WAIVER OF UNKNOWN CLAIMS UNDER CALIFORNIA CODE §1542

Introduction

In settlement agreements, one or more parties may waive their right to pursue recourse against other parties to the agreement in return for some form of consideration, such as a payment of money. However, what if a party is unaware of certain claims they may have against the party they are releasing–could they then accept the described consideration and still turn around and pursue legal action against the released party once they become aware of the grounds for their claim? Is a waiver of “unknown” claims enforceable in California? We explore the answers to these questions in this article.

California Civil Code §1542

A good place to begin our analysis is by reviewing the language of Section 1542, which reads:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” 

In short, this section of the Code creates rights—the right of a releasing party’snon-waiver of unknown claims. In other words, a releasing party is presumed NOT to have waived claims which are not known. Therefore, California courts will interpret a general waiver of claims as not waiving unknown claimsof the releasing party.

Enforceable Waivers of Unknown Claims

However, it is well established that a general release that explicitly covers unknown claims and specifically waives the provisions of California Civil Code §1542 is “completely enforceable and act[s] as a complete bar to all claims (known or unknown at the time of the release) despite protestations by one of the parties that he [or she] did not intend to release certain types of claims.” San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1053.

At the same time, waivers of unknown claims are not absolute, but are subject to attack like many other contractual provision. Some of the more common grounds for challenging the enforceability of such waivers includes, fraud in the inducement, duress, and mistake. The scope of the release must also be fairly definite to ensure enforceability. As the Court noted in Kaufman & Broad-S. Bay v. Unisys Corp., 822 F. Supp. 1468, 1474 (N.D. Cal. 1993):

“California Civil Code section 1542 provides that a general release does not extend to unknown or unsuspected claims. The parties to a release may be bound by a waiver of the section’s protection if they understand and consciously agree to the waiver. However, if the parties have not dealt at arms’ length and the releasor has relied on fraudulent statements or misrepresentations by the releasee, then the release is binding only to the extent actually intended by the releasor. In order to void the release, the releasor must show that its entry into the release was induced by fraud, undue influence, mistake or deceit.”[Emphasis Added].

Conclusion

While specific and express waivers of unknown claims are generally enforceable in California, since they may be subject to legal challenges by a releasing party, it is wise to consult with a business or civil litigation attorney to ensure any specific release, taken together with the contract as a whole, is likely to be enforced. Your attorney will apply contract principles when drafting your contract that many laypersons are simply unaware exist, and which can help ensure your intentions are clearly and expressly enunciated and enforced if they become the subject of a dispute.

The business litigation lawyers at Gehres Law Group, P.C. have decades of experience representing clients in business-related disputes and work diligently to protect the interests of clients above all else. Contact us today for a free evaluation of your business-related matter.

NOTE: Articles on this website are provided as a convenience to users as general legal information only and do not constitute legal advice or a substitute for legal advice.  Do not rely on this information.  Contact a California litigation attorney to discuss your case.

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Considerations in Settling a California Dispute

In a prior Blog Article published here Dec. 8, 2015 (“Filing a Lawsuit to Secure a Prompt & Enforceable Settlement”), we discussed the advantages of filing a lawsuit, even where you know from the outset that the other party will likely agree to settle, so you can use a “Stipulated Judgment”, under CA Code of Civ. Procedure § 664.6 to aid in collection efforts if the settlement is not timely paid.  Section 664.6 authorizes a Court to enter Judgment based on the stipulation of the parties, i.e. in accordance with their settlement.

Since most settling parties prefer to avoid having a judgment on record, it is not uncommon for parties to sign, but not file, a Stipulated Judgment, while providing in their settlement agreement that, upon any failure of payment, the Stipulated Judgment can be filed and enforced forthwith.  One important note of caution regarding this technique of “securing” a settlement with an unfiled Stipulated Judgment:  The Court must agree to retain jurisdiction following the settlement and keep the case open pending payment of the settlement.  If the case is dismissed following the settlement, but before the settlement is paid or the Stipulated Judgment is filed, it cannot be enforced unless the Court is persuaded to reopen the case.  Viejo Bancorp, Inc. v. Wood, 217 Cal. App. 3d 200, 265 Cal. Rptr. 620, 1989 Cal. App. LEXIS 1360 (Cal. App. 4th Dist. 1989)

Having a Stipulated Judgment won’t solve all the problems of collecting an unsecured debt, but it WILL give you important enforcement powers such as 1) the right to conduct a debtor’s examination under oath to seek information that might help locate the debtor’s assets; 2) place judgment liens on properties of the debtor; 3) garnish debtor’s wages; and, 4) file orders of attachment against debtor’s bank accounts.

Planning to Contest Defendant’s Bankruptcy Filing

One of the most intractable problems in trying to collect money from a financially stressed or insolvent party is the possibility they will file for bankruptcy.  Unfortunately, most legal claims for money are presumptively dischargeable in bankruptcy. In addition, settlement agreements where the defendant “waives” the right to seek bankruptcy are often found to be unenforceable in California. If you anticipate a bankruptcy filing, be flexible and negotiate to get paid quickly, or insist on security or guarantors when possible.

In appropriate cases where the factual basis for the claims against defendant would, if proved, bring the matter within an exception to the rule of presumptive dischargeability, you might try to include a detailed stipulation as to the agreed and undisputed FACTS supporting defendant’s liability. In such cases, the Settlement Agreement and/or the Stipulated Judgment should include a detailed recitation of defendant’s wrongdoing, essentially an admission of facts which would support the non-dischargeable liability of defendant.

Most settlement agreements, however, contain language to the effect that “the parties to this settlement deny all wrongdoing and are not hereby admitting any liability.”   You can anticipate great resistance in getting a defendant to formally admit wrongdoing, even when Stipulating to Judgment. If you have sufficient leverage and the defendants are appropriately motivated to settle, they may agree to such language.

CONCLUSION

As the old saying goes, “you can’t get blood from a turnip”.  In any settlement try to include solvent parties, with assets to secure the settlement. If you are settling with an entity, try to insist that the settlement be guaranteed by the individuals who control that entity.  And again, generally speaking, if you are settling with an insolvent and untrustworthy party, for any significant amount of money, you are better off filing a lawsuit and settling by means of a Stipulated Judgment.

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