McDermott, Inc. v. AmClyde

511 U.S. 202 (1994)

McDERMOTT, INC.
v.
AmCLYDE et al.

No. 92-1479.

United States Supreme Court.

Argued January 11, 1994. Decided April 20, 1994. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

Stevens, J., delivered the opinion for a unanimous Court.

Arden J. Lea argued the cause for petitioner. With him on the briefs was R. Jeffrey Bridger.

William K. Kelley argued the cause for the United States as amicus curiae urging reversal. With him on the brief were Solicitor General Days, Assistant Attorney General Hunger, Acting Deputy Solicitor General Kneedler, Richard A. Olderman, and David V. Hutchinson.

Robert E. Couhig, Jr., argued the cause for respondents. With him on the brief was Thomas G. O'Brien.^[*]

Justice Stevens, delivered the opinion of the Court.

A construction accident in the Gulf of Mexico gave rise to this admiralty case. In advance of trial, petitioner, the plaintiff, settled with three of the defendants for $1 million. Respondents, however, did not settle, and the case went to trial. A jury assessed petitioner's loss at $2.1 million and allocated 32% of the damages to respondent AmClyde and 38% to respondent River Don Castings, Ltd. (River Don). The question presented is whether the liability of the nonsettling defendants should be calculated with reference to the jury's allocation of proportionate responsibility, or by giving the nonsettling defendants a credit for the dollar amount of the settlement. We hold that the proportionate approach is the correct one.

I

Petitioner McDermott, Inc., purchased a specially designed, 5,000-ton crane from AmClyde.^[1] When petitioner first used the crane in an attempt to move an oil and gas production platform—the "Snapper deck"—from a barge to a structural steel base affixed to the floor of the Gulf of Mexico, a prong of the crane's main hook broke, causing massive damage to the deck and to the crane itself. The malfunction may have been caused by petitioner's negligent operation of the crane, by AmClyde's faulty design or construction, by a defect in the hook supplied by River Don, or by one or more of the three companies (the "sling defendants") that supplied the supporting steel slings.^[2]

Invoking the federal court's jurisdiction under 28 U.S. C. §§ 1332 and 1333(1),^[3] petitioner brought suit against AmClyde and River Don and the three sling defendants. The complaint sought a recovery for both deck damages and crane damages. On the eve of trial, petitioner entered into a settlement with the sling defendants. In exchange for $1 million, petitioner agreed to dismiss with prejudice its claims against the sling defendants, to release them from all liability for either deck or crane damages, and to indemnify them against any contribution action. The trial judge later ruled that petitioner's claim for crane damages was barred by East River S. S. Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986).

In its opening statement at trial, petitioner McDermott "accepted responsibility for any part the slings played in causing the damage."^[4]McDermott, Inc. v. Clyde Iron, 979 F. 2d 1068, 1070 (CA5 1993). The jury found that the total damages to the deck amounted to $2.1 million and, in answer to special interrogatories, allocated responsibility among the respective parties: 32% to AmClyde, 38% to River Don, and 30% jointly to McDermott and the sling defendants.^[5] The court denied a motion by respondents to reduce the judgment pro tanto by the $1 million settlement, and entered judgment against AmClyde for $672,000 (32% of $2.1 million) and against River Don for $798,000 (38% of $2.1 million). Even though the sum of those judgments plus the settlement proceeds exceeded the total damages found by the jury, the District Court concluded that petitioner had not received a double recovery because the settlement had covered both crane damages and deck damages.^[6]

The Court of Appeals held that a contractual provision precluded any recovery against AmClyde and that the trial judge had improperly denied a pro tanto settlement credit. It reversed the judgment against AmClyde entirely and reduced the judgment against River Don to $470,000. It arrived at that figure by making two calculations. First, it determined that petitioner's "full damage[s] award is $1.47 million ($2.1 million jury verdict less 30% attributed to McDermott/sling defendants)." 979 F.2d, at 1081. Next, it deducted the "$1 million received in settlement to reach $470,000." Ibid. It treated this figure as the maximum that could be recovered from the nonsettling defendants. Because it was less than River Don's liability as found by the jury (38% of $2.1 million or $798,000), it directed the entry of judgment against River Don in that amount. Ibid.

Because we have not previously considered how a settlement with less than allof the defendants in an admiralty case should affect the liability of nonsettling defendants, and because the Courts of Appeals have adopted different approaches to this important question, we granted certiorari. 509 U.S. 921 (1993).

II

Although Congress has enacted significant legislation in the field of admiralty law,^[7] none of those statutes provides us with any "policy guidance" or imposes any limit on our authority to fashion the rule that will best answer the question presented by this case. See Miles v. Apex Marine Corp., 498 U.S. 19, 27 (1990). We are, nevertheless, in familiar waters because "the Judiciary has traditionally taken the lead in formulating flexible and fair remedies in the law maritime." United States v. Reliable Transfer Co., 421 U.S. 397, 409 (1975).

In the Reliable Transfer case we decided to abandon a rule that had been followed for over a century in assessing damages when both parties to a collision are at fault. We replaced the divided damages rule, which required an equal division of property damage whatever the relative degree of fault may have been, with a rule requiring that damages be assessed on the basis of proportionate fault when such an allocation can reasonably be made. Although the old rule avoided the difficulty of determining comparative degrees of negligence, we concluded that it was "unnecessarily crude and inequitable" and that "[p]otential problems of proof in some cases hardly require adherence to an archaic and unfair rule in all cases." Id., at 407. Thus the interest in certainty and simplicity served by the old rule was outweighed by the interest in fairness promoted by the proportionate fault rule.

Our decision in Reliable Transfer was supported by a consensus among the world's maritime nations and the views of respected scholars and judges. See id., at 403-405. No comparable consensus has developed with respect to the issue in the case before us today. It is generally agreed that when a plaintiff settles with one of several joint tortfeasors, the nonsettling defendants are entitled to a credit for that settlement. There is, however, a divergence among respected scholars and judges about how that credit should be determined. Indeed, the American Law Institute (ALI) has identified three principal alternatives and, after noting that "[e]ach has its drawbacks and no one is satisfactory," decided not to take a position on the issue. Restatement (Second) of Torts § 886A, pp. 343-344 (1977). The ALI describes the three alternatives as follows:

"(1) The money paid extinguishes any claim that the injured party has against the party released and the amount of his remaining claim against the other tortfeasor is reached by crediting the amount received; but the transaction does not affect a claim for contribution by another tortfeasor who has paid more than his equitable share of the obligation." Id. , at 343.

"(2) The money paid extinguishes both any claims on the part of the injured party and any claim for contribution by another tortfeasor who has paid more than his equitable share of the obligation and seeks contribution." Ibid. (As in alternative (1), the amount of the injured party's claim against the other tortfeasors is calculated by subtracting the amount of the settlement from the plaintiff's damages.)

"(3) The money paid extinguishes any claim that the injured party has against the released tortfeasor and also diminishes the claim that the injured party has against the other tortfeasors by the amount of the equitable share of the obligation of the released tortfeasor." Id. , at 344.^[8]

The first two alternatives involve the kind of "pro tanto" credit that respondents urge us to adopt. The difference between the two versions of the pro tanto approach is the recognition of a right of contribution against a settling defendant in the first but not the second. The third alternative, supported by petitioner, involves a credit for the settling defendants' "proportionate share" of responsibility for the total obligation. Under this approach, no suits for contribution from the settling defendants are permitted, nor are they necessary, because the nonsettling defendants pay no more than their share of the judgment.

The proportionate share approach^[9] would make River Don responsible for precisely its share of the damages, $798,000 (38% of $2.1 million).^[10] A simple application of the pro tanto approach would allocate River Don $1.1 million in damages ($2.1 million total damages minus the $1 million settlement).^[11] The Court of Appeals, however, made a different calculation. Because McDermott "accepted responsibility for any part the sling played in causing the damage," 979 F.2d, at 1070, the Court of Appeals treated the 30% of liability apportioned to "McDermott/sling defendants" as if that 30% had been caused solely by McDermott's own negligence. Id. , at 1081. The Court of Appeals, therefore, gave River Don a double credit, first reducing the total loss by the McDermott/sling defendants' proportionate share and then applying the full pro tanto reduction to that amount. This double credit resulted in an award of only $470,000 ($2.1 million minus 30% of $2.1 million minus $1 million).^[12]

III

In choosing among the ALI's three alternatives, three considerations are paramount: consistency with the proportionate fault approach of United States v. Reliable Transfer, 421 U.S. 397 (1975), promotion of settlement, and judicial economy. ALI Option 1, pro tanto setoff with right of contribution against the settling defendant, is clearly inferior to the other two, because it discourages settlement and leads to unnecessary ancillary litigation. It discourages settlement, because settlement can only disadvantage the settling defendant.^[13] If a defendant makes a favorable settlement, in which it pays less than the amount a court later determines is its share of liability, the other defendant (or defendants) can sue the settling defendant for contribution. The settling defendant thereby loses the benefit of its favorable settlement. In addition, the claim for contribution burdens the courts with additional litigation. The plaintiff can mitigate the adverse effect on settlement by promising to indemnify the settling defendant against contribution, as McDermott did here. This indemnity, while removing the disincentive to settlement, adds yet another potential burden on the courts, an indemnity action between the settling defendant and plaintiff.

The choice between ALI Options 2 and 3, between the pro tanto rule without contribution against the settling tortfeasor and the proportionate share approach, is less clear. The proportionate share rule is more consistent with Reliable Transfer, because a litigating defendant ordinarily pays only its proportionate share of the judgment. Under the pro tanto approach, however, a litigating defendant's liability will frequently differ from its equitable share, because a settlement with one defendant for less than its equitable share requires the nonsettling defendant to pay more than its share.^[14] Such deviations from the equitable apportionment of damages will be common, because settlements seldom reflect an entirely accurate prediction of the outcome of a trial. Moreover, the settlement figure is likely to be significantly less than the settling defendant's equitable share of the loss, because settlement reflects the uncertainty of trial and provides the plaintiff with a "war chest" with which to finance the litigation against the remaining defendants. Courts and legislatures have recognized this potential for unfairness and have required "good-faith hearings" as a remedy.^[15] When such hearings are required, the settling defendant is protected against contribution actions only if it shows that the settlement is a fair forecast of its equitable share of the judgment.^[16] Nevertheless, good-faith hearings cannot fully remove the potential for inequitable allocation of liability.^[17] First, to serve their protective function effectively, such hearings would have to be minitrials on the merits, but in practice they are often quite cursory.^[18] More fundamentally, even if the judge at a good-faith hearing were able to make a perfect forecast of the allocation of liability at trial, there might still be substantial unfairness when the plaintiff's success at trial is uncertain.^[19] In sum, the pro tanto approach, even when supplemented with good-faith hearings, is likely to lead to inequitable apportionments of liability, contrary to Reliable Transfer.

The effect of the two rules on settlements is more ambiguous. Sometimes the pro tanto approach will better promote settlement.^[20] This beneficial effect, however, is a consequence of the inequity discussed above. The rule encourages settlements by giving the defendant that settles first an opportunity to pay less than its fair share of the damages, thereby threatening the nonsettling defendant with the prospect of paying more than its fair share of the loss. By disadvantaging the party that spurns settlement offers, the pro tanto rule puts pressure on all defendants to settle.^[21] While public policy wisely encourages settlements, such additional pressure to settle is unnecessary. The parties' desire to avoid litigation costs, to reduce uncertainty, and to maintain ongoing commercial relationships is sufficient to ensure nontrial dispositions in the vast majority of cases.^[22] Under the proportionate share approach, such factors should ensure a similarly high settlement rate. The additional incentive to settlement provided by the pro tanto rule comes at too high a price in unfairness.^[23] Furthermore, any conclusion that the pro tanto rule generally encourages more settlements requires many simplifying assumptions, such as low litigation costs. Recognition of the reality that a host of practical considerations may be more significant than stark hypotheticals persuades us that the pro tanto rule has no clear advantage in promoting settlements.^[24]

The effect of the two rules on judicial economy is also ambiguous. The pro tanto rule, if adopted without the requirement of a good-faith hearing, would be easier to administer, because the relative fault^[25] of the settling defendant would not have to be adjudicated either at a preliminary hearing or at trial. Nevertheless, because of the large potential for unfairness, no party or amicus in this suit advocates the pro tanto rule untamed by good-faith hearings. Once the pro tanto rule is coupled with a good-faith hearing, however, it is difficult to determine whether the pro tanto or proportionate share approach best promotes judicial economy. Under either approach, the relative fault of the parties will have to be determined. Under the pro tanto approach, the settling defendant's share of responsibility will have to be ascertained at a separate, pretrial hearing. Under the proportionate share approach, the allocation will take place at trial. The pro tanto approach will, therefore, save judicial time only if the good-faith hearing is quicker than the allocation of fault at trial. Given the cursory nature of most good-faith hearings, this may well be true. On the other hand, there is reason to believe that reserving the apportionment of liability for trial may save more time. First, the remaining defendant (or defendants) may settle before trial, thus making any determination of relative culpability unnecessary. In addition, the apportionment of damages required by the proportionate share rule may require little or no additional trial time. The parties will often need to describe the settling defendant's role in order to provide context for the dispute. Furthermore, a defendant will often argue the "empty chair" in the hope of convincing the jury that the settling party was exclusively responsible for the damage. The pro tanto rule thus has no clear advantage with respect to judicial economy.^[26]

In sum, although the arguments for the two approaches are closely matched, we are persuaded that the proportionate share approach is superior, especially in its consistency with Reliable Transfer.

IV

Respondents advance two additional arguments against the proportionate share approach: that it violates the "one satisfaction rule" and that it is inconsistent with Edmonds v. Compagnie Generale Transatlantique, 443 U.S. 256 (1979).

In the 19th and early 20th centuries, the "one satisfaction rule" barred a plaintiff from litigating against one joint tortfeasor, if he had settled with and released another.^[27] This version of the one satisfaction rule has been thoroughly repudiated.^[28] Respondents do not ask that the one satisfaction rule be applied with its original strictness, but rather in the milder form in which some courts still invoke it to reduce a plaintiff's recovery against a nonsettling defendant in order to ensure that the plaintiff does not secure more than necessary to compensate him for his loss.^[29] As a preliminary matter, it is far from clear that there was any danger of supercompensatory damages here. First, there is the question of the crane damages, which were not covered by the judgment against River Don. In addition, even limiting consideration to deck damages, the jury fixed plaintiff's losses at $2.1 million. Plaintiff received $1 million in settlement from the sling defendants. Under the proportionate share approach, plaintiff would receive an additional $798,000 from River Don. In total, plaintiff would recover only $1.798 million, over $300,000 less than its damages. The one satisfaction rule comes into play only if one assumes that the percent share of liability apportioned to McDermott and the sling defendants really represented McDermott's contributory fault, and that it would be overcompensatory for McDermott to receive more than the percentage of the total loss allocated to the defendants, here $1.47 million (70% of $2.1 million).

Even if the Court of Appeals were correct in finding that the proportionate share approach would overcompensate McDermott, we would not apply the one satisfaction rule. The law contains no rigid rule against overcompensation. Several doctrines, such as the collateral benefits rule,^[30] recognize that making tortfeasors pay for the damage they cause can be more important than preventing overcompensation. In this case, any excess recovery is entirely attributable to the fact that the sling defendants may have made an unwise settlement. It seems probable that in most cases in which there is a partial settlement, the plaintiff is more apt to accept less than the proportionate share that the jury might later assess against the settling defendant, because of the uncertainty of recovery at the time of settlement negotiations and because the first settlement normally improves the plaintiff's litigating posture against the nonsettlors. In such cases, the entire burden of applying a proportionate share rule would rest on the plaintiff, and the interest in avoiding overcompensation would be absent. More fundamentally, we must recognize that settlements frequently result in the plaintiff's getting more than he would have been entitled to at trial. Because settlement amounts are based on rough estimates of liability, anticipated savings in litigation costs, and a host of other factors, they will rarely match exactly the amounts a trier of fact would have set. It seems to us that a plaintiff's good fortune in striking a favorable bargain with one defendant gives other defendants no claim to pay less than their proportionate share of the total loss. In fact, one of the virtues of the proportionate share rule is that, unlike the pro tanto rule, it does not make a litigating defendant's liability dependent on the amount of a settlement negotiated by others without regard to its interests.

Respondents also argue that the proportionate share rule is inconsistent with Edmonds v. Compagnie Generale Transatlantique, 443 U.S. 256 (1979). In that case, we refused to reduce the judgment against a shipowner by the proportionate fault attributed to a stevedore whose liability was limited by the Longshoremen's and Harbor Workers' Compensation Act. Instead, the Court allowed the plaintiff to collect from the shipowner the entirety of his damages, after adjusting for the plaintiff's own negligence. There is no inconsistency between that result and the rule announced in this opinion. Edmonds was primarily a statutory construction case and related to special interpretive questions posed by the 1972 amendments to the Longshoremen's and Harbor Workers' Compensation Act. Both parties acknowledge that this case must be resolved by judge-made rules of law. Moreover, Edmonds did not address the issue in this case, the effect of a settlement on nonsettling defendants. Indeed, there was no settlement in that case. Instead, one can read that opinion as merely reaffirming the well-established principle of joint and several liability. As the Court pointed out, that principle was in no way abrogated by Reliable Transfer `s proportionate fault approach. Edmonds, 443 U. S., at 271— 272, n. 30. In addition, as the Commissioners on Uniform State Laws have noted, there is no tension between joint and several liability and a proportionate share approach to settlements.^[31] Joint and several liability applies when there has been a judgment against multiple defendants. It can result in one defendant's paying more than its apportioned share of liability when the plaintiff's recovery from other defendants is limited by factors beyond the plaintiff's control, such as a defendant's insolvency. When the limitations on the plaintiff's recovery arise from outside forces, joint and several liability makes the other defendants, rather than an innocent plaintiff, responsible for the shortfall. Ibid.^[32] Unlike the rule in Edmonds, the proportionate share rule announced in this opinion applies when there has been a settlement. In such cases, the plaintiff's recovery against the settling defendant has been limited not by outside forces, but by its own agreement to settle. There is no reason to allocate any shortfall to the other defendants, who were not parties to the settlement. Just as the other defendants are not entitled to a reduction in liability when the plaintiff negotiates a generous settlement, see supra, at 219-220, so they are not required to shoulder disproportionate liability when the plaintiff negotiates a meager one.

V

The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.