Andrea M. Alonso and Kevin G. Faley
*Originally published in the
New York State Bar Journal
March/April 1998

It was recently reported that the New York state courts have 3.7 million cases on their dockets.1 The majority of these cases will not be settled until jury selection or even shortly before a verdict is rendered. This delay is attributable both to unreasonable settlement demands made by plaintiffs and a lack of any incentive to pay sooner rather than later by defendants and their insurance carriers.

In an earlier attempt to countervail this delay and reduce the back log of cases, the New York legislature enacted an offer of settlement statute (CPLR 3221).2 This Section provides in pertinent part:

Except in a matrimonial action, at any time not later than ten days before trial, any party against whom a claim is asserted, and against whom a separate judgment may be taken, may serve upon the claimant a written offer to allow judgment to be taken against him for a sum of property or to the effect therein specified, with costs then accrued… If the offer is not accepted and the claimant fails to obtain a more favorable judgment, he shall not recover costs from the time of the offer, but shall pays costs from that time.

Although this statute was a step in the right direction towards encouraging early settlements, this statute is flawed in several respects. First, the statute is one-sided; it only permits the defendant to make an offer judgment.

Second, the only penalty imposed for failing to accept the offer of judgment is the payment of costs from the date of the offer. No provision is made for the recovery of attorney’s fees or investigation expenses. Even after a prolonged trial, costs will generally only amount to approximately $2,000.00. Thus, as long as the offeree views the scope and amount of recoverable costs as insignificant the statute will not be effective.

Third, the penalty for failing to accept an offer of judgment is only triggered where the claimant fails to obtain a “more favorable judgment.” What constitutes a “favorable judgment” is not expressly denied in the statute and thus left entirely to the court’s discretion.3 This is likely to lead to disparate treatment of parties and inconsistent results. Additionally, the courts’ interpretation of this ambiguous term is also likely to result in collateral litigation, thereby contradicting one of the statute’s main goals, i.e., reduce court’s caseloads.

Fourth, the statute does not permit a subsequent offer to be made. A subsequent offer may be the most reasonable offer and one which a plaintiff or defendant may find difficult to refuse.

Finally, the lack of efficacy of this statute is illustrated by its neglect. Most attorneys do not even know of the statute’s existence.

A better approach is found in Florida’s offer of judgment statute (Fla. Stat. 768.79). This statute provides:

In any civil action for damages filed in the courts of this state, if a defendant files an offer of judgment which is not accepted within 30 days, the defendant shall be entitled to recover reasonable costs and attorney’s fees incurred…from the date of filing if the judgment is one of no liability or the judgment obtained by the plaintiff is at least 25% less than such offer. (emphasis supplied)4

Unlike New York’s offer of settlement statute, Florida’s statute also permits a plaintiff to make a demand for judgment. If such a demand is rejected and the plaintiff obtains a judgment 25% in excess of the demand, the plaintiff is entitled to recover costs and attorney’s fees.

Not only does this statute permit both parties to take advantage of the offer of judgment procedure, it also permits a party to make a subsequent offer if the first one is rejected.5 More importantly, the Florida statute requires the rejecting party to pay the offering party’s attorney’s fees and investigation costs. This mandatory award may only be avoided by a showing that the offer was not made in good faith.6

The risk of having to pay such expenses serves as a strong deterrent against refusals to settle a matter for a reasonable amount. In addition, the 25% percentage formula establishes a uniform, clear-cut, self-executing method of determining whether the rejecting party acted unreasonably in declining the offer. This is clearly a “bright line” and more efficient than requiring judges to determine what constitutes a “more favorable judgment.”

For example, suppose the defendant provided the plaintiff an offer of judgment of $100,000 and the plaintiff rejected this offer. After trial, the plaintiff receives a verdict of $150,000. Under this scenario, the plaintiff would be entitled to costs, expenses and attorney’s fees.

Now suppose that the plaintiff rejected the same offer of judgment and received a verdict of $25,000. Under this scenario, the defendant would be entitled to costs, expenses and attorney’s fees. The statute can also apply where the defendant receives a directed verdict at the time of trial. For instance, suppose the defendant provided the plaintiff with an offer judgment of $10,000 and the plaintiff rejected this offer, After the plaintiff presents her case, the trial directs a verdict in favor of the defendant. In this case, the plaintiff’s recovery would be $0. Therefore, the defendant would be entitled to costs, expenses and attorney’s fees.

The only “disadvantage” of the statute is that the mandatory award of attorneys’ fees requires courts to strictly construe the terms of the statute.

The recent Florida case of Hanzelik v. Grottoli, 687 So. 2d 1362 (CA 4th Dist. 1997) demonstrates the court’s tendency to strictly construe the timing requirements of the statute.

In that case, the defendants made an offer of judgment of $10,001 to the plaintiff on February 16, 1994. This offer was made less than 30 days prior to start of trial. As of the date of the trial, March 6, 1994, the offer had not been accepted, rejected, or revoked. After a non-jury trial on the same date, the court orally found in favor of the defendant. Prior to the entry of the written judgment, the plaintiff accepted the defendant’s offer of judgment. The defendant moved to strike the plaintiff’s acceptance and sought the assessment of attorney’s fees. In opposition, the plaintiff argued her acceptance was valid because it was given within 30 days as provided by the statute. The trial court rejected this argument. The court held that where an offer of judgment is not accepted by the time of trial, it will be considered withdrawn. The court reasoned that to hold otherwise, would give an offeree an overwhelming tactical advantage, by allowing him to wait to accept an offer until it becomes evident that an unsatisfactory verdict will be rendered. However, the court denied the defendant’s right to attorney’s fees because the defendant failed to make its offer within 30 days prior to the trial

The courts also firmly require that the offer be “stated with particularity.”7 For instance, in Hartford Casualty Ins. Co v. Silverman, 689 So. 2d 347 (CA 3rd Dist. 1997), the plaintiff brought a bad faith claim against her carrier and Hartford counterclaimed, seeking damages and rescission of the insurance contract. The defendant made an offer of judgment of $5,000 in exchange for a release of all the plaintiff’s claims. The plaintiff rejected this offer and the jury found for the defendant. The defendant moved for attorney’s fees. In opposition to this motion, the plaintiff argued that the offer of judgment was ambiguous and therefore invalid. Given that Hartford’s offer did not include any mention of its counterclaim, the court agreed with the plaintiff and denied the defendant’s motion.

Caution should also be undertaken when subsequent offers are made pursuant to the statute. In Kaufman v. Smith, 693 So. 2d 133 (CA 4th Dist. 1997), the defendant made an offer of judgment prior to trial in the amount of $50,000. The plaintiff rejected this offer and obtained a jury verdict of $3,000. The plaintiff appealed and claimed that the award was grossly inadequate. A new trial was ordered and the defendant made a second offer judgment in the amount of $20,000. The plaintiff once again rejected the defendant’s offer. At the second trial, the plaintiff received a verdict in the amount of $30,000. Since this verdict was more than 25% less than the defendant’s first offer, the defendant moved for assessment of attorney’s fees. The trial court denied the motion, concluding that the initial offer was not valid because of the appeal. The Court of Appeals reversed. The Court found that the defendant’s second offer did not revoke its first offer. The Court noted that the statute permits an offeror to make a subsequent offer after the first is rejected, but does not provide that making a subsequent offer automatically revokes the first offer. In other words, unless the offeror revokes its first offer, a non-accepting offeree will be required to pay the offeror’s attorney’s fees and costs pursuant to the statute where the verdict obtained is 25% less than the offer, despite the fact the second offer would not lead to the same result.

Similarily, in Scope v. Fannelli, 639 So. 2d 141 (CA 5th Dist. 1994), the plaintiff provided the defendant with an offer of judgment in the amount of $10,128.50. The demand provided “this offer shall remain in full force for thirty days, unless withdrawn sooner in writing and prior to acceptance by the Defendant.” Nine days later, the defendant offered $3,000 in complete settlement of the matter. Five days later, plaintiff’s counsel rejected the defendant’s counter-offer by letter. In the letter plaintiff’s counsel indicated that he would recommend that his client accept $20,000. A week later, the defendant accepted the plaintiff’s original offer of judgment. Thereafter, the plaintiff moved to strike the defendant’s acceptance. The court noted that the same statute provides that an offer is irrevocable for 30 days unless the offeror serves a written withdrawal upon the offeree before the offeree’s written acceptance is filed. As such, the court found that the defendant’s written counter-offer did not terminate the plaintiff’s offer. The court also found that the plaintiff’s second letter did not serve as a withdrawal of her offer because it did not unequivocally state so.

Finally, all voluntary dismissals should be obtained with prejudice to ensure the benefit of the statute. For example, in MX Investments Inc. v. Crawford, 683 So. 2d 584 (Fla. 1st DCA 1996), aff’d 1997 Fla. LEXIS 1357 (September 4, 1997), the plaintiffs voluntarily dismissed their complaint without prejudice, after being served with offers of judgment before trial. The defendants filed a motion to assess attorney’s fees and tax costs pursuant to Florida’s Offer of Judgment statute. The trial court denied the motion and the District Court affirmed. The courts reasoned that entitlement to attorney’s fees requires “the entry of judgment.” Because there was no judgment entered following the voluntary dismissal, the defendants were not entitled to attorney’s fees. The Supreme Court affirmed the lower courts’ decisions based upon different reasoning. Specifically, the Supreme Court found that the defendant was not entitled to attorney’s fees because the dismissal was without prejudice.

In conclusion, the adoption of a new Offer of Judgment rule by the New York legislature will promote early settlements and discourage frivolous litigation without stifling a party’s desire to bring a meritorious suit or to advance a valid defense. Consequently, a large reduction in the amount of trial-ready cases will ensue.

Andrea M. Alonso and Kevin G. Faley are partners at the insurance defense firm of Morris, Duffy, Alonso & Faley in Manhattan. They are both graduates of St. John’s University School of Law.

Endnotes:

1. See Record Caseloads cited at Courts’ Budget Hearing, N.Y.I.J., p.l (February 15, 1997).

2. See N.Y. McKinney’s CPLR 3221 (1962) New York’s rule as well as the numerous states’ offer judgment statutes have been modeled by the Federal Rule 68. See U.S.C.S. Fed. Rules Civ. Proc. 68.

3. There are currently no reported decisions interpreting the term “more favorable judgment.”

4. See Fla. Stat. 768.79(1).

5. Fla. Stat. 768.79(2).

6. Fla. Stat. 768.79(7)(a)-(b).

7. Section 768,79(2)(c).