A Moral Dilemma

10.29.2010

Daily Journal

These stories are reprinted with permission from Kurt Melchior's "Off the Record: Sidebars from a Trail Lawyer's Life," published by Courthouse Steps Publishing in September 2010. Melchior, who is a partner and general counsel at Nossaman in San Francisco, is a member of the California Trial Lawyers Hall of Fame. The 100-plus anecdotes in the book are true and share lessons learned from his almost 60 years of practice, providing an inside look at the sometimes humorous twists and turns of our legal system.

"You Actually Agree With Me, Your Honor? No Objection!"

I'm not sure that you would call this one a story about settling cases.

Encouraged by a case in Oregon where plaintiffs obtained a large judgment against banks for "conspiring to fix the prime interest rate" - a judgment which was later reversed on appeal - some plaintiffs' lawyers filed a class action against most savings and loan associations in our area, claiming that the associations had fixed the rates of interest on housing loans. It quickly turned out that at any given time there were some 30 or 40 different home loan rates available at any moment during the period in issue, and that this rate information was distributed weekly to all brokers on a "blue sheet." So, that core claim turned to naught in a hurry. But the plaintiffs' lawyers had invested time and effort in this case and thus turned to the periphery of the business to find their alleged price fixing claims. They now said that the lenders were fixing prices on inspection fees, title insurance and other closing costs. This was a thin copy of the earlier claim that loan rates were fixed; but there was no substance even in this claim.

They also sued many major banks in California for "fixing the prime rate;" but that is another story.

The savings and loan case went through a fair amount of discovery - depositions, interrogatories, production of countless documents which required file searches going back over many years. This was costly, but none of it produced any evidence of a conspiracy to set any prices at all.

As in all cases, shortly before the trial date this case was set for a mandatory settlement conference. My client had to send a representative. It sent a lawyer - an associate general counsel. We met beforehand and agreed that the case was a pure holdup. We would pay nothing to settle it.

On the assigned day, platoons of lawyers assembled in the courtroom. The usual procedure is that the judge who oversees settlement negotiations will first speak privately with the plaintiffs and their lawyers - in a class action, there would be no plaintiffs, only lawyers - and then with the defendants.

Here, however, the judge looked across the crowded room. "Mr. Melchior," he said. "Would you please come into my chambers."

This was a surprise. My client was a volume leader in the industry; but that was no reason for the judge to single me out this way. Once inside, the judge was relaxed. "Tell me, Kurt," he said. "What's this case about?"

After a moment's thought I decided that this overture - singling me out and then asking such an open ended question - allowed me to let my hair down. I knew that as in all settlement conferences, whatever I said would be off the record.

"I have to tell you, Judge, that this is a pure strike suit. They are claiming all kinds of horrendous conduct by the entire industry; but they've turned the industry upside down and they haven't found anything. Nor will they. The price fix just isn't there."

I elaborated so that the judge would understand that I had good reasons for making the statements I did. He then asked me whether we were prepared to pay anything in settlement.

I told him that we had reviewed the situation carefully with the client and that we would pay nothing. I said that I had trouble sleeping nights when we paid money as an expedient just because it cost more to try the case, where the client hadn't done anything wrong. I probably said some things about how this sort of merchandising corrupted the legal system.

To my surprise, the judge said, "You, too? That sort of thing bothers me more than I can tell you. I hate it when we dispense deals rather than justice. While I can't evaluate the case since I have only heard your side, I'm glad that you're taking a principled stand. Tell your client that I respect it for that position."

I left the judge's chambers and saw some 25 expectant faces looking at me: all the waiting lawyers. But I had nothing to say to them. I took my client aside and told him what had happened. We then spent a long day in the courthouse corridor, waiting to be excused.

In mid-afternoon the clerk asked me to come into chambers with my client. The number of lawyers waiting in the courtroom seemed smaller, but we had no idea what might have happened in the negotiations meanwhile. We went into the chambers, where we found some six or eight of the plaintiffs' lawyers lined up along the wall. Strange!

Kurt," said the judge. "I know that you intend to pay nothing. I've made that plain to these gentlemen. But the plaintiffs' lawyers are willing to take $25,000 from your client and let you go. It's an offer I felt I had to pass on to you."

The plaintiffs' lawyers seemed to be holding their breaths. I whispered with my client. It seemed to both of us that even principle had a price and that in the context of a multi-million dollar case this offer had to be taken seriously. We countered with $15,000; and to our astonishment this offer was accepted.

Once the ice had been broken in this way, the entire case settled very quickly and for very little money. But had we compromised our integrity, or the judge his, even though the price of a trial would have been many times the token amount of the settlement?

Kurt W. Melchior is a partner at Nossaman and chair of the Firm's Insurance Coverage Practice Group. He serves on the State Bar Commission for Revision of the Rules of Professional Conduct. He can be reached at (415) 438-7279 or kmelchior@nossaman.com.