LACK OF ALLOCATION IN ACCORD TRIPS UP SETTLING PARTIES' CONTRIBUTION CLAIM

June 21, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

An important lesson on the law of contribution, from the case of a mold- infested house, is that a lawyer drafting a settlement agreement for a defendant that intends to ask for contribution should expressly allocate the amount of the settlement among the settling parties.

In addition to considering the consequences of a settlement agreement that failed to allocate a negotiated payment among the settling defendants, the Illinois Appellate Court decided that the economic-loss doctrine only partially barred a contribution claim involving a moldy house. Muirfield Village- Vernon Hills LLC v. K. Reinke Jr. and Co., No. 2-03-0116 (2d Dist., May 13).

This article focuses on the allocation issue. Tuesday's Trial Notebook will turn to court's analysis of the economic-loss rule.
Several months after Kerry and Jodi Strain bought a new house, they had to move out because of mold and bacteria infestation.
The Strains sued the general contractor and developer, Muirfield LLC and Muirfield Village-Vernon Hills LLC (referred to collectively as "Muirfield"), plus two other entities, Zale Homes and Hearthstone Advisors.

That claim was settled in return for a buy-back of the residence, plus payment of $59,000 to the Strains, and $49,200 to their insurance company. But the settlement agreement failed to state how much money was being paid by which defendant.

The Muirfield companies substituted as plaintiffs (under an assignment from the Strains), and filed an amended complaint seeking contribution against several subcontractors.

The subcontractors moved to dismiss, arguing that a contribution claim was barred because (1) the settlement agreement didn't allocate payments and (2) there was no tort claim because of the economic-loss rule.

The Circuit Court dismissed the case, but the Appellate Court reversed in part.

Here are some highlights of Justice Jack O'Malley's opinion (with various omissions not noted in the quoted text):

"Plaintiffs [the Muirfield companies] bring their claim for contribution under the Joint Tortfeasor Contribution Act. Section 2(a) of the act provides that, 'where two or more persons are subject to liability in tort arising out of the same injury to person or property, or the same wrongful death, there is a right of contribution among them, even though judgment has not been entered against any or all of them.'

"Section 2(b) of the act provides: 'The right of contribution exists only in favor of a tortfeasor who has paid more than his pro rata share of the common liability, and his total recovery is limited to the amount paid by him in excess of his pro rata share. No tortfeasor is liable to make contribution beyond his own pro rata share of the common liability.'

"Plaintiffs argue that they properly alleged a claim for contribution under the act. Plaintiffs point out that they alleged that there was a contractor- subcontractor relationship between themselves and defendants. Plaintiffs alleged that they reasonably settled the Strains' claim and received the assignment of the Strains' claims against defendants. Plaintiffs also alleged that defendants' tortious acts gave rise to the liability against both plaintiffs and defendants. According to plaintiffs, these allegations sufficiently stated a claim for contribution.

"Defendants counter by arguing that, because plaintiffs did not apportion the payments made to the Strains among the four entities listed in the settlement document attached to the third amended complaint, it is impossible to determine by how much each plaintiff exceeded its pro rata share of the common liability. According to defendants, this failure renders the claim legally insufficient. We agree with defendants.

"In order to properly state a claim for contribution, the plaintiff in contribution must allege that it and the defendant in contribution are both subject to liability in tort to the injured party, and that the liability of the plaintiff and the defendant in contribution arises out of the same injury.

"In addition, the plaintiff in contribution must plead the amount it paid to the injured party, so that, ultimately, the fact finder can determine what amount, if any, was paid by the plaintiff in contribution over its fair share of the common liability. Victory Memorial Hospital Association v. Schmidt, Garden & Erickson, 158 Ill.App.3d 931, 935 (1987).

"Here, plaintiffs have not pleaded what amount each plaintiff paid to the Strains. Accordingly, plaintiffs have failed to plead the essential elements necessary to state a claim for contribution. We hold, therefore, that the trial court properly dismissed plaintiffs' third amended complaint.

"Plaintiffs appear to argue generally that because they provided the total amount they paid to the Strains, the fact finder would be able to assign the parties their proportionate liabilities following the presentation of evidence. It then would become a simple mathematical exercise to determine the amount each plaintiff paid in excess of its pro rata share of the common liability.

"It is precisely this argument that was rejected by the court in Victory Memorial. There, a hospital contracted with an architectural firm to design the interiors of the fifth and sixth floors of the hospital. Among the services the architect provided was the design and specifications for a fire detection system. The architect retained a general contractor to manage the project, an electrician and an air conditioning contractor to install the components of the fire detection system.

"At some time after the installation was completed, a fire occurred on the sixth floor of the hospital. The architect and the general contractor jointly paid $160,000 to the hospital to settle the hospital's negligence claim against them and the other defendants. The architect and the general contractor maintained a claim for contribution against the electrician. The architect presented evidence regarding the amount of the damages that the hospital sustained and evidence showing that the fire detectors had not been properly installed. The electrician presented no evidence and received a directed verdict in its favor, as the architect had not established a prima facie case.

"The architect argued to the Appellate Court: '[T]he act requires the jury to assess only fault, not dollar damages, and to assign a percentage figure of fault to each party to the contribution action. Then, according to [the architect,] the court may, as a matter of law, apply the percentages to the amount paid to the injured party by the plaintiff and enter judgment accordingly.'

"The court rejected this argument, holding, '[B]oth the language and the purpose of the act anticipate that a plaintiff in contribution must plead and offer evidence of the amount he paid to the injured party, along with evidence of the joint tortfeasors' fault, so the fact finder has a basis for determining what, if any, amount was paid by plaintiff over and above his fair share of the joint liability.'
"Here, plaintiffs did not plead the amount each paid in the settlement with the Strains. This situation is identical to that in Victory Memorial, where the architect did not plead or offer evidence on the amount that it and the general contractor paid in the settlement with the hospital. Therefore, Victory Memorial compels us to reject plaintiffs' argument.

"We also note that, although Victory Memorial involved a directed verdict, this does not serve to distinguish its holding from application in this case. The issue in Victory Memorial involved whether the plaintiff had established a prima facie case, or in other words, had presented evidence establishing all of the essential elements of its claim.

"Here, the issue is whether plaintiffs pleaded all of the essential elements of their claim. Thus, the court's holding on what elements are necessary to establish a prima facie case also sets forth the requirements necessary to plead the essential elements of the claim.

"Plaintiffs attempt to distinguish Victory Memorial. They point to Sands v. J.I. Case Co., 239 Ill.App.3d 19, 25 (1992), for the proposition that a settling plaintiff in contribution is not required to prove its own liability to the injured party with whom it has settled, but it merely need present the fact finder with a factual basis showing that liability was reasonably anticipated.

"Plaintiffs appear to equate pleading the amounts each paid in settlement with proving their own liability to the injured party with whom they have settled. Sands suggests no such equivalency; rather, it distinguishes itself from Victory Memorial on the basis that Victory Memorial required proof of the amount paid in settlement, while Sands required a showing that liability to the injured party was reasonably anticipated in order to demonstrate the plaintiff's status as a tortfeasor for the purposes of the act. Plaintiffs' reliance on Sands therefore is misplaced.

"Plaintiffs also cite Hall v. Archer Daniels Midland Co., 122 Ill.2d 448, 458-59 (1988), apparently for the proposition that the failure of a plaintiff in contribution to allocate settlement monies between separate claims will not preclude the contribution claim. Plaintiffs seem to suggest that, analogously, the failure to allocate the amount paid to the injured party among the plaintiffs should be treated the same way as the failure to allocate the amount paid among separate claims. We disagree.

"Hall had a single plaintiff in contribution who paid the injured party in settlement of two claims, one for compensation, and the other for punitive damages. In rejecting the argument of the defendants in contribution, the court noted that the plaintiff in contribution had established the total amount of its liability to the injured party, even though there were separate theories of recovery.

"In addition, the court noted that the act did not expressly require that a plaintiff allocate the settlement proceeds between alternative theories of recovery. The court held that the failure to allocate the settlement monies would be examined for good faith; if the settlement was made in good faith and not unfairly to pass on punitive damages to a defendant for which the plaintiff would not otherwise be able to obtain contribution, then the failure to allocate the monies would not bar the contribution claim.

"Here, by contrast, there is no issue of good or bad faith in settling the Strains' claim, or of improperly passing on punitive damages to defendants. Moreover, the failure to allocate was not in regard to several theories of recovery, but was in regard to the plaintiffs in contribution.

"While there is no express requirement in the act to allocate settlement proceeds to different claims, there is an express requirement for plaintiffs in contribution to allocate the settlement to the injured party between the various plaintiffs in contribution. Therefore, we find that Hall is distinguishable. Accordingly, we hold that the trial court correctly dismissed plaintiffs' third amended complaint."

Tuesday: The economic-loss doctrine.

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