DOCTRINE OF MERGER DOES NOT APPLY TO 'INSTALLMENT AGREEMENT'

June 30, 2004

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

Finding that an "installment agreement" for repayment of a debt did not amount to a "settlement contract" that would have compromised a claim, the Illinois Appellate Court ruled that the doctrine of merger did not bar a breach-of-contract case against a young doctor.

People ex rel. Department of Public Health v. Wiley, No. 1-02-3529 (1st Dist., May 26).

The state filed a lawsuit seeking treble damages from Thelma E. Wiley, a physician who allegedly breached the terms of scholarship contracts with the Illinois Department of Public Health. These agreements obligated Wiley to practice for a specified period of time after graduation in a "designated shortage area," as defined by the Illinois Family Practice Residency Act.

Before filing the lawsuit, the state demanded immediate payment of three times the amount of the scholarship money Wiley received. This added up to $157,395. But the state offered the doctor an "installment agreement" for payment of this claim. Under the installment contract, the doctor was initially obligated to pay $100 a month for two years.

Wiley signed the installment contract. But she happened to work part time for the state (at the University of Illinois Medical Center in Chicago), and despite the installment agreement, the state comptroller started deducting 25 percent of her monthly paycheck (withholding $525 from each check).

Then, although the withholding gave it more money per month than called for under the installment agreement, the state filed a lawsuit seeking a judgment for $157,395 (plus interests and costs). Count 1 alleged breach of the scholarship contracts, and count 2 alleged breach of the installment agreement.

The trial judge granted the doctor's motion to dismiss count 2, concluding that the state abandoned the installment agreement when it started deducting $525 a month from the doctor's paycheck.
Summary judgment was entered in favor of the state on count 1. On appeal, Wiley argued four points:

• Since there was no cross-appeal by the state, the "law of the case" should be the trial judge's finding that the state abandoned the installment agreement (which, the doctor argued, affected the ruling on count 1).
• The state's claim for breach of the scholarship contracts was barred because it merged into the installment agreement.
• The state's claim was barred by a judicial admission.
• Under contract principles concerning penalties, she should not be subject to treble damages.

Here are some highlights of Justice Themis N. Karnezis' ruling on these issues (with various omissions not noted in the quoted text):

"The law-of-the-case doctrine provides where an issue has been litigated and decided, a court's unreversed decision on a question of law or fact settles that question for all subsequent stages of the suit. A trial court's order becomes the law of the case only if there is a final appealable order.

"A party's failure to challenge a legal decision when it had the opportunity to do so renders that decision the law of the case for future stages of the same litigation.

"However, findings of the trial court adverse to the appellee do not require the appellee's cross-appeal if the judgment of the trial court was not at least in part against the appellee. It is the judgment and not what else may have been said by the circuit court that is on appeal.

"The court's final judgment here, entry of summary judgment in favor of plaintiff on count 1, was not adverse to plaintiff in any way. The court awarded plaintiff the entire sum it sought, $157,395, and plaintiff seeks only affirmance of that judgment on appeal. Since the judgment was not adverse to plaintiff, plaintiff was not required to cross-appeal the preliminary ruling dismissing count 2 and its failure to do so does not render that ruling the law of the case. Accordingly, plaintiff may advance any argument supported by the record to sustain the judgment of the trial court."

Installment Agreement

"A plaintiff's voluntary compromise and settlement of a case for consideration," Karnezis continued, "bars him from raising the issues that otherwise could have been raised before the trial court. A valid compromise is in the nature of a contract and operates as a merger of all included claims, as well as a bar thereto. After compromising disputed claims, a plaintiff's only remedy is based upon the settlement contract itself.

"In order for there to be a compromise, the parties agree that a substituted performance is acceptable instead of what was previously claimed to be due; thus, each party yields something and agrees to eliminate both the hope of gaining as much as he previously claimed and the risk of losing as much as the other party previously claimed.

"However, where, as here, the claim is undisputed and no concessions are made by the creditor, there is no compromise.
"There is nothing in the installment agreement to show that the department surrendered its rights under the scholarship contracts or that the installment agreement was a substitute or compromise of the scholarship contracts. Rather, the installment agreement affirmed defendant's obligation to pay the entire amount owed under the scholarship contracts and specified the terms under which that sum was to be repaid.

"The agreement specifically states that, 'Upon payment in full, [defendant] shall be entitled to a full release from any further obligation on this matter.' Clearly, the department retained the right to pursue alternative remedies until defendant paid the entire obligation under the scholarship contracts.

"In essence, the installment agreement was nothing more than the department's agreement to suspend further action regarding defendant's breach of the scholarship contracts and her failure to repay her obligations thereunder in exchange for defendant's promise to repay such obligations. The department merely gave defendant extra time in which to monetarily repay her obligation. Nothing in the installment agreement leads this court to believe that a settlement of claims based on those contracts was intended by either party."

Judicial Admission

According to Karnezis, "Defendant makes much of the department's statement in count 2 of its verified complaint that, 'On or about Sept. 1, 1993, plaintiff and defendant entered into an "installment agreement," for the purpose of settling claims in accordance with the [Act].' Defendant argues that the statement constitutes a judicial admission that the installment agreement was a settlement agreement.

"A fact admitted in a verified pleading is a formal, conclusive judicial admission which is binding on the pleader and which dispenses wholly with proof of that fact. However, a party is not bound by admissions regarding conclusions of law since it is for the trial court to determine the legal effect of the facts adduced.

"Although the statement is a clear judicial admission of the fact that the parties entered into an installment agreement on or around Sept. 1, 1993, we disagree that it is also a judicial admission that the agreement was a settlement agreement.

"Construction of a contract is a question of law. Therefore, the department's statement was not a judicial admission that the installment agreement was a settlement agreement, and it is not bound by its statement.

"Given our determination that the contract was not a settlement agreement, the department's claims on the underlying contracts were properly considered by the trial court."

Treble Damages

"Pursuant to section 10 of the act," Karnezis noted, "a scholarship recipient who fails to fulfill the practice requirement must pay the department a sum equal to three times the amount of the scholarship grants for each year that the requirement is not fulfilled.
"Under Illinois law, damages are not recoverable in a breach of contract action if the purpose of the contractual damages is merely to secure a party's performance of the agreement. Such damages are considered an unenforceable penalty unless the damages are a reasonable forecast of the harm caused by the breach or the harm is difficult or impossible to estimate.

"The only case addressing the issue of triple damages awarded pursuant to the act is Department of Public Health v. Jackson, 321 Ill.App.3d 228, 237- 39 ([3d Dist.] 2001) (Steigmann, P.J., dissenting).

"The Jackson court accepted the proposition that triple damages are appropriate in cases 'where there has been a substantial failure to perform.' However, it held that, 'Where the failure to perform has not been so substantial, where the recipient has come close to performance, we reject the proposition that treble damages are a fair and reasonable attempt to fix just compensation.'

"Applying ordinary contract principles of substantial performance rather than considering statutory intent, the court found it clear that the defendant breached her contract with the department but nevertheless reversed the order of summary judgment, finding that there remained genuine issues of material fact regarding whether the department was damaged by the breach, whether the defendant should be entitled to further credit for her three-year practice, whether triple damages were appropriate and whether the defendant was estopped by its conduct from seeking any damages.
"We decline to follow the Jackson majority."

The 1st District agreed with Justice Robert J. Steigmann's conclusion that "the Illinois General Assembly did not intend for contract principles to govern the interpretation of the relationship between the department and a scholarship recipient.'

"Accordingly," Karnezis decided, "in considering a statutory triple damages provision in a scholarship contract, a party's substantial performance under a scholarship contract or the punitive nature of those damages is not considered. The department proved the contract, it's funding of defendant and that defendant did not obtain approval for her fellowship or practice locations nor serve her obligation within 30 days provision in accordance with the act. Therefore, as a matter of law, the department is entitled to summary judgment and triple damages pursuant to section 10 of the act."

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