Opinion ID: 894515
Heading Depth: 2
Heading Rank: 5

Heading: Pass-Through v. Assignment of Claims

Text: The City argues that pass-through claims resemble certain assignments of claims resulting in litigation between nominal adversaries that is purposely skewed to obtain a judgment against a common foe. We held in State Farm Fire and Casualty Co. v. Gandy, 925 S.W.2d 696 (Tex.1996), that such assignments are invalid for two reasons. First, rather than put matters to rest, assignments of this sort spur additional and often more caustic litigation. 925 S.W.2d at 712-13. Second, assignments of this nature distort litigation by causing parties to take positions that appear contrary to their natural interests. Id. We identified similar concerns when rejecting Mary Carter agreements in Elbaor v. Smith, 845 S.W.2d 240, 250 (Tex. 1992), noting that assignments bearing these characteristics are disfavored in Texas. What was disconcerting about assignments in those contexts is less evident in the context of pass-through claims. The pass-through claim certainly does not increase litigation and even tends to reduce it by rendering unnecessary a suit between the subcontractor and the contractor for the damages caused by the owner. Furthermore, in a pass-through situation, any settlement by the owner is a full and final settlement because the subcontractor promises to release the contractor from liability to the extent the contractor presents the subcontractor's claim and renders any recovery to the subcontractor. Passthrough claims also avoid the problem presented when one defendant settles while the other remains partially liable, necessitating an additional settlement or further litigation. These features of pass-through claims facilitate efficient litigation, unlike the assignments we invalidated in Gandy. We are cognizant that pass-through claims distort litigation to a degree. For the owner to be liable to the subcontractor, the contractor must also be liable to the subcontractor. In a suit by the subcontractor against the contractor, the contractor would ordinarily be inclined to deny liability. In a suit on a pass-through claim, because the contractor asserts that the owner is liable to the subcontractor, the contractor's position must be that it, too, is liable to the subcontractor. By taking a position contrary to its apparent interest, the contractor's credibility may be enhanced. In short, pass-through claims put the contractor on the side of the subcontractor and against the owner when otherwise that would often not be in the contractor's best interest. This distortion of positions is similar to the concern we raised in Gandy. Nevertheless, for several reasons, we think this concern does not warrant prohibiting pass-through claims. For one thing, the contracting industry has become comfortable with pass-through claims as an efficient means of dispute resolution. As we have noted, such claims have long been allowed against the federal government and are permitted in every state that has considered the issue but one. Moreover, the allowance of pass-through claims does not make the contractor a mere pawn for the subcontractor. If the contractor disputes the merits of its subcontractor's claims, it is entitled to (1) refuse to enter into a pass-through arrangement with the subcontractor, or (2) refuse to pursue the subcontractor's claims against the owner. In the latter case, the subcontractor could assert its claims directly against the contractor as the release only applies to claims for which the owner may be responsible and that the contractor actually asserts against the owner. Pass-through claims are also unlike Mary Carter assignments in which the assignee is at least partly responsible for the damages sought. See Int'l Proteins Corp. v. Ralston-Purina Co., 744 S.W.2d 932, 934 (Tex.1988) (concluding that it is contrary to public policy to permit a joint tortfeasor the right to purchase a cause of action from a plaintiff to whose injury the tortfeasor contributed). With passthrough claims, the claims asserted by the contractor are not contingent on the value of claims the subcontractor may have against the contractor. Instead, the claims are presented directly to the party ultimately responsible. In this way, passthrough claims avoid the concerns inherent in Mary Carter agreements because they do not create a false impression of adversity between the contractor and subcontractor. See Elbaor, 845 S.W.2d at 249. Furthermore, while a plaintiff in a Mary Carter agreement risks no increased exposure due to the settlement with the defendant, a contractor exposes itself to counterclaims by the owner and to cross-claims by potential third parties and to penalties assessed by the court. See Tex.R. Civ. P. 51(a); Allison v. Arkansas La. Gas Co., 624 S.W.2d 566, 568 (Tex.1981). Although the contractor may elect to delegate to the subcontractor the cost of prosecuting the subcontractor's claim, the entity named in the suit is the contractor. As such, the contractor submits to the jurisdiction of the court and risks exposure to an adverse judgment. This risk may not be sufficient in itself to justify recognition of passthrough claims or to eliminate the concern that owners will be subject to more litigation by contractors who appear to have little to lose by passing through claims. But alignment with a majority of jurisdictions recognizing pass-through claims, combined with the reduction of unnecessary litigation, outweighs that concern. Accordingly, we decline to require instigation of separate litigation merely to provide the contractor standing if the contractor agrees to pursue the subcontractor's claims on a pass-through basis. See Howard Contracting, 83 Cal.Rptr.2d at 602.