JAMES GALLAGHER et al., v. LENART et al.

Plaintiffs, James Gallagher and his wife, filed suit against
defendants Jaroslaw Robert Lenart and Pacella Trucking Express,
Inc., based on injuries Gallagher sustained when the truck he was
operating for his employer, Rail Terminal Services, LLC, collided
with the truck Lenart was operating for Pacella. After plaintiffs settled
their lawsuit against defendants, Rail Terminal sought to enforce its
workers' compensation lien against the settlement proceeds allocated
to Gallagher (820 ILCS 305/5(b) (West 2004)). The circuit court of
Cook County found that Rail Terminal had waived its lien when it
settled Gallagher's workers' compensation claim. Accordingly, the
court granted defendants' motion to adjudicate third-party claims and
issue settlement drafts. Rail Terminal appealed, and the appellate
court reversed and remanded, holding that Rail Terminal had not
waived its workers' compensation lien, and that the circuit court erred
in granting defendants' motion. 367 Ill. App. 3d 293. For the reasons
that follow, we affirm the judgment of the appellate court.

BACKGROUND

On April 10, 2001, James Gallagher was operating a truck for his
employer, Rail Terminal Services, LLC, when his truck collided with
another truck driven by Jaroslaw Robert Lenart, an employee of
Pacella Trucking Express, Inc. Gallagher injured his spine as a result
of the accident and was required to undergo surgery and take pain
medication.

After the accident, Gallagher filed a workers' compensation claim
against Rail Terminal. Initially, Rail Terminal paid him $24,903.51
in temporary total disability benefits and $53,392.21 in medical
expenses. Then, on July 28, 2003, the parties settled Gallagher's
claim for an additional lump-sum payment of $150,000.
The parties executed two documents as part of the settlement. The
first was entitled "Illinois Industrial Commission Settlement Contract
Lump Sum Petition and Order." The settlement contract provided, in
relevant part:

"Respondent [Rail Terminal] to pay the petitioner [Gallagher]
$150,000.00 in full and final settlement of all claims under
the Workers' Compensation Act for injuries allegedly
incurred on or about April 10, 2001 and any and all results,
developments or sequale [sic], past, present or future resulting
from this accident. Respondent denies these injuries are
compensable and this settlement is made to settle those issues
as a purchase of the peace against any and all claims of
temporary total compensation, permanent partial disability
and medical, surgical [or] hospital expenses, past, present or
future. Review under Sections 19(h) and 8(a) are waived by
the petitioner. The settlement is made in lieu of any additional
compensation beyond the date of approval of this contract and
includes only payment of temporary total compensation in the
amount of $58,049.70, unpaid medical bills in the amount of
$388.02, and the aforementioned purchase of the peace.
Respondent is not responsible for any outstanding medical
bills not submitted for payment prior to approval of this
settlement contract."

The second document the parties executed was entitled
"Resignation Agreement." It was contingent upon the workers'
compensation arbitrator's approval of the settlement contract
described above. In its recitals, the resignation agreement
acknowledged that Gallagher had a pending workers' compensation
claim against Rail Terminal, and that the claim was being settled. It
further acknowledged that, as part of the settlement, Gallagher would
voluntarily resign from his position with Rail Terminal and waive all
claims arising from his employment. The agreement explained that
the basis for the settlement was that Rail Terminal had "no position
available within [Gallagher's] permanent restrictions." Thus, "in
consideration of [Rail Terminal's] agreement to pay [Gallagher] the
sum of $1.00 *** in a lump sum after an Order issued approving the
settlement of [Gallagher's] workers' compensation claim," Gallagher
agreed to be bound by a series of specific provisions.
First, Gallagher agreed to the sufficiency of the stated
consideration. Second, Gallagher agreed that, by signing the
resignation agreement, he was "voluntarily resigning his employment
with [Rail Terminal]." Third, Gallagher agreed to "refrain from suing
[Rail Terminal], or authorizing any complaint or suit against [Rail
Terminal], on his behalf for any action of any kind or character, in
law or equity, suspected or unsuspected, arising out of or related to
his employment with [Rail Terminal]." Fourth, Gallagher agreed not
to "seek reinstatement, future employment or return to active
employment status with [Rail Terminal]." Fifth, Gallagher agreed to
"release[ ] and forever discharge[ ]" Rail Terminal from any and all
claims arising out of his employment with Rail Terminal, including
claims based on a variety of statutes and legal theories specifically
enumerated in the resignation agreement. The latter provision
concluded by stating that it did "not apply to claims, if any, for which
releases are prohibited by applicable law or which arise after the date
that [Gallagher] executes his agreement."

The resignation agreement also contained the following clause:

"This Agreement does not constitute an admission by

Employer of any liability or wrongdoing but it is intended to
resolve in good faith any existing or potential disputes or
claims arising out of Employee's relationship and separation
with Employer."

While Gallagher's workers' compensation claim was still
pending, he filed a personal injury action against defendants Lenart
and Pacella in the Cook County circuit court. Gallagher sought
damages for the injuries he suffered as a result of the accident. In
addition, in an amended complaint, his wife raised a loss of
consortium claim.

On November 20, 2003, defendants filed a third-party action
against Rail Terminal seeking contribution pursuant to the Joint
Tortfeasor Contribution Act (740 ILCS 100/1 et seq. (West 2002)).
Defendants alleged that Rail Terminal failed to properly train and
supervise Gallagher. Rail Terminal filed a motion for summary
judgment arguing that it did not fail to train or supervise Gallagher,
and that no additional training or supervision would have prevented
the accident. The circuit court granted Rail Terminal's motion.
Subsequently, on September 16, 2005, defendants reached a
settlement with plaintiffs. They agreed to pay Gallagher $125,000 for
his personal injury claim and pay his wife $225,000 for her loss-ofconsortium
claim.

Shortly thereafter, Rail Terminal filed a motion to intervene in the
personal injury action. It also filed a motion to set aside the allocation
of the settlement proceeds and reallocate them. Rail Terminal's
purpose for intervening was to assert its workers' compensation lien
under section 5(b) of the Workers' Compensation Act (820 ILCS
305/5(b) (West 2004)). Section 5(b) provides, in relevant part:
"Where the injury or death for which compensation is
payable under this Act was caused under circumstances
creating a legal liability for damages on the part of some
person other than his employer to pay damages, then legal
proceedings may be taken against such other person to
recover damages notwithstanding such employer's payment
of or liability to pay compensation under this Act. In such
case, however, if the action against such other person is
brought by the injured employee *** and judgment is
obtained and paid, or settlement is made with such other
person, *** then from the amount received by such employee
*** there shall be paid to the employer the amount of
compensation paid or to be paid by him to such employee

***. ***

***

*** [T]he employer may have or claim a lien upon any
award, judgment or fund out of which such employee might
be compensated from such third party.

*** The employer may[ ] at any time [after the filing of a
third-party action] join in the action upon his motion so that
all orders of court after hearing and judgment shall be made
for his protection." 820 ILCS 305/5(b) (West 2004).
Rail Terminal claimed its lien amounted to $228,295.72 based on the
$24,903.51 it paid in temporary total disability benefits, the
$53,392.21 it paid in medical expenses, and the $150,000 lump sum
it paid pursuant to the settlement contract. In both of its motions, Rail
Terminal stated that it did not participate in or approve of the
settlement between defendants and plaintiffs. Furthermore, it claimed
that plaintiffs had structured the settlement to circumvent its workers'
compensation lien by allocating 64.3% of the settlement proceeds to
Gallagher's wife.

On October 7, 2005, in response to Rail Terminal's motions,
defendants filed a motion to adjudicate third-party claims and issue
settlement drafts. They argued that language in the settlement contract
between Rail Terminal and Gallagher constituted a waiver of Rail
Terminal's workers' compensation lien. In support of this contention,
defendants relied on Borrowman v. Prastein, 356 Ill. App. 3d 546
(2005), where the Fourth District of the appellate court concluded that
an employer that entered into a settlement contract similar to the one
between Rail Terminal and Gallagher had given up its right to assert
its workers' compensation lien.

Plaintiffs joined defendants' motion and filed responses of their
own to Rail Terminal's motion to intervene and its motion to
reallocate the settlement proceeds. In their response to Rail
Terminal's motion to intervene, plaintiffs, like defendants, relied on
Borrowman and argued that Rail Terminal had waived its workers'
compensation lien. In addition, they pointed out that Rail Terminal
received Gallagher's resignation as part of the settlement, suggesting
that Rail Terminal had knowingly contracted away the lien in
exchange for this concession. The response included an affidavit from
plaintiffs' counsel, Jonathan Kurasch. He averred that Rail Terminal
was aware of plaintiffs' personal injury action at the time it settled
Gallagher's workers' compensation claim, and that, in negotiating the
settlement, "no claim was ever made or reserved for continuation of
[Rail Terminal's] rights" under section 5 of the Workers'
Compensation Act.

In plaintiffs' response to Rail Terminal's motion to reallocate the
settlement proceeds, they argued that their settlement with defendants
was fairly achieved, because all interested parties had the opportunity
to appear and protect their interests. They also argued that Rail
Terminal's claim that the settlement funds were inappropriately
allocated was speculative.

Rail Terminal, for its part, filed both a reply to plaintiffs'
responses and a response to defendants' motion to adjudicate thirdparty
claims and issue settlement drafts. Rail Terminal argued that the
settlement contract contained no specific waiver of its section 5(b)
workers' compensation lien. It also argued that the Fourth District's
decision in Borrowman was distinguishable from the instant case. In
addition, Rail Terminal contended that the resignation agreement did
not contain a waiver of its workers' compensation lien and denied
that such a waiver provided the consideration for Gallagher's
resignation. With respect to the allocation of the settlement, Rail
Terminal criticized plaintiffs for failing to produce any evidence in
support of allocating the majority of the proceeds to Gallagher's wife.
Rail Terminal bolstered its reply and its response with affidavits
from William Ryan, its counsel; Patrick Holden, a claims adjuster for
Rail Terminal's workers' compensation insurer; and Michael
McCabe, an employee of the third-party administrator that handled
Gallagher's workers' compensation claim for Rail Terminal's
workers' compensation insurer. Ryan's affidavit contained a
description of the events leading up to the September 16, 2005,
settlement conference between plaintiffs and defendants. Ryan
averred that at the previous settlement conference on August 19,
2005, he informed the court, plaintiffs' counsel, and defendants'
counsel that Rail Terminal was not prepared to waive a portion of its
workers' compensation lien to facilitate a settlement between
plaintiffs and defendants. Ryan further averred that at no time prior
to or during the August 19, 2005, settlement conference did plaintiffs'
counsel or defendants' counsel ever take the position that Rail
Terminal had waived its workers' compensation lien as part of its
workers' compensation settlement with Gallagher. According to
Ryan, the first time that position was taken was when defendants filed
their motion to adjudicate third-party claims and issue settlement
drafts.

Holden's affidavit described his involvement with the settlement
of Gallagher's workers' compensation claim. He averred that, prior
to the settlement of that claim, he told plaintiffs' counsel that Rail
Terminal would not waive its workers' compensation lien as part of
the settlement. He also averred that both during the settlement
negotiations and after the settlement was reached, plaintiffs' counsel
acknowledged the existence of Rail Terminal's lien and indicated that
Rail Terminal would recover any amounts paid in settlement of
Gallagher's workers' compensation claim from subsequent civil
recovery by Gallagher.

McCabe's affidavit, like Holden's, described his involvement
with the settlement of Gallagher's workers' compensation claim.
McCabe averred that it was not customary for Rail Terminal's
workers' compensation insurer to waive an employer's right to
recover its workers' compensation lien as part of negotiations for the
settlement of a workers' compensation claim without the receipt of
additional consideration. McCabe further stated that if such a waiver
was contemplated, a provision expressly memorializing it would have
been included in the settlement contract. In addition, McCabe stated
that Holden had communicated with plaintiffs' counsel and indicated
that Rail Terminal's workers' compensation insurer did not intend to
waive Rail Terminal's workers' compensation lien as part of the
settlement with Gallagher.

On December 13, 2005, the circuit court held a hearing on Rail
Terminal's motion to intervene, Rail Terminal's motion to reallocate
the settlement proceeds, and defendants' motion to adjudicate thirdparty
claims and issue settlement drafts. At the hearing, the parties
reiterated the positions set forth in their respective pleadings. After
considering the parties' arguments, the circuit court granted Rail
Terminal's motion to intervene. It also granted defendants' motion to
adjudicate third-party claims and issue settlement drafts, finding that
Rail Terminal had no workers' compensation lien under Borrowman.

The court noted that, in deciding to grant defendants' motion, it was
not relying on the resignation agreement. Finally, the court denied
Rail Terminal's motion to reallocate the settlement. The court
reasoned that it did not need to reach the allocation issue in light of
its determination that Rail Terminal had no lien.

Rail Terminal appealed, and the First District of the appellate
court found in its favor, rejecting the Fourth District's analysis in
Borrowman. 367 Ill. App. 3d at 298. The court reasoned that
Borrowman is unsupported by case law (367 Ill. App. 3d at 298-99),
contrary to several principles underlying the Workers' Compensation
Act (367 Ill. App. 3d at 299-301), and at odds with general principles
of contract law (367 Ill. App. 3d at 301-02). It concluded that, in this
case, Rail Terminal had a valid workers' compensation lien. 367 Ill.
App. 3d at 303. Accordingly, it reversed the circuit court's decision
to grant defendants' motion to adjudicate third-party claims and issue
settlement drafts. 367 Ill. App. 3d at 303. With respect to Rail
Terminal's motion to reallocate settlement proceeds, the appellate
court declined to address the merits of the motion for the first time on
appeal and remanded the cause to the circuit court for consideration
of the allocation issue. 367 Ill. App. 3d at 303.

Plaintiffs filed a petition for leave to appeal (210 Ill. 2d R. 315),
which we allowed to address the conflict between Borrowman and
the appellate court's decision in the instant case.

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