Tag: contribution

Zero Dollars Settlement Still in ‘Good Faith’ In Corporate Embezzlement Case – IL 1st Dist.

Upon learning that its former CEO stole nearly a million dollars from it, the plaintiff marketing firm in Adgooroo, LLC v. Hechtman, 2016 IL App (1st) 142531-U, sued its accounting firm for failing to discover the multi-year embezzlement scheme.

The accounting firm in turn brought a third-party action against the plaintiff’s bank for not properly monitoring the corporate account and alerting the plaintiff to the ex-CEO’s dubious conduct.

When the bank and plaintiff agreed to settle for zero dollars, the court granted the bank’s motion for a good-faith finding and dismissed the accounting firm’s third-party complaint.  The accounting firm appealed.  It argued that the bank’s settlement with the plaintiff deprived it (the accounting firm) of its contribution rights against the bank and that the settlement was void on the basis of fraud and collusion.

The appeals court affirmed the trial court and discussed the factors a court considers in deciding whether a settlement is made in good faith and releases a settling defendant from further liability in a lawsuit.

The Joint Tortfeasor Contribution Act (740 ILCS 100/1 et seq.) tries to promote two policies: (1) encouraging settlements, and (2) ensuring that damages are assigned equitably among joint wrongdoers.  The right of contribution exists where 2 or more persons are liable arising from the same injury to person or property.  A tortfeasor who settles in good faith with the injured plaintiff is discharged from contribution liability to a non-settling defendant.  740 ILCS 100/2(c).

Here, the underlying torts alleged by the plaintiff were negligence, breach of fiduciary duty, fraud and civil conspiracy.

A settlement is deemed not in good faith if there is wrongful conduct, collusion or fraud between the settling parties.  However, the mere disparity between a settlement amount and the damages sought in a lawsuit is not an accurate measure of a settlement’s good faith.

Illinois courts note that a small settlement amount won’t necessarily equal bad faith since trial results are inherently speculative and unpredictable.  The law is also clear that settlements are designed to benefit non-settling parties.  If a non-settling party’s position is worsened by another party’s settlement, then so be it: this is viewed as “the consequence of a refusal to settle.”  (¶¶ 22-24).

A settling party bears the initial burden of making a preliminary showing of good faith.  Once this showing is made, the burden shifts to the objecting party to show by a preponderance of the evidence (i.e. more likely than not), the absence of good faith.  The court applies a fact-based totality of circumstances approach in deciding whether a settlement meets the good faith standard.

For a settlement to meet the good faith test, money doesn’t have to change hands.  This is because a promise to compromise a disputed claim or not to sue is sufficient consideration for a settlement agreement.

Here, the fact that plaintiff’s corporate resolutions required it to indemnify the bank against any third-party claims, subjected the plaintiff to liability for the third-party bank’s defense costs.  The bank’s possible exposure was a judgment against it for the accounting firm.  As a result, the marketing company and bank both benefited from the settlement and there was sufficient consideration supporting their mutual walk-away.

Take-aways:

This case sharply illustrates the harsh results that can flow from piecemeal settlement.  On its face, the settlement seems unfair to the accounting firm defendant: the plaintiff settled with the third-party defendant who then gets dismissed from the lawsuit for no money.  However, under the law, a promise for a promise not to sue is valid consideration in light of the inherent uncertainty connected with litigation.

The case also spotlights broad disclaimer language in account agreements between banks and corporate customers as well as indemnification language in corporate resolutions.  It’s clear here that the liability limiting language in the deposit agreement and resolutions doubly protected the bank, giving plaintiff extra impetus to settle.

 

Illinois’ Contribution Law and the ‘Savings’ Statute

Illinois has a 2 year statute of limitations (SOL) for contribution claims.  Contribution applies where two or more defendants have common liability to an injured plaintiff.  740 ILCS 100/1 (Illinois’s contribution statute).

The idea is that each defendant responsible for injuring a plaintiff should pay his share of liability to the plaintiff.  Section 13-204(b) of the Code prescribes the two year limitations period for contribution claims.

Another section of the Code of Civil Procedure, 735 ILCS 5/13-207 – labelled the “savings statute” – gives a defendant extra time to file an otherwise time-barred counterclaim or set-off under certain circumstances.

This statute protects against last minute filings by plaintiffs that would prevent a defendant from having a reasonable opportunity to assert counterclaims against that plaintiff.

Example: Assume plaintiff has personal injury claim against defendant and defendant has defamation claim against plaintiff arising from same underlying facts.  Illinois has a 2 year limitations period for personal injury claims (735 ILCS 5/13-202) and 1 year period for defamation (735 ILCS 5/13-201).  If plaintiff files personal injury suit on day 729 after he is injured and serves defendant some weeks later, the defendant’s defamation counterclaim would normally be barred since well over 1 year has elapsed from the underlying injury.  But, under the savings statute, the defendant now has 1 year from the date of service of plaintiff’s complaint to sue for defamation.

But consider this fact pattern: plaintiff serves defendant 1 on January 1, 2013 and serves defendant 2 on January 15, 2013.  Defendant 1 does not file any counterclaims.  Defendant 2 sues defendant 1 for contribution on January 14, 2015, the day before the 2-year SOL expires and defendant 1 is served on February 1, 2015.

Q:  Can defendant 1 now file a counterclaim for contribution against defendant 2 on or after February 1, 2015? Remember, defendant 1 was served with the underlying complaint on January 1, 2013 – so under 13-204(b)(see above), defendant 1 would have had until January 1, 2015 to file contribution counterclaims.  Clearly, defendant 1’s contribution action is time-barred by the 2-year SOL, right?

A: Wrong.  An off-shoot of the above fact pattern is exactly what the Illinois Supreme Court addressed in Barragan v. Casco case, 216 Ill.2d 435 (2005).  There, the Court reversed the Appellate Court and held that a contractor’s contribution counterclaim against a co-defendant architect could proceed even though it was time-barred under 13-204’s two-year SOL for contribution claims.

In Barragan, the plaintiff served the defendant contractor on July 25, 1997 and the defendant architect on September 15, 1997.  Under 13-204(b), the contractor and architect would have until July 25, 1999 and September 15, 1999 respectively to sue for contribution..  The architect filed its contribution claim against the contractor on July 29, 1999 – about six weeks before the 2-year limitations period expired.  The contractor filed its responsive contribution claim against the architect in December, 2000 – about 3.5 years after it was served by the underlying plaintiff and 16 months after the contribution 2-year limitations period expired.

The Court still permitted the contractor’s counterclaim to go forward under Code Section 13-207, the savings provision.  The  Court ruled that Section 13-207’s savings provision trumped the two-year SOL contained in Section 13-204(b) for contribution claims, noting that the contractor and architect were in an adversarial posture and that the contractor’s counterclaim was responsive to the architect’s.

Take-away: Personal injury defendants should be cognizant of Barragan and the interplay between 13-204 and 13-207.  If you – as a defendant – sue another defendant for contribution, be prepared for that defendant to counter-sue you for contribution beyond the 2-year limitations period.  This seems to penalize the timely filing defendant by allowing the contribution counter-defendant to circumvent the 2-year SOL for contribution.