Wednesday, June 3, 2020
The Minnesota Supreme Court has held that a litigation funder has an enforceable contract
This appeal arises from a contract between appellant Prospect Funding Holdings LLC and respondent Pamela Maslowski whereby appellant purchased an interest in respondent’s personal injury suit. When respondent settled her suit and did not abide by the terms of the contract, appellant sued respondent to enforce the contract. Both the district court and the court of appeals held that appellant could not enforce the contract because it violated Minnesota’s common law prohibition against champerty. We reverse and remand to the district court for further proceedings consistent with this opinion.
The respondent had settled a personal injury claim
This case concerns the common-law prohibition against champerty. 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.” Champerty, Black’s Law Dictionary (11th ed. 2019). It is closely related to the concept of maintenance. See Maintenance, Black’s Law Dictionary (11th ed. 2019) (“Improper assistance in prosecuting or defending a lawsuit given to a litigant by someone who has no bona fide interest in the case; meddling in someone else’s litigation.”). The issue before us is whether we should affirm the court of appeals’ decision on the ground that the contract between Prospect and Maslowski is void as against public policy, or reverse the decision and abolish, under Minnesota law, the common-law doctrine that champertous agreements are unenforceable.
The common law’s disapproval of champerty and maintenance traces back many centuries.
The contract may be champertous but was not contrary to public policy
Under the rule of law articulated by these cases, the contract between Prospect and Maslowski is champertous because Prospect is a stranger to the lawsuit who agreed to provide Maslowski with financial support during her personal injury litigation in exchange for a right to recover from the proceeds of the settlement of her lawsuit. The lower courts therefore did not err in determining that, under our prior decisions, the contract was unenforceable.
We decline, however, to hold that the contract between Maslowski and Prospect is void as against public policy as we understand it today.
Our review of changes in the legal profession and in society convinces us that the ancient prohibition against champerty is no longer necessary.
We first recognized the prohibition against champerty in the years before we adopted formal rules of ethics and before we adopted Minnesota’s Rules of Civil Procedure. Today, the rules of professional responsibility and civil procedure address the abuses of the legal process that necessitated the common-law prohibition. Although attorneys may advertise to the general public, there are strict limits on solicitation...
Along with the increase in regulation, another important development in the law has been the narrowing or abolition of other common law prohibitions based on concerns about champerty and maintenance. Although contingency fees were disfavored under early common law, all American jurisdictions now allow attorneys to take cases on contingency.
Societal attitudes regarding litigation have also changed significantly. Many now see a claim as a potentially valuable asset, rather than viewing litigation as an evil to be avoided. Radin, supra, at 72. The size of the market for litigation financing reflects this attitudinal change...
It is true that the rules of professional responsibility and civil procedure do not specifically regulate champertous agreements. But, as we have explained, the rules of professional responsibility and civil procedure prevent both attorneys and parties from profiting off of frivolous litigation—which is the type of behavior that we took issue with in Huber, Holland, and Gammons. It is also unlikely that companies like Prospect will fund frivolous claims because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance—an unlikely result in a meritless suit. See David Tyler Adams, Note, Laissez Fair: The Case for Alternative Litigation Funding and Assignment of Lawsuit Proceeds in Georgia, 49 Ga. L. Rev. 1121, 1148–49 (2015). Litigation financing companies have claim valuation procedures to avoid this very problem. Id.
Professional responsibility professors may find this case useful in teaching how ethics concepts and rules evolve with societal changes. (Mike Frisch)