An Assignment of a cause of action is useful where the cause of action is more valuable in the assignee’s hands. For example, a defendant who just lost a jury trial may lack the appetite or resources for a fight with the insurance company who wrongfully denied coverage to that defendant for the plaintiff’s claims. In this instance, the recovery from the insurance company may simply pass through to the plaintiff and the plaintiff’s only source of compensation may be the insurance company. Under this circumstance, an assignment of the defendant’s cause of action against the insurance company to the plaintiff in exchange for the plaintiff’s covenant not to execute the judgment against the defendant may increase both parties’ net economic position.
Assignments typically involve a contractual conveyance by the owner to another of 100% of a cause of action, including all associated rights such as the right to control litigation. Assignments are governed by contract and property law, as well as public policy. An assignment of a cause of action is a conveyance of personal property. Since a cause of action is property, a sale can be structured in the same manner as similar real property or business transactions. The general rule is that all of a cause of action is assignable. However, parties may agree the only parts of the cause of action will be assigned. Components of a cause of action include the right to the proceeds, the right to control the litigation, and the right to accept or reject settlement among others. Once a successful assignment is made, the assignor loses control of the rights assigned.
However, there are limits on assignments of causes of action. In State Farm Fire and Casualty Co. v. Gandy, 925 S.W.2d 696, 706 (Tex. 1996), the Texas Supreme Court voided an assignment in a settlement agreement by an insured defendant to a plaintiff against the insurance company on public policy grounds. The Court held that a defendant’s assignment of his claims against his insurer to a plaintiff is invalid if (1) it is made prior to an adjudication of plaintiff’s claim against the defendant in a fully adversarial trial, (2) the defendant’s insurer has tendered a defense, and (3) either (i) defendant’s insurer has accepted coverage, or (ii) defendant’s insurer has made a good faith effort to adjudicate coverage issues prior to the adjudication of plaintiff’s claim. But the Court made clear that, in no event, is a judgment for plaintiff against defendant, rendered without a fully adversarial trial binding on defendant’s insurer or admissible as evidence of damages in an action against defendant’s insurer by the defendant or the plaintiff as defendant’s assignee.
The assignment in Gandy was found to violate many of these principles. The settling parties in Gandy made an agreed $6 million judgment without notice to the insurance company and the parties reversed key pre-settlement sworn testimony. The Court voided the settlement and the assignment because it prolonged and skewed the litigation against the insurance company. However, Gandy did not approve of all types assignments of claims against insurance companies that meet these requirements. Texas is one of a few jurisdictions willing to enforce non-assignment clauses in an insurance policy after a loss occurs. Many policies have an anti-assignment clause. Texas law provides that parties may agree to an anti-assignment clause in a contract, and such a clause is enforceable.
Other types of assignments have also been held invalid. In Elbaor v. Smith, 845 S.W.2d 240 (Tex.1992), the Court declared Mary Carter agreements void because they allowed one defendant, not the plaintiff, to become the real party in interest in the litigation. A Mary Carter agreement is any settlement arrangement between the plaintiff and one or more of the defendants in the case by which the settling defendant(s) agree to pay the plaintiff a certain amount of money and to participate in the trial against the nonsettling defendants. In return, the plaintiff agrees to release the settling defendants from liability and, if the judgment against a nonsettling defendant is large enough, to repay the settlement amount paid to the plaintiff.
Similarly, in International Proteins Corp. v. Ralston-Purina Co., 744 S.W.2d 932 (Tex. 1988), the Court held a settling defendant may only settle its proportionate share of liability. A defendant may not settle the entire liability, take an assignment of the Plaintiffs’ claims, and seek judgment for the full amount of the Plaintiffs’ claims from non-settling defendants.
Another extreme example of limitations on assignments is a legal malpractice claim. Texas Courts are against allowing anyone other than the client to sue their lawyer, absent very special circumstances. Courts will not allow assignment of a legal malpractice claim to an opposing litigant. However, the Texas Supreme Court has never held that an assignment of a 40% contingent fee from the proceeds of a legal malpractice claim to the plaintiff’s lawyer is against public policy.
DISCLAIMER Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. The Law Office of Stephen O’Rear, P.C. does not represent any person unless and until it is retained and agrees to provide such representation in writing.