Westamerica Mortgage Co. v. Tri-County Reports, Inc.

Citations: 670 F. Supp. 819; 1987 U.S. Dist. LEXIS 8622Docket: 85 C 0281

Court: District Court, N.D. Illinois; September 21, 1987; Federal District Court

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Third-party defendants James Berke, d/b/a Berke Insurance Agency, and G.A. Mavon and Company filed a motion to vacate a settlement between plaintiff WestAmerica Mortgage Company and defendant Tri-County Reports, Inc. The settlement stemmed from WestAmerica's breach of contract and negligence claims against Tri-County, alleging that Tri-County failed to report seven lawsuits and judgments against loan applicants, leading to WestAmerica's financial loss after the applicants defaulted.

WestAmerica, a Colorado corporation, had engaged Tri-County, a credit investigation firm, to assess the creditworthiness of the applicants for a loan to purchase an apartment building in Illinois. WestAmerica claimed reliance on the incomplete credit reports from Tri-County for its loan decision. In response, Tri-County filed a third-party complaint against Trans Union Credit Information Company, Berke, and Mavon, alleging that Trans Union also failed to report the lawsuits and that Berke and Mavon had responsibilities regarding errors and omissions insurance that were not fulfilled.

Following a pretrial conference, Tri-County settled with WestAmerica for $325,000, comprising a $10,000 payment and an assignment of Tri-County's claims against Trans Union, Berke, and Mavon. Prior to the settlement, Berke and Mavon were informed of the likely terms. They now seek to vacate this settlement agreement. The court ultimately denied their motion to vacate the settlement.

Under Illinois law, if Berke and Mavon are found liable on a third-party complaint for indemnity, they will be responsible for the full amount of Tri-County's settlement, provided the settlement was made in reasonable anticipation of personal liability and the amount was reasonable, even without prior notice of the settlement. An indemnitee does not need to prove actual liability in the principal action but must demonstrate that the settlement was a response to a reasonable anticipation of liability, not a voluntary act. Berke and Mavon's attempt to contest Tri-County's liability to WestAmerica is rejected, with the focus shifting to whether the settlement was made under reasonable expectations of liability and if the amount was reasonable.

Tri-County's attorney presented evidence during discovery indicating potential damages to WestAmerica between $581,851 and $1,143,522. Berke's attorney claimed that an agent of WestAmerica admitted there was no liability on Tri-County's part, but did not provide relevant evidence or authority to support this claim. Affidavits from attorneys for both Tri-County and WestAmerica refuted any indication of non-liability, establishing that Tri-County faced a reasonable anticipation of liability.

The reasonableness of the settlement amount is assessed solely in relation to the damages. Berke and Mavon's challenge to the settlement’s reasonableness, based on the absence of discussion regarding the figure of $325,000 in prior settlement conferences, is deemed irrelevant. These conferences pertained to all claims, and what was acceptable for a comprehensive settlement does not inform what is reasonable for a partial settlement. The evidence supports that the settlement amount of $325,000 is reasonable given WestAmerica's potential damages.

A settlement of $325,000 is deemed reasonable, despite Berke and Mavon's concerns regarding Tri-County's ability to settle a $325,000 judgment for only $10,000 in cash and an assignment of its claim against third parties. WestAmerica does not possess an enforceable $325,000 judgment against Berke and Mavon; instead, it holds a potential right to recover that amount contingent upon success in proving Tri-County's case. If Berke and Mavon choose not to settle before trial, WestAmerica may incur substantial litigation costs without guaranteed success, which could lead WestAmerica to settle Tri-County's assigned claim for less than $325,000.

Berke and Mavon argue they can present substantive defenses against Tri-County's liability to WestAmerica, referencing Maneikis, which indicates that insurers are estopped from denying coverage when they fail to defend the insured. However, this principle does not extend to Berke and Mavon, who can only contest the reasonableness of Tri-County's anticipated liability and the settlement amount, both of which have been found reasonable.

Additionally, Berke and Mavon cite Schutter Candy Company v. Stein Brothers Paper Box to assert that a third-party defendant cannot be bound by consent judgments made without their involvement. While this principle of collateral estoppel is accurate, it is not applicable here, as the present case involves distinct theories of liability between the main claim and the third-party action against Berke and Mavon. In Schutter, the liability was the same for both parties, whereas this case involves separate legal theories, making Schutter's ruling irrelevant.

WestAmerica alleges that Tri-County failed to disclose lawsuits involving loan applicants. Tri-County's claims against Berke and Mavon relate to the failure to secure insurance and to write a policy, which does not support Berke and Mavon's defense. The motion to vacate the settlement is denied, as the settlement between WestAmerica and Tri-County was deemed reasonable and made in anticipation of Tri-County's liability. Prior to the next status hearing on October 2, 1987, parties are directed to meet to explore the possibility of a full settlement. The applicable law for this motion is determined to be Illinois law, based on the significant contacts of Illinois to the third-party complaint against Berke and Mavon. Additionally, Berke and Mavon's argument regarding the assignment of rights being limited to $10,000 was rejected, referencing the Seventh Circuit's decision in Maneikis v. St. Paul Insurance Co., which acknowledged a settlement amount of $325,000 that included an assignment of all of Tri-County's rights against Berke and Mavon.