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Non-Traditional Settlement Agreements in Multi-Defendant Tort Litigation

                            By Larry A. Mancini

The developing complexity of multi-party personal injury litigation and the competing
interests of multiple insurers as these cases approach trial, have developed creative
approaches to achieve settlement of such cases. Some of the approaches discussed
below create a duty of disclosure by the "settling" party; some require continued
participation in the trial by the "settling" party; and, may therefore compromise the
credibility of the "settling" party’s witnesses at trial. This article will explore such
"settlement" agreements and their potential ramifications.

                         I. Loan Receipt Agreements, a/k/a "Mary Carter"

The most often discussed and litigated of these settlement agreements is the "loan
receipt agreement," commonly referred to as a "Mary Carter" agreement, first reported in
the case of Booth v. Mary Carter Paint Co., (Fla. Dist. Ct. App. 1967, 202 So.2d 8). A
"loan receipt agreement" is an agreement between the plaintiff and one or more
defendant in which the settling defendant(s) "loan(s)" a stated amount of money to the
plaintiff and is entitled to be repaid the loan from any recovery the plaintiff receives from a non-settling defendant. Banovz v. Rantanen, 271 Ill.App.3d 910, 208 Ill.Dec. 617 (5th
Dist. 1995). The essential feature of a "Mary Carter" agreement is the repayment of the
loan from monies recovered from the non-settling co-defendants. Banovz, 208 Ill.Dec. at
622. Should there be no further recovery, there is no repayment.

In 1973, the Illinois Supreme Court, for the first time, upheld the validity of "loan receipt
agreements." Reese v. Chicago, Burlington & Quincy Railroad Company, 55 Ill.2d 356,
303 N.E.2d 382 (1973). A majority of four of the justices believed "loan receipt
agreements," in accordance with the public policy of this state, encouraged settlement
of litigation. While, nonetheless validating the concept, it is not insignificant to note that
the majority’s analysis in Reese struggled with the then state of the law which forbade
contribution among joint tortfeasors. The court cautioned that, "it may be fairly argued
that a loan agreement permits a joint tortfeasor to achieve by indirection that which he could not do directly," Reese at 386. Also noteworthy was the dissent of Justice
Schaefer, joined by Justices Ward and Ryan, who opined that the holding of the majority
"seriously undermines without even mentioning it, the long standing doctrine that
prohibits the assignment of a cause of action for personal injuries or wrongful death."
Reese at 387. (Contrast to the Reese analysis with that of the Supreme Court in In Re
Guardianship of Babb, 162 Ill.2d 153, 642 N.E.2d 1195, (1994), which will be discussed
later, where the court held settlement agreements which incorporate loan receipt
provisions may not be considered "good faith" settlements within the meaning of the
Contribution Act, S.H.A. 740 ILCS 100/2(c).

A loan receipt agreement is valid in Illinois under the following circumstances: 1) if
entered into prior to judgment, Kerns v. Engelke, 390 N.E.2d 859, 28 Ill.Dec. 500 (1979);
2) if disclosed to the court and parties (non-settling defendants), Reese v. Chicago,
Burlington & Quincy Railroad Company, 55 Ill.2d 356 (1973), Gatto v. Walgreen Drug
Company, 61 Ill.2d 513, 337 N.E.2d 23 (1975), Harris Trust and Savings Bank v. Ali, 100
Ill.App.3d 1, 55 Ill.Dec. 186 (1st Dist. 1981); 3) only to the extent that the money
advanced thereunder by the settling defendant is to be repaid by plaintiff, Schoonover v.
International Harvester Company, 171 Ill.App.3d 882, 121 Ill.Dec. 734 (1st Dist. 1988),.
Harris Trust and Savings Bank v. Ali, 55 Ill.Dec. 186 (1981). If some amount of the loan
is to be forgiven, that amount is treated as an ordinary, unconditional payment for a
covenant-not-to-sue, and must be set-off against any verdict as a partial satisfaction of
judgment. Greco v. Coleman, 176 Ill.App.3d 394, 125 Ill.Dec. 867, 871 (5th Dist. 1988).

                         A. Disclosure

Because the "settling" defendant in a loan receipt agreement remains in the case and
proceeds through the trial, the agreement must be disclosed to the court and the
non-settling parties. The basis for this requirement is the courts’ concern that the
agreement will have an undermining effect on the adversarial nature of the proceedings.
Obviously, "Mary Carter" agreements can give the "settling" defendant a financial interest
in the remainder of the plaintiff’s case and more importantly in the amount recovered
against any non-settling defendant(s). Such an interest certainly has the potential to
encourage the "settling" defendant to "drive up" the amount of the verdict. Banovz, 208
Ill.Dec. at 621. The realignment can manifest itself in several ways, limited only by the
imagination and skill of the attorney. It may induce the settling defendant to testify
adversely to the non-settling defendants, if not in substance, certainly in nuance or
subtle shading. Clearly, the settling defendant can take a passive role in attacking the
plaintiff’s damages, or even endeavor to enhance them, thereby increasing the likelihood
of the loan repayment. These agreements, therefore, have the potential to distort the adversarial process.

While "loan receipt agreements" must always be disclosed to the court and the non-settling co-defendants, Harris v. Ali, 55 Ill.Dec. at 192; Gatto v. Walgreens, 337 N.E.2d at 28, they need not always be disclosed to the jury. Casson v. Nash, 74 Ill.2d 64, 384 N.E.2d 365, 23 Ill.Dec. 571 (1978). Obviously, the disclosure to the court and the parties has been mandated so that those parties can explore whether there has been a realignment which would otherwise undermine the adversarial nature of the trial process. The Illinois Supreme Court has mandated that the burden rests upon the persons who have entered into the agreement to disclose it. Gatto, 227 N.E.2d at 28. The failure to disclose such an agreement to the trial court renders the agreement void and will usually constitute reversible error. Gatto at 28; Harris at 192.

Whether "loan receipt agreements" should be disclosed to the jury is not so simply aswered. These agreements do not necessarily have to be disclosed to the jury. As a general rule, courts have allowed non-settling co-defendants to cross examine any witness who has knowledge of the existence of the agreement to show bias. Banovz, 208 Ill.Dec. at 622. In such cases, the agreement can be admitted into evidence solely for that limited purpose. Reese, 55 Ill.2d 356; Webb v. Toncray, 102 Ill.App.3d 78, 57 Ill.Dec. 757 (3rd Dist. 1981).

The Illinois Supreme Court in Casson stated the following: The relevant principle that emerges from Reese is that when a witness whose interest in the outcome of the case is not apparent to the jury may be influenced by the existence of a loan receipt agreement, the jury may properly consider the effect of the agreement on the credibility of that witness. 23 Ill.Dec. at 573.

In determining whether the agreement will be disclosed to the jury, however, one must
consider whether the witness’ bias is otherwise apparent to the jury. Where the bias of the witness is already apparent to the jury, such agreements may not be introduced or used for impeachment. Admission under those circumstances may constitute reversible error. Casson, 23 Ill.Dec. at 573. For example, a plaintiff’s adversary relation to the other defendants is always apparent to the jury, and, therefore, it is reversible error to allow a non-settling defendant to cross examine the plaintiff regarding the existence of such an agreement. Id. Therefore, if the only testifying witness who has knowledge of the agreement is the plaintiff, the jury will ordinarily never be made aware of it. Sometimes, the adversary relation of the "settling" defendant to the non-settling defendants may be apparent to the jury because of a counterclaim. Under those circumstances, cross  examination on the "loan receipt agreement" may also be inappropriate. Harris at 193. 

Finally, if these agreements are used to cross examine any witness, a limiting jury instruction is proper. Kerns v. Engelke, 28 Ill.Dec. at 507.

                            B. Timing
 "Loan receipt agreements" must be entered into prior to judgment, otherwise they are
rendered void. Kerns v. Engelke, 28 Ill.Dec. at 508. They will be held valid even if entered into after the trial begins so long as they are timely disclosed to the court and the
non-settling co-defendants. McDermott v. Metropolitan Sanitary District, 240 Ill.App.3d 1, 180 Ill.Dec. 758 (1st Dist. 1992). In McDermott, after the trial began, the plaintiff and one defendant entered into a "high-low" agreement whereby the settling defendant extended an irrevocable offer that guaranteed plaintiff a minimum of $100,000.00, on the condition that plaintiff agree not to execute in excess of $1,000,000.00 on any judgment he might obtain against that defendant. Subsequently, during jury deliberation, the same parties entered into a "loan receipt agreement" which guaranteed the plaintiff $500,000.00 and "loaned" an additional $500,000.00. The loan receipt agreement superseded the previous "high-low" and was promptly disclosed to the court and parties. After judgment, the previous non-settling defendants sought to have the agreement set aside. The trial court found the agreement to have been made in good faith and the appellate court affirmed the trial court’s ruling.

                         C. Discovery Vehicles Available to Non-Settling Defendants

The trial court may allow the non-settling defendants to conduct discovery to determine
the existence of "loan receipt agreements" at any stage of the proceedings, including
after a jury verdict, McDermott at 784, or even after an appellate court has remanded the
action to the trial court. Gatto at 25. Discovery can encompass any reasonable method,
including written interrogatories, Gatto at 25, or voir dire of the parties by the court during the trial. Lam v. Lynch, 127 Ill.Dec. at 420.

                         D. Consequences If a "Mary Carter" Agreement Is Held Void
In Kerns and Rucker v. Norfolk & W. Ry. Co., 77 Ill.2d 434, 33 Ill.Dec. 145, 147 (1979),
two defendants entered into a "loan receipt agreement" with the plaintiff after a joint and
several judgment was entered against all defendants. The Illinois Supreme Court held
both "loan receipt agreements" void because they were entered into after judgment. The
court also found that the "loan" paid to the plaintiff by the settling defendants would act
as a set-off/partial satisfaction of the plaintiff’s "joint and several" judgment. (Normally,
the monies received by a plaintiff pursuant to a loan receipt agreement are not set-off
against the recovery from the other defendants because those sums will be re-paid.)

Similarly, a loan receipt agreement can be held void if it is undisclosed and subsequently
serves a hardship on the uninformed defendant. See Gatto. (The Supreme Court held,
"The burden rested upon the persons who had entered into the settlement to disclose it.
It was not the responsibility of Calumet or of the trial judge to ferret out the facts.") Gatto
at 28.

                         E. Loan Receipt Agreements And The Contribution Act

Most recently, the Illinois Supreme Court has addressed the "good faith" nature of "loan
receipt agreements" in light of the Contribution Act, 740 ILCS 100/1, et seq. In In Re
Guardianship of Babb, 162 Ill.2d 153, 205 Ill.Dec. 78 (1994), the court found that a loan
receipt agreement violates both the provisions of the Contribution Act, as well as the
public policy underlying the Act.

The court found that a "loan receipt agreement" allows a settling defendant to do
indirectly what it is prohibited from doing directly, i.e., receive contribution from the
non-settling defendant. 205 Ill.Dec. at 87. The Act at 740 ILCS 100/2(e) prohibits a
settling defendant from recovering contribution from another tortfeasor whose liability is
not extinguished by the settlement agreement. However, a loan receipt agreement allows
the settling defendant to do precisely that which the statute prohibits by the plaintiff’s
repayment of the "loan" from monies he recovers from those non-settling co-defendants.

The court further found that "loan receipt agreements" violate section 2(c) of the Act,
which provides that where a settlement is reached in good faith, the amount the plaintiff
recovers by verdict against the non-settling defendants will be reduced by the amount of
the settlement. 740 ILCS 100/2(c). This provision protects the non-settling defendant
from paying more than his pro rata share of the judgment. Because "loan receipt
agreements" do not provide for a set-off to the non-settling defendant, the court found
such agreements violate that section of the Act. 205 Ill.Dec. at 87. Furthermore, by
depriving the non-settling defendant of a set-off, these agreements defeat the Act’s policy
of an equitable distribution among all joint tortfeasors of the burden of compensating an
injured plaintiff. Id. at 88. For those reasons, the court found that "loan receipt
agreements" do not constitute "good faith" settlements within the meaning of the Act. Id.
at 90.

                         II. High-Low Agreements

A "high-low agreement" is entered into between the plaintiff and one defendant in a
multi-defendant action whereby the plaintiff agrees to recover a minimum amount ("low")
from a settling defendant irrespective of the jury verdict and also agrees not to execute
on a verdict beyond a specified maximum amount ("high") regardless of the size of the
verdict against the settling defendant. McDermott v. Metropolitan Sanitary Dist., 240
Ill.App.3d 1, 180 Ill.Dec.758 (1st Dist. 1992). See also, Banovz, 208 Ill.Dec. at 620. Any
amount collected pursuant to a "high-low agreement" is a set-off to the eventual
judgment. Greco v. Coleman, 176 Ill.App.3d 394, 125 Ill.Dec. 867, 871 (5th Dist. 1988).
There appears to be no case law requirement regarding the disclosure of this type of
agreement.

                         III. Verdict Sharing Agreements

The third type of settlement agreement is a verdict sharing agreement, which, unlike the
"Mary Carter" and "High-Low" Agreements, is entered into between two or more
defendants or a defendant/third-party plaintiff and third-party defendant. The result of a
verdict sharing agreement is to apportion the percentages each defendant will pay in the
event a verdict is rendered in favor of plaintiff and against the defendants. Lam v. Lynch
Machinery Div. of Lynch Corp., 178 Ill.App.3d 229, 127 Ill.Dec. 419 (1st Dist. 1989).
Again, there appears to be no requirement to disclose such agreements. They are
generally the least common of these agreements, although they do offer an alternative if
the defendants believe it to be in their mutual interest to refrain from filing contribution
actions against one another.

                         Conclusion

When choosing to utilize one of the above-described settlement vehicles, an attorney
must be cautious to use the one most appropriate to the needs of his client and also be
careful to adhere to the court imposed procedural steps to insure both the validity and
enforceability of the agreement. Clearly, these agreements can benefit both plaintiff and
settling defendant by guaranteeing the plaintiff some recovery, while fixing the high end
exposure to the settling defendant. On occasion, disclosure can also serve as an
inducement to the non-settling defendants to re-think their non-settlement position.

Larry A. Mancini is a Principal of Norton, Mancini, Argentati, Weiler & DeAno,
P.C.,Wheaton. His practice is concentrated in Civil Litigation Defense. He received his
Undergraduate Degree in 1968 from St. Mary’s College and his Law Degree in 1977 from
DePaul University. The author acknowledges the assistance of Dawn C. Didier, an
associate with the firm, in the preparation of this article.

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