Lebanon Count EIT Bureau vs. Bank of Lebanon County and Faren Garcia & Garman, P.C. et al

 

                        IN THE COURT OF COMMON PLEAS OF LEBANON COUNTY

PENNSYLVANIA

 

LEBANON COUNTY EARNED INCOME            :  NO. 2007-01270

TAX BUREAU,                                                          :

                                    Plaintiff                                   :

                                                                                    :

                        v.                                                         :                                                                                                                                                           :

BANK OF LEBANON COUNTY, A                        :

DIVISION OF BLC BANK, N.A.,               :

                                    Defendant                               :

_________________

 

LEBANON COUNTY EARNED INCOME            :  NO. 2008-00990

TAX BUREAU,                                                          :

                                    Plaintiff                                   :

                                                                                    :

                        v.                                                         :                                                                                                                                                           :

FAREN GARCIA & GARMAN, P.C.,                    :

FAREN & ASSOCIATES, P.C.,                   :

STEINER & FAREN P.C. and JAMES       :

F. FAREN,                                                                 :

                                    Defendants                             :

                                                                                    :

                        v.                                                         :

                                                                                    :

BANK OF LEBANON COUNTY, A                        :

DIVISION OF BLC BANK, N.A.,               :

                                    Additional Defendant :

 

 

 

Appearances:

 

Matthew A. Lipman, Esuqire            For Lebanon County Earned Income

McELROY, DEUTSCH,                                     Tax Bureau

MULVANEY & CARPENTER, LLD

 

Michael Kelley,Esquire                     For Bank of Lebanon County

McNEES, WALLACE & NURICK,

LLC                    

 

David L. Pennington, Esquire           For Faren Garcia & Garman, P.C.,

Patrick J. Cosgrove, Esquire                  Faren & Associates, P.C.,

HARVEY, PENNINGTON, LTD.          Steiner & Faren, P.C. and

                                                                              James F. Faren

 

OPINION BY CHARLES, J. , October 3, 2012

 

The term “renege” is defined in the dictionary as:  “to go back on one’s word; to fail to carry out a promise or commitment.”[1]  Among the synonyms for “renege” found in the thesaurus are the following:  “weasel out,” “welsh,” “worm out,” and “back pedal.”[2]  In this case, the Bank of Lebanon County, a division of B.L.C. Bank, N.A. (hereafter “BANK”) reached an agreement to resolve the above-captioned litigation on the eve of trial.  Subsequently, BANK attempted to renege on its settlement agreement.  For reasons that we will set forth herein, we will not permit BANK’s effort to succeed.

 

I.          FACTS AND PROCEDURAL HISTORY

On June 22, 2007, the Lebanon County Earned Income Tax Bureau (hereafter “EIT”) commenced a lawsuit against BANK alleging negligence that enabled EIT’s Executive Director to embezzle hundreds of thousands of dollars.  On May 9, 2008, EIT filed a separate complaint against Faren, Garcia and Garman, Faren and Associates, Steiner and Faren, and James R. Faren (hereafter collectively referred to as “FAREN”) alleging that FAREN negligently performed accounting services that should have revealed the embezzlement from EIT. While both Complaints were filed in EIT’s name, each was filed at the behest of EIT’s bonding agent, Selective Insurance Company.  Selective had paid a claim submitted by EIT as a result of the embezzlement.  Selective then caused a suit to be filed against FAREN and BANK seeking to be recompensed for the amount of the claim it paid.

The cases against BANK and FAREN were consolidated for purposes of discovery and trial.  For over four years, the parties peppered this Court with a multitude of legal arguments that we resolved via hundreds of pages of written Opinions.  Finally, a trial was scheduled to commence on Monday, January 16, 2012 and an unusually large jury panel was summoned.[3]

Counsel for the parties engaged in settlement discussions that culminated on January 13, 2012.  These discussions focused entirely upon the dollar figure that would be needed to resolve the parties’ financial dispute.  At approximately 6:00 p.m. on Friday the 13^th,[4] a settlement was reached whereby EIT would receive $160,000 from BANK and $260,000 from FAREN.  At 6:07 p.m., EIT’s counsel, Matthew Lipman (hereafter “LIPMAN”), confirmed this agreement with an email to counsel for BANK and FAREN that stated:

 

 

Our client has agreed to accept $160,000 from PNC Bank and $260,000 from Faren to settle this matter.  I will call Judge Charles to advise him of the settlement.  Please let us [know] what documents you would like to have executed to memorialize the agreement.

 

(Exh. P-2). Pursuant to his email, LIPMAN contacted the Court to advise that a settlement had been reached.  None of the parties appeared on Monday morning and the Court excused all jurors who had been summoned.

During the negotiations leading up to settlement, BANK was represented by Attorney Charles Young (hereafter “YOUNG”).  At no time during the settlement negotiations did YOUNG demand or even discuss the concept of an indemnity agreement.  Likewise, at no time did YOUNG question EIT’s legal ability or authority to enter into a settlement.  In fact, at no point during the four year pendency of the above-referenced case did YOUNG, BANK or FAREN challenge EIT’s standing or its legitimacy as a legal entity.

On January 14, 2012, FAREN’s lawyer, David Pennington (hereafter “PENNINGTON”) volunteered to draft a Settlement Agreement with input from YOUNG.  Two days later, YOUNG sent an email regarding the settlement agreement that read:

I believe that (1) each member/school district of the Lebanon County Earned Income Tax Bureau (together with selective [Insurance Company]) will need to execute the settlement agreement and (2) any confidentiality agreement would not be enforceable.

 

The Bureau is an unincorporated associated (see Exhibit P1 at 6, bottom, left).  The true plaintiffs are the member/school district acting as trustees ad litem for the association.  See Highway Truck Drivers and Helpers, Local 107 v. Cohen, 187 A.2d 291, 293 (Pa. 1963); Pa.R.C.P. 2152.

 

The school districts are obviously public entities, and they would need to disclose the existence of the settlement in response to any Right to Know Request.  Accordingly, the school districts could not maintain the confidentiality of the parties’ settlement.

 

We would also want all of the school districts’ signatures because the school districts are presently fighting with one another regarding their respective shares of the earned income taxes collected during the years in question.  The dispute is ongoing, and it is important that PNC not get sucked into the middle of that quagmire.

 

Having said all of this, I’m obviously fine with a confidentiality agreement.  I just don’t think it will be enforceable.  Plus, if the school districts’ signatures are a problem, we could negotiate around the issue.  In lieu of all the school districts executing the settlement agreement, we would accept an appropriate indemnity agreement from Selective.

 

(Exh. P-6).

On January 18, 2012, PENNINGTON mailed a proposed Release Agreement that did not contain any sort of indemnity agreement.  One day later, YOUNG sent an email to PENNINGTON and LIPMAN rejecting PENNINGTON’s proposed Release.  On January 20, YOUNG then sent a proposed Settlement Agreement to LIPMAN and PENNINGTON.  This proposed Agreement contained an indemnity provision that read as follows:

Selective hereby agrees to indemnify, defend, and hold PNC and the Faren firm harmless from and against any loss, expense, demand, or cause of action (including reasonable attorney’s fees and court costs) arising, directly or indirectly, from either (1) the falsity or inaccuracy of Selective’s representations and/or warranties contained within this Agreement; or, (2) the claims of any person seeking to share in the Settlement Agreement.

 

(Exh. P-4).

 

On February 6, 2012, LIPMAN communicated his proposed revisions to YOUNG’s proposed Settlement Agreement.  LIPMAN did not propose any changes whatsoever to the above-quoted indemnity clause that was proposed by YOUNG.  (Exh. P-7).

On February 16, 2012, YOUNG sent an email to LIPMAN advising that he was leaving BANK’s law firm and that Michael Kelley (hereafter “KELLEY”) would be taking over as attorney for BANK.  Attached to YOUNG’s email was an additional draft Settlement Agreement.  This draft dramatically changed the indemnity clause to read as follows:

Selective and the Bureau hereby agree to indemnify, defend, and hold PNC and the Faren Firm harmless from and against all claims, demands, lawsuits, expenses, damages, settlements, and/or judgments (including reasonable attorney’s fees and court costs) arising, directly or indirectly, from (1) the falsity or inaccuracy of their representations and/or warranties contained within this Agreement; (2) the claims of any persons seeking to share in the settlement amount; (3) any claims which arise out of or relate in any way, to the opening, maintenance, or closing of the Theft Account; (4) any claims which arise out of or relate in any way, to the auditing services performed by the Faren Firm; (5) any claims which arise out of or relate in any way to the alleged facts pled in the Civil Litigation; and, (6) any and all other claims related in any manner to the Loss.

 

(Exh. P-5).

LIPMAN was concerned about the revisions to the indemnity clause.  LIPMAN described these revisions as creating “an insurance policy for BANK.”  LIPMAN promptly communicated to KELLEY that EIT would not agree to BANK’s proposed revision to the indemnity provision.  In an email dated February 22, 2012, LIPMAN stated:

An indemnity provision whereby my client would indemnify PNC for any and all claims brought by any person or party related in any manner to the Theft Account was not discussed prior to my client agreeing to accept the compromised settlement amount.  In fact, such a provision was not raised until February 16, which was 34 days after we accepted your offer to settle the matter.

 

(Ex. P-8).

When BANK did not respond to LIPMAN’s concerns, representatives from EIT and FAREN signed a Settlement Agreement very similar to the one that had been proposed by YOUNG, LIPMAN forwarded that Agreement to BANK on April 10, 2012.  (Exh. P-1).[5]  BANK refused to sign the Settlement Agreement.  During an acrimonious telephone call between KELLEY and LIPMAN regarding the impasse, KELLEY communicated BANK’s position that EIT could not legally settle the dispute.  Within this conversation, KELLEY threatened to “continue” the litigation and join all school districts as individual parties to the litigation.

In April of 2012, counsel communicated with the court to advise that a problem had arisen with respect to consummation of the parties’ settlement.  Rather than require the filing of motions, we directed that the parties appear at a conference on May 7, 2012 in order to discuss the matter.  We met with counsel on May 7, 2012 and immediately recognized that a factual hearing would be necessary to resolve the question of whether and under what terms a settlement existed.  Everyone recognized that counsel involved in the settlement negotiations would have to provide testimony.  All parties therefore agreed that another lawyer from each firm could serve as an advocate and that those who were directly involved in the settlement discussions would be required to testify as witnesses.

We conducted a factual hearing on August 15, 2012.  At that hearing, LIPMAN, PENNINGTON, YOUNG, and KELLEY all provided testimony.  Everyone agreed that an agreement requiring payment of $420,000 was reached on January 13, 2012.  Everyone also concurred that the agreement did not include any condition relating to indemnity of BANK by EIT.  Similarly, all parties acknowledged the authenticity of the documentation referenced in preceding paragraphs.  Still, the parties placed a starkly different “spin” on the events that occurred on January 13, 2012 and thereafter.

LIPMAN and PENNINGTON testified emphatically that a final enforceable agreement was reached to settle the above-referenced case.  Both LIPMAN and PENNINGTON acknowledged that BANK was entitled to indemnity to protect against misrepresentations regarding EIT’s authority to settle.  Both LIPMAN and PENNINGTON considered the indemnity agreement as originally proposed by YOUNG on January 19, 2012 (Exh. P4) to be a normal, standard provision of a release agreement.  On the other hand, the additions to the indemnity agreement proposed after KELLEY entered the picture (Exh. P-5) were decried by both PENNINGTON and LIPMAN.  In fact, PENNINGTON testified that KELLEY’s proposed indemnity agreement far exceeded what was standard to effectuate a settlement.[6]  He further testified that he had “never seen such a clause in 56 years of practice.”  Both LIPMAN and PENNINGTON testified that Exhibit P-1 represented the agreement that the parties reached to end the above-captioned litigation.

YOUNG testified that he was assigned by his firm as lead counsel in the above-referenced matter.  YOUNG acknowledged that when the settlement was reached on January 13, he did not communicate anything regarding an indemnity agreement.  He also acknowledged that he knew LIPMAN was planning to communicate to the Court that the above-referenced matter had been resolved.  YOUNG at no time told LIPMAN to refrain from communicating to the Court, and did not undertake any action himself to communicate with the Court that a settlement had not been reached.  Despite these facts, YOUNG testified that he did not consider a “settlement” of the above-referenced case to have been reached because “there were material terms that were open.”

During his testimony, YOUNG questioned the legitimacy of EIT as a party to the above-referenced litigation.  He referred to EIT as a “ghost.”  He stated:  “It does not exist.  It is an unincorporated association.  The true parties in interest are the municipalities and school districts for which it worked.”[7]   During cross-examination, YOUNG admitted that EIT had a Board of Directors, was governed by by-laws, conducted regular meetings, maintained minutes, and kept financial records.   In addition, YOUNG acknowledged that EIT entered into contracts in its own name with third parties, including FAREN and BANK itself.  He agreed with the testimony of PENNINGTON and LIPMAN that throughout the four year history of the above-referenced case, BANK had never challenged standing or the legitimacy of EIT as a party plaintiff.

Both sides have filed briefs setting forth their perspective positions.  We were particularly interested in the position proffered by BANK.  At page four of its brief, BANK set forth the following:

[BANK’s] position is that an appropriate indemnity provision was contemplated at the outset of the proposed Settlement Agreement and is required for there to be a meeting of the minds on essential terms of this settlement agreement.  Because such a meeting has not occurred, there is no valid and enforceable settlement agreement…

 

[BANK] requests that the Court enter an order finding that no valid or binding settlement agreement has been entered into between the parties.

 

(BANK’s Brief at pg. 4).  Essentially, both FAREN and EIT take the position that a settlement was reached.  They have asked us to enforce the settlement and award attorney’s fees that they incurred in order to pursue enforcement.  BANK asks us to send the above-referenced case backward for a trial on its merits.

II.        DISCUSSION

We will begin our discussion by setting forth the reasons why we conclude that an enforceable settlement was reached by the parties on January 13, 2012.  Thereafter, we will separately address BANK’s arguments involving the legitimacy of EIT as a party plaintiff and the appropriateness of a broad indemnity clause.  We will then conclude by addressing the claims of EIT and FAREN for counsel fees.

A.        EXISTENCE OF ENFORCEABLE SETTLEMENT

When parties resolve litigation, there is no requirement that every “t” be crossed and every “i” be dotted.  “[A]n agreement is binding if the parties come to a meeting of the minds on all essential terms, even if they expect the agreement to be reduced to writing but that formality does not take place.”  Commerce Bank v. First Union National Bank, 911 A.2d 133, 147 (Pa.Super. 2006).  An unsuccessful effort by the parties to reduce the terms of a settlement to writing does not prohibit a court from enforcing the essential terms of the settlement.  Mazella v. Koken, 739 A.2d 531, 536 (Pa. 1999).  “[C]ourts routinely enforce settlement agreements even where the precise wording of a release has not been finalized.”  Mastroni-Mucker v. Allstate Insurance Company, 976 A.2d 510, 522 n.5 (Pa.Super. 2009).

In this case, litigation was heading to trial, the outcome of which was uncertain.  Including interest, the amount that EIT would have sought at trial would likely have exceeded one million dollars.  To avoid the risk of an adverse jury verdict, BANK offered EIT $160,000.  In legal terms, BANK communicated an offer of compromise.  Through his January 13, 2012 email, LIPMAN accepted this offer on behalf of EIT, thus consummating the settlement.

At no time did BANK place any conditions upon the settlement.  BANK could easily have said:  “We will pay $160,000 to settle this case if you will agree to a broad indemnity agreement” or “we will pay $160,000 if you will agree to obtain the signatures of all municipalities and school districts for whom EIT works.”  No such conditions were placed upon the settlement.  In simple terms, a settlement agreement was reached whereby BANK would pay and EIT would accept less than what EIT would have asked a jury to award.

In Wolf v. Consolidated Rail Corporation, 840 A.2d 1004 (Pa.Super. 2003), the parties similarly entered into a settlement to resolve litigation.  The defendant thereafter forwarded a release to the plaintiff that contained additional terms that had not been previously discussed by the parties.  The plaintiff refused to sign the release agreement.  Despite the fact that a written document was not signed, the Superior Court held that the parties’ verbal agreement was enforceable.  The court stated:  “The signing of the release was not made a condition of the settlement and the tender of a release did not reopen the agreement or make its execution a condition to the settlement itself.”  Id. at 1007.

As in Wolf, the parties to this litigation clearly reached an agreement as to the amount of money that would be paid to settle the pending uncertain litigation.  That everyone – including BANK – considered the deal to be done is evident from the following facts:

(1)        The email sent by LIPMAN to confirm the settlement;

(2)        The absence of any response that could have characterized LIPMAN’s email as anything other than a final deal;

(3)        The fact that the parties communicated to the court that a settlement had been reached and no trial would be necessary; and

(4)        The fact that none of the parties appeared for jury selection on Monday morning.

We conclude, without hesitation, that an enforceable contract was made whereby EIT would cease pursuit of its lawsuit in return for FAREN’s payment of $260,000 and BANK’s payment of $160,000.  Contrary to the testimony of YOUNG, we conclude that there were no “open material terms” that needed to be resolved in order to consummate the settlement.  Specifically, we conclude that BANK never placed any condition upon settlement that would preclude us from enforcing the parties’ deal.  Accordingly, we hold that the parties’ settlement agreement of January 13, 2012 was and remains binding and enforceable upon all parties to the above-referenced litigation.

 

 

B.        STATUS OF EIT

EIT is an entity that does not fall neatly within any particular classification.  It is not a corporation and it is not a governmental entity, but neither does it fall within the classic definition of a partnership or an unincorporated association.  The elected representatives of each municipality utilizing EIT’s services voted to create it via a duly enacted ordinance.  (See Exh. PNC-13).  Regulations were created by ordinance that governed EIT and authorized its ability to operate from a financial standpoint.  EIT possessed a Board of Directors.  It conducted regular meetings for which minutes were created.  It possessed its own financial records.  It even contracted with third parties, including FAREN and BANK.  Whatever its classification, we disagree with YOUNG’s effort to characterize EIT as a “ghost” or “non-entity.”  Moreover, it is not necessary for us to specifically analyze EIT’s official status because BANK waived any ability it may have had to challenge EIT’s capacity to sue.

After EIT filed its Complaint in 2007, BANK filed Preliminary Objections.  After dozens of depositions and extensive discovery of documentation, BANK filed a Motion for Summary Judgment.  When we denied BANK’s summary judgment as to all claims, we conducted a pre-trial conference.  Thereafter, the parties proceeded to mediation and embarked upon private settlement negotiations.  At no point during any of the above proceedings did BANK question EIT’s standing, nor did BANK question the legitimacy of EIT’s status as a party plaintiff.[8]

Under Pennsylvania law, a defendant possesses the ability to challenge a plaintiff’s capacity to sue.  Pa.R.C.P. 1028 permits the filing of a preliminary objection in order to challenge a “lack of capacity to sue.”  Our Commonwealth Court has held “the issue of standing is not jurisdictional and failure to raise it in preliminary objections waives the issue in future proceedings.”  Bullock v. County of Lycoming, 859 A.2d 518, 523 (Pa.Cmwlth. 2004) (citing Society Created to Reduce Urban Blight (SCRUB) v. Zoning Board of Philadelphia, 682 A.2d 1 (Pa.Cmwlth. 1996)).  See also Whitt v. Commonwealth, Department of Banking, 425 A.2d 374 (Pa. 1981) (“Whether [defendant’s claim regarding the status of plaintiff] is to be classified as ‘standing to sue’ or ‘capacity to sue,’ in either instance it is not a jurisdictional question and is therefore an issue which is waived.” Id. at 376-77).  In this case, BANK did not file Preliminary Objections challenging EIT’s status or capacity to sue.  Ergo, BANK waived the argument.

In addition, Pennsylvania recognizes the doctrine of judicial estoppel.  Judicial estoppel prevents a party from assuming a position in litigation that is inconsistent with a position that was proffered previously by the same party.  See Trowbridge v. Scranton Artificial Limb Company, 747 A.2d 862, 864 (Pa. 2000).  The purpose of judicial estoppel is to uphold the integrity of the courts by preventing litigants from “playing fast and loose” with the judicial system by changing positions to suit their legal needs.  In re Pittsburgh Citizen Police Review Board, 36 A.3d 631, 638 (Pa.Cmwlth. 2011).  The doctrine depends upon the relationship between the party and the tribunal rather than upon the relationship between the parties themselves.  In re Pittsburgh Citizen Police Review Board, supra.  In this case, the undersigned jurist expended well over one hundred hours to analyze, decide, and articulate written opinions regarding a multitude of issues presented by the parties during the pendency of their litigation.  The Lebanon County Court summoned an unusually large number of jurors and was prepared to afford the parties with over one week to try their case in January of 2012.  We consider BANK’s efforts to settle and then disavow the settlement based upon a lack of capacity to sue argument that was never previously raised to be conduct that dramatically impacted the Lebanon County court system.  In addition to all the other reasons why BANK’s belated challenge to EIT’s status cannot stand, we consider BANK’s efforts to be barred by the doctrine of judicial estoppel.

We disagree with BANK’s characterization of EIT as a “ghost” that lacked standing to settle the above-referenced case.  We conclude that if BANK did have a legitimate argument regarding EIT’s capacity or standing, that argument was waived in this case.  Finally, we conclude that the doctrine of judicial estoppel precludes BANK from raising objections to EIT’s status or its own negotiated settlement with EIT.  For all of the above reasons, we categorically reject BANK’s effort to renege on its settlement based upon the nature of EIT as an entity.

C.        NEED FOR AN INDEMNITY AGREEMENT

As noted above, none of the parties negotiated the need for an indemnity agreement as an essential term of their settlement.  Recognizing this, BANK argues that the requirement of an indemnity agreement must be implied because such an agreement is necessary in order to ensure that BANK never pays anything more than the specified settlement amount.

Initially, we note that both EIT and FAREN recognize the legitimacy of BANK’s request for limited indemnity.  Both LIPMAN and PENNINGTON acknowledged BANK’s need for an indemnity provision that would protect BANK from any loss stemming from a misrepresentation by EIT about its authority to settle the above-referenced litigation.  The problem is not the concept of indemnity for BANK; the problem is the nature and extent of the indemnity that is now sought by BANK.

Without question, the indemnity provision that BANK ultimately demanded was extremely broad.  LIPMAN characterized the broad indemnity as akin to an “insurance policy for BANK.”  PENNINGTON testified that he had never seen such a broad indemnity provision in fifty-six years of practicing law.  Neither LIPMAN nor PENNINGTON considered BANK’s broad proffered indemnity clause to be “standard.”  We agree.  We find the testimony of PENNINGTON and LIPMAN to be credible.  We find the broad indemnity provision proffered by BANK within Exhibit P-5 to be well beyond the type of indemnity clause that a defendant could reasonably expect when settling contested litigation.

Had BANK desired the type of unusually broad indemnity that it ultimately insisted upon, it should have made the inclusion of such indemnity a part of its pre-settlement negotiations.  It did not.  Because we agree with LIPMAN and PENNINGTON that the extremely broad indemnity provision found in Exhibit P-5 constitutes a new material term of the agreement that had not been previously requested or negotiated, we reject it as an essential or implied term of the parties’ settlement agreement.  Instead, we declare that Exhibit P-1 represents the essential terms of the parties’ settlement agreement and that BANK cannot insist upon the inclusion of its extremely broad indemnity provision under the guise of characterizing it as a “standard,” “normal,” “implied” or “presumed” provision.

D.        REQUEST FOR COUNSEL FEES

Pennsylvania follows the so-called “American rule” which provides that parties to litigation are responsible for their own counsel fees “unless otherwise provided by statutory authority, agreement of the parties, or some other recognized exception.”  Mrozek v. Eiter, 805 A.2d 535, 538 (Pa.Super. 2002) (citing Hart v. O’Malley, 781 A.2d 1211, 1216 (Pa.Super. 2001)).  Pennsylvania’s version of the “American rule” has been codified by statute.  The general rule outlined above is set forth in the Judiciary Code at 42 Pa.C.S.A. § 1726, which states that attorney’s fees are not generally to be considered an item of taxable costs.  However, Pennsylvania’s General Assembly has created exceptions to the American rule.

42 Pa.C.S.A. § 2503 is entitled “Right of Participants to Receive Counsel Fees.”  This section authorizes an award of counsel fees “as a sanction against another participant for dilatory, obdurate or vexatious conduct during the pendency of a matter.”  42 Pa.C.S.A. § 2503(7).

Under Pennsylvania law, a party acts in a vexatious matter if he acts without legal or factual grounds or only to cause annoyance to the other party.   Scalia v. Erie Insurance Exchange, 878 A.2d 114, 116 (Pa.Super. 2005).  Obdurate conduct has been defined as “unyielding” or “stubborn.”  Scalia, supra.  “Arbitrary” conduct is predicated upon “random or convenient selection or choice” rather than rationality.  Maurice A. Nernberg & Associates v. Coyne, 920 A.2d 967, 972 (Pa.Cmwlth. 2007).  By definition, when there is no basis in law or fact for a party’s position, said position can be deemed to be “arbitrary.”  Thunberg v. Strause, 682 A.2d 295, 301 (Pa. 1996).

In 2000, the Allegheny Court of Common Pleas was asked to interpret Judiciary Code Section 2503 within the context of a Motion to Enforce Settlement.  In Testa v. Williams, 55 Pa. D. & C. 4^th 216 (2000), the parties entered into a settlement relating to real estate.  Thereafter, another attorney from the defendant’s counsel’s law firm became involved.   This attorney had not participated in the prior settlement negotiations, but he nonetheless attempted to change the deal.  The court stated:

The court concludes that the belated letter from the other attorney in defendants’ counsel’s office, demanding various changes to the mylar the day before the application for the subdivision was to be presented to the borough counsel, created unjustified and vexatious delay in the execution of the settlement and resulted in extra expense to plaintiff who had to seek court intervention because of defendants’ counsel’s imposition of conditions [that were] apparently different from those agreed to in January 2000.

 

This may not be “bad faith” on the part of defendants’ counsel, but it certainly reflects his confusion of the subdivision approval process with the final closing of the sale.  This confusion caused great inconvenience to the court and unnecessary expense to plaintiff.  It clearly constitutes “dilatory, obdurate and vexatious conduct during the pendency of [the instant matter].”  Section 2503(7) applies.

 

Id. at 224.

Also relevant to our inquiry is Pa.R.C.P. 229.1(c), which requires that settlement funds be delivered by the defendant to the plaintiff within twenty days from receipt of an executed release.  Rule 229.1(g) states:

If the court finds that the defendant violated subdivision (c) of this rule and that there is no material dispute as to the terms of the settlement or the terms of the release, the court shall impose sanctions in the form of interest calculated at the rate equal to the prime rate as listed in the first edition of the Wall Street Journal published for each calendar year for which the interest is awarded, plus one percent, not compounded, running from the twenty-first day to the date of delivery of the settlement funds, together with reasonable attorneys’ fees incurred in the preparation of the affidavit.

 

Pa.R.C.P. 229.1(g).

When a dispute is presented to us, we always review it with a presumption that while the parties may disagree, each is acting in good faith.  In thirteen years on the bench, this jurist has only awarded counsel fees under 42 Pa.C.S.A. § 2503 twice.  Today will mark the third time that we deem an award of counsel fees to be justified under § 2503 of the Judiciary Code.

BANK’s stated concern about EIT’s ability to settle and its demand for an excessively broad indemnity clause do not syncopate.  From the outset of this litigation, BANK knew that EIT’s bonding agent, Selective Insurance Company, had already paid EIT and that all of EIT’s governmental agency members had received the benefit of Selective’s payment.  BANK knew that Selective had hired LIPMAN to pursue a subrogation claim in EIT’s name in order to recoup the amounts that Selective had already paid.  Given these facts, BANK had to realize that an objection to the settlement by any municipality or school district would be extremely unlikely.  Moreover, BANK also knew that EIT had agreed to YOUNG’s initially proposed indemnity clause that provided protection in the event that EIT misrepresented any facts related to the authority of EIT

 

 

to settle or the authority of Selective to act as subrogee of EIT.  Why BANK would require anything more baffled both LIPMAN and PENNINGTON.[9]  Quite frankly, BANK’s conduct caused us to question its motives.

We found the timing of BANK’s insistence on broad indemnity to be illuminating.  When the settlement agreement was initially proposed, YOUNG added an indemnity provision that protected BANK from harm resulting from any misrepresentations by EIT regarding its authority or status.  This was the type of indemnity agreement that both PENNINGTON and LIPMAN expected.  Neither objected to it or proposed any modifications of it.  When proposed, we are confident that YOUNG believed his client wished to resolve the litigation and had every intention to consummate the agreement by paying the necessary funds.

 

 

After February 16, things changed.  KELLEY was inserted and YOUNG was removed as BANK’s counsel.[10]  Since February 16, BANK’s focus has shifted from language negotiation to agreement repudiation.[11]   While we have no direct testimony of what occurred between BANK and BANK’s law firm, we conclude based upon circumstantial evidence that the following occurred:

(1)        While BANK was contemplating issues pertaining to the settlement, it realized that YOUNG had missed a potential argument regarding EIT’s standing and/or capacity to sue.

(2)        BANK complained about YOUNG’s handling of the case.  As a result, YOUNG’s law firm decided to appoint KELLEY to work on the case.

(3)        BANK insisted upon an onerous indemnity clause with the hope that it would sabotage the settlement so that the litigation could be returned to the point where its capacity to sue argument could be pursued.

Whether or not our circumstantial conclusions are correct, the following is self-evident:

(1)        BANK repudiated its own lawyer’s effort to employ a reasonable indemnity clause in order to finalize the parties’ agreement.

(2)        BANK then compounded its inconsistent behavior by stubbornly refusing to alter the terms of its new and unreasonably broad indemnity clause.

(3)        When EIT refused to acquiesce to an onerous indemnity clause, BANK sought to repudiate the financial settlement that EIT accepted in good faith.

(4)        Even worse, BANK’s new attorney sought to gain leverage by threatening to join various school districts as parties to the above-referenced litigation.

It is with some degree of regret and a bit of consternation that we are forced to declare BANK’s conduct following February 16 to be arbitrary, vexatious, and obdurate.  To the extent necessary, we declare BANK’s inclusion of the broad indemnity agreement and its stubborn refusal to reconsider its inclusion to constitute bad faith.  As such, we will be awarding counsel fees that both EIT and FAREN were forced to expend unnecessarily as a result of BANK’s ill-considered conduct.

In addition to the above, we conclude that EIT and FAREN proffered a settlement agreement and mutual release that reflected all essential terms of the parties’ agreement to BANK on April 10, 2012.  As a result, under Pa.R.C.P. 229.1, we will award interest to EIT commencing on May 1, 2012.

We cannot award a specific amount of attorney’s fees or interest without a factual record.  Both EIT and FAREN have appended invoices from counsel to their various submissions.  However, these invoices have not been subject to cross-examination and we will not accept the amounts set forth therein without a factual hearing.  Therefore, we will be establishing a factual hearing to determine an amount of counsel fees to be awarded to both FAREN and EIT as a result of BANK’s conduct as proscribed by 42 Pa.C.S.A. § 2503.   At that hearing, we will also address the issue of interest and will receive information regarding the prime rate of interest in order to calculate what is owed.

 

III.       CONCLUSION

At the outset of this opinion, we listed a series of somewhat incendiary synonyms for the word “renege.”  We did so to emphasize that when parties reach agreements, they should stand behind them regardless of any doubts or second thoughts that may subsequently arise.  “Reneging” on a deal is not an appropriate tactic.  Yet it is exactly the tactic BANK has attempted to employ in this case.

We realize that we easily could have written a “softer” opinion that focused upon a dispute over language in a release agreement instead of on the effort by a party to renege on a settlement.  Unfortunately, our honest appraisal of the evidence and testimony leads us to conclude that this dispute arose for reasons that transcend a mere disagreement over the terms of a release agreement.  As is evident from our decision and the language we have chosen to utilize, we are not pleased with the conduct of BANK following the parties’ eleventh hour settlement of the above-referenced case.  In simple terms, our job requires us to call this dispute as we see it.  What we have seen is not at all complimentary to BANK.

We will be issuing a Court Order today that declares the parties’ January 13, 2012 settlement to be final and enforceable.  In so doing, we reject BANK’s belated effort to challenge the legitimacy of EIT’s status as a plaintiff.  We likewise reject BANK’s argument that its excessively broad indemnity clause should be considered “standard,” “normal,” “implied” or “essential.”  Finally, we conclude that BANK’s conduct warrants an award of counsel fees and we will determine an appropriate amount at a hearing that we will schedule as promptly as practical.   The attached Court Order will effectuate all of the above conclusions.