author: Justice Stevens

text:
    McDERMOTT, INC. v. AmCLYDE et al.
    No. 92-1479.
    Argued January 11, 1994
    Decided April 20, 1994

      Stevens, J., delivered the opinion for a unanimous Court.

      Arden J. Lea argued the cause for petitioner. With him on the briefs was R. Jeffrey Bridger.

      William K. Kelley argued the cause for the United States as amicus curiae urging reversal. With him on the brief were Solicitor General Days, Assistant Attorney General Hunger, Acting Deputy Solicitor General Kneedler, Richard A. Olderman, and David V. Hutchinson.

      Robert E. Couhig, Jr., argued the cause for respondents. With him on the brief was Thomas G. O’Brien.

        Warren B. Daly, Jr., and George W. Healy III filed a brief for the Maritime Law Association of the United States as amicus curiae urging reversal.

   Justice Stevens

delivered the opinion of the Court.

A construction accident in the Gulf of Mexico gave rise to this admiralty case. In advance of trial, petitioner, the plaintiff, settled with three of the defendants for $1 million. Respondents, however, did not settle, and the case went to trial. A jury assessed petitioner’s loss at $2.1 million and allocated 32% of the damages to respondent AmClyde and 38% to respondent River Don Castings, Ltd. (River Don). The question presented is whether the liability of the nonsettling defendants should be calculated with reference to the jury’s allocation of proportionate responsibility, or by giving the nonsettling defendants a credit for the dollar amount of the settlement. We hold that the proportionate approach is the correct one.

I

Petitioner McDermott, Inc., purchased a specially designed, 5,000-ton crane from AmClyde. When petitioner first used the crane in an attempt to move an oil and gas production platform — the “Snapper deck” — from a barge to a structural steel base affixed to the floor of the Gulf of Mexico, a prong of the crane’s main hook broke, causing massive damage to the deck and to the crane itself. The malfunction may have been caused by petitioner’s negligent operation of the crane, by AmClyde’s faulty design or construction, by a defect in the hook supplied by River Don, or by one or more of the three companies (the “sling defendants”) that supplied the supporting steel slings.

Invoking the federal court’s jurisdiction under 28 U. S. C. §§1332 and 1333(1), petitioner brought suit against Am-Clyde and River Don and the three sling defendants. The complaint sought a recovery for both deck damages and crane damages. On the eve of trial, petitioner entered into a settlement with the sling defendants. In exchange for $1 million, petitioner agreed to dismiss with prejudice its claims against the sling defendants, to release them from all liability for either deck or crane damages, and to indemnify them against any contribution action. The trial judge later ruled that petitioner’s claim for crane damages was barred by East River S. S. Corp. v. Transamerica Delaval Inc., 476 U. S. 858 (1986).

In its opening statement at trial, petitioner McDermott “accepted responsibility for any part the slings played in causing the damage.” McDermott, Inc. v. Clyde Iron, 979 F. 2d 1068, 1070 (CA5 1993). The jury found that the total damages to the deck amounted to $2.1 million and, in answer to special interrogatories, allocated responsibility among the respective parties: 32% to AmClyde, 38% to River Don, and 30% jointly to McDermott and the sling defendants. The court denied a motion by respondents to reduce the judgment pro tanto by the $1 million settlement, and entered judgment against AmClyde for $672,000 (32% of $2.1 million) and against River Don for $798,000 (38% of $2.1 million). Even though the sum of those judgments plus the settlement proceeds exceeded the total damages found by the jury, the District Court concluded that petitioner had not received a double recovery because the settlement had covered both crane damages and deck damages.

The Court of Appeals held that a contractual provision precluded any recovery against AmClyde and that the trial judge had improperly denied a pro tanto settlement credit. It reversed the judgment against AmClyde entirely and reduced the judgment against River Don to $470,000. It arrived at that figure by making two calculations. First, it determined that petitioner’s “full damage[s] award is $1.47 million ($2.1 million jury verdict less 30% attributed to McDermott/sling defendants).” 979 F. 2d, at 1081. Next, it deducted the “$1 million received in settlement to reach $470,000.” Ibid. It treated this figure as the maximum that could be recovered from the nonsettling defendants. Because it was less than River Don’s liability as found by the jury (38% of $2.1 million or $798,000), it directed the entry of judgment against River Don in that amount. Ibid.

Because we have not previously considered how a settlement with less than all of the defendants in an admiralty ease should affect the liability of nonsettling defendants, and because the Courts of Appeals have adopted different approaches to this important question, we granted certiorari. 509 U. S. 921 (1993).

II

Although Congress has enacted significant legislation in the field of admiralty law, none of those statutes provides us with any “policy guidance” or imposes any limit on our authority to fashion the rule that will best answer the question presented by this case. See Miles v. Apex Marine Corp., 498 U. S. 19, 27 (1990). We are, nevertheless, in familiar waters because “the Judiciary has traditionally taken the lead in formulating flexible and fair remedies in the law maritime.” United States v. Reliable Transfer Co., 421 U. S. 397, 409 (1975).

In the Reliable Transfer case we decided to abandon a rule that had been followed for over a century in assessing damages when both parties to a collision are at fault. We replaced the divided damages rule, which required an equal division of property damage whatever the relative degree of fault may have been, with a rule requiring that damages be assessed on the basis of proportionate fault when such an allocation can reasonably be made. Although the old rule avoided the difficulty of determining comparative degrees of negligence, we concluded that it was “unnecessarily crude and inequitable” and that “[pjotential problems of proof in some cases hardly require adherence to an archaic and unfair rule in all cases.” Id., at 407. Thus the interest in certainty and simplicity served by the old rule was outweighed by the interest in fairness promoted by the proportionate fault rule.

Our decision in Reliable Transfer was supported by a consensus among the world’s maritime nations and the views of respected scholars and judges. See id., at 403-405. No comparable consensus has developed with respect to the issue in the case before us today. It is generally agreed that when a plaintiff settles with one of several joint tortfeasors, the nonsettling defendants are entitled to a credit for that settlement. There is, however, a divergence among respected scholars and judges about how that credit should be determined. Indeed, the American Law Institute (ALI) has identified three principal alternatives and, after noting that “[e]ach has its drawbacks and no one is satisfactory,” decided not to take a position on the issue. Restatement (Second) of Torts § 886A, pp. 343-344 (1977). The ALI describes the three alternatives as follows:

“(1) The money paid extinguishes any claim that the injured party has against the party released and the amount of his remaining claim against the other tortfeasor is reached by crediting the amount received; but the transaction does not affect a claim for contribution by another tortfeasor who has paid more than his equitable share of the obligation.” Id., at 343.
“(2) The money paid extinguishes both any claims on the part of the injured party and any claim for contribution by another tortfeasor who has paid more than his equitable share of the obligation and seeks contribution.” Ibid. (As in alternative (1), the amount of the injured party’s claim against the other tortfeasors is calculated by subtracting the amount of the settlement from the plaintiff’s damages.)
“(3) The money paid extinguishes any claim that the injured party has against the released tortfeasor and also diminishes the claim that the injured party has against the other tortfeasors by the amount of the equitable share of the obligation of the released tortfeasor.” Id., at 344.

The first two alternatives involve the kind of “pro tanto” credit that respondents urge us to adopt. The difference between the two versions of the pro tanto approach is the recognition of a right of contribution against a settling defendant in the first but not the second. The third alternative, supported by petitioner, involves a credit for the settling defendants’ “proportionate share” of responsibility for the total obligation. Under this approach, no suits for contribution from the settling defendants are permitted, nor are they necessary, because the nonsettling defendants pay no more than their share of the judgment.

The proportionate share approach would make River Don responsible for precisely its share of the damages, $798,000 (38% of $2.1 million). A simple application of the pro tanto approach would allocate River Don $1.1 million in damages ($2.1 million total damages minus the $1 million settlement). The Court of Appeals, however, made a different calculation. Because McDermott “accepted responsibility for any part the sling played in causing the damage,” 979 F. 2d, at 1070, the Court of Appeals treated the 30% of liability apportioned to “McDermott/sling defendants” as if that 30% had been caused solely by McDermott’s own negligence. Id., at 1081. The Court of Appeals, therefore, gave River Don a double credit, first reducing the total loss by the McDermott/sling defendants’ proportionate share and then applying the full pro tanto reduction to that amount. This double credit resulted in an award of only $470,000 ($2.1 million minus 30% of $2.1 million minus $1 million).

Ill

In choosing among the ALI’s three alternatives, three considerations are paramount: consistency with the proportionate fault approach of United States v. Reliable Transfer, 421 U. S. 397 (1975), promotion of settlement, and judicial economy. ALI Option 1, pro tanto setoff with right of contribution against the settling defendant, is clearly inferior to the other two, because it discourages settlement and leads to unnecessary ancillary litigation. It discourages settlement, because settlement can only disadvantage the settling defendant. If a defendant makes a favorable settlement, in which it pays less than the amount a court later determines is its share of liability, the other defendant (or defendants) can sue the settling defendant for contribution. The settling defendant thereby loses the benefit of its favorable settlement. In addition, the claim for contribution burdens the courts with additional litigation. The plaintiff can mitigate the adverse effect on settlement by promising to indemnify the settling defendant against contribution, as McDermott did here. This indemnity, while removing the disincentive to settlement, adds yet another potential burden on the courts, an indemnity action between the settling defendant and plaintiff.

The choice between ALI Options 2 and 3, between the pro tanto rule without contribution against the settling tortfeasor and the proportionate share approach, is less clear. The proportionate share rule is more consistent with Reliable Transfer, because a litigating defendant ordinarily pays only its proportionate share of the judgment. Under the pro tanto approach, however, a litigating defendant’s liability will frequently differ from its equitable share, because a settlement with one defendant for less than its equitable share requires the nonsettling defendant to pay more than its share. Such deviations from the equitable apportionment of damages will be common, because settlements seldom reflect an entirely accurate prediction of the outcome of a trial. Moreover, the settlement figure is likely to be significantly less than the settling defendant’s equitable share of the loss, because settlement reflects the uncertainty of trial and provides the plaintiff with a “war chest” with which to finance the litigation against the remaining defendants. Courts and legislatures have recognized this potential for unfairness and have required “good-faith hearings” as a remedy. When such hearings are required, the settling defendant is protected against contribution actions only if it shows that the settlement is a fair forecast of its equitable share of the judgment. Nevertheless, good-faith hearings cannot fully remove the potential for inequitable allocation of liability. First, to serve their protective function effectively, such hearings would have to be minitrials on the merits, but in practice they are often quite cursory. More fundamentally, even if the judge at a good-faith hearing were able to make a perfect forecast of the allocation of liability at trial, there might still be substantial unfairness when the plaintiff’s success at trial is uncertain. In sum, the pro tanto approach, even when supplemented with good-faith hearings, is likely to lead to inequitable apportionments of liability, contrary to Reliable Transfer.

The effect of the two rules on settlements is more ambiguous. Sometimes the pro tanto approach will better promote settlement. This beneficial effect, however, is a consequence of the inequity discussed above. The rule encourages settlements by giving the defendant that settles first an opportunity to pay less than its fair share of the damages, thereby threatening the nonsettling defendant with the prospect of paying more than its fair share of the loss. By disadvantaging the party that spurns settlement offers, the pro tanto rule puts pressure on all defendants to settle. While public policy wisely encourages settlements, such additional pressure to settle is unnecessary. The parties’ desire to avoid litigation costs, to reduce uncertainty, and to maintain ongoing commercial relationships is sufficient to ensure non-trial dispositions in the vast majority of cases. Under the proportionate share approach, such factors should ensure a similarly high settlement rate. The additional incentive to settlement provided by the pro tanto rule comes at too high a price in unfairness. Furthermore, any conclusion that the pro tanto rule generally encourages more settlements requires many simplifying assumptions, such as low litigation costs. Recognition of the reality that a host of practical considerations may be more significant than stark hypotheticals persuades us that the pro tanto rule has no clear advantage in promoting settlements.

The effect of the two rules on judicial economy is also ambiguous. The pro tanto rule, if adopted without the requirement of a good-faith hearing, would be easier to administer, because the relative fault of the settling defendant would not have to be adjudicated either at a preliminary hearing or at trial. Nevertheless, because of the large potential for unfairness, no party or amicus in this suit advocates the pro tanto rule untamed by good-faith hearings. Once the pro tanto rule is coupled with a good-faith hearing, however, it is difficult to determine whether the pro tanto or proportionate share approach best promotes judicial economy. Under either approach, the relative fault of the parties will have to be determined. Under the pro tanto approach, the settling defendant’s share of responsibility will have to be ascertained at a separate, pretrial hearing. Under the proportionate share approach, the allocation will take place at trial. The pro tanto approach will, therefore, save judicial time only if the good-faith hearing is quicker than the allocation of fault at trial. Given the cursory nature of most good-faith hearings, this may well be true. On the other hand, there is reason to believe that reserving the apportionment of liability for trial may save more time. First, the remaining defendant (or defendants) may settle before trial, thus making any determination of relative culpability unnecessary. In addition, the apportionment of damages required by the proportionate share rule may require little or no additional trial time. The parties will often need to describe the settling defendant’s role in order to provide context for the dispute. Furthermore, a defendant will often argue the “empty chair” in the hope of convincing the jury that the settling party was exclusively responsible for the damage. The pro tanto rule thus has ho clear advantage with respect to judicial economy.

In sum, although the arguments for the two approaches are closely matched, we are persuaded that the proportionate share approach is superior, especially in its consistency with Reliable Transfer.

IV

Respondents advance two additional arguments against the proportionate share approach: that it violates the “one satisfaction rule” and that it is inconsistent with Edmonds v. Compagnie Generale Transatlantique, 443 U. S. 256 (1979).

In the 19th and early 20th centuries, the “one satisfaction rule” barred a plaintiff from litigating against one joint tortfeasor, if he had settled with and released another. This version of the one satisfaction rule has been thoroughly repudiated. Respondents do not ask that the one satisfaction rule be applied with its original strictness, but rather in the milder form in which some courts still invoke it to reduce a plaintiff’s recovery against a nonsettling defendant in order to ensure that the plaintiff does not secure more than necessary to compensate him for his loss. As a preliminary matter, it is far from clear that there was any danger of super-compensatory damages here. First, there is the question of the crane damages, which were not covered by the judgment against River Don. In addition, even limiting consideration to deck damages, the jury fixed plaintiff’s losses at $2.1 million. Plaintiff received $1 million in settlement from the sling defendants. Under the proportionate share approach, plaintiff would receive an additional $798,000 from River Don. In total, plaintiff would recover only $1,798 million, over $300,000 less than its damages. The one satisfaction rule comes into play only if one assumes that the percent share of liability apportioned to McDermott and the sling defendants really represented McDermott’s contributory fault, and that it would be overcompensatory for McDermott to receive more than the percentage of the total loss allocated to the defendants, here $1.47 million (70% of $2.1 million).

Even if the Court of Appeals were correct in finding that the proportionate share approach would overcompensate Mc-Dermott, we would not apply the one satisfaction rule. The law contains no rigid rule against overcompensation. Several doctrines, such as the collateral benefits rule, recognize that making tortfeasors pay for the damage they cause can be more important than preventing overcompensation. In this case, any excess recovery is entirely attributable to the fact that the sling defendants may have made an unwise settlement. It seems probable that in most cases in which there is a partial settlement, the plaintiff is more apt to accept less than the proportionate share that the jury might later assess against the settling defendant, because of the uncertainty of recovery at the time of settlement negotiations and because the first settlement normally improves the plaintiff’s litigating posture against the nonsettlors. In such cases, the entire burden of applying a proportionate share rule would rest on the plaintiff, and the interest in avoiding overeompensation would be absent. More fundamentally, we must recognize that settlements frequently result in the plaintiff’s getting more than he would have been entitled to at trial. Because settlement amounts are based on rough estimates of liability, anticipated savings in litigation costs, and a host of other factors, they will rarely match exactly the amounts a trier of fact would have set. It seems to us that a plaintiff’s good fortune in striking a favorable bargain with one defendant gives other defendants no claim to pay less than their proportionate share of the total loss. In fact, one of the virtues of the proportionate share rule is that, unlike the pro tanto rule, it does not make a litigating defendant’s liability dependent on the amount of a settlement negotiated by others without regard to its interests.

Respondents also argue that the proportionate share rule is inconsistent with Edmonds v. Compagnie Generale Transatlantique, 443 U. S. 256 (1979). In that case, we refused to reduce the judgment against a shipowner by the proportionate fault attributed to a stevedore whose liability was limited by the Longshoremen’s and Harbor Workers’ Compensation Act. Instead, the Court allowed the plaintiff to collect from the shipowner the entirety of his damages, after adjusting for the plaintiff’s own negligence. There is no inconsistency between that result and the rule announced in this opinion. Edmonds was primarily a statutory construction case and related to special interpretive questions posed by the 1972 amendments to the Longshoremen’s and Harbor Workers’ Compensation Act. Both parties acknowledge that this case must be resolved by judge-made rules of law. Moreover, Edmonds did not address the issue in this case, the effect of a settlement on nonsettling defendants. Indeed, there was no settlement in that case. Instead, one can read that opinion as merely reaffirming the well-established principle of joint and several liability. As the Court pointed out, that principle was in no way abrogated by Reliable Transfer’s proportionate fault approach. Edmonds, 443 U. S., at 271-272, n. 30. In addition, as the Commissioners on Uniform State Laws have noted, there is no tension between joint and several liability and a proportionate share approach to settlements. Joint and several liability applies when there has been a judgment against multiple defendants. It can result in one defendant’s paying more than its apportioned share of liability when the plaintiff’s recovery from other defendants is limited by factors beyond the plaintiff’s control, such as a defendant’s insolvency. When the limitations on the plaintiff’s recovery arise from outside forces, joint and several liability makes the other defendants, rather than an innocent plaintiff, responsible for the shortfall. Ibid Unlike the rule in Edmonds, the proportionate share rule announced in this opinion applies when there has been a settlement. In such cases, the plaintiff’s recovery against the settling defendant has been limited not by outside forces, but by its own agreement to settle. There is no reason to allocate any shortfall to the other defendants, who were not parties to the settlement. Just as the other defendants are not entitled to a reduction in liability when the plaintiff negotiates a generous settlement, see supra, at 219-220, so they are not required to shoulder disproportionate liability when the plaintiff negotiates a meager one.

V

The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

       “AmClyde,” formerly known as “Clyde Iron,” is a division of AMCA International, Inc.

       The three sling defendants, sometimes also described as the “settling defendants,” were International Southwest Slings, Inc.; British Ropes, Ltd.; and Hendrik Veder B. V.

       Section 1333(1) provides: “The district courts shall have original jurisdiction, exclusive of the courts of the States, of: (1) Any civil case of admiralty or maritime jurisdiction, saving to suitors in all cases all other remedies to which they are otherwise entitled.”

       McDermott’s motive in taking upon itself responsibility for the sling defendant’s fault is obscure. Perhaps it thought doing so would prevent a contribution action against the sling defendants and thus relieve McDermott of its indemnity obligation.

       The special interrogatory treated McDermott and the sling defendants as a single entity and called for a percentage figure that covered them both. This combined treatment reflected McDermott’s acceptance of responsibility for the damages caused by the sling defendants.

       The trial judge also noted that “[t]o hold as the defendants request would result in the settling defendants, who were at the most thirty percent (30%) responsible for the accident (no separate contributory negligence, if any, finding was made as to McDermott), paying One Million Dollars ($1,000,000.00) while the defendants who insisted on a trial and were found to be seventy percent (70%) liable would pay Four Hundred and Seventy Thousand Dollars ($470,000.00) between them. That is unjust....” App. to Pet. for Cert. A-52 to A-53.

       See, e. g., Longshore and Harbor Workers’ Compensation Act, 33 U. S. C. §§901-950; Death on the High Seas Act, 46 U. S. C. §§761-768; Public Vessels Act, 46 U. S. C. §§781-790.

       The three alternatives sketched by the ALI correspond to three detailed model Acts proposed by the National Conference of Commissioners on Uniform State Laws. Uniform Contribution Among Tortfeasors Act (1939 Act), 12 U. L. A. 57-59 (1975) (ALI Option 1); Revised Uniform Contribution Among Tortfeasors Act (1955 Revised Act), id., at 63-107 (ALI Option 2); Uniform Comparative Fault Act (1977 Act), 12 U. L. A. 45-61 (1993 Supp.) (ALI Option 3). Although the three ALI options are the most plausible, a number of others are possible. So, for example, in addition to arguing for the pro tanto rule, respondents suggest that we consider a rule that allows the nonsettling defendants to elect before trial either the pro tanto or the proportionate share rule. Although respondents claim support for their proposal in Texas and New York statutes, those statutes enact regimes quite different from that proposed by respondents. Texas Civ. Prac. & Rem. Code Ann. § 33.012(b) (Supp. 1994) (nonsettling defendant can choose pro tanto rule or reduction of damages by fixed proportion of total damages without regard to relative fault); N. Y. Gen. Oblig. Law § 15-108 (McKinney 1989) (pro tanto rule or proportionate share rule, whichever favors nonsettling defendants). We are unwilling to consider a rule that has yet to be applied in any jurisdiction.

       In this opinion, we use the phrase “proportionate share approach” to denote ALI Option 3. We have deliberately avoided use of the term “pro rata,” which is often used to describe this approach, see, e. g., T. Schoenbaum, Admiralty and Maritime Law §4-15, p. 153 (1987), because that term is also used to describe an equal allocation among all defendants without regard to their relative responsibility for the loss. See In re Masters Mates & Pilots Pension Plan and IRAP Litigation, 957 F. 2d 1020, 1028 (CA2 1992); Silver, Contribution Under the Securities Acts: The Pro Rata Method Revisited, 1992/1993 Ann. Survey Am. L. 273. Others have used different terms to describe the approach adopted here. Ibid, (“proportionate method”); Kornhauser & Revesz, Settlements Under Joint and Several Liability, 68 N. Y. U. L. Rev. 427, 438 (1993) (“apportioned share set-off rule”); Polinsky & Shavell, Contribution and Claim Reduction Among Antitrust Defendants: An Economic Analysis, 33 Stan. L. Rev. 447 (1981) (“claim reduction”).

       It might be thought that, since AmClyde is immune from damages, River Don’s liability should be $1.47 million (McDermott’s $2.1 million loss minus 30% of $2.1 million, the share of liability attributed to the settling defendants and McDermott). This calculation would make River Don responsible not only for its own 38% share, but also for the 32% of the damages allocated by the jury to AmClyde. This result could be seen as mandated by principles of joint and several liability and by Edmonds v. Compagnie Generale Transatlantique, 443 U. S. 256 (1979). See infra, at 220-221. Nevertheless, McDermott has not requested that River Don pay any more than its 38% share of the damages. AmClyde is immune from damages because its contract with McDermott provided that free replacement of defective parts “shall constitute fulfillment of all liabilities ... whether based upon Contract, tort, strict liability or otherwise.” 979 F. 2d 1068, 1075 (CA5 1993) (emphasis omitted). The best way of viewing this contractual provision is as a quasi settlement in advance of any tort claims. Viewed as such, the proportionate credit in this case properly takes into áccount both the 30% of liability apportioned to the settling defendants (and McDermott) and the 32% allocated to AmClyde. This leaves River Don with $798,000 or 38% of the damages.

       For simplicity, we ignore AmClyde, which was found to be immune from damages by the Court of Appeals. Id., at 1075-1076. No party appeals that holding. Although AmClyde spent a considerable amount replacing the defective hook, River Don does not argue that that amount should be included in the calculation of its liability.

       Whether the Court of Appeals correctly applied the pro tanto rule in the context of McDermott’s acceptance of responsibility for the sling damages is a difficult question. Fortunately, since we adopt the proportionate share approach, we need not answer it.

       Uniform Contribution Among Tortfeasors Act §4 (1955 Revised Act), Commissioners’ Comment, 12 U. L. A. 99 (1975); Kornhauser & Revesz, 68 N. Y. U. L. Rev., at 474; Polinsky & Shavell, 33 Stan. L. Rev., at 458-459, 462, 463. This argument assumes, in accordance with the law of most jurisdictions, that a settling defendant ordinarily has no right of contribution against other defendants. See Uniform Contribution Against Tortfeasors Act § 1(d), 12 U. L. A. 63 (1975); Uniform Comparative Fault Act §4(b), 12 U. L. A. 54 (1993 Supp.); Restatement (Second) of Torts §886A(2) and Comment f, pp. 337, 339 (1977).

       Suppose, for example, that a plaintiff sues two defendants, each equally responsible, and settles with one for $250,000. At trial, the non-settling defendant is found liable, and plaintiff’s damages are assessed at $1 million. Under the pro tanto rule, the nonsettling defendant would be liable for 75% of the damages ($750,000, which is $1 million minus $250,000). The litigating defendant is thus responsible for far more than its proportionate share of the damages. It is also possible for the pro tanto rule to result in the nonsettlor paying less than its apportioned share, if, as in this case, the settlement is greater than the amount later determined by the court to be the settlors’ equitable share. For a more complex example illustrating the potential for unfairness under the pro tanto rule when the parties are not equally at fault, see Kornhauser & Revesz, 68 N. Y. U. L. Rev., at 465-456 (pro tanto rule can lead to defendant responsible for 75% of damages paying only 37.5% of loss, while 26% responsible defendant pays 31.25%).

         In re Masters Mates & Pilots Pension Plan and IRAP Litigation, 957 F. 2d 1020 (CA2 1992); Miller v. Christopher, 887 F. 2d 902, 906-907 (CA9 1989); Tech-Bilt, Inc. v. Woodward-Clyde & Assocs., 38 Cal. 3d 488, 698 P. 2d 159 (1985); Uniform Contribution Among Tortfeasors Act §4 (1955 Revised Act), 12 U. L. A. 98 (1975) (enacted as statute law in 19 States, 12 U. L. A. 81 (1993 Supp.)).

        Tech-Bilt, Inc., 38 Cal. 3d, at 499, 698 P. 2d, at 166; Miller, 887 F. 2d, at 907; In re Masters, 957 F. 2d, at 1031; but see Noyes v. Raymond, 28 Mass. App. 186, 190, 548 N. E. 2d 196, 199 (1990) (judge in good-faith hearing should not scrutinize the settlement amount, but merely look for “collusion, fraud, dishonesty, and other wrongful conduct”).

        Franklin v. Kaypro Corp., 884 F. 2d 1222, 1230 (CA9 1989).

        Tech-Bilt, 38 Cal. 3d, at 500, 698 P. 2d, at 167 (“[T]he determination of good faith can be made by the court on the basis of affidavits”); TBG Inc. v. Bendis, 811 F. Supp. 596, 605, n. 17, 608 (Kan. 1992) (no “mini trial” required; settlement amount is “best available measure of liability”).

       Suppose again, as in footnote 14, that plaintiff sues two equally culpable defendants for $1 million and settles with one for $250,000. At the good-fáith hearing, the settling defendant persuasively demonstrates that the settlement is in good faith, because it shows that its share of liability is 50% and that plaintiff has only a 50% chance of prevailing at trial. The settlement thus reflects exactly the settling defendant’s expected liability. If plaintiff prevails at trial, the nonsettling defendant will again be liable for 75% of the judgment even though its equitable share is only 50%. The only way to avoid this inequity is for the judge at the good-faith hearing to disallow any settlement for less than $500,000, that is, any settlement which takes into account the uncertainty of recovery at trial. Such a policy, however, carries a grave cost. It would make settlement extraordinarily difficult, if not impossible, in most cases. As a result, every jurisdiction that conducts a good-faith inquiry into the amount of the settlement takes into account the uncertainty of recovery at trial. Miller, 887 F. 2d, at 907-908; Tech-Éilt, 38 Cal. 3d, at 499, 698 P. 2d, at 166; TBG Inc., 811 F. Supp., at 600.

       Illustration of the beneficial effects of the pro tanto rule requires substantial simplifying assumptions. Suppose, for example, that all parties are risk neutral, that litigation is costless, and that there are only two defendants. In addition, suppose everyone agrees that the damages are $100, that if one defendant is found liable, the other one will also be found liable, and that if the defendants are liable, each will be apportioned 50% of the damages. And suppose, as frequently happens, that the plaintiff is more optimistic about his chances of prevailing than the defendants: Plaintiff thinks his chances of winning are 60%, whereas the defendants think the plaintiff’s chances are only 50%. In this case, under the proportionate setoff rule, settlement is unlikely, because the plaintiff would be reluctant to accept less than $30 (60% times 50% of $100) from each defendant, whereas neither defendant would be disposed to offer more than $25 (50% times 50% of $100). On the other hand, under the pro tanto rule, the plaintiff would be willing to accept a $25 settlement offer, because he would believe he had a 60% chance of recovering $75 ($100 minus the $25 settlement) at trial from the other defendant. Accepting the $25 settlement offer would give the plaintiff an expected recovery of $70 ($25 plus 60% of $75), which is more than the $60 (60% of $100) the plaintiff would expect if he went to trial against both defendants. For a more thorough discussion of settlement under the pro tanto rule, see Kornhauser & Revesz, 68 N. Y. U. L. Rev., at 447-465.

       See H. Hovenkamp, Economics and Federal Antitrust Law §14.6, p. 377 (1985), summarizing Easterbrook, Landes, & Posner, Contribution among Antitrust Defendants: A Legal and Economic Analysis, 23 J. Law & Econ. 331, 353-360 (1980).

       Less than 6% of cases filed in federal court end in trial. Administrative Office of United States Courts, Annual Report of the Director, 186, 217 (1991) (Of 211,713 civil cases terminated between July 1, 1990, and June 30, 1991, only 11, 024 involved trials). Although some of the nontrial terminations are the result of pretrial adjudications, such as summary judgments and contested motions to dismiss, the bulk of the nontrial terminations reflect settlements. Kritzer, Adjudication to Settlement: Shading in the Gray, 70 Judicature 161, 163-164 (1986).

        United States v. Reliable Transfer Co., 421 U. S. 397, 408 (1975) (“Congestion in the courts cannot justify a legal rule that produces unjust results in litigation simply to encourage speedy out-of-court accommodations”).

       An excellent discussion of the effect of the various rules on settlement is Kornhauser & Revesz, Settlement Under Joint and Several Liability, 68 N. Y. U. L. Rev. 427 (1993). After considering the effects of strategic behavior, litigation costs, and whether the probabilities of the defendants’ being found liable at trial are “independent” or “correlated,” they conclude that “neither rule is consistently better than the other.” Id., at 492. In addition, in comparing the pro tanto and proportionate share rules, they generally assume that the pro tanto rule is implemented without good-faith hearings. Good-faith hearings, however, “mak[e] the pro tanto set-off rule relatively less desirable from the perspective of inducing settlements than the apportioned [i. e. proportionate] share set-off rule.” Id., at 476. Moreover, the pro tanto rule contains a unique disincentive to settlement in cases, like this one, in which the settlement covers more items of damage than the litigated judgment. McDermott argued that the settlement covered damage both to the crane and to the deck, whereas the judgment against River Don related only to the deck. The Court of Appeals refused to apportion the settlement between deck damages and crane damages and to credit River Don only with that portion related to deck damages. 979 F. 2d, at 1080. This refusal to apportion will greatly discourage settlement, because parties like McDermott will be unable to recover their full damages if they settle with one party.

         By referring to the relative fault of the parties, we express no disapproval of the lower courts’ use of relative “causation” to allocate damages. See 979 F. 2d, at 1081-1082.

       A further cost of the pro tanto rule would be incurred in cases in which the settlement covered more items of damage than the judgment. See n. 24, supra. To avoid discouraging settlement, the judge would have to figure out what proportion of the settlement related to damages covered by the judgment and what percentage related to damages covered only by the settlement. Presumably this allocation would be done by comparing the settling defendant’s liability for the damages to be covered by the judgment to those not so covered. Ascertaining the liability of a settling defendant for damages not otherwise litigated at trial would be at least as difficult as ascertaining an absent defendant’s responsibility for damages already the subject of litigation.

         Conway v. Pottsville Union Traction Co., 253 Pa. 211, 97 A. 1058 (1916); Rogers v. Cox, 66 N. J. L. 432, 50 A. 143 (1901); W. Prosser, Law of Torts §109, pp. 1105-1111 (1941).

       W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 49, pp. 333-334 (5th ed. 1984); Restatement (Second) of Torts §885(1), Comment b, at 334.

        Rose v. Associated Anesthesiologists, 501 F. 2d 806, 809 (CADC 1974); Sanders v. Cole Municipal Finance, 489 N. E. 2d 117, 120 (Ind. App. 1986).

       See 4 F. Harper, F. James, & O. Gray, Law of Torts §25.22 (2d ed. 1986) (injured person can recover full damages from tortfeasor, even when he has already been made whole by insurance or other compensatory payment); Restatement (Second) of Torts §920A(2) (1977). The one satisfaction rule once applied to compensatory payments by nonparties as well, thus preventing or diminishing recovery in many situations in which the collateral benefits rules would now permit full judgment against the tortfeasor. W. Prosser, Law of Torts § 109, pp. 1105-1107 (1941).

       Uniform Comparative Fault Act §2, Comment “Joint and Several Liability and Equitable Shares of the Obligation,” 12 U. L. A. 51 (1993 Supp.).

       See also Uniform Comparative Fault Act §2 (reallocation of insolvent defendant’s equitable share), id., at 50.


source: Caselaw Access Project

license: Public Domain

text:
    BOCA GRANDE CLUB, INC. v. FLORIDA POWER & LIGHT CO., INC.
    No. 93-180.
    Argued January 11, 1994
    Decided April 20, 1994
    Stevens, J., delivered the opinion for a unanimous Court.

      David F. Pope argued the cause for petitioner. With him on the briefs was Jack C. Rinard.

      Ronald J. Mann argued the cause for the United States as amicus curiae urging affirmance. With him on the brief were Solicitor General Days, Assistant Attorney General Hunger, Deputy Solicitor General Kneedler, and Richard A. Olderman.

      Stuart C. Markman argued the cause for respondent. With him on the briefs were James E. Felman, C. Steven Yerrid, and Christopher S. Knopik.

      Briefs of amicus curiae urging reversal were filed for the Maritime Law Association of the United States by Warren B. Daly, Jr., and George W. Healy III; and for the National Association of Securities and Commercial Law Attorneys by William S. Lerach, Leonard B. Simon, and Kevin P. Roddy.

        Kathryn A Oberly, Carl D. Liggio, Jon N. Ekdahl, Harris J. Amhowitz, Howard J. Krongard, Edwin D. Scott, and Eldon Olson filed a brief for Arthur Andersen & Co. et al. as amici curiae urging affirmance.

   Justice Stevens

delivered the opinion of the Court.

We granted certiorari, 509 U. S. 953 (1993), to consider the question whether, in an action against several alleged joint tortfeasors under general maritime law, the plaintiff’s settlement with one defendant bars a claim for contribution brought by nonsettling defendants against the settling defendant. Because the opinion that we announce today in McDermott, Inc. v. AmClyde, ante, p. 202, adopts the proportionate share rule, under which actions for contribution against settling defendants are neither necessary nor permitted, we vacate the judgment of the Court of Appeals and remand the case for further proceedings consistent with that opinion.

It is so ordered.


author: Justice Souter Justice Scalia,

text:
    UNITED STATES v. IRVINE et al.
    No. 92-1546.
    Argued December 6, 1993
    Decided April 20, 1994

      Souter, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Stevens, O’Connor, Kennedy, Thomas, and Ginsburg, JJ., joined, and in which Scalia, J., joined except as to Part III-A. Scalia, J., filed an opinion concurring in part and concurring in the judgment, post, p. 242. Blackmun, J., took no part in the decision of the case.

      Kent L. Jones argued the cause for the United States. With him on the briefs were Solicitor General Days, Acting Assistant Attorney General Paup, Deputy Solicitor General Wallace, Jonathan S. Cohen, and Teresa E. McLaughlin.

      Phillip H. Martin argued the cause for respondents. With him on the briefs were Mary J. Streitz, Carol A. Peterson, and Cole Oehler.

        Burton G. Ross, Cynthia S. Rosenblatt, and Robert P. Reznick filed a brief for John G. Ordway, Jr., et al. as amici curiae urging affirmance.

        Geoffrey J. O’Connor filed a brief for the estate of Helen W. Halbach et al. as amici curiae.

   Justice Souter

delivered the opinion of the Court.

In Jewett v. Commissioner, 455 U. S. 305 (1982), we construed the 1958 version of Treasury Regulation §25.2511-1(c) to provide that the disclaimer of a remainder interest in a trust effects a taxable gift unless the disclaimant acts within a reasonable time after learning of the transfer that created the interest. This case presents the question whether the rule is the same, under current Treasury Regulation §25.2511-l(c)(2) (Regulation), when the creation of the interest (but not the disclaimer) occurred before enactment of the federal gift tax provisions of the Revenue Act of 1932. We hold that it is.

I

In 1917, Lucius P. Ordway established an irrevocable inter vivos family trust, with his wife and their children as primary concurrent life income beneficiaries, to be succeeded by unmarried surviving spouses of the children and by grandchildren. The trust was to terminate upon the death of the last surviving primary income beneficiary, at which time the corpus would be distributed to Mr. Ordway’s surviving grandchildren and the issue of any grandchildren who had died before termination. When the trust terminated on June 27, 1979, the corpus was subject to division into 13 equal shares among 12 grandchildren living and the issue of one who had died. Prior to distribution, on August 23,1979, one of the grandchildren, Sally Ordway Irvine, filed a disclaimer of five-sixteenths of her interest in the trust principal. Mrs. Irvine had learned of her contingent interest in the trust at least as early as 1931 when she reached the age of 21, and she had begun receiving a share of the annual trust income after her father’s death in 1966. Her disclaimer was nonetheless effective under a Minnesota statute on the books at the time, which permitted the disclaimer of a future interest at any time within six months of the event finally identifying the disclaimant and causing her interest to become indefeasibly fixed. As a result of her disclaimer, each of Mrs. Irvine’s five children received one-sixteenth of her share of the distributed trust principal.

Mrs. Irvine reported the disclaimer in a federal gift tax return, but did not treat it as resulting in a taxable gift. The Commissioner of Internal Revenue determined on audit that the disclaimer indirectly transferred property by gift within the meaning of Internal Revenue Code of 1986 §§ 2501(a)(1) and 2511(a), and was not excepted from gift tax under Treas. Reg. § 25.2511 — 1(c) because it was not made “within a reasonable time after [Mrs. Irvine’s] knowledge” of her grandfather’s transfer creating, her interest in the trust estate. Mrs. Irvine responded with an amended return treating the disclaimer as a taxable gift, on which she paid the resulting tax of $7,468,671, plus $2,086,627.51 in accrued interest on the deficiency. She then claimed a refund of the tax and interest, which the Internal Revenue Service denied.

After Mrs. Irvine’s death in 1987, respondents, representing her estate, filed this action for . refund of the tax and interest in the United States District Court for the District of Minnesota. The Government continued to maintain that the partial disclaimer brought about a transfer subject to federal gift tax because Mrs. Irvine had not made it, as the Regulation requires, “within a reasonable time after knowledge of the [earlier] transfer” that created her interest in the trust estate. The Government relied on Jewett v. Commissioner, 455 U. S. 305 (1982), in which this Court held that the “transfer” referred to in Treas. Reg. §25.2511-l(c), 26 CFR § 25.2511-1(c) (1959) (promulgated in 1958), knowledge of which starts the clock ticking, occurs at the creation of the interest being disclaimed, not when its extent is finally ascertained or it becomes possessory. Jewett, supra, at 311-312.

Respondents tried to distinguish Jewett as having dealt with a trust established in 1939, after the creation of the gift tax by the Revenue Act of 1932 (Act), whereas the Ordway trust had been created before the Act, in 1917. Respondents also argued that the “reasonable time” limitation did not apply because the pre-Act, 1917 transfer creating the trust was not a “taxable transfer” of an interest, absent which the Regulation was inapplicable. On cross-motions for summary judgment, the District Court held that imposing the gift tax on Mrs. Irvine’s disclaimer would amount to retroactive application of the gift tax in violation of the Act’s provision that “[t]he tax shall not apply to a transfer made on or before the date of the enactment of this Act [June 6, 1932].” Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 245. The District Court cited Ordway v. United States, 89-1 USTC ¶ 13,802 (1989), in which the United States District Court for the Southern District of Florida had reached the same conclusion, on virtually identical facts, in a case involving a partial disclaimer by another beneficiary of the Ordway trust.

A divided panel of the Court of Appeals for the Eighth Circuit reversed. 936 F. 2d 343 (1991). It rejected the view that the Regulation is inapplicable to a trust created before enactment of the gift tax statute simply because the Regulation reaches only ‘“taxable transfers creating an interest in the person disclaiming made before January 1, 1977.’” Id., at 347 (emphasis in original). The Court of Appeals held that the transfer creating the trust was “taxable,” relying on the provision of Treas. Reg. §25.2518-2(c)(3) that ‘“a taxable transfer occurs when there is a completed gift for Federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift.’” 936 F. 2d, at 347-348. The court adopted the reasoning of its sister court for the Eleventh Circuit in Ordway v. United States, 908 F. 2d 890 (1990), which held that a “taxable transfer” occurs within the meaning of the Regulation whenever there is “ ‘any transaction in which an interest in property is gratuitously passed or conferred upon another,’ even if that transaction was not subject to the gift tax.” Id., at 895 (citation omitted). Applying the Regulation, the Court of Appeals for the Eighth Circuit held that Mrs. Irvine’s disclaimer was subject to gift tax because she did not make it within a reasonable time after she learned of her interest in the trust. Finally, the divided panel also upheld application of the Act against the claim of retroactivity, holding it to be irrelevant that the trust antedated the 1932 enactment of the Act, since the tax was being imposed on the transfer brought about by the 1979 disclaimer, not on the inter vivos transfer that created the trust in 1917. 936 F. 2d, at 346.

Respondents’ suggestion for rehearing en banc was granted, however, and the panel opinion was vacated. Unlike the panel, the en banc court affirmed the District Court, holding the Regulation inapplicable because its terms expressly limit its scope to “taxable transfers ... made before January 1, 1977.” 981 F. 2d 991 (CA8 1992). The creation of the Ordway trust in 1917 was not a “taxable transfer,” the court reasoned, because the federal gift tax provisions had yet to be enacted: “It is fundamental that for a transfer to be taxable there must be an applicable tax in existence when the transfer is made. No such federal tax existed on January 16, 1917, when . .. Mrs. Irvine’s interest was created.” Id., at 994. Given the inapplicability of the Regulation and its “reasonable time” requirement for tax-free disclaimer, the majority held that state law governed the effect of a disclaimer for federal gift tax purposes. See id., at 996 (citing Hardenbergh v. Commissioner, 198 F. 2d 63 (CA8), cert. denied, 344 U. S. 836 (1952)); 981 F. 2d, at 998 (concurring opinion). Because Mrs. Irvine’s disclaimer was indisputably valid under Minnesota law, the court held that the federal gift tax did not apply. Finally, the majority rejected the panel’s analysis of retroactive application, indicating that taxation of the transfer effected by the disclaimer would violate the Act’s prohibition of retroactive gift taxation. Id., at 994.

In a concurring opinion, id., at 996-998, Judge Loken also concluded the Regulation was inapplicable, not because of its limitation to “taxable transfers,” but because it is limited to interests in “property transferred from a decedent ... by the decedent’s will or by the law of descent and distribution,” whereas the Ordway trust came from an inter vivos transfer. Judge Loken shared the majority view, however, that because the Regulation was inapplicable, the federal gift tax consequences of the disclaimer were a function of state law. The dissent took the position of the majority in the panel opinion, and of the Eleventh Circuit in Ordway v. United States, supra. See 981 F. 2d, at 998-1002.

The conflict prompted us to grant certiorari to determine whether a disclaimer made after enactment of the gift tax statute, of an interest created before enactment, is necessarily free of any consequent federal gift taxation. 508 U. S. 971 (1993). We hold that it is not, and reverse.

II

The Internal Revenue Code of 1986 taxes “the transfer of property by gift,” 26 U. S. C. § 2501(a)(1), “whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible,” § 2511(a). We have repeatedly emphasized that this comprehensive language was chosen to embrace all gratuitous transfers, by whatever means, of property and property rights of significant value. See, e. g., Dickman v. Commissioner, 465 U. S. 330, 333-335 (1984); Jewett v. Commissioner, 455 U. S., at 309-310; Smith v. Shaughnessy, 318 U. S. 176, 180 (1943). We held in Jewett, supra, at 310, that “the statutory language . . . unquestionably encompasses an indirect transfer, effected by means of a disclaimer, of a contingent future interest in a trust,” the practical effect of such a transfer being “to reduce the expected size of [the taxpayer’s] taxable estate and to confer a gratuitous benefit upon the natural objects of [her] bounty ....”

Treasury Reg. §25.2511-1(c)(1) restates the gift tax’s broad scope by providing that the tax is payable on “any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed . . . .” The Regulation (subsection 1(c)(2)), on the other hand, affords an exception to the general rule of taxability, by providing that a disclaimer of property transferred by a decedent’s will or the law of descent and distribution does not result in a gift if it is unequivocal and effective under local law, and made “within a reasonable time after knowledge of the existence of the transfer.” As already noted, the Jewett Court held that “the transfer” in the 1958 version of the Regulation refers to the creation of the interest being disclaimed, with the “reasonable time” therefore beginning to run upon knowledge of the creation of the trust. See supra, at 229.

Ill

A

On one point there cannot be any serious dispute, for it is clear that if the Regulation applies to Mrs. Irvine’s disclaimer, her act resulted in taxable gifts. The knowledge and capacity to act, which are presupposed by the requirement that a tax-free disclaimer be made within a reasonable time of the disclaimant’s knowledge of the transfer of the interest to her, were present in this instance at least as early as Mrs. Irvine’s 21st birthday in 1931. We need not decide whether a disclaimer good for gift tax purposes could be required to have been made before enactment of the gift tax, for Mrs. Irvine did not disclaim shortly after enactment of the Act, and the timeliness determination in this case would be the same whether the reasonable time was calculated from Mrs. Irvine’s first knowledge of the interest (1931) or from the enactment of the federal gift tax statute (1932). Moreover, we understand the Government to have conceded that it would not have contested the timeliness of a disclaimer made within a reasonable time after the enactment of the Act. See Tr. of Oral Arg. 12.

The determination of the amount of “reasonable time” that remained after Mrs. Irvine learned of the interest and reached majority status must be based upon the gift tax’s purpose to curb avoidance of the estate tax. We have already observed, supra, at 233, that “the practical effect of [a disclaimer like this one is] to reduce the expected size of [the disclaimant’s] taxable estate and to confer a gratuitous benefit upon the natural objects of [her] bounty . . . Jewett, 455 U. S., at 310. Accordingly, as the Court said in Jewett, “ ‘[a]n important, if not the main, purpose of the gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death.’” Ibid, (quoting Estate of Sanford v. Commissioner, 308 U. S. 39, 44 (1939)). Hence the capacious language of Internal Revenue Code §§ 2501(a)(1) and 2511(a), which encompasses all gratuitous transfers of property and property rights of significant value. See supra, at 232-233.

“[T]he passage of time is crucial to the scheme of the gift tax.” Jewett, supra, at 316, n. 17 (internal quotation marks and citation omitted). The opportunity to disclaim, and thereby to avoid gift as well as estate taxation, should not be so long as to provide a virtually unlimited opportunity to consider estate planning consequences. While a decision to disclaim even at the earliest opportunity may be made with appreciation of potential estate tax consequences, the passage of time puts the prospective disclaimant in a correspondingly superior position to determine whether her need to enjoy the property (and incur a tax for a subsequent gift of it or an increased estate tax if she retains it) outweighs the favorable estate and gift tax consequences of a disclaimer. Although there is no bright-line rule for timeliness in the absence of a statute or regulation providing one, Mrs. Irvine’s delay for at least 47 years after the clock began running, until she reached age 68, could not possibly be thought reasonable. By the date of her disclaimer, Mrs. Irvine was in a position to make a fairly precise determination of the advantage to be gained by a transfer diminishing her estate and its eventual taxation. If her decision were treated as timely, the requirement for a timely election would have no bite at all.

B

Respondents would avoid this result on two alternative grounds. They argue first that by its own terms, the Regulation does not apply on the facts of this case, with the consequence that taxability under the Internal Revenue Code turns on the efficacy of the disclaimer under state law. Second, respondents argue that even if the disclaimer would result in an otherwise taxable transfer in the absence of the governing Regulation, the tax on transfer of an interest created by an instrument antedating the enactment of the gift tax statute would be barred by the statutory prohibition of retroactive application.

1

The question of the Regulation’s applicability under its own terms need not be resolved here, for the result of its inapplicability would not be freedom from gift taxation on a theory of borrowed state law or on any other rationale. The arguments for inapplicability may therefore be shortly stated, each having been raised at one point or another in the prior litigation of this case.

The first argument turns on the Regulation’s application to disclaimers of interests created by what it terms “taxable transfers,” a phrase that on its face presupposes some source of taxability for the transfer. There was, however, no gift tax when the trust, including its remainder interests, was created in 1917, and the gift tax provisions of the Act did not render preenactment transfers taxable. The language is, to say the least, troublesome to the Government’s position that the Regulation applies. The Government responds to the trouble by citing Treas. Reg. § 25.2518-2(c)(3) (adopted in 1986, as was the Regulation), which deals with the new regime (not applicable here) for disclaimers of interests created after December 31, 1976, and defines “taxable transfer” for its purposes as covering transfers on which no tax is actually imposed (e. g., because a gift is chargeable against the current lifetime exemption, 26 U. S. C. § 2503(b)). If this definition is thought to beg the question, the Government falls back to the argument that the predecessor regulation was not limited in application to interests derived from taxable transfers, and there was no intent in 1986 to narrow the scope covered by the 1958 version of the Regulation in any such way.

The second argument rests on the Regulation’s provision that “the transfer” to which it applies is subject to a timely, tax-free disclaimer “whether the transfer is effected by the decedent’s will or by the law of descent and distribution,” but only “where the law governing the administration of the decedent’s estate” gives the recipient of the transferred interest a right to refuse it. As against these descriptions of the transfer’s testamentary character, the text says nothing indicating that a taxable transfer from anyone other than a decedent may create an interest subject to a disclaimer free of gift tax. If the text is given its strict reading, then, it has no application to the interest in question here, which came into being not from a decedent’s transfer by will or from application of the law of descent and distribution, but from Mr. Ordway’s transfer during his lifetime, creating an irrevocable inter vivos trust.

2

Even assuming the soundness of one or both of these arguments that the Regulation is inapposite, however, the disclaimer would not escape federal gift taxation by reference to state law rules giving effect to the disclaimer as causing a transfer to the beneficiary next in line. Any such reasoning would run counter to our holding in Jewett. In rejecting the argument that the 1958 version of the Regulation was being applied retroactively to the taxpayer’s disadvantage in that case, the Jewett Court repudiated the “assumption that [the taxpayer] had a ‘right’ to renounce the interest without tax consequences that was ‘taken away’ by the 1958 Regulation. [The taxpayer] never had such a right.” Jewett, 455 U. S., at 317. Only then did the Jewett Court go on to determine that the disclaimer at issue did not fall within the exemption from the gift tax provided by the Regulation, and was consequently taxable. Id., at 312-316. The Court followed the general and longstanding rule in federal tax cases that although state law creates legal interests and rights in property, federal law determines whether and to what extent those interests will be taxed. See, e. g., Burnet v. Harmel, 287 U. S. 103, 110 (1932); Morgan v. Commissioner, 309 U. S. 78, 80-81 (1940); United States v. Mitchell, 403 U. S. 190, 197 (1971). The Court put it this way in United States v. Pelzer, 312 U. S. 399, 402-403 (1941):

“[T]he revenue laws are to be construed in the light of their general purpose to establish a nationwide scheme of taxation uniform in its application. Hence their provisions are not to be taken as subject to state control or limitation unless the language or necessary implication of the section involved makes its application dependent on state law.”

Cases like Jewett and this one illustrate as well as any why it is that state property transfer rules do not translate into federal taxation rules. Under state property rules, an effective disclaimer of a testamentary gift is generally treated as relating back to the moment of the original transfer of the interest being disclaimed, having the effect of canceling the transfer to the disclaimant ab initio and substituting a single transfer from the original donor to the beneficiary of the disclaimer. See, e. g., Schoonover v. Osborne, 193 Iowa 474, 478, 187 N. W. 20, 22 (1922); Seifner v. Weller, 171 S. W. 2d 617, 624 (Mo. 1943); Albany Hosp. v. Hanson, 214 N. Y. 435, 445, 108 N. E. 812, 815 (1915); Burritt v. Silliman, 13 N. Y. 93, 97-98 (1855); Perkins v. Isley, 224 N. C. 793, 798, 32 S. E. 2d 588, 591 (1945); see also 3 American Law of Property § 14.15 (A. Casner ed. 1952). Although a state-law right to disclaim with such consequences might be thought to follow from the common-law principle that a gift is a bilateral transaction, requiring not only a donor’s intent to give, but also a donee’s acceptance, see, e. g., Wallace v. Moore, 219 Ga. 137, 139, 132 S. E. 2d 37, 39 (1963); Gottstein v. Hedges, 210 Iowa 272, 275, 228 N. W. 93, 94 (1929); Pirie v. Le Saulnier, 161 Wis. 503, 507, 154 N. W. 993, 994 (1915); Blanchard v. Sheldon, 43 Vt. 512, 514 (1871), state-law tolerance for delay in disclaiming reflects a less theoretical concern. An important consequence of treating a disclaimer as an ab initio defeasance is that the disclaimant’s creditors are barred from reaching the disclaimed property. See, e.g., Gottstein v. Hedges, supra. The ab initio disclaimer thus operates as a legal fiction obviating a more straightforward rule defeating the claims of a disclaimant’s creditors in the property disclaimed.

The principles underlying the federal gift tax treatment of disclaimers look to different objects, however. As we have already stated, Congress enacted the gift tax as a supplement to the estate tax and a means of curbing estate tax avoidance. See supra, at 234-235. Since the reasons for defeating a disclaimant’s creditors would furnish no reasons for defeating the gift tax as well, the Jewett Court was undoubtedly correct to hold that Congress had not meant to incorporate state-law fictions as touchstones of taxability when it enacted the Act. Absent such a legal fiction, the federal gift tax is not struck blind by a disclaimer. And as we have already stated, supra, at 233, without the exception afforded in the Regulation, the gift tax statute provides a general rule of taxability for disclaimers such as Mrs. Irvine’s.

IV

Presumably to ward off any attack on the federal gift tax resting on the possibility that its retroactive application would violate due process, see Untermyer v. Anderson, 276 U. S. 440 (1928), § 501(b) of the Act provided that it would “not apply to a transfer made on or before the date of the enactment of this Act [June 6,1932].” Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 245. The same provision has in substance been carried forward to this day. Respondents argue that even if the Regulation applies, or taxation would otherwise be authorized, taxation of the transfer following Mrs. Irvine’s disclaimer would violate this limitation. The language that respondents use to frame this claim reveals the flaw in their position. Respondents argue that “[t]he government’s interpretation of the 1986 Regulation to apply to interests created before enactment of the Act [i. e., to result in taxability] would be a retroactive application of the Act clearly contrary to Congressional intent.” Brief for Respondents 26. But § 501 merely prohibited application of the gift tax statute to transfers antedating the enactment of the Act; it did not prohibit taxation when interests created before the Act were transferred after enactment. Such postenactment transfers are all that happened on the occasion of Mrs. Irvine’s disclaimer. The critical events, the transfers of fractional portions of Mrs. Irvine’s remainder to her children, occurred after enactment of the gift tax, though the interests transferred were created before that date. To argue otherwise, that the transfer to be taxed antedated the Act, would be to cling to the legal fiction that the disclaimer related back to the moment in 1917 when Lucius P. Ordway established the trust. This fiction may be indulged under state law as a device to regulate creditors’ rights, but the Jewett Court clearly held that Congress enacted no such fantasy. In sum, the retroactivity argument is sufficiently answered by our statement in United States v. Jacobs, 306 U. S. 363, 367 (1939), that a tax “does not operate retroactively merely because some of the facts or conditions upon which its application depends came into being prior to the enactment of the tax.”

V

The Commissioner’s assessment of federal gift tax on Mrs. Irvine’s 1979 disclaimer was authorized by the statute. The judgment of the Court of Appeals is reversed.

It is so ordered.

Justice Blackmun took no part in the decision of this case.

Justice Scalia,

concurring in part and concurring in the judgment.

I join the judgment of the Court, and its opinion except for Part III-A. It seems to me that the basis for the “reasonable time” limitation in the Regulation cannot be, as the Court says, ante, at 235, the need to deprive the beneficiary of “a virtually unlimited opportunity to consider estate planning consequences.” Considering estate planning consequences (not a malum in se) is nowhere condemned by the tax laws, and I would see no basis for the Treasury Department’s arbitrarily declaring a disclaimer to be a gift solely in order to deter such consideration. The Secretary undoubtedly has broad discretion to determine the meaning of the term “transfer” as it is used in the gift tax statute, and undoubtedly may indulge an antagonism to estate planning in choosing among permissible meanings. But “disclaimer after opportunity for estate tax planning” is simply not a permissible meaning.

The justification for the “reasonable time” limitation must, as always, be a textual one. It consists, in my view, of the fact that the failure to make a reasonably prompt disclaimer of a known bequest is an implicit acceptance. Qui tacet, consentiré videtur. Thus, a later disclaimer, which causes the property to go to someone else by operation of law, is effectively a transfer to that someone else. (The implication from nondisclaimer is much weaker when the interest is a contingent one, but Jewett v. Commissioner, 455 U. S. 305 (1982), resolved that issue — perhaps incorrectly.) While state disclaimer laws have chosen to override the reasonable implication of nondisclaimer, the Treasury Department regulations correctly (or at least permissibly) conclude that the federal gift tax does not.

       Minn. Stat. §501.211, subd. 3 (1978), repealed by 1989 Minn. Laws, ch. 340, art. 1, § 77 (and replaced by Minn. Stat. § 501B.86, subd. 3 (1992) (changing the time permitted for disclaiming to nine months, effective January 1, 1990)).

       “A tax ... is hereby imposed for each calendar year on the transfer of property by gift during such calendar year by any individual resident or nonresident.” 26 U. S. C. § 2501(a)(1).

       “Subject to the limitations contained in this chapter, the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible ....” 26 U. S. C. § 2511(a).

       The following is the relevant text of the 1958 regulation then in effect:
      “The gift tax also applies to gifts indirectly made. Thus, all transactions whereby property or property rights or interests are gratuitously passed or conferred upon another, regardless of the means or device employed, constitute gifts subject to tax. See further §25.2512-8. Where the law governing the administration of the decedent’s estate gives a beneficiary, heir, or next-of-kin a right to completely and unqualifiedly refuse to accept ownership of property transferred from a decedent (whether the transfer is effected by the decedent’s will or by the law of descent and distribution of intestate property), a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable time after knowledge of the existence of the transfer. The refusal must be unequivocable [sic] and effective under the local law. There can be no refusal of ownership of property after its acceptance. Where the local law does not permit such a refusal, any disposition by the beneficiary, heir, or next-of-kin whereby ownership is transferred gratuitously to another constitutes the making of a gift by the beneficiary, heir, or next-of-kin. In any case where a refusal is purported to relate to only a part of the property, the determination of whether or not there has been a complete and unqualified refusal to accept ownership will depend on all of the facts and circumstances in each particular case, taking into account the recognition and effectiveness of such a purported refusal under the local law. In the absence of facts to the contrary, if a person fails to refuse to accept a transfer to him of ownership of a decedent’s property within a reasonable time after learning of the existence of the transfer, he will be presumed to have accepted the property. . . .” Treas. Reg. § 25.2511-l(c), 26 CFR §25.2511-l(c) (1959).

       Mrs. Irvine was also assessed additional gift tax and penalties in connection with an unrelated gift made in 1980 because her amended gift tax return for the third quarter of 1979 reduced the amount of unified credit available to her in the following year. See 26 U. S. C. §2505 (1988 ed. and Supp. IV). That assessment is not at issue here.

       The 1958 version of the Regulation was in force throughout the period from Mrs. Irvine’s disclaimer to her unsuccessful claim for a refund. The parties agree, however, that the current (1986) version of the Regulation supersedes the earlier version and governs this case. See 26 U. S. C. § 7805(b) (Secretary of the Treasury “may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect”); Automobile Club of Mich. v. Commissioner, 353 U. S. 180,184 (1957) (Treasury Regulations may be retroactively applied unless doing so constitutes an abuse of the Secretary’s discretion).
      The relevant regulation is now Treas. Reg. § 25.2511-l(c)(2), 26 CFR §25.2511-l(c)(2) (1993), which provides in relevant part:
      “In the case of taxable transfers creating an interest in the person disclaiming made before January 1,1977, where the law governing the administration of the decedent’s estate gives a beneficiary, heir, or next-of-kin a right completely and unqualifiedly to refuse to accept ownership of property transferred from a decedent (whether the transfer is effected by the decedent’s will or by the law of descent and distribution), a refusal to accept ownership does not constitute the making of a gift if the refusal is made within a reasonable time after knowledge of the existence of the transfer. The refusal must be unequivocal and effective under the local law. There can be no refusal of ownership of property after its acceptance. In the absence of the facts to the contrary, if a person fails to refuse to accept the transfer to him of ownership of a decedent’s property within a reasonable time after learning of the existence of the transfer, he will be presumed to have accepted the property. Where the local law does not permit such a refusal, any disposition by the beneficiary, heir, or next-of-kin whereby ownership is transferred gratuitously to another constitutes the making of a gift by the beneficiary, heir, or next-of-kin. In any case where a refusal is purported to relate to only a part of the property, the determination of whether or not there has been a complete and unqualified refusal to accept ownership will depend on all the facts and circumstances in each particular case, taking into account the recognition and effectiveness of such a purported refusal under the local law.”

       See n. 2, supra.

       See n. 3, supra.

       “The gift tax also applies to gifts indirectly made. Thus, any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. See further § 25.2512-8 relating to transfers for insufficient consideration. However, in the case of a taxable transfer creating an interest in the person disclaiming made after December 31, 1976, this paragraph (c)(1) shall not apply to the donee if, as a result of a qualified disclaimer by the donee, the property passes to a different donee. Nor shall it apply to a donor if, as a result of a qualified disclaimer by the donee, a completed transfer of an interest in property is not effected. See section 2518 and the corresponding regulations for rules relating to a qualified disclaimer.” Treas. Reg. §25.2511-l(c)(l), 26 CFR §25.2511-l(c)(l) (1993).

       Arguably, occasion and capacity occurred under applicable Minnesota law in 1928 when Mrs. Irvine became 18 years old, the age of majority for women at the time. 1866 Minn. Gen. Stat., ch. 59, §2; see Vlasek v. Vlasek, 204 Minn. 331, 331-332, 283 N. W. 489, 490 (1939).

       See Revenue Act of 1932, ch. 209, § 501(b), 47 Stat. 245 (nonretroactivity provision).

       Treasury Reg. §25.2518-2(c)(3), 26 CFR §25.2518-2(c)(3) (1993), provides in relevant part: “With respect to inter vivos transfers, a taxable transfer occurs when there is a completed gift for Federal gift tax purposes regardless of whether a gift tax is imposed on the completed gift.”

       Under the new regime, tax-free disclaimers of interests created by post-1976 transfers may generally be made within nine months after the disclaimant has learned of the interest and reached the age of 21. See 26 U. S.C. §2518; Treas. Reg. §§25.2518-1, 25.2518-2, 26 CFR §§25.2518-1, 25.2518-2 (1993).

       See n. 6, supra.

       In direct contrast, the disclaimed interest in Jewett was created by a testamentary trust, and the disclaimer therefore involved “property transferred from a decedent ... by the decedent’s will . . . .” Treas. Reg. § 25.2511 — 1(c)(2), 26 CFR § 25.251l-l(c)(2) (1993). See Jewett v. Commissioner, 455 U. S. 305, 306 (1982).

       See Brown v. Routzahn, 63 F. 2d 914, 916 (CA6 1933); 3 American Law of Property § 14.15 (A. Casner ed. 1952). As to interests created by intestate succession, state laws generally refused to give effect to disclaimers; the traditional rule is that “title to the property of an intestate passes by force of the rules of law .. . and that those so entitled by law have no power to prevent the vesting of title in themselves.” Hardenbergh v. Commissioner, 198 F. 2d 63, 66 (CA8), cert. denied, 344 U. S. 836 (1952) (citations omitted).

       Respondents challenge the Regulation’s validity only insofar as it would allegedly sanction a retroactive application of gift tax. See infra, at 241.

       See 26 U. S. C. § 2502(b).

       While respondents do not take the further step of arguing that § 502 should be read to embody the fiction because due process would otherwise be violated, they do argue that taxation here would violate due process because Mrs. Irvine would not have been allowed to make a tax-free disclaimer within a reasonable time after adoption of the Act. But those facts are not presented here, as Mrs. Irvine did not disclaim until 1979. See supra, at 235.