As tax professionals, we frequently advise clients regarding the taxability and reporting requirements associated with litigation settlements. The recent Report and Recommendation in Barbara Rumain v. Gregoris Motors, Inc., No. 17-CV-7251 (DG) (TAM) from the United States District Court for the Eastern District of New York provides a relevant illustration of the contractual enforceability of settlement agreements, particularly when a dispute arises post-agreement concerning mandatory IRS reporting via Form 1099.

Factual Background of the Dispute

The underlying litigation, initiated by Plaintiff Barbara Rumain approximately seven and a half years prior, involved New York state law claims for fraud and breach of contract related to a car lease transaction against Defendants Gregoris Motors, Inc. and several Nissan entities. The claims originated from a 2011 car lease transaction where the Plaintiff inquired about a 24-month term but allegedly later discovered the lease term was actually 39 months. Due to being two to three months behind on payments, the vehicle was repossessed in February 2015. Subsequently, the Plaintiff alleged that her TransUnion credit report noted a “charged off” loan status and an outstanding balance exceeding $4,000.

Following lengthy procedural history and multiple failed attempts at mediation, the parties reached a settlement in principle during a third mediation session on November 7, 2024. The parties subsequently filed a joint letter informing the Court of the settlement. The written settlement agreement detailed a full settlement of the claims for $30,500, to be paid by Defendants on or before January 10, 2025. The agreement was signed by the Plaintiff and a Gregoris representative on December 16, 2024.

Taxpayer’s Objection and Request for Relief

The central controversy arose immediately following the Plaintiff’s signing of the written agreement. Approximately six hours after signing, the Plaintiff received an email from Nissan counsel requesting that she complete a form necessary for the Defendants to issue a Form 1099 tax document related to the settlement payment. Upon receipt of this email, and before all Defendants had countersigned the agreement, Plaintiff emailed counsel to withdraw her signature.

Plaintiff specifically objected to the enforcement of the settlement on three grounds:

Material Misrepresentation: Plaintiff argued that Defendants failed to disclose the tax implications, asserting she signed the agreement "under the express understanding that no 1099 would be issued".
Lack of Mutual Assent: Plaintiff contended there was no meeting of the minds because she did not understand the taxability of the settlement, which she described as a material term.
Lack of Execution: She argued the settlement was never fully executed because she withdrew her signature before all Defendants countersigned.

In addition to opposing the enforcement motion, the Plaintiff filed motions seeking a court order to prohibit the Defendants from issuing a Form 1099.

Judicial Analysis of Contractual and Tax Law Principles

Contractual Enforcement Standards

The Court analyzed the settlement agreement under established principles of New York contract law, recognizing that settlement agreements are contracts (citing Murphy v. Inst. of Int’l Educ., 32 F.4th 146, 150 (2d Cir. 2022)). The ultimate legal issue is determining the parties’ intent to be bound (citing Vacold LLC v. Cerami, 545 F.3d 114, 125 (2d Cir. 2008)). A binding contract requires mutual assent and agreement on all essential terms (citing Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 427 (2d Cir. 2004); Mun. Consultants & Publishers, Inc. v. Town of Ramapo, 47 N.Y.2d 144, 149 (1979)).

The analysis relied on the Second Circuit’s framework for evaluating preliminary agreements, comparing Type I (fully binding agreements awaiting only formalization) and Type II (agreements on major terms with negotiable open terms) (citing Murphy, 32 F.4th at 150). Settlements reached at mediation with agreed-upon material terms are presumptively Type I unless the parties explicitly reserve the right not to be bound (citing Murphy, 32 F.4th at 153).

The Court applied the four factors established in Winston v. Mediafare Entertainment Corporation, 777 F.2d 78, 80 (2d Cir. 1985), to determine if the parties intended to be bound.

Tax Reporting and Taxability Implications

Crucially for tax professionals, the Court clarified the limited role parties have in determining tax treatment during settlement:

Parties cannot dictate tax treatment. The parties’ intentions or characterization of settlement payments, standing alone, do not dictate the correct tax treatment (citing Guzman v. Prodelca Corp., 2016 WL 4371631, at *1 (S.D.N.Y. Aug. 16, 2016) and Gerstenbluth v. Credit Suisse Sec. (USA) LLC, 728 F.3d 139, 144 (2d Cir. 2013)).
Issuance of 1099 is mandatory disclosure, not a tax determination. Federal tax regulations require companies to issue a Form 1099 for every settlement payment exceeding $600 (citing 26 U.S.C. § 6041 and 26 C.F.R. § 1.6041-1(f)).
Taxability is not a negotiable term. Because the law dictates taxability, the tax treatment of the settlement could not have been a negotiable term during mediation. Defense counsel affirmed this position, noting their client’s issuance of the 1099 was merely "following disclosure obligations" and they "do not dictate the taxability of those funds".
Agreements contrary to law are voidable. The Court noted that an agreement seeking to prohibit the issuance of required tax documents would be readily voidable as contrary to law and public policy (citing Gray v. Collection Info. Bureau, Inc., 823 F. Supp. 2d 1296, 1297 (S.D. Fl. 2011)).

Application of Winston Factors

The Court analyzed the settlement as a presumptive Type I agreement and evaluated the four Winston factors:

Winston Factor 1: Express Reservation of Rights Not to be Bound

This factor, often deemed the most important (citing Brown v. Cara, 420 F.3d 148, 154 (2d Cir. 2005)), favored enforcement. Plaintiff provided no evidence that she reserved the right to withdraw her agreement in the absence of a writing. The parties confirmed the full settlement amount of $30,500 at mediation. Although the Plaintiff argued there was no mutual understanding regarding the issuance of the 1099 form, she did not contend that she expressly reserved acceptance until that question was resolved in writing.

Winston Factor 2: Partial Performance

This factor was found to favor neither party. Defendants demonstrated their intent to be bound by issuing settlement checks in the full amount. However, the Plaintiff had not fully accepted performance, having cashed the Nissan check only "under protest" and having failed to cash the Gregoris check. Partial performance favors enforcement only when the performance is accepted by the disclaiming party (citing Acun v. Merrill Lynch Pierce Fenner & Smith, Inc., 852 F. App’x 552, 554 (2d Cir. 2021)).

Winston Factor 3: Whether All Terms Were Agreed Upon

This factor favored enforcement. The Plaintiff failed to establish that a negotiable, essential term was expressly left open post-mediation. Since the taxability and reporting obligations of a settlement are dictated by law (26 U.S.C. § 6041; 26 C.F.R. § 1.6041-1(f)), the issuance of a 1099 could not have been a term requiring negotiation. The key financial terms—the settlement amount and payment period—were confirmed, resolving all material terms.

Winston Factor 4: Whether Agreement Would be Reduced to Writing

This factor favored enforcement. While simple settlements do not always require formal memorialization, the fact that the agreement was reduced to writing and signed by the Plaintiff prior to her objection provides further evidence that the settlement reached at mediation was final and binding. The physical execution of the document by all parties was deemed irrelevant to the core question of whether the underlying agreement reached at mediation was enforceable (citing Murphy, 32 F. 4th at 151).

Conclusion and Recommendations

Based on the analysis of the Winston factors, three of the four factors favored enforcement, leading the Court to conclude that the parties reached a binding Type I settlement agreement at mediation.

The Court affirmed the principle that when a party makes a deliberate choice to settle, they "cannot be relieved of such a choice merely because her assessment of the consequences was incorrect" (citing United States v. Bank of New York, 14 F.3d 756, 759 (2d Cir. 1994)). The Plaintiff’s desire to avoid the issuance of tax forms, which was not expressed to Defendants during negotiations, did not void the binding settlement.

The Court respectfully recommended:

Granting Defendants’ motion to enforce settlement.
Directing the Clerk of Court to enter judgment in favor of the Plaintiff in the amount of $30,500, comprising $20,500 payable by Gregoris and $10,000 payable by Nissan.
Denying Plaintiff’s motion to prevent the issuance of an IRS Form 1099.

Prepared with assistance from NotebookLM.