LIMITS ON CLAW-BACKS
By: John Newman, Spring 2001
Many lawsuits are settled for less than the original amount claimed. In a suit on a note, it is not uncommon for a settlement agreement to provide for payment over time of the entire principal amount due with a reduction in some interest or late fees. In other contexts, however, the difference between the original claim and the settlement amount can be more dramatic.
The typical settlement provides that upon default the defendant is obliged to pay the full amount claimed in the complaint less payments made under the stipulation of settlement. This is a common provision known as a “claw-back” and is used to add teeth to a settlement. A debtor facing a claw-back is far more likely to pay as agreed than a debtor who is only obligated to pay the reduced balance negotiated in the settlement.
The recent case of Williams v. Swift illustrates the limitations of claw-backs. In Williams, there was a claim for treble damages under the Consumer Fraud Act. The trebled damages totaled $75,000 and there was an additional claim for attorney’s fees. The parties settled the case for $15,000, payable in 12 monthly installments of $1,250 each. After the defendant made nine of the 12 payments, he defaulted. The plaintiff applied to the court, as provided in the stipulation of settlement, for judgment for the full amount due less the payments made to date, which came to over $125,000. Several months later, the defendant moved to vacate the judgment. The trial court vacated the judgment but assessed $5,000 in counsel fees for the plaintiff’s efforts in seeking the judgment, issuing execution, and defending the motion to vacate.
The Appellate Division affirmed the trial court’s decision. The court noted that although the claw-back was intended primarily to insure prompt and full payment of the settlement amount:
Under the circumstances enforcement of such a large penalty provision would have been
unjust and oppressive once the settlement amount had been paid in full.
The court reasoned that it has no obligation to enforce a contract that is unfair, oppressive or against public policy.
By contrast, in another recent case, Montague Mini Mall v. Caterall, the Appellate Division upheld a claw-back where the full amount claimed was $12,300, the stipulation provided for four payments of $2,400 each (totaling $9,600) and the defendant defaulted after making three payments.
Clawbacks are excellent mechanisms which should be included in stipulations of settlement whenever appropriate. However, when there is a substantial difference between the amount of the required payments in the stipulation of settlement and the total claw-back, the creditor must understand that there is a possibility, particularly after many of the payments have been made, that a court will decline to enforce the claw-back.
There is no downside for a creditor to protect himself with a claw-back provision. In fact, it is, as intended, a major point of leverage in effecting payment.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
Many lawsuits are settled for less than the original amount claimed. In a suit on a note, it is not uncommon for a settlement agreement to provide for payment over time of the entire principal amount due with a reduction in some interest or late fees. In other contexts, however, the difference between the original claim and the settlement amount can be more dramatic.
The typical settlement provides that upon default the defendant is obliged to pay the full amount claimed in the complaint less payments made under the stipulation of settlement. This is a common provision known as a “claw-back” and is used to add teeth to a settlement. A debtor facing a claw-back is far more likely to pay as agreed than a debtor who is only obligated to pay the reduced balance negotiated in the settlement.
The recent case of Williams v. Swift illustrates the limitations of claw-backs. In Williams, there was a claim for treble damages under the Consumer Fraud Act. The trebled damages totaled $75,000 and there was an additional claim for attorney’s fees. The parties settled the case for $15,000, payable in 12 monthly installments of $1,250 each. After the defendant made nine of the 12 payments, he defaulted. The plaintiff applied to the court, as provided in the stipulation of settlement, for judgment for the full amount due less the payments made to date, which came to over $125,000. Several months later, the defendant moved to vacate the judgment. The trial court vacated the judgment but assessed $5,000 in counsel fees for the plaintiff’s efforts in seeking the judgment, issuing execution, and defending the motion to vacate.
The Appellate Division affirmed the trial court’s decision. The court noted that although the claw-back was intended primarily to insure prompt and full payment of the settlement amount:
Under the circumstances enforcement of such a large penalty provision would have been
unjust and oppressive once the settlement amount had been paid in full.
The court reasoned that it has no obligation to enforce a contract that is unfair, oppressive or against public policy.
By contrast, in another recent case, Montague Mini Mall v. Caterall, the Appellate Division upheld a claw-back where the full amount claimed was $12,300, the stipulation provided for four payments of $2,400 each (totaling $9,600) and the defendant defaulted after making three payments.
Clawbacks are excellent mechanisms which should be included in stipulations of settlement whenever appropriate. However, when there is a substantial difference between the amount of the required payments in the stipulation of settlement and the total claw-back, the creditor must understand that there is a possibility, particularly after many of the payments have been made, that a court will decline to enforce the claw-back.
There is no downside for a creditor to protect himself with a claw-back provision. In fact, it is, as intended, a major point of leverage in effecting payment.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.
