Wisconsin Lawyer: No Longer a ‘Back Room’ Deal: Nontraditional Settlement Agreements Revealed:

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  • Wisconsin Lawyer
    April
    01
    2013

    No Longer a ‘Back Room’ Deal: Nontraditional Settlement Agreements Revealed

    Matthew R. Rosek, Nicholas K. Rudman & Andrew J. Christman

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    Many courts and litigation attorneys view nontraditional settlement agreements like Mary Carter and loan receipt agreements with mistrust. But such agreements, when properly structured, can promote more efficient settlement of certain lawsuits.

    boardroomOver the past several years, our firm has litigated large complex cases for which nonstandard settlement agreements have either been proposed or agreed to by the parties. Several of the nonstandard agreements our firm has dealt with recently are similar or closely related to Mary Carter agreements or loan receipt agreements. Given the state of the economy and the added frugality of many corporations and insurance companies involved in litigation, the use of nontraditional settlement agreements appears to be on the rise.

    The terms “Mary Carter agreement” and “loan receipt agreement” are akin to vulgarity for many attorneys. These types of agreements conjure up images of smoke-filled back rooms and underhanded dealings in which parties conspire to mislead courts and juries for their own financial gain. Historically, there may be some truth to this stigma. In the modern world of complex multidefendant litigation, however, the loan receipt agreement can be a useful tool for both plaintiffs and defendants. If steps are taken to prevent some of the harms these agreements have caused, these types of agreements may have benefits for both plaintiffs and defendants seeking to settle claims before trial.

    Although many jurisdictions have a well-defined law for interpreting Mary Carter agreements and loan receipt agreements, Wisconsin law has not yet laid out a clear analytical framework for how to deal with these agreements. This article offers tips for dealing with these agreements, in the absence of more guidance from Wisconsin courts.

    Background

    The term “Mary Carter agreement” comes from a 1967 Florida case, Booth v. Mary Carter Paint Co.1 In that case, the plaintiff brought suit against numerous defendants for the alleged wrongful death of his wife.2 The plaintiff made an agreement with two of the defendants that the maximum liability of those two defendants would be limited to $12,500.3 The agreement further specified that if the jury or court returned a judgment exceeding $37,500, the settling defendants would not be obligated to pay anything to the plaintiff.4 In the event of a judgment at trial of less than $37,500, the settling defendants would contribute an amount up to $12,500.5 The agreement also required that the settling defendants remain in the suit as defendants and that the agreement was to be secret and not be disclosed to the nonsettling defendants or the court.6

    Florida courts allowed Mary Carter agreements until 1993. That year the Florida Supreme Court overturned Booth v. Mary Carter and outlawed Mary Carter agreements in Florida,7 saying that Mary Carter agreements had a “sinister” effect on litigation.8

    Key Features and Enforceability

    Although the details of Mary Carter agreements often differ, they do have several shared features, including the following:

    • The plaintiff settles with some but not all of the defendants.
    • There is a guaranteed minimum recovery for the plaintiff and a guaranteed maximum amount of liability for the defendant.
    • The settling defendant remains an active party to the suit.
    • The agreement is kept secret from the court and the nonsettling parties.9

    Secrecy is a key aspect of a traditional Mary Carter agreement.10 It is this secrecy that has contributed to the negative reputation of Mary Carter agreements and often has led courts to declare that these agreements are unenforceable. Another problem with Mary Carter agreements is that the settling defendants remain parties to the suit even though they have no liability beyond what they agreed to in the settlement. The settling defendant’s strategy may change from defending itself to maximizing the plaintiff’s recovery in hopes of limiting its own liability.

    Matt Rosekcom mrosek MLLlaw Matthew R. Rosek, Marquette 2004, is a partner at McCoy Leavitt Laskey LLC, Waukesha. He defends corporations and insurance companies nationwide in catastrophic injury and death cases and handles construction disputes and commercial, business, and securities litigation in Wisconsin. He is also an adjunct lecturer at Carroll University.

    Nicholas Rudmancom nrudman MLLlaw Nicholas K. Rudman, Creighton 2008, is an associate with the firm. He defends insurance companies and their insureds nationwide in catastrophic injury and death cases involving trucking, fire, explosion, and carbon monoxide poisoning cases.

    Andrew Christmancom achristman MLLlaw Andrew J. Christman, Marquette 2012, is an associate with the firm. He litigates insurance defense cases defending corporations in catastrophic injury and death cases and other litigation matters nationwide.

    Of course, the reality is that the settling defendant now has a great deal of motivation to not just defend itself but also actively attack the nonsettling party. According to some critics, the secret realignment against a nonsettling defendant caused by these agreements “distorts tort litigation” and “undermin[es] the equitable apportionment of damages among tortfeasors.”11

    Jurisdictions across the country have reached varying conclusions on the enforceability of loan receipt agreements. At one end of the spectrum, states like Texas have held that Mary Carter agreements are void as against public policy.12 As the Texas Supreme Court put it, Mary Carter agreements “allow plaintiffs to buy support for their case….”13 Other jurisdictions, such as Louisiana, have held that Mary Carter agreements are enforceable if they are not kept secret.14 In Louisiana, if the judge and other parties are told about the agreement and the jury is instructed concerning the agreement’s terms and conditions, these agreements do not violate public policy.15

    Differences Between Mary Carter and Loan Receipt Agreements

    Although the terms are often used interchangeably, there are differences between a traditional Mary Carter agreement and a loan receipt agreement. The Seventh Circuit Court of Appeals, citing the Indiana Appellate Court, defined a loan receipt agreement as follows:

    “A loan receipt agreement, in its simplest form, provides that one with potential liability to a claimant will advance funds in the form of a non-interest loan to the claimant in order that the claim may be prosecuted against another who is also potentially liable for the claim. In return for the funds advanced, the claimant agrees that he will not sue or will not seek to enforce a judgment against the lender and will repay the loan according to some formula based upon the claimant’s recovery against the other party. Such an agreement, then, serves to limit the liability of one against whom a claim might be pressed and, at the same time, gives the claimant an immediate ‘bird in hand’ instead of forcing him to await but possible recovery following protracted litigation.”16

    Loan receipt agreements differ from Mary Carter agreements in a few ways. The most obvious of these is that in most cases, a loan receipt agreement is not, and indeed should not be, kept secret. Further, unlike a Mary Carter agreement, in which the settling defendant guarantees a minimum recovery to the plaintiff, in a loan receipt agreement the settling defendant makes a loan to the plaintiff so that the plaintiff can continue litigation against the nonsettling defendant. Then, in the event of a recovery against the nonsettling defendant, the loan can be paid back, in whole or in part, based on the formula established as part of the loan receipt agreement.

    As in a Mary Carter agreement, in a loan receipt agreement the settling defendant usually remains part of the case and actively defends itself at trial. Critics of loan receipt agreements consider this a problem. Because the plaintiff no longer has a claim against the settling defendant, the defendant has no real need to defend itself. Further, because the settling defendant now has an interest in the plaintiff making a recovery, allowing the defendant to remain in the case tilts the scales of fairness at trial in favor of the plaintiff and the settling defendant. The agreement gives the defendant a chance to make a case for its own financial benefit and against the nonsettling defendant, without full disclosure of its motivations.

    In essence, this type of agreement creates an alliance between a plaintiff and a defendant with the goal of jointly defeating a nonsettling party. Of course, parties often align themselves in unusual and unique ways during litigation. So what? The difference here is that a party is not aligning itself with another solely because of its own interests; rather it is doing so for the economic benefit of both settling parties.

    Loan Receipt and Mary Carter Agreements in Wisconsin

    No Wisconsin court has said that loan receipt agreements and Mary Carter agreements are unenforceable nor has a Wisconsin court said that these agreements violate public policy. Despite the fact that some lawyers believe that Wisconsin prohibits Mary Carter agreements,17 the case most often cited for this point does not actually involve a Mary Carter agreement. Trampe v. Wisconsin Telephone Co.18 involved an agreement under which a defendant that secretly settled agreed to give a portion of any money it collected in contribution from the nonsettling defendant to the plaintiff. In Trampe, the plaintiff and the settling defendant, Wren, informed the court of their agreement after the trial but before the entry of judgment.19 They then allowed a judgment to be entered against Wren.

    Although Trampe is not actually about a Mary Carter agreement or a loan receipt agreement, the broad language the decision closes with that criticizes secret settlement agreements is often cited for the proposition that Wisconsin has rejected Mary Carter and loan receipt agreements. Regarding the secret settlement, the Wisconsin Supreme Court said, “[Wren] could rest secure in the knowledge that, if successful in keeping the matter secret, he would reap a profit, and, if he were unsuccessful, he would suffer no loss. This practice cannot be tolerated.”.20 The court ultimately held that the matter should be dismissed.

    In Vonch v. American Standard Insurance Co., although the case involved a loan receipt agreement, the court did not address the validity of the agreement nor whether it violated public policy.21 In Vonch, American Standard argued that its liability should be limited because a loan receipt agreement between the plaintiff and another insurance company should function as a Pierringer release and limit American Standard’s liability.22 The court of appeals held that because the loan receipt agreement did not release the insurance company from liability, the agreement did not function as a Pierringer release and American Standard’s liability would not be limited based on this agreement.23 The court did not address whether the loan receipt agreement was enforceable but rather simply held that it did not function to limit a nonsettling party’s liability like a Pierringer release would.

    Benefits of Mary Carter and Loan Receipt Agreements

    Some benefits of loan receipt agreements and Mary Carter agreements weigh against a total ban on these types of settlement agreements. Most important, loan receipt and Mary Carter agreements encourage settlement.24 Some courts, however, have opined that rather than encouraging settlement, Mary Carter and loan receipt agreements discourage settlement because once a plaintiff has entered into one of these agreements with one defendant, the plaintiff is unlikely to enter any settlement agreement with the remaining defendant or defendants.25

    Regardless of whether these types of agreements encourage or discourage settlement, they do function as a way to memorialize the events of a case. In litigation, especially in complex multidefendant litigation, parties’ positions are constantly adapting and changing based on new evidence, revised litigation strategies, and changes in momentum. A loan receipt or Mary Carter agreement allows a litigator to have a record of those changes.

    A 1995 Georgetown Law Journal article analyzed Mary Carter agreements from an economic perspective.26 The authors suggested that in many cases, Mary Carter agreements have “socially desirable” effects.27 For example, Mary Carter agreements encourage settling defendants to disclose information they otherwise would not have, thus allowing the trier of fact to make its decision based on a more complete picture of the available evidence.28 Additionally, in some cases a Mary Carter agreement allows plaintiffs with meritorious suits to pursue their claims when they would otherwise be unable to afford protracted litigation.29 Finally, the article suggests that Mary Carter agreements allocate risk to those parties most willing to accept the risk and take it away from risk-averse parties.30 For example, these agreements allow more risk-averse parties such as uninsured defendants and contingent-fee attorneys to limit their risk while allowing more risk-neutral parties, such as insurance companies, to move forward.

    Creating Effective and Enforceable Agreements

    Somewhere between total acceptance of all Mary Carter and loan receipt agreements and a total ban on them lies a middle ground where, with the help of safeguards, these agreements can be used without the potential miscarriage of justice historically associated with them. The Louisiana Court of Appeals, in Thibodeaux v. Ferrellgas Inc., struck this balance by holding that a Mary Carter agreement does not violate public policy so long as it is not kept secret, the jury is properly instructed regarding the financial interests of the party, and the amount of evidence the jury receives about the specifics of the settlement is limited.31 The Thibodeaux model provides an effective and ethical way to use Mary Carter agreements and loan receipt agreements.

    A settling defendant can certainly undermine nonsettling codefendants by using a secret, nontraditional settlement agreement. Consider the following hypothetical: John Smith is injured when a building constructed by Builder collapses. Insurance Company insures the building owner. Both Smith and Insurance Company sue Builder, but Smith also sues Insurance Company. Smith’s attorney informs Builder’s attorney that he now has a written agreement in place with Insurance Company, according to which Smith will recover the first $100,000 of any recovery by Insurance Company. Smith, by virtue of a guaranteed recovery, now has much more incentive to pin the blame on Builder. What are the options for Builder’s attorney? More important, can the benefits of these options alleviate the perceived negative effects of such agreements?

    First and foremost, under the Thibodeaux model the agreement should not be kept secret. The other parties to the suit and the court should be made aware of the agreement. Builder’s attorney should move to compel disclosure of the full written agreement. This prevents the nonsettling defendant from being sandbagged at trial and allows the judge to more accurately control the trial and ensure fairness for all the parties.

    Second, the jury should be instructed that the defendant that has made a Mary Carter or loan receipt agreement with the plaintiff has a financial interest in the plaintiff’s lawsuit. This disclosure is necessary so the jurors can properly evaluate the evidence presented to them.

    It might appear that the giving of such an instruction would be barred by Wis. Stat. section 904.08, which prohibits introduction of settlement evidence as a general rule.32 There are two justifications for exclusion of settlement evidence: First, parties settle for a variety of reasons, including conceding a weak position or simply being done with the dispute. Second, the rule promotes “the public policy favoring the compromise and settlement of disputes.”33

    Section 904.08 does, however, allow introduction of settlement evidence when it is offered for the purpose of showing bias.34 This is exactly the reason that evidence of the Mary Carter or loan receipt agreement would need to be introduced. The fact that the settling defendant has a financial interest in a judgment entered against the nonsettling defendant shows that there may be some bias in whatever evidence the settling defendant presents.

    Finally, although the court should instruct the jury about the settlement, the specific information the jury receives should be limited. The court, of course, must instruct the jury regarding the agreement’s foundation, that is, a payment by the settling defendant in exchange for a release of the plaintiff’s claims against it. To explain why there might be bias, the court also must disclose the fact that a portion of the judgment will go to the settling defendant to repay the settlement loan. This should suffice to explain the settling defendant’s financial interest in a potential judgment and the potential bias of the settling defendant.

    The specific amounts should not, however, be disclosed to the jury. Neither the amount of the settlement loan payment nor the formula for how a judgment will be divided between the plaintiff and settling defendant should be given to the jury. These numbers may mislead the jury and encourage it to use the figures as a way to apportion fault among the parties. Mary Carter and loan receipt agreements also often contain a provision stating that the plaintiff and the settling defendant believe that the nonsettling defendant is the true party at fault for the plaintiff’s damages. Any provision to this effect should not be disclosed to the jury. It is only a conclusion of the parties to the agreement and may confuse the issues at trial or mislead the jury.

    With these precautions in place, the traditionally recognized negative effects of Mary Carter agreements can be minimized, thereby providing a place for these agreements in modern litigation. Of course, loan receipt and Mary Carter agreements are not appropriate or advisable in many circumstances. Whether a party should seek an agreement of this type requires careful consideration by all attorneys involved. Plaintiff’s counsel must consider whether there is truly a need for this type of agreement and whether this type of settlement is worth the potential reduction of the amount that ends up in the client’s pocket (because the client pays a portion to the settling defendant). Conversely, defense counsel must consider the likelihood of the plaintiff recovering from the nonsettling defendant, the client’s relationship to the nonsettling defendant, and the effect that disclosure of the agreement at trial will have on the jury’s perception of the client and its potential recovery.

    Conclusion

    Litigators need a variety of tools to obtain favorable – or at least acceptable – outcomes for their clients. At a time when litigation costs are on the rise, new and creative settlement options should be explored. Loan receipt agreements and Mary Carter agreements may provide an opportunity, in certain cases, to settle claims short of litigation. For defense attorneys this is an opportunity to limit their clients’ potential exposure and possibly recover some of their settlement payment. For plaintiff’s attorneys, it is a chance to guarantee some recovery for their clients and lower the risks associated with going to trial. Counsel for nonsettling defendants must also be aware of their options for disclosure of the agreement and instruction of the jury at trial.

    Litigators should not simply assume that they are limited to a traditional complete release or that their only creative alternative is a Pierringer release. The high stakes of litigation may require that counsel examine a variety of alternatives. The days of the secretive Mary Carter agreement are over, and there are signs that the reputation of these types of agreements may be inaccurate and exaggerated. Accordingly, their potential use should be examined and, when appropriate, the agreements should be used. 

    Endnotes

    1 Booth v. Mary Carter Paint Co., 202 So. 2d 8 (Fla. Dist. Ct. App. 1967).

    2 Id. at 9.

    3 Id. at 10.

    4 Id.

    5 Id.

    6 Id.

    7 Dosdourain v. Carsten, 624 So. 2d 241 (Fla. 1993).

    8 Id. at 246.

    9 See Banovz v. Rantanen, 649 N.E.2d 977, 980-81 (Ill. App. Ct. 1995); see also Smith v. Childs, 497 N.W.2d 538, 539 (Mich. Ct. App. 1993).

    10 See, e.g., Slusher v. Ospital, 777 P.2d 437, 440 (Utah 1989) (holding that secret agreement should have been disclosed to jury and that disclosing agreement to jury would not have been prejudicial).

    11 It’s a Mistake to Tolerate the Mary Carter Agreement, 87 Colum. L. Rev. 368 (1987).

    12 See Elbaor v. Smith, 845 S.W.2d 240, 250 (Tex. 1992) (holding that Mary Carter agreements are void as against public policy).

    13 Id. at 249.

    14 See Thibodeaux v. Ferrellgas Inc., 717 So. 2d 668 (La. Ct. App. 1998).

    15 Id.

    16 Fort v. C.W. Keller Trucking Inc., 330 F.3d 1006, 1009-10 (7th Cir. 2003) (citing Burkett v. Crulo Trucking Co., 355 N.E.2d 253, 258 (Ind. App. 1976)) (holding that agreement in question was loan receipt agreement and therefore that nonsettling defendant was not entitled to a set-off).

    17 See Elbaor, 845 S.W.2d at 251 n.21.

    18 Trampe v. Wisconsin Tel. Co., 214 Wis. 210, 252 N.W. 675 (1934).

    19 Trampe, 252 N.W. at 675.

    20 Id. at 678.

    21 Vonch v. American Standard Ins. Co., 151 Wis. 2d 138, 442 N.W.2d 598 (Ct. App. 1989).

    22 Id. at 145.

    23 Id.

    24 See, e.g., Ohio Valley Gas Inc. v. Blackburn, 445 N.E.2d 1378, 1382 (Ind. App. 1983) (“We not only approve of, we encourage loan receipt agreements because 1) they provide immediate funds to those who need them, circumventing the delay inherent in a prolonged trial and appeal, and 2) they tend to settle litigation.”).

    25 See, e.g., Elbaor, 845 S.W.2d at 250.

    26 Lisa Bernstein & Daniel Klerman, An Economic Analysis of Mary Carter Settlement Agreements, 83 Geo. L.J. 2215 (1995).

    27 Id.

    28 Id.

    29 Id.

    30 Id.

    31 Thibodeaux, 717 So. 2d at 673-74.

    32 Wis. Stat. § 904.08.

    33 See Daniel LaFave, The Admissibility of Settlement Evidence in Multi-Defendant Tort Cases, 71 Wis. Law. 6 (June 1998) (discussing Wisconsin rule on admissibility of settlement evidence) (citing Federal Advisory Committee’s notes; Connor v. Michigan Wis. Pipe Line Co., 15 Wis. 2d 614, 619-21, 113 N.W.2d 121 (1962)).

    34 Wis. Stat. § 904.08.