Mercury Finance Co. dispelled a major cloud hanging over it by settling an expensive court case in Alabama.

Mercury, the country's largest sub-prime auto lender, apparently settled the case known as Johnson v. Mercury Finance for less than $1 million.

Last July, a jury in Barbour County, Ala., had awarded the plaintiff, Willie Ed Johnson, a whopping $50 million in punitive damages and $90,000 in compensatory damages.

Northbrook, Ill.-based Mercury and Mr. Johnson reached their agreement in January after a higher state court reduced the damage award to $2 million and accepted Mercury's motion for a new trial.

The finance company did not disclose terms of the settlement but said it would expense all its costs in the first quarter and still report record earnings.

Mercury earned $19.6 million, or 17 cents a share, in the first quarter of 1994.

Katrina Blecher, an analyst at Gruntal & Co., said Mercury's settlement costs were less than the company would have had to spend pursuing the litigation.

Mercury spent nearly $2 million defending itself against the charges last year.

The case involved a $4,000 used-car loan that Mercury made to Mr. Johnson in November 1991. Mr. Johnson's attorneys argued that Mercury had applied improper finance charges to the loan.

Joseph A. Jolson, an analyst at San Francisco-based Montgomery Securities, said Mercury faces continuing legal bills from "copycat" cases, including one filed in the same Alabama county. "It's always going to be a risk of their doing business," he said.

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