Grillo v. Burke's Paint Co., Inc.

• Decision Date: 01 July 1976
• Docket Number: B--G
• Citation: 275 Or. 421,551 P.2d 449
• Parties: Robert GRILLO, dbaPaint Co., Respondent, v. BURKE'S PAINT COMPANY, INC., a Washington Corporation, Respondent, E. I. du Pont de Nemours and Company, a Delaware Corporation, Appellant.
• Court: Oregon Supreme Court

Page 449

551 P.2d 449

275 Or. 421

Robert GRILLO, dba B--G Paint Co., Respondent, v. BURKE'S PAINT COMPANY, INC., a Washington Corporation, Respondent,

E. I. du Pont de Nemours and Company, a Delaware

Corporation, Appellant.

Supreme Court of Oregon.

Argued and Submitted March 1, 1976.

Decided July 1, 1976.

Cleveland C. Cory, Portland, argued the cause for appellant. With him on the briefs were Clarence R. Wicks, and Davies, Biggs, Strayer, Stoel & Boley, Portland.

Edwin J. Peterson, Portland, argued the cause for respondents. With him on the brief for respondent Burke's Paint Company were E. Richard Bodyfelt, and Tooze, Kerr, Peterson, Marshall & Shenker, Portland, and Ronald L. Miller, Astoria, for respondent Grillo.

Before DENECKE, P.J., and HOLMAN ^*, TONGUE, HOWELL and BRYSON, JJ.

HOWELL, Justice.

Plaintiff Grillo, doing business as B--G Paint Co., brought this action for damages against defendant Burke's Paint Company and defendant E.I. du Pont de Nemours (de Pont). Plaintiff had a contract with the State of Oregon to paint the Youngs Bay bridge in Clatsop County. Plaintiff purchased the paint from defendant Burke's, who had mixed it according to specifications which had been supplied to Burke's along with the specified pigment by defendant du Pont. The paint supplied by defendants was defective in that the pigments used were incompatible with each other and the paint turned yellow instead of remaining the required green. As a result, the State of Oregon required plaintiff to repaint the bridge using proper paint. Plaintiff's complaint charged defendant Burke's with breach of warranty and charged defendant du Pont with negligence in failing to discover and warn of the defect. The parties stipulated that plaintiff's damages amounted to $36,500, and a jury returned a verdict against both defendants. Defendant du Pont filed a motion for a new trial which was denied, and defendant du Pont appeals.

Du Pont contends that it was entitled to a new trial on the basis of newly-discovered evidence. Du Pont alleged in its motion that it discovered after the trial that plaintiff and defendant Burke's had entered into an agreement entitled 'Loan, Receipt and Covenant Not to Execute' immediately before the trial. It is conceded that this agreement was not made known to counsel for du Pont or to the trial court at the time of trial. The agreement recited the problems with the paint and declared that although plaintiff and Burke's could not agree on the amount of plaintiff's damages, they did agree that the problems with the paint were primarily caused by du Pont's negligent provisions of erroneous formulae and paint ingredients. The agreement then stated:

'LOAN, RECEIPT AND COVENANT NOT TO EXECUTE

'In consideration of the loan of the sum of $16,000 paid to GRILLO, by and in behalf and for BURKE'S, * * * which loan shall be without interest and repayable only in the event and to the extent of any recovery that GRILLO may make from any other person, persons, corporation, corporations, parties, or other legal entities other than BURKE'S on account of or in any way growing out of the aforedescribed events and problems with the described paint, GRILLO covenants * * * to irrevocably bind himself * * * to forever refrain from executing upon or otherwise enforcing * * * any judgment which may hereafter be entered in any court in favor of GRILLO and against BURKE'S and which arises out of the above described claims. * * *

'* * *

'FUTURE ACTION

'A. GRILLO expressly declares his intent and hereby covenants to prosecute with all due diligence that certain action pending in the Clatsop County Circuit Court for the state of Oregon entitled ROBERT GRILLO dba B-G PAINT COMPANY vs BURKE'S PAINT COMPANY INC. and E. I. DUPONT DE NE MOURS & COMPANY, No. CC 74--211, and shall exercise all reasonable efforts to obtain and collect the judgment, or settlement, in that action or otherwise, for the maximum recoverable damages arising from the above described delays and extra work and damages.

'B. GRILLO hereby covenants and agrees to exercise all reasonable efforts to aid and assist BURKE'S in the sucessful prosecution of BURKE'S indemnity claims against DUPONT, and GRILLO shall comply in all reasonable respects with requests to that end.

'C. In the event that any sums in excess of $16,000 are recovered (by judgment, settlement or otherwise) by GRILLO from DUPONT, or any other person or entity, in compensation for GRILLO'S damages above described, GRILLO hereby agrees to pay over to BURKE'S $16,000 thereof in repayment of the aforedescribed loan. All such sums recovered which do not exceed $16,000 shall be promptly payable to BURKE'S in partial payment of said loan. BURKE'S shall be vested with a lien in the amount of $16,000 against any and all sums which GRILLO might hereafter recover for said damages, until such time as the $16,000 loan is repaid to BURKE'S.'

The above agreement combines the features of a loan agreement with a covenant not to enforce or execute any judgment rendered in favor of plaintiff and against defendant Burke's. The loan is to be repaid only out of the proceeds of a judgment against defendant du Pont. The net effect of the agreement is to limit Burke's liability and to assure plaintiff of a recovery of at least $16,000. Since plaintiff is required to enforce any judgment against du Pont alone and to pay $16,000 of the proceeds thereof over to Burke's in repayment of the loan, the ultimate effect of a judgment for the full amount, $35,500, against both defendants is that du Pont will be forced to pay the entire judgment and Burke's will receive back everything that it has previously paid out. Moreover, under the terms of this agreement, the plaintiff's case against Burke's was not dismissed, and, in fact, Burke's continued to participate throughout the case as a party defendant.

Private agreements which constitute a partial settlement of a dispute between a plaintiff and two or more defendants and which retain the settling defendant as a party at the trial have become known as 'Mary Carter agreements.' ¹ Such agreements may take on various forms depending upon the factual setting in an individual case and the underlying law in the particular jurisdiction.

Mary Carter agreements have been criticized as distorting the relationship between plaintiffs and defendants, resulting in a nonadversary and possibly collusive proceeding between the plaintiff and one defendant which may adversely affect the non-settling defendant's right to a fair trial. See Note, The Mary Carter Agreement--Solving the Problems of Collusive Settlements in Joint Tort Actions, 47 S.Cal.L.Rev. 1393 (1974). But see Northern Indiana Public Ser. Co. v. Otis, 145 Ind.App. 159, 250 N.E.2d 378 (1969). At least two courts have held such agreements to be void or against public policy. Trampe v. Wisconsin Telephone Co., 214 Wis. 210, 252 N.W. 675 (1934) ², and Lum v. Stinnett, 87 Nev. 402, 488 P.2d 347 (1971).

However, the majority of jurisdictions which have considered this question do not condemn the agreements as invalid per se but instead require that the agreements be subject to pretrial disocvery procedure and be admissible into evidence on request of any non-settling defendant. See e.g., Kuhns v. Fenton, 288 So.2d 253 (Fla.1973); Ward v. Ochoa, 284 So.2d 385 (Fla.1973); Pellett v. Sonotone Corporation, 26 Cal.2d 705, 160 P.2d 783 (1945); Annot., 62 ALR3d 1111 (1975); Note, supra at 1409. Such courts generally recognize that an agreement between one of two or more defendants and the plaintiff, whereby the defendant 'loans' the plaintiff a certain sum which is to be repaid only to the extent of any recovery against the other defendants, creates a valid and enforceable loan, even when coupled with a covenant not to sue or a covenant not to execute on the settling defendant. See, e.g., Reese v. Chicago, Burlington & Quincy R.R., 55 Ill.2d 356, 303 N.E.2d 382 (1973); American Transport Co. v. Central Indiana Ry. Co., 255 Ind. 319, 264 N.E.2d 64 (1970); Annot., supra at 1121. But see Bolton v. Ziegler, 111 F.Supp. 516 (ND Iowa 1953); Cullen v. Atchison, Topeka & Santa Fe, 211 Kan. 368, 507 P.2d 353 (1973); Monjay v. Evergreen School District No. 114, 13 Wash.App. 654, 537 P.2d 825 (1975). ³ Some courts have even declared that the loan agreements have a salutory effect as they encourage out-of-court settlements and help solve the economic needs of an injured person confronted with the delays in the court system. Northern Indiana Public Ser. Co. v. Otis, supra; Reese v. Chicago, Burlington & Quincy R. R., supra.

Having reviewed these authorities, we conclude that the loan agreement and covenant not to execute in the instant case is valid and enforceable but that it would have been subject to pretrial discovery and, upon request of defendant, would have been admissible in evidence. ⁴ However, du Pont made no effort to discover the existence or the terms of the agreement despite the fact that it had been repeatedly informed by Burke's that it intended to settle with plaintiff. De Pont may not have actually known of the particular kind of settlement which was contemplated, but, under the circumstances of this case, du Pont should have been aware that Burke's was attempting to protect itself from...