Champerty

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Litigation finance would be much more mainstream if not for the champerty doctrine, which generally speaking prohibits funding someone else’s lawsuit for profit. The doctrine is unmoored from its historic foundations in England, and rests on no coherent policy justification in the American states in which it remains in force. Other issues raised by litigation funding have ongoing relevance, such as the attorney-client privilege, conflicts of interest, usury/unconscionability, and at root, society’s normative views around lawsuits. But, for reasons discussed elsewhere, we view the bare question: ‘Should meritorious lawsuits be able to be brought using speculative, non-recourse financing?’ as being answered with a straightforward “Yes.”

The critical caveat is “meritorious”, but as long as funders assume the risk (as opposed to transfer it to secondary investors) we see little risk that frivolous claims will be financed. In addition our support for litigation funding in principle is not the same as supporting any particular deal currently happening in the marketplace, or to suggest that concerns about unconscionability, conflicts of interest, or the societal/economic role of lawsuits are unimportant. One goal of the model contract is to constructively air out the issues.

One reason we chose New York law for the model contract is its relatively permissive view on champerty. More specifically, New York does not have a common law prohibition on champerty, but it does have a narrowly interpreted anti-assignment statute that bars certain types of deal structures. In short, litigation funding is legal within not-yet-quite-defined bounds.

The basic rule in New York is that one cannot acquire a claim to instigate litigation that would otherwise not be brought, presumably for profit. This rule is very narrow, prohibiting (in Professor Sebok’s words) “bare assignments” and “fee skimming”, but not all transfers of claims that are then sued upon are prohibited. The model contract is intended to comply with those limited restrictions and we believe it does. However the area of law is not settled and the outcome if challenged impossible to predict with certainty.

First and foremost the model seeks to avoid champerty by avoiding claim transfer. No assignment of the claim is included. Whether de facto claim transfer occurs by ceding control of the litigation to the funder is fact specific and the doctrinal boundaries not set. The analysis has mostly been done by judges in dicta. Under our reading of the cases, giving the funder the opportunity to weigh in on the settlement or choice of counsel decision is not the same as giving the funder control over either. As a result, we believe claim transfer does not occurs.

Second, the model embraces a long distinction in New York between the claim and the proceeds of the claim. In New York,  financing the conduct of a claim in exchange for a share of the claim proceeds is allowed, at least in the personal injury context where the doctrine developed. When the funder purchases litigation proceed rights, it gets nothing other than a share in the proceeds; no control rights are attached.

As a result, while our recitals (now live in the contract) make an honest statement, that the funder’s purpose is to finance a meritorious claim and profit if possible, the honesty should not transmute the deal into a champertous one.

A final note: the New York cases (discussed in our commentary on champerty, now live at left) suggest that the timing of the funding may be important. If the funding occurs after the claim is filed, it is hard to see how the transaction is instigating litigation. The line is not as tidy as it seems, however because a couple of cases treat filing new claims or counterclaims in existing litigation as the same as initiating litigation. Nonetheless, since the model structure does not involve claim transfer it is unclear how much the timing actually matters.

We believe the primary champerty threat to litigation funding in New York generally and to the model contract specifically would be if the courts started treating commercial claims differently than they have personal injury claims, that is, if taking a share of the proceeds amounted to claim transfer for purposes of the anti-assignment statute, or if the level of influence the funder gains under the model were held to be claim transfer.

One thought on “Champerty

  1. Professor: As I read most Champerty statutes, I find that the “tipping point” is not INVESTING in lawsuits. Rather, it is the outright purchase of them by disinterested parties or the granting of lawsuit control/decision making to the investor/purchaser. Every litigation funding contract I have seen has involved a partial purchase of PROCEEDS, not a complete assignment of and control over the litigation. As long as the investor takes a passive interest only and does not seek to control the litigation or direct lawyer/client decision making, it is NOT, based on my read, Champerty. Regards, Mark

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