Disbursements in Minors’ Settlements

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By Rachel Scott Decker
208 West Wendover Ave.
Greensboro, North Carolina 27401
(336) 273-3812

I. When Is Court Approval Required?

A settlement on behalf of a minor which is not investigated and approved by the court is not binding upon the minor. Rector v. Laurel River Logging Co., 179 N.C. 59, 101 S.E.2d 502 (1919); Creech v. Melnik, 147 N.C. App. 471, 556 S.E.2d 587 (2001), rev. denied, 355 N.C. 490, 561 S.E.2d 498 (2002); Ballard v. Hunter, 12 N.C. App. 613, 184 S.E.2d 423 (1971), rev. denied, 280 N.C. 180, 185 S.E.2d 704 (1972). Even a confession of judgment does not bind a minor where there has been no investigation by the court. Ballard.

The rule is not merely one of a court order approving settlement; rather, the rule requires that the court actually investigate and approve the settlement. In Rector, the Supreme Court reversed the trial court’s dismissal of plaintiff’s action. There, plaintiff had been injured as a minor and his guardian ad litem had entered into a consent judgment settling his case.

Later, in this action, plaintiff as an adult sought to recover for the same injuries against the defendant, and defendant raised the prior action as a bar. The plaintiff also alleged that the prior consent judgment was procured through fraud, notwithstanding the court’s approval of the prior consent judgment. The supreme court held that the mere fact that a consent judgment was entered was not conclusive of the matter, if there was no evidence that the prior court had in fact investigated the propriety of the settlement.

The case was remanded to determine what, if any, investigation had been done by the trial court in approving the earlier consent judgment. If no investigation had been performed by the earlier trial court, this plaintiff would not be bound by the prior settlement.

Likewise, in Ballard, one tortfeasor made a statutory confession of judgment, a device which predated the offer of judgment. The minor plaintiff accepted the confession of judgment and a judgment against that tortfeasor was entered. The plaintiff’s attorney then later petitioned the trial court for an award of attorneys’ fees which was granted.

Thereafter, the trial court granted the other tortfeasors’ motion for summary judgment, opining that the cancellation of the confession of judgment released all tortfeasors from liability under the Uniform Contribution among Joint Tortfeasors Act. The court of appeals disagreed, holding that notwithstanding a cancellation of a judgment, the minor was not bound by the prior judgment because there had been no investigation or court approval of the proposed settlement. Summary judgment for the remaining tortfeasors was reversed.

Also in Creech v. Melnik, 147 N.C. App. 471, 556 S.E.2d 587 (2001), rev. denied, 355 N.C. 490, 561 S.E.2d 498 (2002), the court of appeals reversed a jury verdict for defendant doctor based on the jury’s conclusion that the minor plaintiff’s attorney had entered into a contract not to sue defendant. In reversing, the court of appeals indicated that the contract not to sue was not approved by the court and was therefore not binding upon the plaintiff. The court noted that the requirement that settlements and contracts with minors be approved by the court is mandatory. “Those who venture to act in defiance of them must take the risk of their action being declared void, or set aside.” Id.

A more difficult situation arises where there is partial settlement of a minor’s claim but where litigation continues against other parties. For example, what happens when a tortfeasor’s insurance carrier tenders its insurance policy limits, but there are underinsured motorists benefits available that have not been offered? What occurs if one defendant makes an offer of judgment?

Similar situations have been addressed by the appellate courts. For example, in Payseur v. Rudisill, 15 N.C. App. 57, 189 S.E.2d 562, rev. denied, 281 N.C. 758, 191 S.E.2d 356 (1972), the court of appeals reversed a summary judgment motion of the defendant which had been granted by the trial court. There, the minor, through his guardian ad litem, sued two tortfeasors. The minor settled with one tortfeasor which settlement was approved by the court and resulted in a minor settlement judgment against one defendant. The other defendant moved for summary judgment based on the other defendant’s judgment extinguishing his liability. The trial court agreed and granted summary judgment. Reversing, the court of appeals noted that to allow such a result would be inconsistent with the duties of the court and the guardian ad litem towards the minor. The court of appeals likened the minor settlement judgment to a partial release which is all that would be required had the minor been an adult desirous of settling his case. Accordingly, the partial settlement resulting in judgment did not bar the plaintiff from continuing the action against the remaining tortfeasor.

Attached to these materials are some examples of minor settlement judgments that attempted to preserve an underinsured motorists claim. However, the underinsured motorist carrier had approved the language in the first minor settlement and indicated that it would not raise the settlement with and judgment against the tortfeasor as a defense in the action. There

are also attached some general minor settlement judgments which attempt to incorporate language memorializing the court’s investigation into the settlement.

In conclusion, the law seems to indicate that court investigation and approval is required if the minor is to be bound. There is no prohibition that parties cannot settle without court approval; only, the minor will not be bound if that occurs. Additionally, the mere fact that an order is entered does not necessarily mean that the minor will not be able to later attack the settlement, if the approving court does not investigate the matter. Evidence, such as a recitation in the order, may be required to establish that the court approving the settlement exercised its due diligence.

II. What Is Needed For Your Court Approval Hearing?

As mentioned elsewhere in this manuscript, one of the most important things needed for a minor settlement hearing is to know the judge. The trial judge exercises great discretion in reviewing a minor settlement, and he or she has power to approve the settlement, approve there the funds will be held, and to set attorneys fees. Each judge also has different ways in

approving settlements and different requirements in approving them. At the very least, the attorney should have available to him or her a number of things. First and foremost, the attorney should have the guardian ad litem and the minor available. Many judges want to see and speak with the parties themselves.

Additionally, many judges would like to see a total of the medical bills, to have an understanding of how the injury occurred and what the injuries are, and to know what the permanent damage if any is. Some judges want to see the medical records themselves. Others want statements from the physicians regarding the degree of permanency, be it through deposition or medical records. Still others want to know what bills are outstanding and are loathe to award great amounts of money to the parents for these bills. In regards to any attorneys’ fee awarded, the attorney should also have available for the court a listing of case expenses and a copy of the fee contract. If the attorney expects to keep the contract fee, he or she should also be prepared to describe in some detail the effort that the attorney put into the case. Many judges slash contract fees with some regularity. Some have even gone so far as to award only on an hourly rate. Others are more willing to honor a requested fee if the attorney volunteers that he has reduced it on his or her own. Some attorneys have had better luck in retaining their fees in district court, as opposed to superior court.

Where a settlement is uncontested, the attorney may consider filing the action in district court, regardless of the amount, because district court can hear the case, even if exceeds the district court limit, as this is not a jurisdictional issue. District court may also provide a more timely hearing. An interesting twist with respect to the allocation of medical expenses to the parents arises when health insurance plans seek reimbursement from the settlement. This type of matter is more thoroughly discussed by other speakers, however, it is important to note that a minor settlement is a discreet identifiable fund, which may have significant implications in law involving health insurance plans.

Practitioners should take note of the fact that these settlements generally result in identifiable funds and plan accordingly. Again, these health insurance issues are thoroughly addressed by other speakers at this program. This most important thing to remember about minor settlements is that they are not nearly as routine as they may once have been. Knowing the judge and his and her tendencies will allow you to have an understanding going in about whether your settlement will be approved and whether your intended distribution and allocation of the funds will be honored.

III. Investing the Proceeds with the Clerk of Court and Other Alternatives

One advantage to investing the proceeds with the Clerk of Court is that he or she is strictly liable for any loss of proceeds. State v. Sawyer, 223 N.C. 102, 25 S.E.2d 443 (1943). In that case, the plaintiff sued the Clerk of Court for disbursing proceeds to the minor’s purported guardian, pursuant to a court order. The plaintiff alleged that the purported guardian who obtained the disbursed funds was a fraud and had obtained the court order authorizing disbursal through fraud. The clerk argued that he was bound by the order to disburse and therefore could not be liable for the improper disbursement. The North Carolina Supreme Court disagreed, holding that the clerk is strictly liable for the improper disbursement of funds, even where loss is through thieves or an act of God. Further, the trial court’s order did not protect the clerk because the order was void.

Because the minor was not represented at the hearing where the order issued, the minor was not bound by the order. Additionally, the supreme court indicated that given the situation, the clerk, not the minor, was in a better position to bear the loss. While there is a distinct advantage in the clerk’s strict liability, the clerk has other disadvantages. The clerk generally deposits a minor’s funds into a low interest bearing account. These accounts do not yield the returns of other financial investments. However, generally, the funds are safe and will be there on the minor’s reaching majority.

There are alternatives to the clerk’s office. A popular example is the structured settlement, whereby an annuity is purchased on behalf of the minor. The annuity will pay under installments according to a set schedule, designed in the settlement process. The proceeds of the annuity can survive the minor’s death, if the parties agree. Further, the proceeds from the annuity can have positive tax consequences if handled in the correct way. There are disadvantages to the structure. The annuity company is not strictly liable for the loss of the funds, as the clerk is. Further, with the bankruptcy of so many insurance companies as of late, it is important to consider whether the money will be there as contemplated by the parties when it comes time to pay the proceeds.

While there are many alternatives to handling a minor’s funds, if court approval is sought, what ultimately happens to the money depends on the trial judge. The parties should investigate thoroughly the judge before whom the minor settlement will be brought. Some judges insist that the settlement funds be disbursed to the clerk of court. Other judges will not approve a settlement that does not involve a structure. Still others have no real feelings one way or the other and will make a decision on a case by case basis. Going into the hearing, it is a good idea to know what your judge will approve.

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