Opinion ID: 6985046
Heading Depth: 4
Heading Rank: 3

Heading: Loan Receipt Agreements Violate the Two Policies Underlying the Contribution Act

Text: The instant loan-receipt agreement also undermines the two purposes underlying the Contribution Act. By depriving the defendant/intervenors of their right to a setoff, the loan-receipt agreement defeats the Contribution Act’s purpose of equitably distributing among all joint tortfeasors the burden of compensating an injured plaintiff. Any recovery that Babb’s estate might obtain from the defendant/intervenors in the tort action will be used first to repay the City for the settlement monies paid to the estate under the terms of the settlement agreement. As a result, the loan-receipt agreement simply shifts the City’s share of liability to the defendant/intervenors. The defendant/intervenors will thereby be forced to pay more than their pro rata share of damages, but will have no recourse against the City, because the loan-receipt agreement, if found to be in good faith, discharges the City from contribution liability to the defendant/intervenors. (740 ILCS 100/ 2(d) (West 1992).) The instant loan-receipt agreement therefore allows the City to avoid paying its equitable share of the damages and frustrates one of the twin purposes underlying the Contribution Act. We also find that the instant loan-receipt agreement frustrates the other purpose underlying the Contribution Act, that of encouraging settlement of claims. The public policy favoring settlement of claims recognizes that a tortfeasor should be able to buy its peace” with the injured plaintiff, pay its money and be done with litigation. In this case, however, the City has not simply paid Babb’s estate settlement monies and abandoned the litigation. On the contrary, the City wants to participate in and control the estate’s action against the defendant / intervenors so that it may recover not only the workers’ compensation benefits it paid to Babb, but also the settlement monies it loaned” to him. The settlement agreement frustrates the legislative goal of encouraging settlement because it grants the City control over what would otherwise be Babb’s estate’s unconditional right to settle with other tortfeasors and to determine the terms of such settlement agreements. The instant settlement agreement includes a clause requiring the estate to obtain the City’s consent prior to entering into a settlement with any other tortfeasor. The agreement also provides that the City has an unqualified right to withhold consent unless it is fully indemnified by such agreement. In this respect, the agreement grants the City significantly more control over the settlement negotiations with the defendant/ intervenors than is generally accorded by statute to employers who hold workers’ compensation liens. Section 5(b) of the Workers’ Compensation Act provides that an employer’s consent to a settlement agreement between the employee and a tortfeasor is not required when the employer is protected by court order. (820 ILCS 305/5(b) (West 1992).) By granting the City an unqualified right to prohibit Babb’s estate from settling with any other party unless the agreement indemnifies the City for both its workers’ compensation lien and the settlement monies it loaned to the estate, the instant settlement agreement makes any future settlement with other tortfeasors unlikely, if not impossible. In essence, the agreement makes litigation inevitable because it grants the City the power to veto any proposed settlement between the estate and other remaining tortfeasors. The instant settlement agreement also discourages future settlements because it allows the City, instead of Babb’s estate, to dictate the terms of any settlement agreement between the estate and the remaining tortfeasors. Joint tortfeasors are unlikely to settle a claim on terms dictated by another settling tortfeasor. The instant settlement agreement therefore does not advance the policy of encouraging plaintiffs to settle their entire claims with all tortfeasors, to reduce litigation and to ease the burden on the courts. On the contrary, it is probable that the agreement will actually frustrate the legislature’s goal of removing the entire litigation from the judicial system and thereby easing court congestion. The City argues, however, that the court in Reese v. Chicago, Burlington & Quincy R.R. Co. (1973), 55 Ill. 2d 356, found that loan-receipt agreements promote private settlement of disputes. As noted earlier, however, Reese considered the validity of loan-receipt agreements before contribution among joint tortfeasors was allowed. The Reese court’s conclusion that loan-receipt agreements encouraged settlement rested in large part upon the fact that such agreements allowed the settling tortfeasor to avoid the common law rule barring contribution and the harsh consequences that flowed from that rule. Because contribution among joint tortfeasors is now permitted under the Contribution Act, the validity of the Reese court’s conclusion that loan-receipt agreements promote settlements must be reconsidered. It is possible that the allowance of loan-receipt agreements encourages early settlements between the plaintiff and a single tortfeasor. The injured plaintiff has a strong monetary interest in getting cash up front to offset the immediate economic loss resulting from his or her injuries and to underwrite the costs of the underlying tort litigation. A tortfeasor is likely to prefer a loan-receipt agreement to an ordinary settlement agreement. The amount of money that a tortfeasor pays to an injured plaintiff in an ordinary settlement agreement is lost forever. A settlement agreement that incorporates a loan-receipt provision, on the other hand, releases the settling tortfeasor from all liability, but permits him or her to recover the amount of money paid to the plaintiff to settle the claim. The amount paid in settlement is simply a loan” that the injured plaintiff must repay if he or she recovers from other nonsettling tortfeasors. Thus, a joint tortfeasor would obviously prefer a settlement agreement that incorporates a loan-receipt provision, because such agreements permit the joint tortfeasor to recapture any settlement monies it has paid, and thus effectively to escape liability for the plaintiff’s injuries without suffering any financial loss for those injuries. Loan-receipt agreements, however, rarely further the legislature’s intent to encourage settlement of the entire litigation. As Justice Schaefer pointed out in his dissenting opinion in Reese, the joint tortfeasor most likely to enter into a loan-receipt agreement with the plaintiff is the one who is the most blameworthy. (Reese, 55 Ill. 2d at 367 (Schaefer, J., dissenting, joined by Ward and Ryan, JJ.).) This is so because the more blameworthy tortfeasor would be willing to offer a larger loan to the plaintiff in order to settle and thereby escape potential liability it may be exposed to at trial. At the same time, the more blameworthy tortfeasor retains the right to reimbursement of the loan from the amount recovered pursuant to a tort judgment against the less blameworthy tortfeasor. Because the plaintiff must repay the amount of the loan to the settling tortfeasor, the remaining tortfeasors necessarily must bear a larger share of the plaintiffs damages than might be warranted by an analysis of comparative fault. The plaintiff must insist on higher settlement figures from the remaining tortfeasors to obtain full compensation for his loss, because the plaintiff must repay the loan amount. Consequently, the remaining tortfeasors are less likely to settle, since they have little to lose by taking the matter to trial. Thus, loan-receipt agreements undermine, rather than promote, the private settlement of disputes. In sum, we conclude that loan receipt agreements frustrate both of the policies underlying the Contribution Act.