Do Loan Agreements Violate the Terms of the Contribution Act ?
In In re Guardianship of Babb, 162 Ill. 2d 153, 171, 642 N.E.2d 1195, 1203, 205 Ill. Dec. 78 (1994), the court looked at factors including the deceptive manner in which the settling parties obtained approval from the court, the misrepresentation of the terms of the settlement to the court, the absence of notification to the nonsettling parties, the inequitable terms, and, most significantly, the loan-receipt provision, which violated the terms of the Contribution Act. See Babb, 162 Ill. 2d 153, 642 N.E.2d 1195, 205 Ill. Dec. 78.
A typical loan-receipt agreement involves the following arrangement:
"The plaintiff received an interest-free loan (settlement monies) from the settling tortfeasor, who was then dismissed from the plaintiff's tort action.
Under the terms of the loan-receipt agreement, however, the plaintiff was obligated to repay the settlement monies received pursuant to the loan-receipt agreement to the settling tortfeasor out of any judgment or settlement that the plaintiff obtained from the other nonsettling tortfeasors.
The settling tortfeasor obtained contribution indirectly, because any money that the non-settling tortfeasors paid to the plaintiff was immediately used to repay the settling tortfeasor for the amount it loaned to the plaintiff pursuant to the loan-receipt agreement." Babb, 162 Ill. 2d at 168, 642 N.E.2d at 1202.
Loan agreements violate the terms of the Contribution Act because they allow a settling tortfeasor to indirectly recover contribution from a nonsettling tortfeasor and attempt to deprive the nonsettling tortfeasor of their statutory right to a setoff. Babb, 162 Ill. 2d at 172, 642 N.E.2d at 1204.