                           ILLINOIS OFFICIAL REPORTS
                                        Appellate Court




             In re Liquidation of Legion Indemnity Co., 2013 IL App (1st) 120980




Appellate Court            In re LIQUIDATION OF LEGION INDEMNITY COMPANY (Andrew
Caption                    Boron, Director of Insurance of the State of Illinois, as Liquidator of
                           Legion Indemnity Insurance Company, Petitioner-Appellee, v. Robert
                           Rohlwing, Nancy Rohlwing, Robert Pahlke, and Paulette Pahlke,
                           Claimants-Appellants).



District & No.             First District, Second Division
                           Docket No. 1-12-0980


Filed                      April 16, 2013
Rehearing denied           June 11, 2013


Held                       In an action arising from the settlement of a claim for the death of a
(Note: This syllabus       young girl who was struck by a school bus insured by a company that was
constitutes no part of     in liquidation, a settlement agreement was entered into between the girl’s
the opinion of the court   parents and the owner of the bus company, after it filed for bankruptcy,
but has been prepared      that provided for the payment to the parents of $1.2 million from the bus
by the Reporter of         company, $250,000 from the Insurance Guaranty Fund, and $50,000 from
Decisions for the          uninsured motorist coverage, and in return, the parents assigned their
convenience of the         rights to payment from the insurance company to the bus company, but
reader.)
                           when the bus company submitted a claim for the remaining $5,750,000
                           limits on the bus company’s policies, the liquidator’s approval of the $1.2
                           million amount paid to the parents was upheld on appeal, since allowing
                           the amount requested would result in a windfall for the bus company and
                           circumvent the rule against the assignment of personal injury claims,
                           while the liquidator’s recommendation supported the public policy of
                           distributing the assets of liquidated insurance companies to all interested
                           parties in an even-handed manner.
Decision Under             Appeal from the Circuit Court of Cook County, No. 02-CH-06695; the
Review                     Hon. Mary Mikva, Judge, presiding.


Judgment                   Affirmed.


Counsel on                 Arnstein & Lehr LLP, of Chicago (Hal R. Morris, Mary Cannon Veed,
Appeal                     and Konstantinos Amiros, of counsel), for appellants.

                           Joel A. Haber, Todd A. Rowden, and Timothy L. Binetti, all of
                           Thompson Coburn LLP, of Chicago, for appellee.


Panel                      JUSTICE SIMON delivered the judgment of the court, with opinion.
                           Presiding Justice Harris and Justice Quinn concurred in the judgment and
                           opinion.



                                             OPINION

¶1           On October 7, 1998, 10-year-old Kristie Talley suffered substantial injuries that caused
        her death when the bicycle she was riding was caught between a curb and a school bus
        owned and operated by Barrington Transportation Co., Inc. (Barrington). Kristie’s parents,
        James and Melanie Talley, brought an action against Barrington, Barrington School District
        220 and the driver of the bus, Ralph H. Toppel, Jr. The Talleys pleaded counts seeking
        compensation for: wrongful death; a survival action; and recovery under the Rights of
        Married Persons Act (750 ILCS 65/15 (West 1998)). Prior to trial, Legion Indemnity
        Company (Legion), Barrington’s primary and excess insurer, was declared insolvent and
        placed into liquidation and the Deputy Director of the Office of the Special Deputy Receiver
        of the State of Illinois Department of Insurance was affirmed as the statutory liquidator of
        Legion (Liquidator).
¶2           As a result of the loss of coverage, Barrington had insufficient resources and was unable
        to reach a settlement with the Talleys. In response, Barrington filed for bankruptcy on the eve
        of trial. This effectively halted the trial and the Talleys filed a proof of claim with the
        bankruptcy court.
¶3           Thereafter, Barrington and the Talleys entered into mediation and reached a settlement.
        Under the relevant terms of the settlement agreement, the Talleys received $1.2 million from
        Barrington, $250,000 from the Illinois Insurance Guaranty Fund (Fund) and $50,000 from
        uninsured motorist coverage. In return, the Talleys assigned to Barrington their rights to any
        payment from Legion. The former principals of Barrington and their next generation, the


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     Pahlkes and Nancy and Robert Rohlwing (collectively Claimants), submitted a claim in the
     liquidation of Legion seeking the remaining $5,750,000 limits in Barrington’s two policies
     with Legion. The Liquidator recommended the claim be approved for $1.2 million, the
     amount Barrington paid to the Talleys apportioned among the two policies.
¶4       Claimants objected to the recommendation and the Liquidator filed a petition in the
     circuit court to approve the claim in the amount recommended. The circuit court entered an
     order on October 5, 2011, approving the Liquidator’s recommendation. On February 27,
     2012, the circuit court denied Claimants’ motion for reconsideration.
¶5       On appeal, Claimants contend that the circuit court erred in determining that the
     assignment between the Talleys and Barrington was void because it was not one for a
     personal injury claim but, rather, a contractual right pursuant to the settlement agreement for
     an accrued right of payment. Claimants contend that the Liquidator had ample opportunity
     to challenge the reasonableness of the agreed-upon amount of the settlement, but failed to
     do so, and that the circuit court should have recognized and approved the established value
     of the claim. Claimants assert that it follows that the Liquidator’s determination that the
     claim was worth $1.2 million, and not the full amount of the assignment, is not supported
     by the record. Alternatively, Claimants argue that, if the assignment is void and may be
     disregarded, it does not erase the evidence of record that the Talleys possessed a sizable
     survival claim. Additionally, Claimants argue that Barrington’s motion for partial approval
     of its claim in the amount paid out was not a compromise or offer to negotiate, but a
     concession that it was an out-of-pocket sum certain and that its claim was worth no less than
     that amount. For the following reasons, we affirm the judgment of the circuit court.

¶6                                     I. BACKGROUND
¶7       On October 7, 1998, Kristie Talley suffered substantial injuries and was killed near
     Woodland Elementary School in Carpentersville, Illinois, when the bicycle she was riding
     was caught between a curb and a school bus owned and operated by Barrington. Kristie’s
     parents brought a wrongful death and survival action against Barrington, the school district
     and the driver of the bus, Ralph H. Toppel, Jr. Barrington and Toppel denied liability and the
     matter advanced toward trial.
¶8       At the time of the accident, Barrington had primary and excess insurance policies having
     a combined limit of over $6 million. However, on April 9, 2003, the circuit court entered a
     liquidation order against Legion, Barrington’s primary and excess insurer. Attorneys were
     provided by the Fund to represent Barrington, but the statutory limit of $250,000 was
     insufficient to settle the Talleys’ claims. Therefore, on September 16, 2003, the eve of trial,
     Barrington filed a petition for bankruptcy and the trial was postponed because the circuit
     court had lost jurisdiction over Barrington pursuant to the federal bankruptcy code.
¶9       During the bankruptcy proceedings, the Talleys and Claimants entered into mediation
     over the Talleys’ claims. During mediation, the Talleys, Claimants, and the Fund negotiated
     a settlement. The parties stipulated, and the Talleys submitted a proof of claim, that the
     claims against Barrington were valued at $7.5 million. The bankruptcy court approved the
     settlement and the Talleys received $1.2 million from Barrington. Relevant portions of the

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       settlement agreement provided:
                “The Bankruptcy Court has allowed the Talleys[’] Claim in the amount of
            $7,500,000.00 (Seven Million and Five Hundred Thousand Dollars), and judgment
            entered thereon, which sum represents the fair and reasonable value of the Action, had
            the bankruptcy of [Barrington] and the insolvency of Legion Indemnity Company not
            occurred.
                Pursuant to the Plan [of Reorganization] and in consideration of the sums of
            $1,200,000 from the Estate of [Barrington], $250,000 from the Fund, and $50,000 from
            uninsured motorist coverage, receipt of all of which is hereby acknowledged, the Talleys
            *** hereby covenant and agree that they will not at any time, nor shall anyone for them
            or on their behalf sue, levy or sue out of an execution or executions against Bob Pahlke,
            Lorraine Pahlke, Ralph Toppel or Alfred Pahlke ***.
                The Talleys, for themselves and as Special Administrators of the Estate of Kristie
            Talley hereby irrevocably assign to [Barrington], to the fullest extent permitted by law
            or other wise, all of their rights to payment if any, from Legion Indemnity Company, In
            Liquidation, arising out of the claims asserted against [Barrington], the Action or the
            allowance of the Claim in the Bankruptcy of [Barrington], or this Agreement. ***
                It is understood and expected among the parties hereto that [Barrington] shall seek
            payment of the Claim allowed in the bankruptcy proceeding and not paid by the Fund or
            uninsured motorist coverage from the policies of liability insurance issued by Legion
            Indemnity Company of Illinois and the Talleys shall seek payment of Claim allowed in
            the bankruptcy proceeding and not paid by the Fund or uninsured motorist coverage from
            [Barrington] or its successors or assigns to demonstrate the correctness of the allowed
            claim both as to liability and quantum, and shall, at their own expense, respond to all
            reasonable requests for information made by [Barrington] or its successors or assigns,
            execute any documents necessary or useful in prosecuting such insurance claims, and
            testify if requested at any hearing or trial thereon.”
¶ 10        On April 29, 2004, Claimants, in their capacity as assignees of the rights of the Talleys,
       filed a claim with the Liquidator seeking $5,750,000. The claim represented the remaining
       limits of the two policies with Legion, $1 million under the primary policy and $5 million
       under the excess policy, minus $250,000 to reimburse the Fund. On March 19, 2010, the
       Liquidator made its recommendation, limiting the approval of the claim to the payment of
       $1.2 million as reimbursement for Barrington’s payments to the Talleys. On March 25, 2010,
       the Claimants objected to the Liquidator’s determination, asserting that they were entitled
       to the full limit of the policies as the judgment entered on the settlement between Barrington
       and the Talleys in bankruptcy court was for $7.5 million. On February 25, 2011, the
       Liquidator filed a petition with the circuit court for approval of its claim recommendation.
¶ 11        On October 5, 2011, acknowledging the discretion granted the Liquidator under the
       Illinois Insurance Code (Code) (215 ILCS 5/209(12) (West 2010)), the circuit court entered
       an order approving the Liquidator’s recommendation. The court agreed with the Liquidator
       that questions remained regarding the assignment by the Talleys to Barrington, particularly
       those concerning: Barrington’s actual liability in the underlying lawsuit; the limited proof


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       that the value of the claim was $7.5 million, some of which was not presented for the
       Liquidator’s consideration; the Code’s prohibition against considering judgments effective
       after the entry of the order of liquidation (215 ILCS 5/209(8) (West 2010)); and case law
       prohibiting the assignment of personal injury claims. The court opined that the Liquidator
       correctly determined that the claim assigned by the Talleys to Barrington must be disregarded
       and found that, while a statutory right to file a claim against the insurer directly and a
       contractual claim based on the settlement would be otherwise permissible, the claim
       remained, in essence, a personal injury claim and could not be assigned.
¶ 12        Claimants filed a motion to reconsider. On February 27, 2012, while the circuit court
       admitted that it did not fully appreciate the legal significance of the assigned claims, it denied
       the motion to reconsider. The court noted that the Liquidator relied on section 209(8) of the
       Code, and quoted the relevant portion, which states:
            “No judgment against such an insured or an insurer taken after the date of the entry of
            the liquidation, rehabilitation, or conservation order shall be considered in the
            proceedings as evidence of liability, or of the amount of damages ***.” 215 ILCS
            5/209(8) (West 2010).
       The court also considered Claimants’ argument that language prohibiting reliance on a
       settlement is absent in section 209(8), while other portions of the Code specifically prohibit
       reliance on judgments or settlements, and that: the legislature intended to preserve and
       promote the right to settlement; the Claimants and the Liquidator offered differing
       arguments, both without citation to supporting case law; and the Liquidator is granted “a
       great deal of discretion, both in investigating and in resolving claims” under section 209(12)
       of the Code and, therefore, may determine what to rely on in fashioning its order.
¶ 13        From this, the court reasoned that, while “[i]t is not clear to the Court that the Liquidator
       is required to consider the value of a settlement agreement entered into after the liquidation
       order in assigning value to claims in liquidation,” the Liquidator properly limited the claim
       to the amount paid by Barrington. It further opined that the terms of the settlement itself
       arose out of the stipulated judgment entered by the bankruptcy court after the entry of the
       order of liquidation and that section 209(8) of the Code prohibits the Liquidator from
       considering the agreement and the Claimants’ reliance on that judgment. The Liquidator,
       however, was free to investigate and resolve the claim and the court found that its
       determination was reasonable and proper. This appeal followed.

¶ 14                                       II. ANALYSIS
¶ 15       In seeking recovery of the insurance proceeds, Claimants raise questions in this appeal
       concerning some of the competing public policy issues presented when an insurer is placed
       into liquidation and creditors or injured parties are free to pursue claims against the insured
       while the insured is limited by the discretionary acts of the Liquidator. Due to the complexity
       of the liquidation process, a large amount of time may elapse between the entry of a
       liquidation order and the distribution of the insurer’s assets. Furthermore, during the
       liquidation process, the insurer’s obligation to defend is terminated. 215 ILCS 5/209(5)
       (West 2010). While the Fund does provide protections during this period and the Code

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       allows for reimbursement of reasonable attorney fees under a claim in a liquidation
       proceeding, the Claimants highlight that these issues provide numerous possible obstacles
       and hardships specific to the insured.
¶ 16       Despite what Barrington describes as a “hopeless predicament,” it is important to note
       that the Code was designed to protect the rights of all interested parties while also providing
       an orderly and efficient procedure for liquidating insurance companies. Lincoln Towers
       Insurance Agency, Inc. v. Boozell, 291 Ill. App. 3d 965, 969 (1997). The comprehensive
       nature of the Code reflects the rationale under the Code’s procedures to provide a means of
       marshaling and distributing the assets of the company under court supervision while avoiding
       preference of certain creditors. Id. at 969-70. This statutory scheme and the rule of absolute
       priority established under section 205 of the Code also limit the Liquidator and trial court in
       considering special circumstances, providing preferential treatment, or otherwise fashioning
       some form of equitable relief. In re Conservation of Alpine Insurance Co., 318 Ill. App. 3d
       457, 462 (2000).
¶ 17       Under the Code, when the liquidation order is entered, “any person who has a cause of
       action against an insured of the insurer under an insurance policy issued by the insurer shall
       have the right to file a claim in the proceeding.” 215 ILCS 5/209(6) (West 2010). Both the
       insured and the injured party may file a contingent claim with the Liquidator, which shall be
       allowed if it “is liquidated and the insured claimant presents evidence of payment of such
       claim.” 215 ILCS 5/209(4)(a), (6) (West 2010). A contingent claim by either an insured or
       an injured party may be allowed by estimation if a judgment may be reasonably inferred,
       there is suitable proof that no additional claims exist against the insurer arising out of the
       cause of action, and the total liability of the insurer is no greater than if it were not in
       liquidation. 215 ILCS 5/215(4)(b), (6) (West 2010).
¶ 18       In the instant matter, Claimants contend that the Liquidator and trial court erred in
       denying their claim for the remainder of the policy limits based on the value agreed upon by
       the parties in settlement and as fixed by the bankruptcy court. While they acknowledge that
       section 209(8) rejects the consideration of judgments after the date of liquidation, Claimants
       assert that the assignment was freely bargained for by the parties and it is their right to pursue
       the remainder of the policy limits as, at that time, there no longer was a personal injury claim
       but, rather, contractual rights between Claimants and the Talleys. Claimants point out that
       section 209(8) of the Code does not mention assignments or agreements and argue that the
       prohibition is on judgments in an attempt to infer that the legislature intended to preserve the
       right to settlement. From this they argue that the Liquidator and circuit court improperly
       rejected the assignment and limited their claim to the amount paid to the Talleys. We agree
       with the circuit court that the Liquidator’s allowance of $1.2 million to Barrington as
       reimbursement for the payment of the like amount it made to the Talleys was proper, rather
       than the $5,750,000 requested by Claimants, which would constitute a windfall of
       $4,550,000 to be paid to the entity which was responsible for the accident.
¶ 19       A claimant must support its claim by providing a signed statement including applicable
       enumerated items, or other information required by the Liquidator during the proceeding. 215
       ILCS 5/209(1), (2) (West 2010). Claimants concede that Illinois has a long-standing
       prohibition against the assignment of personal injury claims as being against public policy.

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       North Chicago Street R.R. Co. v. Ackley, 171 Ill. 100 (1897). Claimants counter that the
       long-standing public policy favoring settlement of disputes supports the Talleys’ negotiation
       and assignment of this contractual right against Legion as doing so was their only effective
       means to protect the recovery afforded by Barrington’s policy. See In re Liquidation of Pine
       Top Insurance Co., 266 Ill. App. 3d 99 (1994). Claimants also argue that, after the settlement
       was reached, the personal injury cause of action no longer existed and that the Talleys had
       conveyed a contractual right to them. M.H. Detrick Co. v. Century Indemnity Co., 299 Ill.
       App. 3d 620, 624 (1998). They assert that the public policy concerns behind barring the
       assignment of personal injury causes of action do not apply here and the countering policy
       arguments supporting the right to contract support their claim.
¶ 20       In addition, Claimants contend that this court has held that where an insurer should
       defend a claim, but fails to do so, the insured may bind the insurer by entering into a
       settlement in “reasonable anticipation of liability.” In support for their position, Claimants
       cite Guillen v. Potomac Insurance Co. of Illinois, 323 Ill. App. 3d 121, 136 (2001), aff’d as
       modified, 203 Ill. 2d 141 (2003), where the insureds entered into a settlement agreement with
       the plaintiff after the insurer defendant denied coverage and refused to defend the insureds.
       The insureds’ agreement to pay was based solely on the assignment to the plaintiff of all their
       rights to payment from the insurer. Guillen, 323 Ill. App. 3d at 124-25. Finding that the
       insured breached its duty to defend, the court stated that the law in Illinois is clear that an
       insured has the right to enter into a settlement agreement on its own in reasonable
       anticipation of liability. Id. at 132-36.
¶ 21       Claimants argue that the rule in Guillen was applied years earlier in the context of a
       liquidation proceeding in Pine Top. In Pine Top, Pine Top Insurance Company was put into
       liquidation during the pendency of a survival cause of action against its insureds. The
       plaintiff submitted a proof of claim in the liquidation proceeding and subsequently entered
       into an agreement with defendant insureds whereby, without bargaining away any right to
       pursue a claim against Pine Top, the plaintiff received $500,000 and agreed, inter alia, not
       to seek any judgment against the insureds. Pine Top, 266 Ill. App. 3d at 101-02. The
       Liquidator recommended that the plaintiff’s claim be rejected, but the circuit court approved
       the plaintiff’s claim for the remainder of the limits of Pine Top’s policy. Id. at 102-03.
¶ 22       Citing to section 209(6) of the Code and the right of an injured party to file a direct claim
       against the insurer once a liquidation order is entered, the Pine Top court affirmed the
       approval of the claim for the remainder amount of the insurance policy. Id. at 105. In finding
       that the plain language of the nonexecution covenant did not extinguish the plaintiff’s right
       to pursue Pine Top, the court noted that “[i]n a liquidation proceeding such as the instant
       case, the retention of an injured party’s claim rights against the tortfeasor’s insolvent liability
       carrier is the only effective means by which the injured party can contract to limit the source
       of his recovery to the protection afforded by the tortfeasor’s insurance coverage.” Id. at 106.
       The court found that the $2 million limit of liability under Pine Top’s policy, the approval
       of the $1.85 million claim, after $150,000 paid by the Fund was subtracted, was reasonable
       under the record. Id. The court then rejected the Liquidator’s claim that the plaintiff failed
       to provide support for the amount requested because the Liquidator did not dispute the
       valuation of the claim at any time prior to the appeal. Id. at 108-09.

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¶ 23        Claimants maintain that Pine Top stands for the proposition that injured parties can and
       should negotiate settlements to assure the fullest recovery and that their settlement agreement
       and assignment should be accepted by this court as a bargained-for contractual right. At oral
       argument, claimants’ counsel repeatedly advanced this argument and asserted it was the best
       policy for all parties involved, noting that bankruptcy and liquidation proceedings are
       complex and drawn-out and the social impact of resulting uncertainty is vast. Counsel argued
       that it is best for parties to settle so that the injured party can receive compensation and
       companies, such as Barrington, can remain in business and serve the community without the
       uncertainty of litigation or bankruptcy. Counsel asserted that the secondary market in
       insurance benefits removes all of these poor alternatives and gives certainty to the parties in
       exchange for the risk and possible reward for the investment.
¶ 24        Despite Guillen and Pine Top, we agree with the Liquidator that Claimants’ arguments
       were properly rejected by the trial court and the claim was correctly limited to the amount
       paid out by Barrington. Guillen and Pine Top are distinguishable from this case. Guillen
       involved a claim that the insurer wrongfully denied coverage of a claim and breached its duty
       to defend. Nothing of that sort has occurred here, the insurer was not in liquidation and the
       provisions of the Code did not apply to that case. Pine Top did involve an insurer in
       liquidation and a negotiated settlement; however, the claim under section 209(6) in that
       liquidation proceeding was made directly by the injured party and did not involve the
       assignment of any claim.
¶ 25        The instant matter involved a claim made against the insurer by the insured, standing in
       the place of the injured party and based on a judgment and agreement entered after the date
       of liquidation. It is correct that section 209(8) of the Code does not mention agreements or
       settlements in prohibiting the consideration of a judgment as conclusive evidence. However,
       as the Liquidator and circuit court concluded, the settlement is specifically based on the
       judgment entered in the bankruptcy court and Claimants cannot circumvent parts of the Code
       through contractual negotiation. Parties remain free to negotiate settlements and should be
       encouraged to do so but, when negotiations take place or judgments are entered after the date
       of the entry of a liquidation order, the claim remains subject to the determination of the
       liquidator as detailed in the comprehensive scheme of the Code.
¶ 26        Further, in strict adherence to the Code, we note that “any insured under an insurance
       policy” may have a contingent claim allowed under section 209(4)(a) if it is liquidated and
       the insured presents evidence of payment. 215 ILCS 5/209(4)(a) (West 2010). Section 209(6)
       of the Code allows “any person who has a cause of action against an insured of the insurer”
       to bring a claim. 215 ILCS 5/209(6) (West 2010). But this is of no avail to Claimants because
       the plain language of this section does not grant the right to bring an action to assignees of
       the injured party but, instead, limits the right to bring a claim to the injured party itself.
¶ 27        We agree with the Liquidator that Claimants’ arguments here run afoul of not only the
       policy behind the prohibition of assignment of personal injury claims, but also the public
       policy behind the Code to provide efficient and comprehensive relief to claimholders and the
       policy behind general insurance to indemnify the insured for loss and not provide a windfall
       profit. The settlement agreement between Barrington and the Talleys was specifically based
       on the judgment entered in the bankruptcy proceeding, which occurred after the date of the

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       entry of the liquidation. Accordingly, the weight afforded the settlement is not conclusive and
       is to be determined by the Liquidator. The Liquidator’s argument that the settlement must
       fail because it was not involved in negotiations is not supported by the Code or case law, but
       the Liquidator’s role in evaluating such an agreement and determining value is supported by
       the overall policy set forth in and underlying the Code.
¶ 28        Counsel conceded at oral argument that this situation does “give[ ] you kind of a funny
       feeling,” but repeated that allowing an open secondary market for claims is the soundest
       public policy for all parties. This scenario is anathema to the Code and such dealing stands
       the Code on its head. It is more akin to speculating in future interests or the common law
       offenses of barratry, maintenance, and champerty than sound public policy assuring
       maximization of the liquidated insurer’s assets. Agreeing with Claimants would allow a
       windfall profit and, essentially, circumvention of the general rule against the assignment of
       personal injury claims. The Liquidator’s recommended claim made Barrington whole,
       supporting the public policy behind insurance claims and the policy and structure of the Code
       to comprehensively marshal and distribute the assets of the liquidated insurer to all interested
       parties in an even-handed manner. Accordingly, we affirm the judgment of the circuit court.

¶ 29                                  III. CONCLUSION
¶ 30      For the foregoing reasons, the judgment of the trial court is affirmed.

¶ 31      Affirmed.




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