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Can The Underlying Plaintiff Collect More Than The Amount of the Underlying Judgment in Third Party Failure to Settle Cases?

June 8, 2017

In the typical third party bad faith case, the underlying plaintiff’s attorney makes a policy limits settlement demand, the insurer does not agree to pay its limits, or does not do so in the time the plaintiff’s attorney thinks it should, and the plaintiff then obtains a verdict substantially in excess of the policy limits. In cases where the defendant is a major corporation, the plaintiff can collect the judgment from the defendant, and the defendant can then sue the insurer to recover the amount in excess of its policy, alleging breach of the duty to settle. But in most cases, the defendant has few if any assets other than the insurance policy. So, when the plaintiff executes on the judgment, the court will order the defendant to assign the defendant’s action for bad faith against the insurer to the underlying plaintiff. In exchange, the underlying plaintiff may, or may not agree to release the insured/defendant from the judgment. In either case, the underlying plaintiff will then sue the insurer, and will typically seek to recover the unsatisfied portion of the judgment along with damages for the economic harm suffered by the insured/defendant and punitive damages. This raises the question, though, of whether the forced assignment of the insured/defendant’s bad faith action really gives standing to the underlying plaintiff to recover any more than the amount of the underlying judgment plus post-judgment interest. After all, the insurer did not owe a duty of good faith the underlying plaintiff. The underlying plaintiff did not suffer any economic damages from the failure to settle. And in fact, in many cases, all the underlying plaintiff has is an assignment of an action to enable the underlying plaintiff to fully collect the underlying judgment. If the insured/defendant does not join in the bad faith action against the carrier, there is no reason the underlying plaintiff should be allowed to recover anything other than the amount of the judgment lien.

Assignment of Bad Faith Claims In Illinois

It is well-established in Illinois, like in most states, that an insured’s action for bad faith can be assigned to the underlying plaintiff. See e.g. Phelan v. State Farm Mut. Auto. Ins. Co., 114 Ill.App.3d 96, 102 (1st Dist. 1983) (“We do not find a sound basis to preclude a court, in a citation-to-discover-assets proceeding, from ordering the cited judgment-debtor to assign to the judgment-creditor a bad-faith cause of action against the judgment debtor’s insurer ....”). Additionally, punitive damages are assignable under Illinois law. Kleinwort Benson N. Am. v. Quantum Fin. Servs., 181 Ill.2d 214, 224-227 (1998). Thus, when the plaintiff in an excess judgment case brings a citation to discover assets proceeding against the insured/judgment debtor, Illinois courts routinely require the insured/judgment debtor to assign its bad faith case against the insurer to the underlying plaintiff. When the plaintiff has then, stepping into the shoes of the insured, brought a bad faith claim against the insurer, the plaintiff has been able to recover the full amount of the excess judgment, and in some cases has also been allowed to recover punitive damages against the insurer.

For instance, in O’Neill v. Gallant Ins. Co., 329 Ill.App.3d 1166 (5th Dist. 2002), a judge compelled the insured to assign her claim against Gallant Insurance Company (“Gallant”) to the underlying plaintiff, Marguerite O’Neill. The court found that the statutory language in 735 ILCS 5/2-1402(c)(5) provided the court authority to require assignment of the insured’s bad faith claim to the underlying plaintiff. O’Neill, 329 Ill.App.3d at 1185-86. The court in the O’Neill case laid out seven factors for courts to consider in evaluating bad faith claims and ultimately upheld a jury award for the full amount of the underlying judgment plus significant punitive damages.

The insurer in O’Neill argued that punitive damages could not be awarded in bad faith cases. However, it based its argument on policy grounds, arguing that no previous Illinois courts had approved an award of punitive damages in a bad faith failure to settle case. 329 Ill.App.3d at 1176. The court easily rejected this argument, noting that while “punitive damages are not the law’s favorite, Illinois has traditionally authorized punitive damages in tort cases involving intentional misconduct or a breach of fiduciary duty.” Id. at 1177. The court then noted that “there was ample evidence … that Gallant deliberately chose to gamble with [the insured’s] financial security, in the hope of merely delaying the payment of minimal policy limits.” Id. at 1179 (emphasis in original). Thus, the court held that “where the insurer's conduct exceeds mere negligence and, like here, demonstrates to a jury's satisfaction that the refusal to settle within policy limits was engaged in with utter indifference and reckless disregard for its policyholder's financial welfare, punitive damages can be awarded.” Id. at 1177.

Notably, an argument that the insurer did not raise, and the court did not address, was the issue of whether the fact that the underlying plaintiff was standing in the shoes of the insured through a forced assignment of the insured’s action against the insurer should have limited the recovery of the underlying plaintiff to the amount of the judgment lien.

Illinois procedure for the enforcement of judgments is set forth in 735 ILCS 5/2-1402, which is entitled “Supplementary Proceedings.” Sections 2-1402(c)(5) and 2-1402(c)(6) allow the assignment of “any chose in action” to enforce payment of a judgment, and authorize the judgment creditor to maintain an action against any person or corporation indebted to the judgment debtor:

When assets or income of the judgment debtor not exempt from the satisfaction of a judgment, a deduction order or garnishment are discovered, the court may, by appropriate order or judgment:

(5) Compel any person cited to execute an assignment of any chose in action or a conveyance of title to real or personal property or resign memberships in exchanges, clubs, or other entities in the same manner and to the same extent as a court could do in any proceeding by a judgment creditor to enforce payment of a judgment or in aid of enforcement of a judgment.

(6) Authorize the judgment creditor to maintain an action against any person or corporation that, it appears upon proof satisfactory to the court, is indebted to the judgment debtor, for the recovery of the debt, forbid the transfer or other disposition of the debt until an action can be commenced and prosecuted to judgment, direct that the papers or proof in the possession or control of the debtor and necessary in the prosecution of the action be delivered to the creditor or impounded in court, and provide for the disposition of any moneys in excess of the sum required to pay the judgment creditor’s judgment and costs allowed by the court.

735 ILCS 5/2-1402(c)(5)-(6) (2017).

The O’Neill court did not address whether the statutory assignment allows an underlying plaintiff to collect amounts in excess of the amount of the underlying judgment against the judgment debtor. See O’Neill, 329 Ill.App.3d 1166. The court simply awarded the underlying plaintiff, amounts well in excess of the amount of her underlying judgment against Gallant’s insured. Yet, under Illinois case law, there is no basis for an underlying plaintiff who is successful in litigating an assigned bad faith law suit to receive any amount in excess of the amount of its judgment.

Recovery For Underlying Plaintiffs Involuntarily Assigned Bad Faith Claims In Supplementary Proceedings Should Be Capped At The Amount Of The Underlying Judgment

The purpose of supplementary proceedings under 735 ILCS 5/2-1402 is to provide an efficient and expeditious procedure to discover assets of a judgment debtor and to apply them to payment of the judgment. Bank of Aspen v. Fox Cartage, Inc., 141 Ill.App.3d 369 (2d Dist. 1986). Several other cases have likewise held that the purpose of the section is to apply the discovered assets to “satisfaction of a judgment.” Foluke v. Peoples Gas Light & Coke Co., 38 B.R. 298 (Bankr. N.D. Ill. 1984); T.M. Sweeney & Sons, LTL Servs. v. Crawford, 120 B.R. 101 (Bankr. N.D. Ill. 1990); Froehlich v. J.R. Froehlich Mfg. Co., 93 Ill.App.3d 179 (1st Dist. 1981); Vendo Co. v. Stoner Invs. Inc., 7 B.R. 240 (Bankr. N.D. Ill. 1980).

In Pessin v. State, 49 Ill. Ct. Cl. 42 (1987), the court held that “satisfaction” is defined as “paying a party what is due him or awarded to him by the judgment of a Court or otherwise.” More recently, in an unpublished opinion, the court cited Black’s Law Dictionary defining “satisfaction” as “the fulfillment of an obligation; esp., the payment in full of a debt. Summitbridge Credit Inv., LLC v. 4432-4444 W. West End, LLC, 2013 IL App (1st) 121562-U, citing Black’s Law Dictionary, 1460 (9th ed. 2009). Under either definition of “satisfaction,” the purpose of 735 ILCS 5/2-1402 would simply be to fulfill the obligation imposed by the underlying judgment. This suggests that any amounts in excess of the amount of the judgment would not be recoverable by the underlying plaintiff, since those amounts would not be utilized to “satisfy” the underlying plaintiff’s judgment. This effectively caps the amount of damages collectible by the underlying plaintiff, who is the judgment creditor, in a bad faith proceeding against the judgment debtor’s insurer at the amount of the underlying judgment, plus interest and costs.

Implications Of Capping The Underlying Plaintiff’s Damages At The Amount Of The Underlying Judgment

Since the underlying plaintiff’s damages should be capped at the amount of the judgment, plus interest and costs, pursuant to the supplementary proceedings statute, counsel for the underlying plaintiff in a bad faith action may attempt to recruit the insured judgment debtor to pursue potential damages in excess of the judgment that may have been caused by the insurer’s alleged bad faith. For instance, in a case where the underlying judgment bankrupts or otherwise harms the insured’s business, the insured could potentially join the suit to seek to recover these amounts in excess of the underlying judgment.

Additionally, to the extent the insurer’s conduct is so vexatious and unreasonable that punitive damages may be awarded, if the insured judgment debtor joins the lawsuit against the insurer, the judgment debtor could recover punitive damages exceeding the amount of the judgment, even though the underlying plaintiff would not be entitled to such a recovery. Thus, even where the insured involuntarily assigns its claims against its insurer, it could cooperate with the underlying plaintiff to the detriment of the insurer and become a co-plaintiff in the bad faith action. However, in many of these cases, the insured and the insurer have reasonably good relationships, and the insured may view the excess verdict as a gross miscarriage of justice, which the insured blames on the greed of the underlying plaintiff and the plaintiff’s attorney. In these cases, an insurer could work with the insured to keep the insured from joining the action against the insurer. For example, an insurer concerned about entry of an award of punitive damages may want to affirmatively address this issue by attempting to settle with the insured for amounts in excess of the underlying plaintiff’s judgment, to the extent the insured is willing to engage with the insurer in such discussions.

If the insured is not a party to the litigation, an insurer should move for partial summary judgment to cap the damages plaintiff can recover at the amount of the judgment lien based on the application of 735 ILCS 5/2-1402. No court has yet analyzed this issue under Illinois law, but as detailed above, the plain language and purpose of the statute indicate that a plaintiff’s recovery would be limited to the “satisfaction” of its judgment, in addition to interest and costs to which the plaintiff would be entitled.

Ultimately, this analysis of Illinois law regarding involuntary assignments leads to the conclusion that an underlying plaintiff who receives an assignment of a cause of action for bad faith against an insurer pursuant to 735 ILCS 5/2-1402 should not be entitled to recover an amount greater than the judgment entered in its favor in the underlying case, plus interest and costs. The insurer in the O’Neill case never challenged the plaintiff’s right to pursue punitive damages in excess of the amount of the judgment, so plaintiffs are likely to attempt to seek punitive damages in these cases of involuntary assignments. Yet, as demonstrated by the analysis above, these plaintiffs should be satisfied with collecting the amount of their judgment, plus interest and costs.

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