The Mean Girls star was served with papers from Church Boutique outside a L.A. courthouse last month (Jul10) - minutes before she learned she'd be serving time behind bars for violating probation from a 2007 DUI arrest.
In the suit, it was alleged she had failed to settle a $17, 060 (£11,374) bill for clothing, jewellery and accessories.
But Lohan is cleaning up her act while in court-ordered rehab in more ways than one - she has signed a cheque for the full amount, plus extras, to pay for the goods, according to TMZ.com.
The website reports the boutique has now agreed to drop the suit.
The star is currently in a UCLA treatment centre following her 13 days in prison. She was ordered to stay in rehab for 90 days, but professionals in charge of her treatment are pushing for an early release - and she could be free next week (begs23Aug10).