Brady v. Admiral Insurance Company et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 08-45683 TD
Chapter 7
LIPID SCIENCES, INC.,
Debtor.
___________________________/
LOIS I. BRADY, Trustee, 	A.P. No. 08-4427 AT
Plaintiff,
vs.
ADMIRAL INSURANCE COMPANY;
RSUI INDEMNITY COMPANY; AND
WOODRUFF SAWYER & COMPANY,
Defendants.
___________________________/
MEMORANDUM OF DECISION
Plaintiff’s motion to enforce a settlement agreement relating to
the 	claims 	asserted 	against 	defendants 	Admiral 	Insurance 	Company
(“Admiral”) 	and 	RSUI 	Indemnity 	Company 	(“RSUI”) 	in 	the 	above-
captioned adversary proceeding and to strike Admiral’s answer to the
complaint 	came 	on 	for 	hearing 	before 	the 	above-captioned 	Court 	on
June 	18, 	2009. 	Appearances 	were 	stated 	on 	the 	record. 	At 	the
Signed: July 28, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 28, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-04427 Doc# 33 Filed: 07/28/09 Entered: 07/28/09 18:54:47 Page 1 of 9

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conclusion of the hearing, the Court gave the parties leave to file
post-hearing briefs and otherwise took the matter under submission.
Having 	considered 	the 	issues 	presented 	and 	the 	argument 	made,
including the argument asserted in the post-hearing briefs, the Court
concludes that the motion must be denied without prejudice.
SUMMARY OF FACTS AND PROCEDURAL HISTORY
On 	October 	1, 	2008, 	the 	above-captioned 	debtor 	(the 	“Debtor”)
wire 	transferred 	$90,000 	to 	defendant 	Woodruff-Sawyer 	& 	Co.
(“Woodruff-Sawyer”) 	for 	the 	benefit 	of 	RSUI 	and 	wire 	transferred
$131,484.36 	to 	Admiral 	for 	its 	own 	benefit. 	The 	purpose 	of 	the
payments 	was 	to 	obtain 	an 	extension 	of 	the 	expiration 	date 	of 	an
Officers 	and 	Directors’ 	Errors 	and 	Omissions 	Policy 	(the 	“E&O
Policy”) from November 30, 2008 to October 4, 2011. 	Two days later,
on 	October 	3, 	2008, 	the 	Debtor 	filed 	a 	voluntary 	petition 	seeking
relief under chapter 7 of the Bankruptcy Code.
On 	December 	30, 	2008, 	plaintiff 	Lois 	I. 	Brady, 	the 	duly
appointed 	chapter 	7 	trustee, 	(the 	“Trustee”) 	filed 	the 	above-
captioned adversary proceeding, seeking to avoid the wire transfers
as 	transfers 	that 	were 	both 	actually 	and 	constructively 	fraudulent
under 11 U.S.C. § 548(a)(1) and (2), among other things.
The 	complaint 	was 	served 	on 	all 	three 	defendants. 	Woodruff-
Sawyer 	filed 	a 	timely 	answer 	to 	the 	complaint. 	The 	Trustee 	gave
Admiral 	and 	RSUI 	extensions 	of 	time 	to 	file 	their 	answers. 	A
stipulation 	was 	filed 	giving 	RSUI 	until 	March 	2, 	2009 	to 	file 	an
answer. 	The stipulation with respect to Admiral was not reduced to
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writing 	but 	presumably 	the 	time 	accorded 	to 	file 	an 	answer 	has 	now
expired.
On March 2, 2009, the Trustee’s counsel had a phone conference
with counsel for RSUI in which it was agreed that the claim would be
settled 	by 	rescission 	of 	the 	E&O 	Policy 	and 	payment 	by 	RSUI 	to 	the
Trustee 	of 	$74,250: 	i.e., 	the 	$90,000 	wire 	transfer 	minus 	the
commission paid to Woodruff-Sawyer. 	On March 4, 2009, the Trustee’s
counsel 	had 	a 	phone 	conference 	with 	counsel 	for 	Admiral 	in 	which
Admiral agreed to comparable settlement terms. 	The only difference
was 	that 	the 	amount 	of 	the 	payment 	to 	be 	made 	to 	the 	Trustee 	by
Admiral was not quantified because Admiral’s counsel did not know at
that time the amount of the commission Admiral had paid to Woodruff-
Sawyer.
On 	March 	5, 	2009, 	a 	status 	conference 	was 	conducted 	in 	the
adversary 	proceeding. 	The 	Trustee 	and 	Admiral 	appeared 	through
counsel. 	RSUI 	was 	not 	represented 	at 	the 	status 	conference. 	The
Trustee 	informed 	the 	Court 	that 	she 	had 	entered 	into 	settlement
agreements with both Admiral and RSUI. 	Counsel for Admiral did not
contradict 	this 	statement. 	As 	a 	result, 	the 	status 	conference 	was
continued to June 18, 2009.
On 	April 	9, 	2009, 	counsel 	for 	Admiral 	called 	counsel 	for 	the
Trustee and informed her that his client had changed its mind about
the 	settlement. 	The 	Trustee’s 	counsel 	responded 	that 	this 	was 	no
longer possible, that the settlement agreement was binding. 	Admiral
disagreed 	and 	filed 	an 	answer 	on 	April 	10, 	2009. 	Thereafter, 	RSUI
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1Since no settlement agreement was filed with the clerk,
presumably, the Trustee is contending that the Trustee’s counsel’s
recitation of the settlement at the March 5, 2009 was sufficient to
create an enforceable agreement. 	At best, this would be sufficient
to bind Admiral since RSUI was not represented, even by counsel, at
the status conference.
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also declined to sign the proffered settlement agreement. 	However,
no answer has been filed by RSUI to date.
On 	May 	12, 	2009, 	the 	Trustee 	filed 	this 	motion 	to 	enforce 	the
both 	settlement 	agreements. 	Admiral 	and 	RSUI 	filed 	oppositions 	to
the motion and appeared at the June 18, 2009 hearing.
DISCUSSION
The 	Trustee’s 	original 	motion 	to 	enforce 	the 	purported
settlement 	agreements 	with 	Admiral 	and 	RSUI 	relied 	primarily 	on
section 	283(1) 	of 	the 	California 	Code 	of 	Civil 	Procedure. 	Section
283(1) 	provides 	that 	an 	attorney 	has 	the 	authority 	to 	“bind 	his
client 	in 	any 	of 	the 	steps 	of 	an 	action 	or 	proceeding 	by 	his
agreement 	filed 	with 	the 	clerk, 	or 	entered 	upon 	the 	minutes 	of 	the
Court, and not otherwise;....” 	See Cal. Civ. Proc. Code § 283(1). 1
In response, Admiral and RSUI argued that the relevant provision
of 	state 	law 	is 	section 	664.6 	of 	the 	California 	Code 	of 	Civil
Procedure. 	Section 664.6 states that a court may enter judgment in
pending 	litigation 	only 	pursuant 	to: 	(1) 	a 	writing 	signed 	by 	the
parties outside the court’s presence or (1) an oral statement made in
the presence of the court. 	See Cal. Civ. Proc. Code § 664.6. 	They
asserted that the California Supreme Court has held that “parties” in
this 	context 	means 	the 	clients 	themselves 	and 	not 	just 	their
attorneys of record. 	See Levy v. Superior Court (Golant), 10 Cal. 4 th
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578, 	585 	(1995). 	Since 	neither 	of 	the 	clients 	and 	only 	one 	of 	the
attorneys 	was 	present 	at 	the 	March 	5, 	2009 	status 	conference, 	the
settlement agreement may not be enforced pursuant to this provision.
In 	reply 	and 	in 	her 	post-hearing 	brief, 	the 	Trustee 	contended
that section 664.6 is inapplicable to actions in federal court. 	At
the same time, she contended, section 283(1) is applicable in that it
describes 	the 	authority 	of 	an 	attorney 	to 	bind 	his 	client 	and 	does
not 	just 	set 	forth 	a 	procedural 	rule. 	The 	Court 	concludes 	that
neither provision, strictly speaking, is applicable here. 	The claims
asserted in the complaint are based on the Bankruptcy Code and this
proceeding 	is 	pending 	in 	federal 	bankruptcy 	court. 	Therefore,
federal 	law, 	both 	substantive 	and 	procedural, 	governs 	the 	issues
presented here.
The 	leading 	authorities 	in 	the 	Ninth 	Circuit 	hold 	that, 	to 	be
enforceable, 	a 	settlement 	agreement 	need 	only 	fulfill 	two
requirements. 	First, it must be a “complete settlement agreement.”
Callie 	v. 	Near, 	829 	F.2d 	888, 	890 	(9 th 	Cir. 	1987). 	Second, 	the
parties 	“must 	have 	either 	agreed 	to 	the 	terms 	of 	the 	settlement 	or
authorized their respective counsel to settle the dispute.” 	McCovey
v. 	Pacific 	Lumber 	Co., 	1992 	U.S. 	Dist. 	LEXIS 	10678, 	at 	*6-7 	(N.D.
Cal. May 29, 1992)(citing Harrop v. Western Airlines, Inc., 550 F.2d
1143, 	1145 	(9 th 	Cir. 	1977)(per 	curiam)). 	The 	agreement 	need 	not 	be
in writing or recited in open court in the presence of the clients.
Oral settlement agreements may be enforceable if the parties intended
to be bound by the agreement and agreed on its material terms. 	See
Callie, 829 F.2d 891.
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Admiral and RSUI contended that the settlement agreements were
not 	complete 	because 	there 	was 	no 	agreement 	with 	regard 	to 	third
party releases and/or indemnification from third party claims. 	Their
concern appears to be that the officers and/or directors who, on the
eve 	of 	bankruptcy, 	used 	the 	Debtor’s 	money 	to 	purchase 	the 	E&O
Policies 	would 	sue 	them 	for 	agreeing 	to 	rescind 	the 	E&O 	Policies.
They 	cited 	Inamed 	Corp. 	v. 	Kuzmak, 	275 	F.Supp.2d 	1100, 	1125 	(C.D.
Cal. 	2002), 	for 	the 	proposition 	that 	release 	and 	indemnification
provisions 	are 	generally 	considered 	to 	be 	material 	terms 	of 	a
settlement agreement, particularly in the area of insurance.
The 	Court 	finds 	Admiral’s 	and 	RSUI’s 	arguments 	unpersuasive.
The 	Trustee 	is 	willing 	to 	give 	them 	complete 	releases. 	The 	draft
written agreement circulated by the Trustee contains such releases.
A 	chapter 	7 	trustee 	may 	not 	be 	expected 	to 	be 	able 	to 	obtain 	third
party 	releases. 	The 	Trustee’s 	agreement 	to 	indemnify 	Admiral 	and
RSUI 	if 	the 	officers 	and/or 	directors 	sue 	them 	would 	be 	of 	little
value once the bankruptcy estate has been liquidated and the proceeds
distributed.
The Court is close to summarily adjudicating the issue of intent
in favor of the Trustee as well. 	The declaration of Louis J. Cisz,
III, the attorney for RSUI, is strong evidence that Admiral and RSUI
originally intended to be bound by the payment and rescission terms.
In the declaration, he states as follows:
7. 	Subsequent 	to 	the 	March 	5, 	2009 	status
conference, 	Admiral 	Insurance 	Company 	changed
its position regarding a settlement.
8. 	As 	the 	excess 	insurance 	carrier, 	RSUI
analyzed 	its 	position 	relative 	to 	Admiral
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Insurance 	Company’s 	position 	and 	determined 	a
settlement 	at 	this 	time 	was 	not 	in 	RSUI’s 	best
interest.
[Emphasis added.]
The declaration of Jason A. Fogg supporting Admiral’s opposition
to the motion contains only the self-serving statement that Admiral
did 	not 	consider 	the 	agreement 	complete 	with 	the 	negotiated 	terms
regarding 	releases 	and 	indemnification. 	It 	does 	not 	state 	whether
this 	position 	was 	ever 	communicated 	by 	Admiral’s 	counsel 	to 	the
Trustee’s 	counsel. 	Whether 	or 	not 	a 	contract 	has 	been 	formed, 	as
well 	as 	its 	terms, 	is 	determined 	by 	the 	expressed 	intent 	of 	the
parties. 	When 	engaging 	in 	contract 	negotiations, 	a 	party 	may 	not
effectively keep to itself its private intent not to be bound. 	See
American Employers Group, Inc. V. Employment Development Department,
154 Cal. App. 4 th 836, 847 (2007).
Unfortunately, 	the 	Trustee’s 	counsel 	declaration 	does 	not
clearly state that this position was never communicated to her. 	If
it had, the Court would grant the Trustee’s motion. 	Without such a
statement, 	the 	Court 	concludes 	it 	must 	deny 	the 	Trustee’s 	motion.
However, the denial is without prejudice to the renewal of the motion
based on the submission of further evidence.
CONCLUSION
Based on the foregoing, the Court concludes that the Trustee’s
motion 	to 	enforce 	the 	purported 	settlement 	agreements 	with 	Admiral
and RSUI must be denied without prejudice. 	The procedural history of
the 	case 	renders 	it 	inappropriate 	to 	enforce 	the 	agreements
summarily. 	The Court finds as a matter of law that the terms of the
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settlement 	agreement 	are 	sufficiently 	complete 	to 	render 	them
binding. 	However, 	the 	Court 	finds 	the 	evidence 	presented 	on 	the
intent 	of 	Admiral 	and 	RSUI 	to 	enter 	into 	a 	binding 	settlement
agreement 	without 	negotiation 	of 	further 	terms 	to 	be 	inadequate 	to
support 	a 	finding 	as 	a 	matter 	of 	law 	in 	favor 	of 	either 	party.
Counsel 	for 	the 	Trustee 	is 	directed 	to 	submit 	a 	form 	of 	order 	in
accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Reidun Stromsheim
Stromsheim and Associates
201 California St. #350
San Francisco, CA 94111
Phillip K. Wang
Law Offices of Gordon and Rees
275 Battery St. #2000
San Francisco, CA 94111
Louis J. Cisz, III
Nixon Peabody LLP
One Embarcadero Center, 18th Fl
San Francisco, CA 94111-3600
Gregg M. Ficks
Coblentz, Patch, Duffy and Bass
1 Ferry Bldg. #200
San Francisco, CA 94111
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