Opinion ID: 1171472
Heading Depth: 3
Heading Rank: 3

Heading: Deduction for the Loan Receipt Agreement (LRA).

Text: All parties contend that the trial court erred in its treatment of the LRA. Bohna and Allstate [22] maintain that it was error for the court to deduct any portion of the $3 million loan from the jury verdict. HT argues that, for various reasons, the LRA violates Alaska law and public policy, and thus the entire $3 million should have been deducted from the verdict. [23] Loan receipt agreements originated as a mechanism for insurance companies to compensate their insured who had suffered injury or damage while preserving their rights against potentially liable third parties. After the insured suffered a loss, the insurer would loan the amount of the loss to the insured with the loan to be repaid out of any recovery against a third party. Structuring the transaction as a loan also allowed the insurer to avoid being the named plaintiff in a subsequent action to determine liability. [24] Early in this century, the United States Supreme Court approved the use of the LRA in this context. The Supreme Court recognized the LRA had the laudable effect of promptly delivering compensation to the injured plaintiff. See Luckenbach v. W.J. McCahan Sugar Refining Co., 248 U.S. 139, 149, 39 S.Ct. 53, 55, 63 L.Ed. 170 (1918). This type of arrangement is still generally considered lawful. See 16 Couch on Insurance § 61.79 (M. Rhodes rev. 2d ed. 1983); Annot., 13 A.L.R.3d 48-49. [25] Use of the loan receipt device has expanded beyond the insurer/insured context into the plaintiff/co-defendant context. [26] Although not all courts have accepted LRA's in this context, [27] the majority have. A leading case in the area is Reese v. Chicago, Burlington & Quincy R.R. Co., 55 Ill.2d 356, 303 N.E.2d 382 (1973). Expressing the policy reasons for upholding LRA's, the Reese court said: Because of the potential savings to some tortfeasors, funds under this arrangement will be more readily offered to injured plaintiffs than is the case under a covenant to forbear from suit or an outright settlement. Secondarily, loan receipts may tend to simplify complex multiparty litigation, and are desirable from the standpoint of facilitating private resolution of litigation. Id. 303 N.E.2d at 386. These reasons have been persuasive to a number of other courts faced with LRA's between a plaintiff and a co-defendant. See American Transport Co. v. Central Indiana Ry. Co., 255 Ind. 319, 264 N.E.2d 64, 67 (1970); Crocker v. New England Power Co., 348 Mass. 159, 202 N.E.2d 793, 795 (1964); Grillo v. Burke's Paint Co., 275 Or. 421, 551 P.2d 449, 452-53 (1976); Jensen v. Beaird, 40 Wash. App. 1, 696 P.2d 612, 618 (1985); cf. Slaughter v. Pennsylvania X-Ray Corp., 638 F.2d 639, 643 (3d Cir.1981) (Penn. law); City of Tucson v. Gallagher, 108 Ariz. 140, 142, 493 P.2d 1197, 1199 (1972); Firestone Tire & Rubber Co. v. Little, 276 Ark. 511, 639 S.W.2d 726, 728 (1982), rev'd on other grounds sub nom; Shelton v. Firestone Tire & Rubber Co., 281 Ark. 100, 662 S.W.2d 473, 475 (1983); Webb v. Dessert Seed Co., 718 P.2d 1057, 1067 (Colo. 1986); General Motors Corp. v. Lahocki, 286 Md. 714, 410 A.2d 1039, 1046 (1980); Barlage v. The Place, Inc., 277 N.W.2d 193, 194-95 (Minn. 1979); O'Howell v. Continental Ins. Co., 654 S.W.2d 308, 308-09 (Mo. App. 1983); Hegarty v. Campbell Soup Co., 214 Neb. 716, 335 N.W.2d 758, 764-65 (1983); Bedford School District v. Caron Constr. Co., Inc., 116 N.H. 800, 367 A.2d 1051, 1055 (1976); Corn Exch. Bank v. Tri-State Livestock Auction Co., 368 N.W.2d 596, 599-600 (S.D. 1985); Stein v. American Residential Management, 781 S.W.2d 385, 388-9 (Tex. App. 1989); Vermont Union School Dist. No. 21 v. H.P. Cummings Constr. Co., 143 Vt. 416, 469 A.2d 742, 748-50 (1983); Reager v. Anderson, 179 W. Va. 691, 371 S.E.2d 619, 630 (1988). HT urges us to adopt the reasoning of Justice Schaefer's dissent in Reese. Justice Schaefer made a number of arguments against the use of LRA's in the plaintiff/co-defendant context. First, he argued that such use undermines the doctrine that prohibits assignment of a cause of action for personal injuries. Second, he attacked the majority's policy justifications for the LRA. He argued that the law should not permit one defendant to pay to influence the plaintiff to pursue other defendants. He also denied that the LRA facilitated the private resolution of litigation since it required the plaintiff to pursue the nonsettling defendant. Finally, Justice Schaefer argued that the LRA could throw the entire loss onto the less blameworthy of two defendants. This may happen, according to Justice Schaefer, because the more blameworthy party has more to lose and is thus willing to pay more to secure an LRA from the plaintiff. Reese, 303 N.E.2d at 387-88 (Schaefer, J., dissenting). We do not find that these points compel a rejection of LRA's. As we discuss below, we do not find that the LRA constitutes an illegal assignment. As for the concern about one defendant influencing the plaintiff to sue the others, it would seem that the plaintiff would usually sue the nonsettling defendant regardless of the existence of the LRA. The LRA simply allows the settling defendant to induce the plaintiff not to sue him or her. We also disagree with the objection that the LRA does not facilitate the private resolution of litigation. It is true that the LRA does not eliminate all litigation concerning a case. However, from the viewpoint of the settling defendant, the LRA clearly does provide a way to resolve claims against him or her. An LRA allows settling defendants to limit their liability and avoid some of the uncertainties inherent in litigation. Without the possibility of recoupment provided by LRA's, it is less likely that such defendants would settle. Finally, we do not find that the argument that LRA's allow the more blameworthy defendant to shift the entire liability to the less blameworthy party is a reason for invalidating LRA's. As we note below, the amount of the loan, as well as the amount of the settlement, is fully deductible from the award against the nonsettling defendant. With such deductions, the wholesale loss shifting which concerned Justice Schaefer cannot take place. HT nevertheless maintains that the LRA contracts away the restriction in AS 09.16.010(d) which provides that a settling tortfeasor is not entitled to contribution from a nonsettling joint tortfeasor whose liability is not extinguished by the settlement. [28] According to HT, the LRA allows Allstate, a settling tortfeasor, to obtain what effectively amounts to contribution from HT, a nonsettling tortfeasor, contrary to the intent of the Contribution Act. Despite HT's strenuous defense of what it believes to be the intent of the Contribution Act, the actual language of AS 09.16.010(d) does not preclude these types of agreements. Thus, we hold that the LRA does not violate AS 09.16.010(d). HT attacks the LRA from another angle, arguing that it is inconsistent with the Code of Professional Responsibility and threatens the integrity of the judicial process. HT bases this claim on the realignment of interests created by the LRA. According to HT, the LRA is a collusive agreement which creates a fertile environment for perjury, and misleads the jury since the agreeing defendant remains as a captioned defendant and not a real defendant. [29] We find HT's position to be without merit. The concerns were adequately met by allowing HT to disclose the realignment of interests to the jury and by letting the jury evaluate the witness' credibility. [30] See Reese v. Chicago, Burlington & Quincy R.R. Co., 55 Ill.2d 356, 303 N.E.2d 382, 387 (1973). Finally, HT attacks the LRA as an illegal assignment of a legal malpractice action. According to HT, the terms and conditions of the loan and the fact that some of the loan funds went to pay expenses associated with the litigation against HT establish an assignment to Allstate. We disagree. According to the terms of the LRA, [p]ayment on the note is due at the time of and in the full amount of any money received by Phillip Bohna by reason of any claim arising out of or related to the August 21, 1981 automobile accident which injured Anthony Stevens ... including but not limited to the claims asserted against [HT]. At most, this establishes a partial assignment of the proceeds of the malpractice claim against HT, not the cause of action itself. [31] Although we have not directly addressed the validity of the assignment of the proceeds of a legal malpractice claim, we did not disapprove of the practice in Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 286 (Alaska 1980). Other courts have explicitly upheld the validity of such assignments. See e.g., Weston v. Dowty, 163 Mich. App. 238, 414 N.W.2d 165, 167 (1987); First Nat'l Bank of Clovis v. Diane, Inc., 102 N.M. 548, 557, 698 P.2d 5, 14 (App. 1985). We agree with these authorities. Having concluded that the LRA is a valid settlement device, [32] the next question is whether any part of the loan must be deducted from the judgment against HT. The statute relevant to this issue is AS 09.16.040 (repealed eff. 3/5/89) which provides: When a release or covenant not to sue or not to enforce judgment is given in good faith to one of two or more persons liable in tort for the same injury or the same wrongful death (1) it does not discharge any of the other tortfeasors from liability for the injury or wrongful death unless its terms so provide; but it reduces the claim against the others to the extent of any amount stipulated by the release or the covenant, or in the amount of the consideration paid for it, whichever is the greater; and (2) it discharges the tortfeasor to whom it is given from all liability for contribution to any other tortfeasor. [33] (Emphasis added.) The trial court determined that the portion of the loan which Bohna must repay was not consideration paid for the release given Allstate. We disagree. A loan may be consideration for an exchanged benefit as readily as an unconditional payment. See Credit Alliance Corp. v. Cornelius & Rush Coal Co., 508 F. Supp. 63, 66 (N.D.Ala. 1980) (Ala. law) (a loan is consideration for an exchanged benefit). Further, if the loan amount of an LRA is not treated as consideration, the widespread use of LRA's will have troubling implications. Neither plaintiffs nor settling defendants would have any incentive not to structure 100% of all settlements as LRA's. Such a tactic would result in an undue shifting of losses to nonsettling defendants. There is authority in other jurisdictions which mirrors this view. E.g., Cullen v. Atchinson, Topeka & Santa Fe Ry. Co., 211 Kan. 368, 507 P.2d 353, 362 (1973) ([A]nything received by way of a covenant not to sue operates as a payment pro tanto upon any judgment obtained against the others.) (citation omitted); Reager v. Anderson, 179 W. Va. 691, 371 S.E.2d 619, 632 (1988). We recognize that most jurisdictions deduct no part of the loan amount or only deduct the portion of the loan amount which plaintiffs do not repay. See Webb v. Dessert Seed Co., 718 P.2d 1057, 1067 (Colo. 1986); Popovich v. Ram Pipe & Supply Co., 82 Ill.2d 203, 45 Ill.Dec. 167, 170, 412 N.E.2d 518, 521 (1980); American Transp. Co. v. Central Indiana Ry. Co., 255 Ind. 319, 264 N.E.2d 64, 67 (1970); Pacific Indem. Co. v. Thompson-Yaeger, Inc., 258 N.W.2d 762, 765 (Minn. 1977); Grillo v. Burke's Paint Co., 275 Or. 421, 551 P.2d 449, 454 (1976). [34] However, these jurisdictions do not appear to be construing language similar to the consideration paid language of AS 09.16.040. [35] Thus, although there seem to be more jurisdictions which do not deduct amounts loaned under an LRA than do, our position does not run counter to the uniformity of interpretation clause of Alaska's Uniform Contribution Act. [36]