or supplement the compensatory damage reduction.²

The general legal rule is that a settlement with one defendant reduces the liability of all other defendants by an equal amount. Krusi v. Bear, Stearns & Co., 144 Cal.App.3d 664, 192 Cal.Rptr. 793, 798 (1983). This rule prevents a plaintiff from obtaining several satisfactions of its judgment — one from each party. Paymaster contends that this rule supports its position, since the legal presumption is that liability is reduced by an amount equal to the settlement ($1.7 million). What Paymaster ignores is the fact that American’s liability is reduced by $1.7 million as a matter of law, without any agreement being signed. It would be redundant to draft an agreement which produced exactly the same result as would occur absent the agreement.

Paymaster contends that the agreement did modify the normal rule, since it provided for the $1.7 million to be credited towards American’s punitive rather than compensatory damage liability.³ But since Paymaster claims it intended to modify the normal rule (by replacing American’s credit for compensatory damages), one would expect that at least one of the four documents at issue would mention the modification explicitly. No indication of such an intent to substitute punitive for compensatory damages can be found. Under well-established principles of California law, we cannot rely in interpreting the contract on Paymaster’s unexpressed intent to deviate from the normal legal rule. See Mill Valley, 159 Cal.Rptr. at 639. In short, because it is Paymaster rather than American whose interpretation deviates from the normal operation of law, it is Paymaster who must pay the price for failing to specify what the contract meant.⁴

That the parties in fact intended there to be two separate satisfactions is suggested by the change in the language of the letter Paymaster sent to American. Paymaster sent a letter agreement on November 10. The district court found that American returned the letter unsigned because it did not specify that the consideration supporting the agreement to reduce punitive damages was independent of Paymaster’s settlement with United. This finding, although disputed by Paymaster, is a factual conclusion from the extrinsic evidence and is not clearly erroneous.⁵ The revised letter, dated November 11, provided that the Partial Satisfaction of Judgment was executed in consideration for American agreeing to drop its cross-claims against United. It said nothing about American giving up its right to a $1.7 million reduction in compensatory damages. This provision, and the fact that American insisted on its inclusion, suggest that American intended the Partial Satisfaction to operate independently of United’s settlement, and that Paymaster acquiesced in that interpretation.

Finally, Paymaster relies on two cases which it claims establish a strong presumption against recording setoffs in an amount greater than plaintiff actually received. See FSLIC v. Butler, 904 F.2d 505, 512 (9th Cir.1990) (“The agreement on the amount of setoff should be very specific before the plaintiff is considered to have agreed to a setoff larger than what he received in consideration from the settling defendant.”); accord Arbuthnot v. Relocation Realty Serv. Corp., 227 Cal.App.3d 682, 278 Cal.Rptr. 135, 138 (1991). These cases are inapplicable. The district court did not calculate the setoff at twice the value of the settlement. Instead, it found that two separate satisfactions occurred. The first, between United and Paymaster, operated by law to reduce American’s compensatory damage liability by $1.7 million. In the second, American agreed to drop its cross claims in exchange for a $1.7 million reduction in punitive damages.⁶

In short, this Court is not persuaded that the contracts evidence an intent that the $1.7 million reduction in punitive damages was intended to replace the $1.7 million reduction in compensatory damages. Instead, the documents support the conclusion that the $1.7 million satisfaction of punitive damages was separate from and independent of the satisfaction of compensatory damages.⁷

Oral Testimony

Paymaster claims that it should have been allowed to present oral testimony — specifically, the testimony of attorneys who participated in drafting the agreements — in support of its interpretation. Under Fed.R.Civ.P. 43(e), which normally governs motions, the trial court has wide discretion in deciding whether to admit or deny oral testimony. Miles v. Dep’t of the Army, 881 F.2d 777, 784 (9th Cir.1989). Paymaster contends, however, that this case should be treated as a trial on the merits of a contract action, and therefore should fall under Rule 43(a), which requires a district court to take oral testimony. Paymaster relies on Sanders v. Monsanto Co., 574 F.2d 198, 199-200 (5th Cir.1978), a Fifth Circuit case which held that a civil contempt action should fall within 43(a) because it was “more in the nature of a trial on the merits of a breach of the consent ‘contract.’ ”

Sanders relied on the “highly factual” nature of the motion before it, finding oral testimony necessary because the proceedings depended “so heavily on complex facts not readily perceivable from the record.” Id. at 199, 200. By contrast, in Miles the Ninth Circuit rejected a claim that oral testimony was required because “Miles’ declaration provided the district court with adequate information” to decide the issue. 881 F.2d at 784.

We do not believe these cases are inconsistent. Where factual questions not readily ascertainable from the declarations of witnesses or questions of credibility predominate, the district court should hear oral testimony. In this case, however, Paymaster has conceded that the testimony it would present was contained in the declarations submitted to the district court. Further, as Paymaster itself concedes, “the Order granting [Americanas Rule 60(b)(5) Motion is based on the district court’s interpretation of settlement documents and undisputed extrinsic evidence.” Where, as here, the primary issue before the court is a legal question, and what factual issues do exist are undisputed, we think little purpose would be served by a blanket rule requiring oral testimony.

CONCLUSION

For the foregoing reasons, the judgment of the district court is AFFIRMED.

1 . The other defendants, principally United Commercial Insurance Service (United), had refused to settle with Paymaster unless American dropped its indemnification claim against them. Thus, Paymaster needed American’s agreement in order to finalize the original settlement.

2 . The Sixth Circuit has chosen to resolve a similar problem — where the contract is unclear and the court must choose one party's interpretation — by simply ruling against whatever party has the burden of proof. United Steelworkers v. North Bend Terminal Co., 752 F.2d 256, 261 (6th Cir.1984). We reject this approach. In this case, it would result in a ruling for Paymaster, since American chose to file this motion to determine its rights. Had American waited until Paymaster tried to collect on the judgment, on the other hand, such an approach would lead the Court to rule for American. The meaning of a contract should not depend on who instituted the litigation.

3 . Paymaster also argues that it provided a benefit to American by listing the entire settlement with United and the Raydens as compensatory damages (since if United had paid its punitive damages, that amount would not have gone to reduce American’s liability). This argument is disingenuous. Paymaster collected $500,000 from the Raydens, and $1.2 million from United’s insurers. The Raydens owed no punitive damages, and California law prohibits insurers from paying a punitive damage award. Thus, Paymaster could not have collected the $1.7 million without attributing it all to compensatory damages.

4 . For this reason, the dissent’s argument that ”[n]othing in the various settlement agreements supports the majority’s version of the settlement," post at 859, simply misses the point. Nothing in the agreements supports the dissent’s view, either. The dissent is reduced to relying on its common sense beliefs about what the parties ought to have done in order to support its interpretation of the contract. We do not believe this is an appropriate method of contract interpretation.

5 .Under California law, extrinsic evidence is always relevant to help explain what a contract means, but not to vary the written terms. Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564, 568-70 (9th Cir.1988); Pacific Gas & Elec. Co. v. G. W. Thomas Drayage Co., 69 Cal.2d 33, 69 Cal.Rptr. 561, 565-66, 442 P.2d 641, 645-46 (1968).

6 . We are not persuaded that the fact that the two amounts are the same compels a different result. Deciding how much a claim is "worth" is necessarily an arbitrary process. It seems perfectly reasonable to us that the parties could have concluded that the amount Paymaster was able to recover from United was a good estimate of the value of American’s claim against United.

7 . Because we read the contracts in this way, we have no occasion to consider whether a contrary reading would violate California public policy.