Prospect Capital Corporation v. Adkisson, Sherbert & Associates (4th Circuit)

Filed: November 7, 2013 (unpublished)

Opinion by: Judge Andre Davis 

Held: the United States District Court for the Western District of North Carolina was not clearly erroneous and did not abuse its discretion  in ruling that (1) the parties reached a binding and enforceable oral settlement agreement; and (2) plaintiff did not proceed in bad faith, so neither a dismissal with prejudice nor an award of attorney's fees was appropriate.

Facts: Plaintiff made a $12 million commercial loan to a third party. After the third party borrower filed a voluntary Chapter 11 petition (which was converted to a Chapter 7 liquidation), plaintiff sued several defendants for the gross misconduct of their officers and directors.  Plaintiff entered into settlement negotiations with one such defendant, the third party borrower's accounting firm.  Even though counsel for plaintiff and defendant exchanged several draft settlement agreements, plaintiff refused to execute the agreement.  Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees. 

Plaintiff alleged that defendant was negligent in providing inaccurate information about borrower's financial condition.  Counsel for the parties exchanged several emails and telephone conversations, during the last of which they agreed that defendant would pay plaintiff a sum certain in exchange for a dismissal of the action with prejudice.  Plaintiff stated in a court filing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement." 

In November and December of 2011, the parties exchanged a total of six drafts, each containing the same material terms, including merger and integration clauses.  The parties eventually negotiated a "final" Confidential Settlement Agreement.  Defendant emailed an executed copy of the written agreement to plaintiff, followed a week later by the settlement check.  The day after defendant mailed the settlement check, plaintiff filed additional papers with the court requesting an extension of time and again representing that the parties "have agreed to the principal terms of the settlement agreement, but require additional time to complete the drafting and execution of the settlement agreement."  "Alas," the Fourth Circuit lamented, "the new year brought a refusal by [plaintiff] to execute the Confidential Settlement Agreement."  Plaintiff returned the settlement check to defendant and stated that it would not be executing a settlement agreement with defendant. 

Defendant moved to enforce the purported agreement, to dismiss the complaint, and for an award of attorney's fees.  After a hearing, the district court ruled that the parties agreed on the material and essential terms of a settlement.  The district court reasoned that several months of emails between counsel demonstrated an enforceable agreement because the material terms were settled.  Those terms included payment price and costs per side, mutual releases, and a confidentiality requirement.  The district court found that choice-of-law and venue provisions were not material terms because plaintiff accepted them willingly and without demanding additional consideration.  It found further that plaintiff's apparent dissatisfaction with the settlement amount was "simply a risk of litigation and the nature of its investment business . . . which are insufficient to set aside the remaining agreement."  Finally, the district court ruled that plaintiff was estopped from denying the existence of the agreement, after it had twice represented to the court that the parties had reached a settlement. 

The district court granted in part defendant's motion, ordering the parties to file a notice of settlement within 30 days.  The court denied defendant's motion for dismissal with prejudice, ruling that plaintiff had not acted in bad faith as required to support a dismissal with prejudice other than on the merits by FRCP 41(b).  Absent bad faith, the district court also declined to award attorneys' fees to ASA. 

Analysis: The Fourth Circuit held that the district court was not clearly erroneous in finding that the parties had settled on the material terms of the settlement agreement during a telephone conversation on November 22, 2011. The Fourth Circuit noted that plaintiff never made the agreement contingent on approval by its senior management, that there was no record evidence that the agreement depended on the execution of a writing, and that plaintiff represented to both defendant and to the district court that the parties had reached a settlement.  The Court declined to consider as moot defendant's cross appeal on the issue of bad faith and attorney's fees. 

The Fourth Circuit held further that the district court was not clearly erroneous in identifying the material terms of the agreement, and classifying as immaterial the choice of law, venue, and release provisions.  Plaintiff accepted quickly and without further consideration defendant's change of the choice of law and venue provisions from New York to North Carolina, demonstrating that these terms were not of "paramount importance" to Plaintiff.  The release provision was not a material term because defendant disputed it only once and ultimately accepted it.  Unlike a case cited by plaintiff, Chappel v.Roth , 548 S.E. 2d 499 (N.C. 2001), the parties did not condition their settlement on the negotiation of a specific release provision. 

Reviewing under a deferential clearly erroneous / abuse of discretion standard, the Fourth Circuit appeared to approve of the district court's consideration of the evidence.  The Fourth Circuit stated that it was "entirely proper for the district court to hear the evidence of the sequence of events that took place during the negotiations, as well as the settlement amounts considered and finally agreed upon." It stated further that the district court was correct in looking past the merger and integration clauses in the written settlement agreement.  That agreement was not fully executed because plaintiff did not sign it; "thus, those provisions could not, and did not, guide the district court's inquiry[.]"

The full opinion is available in .pdf.