Tag: settlement

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.

 

Agreed Settlement Order Not a Final Order Under Res Judicata Test – IL 1st Dist.

The Illinois First District recently provided a good synopsis of res judicata in Mass Realty, LLC v. Five Mile Capital, 2014 IL App (1st) 133871-U, a November 2014 unpublished opinion.

The case involves two lawsuits – a 2010 mortgage foreclosure case (the “2010 Case”) and a 2013 breach of contract and unjust enrichment case (the “2013 Case”) that both involve a dispute over commercial property.

In the 2010 Case, a lender filed a foreclosure suit and the defendant real estate broker – the plaintiff in the 2013 Case – counterclaimed to foreclose a broker’s lien it recorded for  securing a tenant for the property. The broker’s lien was never adjudicated in the 2010 Case.  

In the 2013 Case, the broker filed suit against current and former owners to recover its commission.  The 2013 Case defendants moved to dismiss the case on the basis of res judicata. The trial court agreed and the broker appealed.

Held: Reversed.  The 2013 Case isn’t precluded by the 2010 Case.

Reasons:

The court found that the 2013 Case was sufficiently different from the 2010 Case so that the broker could go forward with the 2013 Case.

Res judicata elements

– Res judicata is designed to prevent multiple olawsuits between the same parties where facts and issues are the same;

– Res judicata bars a subsequent action between the parties involving the same cause of action;

– The three elements of res judicata are (1) a final judgment on the merits, (2) an identity of parties; and (3) identity of cause of action.

– Where these three elements are satisfied, res judicata bars not only every matter actually litigated but every matter that might have been litigated in the first action;

– A settlement agreement or other agreed order isn’t a final order for res judicata purposes;

– A judgment is final and “on the merits” where it determines the parties rights and liabilities based on the facts before the court

– Illinois uses the transactional test to determine whether causes of action are the same for res judicata purposes;

– Under the transactional test, separate claims are considered the same if they arise from a single group of operative facts; regardless of whether they assert different theories of relief.

(¶¶ 23-26)

The court ruled that a consent foreclosure in the 2010 Case wasn’t a final judgment on the merits.  The court likened a consent foreclosure to a settlement agreement – something that is not a final judgment. This is because a settlement agreement or agreed order is not a judicial determination of the parties rights, but is instead a recording or documenting of the parties’ agreement.

The court also found the “same cause of action” prong of res judicata absent.  In the 2013 Case, in contrast to the 2010 Case, the broker more definitively alleged a breach of the written commission contract and sought damages from the current and former property owner.

The broker’s 2010 Case counterclaim defensively pled the existence of his broker’s lien but didn’t name some of the defendants in the 2013 Case as those defendants didn’t yet have an interest in the property when the 2010 Case was pending.

Since the underlying facts, central allegations and some key defendants in the 2010 and 2013 Cases differed, the two cases were based on different operative facts and not the “same cause.”

Afterwords:

– When faced with a dismissal motion based on res judicata, respondent should underscore any differences between a prior and current lawsuit; including different parties, different underlying facts and distinct causes of action;

– By contrast, a party seeking dismissal based on the doctrine should focus on the sameness between two suits. It should highlight any common parties, property and factual allegations between the two cases.