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
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
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).
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.
"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
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
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.
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
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.
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.