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Univ. of South Carolina School of Law

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Thursday, October 25, 2007

Unsettling Decision: District Court Misapplies Rule 408 in Indeminifcation Decision

The District Court for the Western District of Kentucky recently made an inexplicable decision in Westlake Vinyls, Inc. v. Goodrich Corp., 2007 WL 3046519 (W.D. Ky. 2007).  In Goodrich, Westlake Vinyls, Inc. sold property to Goodrich Corporation and agreed to indemnify Goodrich for any liability resulting from "remediation of any soil, surface water and/or groundwater resulting from or otherwise attributable to events occurring after the closing date...." Id. at *1.

When such liability arose, Goodrich sought to recover under this agreement, but Westlake claimed that any recovery Goodrich could receive should be reduced by the amount Goodrich recovered from its excess insurers.  Westlake's argument is correct because Goodlake is not entitled to "double recovery."

The problem, however, is that Goodrich and some of its excess insurers could not agree on the amount of insurance proceeds Goodrich should recover, which led to settlement negotiations and eventual settlements.  Thus, when Westlake tried to introduce evidence of these settlement negotiations and agreements to prove its "double recovery" claim, Goodrich objected that this evidence was inadmissible under Federal Rule of Evidence 408.

Federal Rule of Evidence 408 states that evidence of compromises, offers to compromise, and related statements are inadmissible when "offered to prove liability for, invalidity of, or amount of a claim that was disupted as to liability or amount...."  The District Court somehow found the evidence at issue admissible despite this rule. 

In its holding, the court stated, "Here, evidence that Goodrich recovered some of its insurance proceeds as a result of a settlement would not be introduced to prove that those insurers were liable to Goodrich or that Goodrich had a valid claim for the insurance proceeds.  Instead, evidence of the settlements would be introduced merely to show the amount of insurance proceeds Goodrich has recovered, thus limiting any liability Westlake may owe to Goodrich..." Id. at *2 (emphasis added).

It almost seems as if the court read a redacted version of Rule 408 before reaching its decision.  The court correctly noted that this was not a case where evidence of settlement negotiations was offered to prove liability for or invalidity of a claim that was disputed as to liability or amount.  However, as the court itself noted, Westlake was using evidence of settlement of negotiations to prove the amount of a claim that was disputed as to liability or amount.  Clearly, then, the evidence was covered by and should have been held inadmissible under Rule 408.  This is not to say that Westlake was precluded from proving its "double recovery" claim; it simply could not rely on evidence of settlement negotiations to prove its claim.

Although it did not argue that this case was different than the typical case because a party (Westlake) was using evidence of settlement negotiations between the opposing party (Goodrich) and a third party (its excess insurers), perhaps the court relied upon these facts.  As I noted in a blog post yesterday, however, there is no reason to treat these third party situations differently than the regular situations where both parties in a case were parties to the settlement negotiations.

(It's also noted that Federal Rule of Evidence 411, which excludes evidence of liability insurance, was not applicable here because Westlake was not using evidence of Goodrich's liability insurance to prove negilgence or otherwise wrongful conduct.).

-CM

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