Third-party litigation funding is a growing and, some say, controversial industry. We’ve written before about whether such arrangements are permitted under state ethics rules (here), and we reported on the first effort to mandate disclosure of third-party funding via federal court rule (here), as well as the first state statute requiring such disclosure (here).
But litigation funders can also become litigators themselves. Some file suit against law firms for non-payment of their fees. (On Tuesday, for example, a Los Angeles state court judge entered a $6 million judgment against a prominent plaintiff-side attorney and his firm as part of a dispute with a litigation funder over payment of the funder’s fees.) And some funders have found themselves defending against claims that their funding agreements are unenforceable.
In the latest chapter of the second kind of scenario, a Minnesota court of appeals voided a litigation funding agreement under the North Star state’s champerty-and-maintenance doctrine, allowing a personal-injury plaintiff to side-step the sixty-percent annual interest she had agreed to in exchange for the funder’s advance of $6,000 in 2014.
The ruling upheld the trial court’s determination that Minnesota’s common law applied, rather than New York’s, despite a New York choice-of-law provision in the funding agreement. Under New York’s narrower champerty statute, the funding agreement would have been valid, said the court of appeals.
Champerty and what?
You may not have thought about champerty and maintenance since law school — if you even learned about these old doctrines there. But champerty and maintenance are on the books or part of the common law in many jurisdictions, and they have been dusted off, along with usury laws, in litigation-funding disputes like the Minnesota case, and in other jurisdictions.
Under Minnesota law, the appeals court said, champerty is an agreement between a litigant and a stranger to the litigation in which the stranger “pursues the litigant[‘]s claims as consideration for receiving part of any judgment proceeds.” Maintenance is basically “meddling in someone else’s litigation” through assistance to the litigant from “someone who has no bona fide interest in the case.”
In the Minnesota case, the appeals court flatly said that “the [funding] agreement is not valid because it permits [the funder] to receive part of [the tort plaintiff’s] judgment proceeds.” The court, echoing the trial court, said that champertous agreements “have untoward economic effects on the legal system that can provide both improper incentives and disincentives to pursue and settle litigation,” and that state public policy bars “an outsider’s intrusion into a lawsuit solely for speculative gain.”
Choice of law
The Minnesota case turned on a choice-of-law issue. The funder had offices and did business in both New York and Minnesota, and the agreement called for New York law to apply. New York’s statute defines champerty “much more narrowly” than Minnesota law, confining the doctrine to situations where the third party intends to bring the action.
The parties’ agreed choice of law was overcome, the Minnesota court held, because enforcing the provision would “thwart” the state’s policy against champerty. In addition, the funder had admitted that it drafted the agreement specifically to avoid Minnesota’s champerty law.
Faced with the conflict between New York and Minnesota law, the court easily concluded that the funder should have expected Minnesota law to govern, as the agreement originated there, it was signed there, the funder was partly located there, and the agreement was to be performed there. Minnesota also “has a strong interest in compensating tort victims and in protecting Minnesota’s judicial system and litigants” from champertous agreements, the court held.
Over the past decade, the litigation finance industry is estimated to have grown to possibly $5 billion in the U.S., and $10 billion globally. While suits against consumer-tort finance firms, as in the Minnesota case, seem more common than suits involving large funders of commercial litigation, the scrutiny of these funding arrangements is sure to continue.
Both the New York State Bar Association (2018) and the New York City Bar Association (in 2018 and 2011) have weighed in on various ethics aspects of litigation funding, as have New Jersey (2001); the Philadelphia Bar Ass’n (2000); and Ohio (2012).
There are sure to be more bar ethics opinions (and cases) to come.