Champerty? No. Litigation Finance? Yes.

By William Wernz posted 17 days ago

  

On June 3, 2020, the ancient doctrine of champerty was abolished in Minnesota.[i]  Champerty’s life span was 123 years in Minnesota, but champerty’s lineage extended to medieval England, and even to ancient Rome and Greece.[ii]  Although Minnesota applied the law of champerty in four cases between 1897 and 1932, for many decades the doctrine lay dormant, except for one Court of Appeals case.[iii]  Faint vestiges of champerty, and its common law cousins maintenance and barratry, survive in the Rules of Professional Conduct.

Champerty is, “an agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim.”[iv]  The policy basis for champerty was to preclude “stirring up litigation” and to dissuade the “officious intermeddler.”  A majority of states either never adopted the doctrine of champerty or have abolished it.

In the case that led to abolition in Minnesota, Pamela Maslowski retained the Schwebel firm for representation regarding a personal injury.  Prospect Funding Partners advanced funds in return for Maslowski’s agreement to give PFP a share of her expected recovery.  When PFP informed Maslowski what she owed, Schwebel told PFP that the agreement was champertous and therefore unenforceable.  Lower courts, applying established champerty law, agreed with Schwebel.  The Minnesota Supreme Court, however, abolished the governing law, reversed and remanded. 

The Court abolished champerty because the common law serves society’s needs and as social arrangements change the common law must also.  In today’s society, the financial importance of causes of action is widely recognized.  Because claims that will attract contingent financing are unlikely to be frivolous, the likelihood of promoting justice eclipses the danger of stirring up undesirable litigation.  If they have financing, impecunious plaintiffs will be less likely to be coerced into early, below-value settlements.  Sophisticated organizations and needy, injured individuals alike can benefit from a third party’s financing of litigation.  Litigation financing is a $50 billion to $100 billion annual business.

The Court concluded that remedies are available for abusive litigation financing.  “Courts should carefully review uncounseled agreements, particularly between parties of unequal bargaining power or agreements involving an unsophisticated party.”  A court could review a plaintiff’s claim that a financing agreement was unconscionable.  In addition, “Courts and attorneys should likewise be careful to ensure that litigation financiers do not attempt to control the course of the underlying litigation, . . ..” 

Abolition of champerty may well increase the frequency of litigation financing.  Minnesota lawyers will have to be alert to several ethics issues.

Lawyers frequently refer clients to a variety of service providers. Clients may seek assistance from their attorneys in identifying available financing organizations. If a lawyer has any financial interest in the provider, the strict disclosure, consent, and fairness requirements of Rule 1.8(a) apply.  If the lawyer has a referral agreement with the provider, Rule 7.2(b)(4) requires that it be disclosed and any reciprocal agreement must be non-exclusive.  The rules do not require disclosure of informal, non-exclusive referral understandings, involving  “periodic mutual back-scratching.”

As the Court counseled, and Rule 1.2 requires, the client, with the lawyer’s independent professional judgment, makes decisions regarding settlement, trial, and other important matters, free from any influence the financer may attempt to exercise.

If the client and the financer dispute the disposition of settlement or other funds, Rule 1.15 requires the lawyer to hold the disputed funds in trust until the dispute is resolved. 

The word “champerty” appears only once in the Rules of Professional Conduct.  Comment 16 to Rule 1.8 states that Rules 1.8(e) and (i) have their basis in common law champerty and maintenance.  Rule 1.8(i) provides, “A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, . . .” except for a contingent fee and an authorized lien.  Notwithstanding champerty’s demise, the policy reasons for which a lawyer is forbidden to acquire an ownership interest in litigation the lawyer is conducting survive, e.g. giving the lawyer too much of a financial interest in the case might skew the lawyer’s independent professional judgment.  An example of a Rule 1.8(i) violation is found in an admonition issued where a law firm obtained from a client a security interest in a wrestling ring that was the subject of the litigation in which the firm represented the client.[v]

A client may ask the lawyer’s advice on the terms of a financing agreement.  Rule 1.1 requires the lawyer to be competent in rendering such advice.  The lawyer may have to become familiar with the going rates charged by various lenders.  A lawyer should carefully explain the disadvantages of choice-of-law and choice-of-venue provisions.  Substantive law subjects on which the lawyer should advise include whether the contract is unconscionable and whether the contract is subject to usury laws.  Financers typically design litigation financing to involve “advances,” rather than loans, and thereby expect not to be subject to usury laws.

Rule 1.6 requires the lawyer to obtain the client’s informed consent to disclose information regarding the cause of action.  If the attorney-client privilege is at risk because the agreement provides for disclosure of evaluations and privileged documents, the lawyer must also obtain informed consent.  The client should not surrender the right to continue litigation or to settle.

A lawyer’s failure to handle litigation finance issues properly can result in discipline.  A lawyer, Rhodes, “improperly advised her client in a medical malpractice action to enter into an agreement with a financing company that called for a payment of $26,495 to the financing company from any proceeds of any verdict or settlement in the action in exchange for a $7,000 advance for litigation costs, misappropriated at least $3,609.28 of the $7,000 received from the financing company, and misrepresented to the Director how the funds advanced had been spent.” [vi]  The financing agreement provided that $26,495 would be immediately due from the client if the client terminated Rhodes’ employment.  This provision improperly burdened the client’s freedom to discharge Rhodes.  Rhodes also failed to advise the client regarding the burden created by a Nevada choice of law and venue provision.

The Director’s office has reported what appears to be a private discipline where a lawyer tried to conceal his involvement in a financer’s advance to a client.[vii]  The client became dissatisfied with the lawyer and discharged him.  The discharge triggered a payment to the financer of $4,400, even though the financer had advanced just $2,000 only seven months before the discharge.  The agreement provided for fifteen percent monthly interest!

A lawyer who invested a client’s settlement proceeds was suspended for a minimum of one year.[viii]  The lawyer did not follow the strict regulations governing such arrangements, including conflict of interest (Rule 1.7) and business dealings with a client (Rule 1.8(a)). 

Various common law doctrines sought to discourage what was thought to be unnecessary litigation.  Even with champerty abolished, vestiges of some of these doctrines survive in the law of lawyering. 

For example, a statute purports to forbid an attorney to “encourage [an] action or proceeding from motives of passion or interest . . . .”[ix]  Surely, however, we hope there are public interest lawyers who have a passion for justice.  Perhaps the statute means to subordinate the attorney’s own passion to the interests of clients and justice.

Solicitation was generally forbidden, but exceptions have accumulated – for pro bono cases, for written solicitations, and for solicitations to persons who are not vulnerable to importuning (other lawyers, family, close friends, etc.).[x]  More exceptions have been approved by the ABA and Minnesota is likely soon to follow suit.[xi]

The Minnesota Supreme Court’s abolition of champerty is part of a general trend to view clients as capable of deciding what is in their best interest, so long as they are fully informed by counsel, and not subject to hidden or undue pressure.  In abolishing champerty, the Court also believed the justice system can both distinguish meritorious litigation from frivolous claims and can protect parties from unconscionable contracts.

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[i] Maslowski v. Prospect Funding Partners LLC, No. A18-1906, 2020 WL 2893376 (Minn. June 3, 2020).  Before Maslowski, the only reported Minnesota champerty case after 1930 was Johnson v. Wright, 682 N.W.2d 671 (Minn. Ct. App. 2004).

[ii] R. D. Cox, Champerty as We Know It, 13 Mem. St. U. L. Rev. 139, 142 (1983).

[iii] Johnson v. Wright, 682 N.W.2d 671 (Minn. App. 2004).

[iv] Champerty, Black’s Law Dictionary (11th ed. 2019).

[v] Edward J. Cleary, When the Lawyer Takes a Stake, Bench & B. of Minn., May/June 2000.  The lawyer also violated Rule 1.8(a).

[vi] In re Rhodes, 676 N.W.2d 267 (Mem) (Minn. 2004).

[vii] Kenneth L. Jorgensen, Presettlement Funding Agreements: Benefit or Burden?, Bench & B. of Minn., May/June 2004.

[viii] In re Severson, 860 N.W.2d 658 (Minn. 2015).

[ix] Minn. Stat. § 481.06(6).

[x] NAACP v. Button, 371 U.S. 415 (1963); Shapero v. Ky. Bar Ass’n, 486 U.S. 466 (1988); Rule 7.3. 

[xi] ABA Model Rule 7.3(a) limits “solicitation” to a communication, “that is directed to a specific person the lawyer knows or reasonably should know needs legal services in a particular matter.”  The Minnesota Lawyers Board is expected to petition the Court to adopt this definition.

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