FRE 408 Does Not Bar Settlement Evidence Offered To Determine Property Interests

In receivership proceedings involving the ownership of timeshare interests, settlement agreement was not barred by FRE 408 since it was used to resolve whether unsold timeshare units were relet to another party , in United States v. Fairway Capital Corp., 483 F.3d 34 (1st Cir. Apr. 11, 2007) (No. 06-2023)

Generally, FRE 408 bars settlement evidence “when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount.” However, the rule does not bar all settlement evidence when offered for other permissible purposes. A case involving timeshare interests in receivership proceedings demonstrates the application of the rule.

The case concerned the ownership of timeshare interests in the Virgin Islands. Foreclosure proceedings were commenced after a loan default. A stipulated judgment of foreclosure was made. The Government of the Virgin Islands (“GVI”), which had negotiated a fifty-year lease on the property, filed an eviction action. Eventually, the GVI and the Hotel On the Cay Timeshare Association, Inc. (“HOTC”), representing the owners of the sold timeshare units, entered into a “Stipulated Settlement.” The settlement provided “that in exchange for HOTC withdrawing its intervention in the eviction action, GVI would recognize HOTC as the lessee of the timeshare resort, including the unsold timeshare units. In addition, the Stipulated Settlement stated that HOTC would not be deemed a successor to Legend or Fairway. Finally, the parties agreed in the Stipulated Settlement that in the event that Legend and Fairway prevailed in the eviction action and their lease of the resort was reinstated, GVI would give credit to Legend and Fairway for all of HOTC’s rent payments.” Fairway Capital Corp., 483 F.3d at 37.

The Small Business Administration (SBA), which had provided a $1.7 million loan, filed complaint and requested that Fairway Capital Corp. (“Fairway”), a Small Business Investment Company, be placed in receivership based on regulation violations and failure to pay money to the SBA. One issue in the receivership proceedings concerned the possession of the unsold timeshare units. Ownership turned on the validity and enforcement of the Stipulated Settlement. The district court concluded the Stipulated Settlement was valid and enforceable and denied a claim by the GVI for equitable possession. GVI claimed that FRE 408 barred consideration of the Stipulated Settlement from being used to show liability for, invalidity of, or amount of a claim that was disputed as to validity or amount.” In receivership proceedings, the GVI submitted a claim for possession of property and money against the SBA receivership estate for Fairway Capital Corporation. The Receiver’s Report and Recommendation recommend that the possessory claim of GVI be denied and its monetary claim be granted in part in the amount of $430,421.84. The district court affirmed the recommendation. The GVI appealed, claiming in part that the Stipulated Settlement could not be considered under FRE 408.

The circuit affirmed consideration of the Stipulated Settlement, and agreed that GVI was not entitled to possession of the unsold timeshare units. The Stipulated Settlement was not used to show “liability for, invalidity of, or amount of a claim that was disputed as to validity or amount.” The settlement was used “only to determine whether GVI has subsequently relet the unsold timeshare units … in which case GVI would no longer be entitled to possession of the premises. Thus, the district court’s use of the Stipulated Settlement does not implicate Rule 408 concerns.” Fairway Capital Corp., 483 F.3d at 46 n.7. The circuit also affirmed the conclusions of the district court concerning the receivership
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FRE 408 has both prohibited and permitted uses of settlement evidence. FRE 408, as amended in 2006, specifies “[e]xamples of permissible purposes” to introduce compromise evidence, include to prove “a witness’s bias or prejudice”; negative “a contention of undue delay”; and prove “an effort to obstruct a criminal investigation or prosecution.” The list is non-exhaustive and only illustrative.

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