I once represented a plaintiff in a Federal question case (based on the Computer Fraud and Abuse Act) that settled with the defendant making installment payments over time. In the settlement agreement, I took great pains to emphasize that if the defendant missed a payment, I could immediately move to reinstate the case and accelerate the settlement amount plus fees and costs. For good measure, I provided that the court retains jurisdiction to enforce the settlement terms if the defendant defaulted. I thought I was doubly protected. Defendant’s counsel signed off on all the terms.
We then entered a stipulation to dismiss. The court dismissed the suit with prejudice. I remember feeling vaguely uneasy about the “with prejudice” language but quickly reminded myself that (a) dismissals with prejudice AND with the court retaining jurisdiction (seemingly an oxymoron) are entered all the time in State court and (b) the defendant’s counsel requested the with prejudice language as an inducement for getting his client to agree. After a ton of time and money on this case, both sides were anxious to put this one to bed.
Fast forward about 4 months into an 18-month payment arrangement and the defendant defaulted and my demand letter for compliance went unanswered. I quickly filed a motion to vacate the dismissal, to reinstate and enter judgment for the full settlement amount – just as the settlement agreement allowed me to. Imagine my shock when the court denied my motion?! Apparently, the “with prejudice” language has teeth.
I then filed a motion to vacate the dismissal under FRCP 60 – the rule that governs motions to vacate judgments on the basis of mistake, fraud, inadvertence or other reasons “that justify relief.” The Court denied this motion too. My only remedy was to now file a breach of contract action in State Court for breach of the settlement agreement (the contract). While we were able to recover some additional payments from the defendant after we filed in state court (before the defendant filed for bankruptcy protection), I had to consider the question of what I could have done differently?
Key Settlement Enforceability Rules
Federal courts don’t like to babysit settlement agreements (who knew?!). Seventh Circuit caselaw provides that when a case is dismissed pursuant to a stipulation to dismiss, the court does not automatically acquire jurisdiction over disputes arising out of an agreement that produces the stipulation. Kokkonen v. Guardian Life Ins. Co. v. Am., 511 U.S. 375, 378 (1994); McCall-Bey v. Franzen, 777 F.2d 1178, 1188 (7th Cir. 1985)(rejecting suggestion that federal judges have inherent power to enforce settlement agreements arising from lawsuits that were previously before them).
An important rule in the 7th Circuit is that “[a] settlement agreement, unless it is embodied in a consent decree or some other judicial order or unless jurisdiction to enforce the agreement is retained (meaning that the suit has not been dismissed with prejudice), is enforced just like any other contract.” Lynch, Inc. v. SamataMason, Inc., 279 F.3d 487, 489 (7th Cir. 2002).
The 7th Circuit holds that a district judge can’t dismiss a suit with prejudice and at the same time retain jurisdiction to enforce the settlement agreement: it’s a contradiction in terms. A signed stipulation of dismissal does not vest the Court with jurisdiction over an ancillary contract dispute just because the parties included retention of jurisdiction language in the stipulation. Parties cannot confer federal jurisdiction by agreement. Lynch, 279 F.3d at 489.
What About FRCP 60?
I was also surprised that my Rule 60 motion to vacate motion was denied. But, it turns out the standard for Rule 60 relief is high. Like life-and-death high. In Nelson v. Napolitano, 657 F.3d 586, 589 (7th Cir. 2011), the Court held that there may be “some instances” where a Federal court will vacate a voluntary dismissal on plaintiff’s motion, but it would have to be on the order of “a defendant faking his own death with a fraudulent death certificate in order to induce a plaintiff to voluntarily dismiss.”
In dismissing an action in Federal Court (at least in the 7th Circuit), it’s a bad idea to put “with prejudice” language in a dismissal order or stipulation if you want to be able to reopen the case at a later date (such as where a defendant misses an installment payment).
Even better, try to put the settlement payment terms in the dismissal order. This will increase your chances of getting the court to enforce a settlement if the defendant defaults.
If you can’t reinstate a case because of prior “with prejudice” language, then file a new suit for breach of contract (for breach of settlement agreement) in state court.