"Good Faith" Requirement in Settlement Contracts as Applied in Two Recent Cases, Koziol and Hartley

March 2021

By: Dylan R. Besser

Introduction

Imagine a familiar, somewhat common civil lawsuit scenario: Plaintiff, a construction worker, was injured on the job site when he fell through an opening on a catwalk. Plaintiff files suit alleging negligence against the project’s general contractor, the owner of the premises, and the subcontractor who erected the catwalk. A third-party complaint for contribution is then filed by these defendants against plaintiff’s employer, with standard allegations of failure to train, failure to supervise, and the like. Plaintiff then settles directly with the third-party defendant, his employer, and the third-party defendant files a “motion for good faith finding.” What could go wrong?

Legal Standard

The “‘good faith’ of a settlement is the only limitation which the Joint Tortfeasor Contribution Act (the “Act”) places on the right to settle and it is the good-faith nature of a settlement that extinguishes the contribution liability of the settling tortfeasor.” Johnson v. United Airlines, 203 Ill. 2d 121, 128 (2003) (emphasis added); 740 ILCS 100/2(d).

Great! Now that we know the settlement must be done in good faith, determining what constitutes “good faith” should be clear, correct? Not really. Two recent cases analyze factors that courts look to when determining whether a settlement is in good faith, with two very different results. 

The first case, Klein-Koziol v. M-J-T-J Contractors & Builders, Inc., 2020 IL App (1st) 192380-U, follows the recent line of authority that parties have freedom of contract and, if the non-settling parties are unable to satisfy their burden of proof to show an absence of good faith, the settlement will be deemed to be in good faith. However, Hartley v. N. Am. Polymer Co., Ltd., 2020 IL App (1st) 192619, shows that “good-faith” has its limits and a settlement will not be found in good faith when there are familial relationships between the settling parties.

While the Act does not define the term “good faith,” and there is no single, precise formula for determining what constitutes good faith, the Act does promote two important public policies and courts must strike a balance between the same: 1. the encouragement of peaceful settling of claims; and 2. the equitable apportionment of damages among tortfeasors.

The settling parties have the original burden of proof and they must show the existence of a legally valid settlement agreement. 740 ILCS 100/2(c), 100/2(d). If a legally valid settlement agreement is proven, the burden of proof goes to the objecting parties. The Illinois Supreme Court has made clear that a “settlement will not be found to be in good faith if it is shown that the settling parties engaged in wrongful conduct, collusion, or fraud.” Johnson, 203 Ill. 2d at 134 (2003) (emphasis added). Additionally, a settlement will not satisfy the good-faith requirement if it conflicts with the terms of the Act or if it is inconsistent with the above-mentioned policies underlying the Act.

While no factor is determinative, courts are to consider the totality of the circumstances and other considerations may include: “1. whether the settlement amount was reasonable and fair, 2. whether the parties had a close personal relationship, 3. whether the plaintiff sued the settling party, or 4. whether information about the settlement agreement was concealed.” Id. On appeal, a court’s good-faith determination is reviewed for an abuse of discretion and abuse of discretion is found where the “ruling is so arbitrary or illogical that no reasonable person would adopt it.”

Klein-Koziol v. M-J-T-J Contractors & Builders, Inc.

 In Koziol, Plaintiff filed a wrongful death lawsuit based on negligence after Decedent died while working. Koziol, 2020 IL App (1st) 192380-U, ¶ 4. Decedent was operating a scissor lift 25 feet above the ground when one of the wheels went into an exposed hole in the concrete, causing the scissor lift to tip over, which, in turn, caused Decedent to fall out, strike his head on the concrete, and develop severe injuries leading to his death. Id. The three defendants Plaintiff sued were the subcontractor that poured the subject concrete, the general contractor, and the owner of the premises. The direct defendants filed third-party complaints for contribution against Decedent’s employer (“CE”) alleging CE failed to inspect the area where Decedent was working, failed to provide Decedent with a safe location to work, failed to warn Decedent of known conditions, and failed to train and instruct Decedent on how to perform his work safely.

CE settled with Plaintiff, filed a motion to dismiss the contribution count and also sought a finding that it entered into a good-faith settlement with Plaintiff under the Act. Specifically, CE alleged that, after arms’ length negotiation, Plaintiff would secure dismissal of the third-party complaint in exchange for: 1. Fresh money (money that was in addition to what had already been paid in Decedent’s workers’ compensation claim) in the amount of $10,000 that Plaintiff would not have to repay as part of Decedent’s workers’ compensation lien; and 2. A conditional waiver of said lien by CE’s workers’ compensation insurer, that provided “should underlying litigation be settled before verdict,” CE and the insurer would accept “a net 30% of gross settlement proceeds up to full satisfaction of its workers comp lien,” which totaled $903,232.31. Additionally, if the matter went to verdict and in Plaintiff’s favor, CE and the insurer shall be entitled to recover said lien from the verdict proceeds.

If you recall, after the settling parties satisfy the original burden of proof of making a preliminary showing of good faith, the burden of proof shifts to the non-settling parties to prove the absence of good faith. In Koziol, the defendants argued that the $10,000 payment in “fresh money” without a workers’ compensation lien waiver, would deprive the non-settling parties of their right to obtain contribution from CE in an amount that was proportional to the potentially significant share of liability CE had for the incident. The defendants argued further that CE had waived its limited liability protections in its contract. Finally, the defendants complained in the event of a verdict against the non-settling defendants, they would be entitled to a setoff of only $10,000. In contrast, if the lien had been waived as part of the settlement, as the direct defendants sought, they would be entitled to an additional setoff of up to $903,232.31.

CE’s reply to these arguments is the crux of the matter. CE argued that non-settling parties failed to point to any evidence of collusion, unfair dealing, or wrongful conduct on the part of the settling parties. Further, the non-settling parties failed to reference any evidence indicating CE had any liability for Decedent’s death.

The reviewing court emphasized the proper way of determining the settling parties’ proportionate liability. The court instructed that the disparity “between the amount of the settlement and the amount initially sought by the plaintiff is not an accurate measure of good faith,” but rather, when viewing the amount of a settlement, it “must be viewed in relation to the probability of recovery, the defenses raised, and the settling party’s potential legal liability.” The appellate court found “the determinative factor to be that the non-settling defendants are unable to show through evidence, affidavits, or even attorney arguments that there was some act or omission on the part of [CE] suggesting that it had any liability for the incident that led to” Decedent’s death. Absent the direct defendants pointing to “some act or omission suggesting liability on the part of” CE, the appellate court could not conclude CE’s $10,000 settlement and conditional waiver of the workers’ compensation lien failed to equitably apportion damages among the tortfeasors.

The reviewing court affirmed the trial court’s finding that the settlement was in good faith, holding that the trial court did not abuse its discretion.

Hartley v. N. Am. Polymer Co., Ltd.

In Hartley, Plaintiff filed a wrongful death lawsuit based on products liability and negligence after her son (“Decedent”) died from inhaling fumes from a product manufactured by Defendant Samax and sold by Defendant NAPCO. These direct defendants then filed third-party complaints for contribution against Decedent’s employer, Hartley’s Painting, and the owner, Tony Hartley, (collectively “Hartley”). Tony Hartley was also Decedent’s uncle. Plaintiff and Hartley entered into a settlement agreement for $50,000.00 and sought a finding that the settlement was made in good faith.

Hartley filed a motion to dismiss the third-party complaints, claiming the settlement was made in good faith and there was no evidence of fraud or collusion. Hartley also claimed his insurance policy took the position that the third-party complaint was not covered under the CGL policy because it contains an employer’s liability exclusion.

Discovery revealed that Hartley settled with Tennessee Occupational Safety and Health Administration (“TOSHA”) for 13 violations of regulations in connection with Decedent’s death, 12 of which were deemed “serious.” Additionally, discovery revealed that Hartley’s insurance policy had a limit of $1 million for each occurrence. Id. Further, there was a familial relationship between Plaintiff and Hartley and Plaintiff did not sue Hartley directly. Id. Given that Hartley was found to have violated TOSHA regulations 13 times, defendants took the position that Mr. Hartley, Decedent’s uncle, was attempting to settle with Plaintiff for a sliver of his potential liability. Discovery also revealed that Decedent might have been an independent contractor of Hartley’s, contrary to Hartley’s position that Decedent was his employee. As such Hartley’s insurance exclusion for employer’s liability may not have been applicable, and the $50,000 proposed settlement was, in fact, only 5% of available liability coverage under Hartley’s insurance policy.

Having read (and committed to memory) the legal standards above, the facts of this matter should raise some alarms: First, was the settlement amount reasonable and fair, given Hartley’s potentially significant liability and his settlement offer of 5% of available liability coverage? The court held that this factor weighed against the settling parties, given the likelihood that Decedent was an independent contractor and the settlement amount was not fair when considering the 13 TOSHA violations and the $1 million policy.

Second, was the relationship between the settling parties intimate enough to be considered a “close personal relationship”? While the marriage between Plaintiff and Mr. Hartley’s brother dissolved 15 years prior to the suit, Mr. Hartley was still closely intertwined with Decedent’s father, brother, and sister. Further, an economic relationship was also found. As such, because the settlement had “the appearance of collusion,” the court held this factor weighed against the settling parties. The court noted that the relationship did not necessarily have to be familial for a finding of collusion where there was a “strong affinity and close relationship.” Third, Plaintiff did not sue Hartley, so this factor clearly weighed against the settling parties. Fourth, there was no evidence that information about the settlement agreement was concealed, so that factor was deemed “neutral.” As such, of the four listed factors, three weighed against the settling parties and one was neutral.

The court concluded that, in viewing the totality of the circumstances leading to the settlement, the settlement was not entered into in good faith, where the settling parties had a close personal relationship, where Hartley had considerable potential liability, and where the settlement amount was modest compared to the limits of the insurance policy.

Koziol and Hartley show that defendants continue to have an uphill battle in convincing a court to toss out a settlement between plaintiff and a third-party. Where there is consideration and no showing of collusion or bad faith, the settlement will usually be found to be in good faith. However, in cases involving “close relationships,” the court may take a dim view of the settlement, especially if there would otherwise be the potential for substantial liability on the part of the settling defendant.