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

Heading: Loan-Receipt Provision

Text: The defendant/intervenors and Roesch argue that the instant settlement may not be considered a good-faith” settlement within the meaning of the Contribution Act because it incorporates a provision commonly known as a loan-receipt agreement. In addressing this argument, it is useful to consider the history of both the Contribution Act and loan-receipt agreements in Illinois. Prior to 1977, our courts followed the common law rule prohibiting contribution among joint tortfeasors. (Johnson v. Chicago & Pacific Elevator Co. (1882), 105 Ill. 462; Nelson v. Cook (1856), 17 Ill. 443.) Thus, due to the doctrine of joint and several liability, a plaintiff could join all tortfeasors in a single action and execute the full amount of judgment against any one or more of the joint tortfeasors. The tortfeasor against whom a judgment was executed had no legal right to seek contribution from other joint tortfeasors (hereinafter, no-contribution rule). This common law rule was predicated on the notion that a wrongdoer had no right to seek judicial relief from his own wrongdoing. (See, e.g., Johnson v. Chicago & Pacific Elevator Co. (1882), 105 Ill. 462, 468 (there is no right of contribution between wrong-doers”).) The no-contribution rule resulted in harsh consequences to defendants. Because the doctrine of joint and several liability allowed the plaintiff to recover fully against any responsible party, the no-contribution rule permitted the  'entire burden of a loss, for which two defendants were equally, unintentionally responsible, to be shouldered onto one alone, according to the accident of a successful levy of execution, the existence of liability insurance, the plaintiff’s whim or spite, or his collusion with the other wrong-, doer, while the latter goes scot free.’ ” Skinner v. Reed-Prentice Division Package Machinery Co. (1977), 70 Ill. 2d 1, 13, quoting W. Prosser, Torts § 50, at 307 (4th ed. 1971). As a method of mitigating the harsh effects that resulted from the inflexible and inequitable application of the common law bar to contribution, litigants began to employ settlement agreements commonly known as loan-receipt agreements. In the typical loan-receipt agreement, the plaintiff received an interest-free loan (settlement monies) from the settling tortfeasor, who was then dismissed from the plaintiff’s tort action. Under the terms of the loan-receipt agreement, however, the plaintiff was obligated to repay the settlement monies received pursuant to the loan-receipt agreement to the settling tortfeasor out of any judgment or settlement that the plaintiff obtained from the other nonsettling tortfeasors. The loan-receipt agreement thereby allowed a settling tortfeasor to obtain contribution indirectly from other tortfeasors. The settling tortfeasor obtained contribution indirectly, because any money that the nonsettling tortfeasors paid to the plaintiff was immediately used to repay the settling tortfeasor for the amount it loaned to the plaintiff pursuant to the loan-receipt agreement. In Reese v. Chicago, Burlington & Quincy R.R. Co. (1973), 55 Ill. 2d 356, this court upheld the use of loan-receipt agreements, reasoning that such agreements furthered the public policy of encouraging private settlement of litigation. The Reese court found that the policy considerations favoring private settlement of litigation outweighed the policy considerations underlying the common law rule barring contribution among joint tortfeasors. The City argues that the Reese decision is controlling authority here, because that court upheld a settlement agreement that incorporated a loan-receipt provision, such as that employed in this case. We disagree. Reese considered the validity of loan-receipt agreements at a time when direct contribution among joint tortfeasors was prohibited. The court in Reese ultimately permitted the use of loan-receipt agreements because they allowed joint tortfeasors to avoid the harsh consequences, discussed earlier, that flowed from the common law rule barring contribution among joint tortfeasors. After Reese was decided, however, this court abolished the common law rule prohibiting contribution among joint tortfeasors. (Skinner v. Reed-Prentice Division Package Machinery Co. (1977), 70 Ill. 2d 1, 13.) The Skinner court created a contribution action in which liability for the plaintiff’s injuries was to be apportioned among joint tortfeasors on the basis of their relative percentages of fault (pro rata share). (Skinner, 70 Ill. 2d at 14-16.) In Skinner, this court criticized both the common law rule barring contribution and the various devices created to mitigate the harsh consequences of that rule (i.e., loan-receipt agreements). The court concluded that the bar to contribution was unjust because it required one tortfeasor to bear the entire burden for the plaintiff’s loss, even though more than one party was at fault in causing the plaintiff’s injury. The court concluded that the devices created to mitigate the injustice of the common law rule barring contribution, such as implied indemnity and loan-receipt agreements, suffered from other infirmities. (Skinner, 70 Ill. 2d at 12.) The court specifically criticized loan-receipt agreements, finding that they involve[d] the application of an all or nothing rule of liability to situations where some fault is attributable to both parties, and also raisefd] other problems.” Skinner, 70 Ill. 2d at 12. More importantly, Reese was decided before the legislature enacted the Contribution Act, which codified the Skinner holding. The Contribution Act specifies that a tortfeasor may be relieved of this contribution liability only if he or she enters into a good-faith” settlement with the plaintiff. This court has never considered whether a settlement that incorporates a loan-receipt agreement may be considered a good-faith” settlement within the meaning of the Contribution Act. Because Reese was decided before the legislature enacted the Contribution Act requiring good-faith settlements, that decision does not control the issue raised here, namely, whether a settlement that incorporates a loan-receipt agreement may constitute a good-faith” settlement within the requirements of the Contribution Act. As previously noted, in determining whether a particular settlement agreement was made in good faith, a court must consider the totality of the circumstances. Two factors that should be considered in this totality-of-the-circumstances analysis include: (1) whether the agreement is consistent with the terms of the Contribution Act; and (2) whether the agreement is consistent with the policies underlying the Contribution Act. An agreement that conflicts with the terms of and/or the policies underlying the Contribution Act does not satisfy the good-faith requirement and cannot discharge the settling tortfeasor from contribution liability. The Contribution Act promotes two important policies. First, the Act encourages the equitable apportionment of damages by allowing for a right of contribution among joint tortfeasors when one tortfeasor pays more than his pro rata share of common liability. (740 ILCS 100/2(b) (West 1992).) The Act also ensures the equitable apportionment of damages between settling and nonsettling tortfeasors by providing that the amount that the plaintiff recovers on a claim against any other nonsettling tortfeasors will be reduced or set off by the amount stated in the settlement agreement between the plaintiff and the settling tortfeasor or the actual amount paid by the settling tortfeasor in consideration for the release of the settling tortfeasor from liability, whichever is greater (hereinafter, setoff right). (740 ILCS 100/ 2(c) (West 1992).) Second, the Act encourages tortfeasors to settle with an injured plaintiff by providing that a tortfeasor who enters into a good-faith settlement agreement with an injured party is discharged from contribution liability to any other tortfeasor. 740 ILCS 100/2(c), (d) (West 1992). We conclude, for the reasons discussed below, that the instant settlement agreement, which incorporates a loan-receipt provision, may not be considered a good-faith settlement within the meaning of section 2(c) of the Contribution Act. We conclude that the loan-receipt provision within the settlement agreement is inconsistent with both the terms of Contribution Act and two purposes underlying that Act.
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.
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.