August 01, 2012

Scruples: Sinister Secret Settlements

A tangle of ethical problems can ensnare a party who secretly settles in a multiparty case.

Michael Downey

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Relief showed on Paradox’s face. “Kaye has offered Jay a secret settlement,” Paradox told Ethox.

“Secret?” Ethox asked. “Don’t you mean confidential?”

“No,” Paradox responded. “It will be secret from the judge and from the jury. Jay also will get a credit for any judgment Kaye can obtain against the other defendants.  The settlement will be secret so Jay can help Kaye press claims against the codefendants.”

“This sounds unethical,” Ethox warned.

“What do you mean?” Paradox asked.

“It’s a Mary Carter settlement. In most states, they’re unethical.”

“A ‘merry’ what?” Paradox asked.

“A Mary Carter settlement,” Ethox repeated. “They get their name from Booth v. Mary Carter Paint Company (202 So. 2d 8 (Fla. Ct. App. 2d 1967)). A Mary Carter settlement occurs when a defendant settles in secret, capping its liability. The settlement also provides that, if the plaintiff prevails against other, non-settling defendants, the settling defendant’s liability is reduced based on the recovery against the non-settling defendants.

“The three key elements to a Mary Carter agreement are, one, the secrecy surrounding the settlement; two, the fact that the settling defendant remains in the action as if there was no settlement; and, three, the offset the settling defendant receives based on recoveries against other defendants. The settling defendant can help the plaintiff recover against non-settling co-defendants and thus save itself money. After all, not knowing about the settlement, the judge or jury probably will not consider the bias that would impact the settled defendant’s testimony.”

“I’ve never heard of a Mary Carter agreement,” Paradox admitted.

“They can be quite dangerous to everyone involved,” Ethox cautioned. “Upon learning of the settlement, the courts might declare the judgment void if the defendant was covertly aiding the plaintiff. And both parties—and counsel—could face serious sanctions.”

“But,” Paradox protested, “parties enter confidential settlements all the time. Settling parties also often get a credit based on the amounts recovered from non-settling parties.”

“Yes,” Ethox responded. “And such confidential settlements are generally found to be ethical and lawful. Sometimes the confidentiality provision might be drawn too broadly, like the situation discussed in D.C. Ethics Opinion 355 (2006). And some jurisdictions disfavor confidential settlement agreements on public policy grounds—for example, because a manufacturer might get  to continue selling a defective product.

“The problems with Mary Carter settlements, however, are generally more serious—and more widely criticized,” Ethox continued. “There is a real risk that the jury will be misled. Mary Carter settlements hide a motive for the settling defendant to give testimony against a codefendant.”

“What if we disclose the agreement?” Paradox asked.

“Then the agreement probably would be acceptable,” Ethox answered. “The ethical concerns are reduced, because the jury knows exactly what is happening. But a few states, like Texas, have rejected Mary Carter–type settlements even when the trial court knew of the settlement, informed the jury, and took other steps (such as realigning parties) to reflect that a settling defendant is now working with the plaintiff.”

“What if we don’t want to disclose?”

“Then you may need to avoid a Mary Carter agreement. There may be other solutions, for example, a high-low settlement,” Ethox offered. “In such an agreement, the parties agree that a settling defendant will pay an unspecified amount, but that amount will be between a high ‘ceiling’ and a low ‘floor.’ As long as the numbers are real—that is, there is no sham amount used to hide what is really a Mary Carter agreement—most jurisdictions allow such a settlement to be kept from a fact finder.

Ethox continued, “If Jay entered a settlement and was dismissed from the case, Jay and Kaye can also agree that Jay will receive a reduction in any amount owed based on Kaye’s recovery against codefendants. This type of settlement, referred to as a Pierringer settlement, named after Pierringer v. Hoger (124 N.W.2d 106 (Wis. 1963)), generally does not pose ethical problems.”

“Well, I guess we will need to talk to Kaye to tweak our settlement,” Paradox sighed.

 

Michael Downey

The author is with Armstrong Teasdale, LLP, St. Louis, and teaches legal ethics at Washington University School of Law. Please send feedback or questions for future columns to mdowney@armstrongteasdale.com.