Buyers Remorse Insufficient to Change a Settlement Agreement
Claxton Street Apartments, LLC, appealed the order disbursing $81,727.19 in escrowed insurance proceeds to defendant, the City of Detroit, pursuant to a settlement agreement between plaintiff, the City, and defendant, Western World Insurance Company in Claxton Street Apartments, LLC v. Western World Insurance Company and City Of Detroit, No. 350507, State Of Michigan Court Of Appeals (February 18, 2021). Claxton was upset with the terms of a settlement it reached with the defendants five years before.
In November 2012, plaintiff suffered a fire loss at its apartment building in Detroit. In June 2013, plaintiff sued Western World, and received an order appointing an umpire who, in January 2014, awarded plaintiff $376,908.76. Of that amount, Western World had already paid $96,168.85, leaving an outstanding balance of $280,739.91.
Before it paid the balance, Western World received a memorandum from the City stating that Michigan statute MCL 500.2227 required Western World to pay the City 25% of the umpire’s award to ensure that plaintiff’s building, which was in violation of the building code, was repaired or demolished. The parties agreed and the trial court entered a settlement agreement in which the parties agreed that plaintiff’s counsel would hold $81,727.19 in escrow until the March 2013 vandalism claim was resolved, at which time, plaintiff would use the disputed funds to demolish the building.
In May 2018, the City demolished plaintiff’s building for the cost of $86,860. In June 2019, plaintiff filed a motion to reinstate this case, arguing that the settlement agreement was invalid because, at the time of formation, the parties mistakenly believed that MCL 500.2227 applied to the facts of this case, when, for myriad reasons, it did not.
Although plaintiff framed its motion to disburse the escrowed funds as a motion for summary disposition the court considered Plaintiff’s motion as a motion to set aside a settlement agreement. Plaintiff argues that the parties made a mutual mistake regarding the applicability of MCL 500.2227 to the facts of this case.
MCL 500.2227(5) allows the city to take a part of insurance proceeds to fund demolition if the insured does not demolish or repair the building. This case began when plaintiff sued its insurer, Western World, requesting appointment of an umpire to resolve conflicting appraisals of a fire loss.
On April 24, 2014, all parties signed and the trial court entered a settlement order that states, in relevant part: “The disputed funds shall be released to Claxton within 21 days from the date of the entry of this order; B. The disputed funds shall be deposited into an escrow account maintained by Claxton (or its counsel or such other person or entity Claxton may designate) to be used for the demolition of the property; … the City of Detroit, … shall use the disputed funds, … Once the property has been demolished, any portion of the disputed funds not necessary to pay for the costs of demolition may be utilized by Claxton for any purposes it may desire; ….”
As a general rule, settlement agreements are final and cannot be modified. This is because settlements are favored by the law, and therefore will not be set aside except for fraud, mutual mistake, or duress. A mutual mistake is an erroneous belief, which is shared and relied on by both parties, about a material fact that affects the substance of the transaction. A mutual mistake is not a mere error or misunderstanding—it is an extreme mistake that must be so material that it goes to the foundation of the agreement. And, a mutual mistake must be mutual—it is not enough for one party to claim mistake, when the other party was aware of the alleged mistake at issue.
Rescission is not available to relieve a party who has assumed the risk of loss in connection with a mistake. A party may not avoid a contract on the ground of mistake if he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake related but treats his limited knowledge as sufficient, i.e., if he assumes the risk of a mistake.
In this case, there is no reason to believe that the parties were mistaken about any fact or law material to the settlement agreement. Instead of litigating the applicability of MCL 500.2227, plaintiff agreed that it would hold the disputed funds in escrow, use them to demolish the building when the March 2013 vandalism claim was resolved (or earlier if so ordered by the trial court), and keep any funds remaining after demolition.
Five years later, plaintiff filed a motion to set aside the settlement agreement. Every argument regarding the applicability of MCL 500.2227 that plaintiff raised five years after the settlement agreement could have been pursued instead of entering the settlement agreement. When plaintiff entered the settlement agreement, it knowingly assumed the risk that it was forfeiting a valid claim regarding the application of MCL 500.2227 to the facts of this case. Therefore, the trial court did not abuse its discretion in denying plaintiff’s motion to set aside the settlement agreement.
Laches is an affirmative defense based primarily on circumstances that render it inequitable to grant relief to a dilatory plaintiff. The doctrine of laches is founded upon long inaction to assert a right, attended by such intermediate change of conditions as renders it inequitable to enforce the right. The party asserting the defense bears the burden of proving that it was prejudiced by the opposing party’s delay and that it would be inequitable to ignore the prejudice so created.
In this case, 3 years and 10 months, at most, elapsed between plaintiff’s breach of the settlement agreement and the City’s motion to enforce the settlement agreement.
Plaintiff failed to show prejudice in this case. It would be inequitable to allow plaintiff to delay its attempt to avoid the settlement agreement for years, but bar the City from responding by attempting to enforce the agreement. Plaintiff has failed to show that application of laches is appropriate in this case.
There is no good reason to sit on ones rights for 3 to five years, after the city destroys the structure the risk of loss of which was insured, before arguing against the settlement you reached. Plaintiff simply wasted the time of the trial and appellate court and should be happy he was not sanctioned by the court.
© 2021 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
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