Summary of a Recent
Judicial Development in
Landowner Liability

Proposed Settlement Found to be Fair and Reasonable

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Tumbling-T Ranches v. Flood Control District of Maricopa County, 204 P.3d 1051, 2008 WL 5047627 (Ariz. Ct. App. 2008), the Arizona Court of Appeals held that a proposed settlement was fair and reasonable, and that a party's indemnity clause did not, as a matter of law, limit the amount recoverable from the indemnitor to that which was actually paid by the indemnitees under the settlement agreement.

Background

After a dam failed, causing flood damage to several farms, the dam owners entered into a settlement agreement with the injured farmers. Id. at *2. The agreement stated that a stipulated judgment would be entered in favor of the farmers and against the dam owners in the amount of $14.75 million, and also provided that the dam owners would pay the farmers an additional $3.3 million in return for a covenant not to execute against the dam owners on the remainder of the judgment. Id. The judgment expressly provided that the farmers were not releasing the dam owners from liability, although the farmers agreed they would take no steps against the dam owners to collect on the judgment. Id. The dam owners had previously filed an indemnity action against the county Flood Control District based upon the indemnity clause contained in their easement, and the trial court had determined that the indemnity clause was broad enough to cover all fault of the District. Id. at *1. The trial court in this action approved the dam owners' proposed settlement agreement over the District's objection, and held that the indemnity claim against the District was not limited to the $3.3 million actually paid by the owners, and the District appealed. Id.

Arguments

The District argued that the court erred in conducting a reasonableness hearing because such a determination should have taken place in the indemnity proceeding rather than in the tort case, and argued that the proposed agreement could not be enforced because this was not an insurance bad faith claim. Id. at *2-3, *5. The District also argued that the covenant not to execute was essentially a release, so the court must cap the potential liability under the indemnity clause at what was actually paid, and that the settlement was not free of fraud or collusion. Id. at *6, *8.

Analysis and Holdings

The court repeated the general principle of indemnification law that "an indemnitor is bound by the settlement made by its indemnitee if, but only if, the indemnitor was given notice and opportunity to defend . . . the indemnitor will be liable to the indemnitee to the extent that the indemnitee establishes that the settlement was reasonable and prudent under all the circumstances." Id. at *3. The court noted that the District did not claim that it was inhibited in any way in presenting evidence on the issue of reasonableness of the settlement, and moreover the same judge who presided over the reasonableness hearing in the tort case had presided over the indemnity matter also. Id. at *5. Thus, it held that the court had not erred in conducting the reasonableness hearing. Id. The court also explained that a covenant not to execute is not a release from liability, and therefore held that the District's potential liability under the indemnity clause was not limited to the amount the dam owners actually paid. Id. at *6. Regarding whether the settlement was free of fraud or collusion, the court pointed out that the District had not argued that it was not given reasonable notice or an opportunity to participate in its defense and found there was substantial evidence that the dam owners had defended the action with "due diligence and reasonable prudence" as required by the Restatement (Second) of Judgments § 57(1). Id. at *9. The court also found that there was sufficient evidence that the settlement amount was reasonable, and therefore it affirmed the trial court's approval of the settlement. Id. at *10-11.

The case was decided on November 28, 2008.