In cases where there are multiple defendants, there are any number of reasons why a plaintiff might be willing to accept less in settlement from one defendant as opposed to another defendant. Sometimes a plaintiff might be willing to accept less from one defendant in the hope or expectation that it can recover substantially more money from a remaining tortfeasor. A Mary Carter agreement is one such arrangement whereby the settling defendant nevertheless goes to trial, but the liability of the settling defendant is limited. Often the amount to be paid by the settling defendant is dependent on how much is recovered from the non-settling defendant(s). In certain instances, the amount paid by the settling defendant is in inverse proportion to the amount recovered by the plaintiff against the nonsettling defendant(s). Am. Med. Int’l, Inc. v. Nat’l Union Fire Ins. Co., 244 F.3d 715, 718 & n.1 (9th Cir. 2001) (quoting Black’s Law Dictionary 974 (6th Ed. 1990)). In other words, it is a type of settlement agreement in which the settling party stays in the case in order to assist its adversary against the nonsettling defendant. The name originates from a Florida state-court case, as “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 diminished proportionately by increasing the liability of the other co-defendants.” Ward v. Ochoa, 284 So.2d 383, 387 (Fla. 1973) (citing Booth v. Mary Cater Paint Co., 202 So.2d 8 (Fla. App. Ct. 1967)). There are generally three salient elements of a classic Mary Carter agreement:
(1) it is kept secret from the nonsettling defendants; (2) the settling defendant remains in the case and defends itself at trial; and, most importantly, (3) the settling parties structure the settlement in such a way as to give the settling defendant a financial incentive to assist the plaintiff in increasing the liability of the nonsettling defendant.
Wausau Bus. Ins. Co. v. Turner Const. Co., No. 99 CIV. 0682 (RWS), 2001 WL 604188, at *1 (S.D.N.Y. June 4, 2001); see also Leon v. J&M Peppe Realty Corp., 190 A.D.2d 400, 414 (N.Y. App. Div. 1st Dep’t 1993) (describing a Mary Carter agreement as “an agreement limiting the liability of those [settling] defendants to a sum certain, [and to] continue to litigate the matter in order to thrust the lion’s share of liability on the non-agreeing defendants”).
Disclosure of Mary Carter Agreement
Secrecy is a key element of a traditional Mary Carter. However, the lack of disclosure and the prejudice of this lack of disclosure on nonsettling defendants have made traditional Mary Carter agreements unlawful and in violation of public policy. Wausau Bus., 2001 WL 604188, at *1 (“such agreements are void as against public policy, because they secretly realign the parties, may confuse juries if not disclosed, and may affect the settling defendant’s presentation of evidence in a way that prejudices the nonsettling defendants”); Stiles v. Batavia Atomic Horseshoes, 174 A.D.2d 287, 292 (N.Y. App. Div. 4th Dep’t 1992), rev’d on other grounds, 613 N.E.2d 572 (“If such an agreement is established, it may be void per se, and the failure to disclose it may require a new trial”). It is the secrecy of the agreement that “creates the most unfair prejudice to the non-agreeing defendant and his right to a fair trial.” Hoops v. Watermelon City Trucking, Inc., 846 F.2d 637, 640 (10th Cir. 1988). Therefore, disclosure of an agreement that would otherwise resemble a Mary Carter agreement is essential and necessary to its lawful existence as the disclosure distinguishes the subject agreement from an unlawful Mary Carter agreement. “So long as the terms are not kept secret, such an agreement does not harm the integrity of the legal system and can further the goal of resolving disputes amicably.” Sierra Rutile Ltd. v. Katz, No. 90 Civ. 4913, 1994 WL 577888, *3-4 (S.D.N.Y. Oct. 19, 1994).
A court will find a Mary-Carter inspired agreement valid and enforceable where there is no evidence that the plaintiff and defendant are conspiring to increase the nonsettling defendant’s share of liability and where the underlying settlement agreement is made in open court with the nonsettling defendant’s full knowledge—such an agreement “lacks any of the indicia of collusion and secrecy that mark a disfavored Mary Carter agreement.” Reutzel v. Hunter Yes, Inc., 135 A.D.3d 1123, 1125 (N.Y. App. Div. 3d Dep’t 2016). Therefore, disclosure of the agreement to nonsettling defendants is necessary to their validity.
Effect of Mary Carter Agreement on Liability
A traditional Mary Carter agreement absolves the settling defendant of joint and several liability and eliminates a potential contribution claim from the nonsettling defendant. See Phelps Dodge Corp. v. Krueger Engineering & Mfg. Co., Inc., No. 01-87-00194, 1988 WL 10775, at *1 (Tex. App. Feb. 11, 1988). However, in most states, a traditional Mary Carter agreement is unenforceable, and its replacement “does not necessarily ‘release’ a defendant” as a matter of state law. Barton v. State, Dep’t of Transp., 308 F.3d 597, 605 (Wash. 2013); see also Reager v. Anderson, 371 S.E.2d 619, 632 (W. Va. 1988) (“As the settling defendant has, by the nature of such an agreement, elected to remain a party, such party has permitted a joint judgment to be rendered against him and the other joint tortfeasor. By electing to remain in the case he becomes subject to the contribution after judgment statute.”). Many states, however, have determined that the element of disclosure of the Mary Carter-type agreement resolves any potential for prejudice on the nonsettling defendant and therefore the settling defendant will not be accountable for joint and several liability or contribution. Ratterree v. Bartlett, 707 P.2d 1063, 1076 (Kan. 1985). For example, courts in Idaho approve of agreements in which “the plaintiff releases one co-defendant but reserves the right to proceed against the remaining defendants. The nonsettling defendants’ right to contribution can then be cut off by the plaintiff’s agreement to indemnify the settling defendant against any claims of contribution.” Quick v. Crane, 727 P.2d 1187, 1207 (Idaho 1986) (citing Pierringer v. Horger, 124 N.W.2d 106 (Wisc. 1963)). The trends from these cases is that the effect of a Mary Carter-type agreement depends significantly on the specific agreement in question and its full disclosure.
In New York, if the agreement at issue is fully disclosed, courts will enforce its terms, including absolving the settling defendant from joint and several liability. In Sierra Rutile Ltd. v. Katz, the nonsettling defendant argued that the agreement in question should be void as against public policy because it is a Mary Carter agreement and it “distort[s] tort law by disrupting the allocation of liability according to each party’s comparative fault.” 1994 WL 5577888, at *2. The court disagreed finding that the agreement in question was not a Mary Carter agreement because the agreement was fully disclosed. Id. at *4. In terms of the concern of prejudice on the nonsettling defendant, the court further explained that such concerns are addressed through cross examination and impeaching the testimony of the plaintiff and settling defendant as to the potential bias: “If [the nonsettling defendants] fear that the potential benefit to the settling defendants suggests collusion between plaintiff and the settling defendant, or that the settling defendants will perjure themselves, [the nonsettling defendants] can inquire into those subjects at trial.” Id. In In re Refco Inc. Securities Litigation, the court analyzed an agreement where a settling defendant paid a specified amount to the plaintiff and agreed to make himself available for trial and proceedings, including by testifying. No. 07-md-1901; No. 08-cv-7416, 2012 WL 12906289, at *1 (S.D.N.Y. Aug. 10, 2012). The court rejected the argument that this was an impermissible Mary Carter agreement because “the agreement is public and can be used to impeach the settling defendant, or as a basis for court relief, if he tries anything funny.” Id. at *8 n.11. The court proceeded to deny a contribution claim against the settling defendant based on the agreement. Id. at *2.
Mary Carter agreements are not commonly used but they exist and parties need to be aware of their benefits and pitfalls in advising their respective clients. As the above analysis demonstrates, a non-traditional Mary Carter agreement, meaning one that is fully disclosed to the parties and court, is valid and enforceable in New York and other jurisdictions. Moreover, the agreement has the potential to absolve a settling defendant from joint and several liability if the nonsettling defendant has an opportunity to cross-examine and impeach the settling defendant for any potential bias. These types of agreements provide an attractive alternative to traditional settlement agreements and could even apply in cases that are ready for trial.
David Y. Loh is a member of Cozen O’Connor in New York City, New York, and currently a cochair of the ABA Admiralty Litigation Committee. William A. Lesser is an associate at Cozen O’Connor in New York City.