Berry v. Javitch, Block & Rathbone, L.L.P. , 127 Ohio St. 3d 480 ( 2010 )

[Cite as Berry v. Javitch, Block & Rathbone, L.L.P., 127 Ohio St. 3d 480, 2010-Ohio-5772.]
BERRY ET AL., APPELLEES, v. JAVITCH, BLOCK & RATHBONE, L.L.P.,
APPELLANT.
[Cite as Berry v. Javitch, Block & Rathbone, L.L.P.,
127 Ohio St. 3d 480, 2010-Ohio-5772.]
When parties to a tort claim have executed a settlement agreement and consent
judgment entry, one party may not subsequently institute a separate cause
of action for fraud in the inducement of the settlement agreement without
seeking relief from the consent judgment and rescinding the settlement
agreement.
(No. 2009-1507 — Submitted May 11, 2010 — Decided December 2, 2010.)
APPEAL from the Court of Appeals for Cuyahoga County,
No. 91723, 182 Ohio App. 3d 795, 2009-Ohio-3067.
__________________
LUNDBERG STRATTON, J.
{¶ 1} Today this court must examine the following issue: When parties
to a tort claim have executed a settlement agreement and consent judgment entry,
may one party subsequently institute a separate cause of action for fraud in the
inducement of the settlement agreement without seeking relief from the consent
judgment and rescinding the settlement agreement? We answer in the negative
and, therefore, reverse the judgment of the court of appeals.
Facts
{¶ 2} In 2000, Robert and Diane Berry, plaintiffs-appellees, filed a legal
malpractice action against Javitch, Block & Rathbone, L.L.P., defendant-appellant
(“Javitch”). One of the Berrys’ interrogatories in that case requested “the name of
insurer, type of policy/policies, policy number/numbers, and limits of coverage of
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each and every insurance policy that may cover your alleged liability in this
action, including umbrella coverage.”
{¶ 3} Javitch responded:
{¶ 4} “Legion Insurance Company
{¶ 5} “Claims made policy 10-12-99 through 10-12-00
{¶ 6} “Policy No. PL 106-572-42
{¶ 7} “Limits: $1 million per claim/$3 million aggregate”
{¶ 8} A few months later, Javitch supplemented its response to the
Berrys’ interrogatory, amending its answer to state as follows: “Since providing
our original answer to this Interrogatory we have been advised by representatives
of Legion Insurance Company that there is no coverage for plaintiffs’ claim.”
{¶ 9} On December 21, 2001, Javitch and the Berrys negotiated a
settlement agreement in which Javitch consented to judgment in the amount of
$195,000, with Javitch paying $65,000 by February 2002. The Berrys, who were
represented by counsel, were to dismiss with prejudice all of their claims against
the individual attorneys in the lawsuit and provide a full release of all claims
against them. The dismissal was to be held and not filed until Javitch completed
the installment payments totaling $65,000 or until a settlement was agreed to with
Legion Insurance for settlement of this case, or at such earlier time as the parties
may agree. In addition, Javitch was to prepare the dismissal with prejudice of the
counterclaim they had asserted against the Berrys. The dismissal was to be held
and not filed with the court until the Berrys filed their notice of dismissal of their
claims against Javitch.
{¶ 10} Following execution of the agreement, Javitch was to attempt to
persuade Legion to satisfy the $195,000 judgment. After 90 days, if Javitch was
unsuccessful, the Berrys were permitted to attempt to collect the $130,000
balance ($195,000 judgment, less $65,000 paid by Javitch) from Legion. The
agreement stated that “under no circumstances will Javitch * * * pay Plaintiffs
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under this agreement or under any judgment on the subject claim more than a total
of $65,000.” Javitch was unable to persuade Legion to pay the balance of the
settlement, and the parties executed and filed the consent judgment on April 1,
2002. The Berrys were also unsuccessful in their attempt to collect from Legion.
{¶ 11} In 2006, the Berrys filed the current action against Javitch, alleging
fraudulent misrepresentation, fraudulent concealment, gross negligent
misrepresentation, and gross negligent concealment. The Berrys’ claims stemmed
from their allegation that Javitch did not disclose a claims-made policy from
Clarendon National Insurance Company (“Clarendon”) in effect from October 12,
1998, to October 12, 1999. The time for reporting a claim under the Clarendon
policy expired October 22, 1999. The Berrys alleged that the first time that they
became aware of the Clarendon policy was in July 2004. The Berrys alleged that
Javitch’s interrogatory responses (in which it failed to identify the Clarendon
policy) were knowingly false and/or incomplete and were made intentionally to
mislead the Berrys and that the Berrys ultimately had relied on those responses to
their detriment by entering into the settlement agreement.
{¶ 12} Javitch filed a motion for summary judgment, arguing that the
Berrys’ claims were barred by the one-year limitations period for relief from
judgment set forth in Civ.R. 60(B)(3), that the Berrys could not elect to affirm the
settlement agreement and consent judgment and then separately sue for fraud, and
that the Berrys could not establish the requisite elements of their claims. Javitch
alleged that it had not disclosed the Clarendon policy, because by the policy’s
express language, the time for reporting a claim expired October 22, 1999, and no
claim had been made during the effective dates of the policy. Because the time
for reporting claims to trigger the Clarendon policy had long since expired, even
if Javitch had identified the policy in its answers to the interrogatory and the
Berrys’ counsel had immediately used that information, Javitch alleged that
Clarendon would have owed neither coverage nor an indemnity obligation to
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Javitch or the Berrys. The trial court granted Javitch’s summary judgment motion
without opinion.
{¶ 13} On appeal, the Court of Appeals for Cuyahoga County, relying on
Frederickson v. Nye (1924), 110 Ohio St. 459, 144 N.E. 299, reversed the
judgment of the trial court and remanded the cause for further proceedings,
finding that Civ.R. 60(B)(3) does not apply, because the Berrys could and did
choose to bring a separate action for fraud without rescinding the settlement
agreement and seeking relief from the consent judgment entry. The court also
held that a material issue of fact remains as to whether Javitch purposefully
withheld the existence of the Clarendon policy.
{¶ 14} The cause is now before this court pursuant to the acceptance of a
discretionary appeal.
Law and Analysis
{¶ 15} The parties executed a settlement agreement in 2001 that stated:
{¶ 16} “Plaintiffs will not release Javitch * * * with respect to the amount
of the consent judgment, until such time as that judgment is satisfied by Legion
Insurance Company or the claim against Legion Insurance Company for that
judgment is otherwise resolved. The release will include, inter alia, an
acknowledgement that the settlement constitutes a resolution of disputed claims.”
{¶ 17} In spite of the language of the settlement agreement, the court of
appeals concluded that the Berrys could choose to bring a separate action for
fraud without moving for relief from the consent judgment entry, holding that
Civ.R. 60(B)(3) does not apply, because the Berrys were not looking to rescind
the settlement agreement, but rather were suing for damages caused by Javitch’s
alleged fraud. On appeal, Javitch argues that the Berrys failed to timely allege
fraud pursuant to the one-year limitations period set forth in Civ.R. 60(B)(3). We
agree with Javitch.
Release
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{¶ 18} The parties disagree as to whether there was a valid release in this
case. The Berrys argue that they did not release Javitch, because the entire
settlement amount of $195,000 was never paid. Javitch argues that the Berrys did
knowingly and voluntarily release Javitch because the Berrys, while represented
by counsel, entered into the settlement agreement when they knew that Legion
was denying coverage. Moreover, the Berrys had opposed Javitch’s attempts to
obtain a stay of the lawsuit so that it could get a declaration from Legion
concerning coverage. The Berrys, apparently under advisement of counsel,
believed a settlement to be in their best interest. Javitch argues that the claim
against Legion Insurance Company was “otherwise resolved,” which under the
terms of the settlement agreement should have triggered the Berrys’ release of
Javitch, and that by signing the settlement agreement, the Berrys acknowledged
and agreed at paragraph 11 of the agreement: “It is expressly understood that
under no circumstances will Javitch * * * pay Plaintiffs under this agreement or
under any judgment on the subject claim more than a total of $65,000, plus
penalties and attorneys’ fees, as set forth in paragraph 10.”
{¶ 19} While there is no evidence that the Berrys executed a release of
Javitch, the parties entered into a valid settlement agreement. Both parties
performed as promised in the agreement. As required, Javitch paid $65,000 to the
Berrys and attempted to persuade its insurance carrier to provide coverage for the
full $195,000 consent judgment. When Legion denied coverage, the Berrys
pursued a claim against both Legion and Clarendon. Both claims were denied.
Although Legion did not satisfy the remainder of the consent judgment, the claim
against Legion Insurance Company for that judgment was “otherwise resolved.”
Finally, the trial court dismissed the case pursuant to the agreement, thereby
dismissing all claims and counterclaims of the parties.
{¶ 20} The parties performed all conditions of the settlement agreement,
except that the Berrys did not provide a full release of all claims as required by
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the settlement agreement once all the terms and considerations had been met.
Instead, the Berrys chose to pursue this action against Javitch, ironically now
claiming that there was no valid release. However, we conclude that the parties’
actions and fulfillment of the settlement agreement constituted a release of all
claims.
Fraud in the Inducement Action
{¶ 21} This court has long held that an action for fraud in the inducement
of a settlement of a tort claim is prohibited unless the plaintiff tenders back the
consideration received and rescinds the release. However, the court of appeals
arrived at a different result, relying on Frederickson v. Nye, 110 Ohio St. 459, 144
N.E. 299, wherein we addressed the issue of election of remedies and held:
“Where the remedies afforded are inconsistent, it is the election of one that bars
the other; where they are consistent, it is the satisfaction which operates as a bar.
It is the inconsistency of the demands that makes the election of one remedial
right an estoppel against the assertion of the other, and not the fact that the forms
of action are different.” Id. at 466. Citing Frederickson, the court of appeals
concluded that the limitation in Civ.R. 60(B) requiring relief to be sought within
one year was inapplicable, and it held that a material issue of fact still remained as
to whether Javitch purposefully withheld the existence of the Clarendon policy.
{¶ 22} We disagree with the court of appeals’ determination that
Frederickson applies to these facts. For the doctrine of election of remedies to
apply, at least two remedies must exist at the same time. In this case, however,
the remedies do not exist at the same time. In order for one remedy to exist, i.e.,
the separate action for fraud, the plaintiffs must rescind the other remedy, i.e., the
settlement agreement.
{¶ 23} In reversing the judgment of the trial court, the court of appeals
ignored a long line of contrary precedent. In Picklesimer v. Baltimore & O.R. Co.
(1949), 151 Ohio St. 1, 38 Ohio Op. 477, 84 N.E.2d 214, we distinguished between a
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release that is void and one that is voidable: “In the settlement of a tort claim for
damages arising from personal injuries, a release obtained by fraud in the factum
is void, and the claimant may maintain a subsequent action without returning or
tendering the consideration he received. In such a settlement a release obtained
by fraud in the inducement is voidable, and a subsequent action may not be
maintained by the claimant without returning or tendering the consideration he
received. In such a settlement a misrepresentation as to the nature or extent of the
injuries constitutes fraud in the inducement; and the fact that the claimant asks
damages for such fraud does not relieve him of the obligation to return or tender
the consideration he received.” (Emphasis added.) Id., paragraphs one, two, and
three of the syllabus.
{¶ 24} We distinguished between a release that is void and one that is
voidable, noting that an agreement is void when a party has been fraudulently
prevented from knowing that he or she has signed a release or its contents, and is
merely voidable when the party alleges fraud or misrepresentation as to the facts
inducing the party to settle. Id. at 5. The Berrys do not argue that they were
prevented from knowing that they signed a settlement agreement or from knowing
the contents of the settlement agreement. Rather, the Berrys argue that Javitch
fraudulently misrepresented facts to induce them to settle, making this a fraud in
the inducement claim.
{¶ 25} In Shallenberger v. Motorists Mut. Ins. Co. (1958), 167 Ohio St.
494, 5 O.O.2d 173, 150 N.E.2d 295, we followed Picklesimer. The plaintiff in
Shallenberger filed an action for fraud related to representations by the defendant
that she alleged had induced her to sign a release of claims for personal injuries
and damage to personal property arising from an automobile accident. This court
held:
{¶ 26} “[T]he releasor has merely agreed for a consideration not to
enforce his tort claim.
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{¶ 27} “To allow the releasor to recover more than anyone agreed to give
for his tort claim, because the releasor was induced by fraud * * *, is to permit the
releasor in effect to enforce part of the tort claim that he agreed for a
consideration not to enforce. * * * If he desires to do that, he must set aside, not
affirm, his agreement not to sue * * *.” Id. at 501-502, 5 O.O.2d 173, 150 N.E.2d
295, citing Picklesimer, 151 Ohio St. 1, 38 Ohio Op. 477, 84 N.E.2d 214.
{¶ 28} Finally, in Haller v. Borror Corp. (1990), 50 Ohio St. 3d 10, 552
N.E.2d 207, a case involving a breach of contract of employment claim, we
further reaffirmed the principles previously espoused in Picklesimer and
Shallenberger: “A releasor may not attack the validity of a release for fraud in the
inducement unless he first tenders back the consideration he received for making
the release.” Haller, paragraph two of the syllabus.
{¶ 29} As the dissenting appellate judge in this case noted, when the
Berrys settled with Javitch, they were keenly aware that Legion was denying
coverage because the claim was outside the policy’s time frame. Nonetheless, the
Berrys agreed to accept $65,000 from Javitch without the possibility of recovering
the balance from Javitch if Legion continued to deny coverage. The dissenter
argues that this “proves that the Berrys were eager to settle for whatever Javitch
could provide, regardless of coverage from an insurance carrier.” Berry v.
Javitch, Block & Rathbone, L.L.P., 182 Ohio App. 3d 795, 2009-Ohio-3067, 915
N.E.2d 382, ¶ 32. We agree.
{¶ 30} Applying the doctrine of election of remedies from Frederickson
in the context of this settlement agreement and consent judgment would permit
the Berrys to enforce part of a tort claim that it accepted consideration not to
enforce. See Shallenberger, 167 Ohio St. at 501, 5 O.O.2d 173, 150 N.E.2d 295.
The Berrys cannot be permitted to retain the benefit of the settlement agreement
and at the same time attack the validity of that agreement. The appellate court’s
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judgment not only ignores long-standing precedent of this court but also
endangers the finality of judgments.
Conclusion
{¶ 31} Clearly, our long line of cases regarding the appropriate method
for rescinding settlement agreements requires reversal in this case. The plaintiffs
alleged fraud in the inducement, which, if true, would render the settlement
agreement voidable and require the releasor to tender back the consideration paid
before attacking the agreement. The appropriate method to seek relief was
through Civ.R. 60(B). Accordingly, we reverse the judgment of the court of
appeals and reinstate the judgment of the trial court.
Judgment reversed.
O’DONNELL, LANZINGER, and CUPP, JJ., concur.
PFEIFER, J., concurs in judgment only.
BROWN, C.J., and FROELICH, J., dissent.
JEFFREY E. FROELICH, J., of the Second Appellate District, sitting for
O’CONNOR, J.
__________________
FROELICH, J., dissenting.
{¶ 32} I respectfully dissent.
{¶ 33} In response to an interrogatory in a legal-malpractice action,
Javitch, Block & Rathbone, L.L.P. (“the law firm”), misrepresented to Robert and
Diane Berry that it had no malpractice insurance that would cover their claim.
The Berrys subsequently accepted a settlement from the law firm and in exchange
the Berrys were to release their claims against the law firm. Two and a half years
later, the Berrys discovered the alleged misrepresentation. I would hold that the
Berrys were entitled to either rescind the settlement or sue the law firm for fraud.
If the Berrys had chosen to rescind the settlement, they would have had to return
the settlement proceeds, arguing that they would not have settled the claim had
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they known of the possible existence of insurance, and the litigation and/or
negotiations on the underlying claim would begin again. But the Berrys instead
chose to sue the law firm for fraud, arguing that they were entitled to keep the
settlement money but that they had suffered damages because of the fraud, i.e.,
the difference between the amount they would have settled for had they known of
the insurance and the amount for which they did settle. In such cases, the party
injured through no fault of his own can elect the remedy.
I
{¶ 34} On August 26, 1999, the Berrys’ attorney wrote to the law firm
notifying it of his clients’ potential malpractice claim and suggesting that the law
firm put its malpractice carrier on notice. In June 2000, the Berrys sued the law
firm for malpractice that had allegedly occurred in 1999. The law firm reported
the claim to Legion Insurance, with which it had a claims-made policy in effect
from October 12, 1999, through October 12, 2000. Legion denied coverage,
asserting that the law firm had been on notice of the claim prior to the effective
date of this policy. The malpractice case proceeded.
{¶ 35} During discovery, and in response to an interrogatory that
requested “the name of insurer, type of policy/policies, policy number/numbers,
and limit and limits of each and every insurance policy that may cover your
alleged liability in this action, including umbrella coverage,” the law firm
answered with the Legion Insurance claims-made policy effective October 12,
1999, through October 12, 2000. This was later supplemented with the report that
Legion had advised the law firm that “there is no coverage for plaintiff’s claim.”
The law firm did not disclose a claims-made policy it had with Clarendon
Insurance, with effective dates from October 12, 1998, to October 12, 1999.
{¶ 36} The law firm sued Legion, claiming that Legion owed it a duty to
defend or indemnify it with respect to the malpractice claim; Legion was granted
summary judgment. The appellate court affirmed the summary judgment, stating
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that Legion owed no duty to defend or indemnify, because the law firm was aware
of a “potential legal malpractice claim prior to the [October 1999] effective date
of the Legion policy.” Javitch, Block, Eisen & Rathbone, P.L.L. v. Target Capital
Partners, Inc., Cuyahoga App. No. 86926, 2006-Ohio-3325, ¶ 24.
{¶ 37} The parties settled the malpractice claim on December 21, 2001,
and a consent decree was filed on April 1, 2002. The terms of the settlement are
set forth in the majority’s opinion. The Berrys did not become aware until
approximately July 2004 (1) of the existence of the Clarendon policy and (2) that
in the same month that the law firm had responded to the interrogatory by listing
only Legion, the law firm had put Clarendon “on notice of a claim which may be
covered by [Clarendon’s] policy because of events occurring during
[Clarendon’s] policy period which allegedly constituted a claim.”
{¶ 38} In 2006, the Berrys sued the law firm, alleging fraudulent
misrepresentation, fraudulent concealment, gross negligent misrepresentation, and
gross negligent concealment. The law firm filed a motion for summary judgment
arguing, among other things, that the Berrys could not file a separate action for
fraud but rather must rescind the settlement agreement and tender back the
settlement money that they had received; the law firm also contended that the
only way to rescind the agreement because of fraud was by filing a Civ.R.
60(B)(3) motion. Since no Civ.R. 60(B)(3) motion had been filed (the one-year
time period for doing so had elapsed), questions concerning allegations of fraud
by a party and fraud upon the court were not addressed by the appellate court.
{¶ 39} The trial court tersely sustained the defendant’s motion for
summary judgment, finding that there was no genuine issue of material fact. The
court of appeals reversed the trial court (with one judge dissenting), holding that
the Berrys had elected to sue for fraud and not to rescind the settlement and that
there was a genuine issue as to whether the law firm had fraudulently
misrepresented its insurance coverage.
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{¶ 40} The law firm argued that its failure to disclose Clarendon to the
Berrys was not an attempt to perpetrate a fraud, but was instead an accurate
answer to the interrogatory, since the time for reporting a claim to Clarendon had
expired and no claim had been made during the effective dates (even though it
had written to Clarendon demanding coverage); moreover, it argued, there would
be no reason for the law firm not to disclose a potential insurer to a potential
claimant. These arguments may be accurate, but the majority of the court of
appeals held that this was a factual issue for a jury to decide; this is not the
question before us.
II
{¶ 41} According to the majority, the question before us relates to the
“appropriate method for rescinding settlement agreements.” Majority opinion at ¶
31. But the Berrys did not seek to rescind the agreement. Accordingly, the
question before us is whether the Berrys’ only option was to seek rescission of the
settlement once the alleged fraud in the inducement was discovered.
{¶ 42} First, I am not sure that the record reflects a settlement of the
underlying malpractice claim. But even if the settlement agreement is
enforceable, it states, “[U]nder no circumstances will [the law firm] * * * pay [the
Berrys] under this agreement or under any judgment on the subject claim more
than a total of $65,000.” (Emphasis added.) However, the Berrys did not seek to
rescind the agreement “on the subject claim” (i.e., the malpractice claim).1
1. {¶ a} Continuing with the belief that the Berrys seek to rescind the agreement, the majority
holds that the only remedy is a Civ.R. 60(B)(3) motion, which must be filed within the rule’s one-
year time period. Neither the trial court nor the appellate court addressed whether the Berrys’
claim could have been raised under Civ.R. 60(B)(5) (“any other reason justifying relief from the
judgment”). Contrast Trenner v. Trenner (Jan. 31, 2002), Franklin App. No. 01AP-743, 2002 WL
124719, as to whether such issues should be analyzed under Civ.R. 60(B)(5), which does not
contain the one-year time requirement; and Dickson v. Dickson (Jan. 23, 1997), Cuyahoga App.
No. 71006, 1997 WL 25527, at *1, holding that Civ.R. 60(B)(3) requires the movant “to file the
motion within one year from the date he learned of the alleged fraud.”
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{¶ 43} The majority holds that the Berrys cannot elect between a suit for
fraud and one for rescission because these remedies do not exist at the same time.
This holding accepts the law firm’s argument that a party damaged by a
settlement induced by fraud cannot sue for that fraud without first setting aside
the fraudulent settlement. This conclusion somehow combines both a tautology
and a logical inconsistency. It is a tautology because it uses different words to say
the same thing, and it is logically inconsistent because once the fraudulent
settlement is set aside, a party is no longer damaged by the (now nonexistent)
fraudulent settlement.
{¶ 44} Citing Picklesimer v. Baltimore & Ohio RR. Co. (1949), 151 Ohio
St. 1, 38 Ohio Op. 477, 84 N.E.2d 214, Shallenberger v. Motorists Mut. Ins. Co.
(1958), 167 Ohio St. 494, 5 O.O.2d 173, 150 N.E.2d 295, and Haller v. Borror
Corp. (1990), 50 Ohio St. 3d 10, 552 N.E.2d 207, the law firm contends that the
settlement was not “void,” since the parties knew that it was a settlement, but that
it is only “voidable,” since there was allegedly fraud in the inducement; therefore,
the Berrys must first tender back the settlement money in order to void the
voidable agreement. Stated differently, the law firm claims that settlements based
on fraud in the inducement are voidable, not void, and require return of the
settlement money; and because this case involved, at most, fraud in the
inducement, the aggrieved parties, the Berrys, were required to return the
settlement money. The law firm’s syllogism is correct, but irrelevant since the
Berrys do not seek to void the settlement and obtain damages for the underlying
{¶ b} If the settlement had been entered into before the lawsuit was filed, as are the vast
majority of settlements, a Civ.R. 60 motion would not be available. In such a situation, the
Berrys’ remedy would be to (1) sue for rescission based on fraud and then, if successful, litigate
the underlying malpractice claim; such a rescission action would be controlled by the four-year
statute of limitations for fraud, R.C. 2305.09(C), which runs from the date the fraud was or should
have been discovered, Investors REIT One v. Jacobs (1989), 46 Ohio St. 3d 176, 546 N.E.2d 206;
or (2) sue for fraud. The same statute (R.C. 2305.09(C)) would apply to the Berrys in bringing
their independent fraud complaint, but such an action is apparently not available to them, because
their case was settled with a court entry.
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claim of legal malpractice. Rather, the Berrys contend that there was a
subsequent act of fraud, and they seek damages resulting from that separate act of
fraud, not for the underlying tort claim.
{¶ 45} Contrary to the law firm’s reading of Picklesimer, Shallenberger,
and Haller, those cases do not require a party to seek to void a contract induced
by fraud. In Haller, the plaintiff sold his stock in a family business and the new
company’s owners agreed to employ him for three years. When he was
terminated before the three years had elapsed, he invoked an arbitration clause
and alleged that he had been fired without cause. The parties met, without
attorneys, and the new owner allegedly told Haller that unless he (Haller)
accepted a $50,000 settlement, the company would close and Haller would
receive nothing. Haller accepted, and the agreement was reduced to a written
contract and signed by the parties the same day.
{¶ 46} The company paid the $50,000, but Haller attempted to obtain
additional money from it. In connection with these attempts, Haller was indicted
for extortion. Haller then sued, alleging that fraud by the new company and its
principals had induced him to commit a crime. He also alleged additional causes
of action arising from his employment that predated the settlement agreement and
fraud in the negotiation of the settlement.
{¶ 47} Haller held that “a releasor ought not be allowed to retain the
benefit of his act of compromise and at the same time attack its validity.” Id., 50
Ohio St.3d at 14, 552 N.E.2d 207. The court held that to avoid the rule that “[a]
release of a cause of action for damages is ordinarily an absolute bar to a later
action on any claim encompassed within the release, * * * the releasor must
allege that the release was obtained by fraud and that he has tendered back the
consideration received for his release.” (Emphasis added.) Id. at 13, relying on
Manhattan Life Ins. Co. v. Burke (1903), 69 Ohio St. 294, 70 N.E. 74.
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{¶ 48} Manhattan Life involved a dispute between a beneficiary and a life
insurance company as to the liability of the company. The dispute was settled for
payment of less than the possible full death benefit. The beneficiary nonetheless
subsequently sued for the full value. The defendant insurance company pleaded
the settlement as a defense and the plaintiff responded that the settlement had
been obtained by fraud. The court held that the plaintiff’s response, without a
payment or tender of the amount already received, was “insufficient in law.” Id.
at paragraph two of the syllabus. However, in so ruling, the court specifically
noted that the suit had been brought “upon the original contract; it was not a suit
to rescind a contract, or to reform it, nor an action for damages on account of
fraud.” (Emphasis added.) Id. at 301, 70 N.E. 74. Rather, the court framed the
question as “can the party claimant maintain an action at law on the original
contract without tendering back the sum received, even though his assent to the
settlement was obtained by the fraudulent and false representation of the other
party?” (Emphasis added.) Id. at 302.
{¶ 49} In both Haller and Manhattan Life, the court dealt with a releasor
who was attacking the settlement so he could litigate the underlying complaint
(i.e., the reason for his termination in Haller or the proper amount of the
insurance proceeds in Manhattan Life), not “for damages on account of fraud.”
Haller specifically relates to when a releasor “may not attack the validity of a
release for fraud.”
{¶ 50} Haller cites Shallenberger, in which a tort victim (releasor) was
involved in an accident that damaged the borrowed car she was driving. She sued
the insurance company (releasee) of the alleged tortfeasor for fraud arising out of
the execution of a release. The plaintiff received no money in the release (the
consideration was the insurance company’s promise to pay property damages to
its insured, the car’s owner) and alleged in her complaint that the fraud deprived
her of her right to recover for her personal injuries from the tortfeasor (i.e., her
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original claim). The Supreme Court upheld the demurrer to the petition. The
court noted that a releasor cannot “logically affirm an agreement not to sue for his
personal injuries (cases allowing recovery in deceit for fraud inducing release of a
tort claim require such affirmance as a necessary basis for such recovery) and yet
recover something on account of those personal injuries.” Shallenberger, 167
Ohio St. at 502, 5 O.O.2d 173, 150 N.E.2d 295. Similarly, the court stated that its
decisions “have consistently held that a releasor of an unliquidated claim cannot
recover anything on account of that claim without first avoiding the release; * * *
[and] such releasor cannot undertake to avoid that release without first tendering
back the consideration received therefor.” (Emphasis added.) Id. at 504, citing
Picklesimer and Manhattan Life.
{¶ 51} The law firm relies heavily on Picklesimer, which held that “a
release obtained by fraud in the inducement is voidable, and a subsequent action
may not be maintained by the claimant without returning or tendering the
consideration he received.” Picklesimer, 151 Ohio St. 1, 38 Ohio Op. 477, 84 N.E.2d
214, paragraph two of the syllabus. Picklesimer sued his employer, the railroad,
for personal injuries, alleging that the employer’s physicians falsely represented
to him that his injuries were not permanent, causing him to release the claim for
$900, a fraction of its potential worth. The trial court sustained a demurrer based
on the plaintiff’s failure to allege that he had returned or offered to return the
$900.
{¶ 52} Picklesimer argued that this averment was not necessary, because
“he has elected to sue for damages for the alleged fraud.” Id. at 7. The Supreme
Court examined his pleadings and found that the complaint’s allegations related
only to negligence, personal injuries, and pain and suffering. It reasoned that
“[t]he simple addition of the claim of fraud cannot be regarded as a bit of
legerdemain by which the plaintiff somehow has eliminated any of the original
elements of negligence, injury and proximate cause.” Id. The negative pregnant
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January Term, 2010
of Picklesimer is that there would be a different result had the plaintiff “elected to
sue for damages for the alleged fraud” and supported that with allegations relating
to the fraud and not to the original tort.
{¶ 53} The damages for fraud in the inducement of a settlement are not
the same as those that the plaintiff would have received if the underlying tort were
successfully litigated. The Supreme Court of Hawaii exhaustively analyzed this
question and concluded that the aim of compensation in all cases of fraud is to put
the plaintiff in the position he or she would have been in had he or she not been
defrauded. Exotics Hawaii-Kona, Inc. v. E.I. Du Pont DeNemours & Co. (2007),
116 Hawai’i 277, 172 P.3d 1021. To determine damages in a claim of fraudulent
settlement, the trier of fact determines the fair compromise value of the claims at
the time of the settlement, i.e., the probable amount of settlement in the absence
of fraud after considering all known or foreseeable facts and circumstances
affecting the value of the claims on the date of settlement. Id. at 298.
{¶ 54} Factors for determining whether a settlement of a tort claim was
made in good faith or by means of fraud include, among others (1) the type of
case and difficulty of proof at trial, (2) the realistic approximation of total
damages that the plaintiff seeks, (3) the strength of the plaintiff’s claim and the
realistic likelihood of his or her success at trial, (4) the predicted expense of
litigation, (5) the amount of consideration paid to settle the claims, and (6) the
insurance policy limits and solvency of the tortfeasor. Id. at 300. This is no more
difficult than establishing and measuring damages in any fraud case in which the
person defrauded has, because of the fraud, not pursued alternative courses of
action, and the results of those alternative courses therefore remain, to some
degree, speculative. Id. at 292-293, citing Leibert v. Fin. Factors, Ltd. (1990), 71
Hawai’i 285, 290-291, 788 P.2d 833, and 3 Restatement of the Law 2d, Torts
(1977), Section 549.
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SUPREME COURT OF OHIO
{¶ 55} It is certainly correct that a party cannot accept a settlement, sign a
release, affirm the release, keep the money, and then sue for the same damages.
However, the Berrys’ damages herein are limited to the “actual settlement value”
and other expenses caused by the fraud, not the same damages for which they
settled.2 Matsuura v. Alston & Bird (C.A.9, 1999), 166 F.3d 1006, 1010;
DiSabatino v. United States Fid. & Guar. Co. (D.Del.1986), 635 F. Supp. 350.
All the cases cited by the law firm, upon examination, relate to a plaintiff’s
attempt to go back and sue for the same underlying tort for which the plaintiff
recovered a settlement.3
{¶ 56} To preclude the defrauded party from pursuing a claim for fraud in
the inducement of a settlement would leave the defrauded party without any
remedy for fraud intentionally committed upon him. Although the issue was not
raised by either party, this result would seem to be inconsistent with years of
common-law fraud claims and, thus, in contravention of Section 16, Article I of
the Ohio Constitution, which states, “All courts shall be open, and every person,
for an injury done him in his land, goods, person, or reputation, shall have remedy
by due course of law, and shall have justice administered without denial or
delay.”
{¶ 57} Moreover, allowing a plaintiff to obtain damages for fraud in the
inducement of a contract through a separate claim is well established in Ohio. In
Colvenbach v. McLaughlin (June 18, 1982), Ashtabula App. No. 1082, 1982 WL
5784, plaintiffs purchased a building for $50,000, which had been represented to
2. They may also include punitive damages, attorney fees, and certain expenses, which are
allowed in fraud, but probably not available in the underlying malpractice. Further, any amount
received in the settlement of the underlying malpractice claim would necessarily be encompassed
in the “actual settlement value” and would entail a setoff.
3. See also Sokol v. Swan Super Cleaners, Inc. (1985), 26 Ohio App. 3d 128, 131, 26 OBR 340,
498 N.E.2d 503 (finding that Shallenberger “held that the plaintiff first had to set aside the release
before proceeding to litigate her claims on their merits” [emphasis added]).
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January Term, 2010
them by the seller as the appraised value. After paying $37,500, the plaintiffs
determined that the value was only $35,000. The plaintiffs stopped making
payments and filed suit “alleging fraudulent misrepresentation and seeking
alternative remedies of rescission or compensatory damages.” Id. at *1. Before
trial, the plaintiffs elected “to maintain the contract and seek compensatory
damages.” Id. The jury returned a verdict for the defendant “due to lack of clear
and convincing evidence.” Id.
{¶ 58} The court of appeals reversed and remanded, holding that clear and
convincing evidence would be required only if the plaintiffs had elected the
equitable remedy of rescission. “[B]ut in an ordinary action at law for money
only based on fraud, a preponderance of the evidence is sufficient to prove such
fraud.” Id. The Eleventh District reasoned:
{¶ 59} “The principle is explained in [Frederickson v. Nye] (1924), 110
Ohio St. 459, at 468-469 [144 N.E. 299], quoting from [Clark v. Kirby], 204 Ohio App.
Div., 447, 451, 198 N.Y.S. 172, 175:
{¶ 60} “ ‘ “The law is elementary that where one has suffered by reason
of the misrepresentation of another, and has been led to part with his money in
reliance upon said false and fraudulent misrepresentation, he has three
independent remedies: First, he may affirm the contract into which he had been
induced to enter and sue for his damages for the fraud perpetrated upon him.
Second, he may rescind the contract itself and bring action to recover back the
moneys which he has paid. Third, he may bring an action in the nature of the
action at bar in a court of equity to obtain a rescission of the contract into which
he had been induced to enter, with incidental relief. An action for rescission is
entirely independent [of] and inconsistent with an action for damages by reason of
the false and fraudulent representations. In the first [third] action the contract is
treated as a nullity and the plaintiff asks the intervention of a court of equity to
obtain a nullification of said contract. In the action for damages for fraudulent
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SUPREME COURT OF OHIO
representations which induced him to enter into the contract, he affirms the
contract and brings his action to recover damages by reason of such false
representations. In the one action he treats the contract as nonexistent, and in the
other action he affirms the contract. Each remedy is inconsistent with the other.”’
{¶ 61} “In the instant case, plaintiffs elected to affirm the contract and
seek recovery of damages for the alleged misrepresentations. Since they did not
elect to set aside the contract, they were required to prove the fraud only by a
preponderance and not by clear and convincing evidence.” Colvenbach, supra, at
*1-2.
{¶ 62} Frederickson’s fact pattern is convoluted and it is made even more
abstruse by the pleading requirements and writing style of the day. Suffice it to
say that the Nyes sued in Hancock County to establish an equitable trust on
certain property in favor of the Nyes; they also sued in Seneca County in an
action “at law in deceit with a prayer for money judgment,” id., 110 Ohio St. at
465, 144 N.E. 299. The court’s syllabus states that an election of one remedial
right is a bar to the pursuit of another only when the remedies are inconsistent and
the election is made with knowledge and intention and purpose to elect. The
majority opinion in this case says that Frederickson’s holding is not applicable
here, since the “remedies do not exist at the same time. In order for one remedy
to exist, i.e., the separate action for fraud, the [Berrys] must rescind the other
remedy, i.e., the settlement agreement.” Majority opinion at ¶ 22. But the
opposite appears to be true, i.e., if the Berrys rescind the agreement, there is no
separate action for fraud, since there would then be no agreement that was
fraudulently induced. See, e.g., Adams v. Wnek (May 11, 1994), Hamilton App.
No. C-930081, 1994 WL 176913 (stating that “rescission nullifies a contract,
extinguishing it for all purposes * * * and, therefore, precludes the assertion of
any rights predicated upon it”), citing Frederickson.
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January Term, 2010
{¶ 63} In Summa Health Sys. v. Viningre (2000), 140 Ohio App. 3d 780,
749 N.E.2d 344, a patient had signed an agreement not to sue a hospital for
malpractice, in exchange for $20,000; allegedly the hospital’s risk-management
department had also promised that the hospital would write off all the patient’s
medical bills, which totaled just over $13,000. When the hospital sued on the
account, the patient counterclaimed for fraud and for violation of the Consumer
Sales Practices Act (“CSPA”) (the trial court granted the hospital a directed
verdict on the CSPA claim, but that judgment was later reversed by the appellate
court, and the cause was remanded).
{¶ 64} The jury found for the patient on the hospital’s account action and
on the patient’s fraud claim and awarded her $10,000 in compensatory damages,
$30,000 in punitive damages, and reasonable attorney fees (which were later
determined by the court to be $40,000). One of the hospital’s assignments of
error was that the patient/releasor was required to return the $20,000 settlement if
she desired to pursue the claim despite the release. The appellate court held that
the hospital’s reliance on Shallenberger was misplaced, since the patient was not
seeking to vacate the release and sue for malpractice, but rather was suing for
fraud. The patient had specifically stated that she never wanted to litigate the
malpractice case and have her illness discussed in public, and thus settled that
claim. When the hospital sued on the account, she countersued for fraud,
claiming that she had suffered emotional trauma and embarrassment from having
to discuss her medical condition with potential employers and creditors who
questioned her credit status. Therefore, the appellate court held, she “was not
obligated to return the consideration because she did not seek to void the release.
Rather, she sues for damages that resulted from [the hospital’s] failure to honor
the settlement.” Id., 140 Ohio App.3d at 789, 749 N.E.2d 344.
{¶ 65} Other states have reached similar results. For example, Siegel v.
Williams (Ind.App.2004), 818 N.E.2d 510, involved a legal-malpractice case
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SUPREME COURT OF OHIO
against the plaintiffs’ former attorney, who had allegedly failed to file a notice of
tort claim, which was a statutory prerequisite for maintaining the medical-
malpractice claim. On the second day of trial, the case settled based on the
defendant’s representation that his wife had gotten all of his money in a divorce
and that he would file for bankruptcy if the judgment were for more than he
offered.
{¶ 66} Two years later, the defendant saw the plaintiffs’ attorney and told
him that he had “pulled one over on the [plaintiffs]” because he could have paid
hundreds of thousands of dollars more.4 The plaintiffs sued, alleging that
defendant’s fraud and misrepresentation had induced them to settle the legal-
malpractice claim. The defendant argued that the complaint was actually a Trial
Rule 60 motion (which is, in all relevant respects, identical to Ohio’s Civ.R.
60(B)). The defendant lost, and the trial court reduced the award by the amount
of the prior settlement. The appellate court affirmed the judgment, finding that in
an action for fraud in the inducement, the party bringing the action has an election
of remedies: “ ‘he may stand upon the contract and seek damages, or rescind the
contract, return any benefits he may have received, and seek a return to the status
quo ante.’ ” Id. at 514, quoting A.G. Edwards & Sons, Inc. v. Hilligoss
(Ind.App.1991), 597 N.E.2d 1, 3. “ ‘ “He can keep what he has received and file
suit against the ones perpetrating the fraud and recover such amounts as will make
the settlement an honest one.” ’ ” Id., quoting Farm Bur. Mut. Ins. Co. of Indiana
v. Seal (1962), 134 Ind.App. 269, 277, 179 N.E.2d 760, quoting Auto.
Underwriters v. Rich (1944), 222 Ind. 384, 390, 53 N.E.2d 775. See also Hanson
v. Am. Natl. Bank & Trust Co. (Ky.1993), 865 S.W.2d 302, 306 (holding that
when a party is induced by a fraudulent misrepresentation to enter into a contract,
that party must elect to either (1) affirm the contract and recover damages in tort
4. The attorney’s license was subsequently suspended for intentionally deceiving a tribunal in
another matter. In re Siegel (Ind.1999), 708 N.E.2d 869.
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January Term, 2010
for the fraud or (2) disaffirm the contract and recover the consideration with
which he has parted), overruled on other grounds by Sand Hill Energy, Inc. v.
Ford Motor Co. (Ky.2002), 83 S.W.3d 483, 495; Bryant v. Troutman
(Ky.App.1956), 287 S.W.2d 918, 920 (holding that if a “purchaser was induced to
enter into the contract in reliance upon the false representations, he may maintain
an action for re[s]cission, or he may accept the contract and sue for damages
suffered on account of the fraud or deceit”).
III
{¶ 67} The majority is concerned that allowing the Berrys to sue for fraud
while affirming the settlement would discourage settlements, endanger the finality
of judgments, and encourage every party (whether a plaintiff or a defendant) who
settles a dispute to subsequently make a claim that the settlement was unfair.
Indeed, “[i]f there is one thing which the law favors above another, it is the
prevention of litigation, by the compromise and settlement of controversies.”
White v. Brocaw (1863), 14 Ohio St. 339, 346, cited in Shallenberger, 167 Ohio
St. at 505, 5 O.O.2d 173, 150 N.E.2d 295.
{¶ 68} In reality, allowing the separate fraud claim would maintain
confidence in the rule of law and would promote settlements by encouraging full
disclosure and discovery, thus minimizing postsettlement allegations of fraud. If
the parties know that the court, at least after a year, would enforce a fraudulent
settlement, it would discourage settlements, since the parties would never know of
the honesty of the other party. If the only remedy for a fraudulent settlement is
paying or receiving back the funds and starting over, there is actually an
incentive, and no downside, for an unscrupulous party to engage in fraud and
concealment.
{¶ 69} This is especially true since starting over in a complex case is
made difficult by, among other things, the passage of time, fading memories,
potential unavailability of experts or lay witnesses, and the additional expenses of
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SUPREME COURT OF OHIO
litigation, not to mention the financial and emotional strains on the parties.
Holding that the only remedy for a fraudulently obtained settlement is a “do over”
brought about by a successful Civ.R. 60(B) motion filed within one year
discourages settlement and promotes game playing and obfuscation by the
attorneys and parties.5
{¶ 70} Moreover, such concerns fall prey to the “slippery slope”
argument, which, perhaps too cutely, has been compared to the argument that
“‘[w]e ought not make a sound decision today, for fear of having to draw a sound
distinction tomorrow.’ ” Schotland, Caperton Capers: Comment on Four of the
Articles (2010), 60 Syracuse L.Rev. 337, 340, fn. 18, quoting English legal
historian Sir Frederick Maitland. It is certainly true that some claims fail because
of timing (e.g., a wronged party does not follow up on a potential claim or an
attorney does not engage in timely and thorough discovery); and there are
safeguards in place (e.g., statutes of limitations and repose, heightened pleading
and proof requirements, remedies for frivolous suits, res judicata, compulsory
counterclaims) that further minimize such concerns. Each case must be decided
on its own merits. This case is for fraud, not to set aside the previous settlement
or judgment, and the Berrys should be entitled to litigate their claim. Therefore, I
would affirm the judgment of the court of appeals and remand the cause to the
trial court.
BROWN, C.J., concurs in the foregoing opinion.
__________________
Morganstern, MacAdams & DeVito Co., L.P.A., Christopher M. DeVito,
and Alexander J. Kipp; and Landskroner, Grieco, Madden, L.L.C., Paul Grieco,
and Drew Legando, for appellees.
5. For examples of how minutely lawyers can parse “the whole truth and nothing but the truth,”
see Temkin, Misrepresentation by Omission in Settlement Negotiations: Should There be a Silent
Safe Harbor (Fall/Winter 2004), 18 Georgetown J. of Legal Ethics 179, especially at 220-226,
discussing nondisclosure of insurance in settlement negotiations.
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January Term, 2010
Synenberg & Associates, L.L.C., Roger M. Synenberg, Dominic J.
Coletta, and Clare C. Christie, for appellant.
______________________
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