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Illinois Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Terms of "Confidential" Co-Defendant Settlement Prove Party Bad Faith and Earn Counsel a Disciplinary Referral

September 5, 2019 | Lisa Larkin

A well-established and often referred to as sacred part of American jurisprudence is the confidential nature of settlement negotiations and terms. In a recent opinion, Illinois’ First District Appellate Court reminded litigants that such confidentiality, in fact, can be lost. 

In Chernyakova v. Puppala, et al., 2019 IL App (1st) 173066, Plaintiff Elena Chernyakova sued Northwestern Memorial Hospital, McGaw Medical Center of Northwestern University and Vinaya Puppala, M.D. alleging that while she was hospitalized at Northwestern for alcohol intoxication, Dr. Puppala, an employee of McGaw, electronically accessed Plaintiff’s medical chart and took and posted photos of her on social media. Plaintiff and Dr. Puppala knew each other socially, and while she was admitted, Dr. Puppala visited Plaintiff twice just hours after admission. He used his credentials to view Plaintiff’s electronic medical chart and spoke with Plaintiff’s treating physicians regarding her progress and possible discharge. On his second visit, Dr. Puppala took photographs of Plaintiff in what was still an intoxicated state and posted them to Facebook and Instagram. Plaintiff contested that she had consented to Dr. Puppala accessing her medical records, speaking to her treating physicians, or taking and posting her photograph.

The Cook County Circuit Court granted summary judgment to Northwestern and McGaw, and Plaintiff proceeded to trial against Dr. Puppala. During trial, Plaintiff settled with Dr. Pappula and the parties requested an on the record “hearing” wherein the attorneys outlined the terms of the “confidential” settlement for the trial judge. Separately, Plaintiff pursued an appeal of the summary judgment in Northwestern and McGaw’s favor.

During the pendency of the appeal, Northwestern and McGaw’s counsel obtained information that the terms of the “confidential” settlement called in question the validity of the factual underpinnings of the lawsuit. Defense counsel moved the trial court to unseal the transcript of the settlement hearing so that it might be considered by the appellate court on a motion to dismiss the appeal even though those proceedings had no direct connection to the summary judgment proceedings. The trial court ultimately unsealed the transcript, and the parties agreed it would be filed in the appellate court under seal.

While generally the appellate court’s review of summary judgment orders is strictly limited to the materials of record before the Circuit Court at the time the summary judgment was entered, this case presented a unique situation. As the appellate court noted, it implicated the appellate court’s responsibility to “strive to enhance and maintain confidence in our legal system.” The appellate court found the contents of the settlement transcript lead to the inescapable conclusion that the appeal was frivolous and being pursued in bad faith. The transcript disclosed that at the hearing counsel stated the amount Dr. Puppala agreed to pay and that Plaintiff agreed to write favorable letters on the doctor’s behalf stating that her underlying allegations were “mistaken” and that she consented to the photos and postings. Significantly, the appellate court learned that after the Circuit Court ordered the settlement hearing transcript unsealed, Plaintiff’s counsel had nevertheless instructed the court reporter to not provide a copy to Defendants.

On appeal, Plaintiff argued there is a presumption that favors the validity of confidentiality provisions in settlement agreements such that the settlement hearing transcript could not be unsealed as a matter of law. The appellate court explained that Plaintiff’s argument demonstrated a misunderstanding of the confidentiality protection afforded to settlement agreements. Once Plaintiff’s counsel described the terms of the settlement to the trial judge, any confidences evaporated and sealing the confidential terms did nothing to save them. By informing the trial judge of the settlement terms on the record, counsel made those terms a part of the public record which could not be sealed.

The appellate court also found Plaintiff’s counsel was incorrect in his assertion that Illinois Supreme Court Rule 408 protected the confidential nature of the settlement terms. Rule 408 provides that evidence of “furnishing or offering or promising to furnish – or accepting or offering or promising to accept – a valuable consideration in compromising or attempting to compromise the claim” and “conduct or statements made in compromise negotiations regarding the claim” is inadmissible “to prove liability… or to impeach through a prior inconsistent statement or contradiction[.]” Such evidence may, however, be admissible to establish bad faith. Here, the inquiries into settlement negotiations was to establish wrongdoing and Rule 408 offered no protection to Plaintiff.

The appellate court found it significant that Plaintiff did not directly question the substantive accuracy of the settlement terms, which on their fact are irreconcilable with Plaintiff’s continued pursuit of her claim against the Defendants. Plaintiff, through counsel, affirmatively agreed to fully exonerate Dr. Puppala by providing a letter completely contradicting the factual bases of the lawsuit. She knew those letters would be sent to favorably influence regulatory or financial decisions involving Dr. Puppala, while simultaneously continuing her quest for money damages against the Defendants under theories she asserted were “mistaken.”

The appellate court dismissed the appeal as frivolous and not pursued in good faith. Further, it found Defendants entitled to their reasonable attorney fees and costs incurred as a result of defending against the frivolous appeal. The court also concluded that it could not turn a blind eye to Plaintiff’s counsel’s instruction to the court reporter to not provide the Defendants will a copy of the hearing transcript in contravention of the trial court order. As a result, the court instructed the clerk of the appellate court to forward a copy of the opinion to the Attorney Registration and Disciplinary Commission.

The decision corrects any misconceptions that settlement negotiations and terms are absolutely protected. One must question how far this holding might reach as there are many proceedings which are held “on the record” but with the transcripts later sealed. Perhaps more importantly, the opinion cautions counsel against showing a lack of respect for the Circuit Court and for the appellate process in a blind drive for a successful outcome.

Taxation of Lost Wages Awards Under the FELA: the Illinois Appellate Court Applies Loos v. BNSF

August 21, 2019 | John Lord

In Munoz v. Norfolk Southern Railway Company, 2018 IL App (1st) 171009 (Munoz I), Plaintiff Munoz sued his railroad employer under the FELA for an on-duty personal injury. A jury awarded Munoz a large sum attributed to past and future lost wages. After the verdict, the railroad moved for a setoff, claiming Munoz owed taxes on the lost wages award under the Railroad Retirement Tax Act (RRTA). Munoz argued that the award of lost wages should be treated the same as personal injury awards that are not subject to income taxes. 

The trial court denied the railroad’s motion, relying on the Missouri Supreme Court’s opinion in Mickey v. BNSF Railway Co., 437 S.W. 2d 207 (Mo. banc 2014). In Mickey, the Missouri Supreme Court held that, like the exclusion for personal injury awards under Internal Revenue Code § 104(a)(2), an FELA lost wages award does not constitute income. Therefore, lost wages do not qualify as taxable compensation under the RRTA.

The railroad appealed, arguing that the plain language of the RRTA, when read in conjunction with the Railroad Retirement Act, supports a finding that an FELA lost wages award is compensation subject to withholding taxes. The Illinois Appellate Court disagreed and affirmed the trial court. The Appellate Court found that the RRTA defines “compensation” as money paid to an employee for “services rendered” and lost wages cannot be paid to an employee for “services rendered”.

Shortly thereafter, the U.S. Supreme Court considered the same issue in BNSF Railway Co. v. Loos, 129 S. Ct. 893 (2019), and held that FELA lost wages awards are compensation subject to taxation. The Illinois Supreme Court then directed the Appellate Court to vacate its initial judgment in Munoz I and consider the effect of the Loos case. Upon reconsideration, the Appellate Court concluded that Munoz’s lost wages award was taxable compensation under the RRTA. Munoz v. Norfolk Southern Railway Company, 2019 IL App (1st) 171009-B (Munoz II).

The Munoz II  Court observed that in Loos the Supreme Court looked to the Social Security Act (SSA) and the Federal Insurance Contributions Act (FICA) for guidance as to the meaning of “compensation.”  The Supreme Court found that the RRTA’s definition of compensation was “materially indistinguishable” from FICA’s definition of “wages”, to include remuneration for “any service, of whatever nature, performed . . . by an employee.”

Previous Supreme Court cases held that “wages” under the SSA and FICA included awards of backpay and severance payments.  These cases held that such awards represented pay for active service, in addition to pay for periods of absence from active service.  As a result, the Supreme Court held that “compensation” under the RRTA can encompass pay for periods of absence from active service, as long as the remuneration in question “stems from the employer-employee relationship.”

The Supreme Court found that damages for lost wages awarded under the FELA “fit comfortably” within these parameters. Wage loss damages compensate an employee for time during which he or she is “wrongfully separated” from employment, and this is akin to an award of back pay. An award of back pay that compensates an employee for wrongful discharge constitutes wages under the SSA, even though the wages were awarded because of the employer’s wrongdoing.  Based on this reasoning, “there should be no dispositive difference between a payment voluntarily made and one required by law.”

The Munoz II Court reiterated the distinction between personal injury damages that are not taxable under the Internal Revenue Code with FELA lost wage awards. Personal injury damages are excluded from “gross income” by the Code. And, “gross income” cannot be conflated with “compensation” under the RRTA, which Congress treated as discrete tax bases.

CONCLUSION

The Illinois Appellate Court is likely the first of many courts that will apply the Loos decision and find that an award of lost wages in an FELA case is subject to taxation. The resolution of the split on this issue will have practical ramifications in FELA litigation, including modification of jury instructions and, potentially, attempts to allocate settlement proceeds to sources other than lost wages.


* Kelly M. “Koki” Sabatés, Summer Law Clerk, assisted in the research and drafting of this post. Sabatés is a 3L student at the University of Missouri-Columbia.

What a Long, Strange Trip It's Been: Illinois Supreme Court Upholds Decision That Res Judicata Does Not Apply to Involuntary Dismissal of Multiple Prior Complaints Spanning Ten Years

July 23, 2019 | Terrence O'Toole, Jr. and John Beard

Plaintiff Gerald Ward originally sued Decatur Memorial Hospital in 2009 alleging medical malpractice in the treatment of his brother who developed a post-surgery bed sore that became infected. Plaintiff alleged that his brother died from complications associated with a bacterial infection approximately one month after the Hospital discharged him.

Plaintiff initially filed a nine-count complaint against the Hospital, Decatur Memorial Hospital Home Health Services, and unknown employees of the Hospital. The trial court granted the Hospital’s Motion to Dismiss the majority of the counts but gave Plaintiff permission to refile. Plaintiff then filed first and second amended complaints. The court again dismissed both but with permission to refile. After plaintiff filed a third amended complaint, the Hospital filed responsive pleadings and the parties continued with discovery towards trial. 

In 2015, nearly four years later and only twenty days before the scheduled trial, the Hospital learned that the plaintiff intended to call a rebuttal expert not previously disclosed. The Hospital moved to bar the newly disclosed rebuttal expert, arguing that plaintiff had ample time during the six-year pendency of the case to obtain and properly disclose experts. Before the trial court ruled on the motion to bar, plaintiff moved for leave to file a fourth amended complaint to “more correctly and succinctly describe the alleged negligence of defendant’s nurses as a result of facts developed throughout discovery.”

Taking the motions together, the trial court granted the Hospital’s motion to bar the proposed rebuttal expert witness and denied plaintiff’s motion for leave to file a fourth amended complaint. The court cited the age of the case and noted that the allegations in the third amended complaint were substantially different from those in the proposed fourth amended complaint.  Plaintiff then voluntarily dismissed the action.

Four months later, plaintiff refiled the action and asserted nearly identical allegations as those set forth in the disallowed fourth amended complaint in the prior action. The Hospital moved to bar plaintiff from disclosing witnesses who had been barred in the previous case and to limit other witnesses to the opinions they gave in the initial action, arguing that plaintiff violated Illinois Supreme Court Rule 219(e) by using the dismissal and refiling to avoid having to comply with the previous court’s order. The trial court partially granted the Hospital’s motion and limited the opinions of witnesses to those provided in the prior case, but denied the Hospital’s request to bar the rebuttal witnesses. 

The Hospital then moved for summary judgment on the basis of res judicata, arguing that the trial court had dismissed “numerous counts of various iterations” of plaintiff’s complaint in the prior action and that he elected not to replead the counts. The Hospital asserted those dismissals constituted final adjudications on the merits as the complaints had been dismissed because of legal impediments, such that it was entitled to summary judgment on the basis of res judicata

Plaintiff opposed the motion, asserting that medical negligence was the sole cause of action in all the iterations of the complaint and no final judgment had been entered in the first action. The trial court ultimately granted the Hospital’s motion for summary judgment based on res judicata after initially denying the motion.

On appeal, the Fourth District Appellate Court reversed the trial court’s grant of summary judgment. It concluded that “by granting the plaintiff permission to file an amended complaint, the trial court vacated any suggestion of ‘with prejudice’ in its dismissal of individual counts of the original complaint.”  The appellate court further observed that the trial court had permitted the plaintiff to amend “over and over again, all the way to the third amended complaint…which remained pending and completely unadjudicated at the time of the voluntary dismissal.”

The Illinois Supreme Court affirmed the decision of the appellate court, concluding that res judicata was inapplicable and did not prohibit plaintiff’s refiled lawsuit because there had not been a final judgment on the merits. Each previous dismissal had been dismissals without prejudice and with permission given to refile. As such, the dismissals were not final, did not terminate the litigation, and did not firmly establish the parties’ rights. 

Despite affirming the decision, the Court criticized the “tortured history of litigation” and lack of urgency on the part of the parties and the trial judge to resolve the matter in a timely or efficient manner. Additionally, while conceding that a plaintiff has the absolute right to refile a dismissed complaint, the Court cited the admission made by plaintiff’s counsel on the record that he voluntarily dismissed the initial action because of his disagreement with the trial court’s rulings. Noting that Rule 219(e) “strikes the delicate balance between preserving a plaintiff’s absolute right to refile, while discouraging noncompliance with the trial court’s orders,” the Court commented that while the Rule does not change the existing law as to a plaintiff’s right to seek a voluntary dismissal, “this paragraph does clearly dictate that when a case is refiled, the court shall consider the prior litigation in determining what discovery will be permitted, and what witnesses and evidence may be barred.”     

Thus, while the Supreme Court reaffirmed a plaintiff’s absolute right to refile a dismissed complaint, the Court’s dictum regarding the applicability of Rule 219(e) offers hope to litigants defending refiled actions regarding the potential for limiting the scope of evidence in the face of demonstrated noncompliance with prior orders.

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The BSCR Illinois Law Blog examines significant developments, trends and changes in Illinois law on a broad range of topics that are of interest to Illinois practitioners and to businesses evaluating risks under Illinois law or managing litigation subject to Illinois law. Learn more about the editor, Lisa Larkin.

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