Disputed FRE 408 Coverage Of Third Party Settlement Activities

Are third party settlement claims covered by FRE 408? In a civil RICO fraud action alleging defendant bank withheld information concerning the deteriorating condition of a lender which resulted in significant losses for plaintiffs conducting business with the lender, admitting evidence that two other third party banks settled claims regarding the withheld information, despite the FRE 408 limitation on settlement evidence to prove liability for, or amount of, a claim; here the proffered settlement evidence concerned third party settlement claims which are not barred by FRE 408, in Dahlgren v. First Nat. Bank of Holdrege, 533 F.3d 681 (8th Cir. July 11, 2008) (No. 07-1951)

FRE 408 excludes evidence of settlement in order “to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction.” The Eighth Circuit has explored the issue whether third party settlement claims were included in the restricted FRE 408 evidence. The circuit ultimately found that while such evidence should be "viewed skeptically because of potential prejudice," it could be considered.

In the case, Damrow Cattle Company (“DCC”), which offered feed, storage and other cattle services, was placed in involuntary receivership. Fourteen cattle investors and corn producers lost nearly $2 million in the collapse. They brought a state fraud and federal civil RICO action against DCC’s primary lender, First National Bank of Holdrege (FNBH), alleging that the bank concealed the financial weakness of DCC. For example, the bank honored overdrawn checks, sometimes exceeding one million dollars, during a four year period. In addition, the defendant bank had been alerted about suspected fraudulent DCC financial statements and that its financial picture was hidden by the DCC's double counting of cattle. At trial, witnesses for banks that were third parties to the suit -- First National Bank of Omaha and Adams Bank & Trust -- were allowed to testify that their banks had sued FNBH for withholding information concerning DCC and that their claims were settled. Dahlgren, 533 F.3d at 688-89.

In presenting this third party evidence of settlement the plaintiff did not prompt their witnesses to testify about the amount of the settlements reached. Yet, defendant FNBH objected to admission of this evidence as violating FRE 408. The court denied the defense objection and the jury returned a verdict for the plaintiff on all fraud claims. The defendant appealed, citing as one ground the admission of the First National Bank of Omaha and Adams Bank & Trust's evidence as to their settlement with the defendant. The defendant argued that this evidence was inadmissible under FRE 408. Dahlgren, 533 F.3d at 699.

The Eighth Circuit found no abuse of discretion in admitting the third party compromise evidence. First, the circuit reviewed whether FRE 408 applied to compromise evidence involving third parties, an issue it had not previously “examined … in depth.” The circuit noted that it had applied FRE 408 narrowly. Dahlgren, 533 F.3d at 699 (citing Vulcan Hart Corp. v. NLRB, 718 F.2d 269, 276-77 (8th Cir. 1983) (while demand to resign union position “arose in the context of negotiations to settle his discharge grievance,” the discharge was not in issue and the statements were admitted to show coercion concerning “participation in organizational activities”)).

The circuit reviewed a number of cases from outside the Eighth Circuit to conclude that FRE 408 did bar admission of settlement activity related to third party conduct. These cases included:

  • Seventh Circuit: Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 688-90 (7th Cir. 2005) (settlement communications arose out of a dispute distinct from the case for which the evidence was being offered; concluding “[t]he district court did not abuse its discretion by admitting the September 6 letter, related to settlement of the action in California state court, for the purpose of determining whether there was an arbitrable dispute under the deductible agreements”)
  • Ninth Circuit: Hudspeth v. Commissioner, 914 F.2d 1207, 1213-14 (9th Cir. 1990) (in taxpayer deficiency action, noting timber valuation data from another settled case was admissible under FRE 408 bias exception where the same valuation expert arrived at widely disparate figures in the two similar cases)
  • Tenth Circuit: Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758, 770 (10th Cir. 1997) (“Rule 408 does not require the exclusion of evidence regarding the settlement of a claim different from the one litigated, though admission of such evidence may nonetheless implicate the same concerns of prejudice and deterrence of settlements which underlie Rule 408.”) (internal citations omitted)
Dahlgren, 533 F.3d at 699 (citing also Lo Bosco v. Kure Eng’g Ltd., 891 F. Supp. 1035, 1037-39 (D.N.J. 1995) (“[T]he Court finds that, where cases are related, the better view is that Rule 408 may exclude settlement proposals in one from admission into evidence in the other.”))

The Eighth Circuit noted that while inclined to join these courts approach to third party compromise offers under FRE 408, third party settlement claims should be viewed “skeptically” under FRE 408 since “the admission of evidence that a defendant settled a claim with a third party arising out of the same set of operative facts carries the inherent risk that ‘such a concession of liability is almost sure to be taken as an admission of fault.’” Dahlgren, 533 F.3d at 699 (quoting Paster v. Pennsylvania R.R., 43 F.2d 908, 911 (2d Cir. 1930) (Judge Learned Hand))

While the third party evidence involved in Dahlgren got a free pass to admission, the circuit did note that other barriers could stand in its way. The third party settlement evidence could still be excluded as unfairly prejudicial or insufficiently probative under FRE 403. In Dahlgren the trial court mitigated any potential prejudice of the FRE 408 evidence by excluding the amounts involved in the third party settlement claims. For instance, the third party settlement evidence was not mentioned during the closing argument. Finally,the circuit determined that the third party settlement evidence was not unduly prejudicial in light of evidence that had been properly admitted to the effect that the defendant bank “made negligent misrepresentations about DCC’s financial condition after DCC was no longer a customer. In these circumstances," concluded the circuit, "the admission of limited settlement evidence was not a clear and prejudicial abuse of discretion.” Dahlgren, 533 F.3d at 700.

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