## Facts

- Chester and Helen Jane Dempsey pursued products-liability claims arising from injuries Mr. Dempsey suffered in a Cessna aircraft.
- In discovery, the Dempseys sought documents concerning known defects; they later alleged Cessna failed to produce a draft service bulletin addressing undrainable water in Cessna fuel tanks.
- The Dempseys settled with Cessna in state court for $300,000 and executed a release in Cessna’s favor; related litigation continued against other defendants.
- After the settlement, Cessna’s counsel disclosed the existence of the draft service bulletin.
- The Dempseys did not return the $300,000; instead, they filed a federal action against Cessna, its insurer (Associated Aviation Underwriters), and the insurer’s claims manager (Lonnie Williams), alleging fraudulent inducement of the settlement and seeking substantial compensatory and punitive damages.

## Issues

1. Whether Pennsylvania law permits a settling plaintiff, after learning of an alleged discovery nondisclosure, to keep settlement consideration and sue the settling defendant (and related parties) for additional damages based on fraud in settlement procurement.
2. Whether the insurer and its claims manager owed an actionable legal duty to the third-party claimants in connection with settlement negotiations and alleged nondisclosure.

## Decision

- The court granted the defendants’ motion to dismiss for failure to state a claim.
- The court held that a plaintiff alleging fraud in the procurement of a release must either rescind the release by tendering back the consideration or affirm the release and waive the fraud claim; plaintiffs could not retain the settlement proceeds while suing for more.
- The court held that the insurer and claims manager owed no cognizable duty to the plaintiffs on the alleged facts, requiring dismissal of claims against them as well.

## Legal Principles

- Pennsylvania law favors the finality of settlements and enforces releases absent proper rescission.
- A party claiming a release was procured by fraud must elect a remedy: (a) disaffirm the release and return the consideration, or (b) keep the consideration and thereby affirm the release and waive the fraud claim.
- Alleged pre-settlement discovery nondisclosure does not create a post-settlement cause of action for additional damages that avoids the tender-back requirement.
- An insurer and its claims personnel generally owe duties to the insured, not to opposing third-party claimants, absent a recognized special basis under state law.

## Conclusion

The court dismissed the action because the plaintiffs sought to retain settlement consideration while asserting fraud to recover additional damages, which Pennsylvania law bars absent tender-back rescission, and because the insurer and its claims manager owed no legal duty to the plaintiffs under the pleaded circumstances.


Dempsey v. Associated Aviation Underwriters, 141 F.R.D. 248 (E.D. Pa. 1992)