Opinion ID: 6985046
Heading Depth: 4
Heading Rank: 2

Heading: Loan-Receipt Agreements Violate the Terms of the Contribution Act

Text: Loan-receipt agreements, such as the instant settlement agreement, may not be considered good-faith” settlements because they violate the terms of the Contribution Act in two important respects. First, under the Contribution Act, a settling tortfeasor is prohibited from recovering contribution from another tortfeasor whose liability is not extinguished by the settlement. (740 ILCS 100/2(e) (West 1992).) Loan-receipt agreements, however, allow a settling tortfeasor to subvert this portion of the Act by allowing the settling tortfeasor to obtain contribution indirectly from the nonsettling tortfeasor. The settling tortfeasor obtains indirect contribution because the plaintiff uses damages recovered from the nonsettling tortfeasor to repay the loan to the settling tortfeasor. (See Henry v. St. John’s Hospital (1990), 138 Ill. 2d 533, 549.) Loan-receipt agreements therefore violate the terms of the Contribution Act by allowing a settling tortfeasor to accomplish indirectly that which is expressly forbidden by the Act. In this respect, the instant settlement may be regarded as collusive, and thus not made in good faith. The settlement is collusive because it incorporates an agreement to obtain an object forbidden by law. The Contribution Act prohibits a settling tortfeasor from recovering contribution from another tortfeasor whose liability is not extinguished by the settlement. Here, however, the settlement allows the City to indirectly obtain contribution from the defendant / intervenors even though the settlement agreement did not extinguish their liability. See In re Waverly Accident of February 22-24, 1978 (Tenn. 1979), 502 F. Supp. 1, 5. More importantly, loan-receipt agreements such as the instant settlement violate the terms of the Contribution Act because they attempt to deprive the nonsettling tortfeasors of their statutory right to a setoff. As stated, section 2 of the Contribution Act specifies that, where a settlement is reached in good faith, the amount the plaintiff recovers on any claim against any other nonsettling tortfeasors will be reduced by the amount stated in the settlement agreement, or the amount of consideration actually paid by the settling tortfeasor, whichever is greater. (740 ILCS 100/2(c) (West 1992).) This setoff provision protects nonsettling tortfeasors from paying more than their pro rata share of the final judgment for damages, and thereby promotes the Contribution Act’s policy of equitably apportioning damages among joint tortfeasors. By providing for setoff rights, section 2 of the Contribution Act also reflects Illinois’ public policy of protecting the financial interests of non-settling tortfeasors. Wilson v. Hoffman Group, Inc. (1989), 131 Ill. 2d 308, 321-22. In the instant case, the settling parties manipulated the terms of the settlement agreement to deprive the nonsettling tortfeasors (defendant/intervenors) of their right to a setoff. Under the terms of the settlement agreement, the City paid Babb $400,000 in settlement monies. The settlement agreement specified, however, that Babb’s estate would repay $350,000 of the settlement monies to the City out of any amount that the estate might recover from other tortfeasors, specifically, the defendant /intervenors. As a result, any nonsettling tortfeasors would be entitled to only a $50,000 setoff, even though the City paid and the estate received $400,000 under the terms of the settlement agreement. (See McDermott v. Metropolitan Sanitary District (1992), 240 Ill. App. 3d 1, 47-48; Johnson v. Belleville Radiologists, Ltd. (1991), 221 Ill. App. 3d 100, 109.) Therefore, we find that the terms of the settlement agreement, under which the nonsettling tortfeasors are not entitled to a full setoff for the amount that the City paid in consideration for its release from liability, violate the terms of the Contribution Act. This court has previously struck down a settlement agreement in which the settling parties manipulated the settlement allocation to deprive the nonsettling defendant of his right to a setoff. In Blagg v. Illinois F.W.D. Truck & Equipment Co. (1991), 143 Ill. 2d 188, an injured plaintiff brought a products liability action against the manufacturer and distributor of the truck that allegedly caused his injuries. The plaintiff’s spouse brought a loss of consortium action against the same defendants. The defendants then, filed a third-party complaint for contribution against the plaintiff’s employer. The employer, in turn, sought to impress a workers’ compensation lien upon any recovery the plaintiff/ employee might obtain from the defendants, pursuant to section 5(b) of the Workers’ Compensation Act (820 ILCS 305/ 5(b) (West 1992)). On the eve of trial, the plaintiffs settled with the defendant manufacturers. The settlement agreement allocated $350,000 to the spouse’s loss of consortium claim, and only $100,000 to the plaintiff/employee’s personal injury claim. At the hearing to determine whether the settlements were made in good faith, the plaintiff’s employer objected to the allocation of the settlement proceeds. The employer argued that the settling parties were collusively attempting to circumvent the employer’s workers’ compensation lien, by allocating more money to the loss of consortium claim, to which the employer’s lien did not attach. The trial court nevertheless found the settlement agreement was in good faith. The appellate court reversed the good-faith order, finding that the allocation of money in the settlement agreement represented an obvious attempt to circumvent the employer’s workers’ compensation lien. Blagg v. Illinois F.W.D. Truck & Equipment Co. (1989), 186 Ill. App. 3d 955, 963. This court affirmed, stating that the settlement agreement, which placed the value of the spouse’s consortium claim at more than three times the value of the plaintiff/employee’s personal injuries does not appear to be in good faith.” (Blagg, 143 Ill. 2d at 195.) The Blagg court concluded that the settling parties’ attempt to allocate the settlement proceeds in a manner that thwarted the employer’s lien indicated that the settlement agreement was not in good faith. Blagg, 143 Ill. 2d at 195. The reasoning in Blagg applies equally here, where the injured plaintiff and the employer have manipulated the settlement award to deprive the nonsettling defendant/ intervenors of their right to a setoff. The loan-receipt provision in the settlement agreement deprives the nonsettling defendant/intervenors of their right to a setoff, and thereby directly contravenes the terms of the Contribution Act.