Update (June 2, 2017): The prohibition of “champerty” — the sale of a share of one’s interest in a lawsuit to “a stranger” — may seem antiquated to many (and bad policy to some) but it is clearly alive and well in Minnesota.
In the post below, we were critical of Minnesota courts’ prohibition of “champerty.” Prospect Funding sought Minnesota Supreme Court review of an adverse decision in which the Court of Appeals identified a “strong public policy” against champerty. Recently, the Minnesota Supreme Court sided with Ms. Maslowski and rejected Prospect Funding’s petition for further review.
Original Post (February 15, 2017): “Champerty” is “an agreement between a stranger to a lawsuit and a litigant by which the stranger pursues the litigant’s claims as consideration for receiving part of any judgment proceeds.”
Sound familiar? Ever heard of a “contingent fee agreement”?
Contingent fee litigation, in which lawyers recover for their time by taking a percentage of the litigant’s recovery is NOT considered “champerty.” Apparently, lawyers are not considered “strangers” to the lawsuits in which they claim a contingent fee interest. That is convenient. No one questions the legality and propriety of lawyers’ contingent fee agreements.
But wait. Hold on. When a court steps in to void a contract between two sophisticated private parties, who’s the officious intermeddler again? “Stirring up strife”? “Vexatious litigation to disturb the peace”? “Intrusion in the troubles of others”? Give us a break. None of these characterizations correspond, even remotely, to reality.
In reality, the controversy of “litigation funding” is all about money and has nothing to do with trouble-making.
Litigation funding involves investors paying for a share of a plaintiff’s recovery in a lawsuit. This might strike some as distasteful. Allowing a victim of an accident to sell her right to her potential recovery might seem perilously close to a market for body parts.
But it’s different.
First and most obviously, the tort victim has suffered the loss (that is, the accident) before entering into the relevant market. A tort victim is not selling a healthy body part; she is seeking a remedy for one already lost. This substantially mitigates the risk of coercion or duress.
And keep in mind that (1) accident victims are often represented by lawyers who have both the objectivity and training to value the claims and the risk (mitigating the risk of “bad deals”); and (2) it is rather widely recognized that a bird in the hand is twice as valuable as two in a bush (meaning that a tort victim probably has a lower risk tolerance than an investor who, presumably, can hedge its bets more easily). In other words, assuming an arm’s length transaction between equally sophisticated parties, what, exactly, is the problem?
The literature on litigation funding contains divergent views of its merit. See e.g., Kenneth L. Jorgensen, Presettlement Funding Agreements: Benefit or Burden, 61 Bench & B. Minn. 14 (2004); Andrew Hananel & David Staubitz, The Ethics of Law Loans in the post-Rancman Era, 17 Geo. J. Legal Ethics 795 (2004); Terry Carter, Cash Up Front, 90 A.B.A.J. 34 (2004); Douglas R. Richmond, Other People’s Money: The Ethics of Litigation Funding, 56 Mercer L.Rev. 649 (2005). But questions of societal value are generally for the Legislature, and a judge ought not ‘succumb to the temptation to substitute his own `incandescent conscience’ for the will of the legislature.’ H. Shanks, The Art and Craft of Judging: The Decisions of Judge Learned Hand 13 743 (1968). See also, Cardozo, The Nature of the Judicial Process 141 (1921).
Some years ago, we discussed another controversial financial arrangement, “STOLIs,” (“stranger originated life insurance agreements”). There, we questioned whether the sanctimonious condemnation of these financial arrangements was a facade to disguise the self-interest and protectionism of life insurance companies, with their valuable underlying related financial interests.
When it comes to voiding “litigation funding arrangements” as champertous, is it possible that our courts, cloaked in righteous indignation, invoking champerty, long characterized as a “hoary doctrine,” are simply intervening in private contractual arrangements in their own self-interest?
In Maslowski, the trial court reasoned:
that the agreement in this case could implicate the concerns underlying Minnesota’s prohibition on champerty as follows: a litigant with no obligation to pay advances back has no incentive to settle, unless the amount recovered would exceed her attorney’s fees plus the amount she would owe to the litigation funding company and the rapid escalation of amounts owed to the litigation funding company would lead to an equally rapid decline in the litigant’s willingness to consider settling for anything less than a maximum recovery.
Putting aside whether the court’s prediction of the effect of such agreements is accurate (which is not a given), since when is it the courts’ business to pressure litigants “to settle for anything less than a maximum recovery”?
Isn’t “a maximum recovery” another name for “the amount of damages that a litigant is entitled to under the law”?