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Sleeping with the Enemy-Litigation Loan Agreements: Are They Legal?

Trial Lawyers

In multi-party litigation there often comes a time when global settlement cannot be

achieved, yet one defendant still wants to settle out of the lawsuit. In such circumstances, litigation loan agreements may be useful settlement tools, particularly where the existence of and amount of damages are not in substantial dispute and where the main issue in the case is liability.

A settlement incorporating a litigation loan agreement usually involves two separate payments to the plaintiff—one a nonrefundable settlement payment, the other a “litiga-tion loan.” The litigation loan is to be used by the plain-tiff to help fund its continuing litigation against the nonsettling defendants. More often than not, the “loan” is required to be repaid only if the plaintiff ultimately obtains a judgment or settlement from the nonsettling defendants that is in excess of some predetermined amount. Typi-cally, the greater the plaintiff’s ultimate recovery against the nonsettling defendants, the more of the litigation loan the plaintiff will have to repay.

Both the plaintiff and the defendant seeking settlement can benefit from the use of a litigation loan agreement. The plaintiff is able to obtain an increased minimum settlement amount (because the settling defendant will pay a little more when a portion of the payment, the loan amount, is subject to repayment), while the defendant is able to settle completely out of the case, secure in the knowledge that its monetary exposure can go nowhere but down. These advantages encourage settlement of litigation, albeit only as to some of the parties.

However, under a litigation loan agreement, the settling defendant is clearly financing the plaintiff’s continuing litigation against the nonsettling defendants, and the settling defendant also has an unmistakable financial stake in the outcome of the remaining case. Further, the settling defendant’s maximum liability in the overall case is directly tied to and inversely proportional to the nonsettling defendants’ liability—as the financial exposure of the nonsettling defendants goes up, the financial exposure of the settling defendant goes down. This inverse liability relationship provides a financial incentive for the settling defendant to cooperate with the plaintiff in the ensuing litigation, and to “stick it to” the nonsettling defendants in deposition testimony, trial testimony, etc. In light of the public policy concerns against financially underwriting another’s litigation and in favor of full, fair, and open advocacy, are litigation loan agreements champertous1 or invalid Mary Carter agreements?2


settling out of a lawsuit yet still retaining a financial interest in its outcome, is a settling defendant entering into an illegal,3 champertous agreement?

In Florida, champerty exists only where a person 1) who has no interest in a controversy 2) agrees to financially underwrite the controversy 3) in exchange for some part of the proceeds to be recovered in the ensuing litigation.4 In the typical litigation loan agreement, the settling defendant obviously “financially underwrites” part of the controversy and in exchange for that financial backing expects to receive, or at least expects the right to receive, “some part of the proceeds” to be recovered in the ensuing litigation. In addition, once the settling defendant enters into the litigation loan agreement and settles out of the case, it clearly has no interest in the controversy other than its financial interest in the lawsuit’s final outcome. At first look, then, a litigation loan agreement may seem champertous. However, a closer analysis of the “no interest in the controversy” element of champerty reveals a significant distinction between a champertous agreement and a litigation loan agreement.

Specifically, while a defendant who has settled out of a case may technically have “no interest in the controversy,” it certainly did have an interest in the controversy prior to the time of its settlement. definition, then, a litigation loan agreement is an agreement which, at the time it was entered, was between two parties to a lawsuit, not between a party and a stranger to the suit. The fact that the settling defendant becomes a nonparty upon compliance with the settlement documents does not change the original nature of the litigation loan agreement as an agreement between two parties. Accordingly, the element of champerty which requires that the agreement be between a party and a person who has no interest in the controversy is not met in those cases settled through use of litigation loan agree-ments.

The argument that a litigation loan agreement is not an agreement entered into between a party and some person with “no interest in the controversy” is further supported by a review of the underlying policy reasons for our rules against champerty. Specifically, champerty, as a species of mainte-nance,5 ex-ists only in those circum-stanc-es in which one inter-meddles in a suit in which one has no independent concern.6 A component of this “intermeddling” aspect of cham-perty is that the “officious intermed-dling” of the otherwise uninvolved third party be undertaken “for the purpose of stirring up litigation and strife [or to] encourag[e] others either to bring [an] action or to. . . defen[d a suit] which they have no right to” bring or defend.7 It simply cannot be argued that a defendant in a pending lawsuit who decides to settle out of a case by entering into a litigation loan agreement is entering into the agreement for “the purpose of stirring up litigation and strife” or to encourage the improper bringing or defense of a lawsuit. Rather, such a defendant enters into a litigation loan agreement to end litigation and strife.

In sum, although litigation loan agreements may superfi-cial-ly seem to meet the elements of champerty, they are not, in fact, agreements between a party to a lawsuit and some third person with no real interest in the case. Further, the main evil to be pre-vented by the prohibition against champerty, the stirring up of unnecessary litigation and strife, simply does not occur in settlements employing litigation loan agreements. To the contrary, litigation loan agreements encourage the opposite; that is, they facilitate settlement and the extinguishment of litigation and strife. Accordingly, litigation loan agreements should not be held violative of our laws against champerty.8

Mary Carter Prohibitions

Even where a litigation loan agreement is not champertous, is it, nonetheless, an invalid Mary Carter agreement?

“A ‘Mary Carter Agreement’. . . is. . . a contract by which one co-defendant secretly agrees with the plaintiff that, if such defendant will proceed to defend himself in court, his own maximum liability will be dimin-ished propor-tionately by increasing the liability of the other co-defen-dants.”9 Although a litigation loan agreement may provide that a settling defendant’s ultimate maximum liabili-ty will decrease in proportion to the increasing liability of the nonsettling defendants, the other elements of a Mary Carter agreement—secrecy and the continued participation of the settling defendant in the lawsuit—are not present. That is, where a settling defendant is dis-missed out of a case, the fact of settlement obviously is not secret, and, since the settling defendant is dismissed out, it certainly will not proceed to defend itself as a party in court.

In Dosdourian v. Carsten, 624 So. 2d 241, 246 (Fla. 1993), the Florida Supreme Court declared Mary Carter agree-ments invalid. They were declared invalid because of the inherent unfairness that occurs in any trial where a settling defendant is allowed to remain in a case as a nomi-nal party, and is allowed to utilize its technical, fictional status as a party to advance the plaintiff’s position, rather than its own.10 Specifically, the Dosdourian court was con-cerned that:

Defendants who have allegedly settled remain parties throughout the. . . suit, even through trial. As a conse-quence, these defendants remain able to participate in jury selection [and use peremptory challenges to empanel a plaintiff-friendly jury, effectively allotting more challenges to the plain-tiff’s side of the litigation and less to the defendant’s.] They present witnesses and cross-examine the witnesses of the plaintiff by leading questions. They argue to the trial court the merits and demerits of motions and evi-dentiary objections. Most significantly, the party status of settling defendants permits them to have their counsel argue points of in-fluence before the jury.11

None of these concerns, however, are risks in litigation loan agreements, for under such agreements, the settling defendant will not remain a party in the case. Rather, it will be dismissed out, and will have no ability to participate in jury selection, no opportunity to present witnesses or cross-examine wit-nesses, no ability to argue motions or evidentiary objec-tions to the court, and no opportunity to have its counsel argue points of influence before the jury. Simply put, where a settling defendant is dismissed from a case, a Mary Carter agreement does not exist.12

Accordingly, as settling defendants who utilize a litigation loan agreement will not remain in the case after settlement, and as the fact of settlement between the plaintiff and the settling defendant will not be secret, a litigation loan agreement should not be considered an invalid, Mary Carter-type agreement by Florida courts. Litigation loan agreements may well make for strange bedfellows, but they simply do not raise the same dangers to a fair trial as Mary Carter agreements.


A litigation loan agreement is a creative tool for settling litigation which guarantees a plaintiff a minimum recovery, but which is made palatable to settling defendants (or their insurers) by a provision which has the potential to reduce settlement costs. Such an agreement cannot fairly be viewed as a “champertous” agreement entered into by intermeddlers seeking to stir up litigation, nor as a Mary Carter-type settlement which requires a settling defendant to stay in the case and participate in trial to advance secretly the plaintiff’s, rather than its own, interests. To the contrary, a litigation loan agreement is simply a tool to be used in achieving a negotiated, fair resolution of ongoing, often very complicated, litigation. The public policy of Florida is to encourage settlement of civil actions,13 and litigation loan agreements further that public policy. Florida courts should not undermine the settlement of civil actions by holding litigation loan agreements champertous or invalid Mary Carter agreements. q

1 Champerty is “[a] bargain by a stranger with a party to a suit, by which [the stranger] undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if successful, a part of the proceeds. . . sought to be recovered [in the lawsuit].” Nationwide Mutual Ins. Co. v. McNulty, 229 So. 2d 585, 586 (Fla. 1969) (quoting Black’s Law Dictionary 292 (4th ed. 1951)).
2 A Mary Carter agreement is a species of settlement agreement made famous, or infamous, by the case of Booth v. Mary Carter Paint Co., 202 So. 2d 8 (Fla. 2d D.C.A. 1967), criticized by Ward v. Ochoa, 284 So. 2d 385 (Fla. 1973). The term is now generally applied to settlement agreements in which one defendant in a multi-defendant lawsuit “settles out” of a case, yet retains “a financial stake in the outcome of the case and. . . remains a party to the litigation.” Elbaor v. Smith, 845 S.W.2d 240, 247 n.13 (Tex. 1992).
3 See Fla. Stat. §877.01 (1995) (making champerty a first degree misdemeanor).
4 Kraft v. Mason, 668 So. 2d 679, 682 (Fla. 4th D.C.A.), rev. dismissed, 679 So. 2d 773 (Fla. 1996). See also Harry Pepper & Assocs., Inc. v. Lasseter, 247 So. 2d 736, 737 (Fla. 3d D.C.A.), cert. denied, 252 So. 2d 797 (Fla. 1971); 9 Fla. Jur. 2d Champerty and Maintenance §1 (1979).
5 Maintenance “consists of maintaining, supporting, or promoting the litigation of another.” Black’s Law Dictio-nary 157 (abr. 6th ed. 1991).
6 9 Fla. Jur. 2d Champerty and Maintenance §1 (1979).
7 Kraft v. Mason, 668 So. 2d at 682 (quoting 9 Fla. Jur. 2d Champerty and Maintenance §1 (1979)). See also Fla. Stat. §877.01 (1995) (requiring as an element of criminal champerty “the intent and purpose of stirring up strife and litigation”).
8 See, e.g., Anderson v. Trade Winds Enterprises Corp., 241 So. 2d 174, 177 (Fla. 4th D.C.A. 1970) (no champerty found because “there was. . . no officious intermeddling by anyone in a law suit, [and] there was no bargaining between any person not involved in a lawsuit to acquire an interest in a matter in litigation”), cert. denied, 244 So. 2d 432 (Fla. 1971); Amerifirst Bank v. Bomar, 757 F. Supp. 1365 (S.D. Fla. 1991) (holding that an agreement to share in litigation proceeds was not champertous because it was entered into as part of a broader agreement to settle other, ongoing litigation). See also Nationwide Mutual Ins. Co. v. McNulty, 229 So. 2d 585 (Fla. 1969).
9 Dosdourian v. Carsten, 624 So. 2d 241, 243 (Fla. 1993).
10 Id. at 243.
11 Id. at 243, 246.
12 See, e.g., Dosdourian, 624 So. 2d at 246 (holding that “any agreement which requires the settling defendant to remain in the litigation” is an invalid Mary Carter agree-ment) (emphasis added); Garrett v. Mohammed, 686 So. 2d 629, 630 (Fla. 5th D.C.A. 1996) (holding that a “high-low” agreement did not pose the same dangers as a Mary Carter agreement because under the challenged high-low agreement the settling defendant “was not required to remain in the litigation. She was free to either participate in the litigation or to walk away.”), rev. denied, 1997 Fla. LEXIS 1150 (Fla. June 23, 1997); Peterson v. Morton F. Plant Hosp. Ass’n, 656 So. 2d 501, 503 (Fla. 2d D.C.A.) (holding that although a settling defendant remained in the case as a nominal party, the set-tlement agreement was not an invalid Mary Carter agreement because the settling defendant “played no role in the tri-al”), rev. denied, 664 So. 2d 249 (Fla. 1995); Elbaor v. Smith, 845 S.W.2d 240, 247 n.14 (Tex. 1992) (relied on by the Florida Supreme Court in Dosdourian and stating that “[o]bviously, a Mary Carter agreement would not exist if a settling defendant [were to] acquire a financial interest in the outcome of the trial and then testif[y] at [the] trial as a non-party witness”).
13 JFK Medical Ctr., Inc. v. Price, 647 So. 2d 833, 834 (Fla. 1994).

R.H. Farnell II graduated magna cum laude from the University of Georgia in 1980 and received his M.B.A. from the University of North Florida in 1984. He received his J.D. (with high honors) from the University of Florida in 1994. Mr. Farnell has practiced with Bedell, Dittmar, DeVault, Pillans & Coxe, P.A., Jacksonville, since his graduation from law school, and concentrates his practice in the areas of commercial and personal injury litigation, both at the trial and appellate levels.

This column is submitted on behalf of the Trial Lawyers Section, David W. Bianchi, chair, and D. Keith Wickendon, editor.

Trial Lawyers