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EXCELSIOR INS. CO. v. PENNSBURY PAIN CTR.

November 13, 1996

EXCELSIOR INSURANCE COMPANY, Plaintiff,
v.
PENNSBURY PAIN CENTER, Defendant/Third Party Plaintiff, v. AMERICAN RELIANCE INSURANCE COMPANY AND VIK BROTHERS INSURANCE COMPANY as successor to American Reliance Insurance Company, Third Party Defendants.



The opinion of the court was delivered by: WOLFSON

 WOLFSON, UNITED STATES MAGISTRATE JUDGE

 Presently before the Court is the motion by third party defendants, American Reliance ("American Reliance") and Vik Brothers Insurance Company ("Vik Brothers") as successor to American Reliance Insurance Company, (hereinafter jointly referred to as "American Reliance"), to set aside a settlement that was reached between Excelsior Insurance Company ("Excelsior") and Pennsbury Pain Center ("Pennsbury"). Pursuant to 28 U.S.C. 634(c), the parties have consented to this Court's jurisdiction to decide this dispositive motion. The Court has considered the moving, opposition, and reply papers submitted by the parties, supplemental certifications and briefs, and heard oral argument from counsel on September 30, 1996. For the following reasons, plaintiff's motion to set aside the settlement agreement is denied.

 Background

 This case stems from a fire that occurred on October 25, 1992, in a multi-tenant commercial office building, located at 168 Franklin Corner Road in Lawrenceville, New Jersey, where Kaylor Chiropractic ("Kaylor") and Pennsbury were tenants. No one disputes that the fire originated in the utility room of an office suite leased to Pennsbury, and further, that as a result of this fire, the neighboring offices occupied by Kaylor suffered fire-related property damage.

 Kaylor submitted a claim for $ 723, 885 to its insurance company, Excelsior, for property damage and business interruption loss. Excelsior compromised Kaylor's claim by paying $ 572,767.78. Subsequently, Excelsior, as subrogee of Kaylor, filed the instant action against Pennsbury to recover its payment of Kaylor's claim.

 Pennsbury requested that American Reliance, its insurer, defend and indemnify Pennsbury in this matter. (Tr. (November 17, 1995) at 4-12 to 5-6 and Corresponding Supplemental Submissions at 1 and 2). On August 18, 1994, American Reliance denied coverage and advised Pennsbury that it would not appoint counsel to defend Pennsbury. (Tr. (November 17, 1995) at 4-12 to 5-6; Excelsior Brief at 3). Thus, Pennsbury retained its own attorney, Arthur S. Alexion, Esq., to defend the claims. (Tr. (November 17, 1996) at 4-12 to 5-6 and Corresponding Supplemental Submissions at 2 and 3). On August 24, 1994, Pennsbury requested American Reliance reconsider its denial and further notified American Reliance that Pennsbury was considering a settlement with Excelsior as permitted by Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982). (Tr. (November 17, 1995) at 5-4 to 5-6 and Corresponding Supplemental Submission at 3; Alexion Certification (September 4, 1996) at 2). American Reliance, however, maintained that it had no obligation to defend. (Alexion Certification (September 4, 1996) at 2). Thereafter, on September 29, 1994, Pennsbury filed a third party declaratory judgment action against American Reliance and Vik Brothers, as successor to American Reliance, seeking a determination that the third party defendants have a duty to defend and indemnify Pennsbury for Excelsior's claim.

 Between October 3, 1994 and August 28, 1995, Excelsior and Pennsbury engaged in settlement negotiations, which are evidenced by the correspondence between the parties. (Excelsior Brief at 3 and Corresponding Exhibits A-C; Alexion Certification (September 4, 19956) at 1 and 3-4). Specifically, Excelsior claims that negotiations began on October 3, 1994, when it raised the issue of settlement as required by F.R.C.P. 26(f) *fn1" (Excelsior Brief at 3). During the Rule 16 Initial Scheduling Conference on December 8, 1994, this Court was informed by Excelsior and Pennsbury that a settlement agreement, with terms consistent with Griggs, was being negotiated.

 Despite being notified that Pennsbury was contemplating a Griggs settlement in August of 1994, American Reliance did not object to the possibility of a settlement until March 15, 1995. (Alexion Certification (September 4, 1996) at 2; Tr. (November 17, 1996) at 5-4 to 5-6 and Corresponding Supplemental Submission at 5). However, Pennsbury maintained its right under Griggs to enter into a settlement. (Alexion Certification (September 4, 1996) at 2; Tr. (November 7, 1996) at 5-4 to 5-6 and Corresponding Supplemental Submission at 6). Shortly thereafter, on April 21, 1995, Excelsior claims that the agreement was modified to include Pennsbury's changes, finalized, signed by Excelsior and sent to Pennsbury for its ratification. (Excelsior Brief at 4). Both Pennsbury and Excelsior contend that the settlement agreement was formed as of April 21, 1995, although it was not yet formally signed by Pennsbury or approved by the court, as required by Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982). (McGuinness Certification (September 25, 1996) at 2, P 3; Alexion Certification (September 4, 1996) at 3).

 Mr. Alexion, counsel for Pennsbury, and Mr. McGuinness, counsel for Excelsior, have further certified that, from April 21, 1995 until the settlement hearing, there were no changes or discussions regarding the substance of the agreement. (McGuinness Certification at 2, P 4; Alexion Certification (September 25, 1996) at 1, P 2). The only discussions that the parties engaged in during this period concerned the timing of the hearing. (McGuinness Certification at 2, PP 4 and 5; Alexion Certification (September 25, 1996) at 1, P 2). Specifically, Mr. Alexion and Mr. McGuinness discussed scheduling the settlement approval hearings, for the convenience of all the parties and the Court, to coincide with the Final Pretrial Conference *fn2" which was originally scheduled for September 7, 1995. (McGuinness Certification at 2, P 5, Alexion Certification at 1, P 2). The Final Pretrial Conference, however, was rescheduled three times. Prior to the October 20, 1996 rescheduled date, in a letter dated October 9, 1995, Excelsior informed this Court of the settlement and that the agreement required Court approval in accordance with the parameters established in Griggs v. Bertram. *fn3" This Court then scheduled the hearing to be held on November 17, 1995, the date of the Final Pretrial Conference. At that time, the parties believed that the hearings would be completed in a half day.

 On November 17, 1995, Pennsbury offered the testimony of Irvin Reiss, C.E.O. of Pennsbury, on the issue of the reasonableness and the bona fides of the settlement. (Tr. November 17, 1995) at 5-19 to 20-1). Mr. Reiss confirmed that Pennsbury considered several factors in deciding to enter into a settlement agreement with Excelsior. Among these factors were: Pennsbury's desire to achieve finality on the claims, (Id. at 9-8 to 9-13); the cause/origin assessments in the various fire reports which pointed to Pennsbury's office suites as the origin of the fire, (Id. at 12-9 to 12-23); American Reliance refused to defend, leaving Pennsbury to retain its own attorney and pay for its own defense, (Id. at 7-13 to 7-14 and 9-14 to 9-19); the possibility that Kaylor might prevail, (Id. at 9-23 to 9-25 and 13-9 to 14-2); and that there were other sizeable claims being asserted against it, (Id. at 10-15 to 12-8). Reiss further testified that he made no attempts to compromise Excelsior's claim because he understood that the claim was for an amount less than Kaylor originally submitted and as such, he believed it to be accurate since it was his experience that insurance companies undertake close scrutiny of damage claims before entering into settlement. (Id. at 18-2 to 19-17). Finally, Reiss clarified that, although Pennsbury didn't pursue an independent investigation of the amount of Excelsior's claim, he did receive all of the relevant documentation concerning the claim and nothing in his evaluation, or in anything conveyed to him, indicated that Excelsior's claim was in any way unreasonable or excessive. (Id. at 14-3 to 15-4).

 On the second day of hearings, January 22, 1996, *fn4" Excelsior presented the testimony of John Wolfersberger, a property adjuster hired by Excelsior to evaluate Kaylor's claims, as well as Richard Lubitz and Barry Feinberg, certified public accountants retained by Wolfsberger to evaluate the detailed claim submission of Kaylor. *fn5" (Tr. (January 22, 1996) at 3-22 to 95-22). Wolfsberger's testimony focused on the process and basis used to reduce Kaylor's claim from $ 723, 885 to $ 572,767.78. Wolfsberger testified that, after detailed scrutiny of Kaylor's receipts and records, verifying this information with the various vendors, inspecting the damages to identify the cause/origin and what goods were salvageable in order to ultimately determine the business personal property loss, and evaluating the reports of the certified public accountants, Lubitz and Feinberg, which provided a detailed analysis of the business interruption loss, *fn6" the total amount of Kaylor's loss amounted to $ 572, 767.78. (Id. at 10-22 to 18-3; 25-18 to 29-10; 33-16 to 33-18; and 34-14 to 36-3).

 After the second day of hearings, on February 14, 1996, Michael Marone, Esq. of McElroy, Deutsch & Mulvaney, substituted for Eli Eytan, Esq., as counsel for American Reliance. In a telephone conference call held on February 21, 1996, Mr. Marone requested an adjournment of the continued hearing date to allow for further depositions and the retention of an expert for American Reliance. The Court granted Mr. Marone's application and postponed the continuation of the proceedings from February, 1996 to March, 1996.

 On the final day of hearings, March 19, 1996, American Reliance called its witnesses: Dr. Kaylor, who owned and operated Kaylor Chiropractic, as well as American Reliance's experts, Michael Hedden, a real estate appraiser/broker, and Eugene T. Carey, a certified public accountant. (Tr. (March 19, 1996)). Dr. Kaylor testified regarding his efforts to re-establish his practice after the fire occurred. (Tr. (March 19, 1996) at 5-14 to 45-20). American Reliance's first expert, Michael Heddon, performed a real estate survey of the available space in the Lawrenceville area. (Id. at 48-7 to 48-21). Based on this survey, Mr. Heddon concluded that Kaylor could have potentially relocated in the immediate area, thereby possibly avoiding a portion of his claimed business interruption losses. (Id. at 48-22 to 52-8). Admittedly, Heddon did not take Kaylor's special needs or considerations into account when he conducted his analysis. Id. at 52-19 to 61-20. Similarly, the second expert, Eugene Carey, testified, inter alia that Kaylor's business interruption losses, based on a three month sales trend analysis, totaled $ 332,609, approximately $ 188,731 less than Excelsior's business loss calculations. (Id. at 67-20 to 83-14; 97-2 to 97-9). Carey, too, conceded that he did not take Kaylor's special circumstances into account in drawing his conclusions. (Id. at 87-6 to 87-25; 92-15 to 92-19).

 At the conclusion of the hearing on March 19, 1996, Mr. Alexion informed the Court and counsel, that, approximately six months before, on September 11, 1995, Pennsbury had filed a Voluntary Petition for protection under Chapter 11 of the United States Bankruptcy Code. (Tr. (March 19, 1996)) at 136). Pennsbury had never communicated this fact to any counsel or the Court. *fn7" The Court directed the parties to evaluate this newly discovered fact and its impact on the hearings. Subsequently, on June 4, 1996, the Bankruptcy Court approved Pennsbury's reorganization and lifted the stay, thereby permitting this matter to go forward.

 American Reliance contends that Pennsbury's failure to sign the settlement agreement and gain the court's approval prior to the September 11, 1995 bankruptcy petition, precludes Pennsbury from subsequently adopting the agreement since it would be in violation of the automatic stay provisions of the Bankruptcy Code. (American Reliance Brief at 7). American Reliance further contends that even if the settlement agreement is held to be valid despite the automatic stay provisions, the agreement should not be approved by the Court because it is unreasonable and was not the product of good faith negotiations. (American Reliance Brief at 9). Thus, American Reliance urges this Court to find that the agreement fails to satisfy the Griggs standard. Id.

 Conversely, both Pennsbury and Excelsior assert that the settlement agreement was finalized on April 21, 1995, and therefore, is not affected by the September 11, 1995 bankruptcy petition. (Excelsior Reply Brief at 4; Alexion Certification at 4-5). Further, they insist that the settlement agreement was reasonable and negotiated in good faith; thereby satisfying the Griggs standard. Id.

 Discussion

 1. The Settlement Agreement

 As a preliminary matter, this Court must determine when a settlement agreement rises beyond mere negotiations to the level of becoming binding and enforceable on the parties. State law governs the construction and enforcement of settlement agreements in federal court. Langella v. Anderson, 734 F. Supp. 185, 191-92 (D.N.J. 1990); Isidor Paiewonsky Assoc., Inc. v. Sharp Properties, Inc., 26 V.I. 228, 761 F. Supp. 1231, 1233 (D.V.I. 1991). Here, New Jersey law applies and holds that "an agreement to settle a lawsuit is a contract which, like all other contracts, may be freely entered into, and which a court, absent a demonstration of 'fraud or other compelling circumstance' shall honor and enforce as it does other contracts." Pascarella v. Bruck, 190 N.J. Super. 118, 124-25, 462 A.2d 186 (App. Div. 1983)(quoting Honeywell v. Bubb, 130 N.J. Super. 130, 136, 325 A.2d 832 (App. Div. 1974)); See also Cooper-Jarrett, Inc. v. Central Transport, Inc., 726 F.2d 93, 96 (3d Cir. 1984) (citing Green v. Lewis & Co., 436 F.2d 389, 390 (3d Cir. 1970))("'An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the Court, and even in the absence of a writing.' ... That is the settlement agreement is itself a contract, separate and independent from the dispute giving rise to the lawsuit which is settled."); See also Pascarella v. Bruck, 190 N.J. Super. at 124 (citing Good v. Pennsylvania R.R., 384 F.2d 989, 990 (3d Cir. 1967)). Thus, New Jersey's basic contract principles of law apply.

 Traditional contract law rules provide that a contract arises from the manifest intentions of the parties to engage in an offer and acceptance of sufficiently definite essential terms. Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435, 608 A.2d 280 (1992) (citations omitted); See also Friedman v. Tappan Development Corporation, 22 N.J. 523, 531, 126 A.2d 646 (1956). To be enforceable, a contract must also be accompanied by consideration. Friedman, 22 N.J. at 533. In bilateral contracts or agreements, such as the one in the case at hand, where the parties make mutual promises to do some future act, "the consideration of the promise of one party is a promise on the part of the other." Id.

 Despite these strict requirements, parties may bind themselves by an informal memorandum, even though they contemplate the execution of a more formal document. Berg Agency v. Sleepworld-Willingboro, Inc., 136 N.J. Super. 369, 374, 346 A.2d 419 (1975). "If the negotiations are finished and the contract between the parties is complete in all its terms and the parties intend that it shall be binding, then it is enforceable, although lacking in formality and although the parties contemplate that a formal agreement shall be drawn and signed." Moran v. Fifteenth Ward Bldg. & Loan Ass'n., 131 N.J. Eq. 361, 366, 25 A.2d 426 (N.J. Ch. 1942). Thus, so long as the parties agree upon the essential terms of a settlement, leaving the details to be "fleshed out" in a writing thereafter, courts will enforce settlement agreements notwithstanding the absence of a future writing. Lahue v. Pio Costa, 263 N.J. Super. 575, 596, 623 A.2d 775 (App. Div. 1993)(citing Bistricer v. Bistricer, 231 N.J. Super. 143, 145, 555 A.2d 45 (Ch. Div. 1987)); Hagrish v. Olson, 254 N.J. Super. 133, 138, 603 A.2d 108 (App. Div. 1992)(quoting Berg Agency v. Sleepworld-Willingboro, Inc., 136 N.J. Super. 369, 377, 346 A.2d 419 (App. Div. 1975))("'So long as the basic essentials are sufficiently definite, any gap left by the parties should not frustrate their intention to be bound.'"); See also Peskin v. Peskin, 271 N.J. Super. 261, 274-75, 638 A.2d 849 (App. Div. 1994); Nolan v. Lee Ho, 120 N.J. 465, 472, 577 A.2d 143 (1990); Hannigan v. Township of Old Bridge, 288 N.J. Super. 313, 672 A.2d 257 (App. Div. 1996).

 In the instant case, it is undisputed that Excelsior and Pennsbury were engaged in negotiations between October 3, 1994 and April 21, 1995. The correspondence between the parties during this time period indicates that Excelsior did make an offer for settlement in the form of the "Proposed Judgment Note and Settlement Agreement." The stated consideration in the agreement was that Excelsior would release Pennsbury from any liability due to the fire in exchange for an assignment of Pennsbury's rights against its insurer, American Reliance/Vik Brothers. *fn8" This constitutes consideration under the law. See Griggs, 88 N.J. at 369-70.

 Upon receipt of this offer, Pennsbury requested certain disclosure materials from Excelsior which were necessary to evaluate the agreement. Once these materials were received, Pennsbury considered the proposal and manifested an intent to be bound, by indicating that it was agreeable to the proposal subject to certain minor modifications. Thus, Pennsbury proposed a counter-offer. *fn9" Excelsior then incorporated the requested modifications, finalized, and signed the agreement. These acts evidence acceptance of Pennsbury's counter-offer.

 After signing the agreement, Excelsior sent it to Pennsbury for its signature on April 21, 1995. Both Pennsbury and Excelsior claim that they intended the agreement to be finalized on April 21, 1995, even though Pennsbury did not sign it on that date.

 Furthermore, it is clear from the certifications and correspondence between the parties, as well as the representations to this Court, see supra. at 345-346, that, at all relevant times, Excelsior and Pennsbury intended to reach a settlement agreement. Thus, this Court, recognizing that "the essential element to the valid consummation of a contract is a meeting of the minds of the contracting parties," finds that a ...


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