Chang v. CK Tours, Inc

Background

On April 20, 2022, minutes before jury selection, the parties told the court they had reached a settlement “in principle.” They reported agreement on a settlement amount and payment plan and jointly agreed that the trial was no longer necessary. The parties indicated that the remaining decision was whether to document the settlement through a settlement stipulation under Federal Rule of Civil Procedure 41 or an offer of judgment under Rule 68.

Two days later, defense counsel asked to withdraw from the settlement and requested a new trial date. The defendants argued that Hyon-Sak Kim, one of the individual defendants, lacked capacity to settle because he had insomnia, had taken the sleeping medication Zolpidem, and was worried about his mother’s medical condition. The defendants submitted a photograph of a medication bottle and medical records and phone screenshots concerning Kim’s mother, but the submissions were not supported by an affidavit or declaration authenticating the exhibits. The defendants later submitted an affidavit from Kim.

The parties agreed that the settlement amount was $330,000. The payment plan called for an initial payment of $50,000 followed by seven payments of $40,000 over eight months. The plaintiffs moved to enforce the April 20 settlement, and the defendants moved to schedule a new trial.

Settlement Enforceability

The court treated the settlement as a preliminary “Type I” agreement. A Type I agreement is a complete agreement in which the parties intend to be bound, even though they may later prepare a more formal document. The court evaluated the parties’ intent using four factors associated with the Winston decision: whether either side expressly reserved the right not to be bound without a writing; whether the parties partially performed; whether they agreed to all terms; and whether the type of agreement is usually put in writing.

The first factor favored enforcement because neither side expressly reserved the right not to be bound without a written agreement. The court explained that merely intending to put an agreement in writing does not prevent the agreement from becoming binding before the writing is signed.

The second factor also favored enforcement. The parties jointly asked the court to adjourn the trial and discharge the prospective jurors, which the court treated as partial performance based on their reliance on the apparent settlement.

The third factor was neutral. The parties had agreed on the settlement amount and payment schedule, but they had not explicitly agreed on the precise scope of the release. The court nevertheless found that the parties objectively intended to be bound despite that open term. In the court’s view, the parties’ statements and conduct showed that the release issue was not an escape route allowing the defendants to abandon the settlement after the trial had been stopped.

The fourth factor weighed against enforcement because settlements of claims under the Fair Labor Standards Act generally require judicial review and are usually documented in writing. The court concluded, however, that this factor did not outweigh the other factors under the exceptional circumstances of the case. The court held that the parties had formed an enforceable Type I settlement agreement.

Incapacity Defense

The court stated that contractual capacity is presumed under New York law. To overcome that presumption, the defendants had to show both that Kim’s mind was so affected that he was wholly unable to understand the nature of the transaction and that the plaintiffs knew or should have known about his condition.

The court noted that the defendants appeared to have abandoned the incapacity defense in their later briefing, although they initially raised it when seeking to revoke the settlement. Even considering the defense, the court found it inadequate. The unauthenticated materials did not establish that Kim was unable to understand the settlement, and the defendants cited no authority showing that fatigue, sleeping medication, or concern about a family member’s health met the required standard. The defendants also failed to explain why the plaintiffs should have known of Kim’s alleged condition. The court therefore declined to void the settlement on incapacity grounds.

Sanctions and Jury Costs

The court did not impose sanctions immediately. Instead, it ordered defense counsel to show cause why sanctions should not be imposed under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the court’s inherent authority. The possible bases included the inadequate support for the incapacity filings and the circumstances surrounding the settlement and attempted withdrawal.

The court identified two possible explanations requiring a response: defense counsel may have participated in a bad-faith effort to delay the trial by settling and then withdrawing after the trial was avoided, or counsel may have failed to investigate Kim’s capacity before settling on his behalf. The plaintiffs were directed to provide a detailed accounting of costs caused by the conduct. The defendants were given 30 days to respond and could also object to the reported costs.

The court assessed $3,056.72 in jury costs against defense counsel alone under the Southern District of New York’s Local Civil Rule 47.1. The court found defense counsel primarily responsible for the events that led to the cancellation of the April 20 trial and the need to summon a second jury. Defense counsel were directed to pay that amount to the Clerk within 30 days.

Disposition

The court granted the plaintiffs’ motion to enforce the April 20 settlement and denied the defendants’ motion to schedule a new trial date. The court stated that the parties could proceed either through judicial fairness review of the settlement or through an offer of judgment under Rule 68. The court also ordered the plaintiffs to provide their cost accounting and defense counsel to show cause why sanctions should not issue.