Sur-Reply to Defendant’s Motion to Exclude Evidence of Prior Settlement Negotiations Under Rule 408

Summary: This case was a breach of contract claim involving a party’s failure to comply with the terms of a settlement agreement.  The Plaintiffs alleged that the Defendant agreed to make significant drainage repairs on their residential property as part of a $250,000.00 settlement payment to resolve a prior lawsuit.  The repairs were never made and the Plaintiffs sought enforcement of the settlement agreement.  The Defendant sought to exclude evidence of the negotiations which led to the settlement claiming they were inadmissible under Texas Rule of Evidence 408.  Needing guidance, the Court ordered submissions from the parties addressing the issue.  These briefs were filed by Heygood, Orr & Pearson on behalf of its clients.

CAUSE NO. 141-228829-08
KENNETH P. GROSS and
BETSY L. GROSS,Plaintiffs

vs.

WB TEXAS RESORT COMMUNITIES, LP,
J. SCOTT SIMMONS and SUSAN P.
SIMMONS,

Defendants.

IN THE DISTRICT COURT
TARRANT COUNTY, TEXAS
141ST JUDICIAL DISTRICT

DEFENDANT J. SCOTT SIMMONS AND SUSAN P. SIMMONS’ SUR-REPLY TO DEFENDANT’S MOTION TO EXCLUDE EVIDENCE OF PRIOR SETTLEMENT NEGOTIATIONS UNDER RULE 408

In their Reply, Plaintiffs Kenneth and Betsy Gross (“the Grosses”) sidestep the subject matter of the relevant inquiry, and raise several additional arguments they claim preclude the admission of statements made during the negotiations that culminated in the subject settlement agreement. Specifically, the Grosses posit that (regardless of Rule 408), the parol evidence rule and the agreement’s integration clause operate to bar admission of extrinsic evidence of settlement negotiations. As these matters are outside the purview of the Court’s initial request, Defendants (“the Simmonses”) respectfully submit this sur-reply.

A. A court is permitted to examine prior negotiations and other incidents bearing on the intent of the parties in determining whether a prior settlement agreement is ambiguous.

As an initial matter, it is necessary to step back and address the Grosses’ blanket proposition that neither the jury nor the court can ever, under any circumstance, consider extrinsic evidence of settlement negotiations in an action to enforce a settlement agreement. The initial question of whether a contract is ambiguous is a question of law that must be decided by the Court which examines the contract as a whole in light of the circumstances present when the contract was entered. See Universal Health Serv., Inc. v. Renaissance Woman’s Group, 121 S.W.3d. 742, 746 (Tex. 2003) and Columbia Gas Trans. Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996) (whether a contract is ambiguous is a question of law that must be decided by the Court by examining the contract as a whole in light of the circumstances present when the contract was entered). Thus, clearly testimony from lawyers regarding surrounding circumstances which led to the settlement agreement would be relevant and admissible.

But, it does not stop there. Testimony as to negotiations leading to an agreement are also relevant and admissible. When determining whether an agreement is ambiguous, it is well-settled that a court is permitted to examine prior negotiations and all other relevant incidents bearing on the intent of the parties. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 848 (Tex. App.–Houston [14th Dist.] 2001, pet. denied); Cook Composites, Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 132 (Tex. App.–Houston [14th Dist.] 2000, pet. dism’d) (the court may examine prior negotiations and all other relevant incidents bearing on the intent of the parties). This also finds support in federal cases holding that negotiations between parties are admissible to interpret ambiguities in the settlement contract. See, eg. Reynolds v. Roberts, 202 F.3d 1303, 1316 (11th Cir. 2000); Waste Mgmt. of Ohio, Inc. v. City of Dayton, 2004 U.S. Dist. LEXIS 30532 (S.D. Ohio Sept. 20, 2004) (“First and foremost, the court should look to what their parties or their lawyers said to one another in fashioning [an ambiguous] consent decree… [N]egotiations between the parties is at the top of the descending order of importance of admissible extrinsic evidence.”).

B. The cases relied upon by the Grosses are distinguishable.

The Grosses futilely attempt to distinguish the cases cited by the Simmonses. For instance, the Grosses try to differentiate Adams v. Petrade Int’l, Inc., 754 S.W.2d 696 (Tex. App.—Houston [1st Dist.] 1988, writ denied), by asserting that, in that case, the issue was “whether a valid settlement agreement had been reached, [not] the interpretation of an allegedly ambiguous agreement.” In truth, the Adams case involved the same subject matter as this case: a party trying to enforce a settlement agreement. And the court in that case properly allowed testimony regarding settlement negotiations which led to the agreement. The Grosses go on to note that the Adams court discussed Rule 408 “in the context” of whether evidence of settlement negotiations warranted severance of the underlying claims from claims for breach of the settlement agreement. The fact that the Adams court held that Rule 408 did not compel severance, if anything, supports the position that Rule 408 would not bar evidence of settlement negotiations in a case such as this, where the merits of the underlying claims that gave rise to settlement are not even at issue.

The Grosses also try to distinguish Avary v. Bank of Am., N.A., 72 S.W.3d 779 (Tex. App.—Dallas 2002, pet. denied) by pointing out that Avery “was a bad faith claim against a party’s insurance carrier, not an alleged breach of a settlement agreement.” The Grosses claim that this renders its holding irrelevant, but in-so-doing, clearly miss the point. The rationale underlying Rule 408 stems from concerns over the prejudicial effect of offers of compromise that do not necessarily represent a party’s actual position on the merits of the underlying claim . This is particularly concerning in insurance bad faith claims because of the implication that an insurer has admitted liability on a contract claim. Id. at 799. Despite these concerns, however, Avary recognized a party’s right to present evidence of offers to compromise when they are offered as proof of the bad faith claim. Id. As in Adams, the fact that the court held evidence of settlement negotiations admissible – despite legitimate concerns over its prejudicial impact – merely underscores the limited reach of Rule 408 and further supports the admissibility of settlement discussions in this case, where it is indisputable that the settlement discussions are not going to be used to prove liability for the underlying claim.

The Grosses attempt to distinguish Gibson v. Bentley, 605 S.W.2d 337 (Tex. Civ. App. 1980, writ ref’d n.r.e.), by noting that the testimony from parties and their attorneys was about the intent of a Mary Carter agreement which occurred during a post-verdict hearing and that Rule 408 was not discussed. Yet, Gibson presents an obvious example where testimony from the parties’ attorneys about settlement discussions was admitted and considered by the court in making a determination as to whether the agreement was ambiguous – something the Grosses seek to avoid in this case. The approach in Gibson is entirely consistent with the rule that courts are permitted to examine prior negotiations (and all other relevant incidents bearing on the intent of the parties) in determining whether an agreement is ambiguous. Baty v. ProTech Ins. Agency, 63 S.W.3d 841, 848 (Tex. App.–Houston [14th Dist.] 2001, pet. denied); Cook Composites, Inc. v. Westlake Styrene Corp., 15 S.W.3d 124, 132 (Tex. App.–Houston [14th Dist.] 2000, pet. dism’d). That Rule 408 wasn’t specifically addressed only underscores how baseless the Grosses’ interpretation of that rule actually is.

The Grosses go on to claim that the federal cases cited by the Simmonses do not support the position that Rule 408 allows parties to testify about settlement negotiations. They correctly point out that Reynolds v. Roberts, 202 F.3d 1303, 1316 (11th Cir. 2000) found the district court erred when it considered evidence of settlement discussion to resolve questions of liability on the underlying claim, an issue on which everyone agrees. The Grosses fail to mention, however, the Reynold’s court’s reiteration of the well-established rule that what the parties and lawyers said to each other during settlement negotiations is the “best evidence” to look at in resolving an ambiguous contract provision, citing Lanier Prof’l Servs., Inc. v. Ricci, 192 F.3d 1, 4 (1st Cir.1999) (noting that contract negotiations between the parties is at the top of the “descending order of importance” of admissible extrinsic evidence). See also, Ferguson v. FDIC, 1997 U.S. Dist. LEXIS 16546 (N.D. Tex. Mar. 19, 1997) (The purpose of Rule 408 is to promote open settlement negotiations between parties to litigation, and to prevent offers of settlement from being construed as admissions of liability. By its express terms, however, the rule provides that evidence is inadmissible only where it is offered to prove liability for or invalidity of the claim or its amount. It is within the court’s broad discretion to admit evidence of an offer of settlement for a purpose other than proving liability or damages.) Master-Halco, Inc. v. Scillia, Dowling & Natarelli, LLC, 739 F. Supp. 2d 125 (D. Conn. 2010) (Fed. R. Evid. 408 only bars the use of compromise evidence to prove the validity or invalidity of the claim that was the subject of the compromise, not some other claim).

Simply put: Rule 408 does not in any way, shape or form bar the admission of statements, discussions (or other extrinsic evidence pertaining to settlement negotiations) in (1) determining whether the settlement contract is ambiguous and, if so, (2) to aid in the determination of the intent of the parties when they agreed to the ambiguous provision. The Simmonses are not seeking to admit testimony pertaining to the settlement negotiations to prove liability for or invalidity of the claim to which the settlement negotiations related. That claim has been settled. The Simmonses seek to admit testimony of settlement negotiations in connection with a completely different claim – a claim for breach of a settlement agreement. Rule 408 is wholly inapplicable, and the authority is clear that testimony pertaining to settlement negotiations in a case asserting breach of a settlement agreement is admissible for the purposes outlined above. It is undoubtedly for this reason that, while the Grosses try in vain to distinguish the cases cited by the Simmonses from the present action, they wholly fail to cite to any authority supporting their interpretation of Rule 408. Instead, they simply declare the subject agreement is unambiguous, an unresolved question that is utterly irrelevant to the issue the Court asked the parties to address.

C. The parol evidence rule is inapplicable because the Court has not declared the settlement agreement unambiguous; similarly, the integration clause does not prohibit admission of extrinsic evidence of settlement negotiations.

The Grosses also latch onto the parol evidence rule in seeking to preclude admission of settlement negotiations. Again, however, the parol evidence rule is irrelevant because it does not apply unless and until the court has determined a contract to be unambiguous. And, as mentioned above, a court is permitted to examine prior negotiations and all other relevant incidents bearing on the intent of the parties to determine whether an agreement is ambiguous. Gonzalez v. United Bhd. of Carpenters & Joiners of Am., Local 551, 93 S.W.3d 208, 211 (Tex. App–Houston [14th Dist.] 2002, no pet.) (Extrinsic evidence is admissible to show, inter alia, the parties’ true intentions pertaining to an ambiguous writing); Baty, 63 S.W.3d at 848; Cook Composites, Inc., 15 S.W.3d at 132. Furthermore, parol evidence rule only prohibits parol evidence to contradict or vary the terms of a written instrument, something the Simmonses do not seek to do. Gibson, 605 S.W.2d at 339. Whether the agreement is ambiguous or not ambiguous, the Simmonses are not trying to vary the terms of the agreement with testimony pertaining to settlement negotiations. They are merely trying to prove the intent of the parties in formulating the settlement agreement. And as one case after another holds, the best evidence of such intent is what the parties and their lawyers communicated to each other when the agreement was formulated. Reynolds, 202 F.3d at 1316; Lanier, 192 F.3d at 4. The parol evidence rule is entirely inapplicable in this setting. And in determining whether an agreement is fully integrated, the parol evidence rule does not bar the consideration of any evidence. Sun Oil Co., 626 S.W.2d at 731-32; City of Pinehurst, Tex., v. Spooner Addition Water Co., 432 S.W.2d 515, 518-19 (Tex. 1968). Initially, a court must decide whether the parol evidence rule is applicable. See Sun Oil Co., 626 S.W.2d at 731-32. Only when the rule is applicable does it affect whether evidence will be admitted. See Foreca, S.A. v. GRD Dev. Co., Inc., 758 S.W.2d 744, 746 (Tex. 1988). As shown above, the parol evidence rule is entirely inapplicable and the merger clause does not do anything, in and of itself, to bar evidence of settlement negotiations.

Along the same lines, the Grosses rely on the integration, or “merger” clause in the settlement agreement to preclude admission of testimony pertaining to the settlement negotiations. Yet, this argument suffers from the same fatal flaw as their assertion that the parol evidence rule prohibits admission of extrinsic evidence of settlement negotiations: it presumes, without establishing, an unambiguous written agreement. And even if the settlement agreement is unambiguous, the court should look at the settlement negotiations in making this determination. Gonzalez, 93 S.W.3d at 211; Baty, 63 S.W.3d at 848; Cook Composites, Inc., 15 S.W.3d at 132. Further, the inclusion of a merger clause, of itself, does not conclusively establish the written contract is fully integrated . Bob Robertson, Inc. v. Webster, 679 S.W.2d 683, 688-89 (Tex. App.–Houston [1st Dist.] 1984, no writ). And even if it is fully integrated, the Simmonses are not trying to add unwritten agreements (or other written agreements) prohibited by the merger clause. They are simply trying to prove that the settlement agreement is unambiguous in their favor or, alternatively, if it is ambiguous, the true intent of the parties.

For these reasons, set forth more fully above, Rule 408 does not bar the Simmonses from introducing testimony from counsel involved in settlement negotiations to support enforcement of the settlement agreement. Further, neither the parol evidence rule or the merger clause prohibit the Simmons from introducing testimony regarding statements made by counsel for Mr. Gross during settlement negotiations.

Respectfully submitted,

______________________________

James Craig Orr, Jr.

State Bar No. 15313550

Heygood, Orr & Pearson

2331 W. Northwest Highway, 2nd Floor

Dallas, Texas 75220

(214) 237-9001 Telephone

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ATTORNEYS FOR

SCOTT L. SIMMONS AND

SUSAN P. SIMMONS