Champerty Assignments

Litigation Funding and the Law of Champerty

July 1, 2010 • NYPRR Archive


By Lazar Emanuel[Originally published in NYPRR July 2010]

 

Does the exchange of questions and answers between the Second Circuit Court of Appeals and the New York Court of Appeals in Trust v. Love Funding, decided in January 2010, put at jeopardy the burgeoning litigation finance industry, at least in New York? In their exchange, both Courts were so careful to limit their comments to the precise facts before them, that we are left to wonder how they would respond to a commercial transaction by a company in the business of arranging alternative litigation financing (ALF), i.e., a company of investors with no proprietary interest in the matter but which funds the costs of a litigation by an unrelated plaintiff with a claim for patent infringement, or by a patient with a claim for medical malpractice; in other words, a company in the business of acquiring a financial interest in a litigation, other than the plaintiffs, the defendants, their lawyers, and their insurers.

The facts of Trust v. Love Funding are critical to our discussion. Love Funding made a loan of $6.4 million dollars to one of its customers, secured by a mortgage on property in Louisiana. The loan was assigned by Love Funding to Paine Webber Real Estate Securities, Inc. Paine Webber sold the Louisiana loan to Merrill Lynch Mortgage Investors, Inc., as part of a larger securities transaction involving numerous mortgage loans. Paine Webber made a series of representations to Merrill Lynch, including a representation that payments on the Louisiana loan were current. (Love Funding had made the same representation to Paine Webber) The Paine Webber loans were securitized by Merrill Lynch under a pooling and service agreement which created a Trust for the holders of pass-through Merrill Lynch certificates.

UBS then acquired the interests of Paine Webber in all the loans purchased by Merrill Lynch.

When UBS defaulted on some of the loans, the Trust sued UBS. UBS settled the suit by agreeing to take two separate steps. First (of no concern to us here), UBS agreed to pay the Trust $19,375,000 million for 32 Paine Webber loans unrelated to Love Funding. Second, on the Love Funding loan, UBS assigned to the Trust the right to sue Love Funding for the misrepresentations in Love Funding’s original loan application. Thus, the sole consideration from UBS to the Trust for the Love Funding loan was the assignment to the Trust of the UBS rights under the original mortgage loan. Armed with the assignment, the Trust commenced a suit for misrepresentation against Love Funding.

Reducing these facts to their essentials, we have:

1. The right of Paine Webber to sue for fraud by Love Funding;

2. The purchase of multiple Paine Webber loans by the Merrill Lynch Trust;

3. Acquisition by UBS, successor to Paine Webber, of the right to sue Love Funding;

4. Suit by the Merrill Lynch Trust against UBS for defaults on the Paine Webber loans;

5. Settlement of suit in part by assignment to Trust of UBS right to sue Love Funding.

 

None of these facts involves a party in the business of arranging litigation financing. All of the parties were in the business of arranging and supplying loans and financing in the ordinary course of business. Why then, all the attention to the law of champerty and to §489 of the Judiciary Law?

In the suit by the Trust against Love Funding, Trust v. Love Funding, 499 F. Supp. 2d 314 (S.D.N.Y. 2007), District Court Judge Shire A. Scheindlin determined that the assignment to Merrill Lynch by Paine Webber of the Louisiana loan was champertous and entered judgment in favor of Love Funding.

On appeal by the Trust, the Second Circuit Court of Appeals confronted the need to review and apply New York’s law on champerty and maintenance. New York’s Judiciary Law §489 provides (in pertinent part):

§489. Purchase of claims by corporations or collection agencies.

349o corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.

Confronting a statute which is the epitome of legal obfuscation and ambiguity, the Second Circuit demurred and lateraled the issue over to the New York Court of Appeals for clarity and direction. [Trust v. Love Funding, 556 F.3d at 114.]

Because of ambiguities in the scope of New York’s statutory proscription of champerty, see N.Y. Judiciary Law §489, we certified certain questions to the New York Court of Appeals.

The questions certified by the Circuit Court to the Court of Appeals were:

1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law §489(1), or must there be a finding of “sole” intent?

2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?

3. (a) as a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?

3. (b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor’s indemnification rights for reasonable costs and attorneys’ fees?

The Second Circuit asked the New York Court of Appeals specifically whether, assuming the truth of the facts alleged by the Trust in its complaint against Love Funding, the assignment to the Trust could be construed as champertous. The Second Circuit’s instructions to the N.Y. Court were:

The Court of Appeals may answer these questions in whatever order it deems best to assist this court in determining whether the facts of this case demonstrate champerty. …

The Law of Champerty

The law of champerty and maintenance traces its origin to the earliest periods of English history. It was the practice for men of title and wealth to buy up and collect the claims of the poor and indigent. To protect the interests of the rightful claimants, Parliament declared champerty a crime and all agreements of champerty void. As one modern English judge has defined it:

In modern idiom maintenance is the support of litigation by a stranger without just cause. Champerty is an aggravated form of maintenance. The distinguishing feature of champerty is the support of litigation by a stranger in return for a share of the proceeds.

More recently, the Supreme Court of Ohio has said:

The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law. [Rancman v. Interim Settlement Funding Corp., 789 N.E.2d. 217, 219-220 (Ohio 2003).]

No New York statute and no recent decision by a New York court have defined champerty in precisely this way. If such a restrictive definition were adopted, it might spell the end of the nascent business of litigation funding. Instead, the New York courts have skirted the litigation funding issue by focusing on a much narrower issue, which may be stated as follows: Does it constitute champerty to permit a party who purchases an existing interest in the outcome of a law suit to pursue his claim by bringing or funding the law suit?

In any event, the Love Funding case raised issues of champerty not in the context of litigation funding, but in the context of the assignment of claims in the distressed debt and secondary loan market. In view of the pressures on that market, the courts would obviously be chary of any decision to hinder the enforcement of rights by existing creditors.

The Court of Appeals Responds

Responding to the questions certified by the Second Circuit, the Court of Appeals (Pigott, J.) reviewed the facts of Love Funding in detail and announced:

We hold that a corporation or association that takes an assignment of a claim does not violate Judiciary Law §489(1) if its purpose is to collect damages, by means of a lawsuit, for losses on a debt instrument in which it holds a pre-existing proprietary interest (emphasis added).

Further:

We answer the second certified question, and both parts of the third certified question, in the negative. Because — as the Second Circuit itself hinted — “the critical issue to assessing the sufficiency of the champerty finding is not the denomination of the Trust’s intent as ‘primary’ or ‘sole,’ but the purpose behind its acquisition of rights that allowed it to sue Love Funding” [556 F.3d at 111], we find it unnecessary to answer the first certified question.

Judge Pigott then discussed the impact of Judiciary Law §489 on the enforcement of contractual and proprietary rights. We summarize Judge Pigott’s chain of reasoning as follows: (We have repeated (and/or paraphrased) and numbered his points for the reader’s convenience. Each of the points is supported by a string of cases cited by the Judge.)

1. The doctrine of champerty developed “to prevent or curtail the commercialization of or trading in litigation.”

2. Sections 488 and 489 of the Judiciary Law derive from Sections 274 and 275 of the former Penal Law.

3. Section 275 was intended to apply to corporations and associations restrictions on litigation that had always governed lawyers.

4. Neither a corporation or association — nor a lawyer (Section 488) — may “solicit, buy or take an assignment of … a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.”

5. The champerty statutes are directed at preventing the “strife, discord and harassment” that would be likely to ensue “from permitting attorneys and corporations to purchase claims for the purpose of bringing actions thereon.”

6. In describing champerty in terms of an acquisition made with the purpose of bringing a lawsuit, we (i.e., the Court of Appeals) intended to convey the difference between one who acquires a right in order to make money from litigating it and one who acquires a right in order to enforce it.

7. New York cases agree that if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation. The inquiry into purpose is a factual one.

8. The champerty statute does not apply when the purpose of an assignment is the collection of a legitimate claim. What the statute prohibits, as the appellate Division stated over a century ago, “is the purchase of claims with the `intent and for the purpose of bringing an action’ that. … may involve parties in costs and annoyance, where such claims would not be prosecuted if not stirred up … in [an] effort to secure costs.”

9. In the present case … the Trust, as the holder of the … Loan and the party that would directly suffer the damages of any default on that loan, had a pre-existing proprietary interest in the loan… If, as a matter of fact, the Trust’s purpose in taking assignment of UBS’s rights … was to enforce its rights, then, as a matter of law, given that the Trust had a pre-existing proprietary interest in the loan, it did not violate Judiciary Law §489(1).

 

Back to the Circuit Court of Appeals

After the New York Court of Appeals answered the Second Circuit’s questions, all parties to the action in the Second Circuit agreed that Judge Scheindlin had “applied a more expansive definition of champerty than was warranted.” Defendant Love Funding, which wanted to preserve Judge Scheindlin’s original finding of champerty, urged the Second Circuit to remand the matter to the trial court with instructions to determine whether any of the answers by the New York Court of Appeals would support a finding of champerty. Plaintiff Trust, on the other hand, asked the Second Circuit to reverse Judge Scheindlin’s decision entirely, as a matter of law. The Second Circuit agreed with the Trust and stated, “This effectively rejects the district court’s finding of champerty.”

However, in the process of answering the Second Circuit, the New York Court of Appeals injected a few words and phrases which make unclear how it would respond to a set of facts describing succinctly a dispute arising out of an instance of alternative litigation funding. Judge Pigott wrote, at various places in his opinion (with emphasis added):

[New York’s champerty statute] “does not apply when the purpose of an assignment is the collection of a legitimate claim.”

“If a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.”

“If, as a matter of fact, the Trust’s purpose in taking assignment of UBS’s rights. … was to enforce its rights, then, as a matter of law, given that the Trust had a pre-existing propriety interest in the loan, it did not violate Judiciary Law §489(1).”

“In describing champerty in terms of an acquisition made with the purpose of bringing a lawsuit, we intended to convey the difference between one who acquires a right in order to make money from litigating it and one who acquires a right in order to enforce it.”

By inserting the words and phrases we have emphasized, did the Court of Appeals mean to say:

• Does the fact that a claim is legitimate insulate an assignment of the claim from a claim of champerty?

• Is a party’s intent to enforce a claim through litigation always irrelevant to a claim of champerty?

• Is litigation to collect a pre-existing proprietary interest always immune from a claim of champerty?

• Does the intent to make money by acquiring a right and then litigating it for profit always constitute champerty?

We may not know the answers to these questions definitively until some litigant claims the defense of champerty against a source of alternative litigation financing. But decisions from the Nassau County Supreme Court and the Ohio Supreme Court, to which I now turn, are instructive.

Litigation Financing — Is It Champerty?

In a 2003 issue of the ABA Journal, a commentator on litigation financing described the growth of the industry in this way:

The past several years have seen a dramatic increase in companies that extend funding to plaintiffs. …during the course of litigation. … What they offer is ‘non-recourse’ funding, meaning that if the case loses at trial or is overturned on appeal, the client is not obligated to reimburse the funder. The loan usually is at a very high rate of interest. Some companies collect a flat sum; others receive a percentage of any final award or settlement.

Since that report, of course, the industry has grown even more, especially because large insurers and investors continue to enter the market.

LawCash, a typical source of litigation funding, has offices in New York and Florida, and calls itself “The nation’s Leading Provider of Litigation Financing, Plaintiff Funding, and Attorney Funding.” Its web site (www.lawcash.net) describes LawCash’s services as follows:

• Pre-Settlement Litigation Financing… Advances for plaintiffs and attorneys including Case Cost Funding

• One Hour Funding® — Litigation Financing for plaintiffs and attorneys who have reached a settlement in any lawsuit

• Pre- and Post-Settlement funding is non-recourse. If you lose your case, you owe us nothing

• Structured Attorneys Fees

• Law Firm Loans, Attorney Lines of Credit, and Case Cost Line of Credit for attorneys

• No credit check for plaintiffs

The services supplied by LawCash were the focus of the court’s opinion in Echeverria v. Estate of Lindner [2005 N.Y. Slip Op. 50675u, 2005 N.Y. Misc. LEXIS 894 (Mar. 2, 2005)]. That case, which was an inquest into the facts to determine plaintiff’s personal-injury damages, gave Nassau County Supreme Court Judge Ira B. Warshawsky an opportunity to discuss the relationship between champerty and litigation funding. In Echeverria, LawCash advanced the sum of $25,000 to plaintiff Echeverria, a day laborer at a construction site who had sustained serious injuries in a fall from a scaffold.

Under its contract with Echeverria, LawCash would receive nothing if Echeverria’s claim was unsuccessful. If his claim succeeded, however, LawCash would receive interest on its advance of $25,000 at 3.85% per month, compounded monthly. Judge Warshawsky called this agreement “obviously usurious,” as well as one that “may or may not also constitute Champerty.”

In the end, however, Judge Warshawsky decided that the LawCash advance did not constitute champerty as defined in §489. “[T]he primary purpose and intent of funding Mr. Echeverria the $25, 000 and charging 3.85% interest,” the judge said, “was not to take action on their claim to the judgment, but to make a profit from their loan/investment.”

Judge Warshawsky also analyzed the case of Rancman v. Interim Settlement Fund [99 Ohio St. 3d 121 (Ohio 2003), supra]. Rancman began as a lawsuit by a woman against her insurance company. After starting her suit, the woman asked a company named Interim Settlement Funding Corp. for an advance secured by her claim. Interim gave her an advance of $6,000, to be repaid by the sum of $16,800 if she recovered within 12 months, and an additional sum if her recovery were delayed. The Ohio Supreme Court held the agreement void under Champerty and maintenance. Judge Warshawsky distinguished Rancman as follows (with all citations omitted):

While the facts and the agreements made by Interim and LawCash are very similar, it is not the facts that account for the differences of opinion, but rather it is the different law of the different states which allow us to differ in our conclusions. … [T]he Ohio decision is based on Ohio precedent that the assignment of rights in a lawsuit can be void as Champerty. Under New York law these assignments are allowed as long as the primary purpose and intent of the assignment was for some reason other than bringing suit on that assignment. Therefore under Ohio law, taking an assignment of a judgment for profit by itself is enough to constitute Champerty, while under New York law the primary purpose and intent of taking the assignment would be to profit, and not to bring suit, which would prevent this action from being Champerty. Resting on the language of Judiciary Law 489 and the purpose and intent requirement, the Court is comfortable finding that the instant agreement is not Champerty.

All this being said, the court feels that the Ohio Supreme Court would agree with the statement that Champerty law was not written to deal with the situation that has developed from this modern form of business which advances plaintiffs’ funding for their lawsuit in exchange for a portion of the judgment. The Ohio court in Rancman noticed that Champerty law has historically been used in cases where attorneys themselves have been Champertors.

I disagree with Judge Warshawsky’s perception of the history and purpose behind the law of champerty. It was indeed written to deal with the situation that results when an otherwise uninvolved but profit-driven third-party agrees to fund a lawsuit.

As a commentator on issues affecting lawyers, I regret that our courts have skirted the issues raised by “alternative” or third-party litigation funding. As the capital of the legal profession, New York has become also the capital for companies offering litigation funding.

Here are some of the questions I would ask. These questions have been answered in a variety of ways in other states (see, Rancman, supra), but not in New York.

1. Is litigation funding by a source that is not a party to a litigation legal? (This question was dodged by the NYSBA in Opinion 769, 11/4/03.)

2. Is litigation funding that provides a return to the source of funding in excess of the legal usury rate lawful and/or proper?

3. Is usury an element in champerty?

4. Recognizing that some plaintiffs (e.g., plaintiffs with claims for personal injury or for malpractice) may not have the funds to recover on their claims, shall we authorize litigation funding only in specified causes of action?

5. In the funding of litigation, is there a difference between loans to litigants with a specified interest rate and the purchase of a contingent interest in the recovery or settlement of the litigation?

6. If the source of the litigation funding purchases a contingent interest, is that interest limited to a specified portion of the lawyer’s contingent fee, or can it extend to a specified portion of the client’s recovery?

7. What is the proper relationship between the lawyer for a litigant and a potential source of litigation funding? (This has many elements and requires careful analysis and rule-making.)

 

The pressures for litigation funding are increasing. Some observers have suggested that funding be permitted in all civil cases requiring help for a litigant without sufficient funds to sustain the action himself, or even in those cases in which the costs of litigation cannot be estimated.

In any event, we need to impose some limits and standards before the litigation funding industry grows beyond our control. Who will take the lead — the courts, the legislature, the State Bar? Or is this a subject requiring extended debate and agreement on public policy?


Lazar Emanuel is the publisher of NYPRR

DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.

ChampertyLazar EmanuelLitigation Funding

Related Posts

About the Author: admin

« Courts Amend Rule 6.4, Removing Big ChillCan Screening Cure Conflicts? Yes and No »

      As seen in DRI, The Voice of the Defense Bar

I.       Introduction 

        Champerty and maintenance are common-law doctrines, often referred to as “antique laws,” which have long prohibited the outside financing of litigation. Maintenance is the act of a disinterested party to promote, encourage, or maintain a lawsuit. Dictionary of Law (6th ed.). London: Longman. p. 260. ISBN 0-582-43809-8. Champerty is a form of maintenance – referred to as maintenance for profit – and is defined as a “bargain between a stranger and a party to a lawsuit by which the stranger pursues the party’s claim in consideration of receiving part of any judgment proceeds.” BLACK’S LAW DICTIONARY 231 (6th ed. 1990) (citing Alexander v. Unification Church, 634 F.2d 673, 677 (2d. Cir. 1980). Some may argue that soliciting personal injury suits or assignment of malpractice claims constitutes champerty. See Frank v. Tewinkle, Pa. Super. Ct., 45 A.3d 434 (Pa. Super. Ct., 2012). 

        The doctrines of champerty and maintenance date back to the middle ages, and some argue as early as the ancient Greece and ancient Roman eras. Jason Lyon, Revolution in Process: Third-Party Funding of American Litigation, 58 UCLA LAW REVIEW 571 (2010). In the Middle Ages, bringing suit was viewed as aggressive and cantakerous behavior that cut against Christian values. Over time, there has been a shift in individuals’ attitudes towards litigation, and the doctrines of champerty and maintenance began to decline. Id. Today, jurisdictions are split as to whether they enforce common law prohibitions against champerty and maintenance. One thing is clear, however, that third-party litigation funding is on the rise.

II.     Litigation Funding Groups 

        Third-party funding began in Australia, made its way to the United Kingdom, and is now becoming more prevalent in the United States. See Belated ‘Clean Up’ for Litigation Funders in Australia, U.S. Chamber of Commerce, (Sept. 17, 2014): http://www.instituteforlegalreform.com/resource/belated-clean-up-for-litigation-funders-in-australia/. (Discussing that Australia has begun to reform its litigation funding industry); See also Lisa Bench Nieuveld, Third Party Funding – Maintenance and Champerty – Where is it Thriving (Nov. 7, 2011), http://kluwerarbitrationblog.com/blog/2011/11/07/third-party-funding-%E2%80%93-maintenance-and-champerty-%E2%80%93-where-is-it-thriving/. Third-party litigation funding is funding, by an outside party, of all or part of a plaintiff’s litigation in exchange for a portion of the recovered proceeds. In some cases, law firms finance litigation by securing funds from a litigation funding group. The third-party funding group that finances the litigation recovers a portion of the settlement or judgment as payment. If the suit is unsuccessful, however, the funding group recovers nothing. Because there is no repayment obligation, these cash advances are not considered “loans” in the traditional sense, but rather, are nonrecourse debt. 

        A typical third-party funding scenario is as follows: a hedge fund or other investment group loans funds to a plaintiff to cover the costs of litigation. The benefit to the plaintiff is two-fold: 1) they may not have otherwise been able to afford to file suit; and 2) if their claim is unsuccessful, they often times do not have to repay the third-party funding group. If successful, however, the third-party funding group receives a high rate of return. The share of proceeds varies based upon a number of factors: 1) the amount of money involved; 2) the length of time until recovery; 3) the projected value of the plaintiff’s claim; 4) and whether the claim is settled, goes to trial, or is appealed. Lawrence S. Schaner and Thomas G. Appelman, The Rise Of 3rd-Party Litigation Funding, Law 360 http://jenner.com/system/assets/publications/130/original/The_Rise_Of_3rd-Party_Litigation_Funding.pdf?1312815913. In order to protect their interests, litigation funding groups often investigate the merits of an individual’s legal claims and the likelihood of success prior to making cash advances. 

        Some litigation funding groups, such as Burford Capital, have actively sought to minimize the reach of the common law doctrines of champerty, maintenance, and barratry. In an ethics article, Buford stated: 

            “[T]hose old laws are last ditch protections against ‘meritless litigation’ 
            assigned to and controlled by a stranger the purpose, not merely the 
            effect, of the stranger’s involvement is to stir up litigation’ and have 
            been used in ‘only a handful of cases … in the United States in the last 
            one hundred years.’”

See     http://www.burfordcapital.com/wp-content/uploads/2014/01/Ethics-1-Champerty-12.5.13.pdf (last visited January 5, 2015). Buford Capital describes itself as a “specialty provider of investment capital and risk solutions for litigation.” Further, Buford states that it “supplies corporate finance solutions to enable meritorious commercial cases to proceed with high quality counsel” and that it can be used to fund “some or all of the costs of litigation…” Litigation Finance: An Introduction, http://www.burfordcapital.com/wp-content/uploads/2013/08/Booklet-Intro-to-Litigation-Finance-FINAL-Web-2013-08-16.pdf. 

        On the other side of the coin, the U.S. Chamber Institute for Legal Reform issued a white paper in October of 2012, suggesting changes to third-party litigation funding. Among the suggested changes are limits or prohibition on investor control of cases, forbidding all contact between the third-party funding group and lawyers without the inclusion of the client, banning law firm ownership of third-party funding groups, and full disclosure of funding contracts in litigation. John Beisner and Gary Rubin, Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party Investments in Litigation, U.S. Chamber for Legal Reform (Oct. 24, 2012), http://www.instituteforlegalreform.com/uploads/sites/1/TPLF_Solutions. 

        Third-party litigation funding is small, but it is growing. According to Buford Capital, the “world’s largest provider of investment capital and risk solutions for litigation,” they had more than three times the number of investment commitments in 2014, as compared to 2013. In addition, they reported doubled cash receipts from investments, and a 60% net return on invested capital. With numbers like that, it is easy to see why this is a growing industry. Litigation Finance: An Introduction, supra. Treatment of third-party funding arrangements by the courts varies wildly across the jurisdictions.

III.   Types of Loans 

        One type of funding is direct funding to consumers, where the third-party litigation funding group provides a nonrecourse loan to an individual to help the plaintiff absorb the costs of litigation. Absolute Legal Funding, LLC describes a nonrecourse loan as follows: 

            “Non Recourse Funding means that a lien is placed on the lawsuit’s 
            pending settlement or verdict. Our non recourse funding provides 
            personal-injury victims or lawsuit plaintiffs with the money needed to 
            cover their every day living expenses while waiting for a case 
            settlement or verdict. Our case disbursement funding allows attorneys 
            to manage their cash flow by providing them with the funds needed 
            throughout the litigation process. Of course, if you don’t win the case, 
            you owe us nothing. The risk is ours, not yours!”

See http://www.absolutelegalfunding.com/ (last visited Dec. 13, 20014). Another advertisement of sorts as to how a third-party funding group forwards money to individual plaintiffs can be found on Law$uit Financial Corp.’s website, which states: 

            “Victims may experience sever injuries and disabilities, significant, 
            unaffordable medical expenses, disability from work or future loss of 
            earning capacity. They often have difficulty paying for the basic 
            necessities of … You have a terrific lawyer (if you don’t have an 
            attorney, Lawsuit Financial’s trial lawyer CEO, Mark M. Mello, can refer 
            you to the best in the industry, nationwide) and a great case; what you 
            don’t have is time…”

See http://lawsuitfinancial.com/general-injury-case-lawsuit-financing.html (last visited Nov. 10, 2014). As one can glean from the above-descriptions, with these cash-advance type loans, there is little restriction on how the money can be spent. 

        Another type of loan is loans to law firms, where the third-party litigation funding group provides a loan to a law firm that has a portfolio of related cases. This is sometimes referred to as “defense funding” loan, where the litigation funding group assists with cash flow issues that face firms when entrenched in large-scale litigation. Defense funding loans have become more prevalent amongst third-party litigation funding groups. Unlike the cash-advance type loans, the money obtained through legal defense funds are used solely to fund litigation and related legal costs. 

        There is also funding to corporations, where the third-party litigation funding group purchases a stake in the company’s litigation for a share in the recovery. Often times, the funding group contracts directly with the corporation and oversees the efficiency of the law firm litigating the matter. A benefit from this type of arrangement is that it shifts the risk and expense of litigation outside of the corporation.

III.     Status of Champerty in the United States 

        There is variation amongst the fifty states, with some states upholding the common law doctrines of champerty and maintenance, others engage in a relaxed form of enforcement, while the remainder have abolished the doctrine altogether. According to a survey conducted in 2010, 28 of 51 states permit champerty. Anthony J. Sebok, The Inauthentic Claim, 64 VANDERBILT LAW REVIEW (2011). In abolishing champerty, the South Carolina Supreme Court stated: “[w]e abolish champerty as a defense because we believe it no longer is required to prevent the evils traditionally associated with the doctrine as it developed in medieval times. Osprey, Inc. v. Cabana Ltd. Partnership, 532 S.E.2d 269, 273 (S.C. 2000). Recently, however, the South Carolina Department of Consumer Affairs tightened regulation of third-party litigation funding, requiring lenders to comply with traditional lending regulations. South Carolina Agency Rules Lawsuit Loans Are Traditional Loans Subject to State Law, Legal Newsline Legal Journal (November 17, 2014) http://legalnewsline.com/news/253390-south-carolina-agency-rules-lawsuit-loans-are-traditional-loans-subject-to-state-law. In doing so, third-party litigation funding groups are subject to limitations on the interest rates that can be charged. Oklahoma and Maine have signed similar bills regulating the often exorbitant interest rates charged by third-party litigation funding groups. The Colorado Attorney General launched a successful lawsuit against Oasis Legal Finance, aimed at treating the third-party funding group as a traditional lender. Id. Ohio and Maine have also enacted laws that require third-party funding groups to register with state authorities, report the fees charged for such loans, and assurances from the lender that the funder will not make any decisions that would influence the course of the litigation. See Me. Rev. Stat. Ann. Tit. 9-A §§ 12-104, 12-106; See also Ohio Rev. Code Ann. § 1349.55. 

        Instead of reform, some jurisdictions have decided to do away with champerty altogether. In Massachusetts, champerty has been abandoned in its entirety. Specifically, in Saladini v. Righellis, the Massachusetts Supreme Court recognized a contract as champertous, but declined to void it on that basis alone. Report on the Ethical Implications of Third-Party Litigations Funding, submission by the Ethics Committee and Federal Litigation Section of the New York State Bar Association (April 16. 2013). Other states have simply refused to acknowledge the existence of champerty. States such as Arizona, California, Connecticut, New Jersey, New Hampshire, New Mexico, and Texas take the position that the doctrine of champerty was never adopted, and thus, it does not apply. Id. 

        A commonly touted benefit of litigation funding groups is that they can be extremely helpful in providing access to the courts. Like South Carolina courts have done, proponents of litigation funding groups have pushed for disclosure as a means to protect the plaintiff, and states condoning litigation funding arrangements have followed suit. New York has not eliminated the doctrine of champerty in its entirety, but encourages more disclosure with such arrangements and as a result, New York courts rarely find that an action is champertous as a matter of law. Id. (The New York City Bar Association cautioned of 5 potential pitfalls with litigation-funding arrangements, including: 1) the legality of the arrangement; 2) the attorney’s failure as an advisor; 3) conflicts of interest; 4) failure to obtain a waiver of privilege; and 5) losing control of the direction of the litigation). Jurisdictions such as Connecticut, New Jersey, Pennsylvania, Missouri, and Maryland require certain client-disclosures, pursuant to their state bar ethics committees. Specifically, if an attorney advises his or her client to seek litigation funding, the client should be made aware of the potential waiver of the attorney-client privilege when disclosing information to the funding company. Id. at 3. 

        Delaware and Minnesota are among a remaining subset of states that rigidly apply the doctrine of champerty. Id. at 11. In fact, the Court of Appeals in Minnesota has held that if repayment of a litigation loan is dependent upon a plaintiff’s recovery in that litigation, that loan is champertous. Johnson v. Wright, 682 N.W.2d 677 (Minn. Ct. App. 2004). 

        It is not just individual states that are tightening regulations on third-party litigation finance. At the federal level, there have been proposed amendments by the U.S. Chamber Institute for Legal Reform, the American Tort Reform Association, Lawyers for Civil Justice, and the National Association of Manufacturers to the Federal Rules of Civil Procedure, including required disclosure of third-party financiers at the outset of a litigation through Rule 26 disclosures. TPLF Transparency: A Proposed Amendment to the Federal Rules of Civil Procedure, U.S. Chamber of Commerce (July 6, 2014), http://www.instituteforlegalreform.com/resource/tplf-transparency-a-proposed-amendment-to-the-federal-rules-of-civil-procedure/.


IV.     Litigation Funding Considerations 

            A. Vexatious or Prolonged Litigation 

                1. Prolonged Litigation 

        There is the concern that third-party litigation funding can prolong litigation, because a plaintiff may be reluctant to settle for a certain amount if the plaintiff realizes that a substantial portion of the settlement will go towards repayment. 

        Some argue that non-recourse loans lead to increased failure of settlement negotiations. The argument is that because the plaintiff has nothing to lose, he can afford to take a more aggressive stance, and may reject what may otherwise be a fair settlement offer under traditional litigation funding structures. While repayment amounts may come into the equation when deciding to settle, this true in the traditional attorney-client relationships. For example, if a plaintiff has $20,000 in legal fees, he is unlikely to settle for less than $20,000. While this does not necessarily change the value of the case, it does alter the plaintiff’s thought process in negotiating (i.e. what is the bottom line). 

        In Rancman v. Interim Settlement Funding Corp., the Ohio Supreme Court voided a third-party funding agreement stating that the arrangement was “evil” and had the effect of “prolong[ing] litigation and reduc[ing] settlement incentives.” Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217, 221 (Ohio 2003). In Rancman, the plaintiff was advanced $7,000 to pursue and automobile accident claim against her insurer. The terms of the non-recourse loan were that the litigation lender agreed to advance $7,000 to the plaintiff, and the plaintiff agreed to repay the lender $19,600 if the suit was resolved within a year. Id. at 218-219. Ultimately, the plaintiff settled for $100,000, and then subsequently sought to void the contract with the litigation funding group, claiming that the contract was unconscionable. The court agreed with the plaintiff, holding that the $19,600 repayment, along with the $7,000 advance effectively prevented the plaintiff for settling for anything less than $28,000. Id. at 220-221. 

                2. Increased Volume of Litigation 

        Some may argue that third-party litigation funding necessarily increases the volume of litigation. With more litigation funding, it is likely that there will be more litigation, but third-party litigation funding groups argue that they carefully select litigation, and because of this diligence, the majority of suits are turned down. Interestingly, most third-party litigation groups are run by lawyers, who are arguably able to access the merits of an individual claim. 


            B. Ethical Considerations 

        Concerns regarding an attorney’s ethical obligations also arise with the use of third-party funding groups. These concerns include waiver of privilege and ethical duties of loyalty. While the attorney’s obligation is to the plaintiff, the lines can become blurred when the attorney is being paid directly by the third-party litigation funding group. Because the attorney/client privilege protects only communications between an attorney and her client, disclosure of these communications to anyone other than the privileged person waives that privilege. 

        Client information is highly relevant to the third-party litigation funding groups and directly impacts their underwriting decisions and case valuation. Thus, there is an urge on the part of third-party litigation funding groups to have as much information as possible. While this is a natural desire, the attorney must balance third-party funding groups’ requests for information with potential waiver of the attorney/client privilege and the ramifications this waiver may have on discovery. Emily Madoff, Analyzing the Fundamentals of Litigation Funding, NEW YORK LAW JOURNAL, (August 23, 2013) http://www.litinsider.com/PubArticleCLI.jsp?id=1202616621254&Analyzing-the-Fundamentals-of-Litigation-Funding. An example of this is Leader Technologies v. Facebook, where the District of Delaware upheld a magistrate’s finding that the attorney/client privilege by passing client documents along to the third-party funding group. Id.,citing Leader Technologies v. Facebook, 719 F. Supp. 2d 373 (D. De. 2010). By entering into a nondisclosure agreement with a third-party litigation funding group prior to entering into any funding agreement, such pressures can be minimized. Id. 

        Another ethical consideration involves the duty of the attorney to the client. This can of particular concern when the third-party litigation funding group entered into a funding agreement with a law firm, as opposed to a plaintiff. By entering into such agreement, the law firm (or attorney) owes contractual duties to the third-party funder, and these duties may ultimately conflict with the ethical duties owed to the plaintiff. When entering into such arrangements, it is important to keep American Bar Association Model Rule 5.4(c) in mind, which states: 

            “A lawyer shall not permit a person who recommends, employs, or pays 
            the lawyer to render legal services for another to direct or regulate the 
            lawyer’s professional judgment in rendering such legal services.” 

        ABA Model Rule 5.4(c). To avoid the appearance of impropriety, third-party funding groups may disclaim any rights to interject themselves into litigation, whether or not they plan to influence litigation decisions. 



            C. The Bottom-Line 

                1. Transfer of Risk Outside the Individual or Corporation 

        In-house litigation departments are often viewed as a cost center. Thus, general counsels have been more limited in the past regarding their ability to bring suit, rather than merely defend it. Limiting factors such as cash flow and capital have prevented corporations, and particularly smaller businesses, from pursuing certain types of litigation in the past. Litigation funding groups permit corporations to transfer the risk of litigation outside of the company, and the litigation becomes an asset, rather than a legal cost. Ward, Margaret, Third-Party Litigation Funding, For the Defense (July 2014), p. 12; See also Blog: The Transformative Power of Litigation Funding for GCs; The Global Legal Post, (Aug. 19, 2014), http://www.globallegalpost.com/blogs/corporate-counsel/the-transformative-power-of-litigation-funding-for-gcs-78600099/. 

                2. Shift of Recovery to Litigation Funding Group 

        While litigation funding groups may give plaintiffs more access to the judicial system for plaintiffs with financial constraints, they also may leave the plaintiff with little to no recovery. An extreme example of this is Elwin Francis, who brought a personal injury case, using two litigation financing groups to fund the litigation, namely: LawCash and Lawbuck$. He settled his personal injury case for $150,000, and ended up with only $111 dollars. Two thirds of the settlement went to went to funding companies, with the other third to his attorneys, fees, and expenses. Joan C. Rogers, Law Firm Wins Dismissal of Suit by Client Whose Litigation Loans Ate Up Settlement, 29 LAWS. MAN. ON PROF. CONDUCT (ABA/BNA) 53, 53 (Jan. 30, 2013), http://www.bna.com/law-firm-wins-n17179872101. Mr. Francis brought suit against his attorneys for malpractice, but ultimately the court dismissed the action, finding that: 

            “Based upon the documentary evidence, which clearly demonstrates 
            that the plaintiff was fully aware of his actions when he entered into the
            various loan agreements that resulted in large liens being placed against 
            the proceeds of his underlying personal injury case, this Court is of the 
            opinion that no amendments to the plaintiff's complaint will enable him 
            to successfully plead a case of legal malpractice against these 
            defendants.” 


Id. In sum, Mr. Francis borrowed $27,000, but with the exorbitant lending rates coupled with the amount of time it took to settle the matter, Mr. Francis owed the litigation funding groups $96,000. Ronen Avraham and Abraham Wickelgren, Third-Party Litigation Funding – A Signaling Model, 63 DePaul Law Review, 233 (2014). 

        Litigation funding groups benefit from not only personal injury plaintiffs, but also corporations who are disinterested or unable to absorb the expense of costly and complex litigation. An example of this is DeepNines. Patent Litigation Weekly: How to Win $25 Million in a Patent Suit – and End up with a Whole Lot Less (Nov. 2, 2009), http://thepriorart.typepad.com/the_prior_art/2009/11/altitude-capital-partners-altitude-nines-v-deep-nines.html. In 2007, Altitude Capital Partners loaned DeepNines $8 million to pursue a patent infringement claim. After paying its attorneys, Fish & Richardson, and Altitude Capital Partners, DeepNines walked away with only $800,000. Id. Fish & Richardson pocked over $11 million for handling the matter. Altitude received $10.1 million, but sued DeepNines for an additional $5.3 million, arguing that legal fees should not have been deducted prior to calculating Altitude’s contingency fee bonus. 

        In the end, DeepNines settled with Altitude Nines (Altitude Capital Partners set up a separate subsidiary called “Altitude Nines” to handle the Deep Nines deal). The Managing Partner of Altitude Capital Partners, stated he is “pleased that Deep Nines decided to resolve its dispute,” and that “Altitude Nines is satisfied with the terms of the settlement agreement between the parties and is glad both parties have respected the terms of the original investment agreement.” Deep Nines & Altitude Capital Portfolio Company Announce Settlement Ending Legal Dispute Between the Companies (July 22, 2011): http://www.prweb.com/releases/2011/7/prweb8663869.htm. After the settlement, DeepNines litigation resulted in a net loss.

Conclusion 

        It appears, with the rise of litigation-funding groups, that third-party litigation finance is there to stay. Whether you support it or not, there is likely to be more controversy surrounding the applicability of the champerty and maintenance, and the regulation of an industry that is in its infancy in the United States.

0 thoughts on “Champerty Assignments”

    -->

Leave a Comment

Your email address will not be published. Required fields are marked *