Settlement Agreement “Tender Back” Rule Upheld by Michigan Court

Can an employee sue its employer where she released all claims in severance agreement, even though the employer stopped payments per the agreement?  In Yob v. Smith and Van Fossen, Mich. Court of Appeals No. 339607 (May 15, 2018), the court of appeals upheld the severance agreement even though the employer filed for bankruptcy and stopped payments half way through the agreement.

In Yob, the Plaintiff, Gina Yob was terminated from employment of 3S International, LLC (3S) as head of sales and marketing.  Defendants Sid Smith was the owner, and John Van Fossen was the President and CEO of the company.  After her termination, the parties entered into a Severance Agreement whereby they agreed to pay her six month’s salary, in exchange for a release of any and all claims she may have against 3S.  She had a previously entered into an agreement whereby she agreed to non-competition provisions.

Before all payments were made, the Employer filed for bankruptcy, and the bankruptcy court granted 3S’s motion to reject the severance agreement based on 3S’s inability to pay. Thereafter, Plaintiff Yob sued the defendants claiming sex discrimination and retaliation in violation of the Michigan Civil Rights statutes. The Defendants filed, and the trial court granted their motion for summary disposition claiming that Plaintiff’s claims were barred by a prior release, and she would have to “tender back” the consideration received before she could sue the defendants. The Plaintiff claimed the consideration she received was for the non-competition portion of the agreement.  Plaintiff appealed.

At the Court of Appeals, Plaintiff argued the trial court erred in applying the “tender back” rule. The Court stated that settlement agreements remain binding until rescinded for cause.  The “tender back rule” requires that a party may not file a lawsuit asserting previously released claims or repudiate a release unless the party first repays all consideration received in exchange for the release. The only exceptions to the rule are “waiver of the plaintiff’s duty by the defendant” or “fraud in the execution” of the release.

Plaintiff argued that the tender back rule didn’t apply to her because the defendants failed to pay the full consideration.  But the court cited the Stefanac case where it held “a plaintiff must, in all cases where a legal claim is raised in contravention of an agreement, tender the consideration recited in the agreement prior to or simultaneously with the filing of the suit.”  Stefanac, 435 Mich. at 176.  The court disagreed with plaintiff who argued she complied with the non-compete portion of the agreement in full, but the Defendants didn’t fulfill their obligations and misrepresented their portion of the agreement. However, the Court upheld that rule tender back rule, and reiterated that the only two exceptions were fraud and waiver, and neither of those issue were present here.  Further, she was already bound to a separate non-competition agreement – while the new release was based on new consideration and had new obligations.

While the result may seem unfair for the Plaintiff, the takeaway here is that settlement agreement language must be drafted very carefully in order to avoid unintended consequences.