Lawyers love to brag about their court wins, not so much about their prowess as contract drafters. But the reality is that the vast majority of inheritance cases settle, which means in most instances “who gets what” is going to be the product of a settlement agreement, not some dramatic trial victory. And inheritance negotiations almost always turn on the value of the assets being divvied up.
So one of the big risk factors that needs to be nailed down in any estate-related settlement agreement is whether anyone’s being dishonest about the assets (which is easily done with “reps and warranties”, as discussed below). Two recent decisions out of the 3d DCA are prime examples of what can go wrong when this risk factor is NOT addressed in the text of your settlement agreement. The first was the Sugar case, which I wrote about here. The second is this case. Both boil down to one simple rule: GET IT IN WRITING!
This case involves three siblings, one of whom (Ms. Moriber) sued her mother over disputes involving a family business, her father’s estate and trusts, and three $1.5 million life insurance policies. The case settled. Part of the settlement agreement involved Ms. Moriber getting one-third of the life insurance after her mother’s death.
According to Ms. Moriber, her mother (and her mother’s lawyer) led her to believe the insurance policies remained in effect at the time she signed her settlement agreement. However, these were all oral statements, they weren’t incorporated into the actual text of the contract. Should Ms. Moriber have relied on her mother’s oral representations? Not according to the 3d DCA:
It is without question that the parties in the instant case had a hostile and antagonistic relationship at the time of Ms. Moriber’s alleged reliance on [her mother’s] representations. Ms. Moriber knew, or should have known, from her own dealings with [her mother] that Ms. Moriber should not rely on any representations made by [her mother].
After her mother’s death Ms. Moriber learned she’d been duped. The three insurance policies had been cancelled years before the settlement agreement was signed. Ms. Moriber sued her mother’s estate for fraud. According to the 3d DCA:
The gravamen of the fraud counts . . . is that Ms. Moriber would never have entered into the Settlement Agreement had she known that the insurance policies . . . had been canceled.
So here’s the $1.5 million question on appeal. Can you sue a hostile party for fraud if they lie to you during settlement negotiations? NO, so saith the 3d DCA:
Beginning with Columbus Hotel Corp. v. Hotel Management Co., 116 Fla. 464, 156 So. 893 (Fla.1934), Florida state and federal courts have . . . consistently [held] that, as a matter of law, a plaintiff may not rely on statements made by litigation adversaries to establish fraud claims. . . .
In reaching its holding [in Columbus Hotel, the [Florida Supreme Court] explained, “[t]here can be no ground for complaint against representations where the hearer lacked the right to rely thereon, because he had reason to doubt the truth of the representation, as where … a [representor] … was obviously hostile to the hearer and interested in misleading him.” Id. at 486, 156 So. 893.
While, in Butler v. Yusem, 44 So.3d at 105, the Florida Supreme Court recently determined that “justifiable reliance” is not an essential element of fraud, we do not read Butler as receding from the well-established and common sense principle of law espoused in Columbus Hotel and its progeny: generally, adverse parties negotiating a settlement agreement in an attempt to avoid litigation cannot rely upon the representations of one another.
So if you can’t sue a hostile adversary for (surprise!) lying to you during settlement negotiations, how can you protect yourself from this kind of deception? Better contract drafting. Again from the 3d DCA:
In the context of settlement agreements, one party certainly may insist upon certain assurances from the other party. In our opinion, however, such assurances are better enforced through contract principals (e.g., warranties, indemnities, etc.) rather than fraud claims.
What’s the takeaway? Think “reps and warranties”
If you’re settling a case based on the assurance by an adverse party that fact “X” is true, that representation needs to be incorporated into the text of your contract and the adverse party needs to assume the risk of the statement being false by warranting its truthfulness. For example, “Party ‘A’ represents and warrants that the three $1.5 million life insurance policies are in effect.” If the fact that’s been represented and warranted in your settlement agreement turns out to be false (for example, the three $1.5 million life insurance policies were cancelled), your client’s remedy is a standard breach of contract lawsuit, not a fraud claim.
For more on the value of “reps and warranties” and how they work in real life, you’ll want to read this short ABA article on the subject. Here’s an excerpt:
A lawyer drafting a business contract has multiple responsibilities, but two of the most important are to protect her client against risks and to secure those advantages that are reasonable and appropriate. Having a client receive both “representations and warranties” will generally help you fulfill these responsibilities. . . .
We will begin with representations. They are statements of present or past fact. For example, “The financial statements fairly present the financial condition of the seller.” Future “facts” cannot generally form the basis of representations because no one can know the future. At best, someone can have an opinion. . . .
Now, let’s turn to warranties. In the past 15 years, courts have been struggling anew with the meaning and implications of a common law warranty — a promise that a fact is true. The seminal case was CBS Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990). In that case, Ziff-Davis “represented and warranted” the financial condition of the division it was selling to CBS. CBS, however, as part of its due diligence, sent in its own accountants to review the division’s financial statements. They reported that the financial condition was not as represented and warranted. The parties closed anyway, and then CBS sued.
In New York’s highest court, the issue was whether CBS had a cause of action for breach of warranty. Ziff-Davis argued that CBS did not because it had known about the problems with the financial statements and had not justifiably relied on the warranties. Stated differently, Ziff-Davis argued that the standards for a cause of action for a fraudulent misrepresentation and a breach of warranty both required justifiable reliance on the truthfulness of the statement. Ziff-Davis lost.
According to the New York court, a warranty is a promise of indemnity if a statement of fact is false. A promisee does not have to believe that the statement is true. Indeed, the warranty’s purpose is to relieve a promisee from the obligation of determining a fact’s truthfulness.
Since the CBS case was decided, the majority of states have followed New York.