Sleeping with the enemy: limitation agreements, are they legal?

• Author: Farnell, R.H., II
• Position: Florida

Florida courts should not undermine the settlement of civil actions by holding litigation loan agreements champertous or invalid Mary Carter agreements.

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 "litigation loan." The litigation loan is to be used by the plaintiff 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. Typically, 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 champertous(1) or invalid Mary Carter agreements?(2)

Champerty

By 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...