There's a saying that goes something like: “learn from others' mistakes because you can't live long enough to make them all yourself.” One recent case reminds me of this point and motivates me to be sure and avoid the same pitfall.
In Grace Capital, LLC, et al. v. Wayne Mills, et al., File No. 27-CV-08-4767 (Minn. App. May 13, 2013), the Minnesota Court of Appeals stuck it to a loan guarantor who made a mistake in settling his debt. Henry Fong signed a personal guaranty for the debt of a company. The guaranty expressly limited his liability to $1 Million. The company failed and the creditors pursued Mr. Fong on the guaranty. The case appears to have sat idle for several years. Mr. Fong eventually agreed to settle with some of the creditors by paying $162,000 in payments and transferring common shares of stock. If Mr. Fong failed to make payments, judgment could be entered against him for the full $1 Million.
Mr. Fong apparently believed he was settling all claims regarding the guaranty at that time. He later went to dismiss the claims asserted by other inactive plaintiffs, but one of the plaintiffs hired counsel and objected. Mr. Fong moved to enforce the settlement against the other plaintiff and lost. The other non-settling plaintiff later secured a separate judgment against Mr. Fong for the full $1 Million, and the Court of Appeals upheld the judgment. In short, by failing to ensure his settlement covered all claims, Mr. Fong ended up being held liable for more than the $1 Million guaranty limit.
The legal issues aside, Mr. Fong's situation could have easily been avoided if Mr. Fong either made sure to include the non-settling parties in the settlement or secured protection from the settling parties regarding any claim thereafter asserted by the non-settling parties.
Settlements are treated like any other contracts in court. In this case, Mr. Fong should have made sure he knew what he was getting in exchange for his payment before signing off.